Fagron Sa Ord

Good day and welcome to the Fagron Trading Update Q3 Results 2019 Conference Calls. Today's conference is being recorded. At this time, I would like to turn the conference over to Rafael Padilla, CEO. Please go ahead, sir.

Thank you very much. Hello and good morning, everyone. Thank you for calling in for the Q3 Trading Update. Today, Constantine, Karen, and myself are very pleased to announce, as stated during our first semester update, an acceleration of our top line during the second semester. that proves the success of our clear strategy. All regions have performed as planned, and we would like to remark the growth in Europe, driven by the restart of our sterile facility in the Netherlands, and strong growth in the brand segment, driven by a clear strategic focus, together with the promising start of Fargron Genomics. In North America, we have reached an important milestone by getting a round rate $50 million sales in our Fargron Sterile Services Division. And ASEO has performed very well, growing almost 7%. And our brands and essentials activities are impressively gaining market share in the attractive U.S. market. Latin America is showing high single-digit growth, driven by the fantastic results of our own developed brands. We surely expect this trend to continue as we have an extensive field pipeline. Having said this, Karin is now going to elaborate on Agile technology.

Thank you, Rafa. So yesterday, Vagron signed an agreement with the management of HL technology for the sale of the activity. In 2013 and 2014, Vagron divested the dental and medical division. Only HL technology was not sold. HL technology sells precision components to the dental and medical industry. In 2018, HL did approximately 7 million of sales with 0.8 million of recurring ABDA. HL technology is a non-core activity with no strategic fits with Vagron. Management indicated a few months ago that they were interested to buy HL technology. We believe the transaction we announced today is in the best interest of all our stakeholders and we wish the new owners and employees all success for the future.

Thanks, Karin. We finalize reinforcing our guidance on further growth in sales and profitability for 2019 and sharing our passion for the attractive market of personalized medicine. Now we will be pleased to answer all your questions. Operator.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star 1 to ask a question. We will now take our first question from Matthias Manhout from Kepler Chivre. Please go ahead.

Yes, good morning, everybody. Thank you for taking my questions. I have three, if I may. We'll ask them one by one. First question is actually on U.S. and the compounding services. Two questions on that end, actually. I see if I look at the organic growth of Anazeo Health, I see that there's a slight deceleration in the third quarter. towards 6.6%. Can you just maybe elaborate a little bit on those growth numbers? And also, there has been some news flow regarding the FDA, where there were some products mentioned of Anazeo Health. Could you maybe elaborate a little bit on that news flow? That may be regarding Wichita housekeeping question. Actually, you mentioned the run rate sales of the US $50 million. Could you give us also a little bit of an indication if the absolute sales number for 2019 will be far off that run rate of $50 million? That's my first question.

Thank you, Matthias. Good morning. Regarding Anaseo, the growth, as you said, is slightly slower than the second quarter, though it's within the frame that we work, so we don't see anything there. So we are very pleased with that. Regarding the FDA statement, in the FDA statement that was published on September 9th, the FDA emphasized the vital role that industry submitted adverse events replay in the help of the FDA monitor safety issues. So we share the interest in putting the public To that end, we have always worked to ensure compliance with appropriate legal and regulatory requirements. We will continue to work with them, and during the investigation, we will refer to this statement. Also, it is mentioned that a producer of our hormone pellets, Anazeo, are produced there in Las Vegas. This is said there. The whole process, Anazeo has been always communicating and working with them. we are having that issue totally under control.

Yeah, Matthias, good morning. To come back on your question on FSS, so if we look at the third quarter sales, it's a little over 11 million, and indeed we expect to have a run rate of 50 million by the end of 2019. So I hope that answers your question.

All right. Then maybe a question on the U.S. brands and essentials. I see there's a really strong pickup in organic growth there. Could you maybe elaborate a little bit on what is happening there? Have you taken any specific measures that have driven this strong acceleration of growth or is this just a comparable related acceleration of growth?

Yes, sure, Matthias. So regarding brands and essentials in the U.S., as you know, brands and essentials are core business everywhere in Europe and in Latin America where we are present and not in the U.S. And it's, of course, the biggest market worldwide. So it's our obligation to perform extremely well in that respect. We have organized our teams accordingly. We have a clear push and focus. So we have a lot of ambition to grow in that segment for sure.

All right, and then maybe just a small third question on HS technology. Does the seller or the buyer, have they already reinsured the financing for the transaction?

Yeah, they have.

Okay, thank you. And congrats with the result. Thank you, Mathias.

Thank you, Mathias.

We will now take our next question from Frank Klassen from Digger of Petercam. Please go ahead.

Yes, good morning. Three questions, please. First, coming back on the growth in the U.S. brands and essentials business, because it's quite an acceleration indeed. What is the impact of Hoonco? Can you elaborate on that? Is the cross-selling of Hoonco, is that an important driver? And what are the other drivers for this growth acceleration? And then secondly, on Fargo Genomics, what is your experience so far with the cross-selling of the DNA test? Do you see recurring business coming from prescriptions and can you elaborate on that and when do you expect to launch the genomics in the US because that could of course also be interesting and then thirdly maybe more in general you've done quite a few acquisitions lately is now acquisitions lower on the management agenda or can we still expect new ones maybe still in 2019 some words on that please thank you

Thank you, Frank. Good morning. Regarding brands and essentials in the U.S., the third quarter we grew in brands 32.5%, so indeed impressive, and essentials 24-1. HomeCore is, of course, helping and helping a lot because we are cross-selling also within our U.S. entities, and that shows fantastic results. And also remarkable is our essentials performance that is, of course – growing high double digit and this comes because the market is huge the market is also slightly is slightly growing again after the 2015 so we are very positive on the market developments as well so all with all we are very happy with these two developments regarding genomics we have launched this year the first test that is for trico test that is for trichology and we have seen sales in europe and in south africa also in canada In the U.S., we are not still active. This depends on the regulation and on the FDA approval. We're in the process, and we expect in 2020 to be up and running in that respect. And now, the 29th of October, we're launching the second test. That is the Nutrigene. That is, of course, without being humble, please, that is one of the most complete nutrigenomic tests worldwide. And we hope and we think and we will continue have extremely good results on that one as well. So genomics is giving us a lot of nice vibes within the organization. Of course, it's not material yet, though what we see and that you said very well is that our brands related to the test that we launch are growing double and even triple digit. So this is a very important driver for our business.

And then to come back to your final question, Frank, on the M&A. So it's not lower on our agendas. As you all know, we have an active M&A strategy. We did some acquisitions this year already, some small ones in Brazil, a bigger one in Mexico, and a smaller one in Europe. So we're currently also looking at different companies in our current regions, so the regions where we're already active. And we hope to do some additional ones the coming months. On the acquisitions we did, we are working on the integration, of course, and that is on track. So I hope that answers your question.

Yeah, that's all very clear. Thank you very much.

Thank you, Frank.

Thank you, Frank.

We will now take our next question from Lennis and Steenhuys from KBC Security. Please go ahead.

Good morning, and thanks for taking my question. On the US front, also on sterile compounding, I was wondering if you could provide us with an operational update on Wichita in terms of number of SKUs added and any progress on the automation efforts in terms of how many automated filling lines are up and running. How is this expected to evolve in the coming months and what are the general next steps for the facility, let's say? And then a second question also on Humco. Since the company is now fully consolidated, I was wondering if you could provide some granularity on Humco's performance in the past year, also in terms of realized synergies, what the ambitions are there and how that has played out for this first year. Thank you.

Thank you, Lenny. Good morning. Regarding FSS SKUs, we have stated in the last call that we have approximately 80, that we're working towards 115. We have launched in this third quarter seven and we will launch in the Q4 28. Of course, a very important driver on these new SKUs are the control substances because the market there is relevant and that's the clear focus now, but also we're working in other segments like dialysis, ophthalmology to fill our pipeline there. Regarding the automation, and thank you for the question because this is of course very important because we need to follow up with the growth. We have now two fully automated lines and during the first semester of next year we'll have our third one, right? So that's what we are working on the automation at this moment. And also regarding labeling, visual inspection, we are doing steps there in order to have a more efficient production. process. Rather than Homecall, we have integrated the company accordingly, of course, first the back office and then the front office, and now we see all the leverage that comes from it, especially the cross-selling opportunities that we have on the brand segment. Okay, thank you very much. Thank you, Lenny.

As a reminder, if you wish to ask a question, please signal by pressing star 1. We will now take our next question from Steen de Meester from ING. Please go ahead.

Yes, good morning. Thanks for taking my questions. I have a few follow-ups on Wichita. So firstly, could you comment on the supplier issue with the top three products which you experienced in the first half? I think it costed you around one million of sales per quarter. Have these missed sales now been fully restored or do you see a further pickup in maybe in Q4. This is my first question.

Yes, thank you, Stijn. Good morning. Yes, the supplier issue, as we stated in the last call, has been solved. And the pickup we're seeing now, surely the pickup of the 1 million, as you said, of course not 100% because we need to come back to the market, to the customers, and this has a process, though we are in the process of getting that million back.

Okay, and will this be this year, or is this something that you see more spread out over the next quarters?

Yes, we see this spread out in the next quarters. Of course, we're working surely on getting the million back.

Okay. Then, second question on Wichita. On this run rate sales target of 50 million by the end of the year, could you comment how much of this 50 million sales can be attributed to the old Wichita facility?

We estimate that one, or we put that one in $80 million. Okay, so there it has been.

Yeah, maybe to start, when we started the investment of the new facility, there was already a facility in place. And the sales of that facility, the old one, is approximately $18 million when we started it. When you now look at the facilities, there are in fact two physical locations, but we look at them as one. So products are moved from one location to another to create optimizations. So we report it as one. So maybe that was to clarify that one. So the 50 million run rate is the combined for the combined site, so the two plants together.

Okay, so to fully understand it well, Your 100 million of additional sales targets for Wichita new facility doesn't include this 18 million in sales which you already did in the- Correct, Stein. In the 2017. Yeah, that's correct. Okay, thank you. Thank you for commenting. These were my questions. Thank you, Stein.

Thank you. We will now take our next question from Eric Wilmer from AMRO. Please go ahead.

Hi, good morning. Yeah, just to come back on Anaseo, just to make sure that I understand correctly. The slower 6.5% organic growth, this is not related to the FDA biotech investigation. And secondly, with 23% light flag growth in the third quarter, the Colombian compiling activities are clearly taking off. Would you perhaps shed some light on the key driving forces there? Thank you.

Yes, sure. Eric, good morning. Yes, indeed. The growth of Anaseo, the 6.6, is not related to the BioTE VA investigation. And regarding the Colombian activities, of course, Colombia is a promising country with a lot of dynamics, and we have a clear focus there with our facilities. We have two in Bogota and one in Medellin, and the growth is, of course, related to our market approach regarding new items, our branded items that are being compounded in the facilities, and our, of course, academies and visits to the medical doctors. So we are also very satisfied of the developments of the Colombian activities.

Thank you.

Thank you.

We will now take our next question from Alex Kogut from Kemben. Please go ahead.

Hi. Thank you. For the US business, as we go into Q4, are there any trends, opportunities, or sort of stress that we should keep an eye on or that you see already? Perhaps something with competitors or regulation coming up? Thanks.

Hello, good morning, Alex. No, there's nothing on the business landscape, so we confirm the growth prognosis for Q4, of course.

Just to check again, is there anything with Farmedium that you hear when... I believe the last guidance was they would be coming back online in the beginning of next year. Is that still what you hear?

Well, what we hear is what we commented last time, is that they are working, of course, on their issues regarding regulations, but more we don't know. So we can narrowly comment on that one.

All right, thanks.

Thank you, Alex.

We will now take our next question from Matthias Manhout from Kepler Shivra. Please go ahead.

Yes, two follow-ups from my end. Maybe firstly on Europe, on the strong growth acceleration we have seen in compounding services and how much is this purely due to the reopening of the compounding facility that has been remodeled. And also, if I recall correctly, I think there the run rate sales were about half a million per month. Could you maybe elaborate on what its present run rate was during the third quarter? and how long it will take to be fully back towards that half a million a month. And then a second question I had was actually back on fire and sterile services in the U.S. Can you maybe elaborate a little bit on onboarding of new clients? How is that going? Are there any specific clients or are there any important clients that have been signed and that can have a material impact in the fourth quarter growth? Thank you.

Yes, thank you, Mathis, for your questions again. Regarding the compound activities, the growth is mainly driven, of course, by the Dutch facility, as you said, very well. This is a process of getting the products again on the pipeline because now we are doing full stability studies on them. We think, again, with a lot of humbleness, that we are one of the most advanced regarding quality activities course stale facilities in the Netherlands and of course we are onboarding those new products and we are boarding back those customers again so during next year we will see the run rate at half a million that you stated very well and regarding the our US activities FSS and customers of course we see new customers coming in this process is very important together with the SKUs and we will see in the next quarters new customers coming and And as we said many times, when a customer comes, it's a process that takes some time because all the quality checks must be done. And we have been successful this year also more than new customers. Can you give us an indication of how many new customers? This is something that we wouldn't like to disclose for competitive reasons, right? Yes. though the process is in place and it's going according to plan. Okay, understood. Thank you. Thank you, Mathias.

We will now take our next question from Beatrice Allen from Berenberg. Please go ahead.

Hi there, good morning. I had a couple of questions too. First, on Europe, do you think, given kind of the strong performance this quarter, that you're still on track for this 2.7%? or in line with last year's organic growth, or actually could that be higher now? And also in terms of Dutch compounding, are you seeing any kind of increased market share within the hospital markets in particular? Because I know that's an area of potential growth for you guys there. And then I'll go on to my next question afterwards.

Yes. Hello, good morning, Beatrice. So we confirm, yes, the 2.7 growth at least for this year in 2019 for Europe. And regarding the hospital market in the Netherlands, it's a market that is growing on the outsourcing, though it's growing in less piece than it is in the U.S. So, of course, we would like that this would be in a higher piece, but though we see some good trends in that respect.

And have you seen any kind of market share gains there? Do you know?

Well, we are back again with our facility, and now we are regaining the market that we lost. During the last year, again, we want to state that the process is different. We have now a full GMP facility with that respect. And, of course, we commented many times when we developed a new product, we have all the stability studies. We have all the performing tests that we need to do. So we are fully offering to the Dutch market a high-quality sterile compounded product.

And then on Latin America, strong growth and, again, quite good organic growth acceleration from Q2. How much of that was due to the trade fair boost in particular? And then what can we expect for Q4 going forward?

The Q4, of course, is promising because in Brazil mainly we have good and sustainable models. Regarding the fare, we had a very good fare, and when you look at the figures of the third quarter in Latin America, we can see that brands grew almost 21%, and this is related to the Consul Pharma, but also to the post-sales of the Consul Pharma fare.

And then in terms of the U.S., you noted kind of back in your H1 update that you saw I think it was phrased unprecedented kind of audit levels or customer site visit levels, sorry, in Q2. Have you seen equal numbers in Q3 or has that slowed down a bit, hence kind of maybe allowed for less disruption in your trading?

Yes, indeed, very good question. We have seen the same number of audits and this is very good for our future sales.

Okay, great.

Thank you very much.

Thank you, Beatriz.

As a reminder, if you wish to ask a question, please signal by pressing star 1. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll now take our next question from Stine de Meester from ING. Please go ahead. Stine de Meester, your line is now open. You may ask your question.

Yes, thank you. I have an additional follow-up on Wichita and on these site visits and audits, how much sales did it cost in sort of the third quarter? Is it possible to quantify that, why you would be under your target because of these events?

Sorry, I cannot understand your question because we don't see a relation between the site visits and the sales. So these are two different processes within our company. The site visits are quality-related operational processes, and we have a dedicated team, as we stated in the other calls, of four people that receive the customers, but also the state boards of pharmacy, the FDA, right? And this is independent on our sales operational process, so it doesn't have a relationship. What we state with that is is that, of course, when we get a new customer, we get audit, and it's the new customer that is onboarding, so this sums up in our sales.

Okay, so maybe to add... Oh, yeah, sorry, maybe to add, so it's a combination of customer audits who come and visit us and regulatory bodies from different states or the FDA in general visiting us. Of course, that impacts the business of FSS because it takes a lot of time to facilitate all those meetings. and that will impact our sales. And that's what we saw in the second quarter because the time consumption of those audits is very heavy and it presses on the organization. And, of course, we believe that quality is really important and sustainable growth is really important going forward. So we invest in those audits to do them, of course, good. And we did see some impact on that. And of course, being in the FSS space, we will have that also in the future, especially when we board new clients because they come and visit the plant. So maybe to add a little bit to what Rafa said.

So to be clear, you don't see all these people running around on the floor impede you to reach your full safe potential at the moment.

Well, again, Stein, this is a process. We have operational processes, and this is something that we cope within how we manage the company and the growth, right? And, of course, we have an attention and has management attention, but our quality teams are responding very well to those audits. Okay, good to hear. Thank you.

Thank you. Thank you.

Our next question comes from Anita Yee from NIBC. Please go ahead.

Good morning, and congrats with the great results. I also have a question on Wichita. I'm not sure if it was already asked because I was kicked out for a moment, but could you elaborate a little bit more on the run rates of 50 million this year and the continuous growth? Like, how is this built up regarding indications, number of SKUs, and geographical expansion?

Yes, hello, good morning, Anne. We have been commenting on the growth of WeChat. It is a combination of the new SKUs that we are launching. We strived into 115 this year, 28 to go in the fourth quarter, and the pipeline is full. And, of course, we have a strategy for next year, and also the onboarding of new customers. That is a process that is ongoing, and we see new customers coming into our customer portfolio. It's a combination of both, right?

And can you also elaborate a little bit about from how many states these customers are coming or which ones?

We see them throughout all the states. Of course, bigger states as California, Texas, Florida have a major representation on that, but we see them throughout the whole nation of the U.S.

Okay, great.

Thank you so much.

Thank you very much.

And just as a reminder to ask a question, it's star 1 on your telephone keypad. It appears there are no more questions, so I'd like to turn the call back to our hosts for any additional or closing remarks.

Well, thank you, operator. Thanks again all for your time today and have a nice Friday.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.