Orion Corp New B Shs

Oike hyvää iltapäivää ja tervetuloa seuraamaan Orionin tulosjulkistustilaisuutta katsauskaudelta tammi-maaliskuu 2023. Minun nimeni on Tuukka Hirvonen ja vastaan meillä Orionilla sijoittajasuhteista. Hetkisen kulttua. Toimitusjohtajamme Liisa Hurme esittelee katsauskauden tuloksen, jonka jälkeen teillä on mahdollisuus esittää kysymyksiä hänelle sekä talousjohtaja Jari Karlssonille. Kysymyksiä voi joko lähettää webcast through the portal or through the question box, or if you are on the phone, you can also ask questions in Finnish. Even though the official language of the event is English, you can also ask questions in Finnish. In addition, later this afternoon, you will receive the Finnish-language interview results of the CEO Liisa Hurme from the Orion website. Good afternoon, ladies and gentlemen, and welcome to Orion's earnings conference call and webcast for the financial period of January-March 2023. My name is Tuukka Hirvonen. I'm the head of IR here at Orion. Like normally, today we start with a presentation from our CEO, Liisa Hurme, after which you will have the opportunity to ask questions either from Liisa or from our CFO, Jari Karlsson. We will be first taking questions through the teleconference call lines, and after that, we will then turn to the webcast questions, which you may type in using the box below the screen in the webcast view. When you are presenting questions through the conference call lines, kindly please state your name and the organization you are representing before asking your question. And just before I let Liisa to take over, I'd like to draw your attention to the disclaimer regarding any future looking statements in this presentation. But with these four words, it's my pleasure to invite on the podium Liisa. Liisa, please, the stage is yours.

Thank you, Tuukka. And good afternoon on my behalf as well. And welcome to Orion Q1 2023 webcast. For the first time, Nubeca darolutamide is now Orion's top-selling product. Also, there are news regarding NUPECA lately. We started with Bayer a new phase three study called Arastep, and I will talk more about that later. And also we have received approvals for additional indication for the metastatic hormone sensitive prostate cancer in Japan, European Union and China. Year 2023 has largely started in line with our expectations. Net sales was 277.9 million euros, and that grew 2.7% from the previous year. The main positives were of course Nubeca and also animal health after the acquisition of Inovet. Also, the base portfolio in general performed well. However, there were some negatives like Intercapone, Effect of Russia, and Dexmedetomidine and Simdex. Operating profit was 55.5 million euros. Decline was 22.4%. However, the decline in the operating profit was in line with our expectations and forecasts, and the full year outlook is the same as previously. The factors behind the declining operating profit was the increase of fixed costs by 9 million euros. The effect of the contraction of the Russian business alone was 7 million euros. And then the lower gross margin was a result of price declines, product mix and increased cost of goods. Cash flow from operating activities declined 87.9%. This is due to the decline, of course, in operating profit. Also, our working capital increased and was much higher than in the comparative period, mainly resulting in regarding the Nubeka and darolutamide. When we look at the net sales in more detail, we can see Nubeka sales, which actually was 18 million euros higher than in the previous year. And then also Easyhaler and other base portfolio developed very well. And then, of course, animal health, as we can see on the last column here, together with fermium, performed excellently. However, there were the declines of 12 million of the Russian operations. The environment is very challenging at the moment. And then some decline on entacapone, This is a timing issue related to the shipments to our partners, so this should sort out during the year. Exchange rates, very little effect from that part, stable quarter compared to the previous last year. Operating profit decline here on 27 million is partly due to the product mix and cost increase. However, when we look at the price decreases, the very significant part of that is explained by the fact that Orion has supplied Nubeka with the lower price than in the comparative period in Q1 2022. This will be a temporary effect as the prices to bear changed actually in the middle of the year 2022. So it's been in effect already for a while, some quarters, but it wasn't in effect last year's quarter one. So to the comparative period, you can clearly see the difference. And however, even though the transfer price of the tablets is lower to bear, as those payments on those tablets will be reduced on the quarter's royalties, the final income doesn't really have the effect on that income. Actually, it has a positive effect on royalties. Then we also see here the effect of exchanges and nothing significant there. No significant milestones. We also see fixed cost increase, and that's mainly due to the increased costs in our sales and marketing. We almost don't remember that last year, this time, the pandemic was still heavily impacting our lives. And last year, we were not able to meet our customers as this year. So, though, we are kind of getting back to normal on the sales front. Innovate is, of course, included here. That wasn't in our fixed cost base last year at this time. When we look at all the business divisions, and now for the first time, we are reporting the new business division according to the new business division structure. We can see here on the columns that animal health and innovative medicines performed very well compared to the previous year. And we can see the division or the sales split between the divisions. Generics and consumer health still almost half of the revenues. Branded products 21% and innovative medicines 15%. Just to remind that the previous year, I think innovative medicines was less than 10, somewhere around 7%. So it's really hiking up here. And of course, animal health is already 10% of the revenues. On top 10 list, Nubeca as the first one with 93% of growth. Easyhaler, a solid performance during the Q1. Then the usual suspects to the generic competition, SIMDACS and Dextor, and rather steep decline in Entacapone with the 37.1%, but this is really a timing issue that just hit us on the first quarter and should be sorted out as we go along. Divina here and Solomet have declined mainly due to the contraction of the Russian business. They were rather big products in that market. When we look at the Nubeka and here we of course look at the Orion sales, the trend is extremely positive, but we can still be prepared that there might be fluctuations between the quarters due to the product supply to Bayer. We are in a launch phase, especially with the new indication, and some quarters we might deliver extremely big quantities to Bayer, and as I said, those are then deducted from the previous quarter's royalties. Branded products, due to decline in Entacapone, almost 20% down, Sales is balanced nicely between Easyhaler portfolio and Entacapone products, which actually should be more than 40, if the deliveries would have been made. And then a smaller portion of HRT products, Divichel being the biggest of those. Generics and consumer health business performed well, even though it shows minus here. But looking at the environment where division operates, I think this is an extremely good achievement. Simdex sector, we know what's happening there. Russia actually has been a significant, somewhat significant part of this business and maturity of that decline is significant. is actually seen in generics and consumer health. In Finland, we performed again very well. Finnish market grew 3.4%, the whole Finnish pharmaceutical market, and Orion was able to grow 5.4%. The growth was even more visible with the reference-priced prescription products where Orion grew 8.3% and the whole market went down with the two digit numbers. Again, I can't resist to underline that we've been really able to create a competitive edge with our service level, which is the best in Finland and very good also in Scandinavian countries. Animal health doubled its revenues due to the acquisition of Inovet VMD. Also the companion animal, the sedative portfolio performed very well. Of course, this sometimes has to do with, again, with the timings of shipments. For the fermion, we see a small decline. However, we currently manufacture big quantities, tons of darolutamide that kind of limits to some extent, capacity for the external sales. But we are working all the time as we speak to build more capacity on that front. And the strike in Finland had a small effect on Fermion in the early part of this year. Fermion, which is a process chemical industry for Fermion, few days strike means actually almost two weeks out of operations, as you need to run down operations, utilities, and then again start it all over again. And both ends takes several days to be prepared for. And our clinical pipeline proceeds as we have planned according to our strategy. Happy to tell about Arastep trial, a new one in phase three with Bayer. Here we study patients with the high risk prostate cancer hormone sensitive prostate cancer and high risk meaning that they have very they double their PSA value in a very short time within a year after after first round of treatment so this way we will be able to offer the new Becca and this treatment to the earlier segment of the disease to which it fits very well as the side effect profile is very good and mild compared to some other products. And of course, Arasensis now received the marketing authorizations in all the key markets. Of course, there are smaller markets where we still await for the registration. Then we have ODM208 for the prostate cancer with MSD. And we are happy to tell that a phase three study will be starting at the end of this year. This is good news. This is good news, of course, for the both companies, but also for the patients. Our ODM 105 for psychiatric disorders, we are preparing for the global phase two. And then our ODM 111 for the treatment of pain is advancing well in the phase one. We have published our sustainability report recently. I hope you've all been able to look at it. Sustainability is an important matter for Orion. Here, I would like to raise two new things that we've taken to our agenda. On the environment track, we have extended our climate targets to cover the scope three emissions. Scope three meaning the emissions of our suppliers and partners. To this day, we've been focusing and targeting to scope one and two, which are our own manufacturing and logistics and all the projects that we are now and we've been running for several years in our own operations have been very successful and we've been able to reduce both the energy or increase the energy efficiency and decrease the emissions. Also, we are now aligned with the 1.5 Celsius warming target. The other topic that I want to raise here regarding our employees and all the professionals working in Orion is the diversity, equity and inclusion. We have raised this topic so that on our safety sessions, all our teams from executive management board to the factory floor level have safety sessions on a regular basis with different topics. And now we also discuss these DEI topics. And it's an important thing for me that all the Orion employees feel safe and accepted and included in Orion. And our outlook for the current year is As we've told before, unchanged as it is, we estimate that our net sales will be slightly higher during this year compared to the 2022, and where the comparative number is €1,130,000,000 without the signing fee from the MSD. For the operating profit, we've given the outlook that we will be on a slightly higher or higher level compared to 2022. And there the comparative number is 232 million euros. Then separately from this outlook, we are currently exploring a possibility to transfer our pension fund to an insurance company. Until today, Orion has managed its pension funds by itself. But now we are exploring if we could really sell this business, if you could call it so. But we don't include it into this outlook. It is a one-off event. It is a very administrative action. And it is difficult to estimate since this will happen, the final day of closing will be in the end of the year. So we don't really know what will be the final effect for the income. It will be dependent on the discount rate and then of course on the value of the assets. when it relates to the cash flow. So that is a separate matter from our outlook, but of course, something that we want to share with the outside world. And basis for the outlook are the same as previously, NUBEKA, animal health, the milestones, we are looking forward to a milestone regarding NUBEKA, And certain sales thresholds exceeded. Easy hailer, a very robust business. And of course, then the generic competition. Russia will still have an effect to us, you know, especially on the early part of the year. I mean, the difference to the comparative year and the pricing pressure will have some negative impacts on our net sales and then the operating costs will have an effect, still increasing effect on our cost of goods, especially on the first half of the year. Regarding upcoming events, the next one will be on 25th of May, our Capital Markets Day. You are all very welcome to participate. And then in July, the half-year financial report. Thank you.

Thank you, Liisa. Now it's time for the questions, and we will start taking questions first from the conference call line. So operator, please, the first questions.

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad.

The next question comes from Dominic Lund from Credit Suisse. Please go ahead.

Hi there, thank you. So you stated that you plan to move ODM 208 into Phase 3 by the end of the year, but we haven't seen the Phase 2 data yet. So I'm just wondering what gives you confidence to go to Phase 3? And then for the Phase 2 study, I think at the full year results, you said the trial would complete in the second half of 2024. So do we have to wait until then to see the data, or is there anything you plan to share ahead of that to help us assess the Phase 3 opportunity? And then lastly, when might we see that data for the Phase 3? And then secondly, just wondering what assumptions are built into your Nubeka forecasts in the longer term in terms of the Inflation Reduction Act. So wondering if you could just give a bit of context in terms of, firstly, the proportion of U.S. sales in Medicare. And then also on our analysis, it looks like Xtandi could be selected in 2026, even if Nubeka isn't. So could there be some indirect impact there? And then just curious on what your assumptions are in terms of impact from any Part D redesign. Thank you.

OK, I'll start from the beginning. So regarding the ODM 208, I leave commenting on that phase three program to MSD. That much I can say that, yes, phase two will run until next year. But based on the results there in the middle, it will be possible to draft the study outlines and start to carry out phase three studies. But otherwise, I think it's MSD who will be able to give you those details. Regarding Bayer, your question was on the long-term plans and forecasts for Nubeka, taking into account the IRA and other things on the marketplace. Also, that's a question for Bayer. I'm not going to comment on that one. I'm sure they can tell you how they have estimated these market effects and changes to their forecasts.

And the last question was... So that was just related to... It was still on the IRA, so I think that's probably a question for Bayer.

The next question comes from Unknown Caller from number ending in 1868.

Please go ahead.

Hi, it's Graham Perry from Bank of America.

I was taking a question. So just first one's on COGS phasing through the year. So do you think you've seen now fully the impact of inflation in your cost of goods? Or do we still expect to see inventories being sold off where we could still see elevated COGS? And also if you could just comment on the impact on cost of goods of the different pricing to buyer in terms of the new Becker sales and how that might positively or negatively impact your COGS. And then secondly, on Russia, should we expect that to continue to shrink to remaining quarters or is that now essentially annualising in the base? Or should we expect to see continued declines on future quarters through the year? So two questions on phasing of costs and margins through the year.

Thank you.

Maybe I can take those. I'd say that compared to last year, we probably still will see some impact in GOGs on the inflation. On the other hand, quarter to quarter, I think the numbers are not changing because of the inflation that much anymore. But one needs to remember that especially in the case of Fermion, because of the long production lead times, the impact on our COGS for the inflation that started around this time last year was shown only towards the end of the year. And that's why we will still see the impact of the inflation in our numbers compared to 22. But On quarter to quarter, I think we probably will not see that much inflation impact anymore. Of course, salaries are increasing in some markets and so forth, but not that much impact in maybe the cost of goods. And then you asked also the impact of the New Pekka and the transfer prices on Cox. That of course doesn't have any impact on Cox. So how the New Pekka profitability ultimately for Orion will be that it will be the royalty minus the cost of goods sold. But what is having impact on our profitability is that if we produce a lot of and deliver a lot of New Pekka to buyer, that of course means that in that period, there is a lot of cost of goods sold. And now as the product is still growing, it means that all the time we are producing and shipping more products to buyer than they are selling out. because they, of course, need to prepare for the growth. So that's the impact on margins, not that much. The pricing as such, of course, is not really impacting the cost of goods, but margins, it has impact because of this timing. And I guess on the Russia, the business is very small there now. We still had business there last year. Currently, the business is very, very small, as one can see in the negative impact on the first quarter. So for the full year of this year, Russian business will be very small, but last year we still had quite a lot of sales and because of the increased value of the Russian ruble, also the currencies were very beneficial in 2022.

Thank you.

The next question comes from Sami Sakamis from Danske Bank. Please go ahead.

Hi, I have three questions, starting from Nubeka. If we look at Q1, you had 90% or €18 million growth year-on-year in Nubeka sales. What is roughly the EBIT contribution from higher Nubeca sales in Q1, if we take into account changes in transit pricing that you're highlighting?

Well, like with any of the other products, we are not disclosing the details of the profitability on individual products. So unfortunately, we cannot really give you too much of an impact. or numbers on that. But like you referred to, royalty of course is 100% income, but then the cost of goods is something we are not disclosing.

Okay. And then regarding ODM 105, you mentioned that you're preparing for a Phase 2 study. When do you think you'll be ready to start this trial?

Well, we'll see. I hope we'll be able to inform about that timing, more accurate timing during this year.

Okay. And then on ODM 208, according to the contract between you and Merck, you have an option to convert this into a normal licensing model. Can you discuss why it would make sense from Orion perspective to do this? instead of current partnership model?

Well, I think The option gives always a freedom for a company to look at the company situation at that time. You know, market environment might change, the company strategy might change. So it really gives a flexibility to look at that matter again. In general, comparing those models, I think licensing model, if you would license the global rights, is a lighter one for Orion type of a company where you wouldn't have to bear all the costs for the development. I think that would be the main difference between those models.

Yes, exactly. It's a timing question that carrying out and participating in expensive and large phase three trials, of course, means that we would be heavily burdened during the early years. Then of course, if everything is successful, of course, that would mean then higher income years later. So from our perspective, it's really a question that how do we allocate our R&D funding Would we like to use it in ODM 208 or something else? But then, of course, one needs to remember also that the other party also has the same rights. So even if we would like to keep it, but our partner would like to use the option, then it would be used. But for the time being, that is a question that we need to consider for later years.

That's true, and as both parties have the option, it gives the flexibility for the both companies to look at the situation at a given time point.

Okay, thanks. I don't have any further questions.

The next question comes from Joe Walton from Credit Suisse. Please go ahead. Thank you.

This is just a more general question, Lisa. Now that you've got the new structure in place, you said that you thought it might be a bit more responsive, aligning the costs and the businesses together. Can you give us some update as to how you found that now it's bedded in for a quarter? Are there any examples you can give us as to perhaps a more speedy response to things that the new structure has been able to give? And could you also tell us, from your perspective of looking at the northern European markets in particular, if you're seeing any signs of austerity measures from any governments anywhere making it more difficult to launch products, or just some, you know, update in terms of the market environment that you're seeing at the moment?

Thank you. Thank you. Well, the first question was about the new structure. Yes. One of the purposes was really make the divisions more accountable for their businesses and also for their operations and actions. also be able to compete in their respective markets, which are very different. And I think we are seeing the first signs of that, especially with the innovative drugs and how they respond to the market, build the market access and other type of capabilities and competencies. So I clearly see that each of them is now approaching their markets and capabilities in a more precise way and being able to compete with their respective similar peers. That's very clear. Also now for the generic business, their research and development is now separated from previous ORION research and development, which is now fully focused on the human innovative tracks. So they are looking for more pace and new partners and CROs to do it in a speedier and more efficacious way. So clearly there is, I can see the signs that this was a very beneficial solution. Then for the Northern European market, Well, first of all, Finland, our biggest single market, we can see the continuation of the price decrease. However, in some of the markets, we already hear rumors like in Sweden that government and the pricing systems might change so that they would allow probably more flexibility on pricing, not just putting prices down. But I think what is really important and interesting at the moment is the EU drug legislation that was published yesterday. And there were several leakages of that beforehand, which will have an effect on the European innovation and competitive environment. There are several kind of changes that are suggested for the exclusivity period, for the launch timing, etc. and other things so it will be very interesting to see how what will be the final uh final outcomes of that one and how what type of an effect that will have on on on the pharma industry in europe thank you there are no more questions at this time so i hand the conference back to the speakers

Okay, thank you. Then we will turn to the webcast questions. We have a few from Carnegie's Iris Theeman. I will start with the first one related to cost of goods sold. So your cost of goods sold increased by about 15% year on year in Q1. Why are your cost increases higher than the inflation? I.e. what are the main cost items that have increased?

Well, of course, one always needs to remember that this is cost of goods sold, which of course means that if you get the same sales at lower price, it means that you have more costs. And part of that increase is due to that. For example, the impact of the lower New Pekka pricing, it means that we are selling certain amount of New Pekka to buyer, but the cost of goods is higher than in the comparative period because the volume was higher. But then if we think of the actual cost elements, the normal ones, energy, of course, is now, luckily the costs are down, but still, of course, energy during the first quarter was more expensive than it was last year. And then many of the key materials we are buying there, one can see clearly that in various types of chemicals, the costs are higher. So those elements have been increasing. But as big impact in the higher cost of goods is really that the volumes have increased and as a consequence of that, the cost of goods is higher.

Then Iris has a follow up. The COGS increase is likely to be faster than sales in Q2 and then in turn in H2, so the second half of the year due to easing inflation. So will the sales increase be higher than the cost increase?

Well, like I said in the previous one, of course, it again is a mix of pricing and actual costs. So still during the second quarter compared to last year, we probably will see a little bit, like I said in one of the earlier answers, that the inflation still is impacting our numbers. Then when we go to the second half of the year, probably the impact of that will be less, because the higher costs were already there. But then again, as long as we see prices declining like in SIMDAX and some of the other areas, that probably will show in the numbers as if the cost of goods were increasing. For the full year, we probably will see a decline in the product sales margin, but probably the impact is bigger now during the early part of the year than in the second part of the year.

Thank you, Ari. Then the third one from Iris is regarding ODM 208. I have understood that you have planned to start your phase three study for ODM 208 as fast as possible. Could this happen already in the first half of this year?

I don't think so. I think the message is very clear that the study will be started in the end of this year. Or by the end of this year. MSD will confirm this one.

Yes. Thank you, Liisa. Now we have exhausted the webcast questions, and I had the information that there should be at least one follow-up on the conference call line, so I will hand it back to the operator, please.

The next question comes from Dominic Lund from Credit Suisse. Please go ahead.

Hi, thanks for taking my follow-up. So it's just a longer-term question. So you still appear to be paying out the vast majority of the free cash flow to pay out the dividend. I'm just wondering what gives you confidence to be able to continue to invest in the growth of the business overall? And can you just remind us of how you think about the dividend policy longer term? I think it was just kind of noteworthy that you said... Deciding whether to license ODM208 or do it yourself might depend on how much money you've got at the time. So I'm just wondering how that kind of weighs up when you think about the dividend as well. Thank you.

Well, I could start and then Jari can continue. Well, in our financial guidance, we have clearly stated that we pay at least 1.30 euros per share dividend per year. Then we've also said that, of course, as we generate more income from the Nubeka royalties, we will invest more to research and development, also to our sales and marketing organization. But then it's always a decision by decision, and eventually board makes a decision on royalties. on the dividends. I mean, it's a decision every year, a separate decision, and it depends on our strategy and confident on how good projects we have. But eventually it's a board decision. Jari, you want to add something?

Yes, I mean, I think the dividend payout ratio as such doesn't really have impact on the R&D spending because it's more that what kind of a profitability we want to show. And then after we have certain profits in our hands, then of course, it's a separate decision that how much of that will be distributed as a dividend. So that's clear. And then of course, it's another question that if we want to do M&A and investments like that, and then of course, it's a question that how much that and what is the right ratio between dividends and the investments. But ultimately, the board looks at the overall total allocation of capital, and it's a balancing act between all of these elements.

Great, thank you.

The next question comes from Corla from Bank of America.

Please go ahead.

Hi, it's Graham Perry. Just a question on the pension fund sale or transfer. Would that potentially generate a material gain and would that be excluded from your outlook? And are there any sort of administrative costs that could benefit the operating profit margin as you're no longer administering it? Just thinking at what kind of changes we could see through the P&L from that transfer if it goes ahead. Thank you.

Thank you.

Yeah, I can probably take that. So we published that, assuming that the discount rates will not fundamentally change from the current level. We are talking about plus 20 million one-time gain from the dissolution of the pension fund. On the other hand, we probably will actually see a small annual decline in our profitability in the coming years because the pension fund has been performing quite well and the administrative costs are really very small. So that is the key thing which we are now evaluating, that is the one-time gain enough to cover a long enough period, lower profit or higher pension cost so that it makes sense to do it now. And then, of course, the cash flow is the other impact. But the outcome is that we probably will have a little bit higher costs than today if we don't have the pension fund.

Thank you.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you, operator. We don't have any further questions on the webcast tool either, so I'll hand it to Liisa and Jari for your concluding words.

Well, I thank you for your attention and very good questions and discussion. Maybe to conclude in the end that really the year has started in line with our expectations, even despite of the decline in the first quarter. So we are keeping our outlook as it was at the beginning of the year. Thank you.

Thank you.