Orion Corp New B Shs

A very good summer evening to all of you and welcome to watch Orion's revenue announcement event from the review period of January-September 2023. My name is Tuukka Hirvonen and I will answer the investor relations with us at Orion. Let's start the event in the traditional way with the review of CEO Liisa Hurme, after which you have the opportunity to ask questions to her and the current CEO Jari Karlsson. The official language of this event is English, but you can also present questions in Finnish. In addition, during the evening, the Orion website will also have an interview with the CEO Liisa Hurmeen. Good afternoon, ladies and gentlemen, and welcome to Orion's earnings conference call and webcast for the financial period of January-June 2023. My name is Tuukka Hirvonen and I'm the head of IR here at Orion. We will kick off shortly with a presentation from our CEO Liisa Hurme, followed by a Q&A session, where also our CFO Jari Karlsson will be present. We will first take questions from the conference call lines, after which we will then take questions from the webcast tool, so you are able to type in questions also through the webcast tool, but we will first take questions from the conference call lines. And kindly please state your name and organization before asking your question. And just before I let Liisa to start with her presentation, I'd like to draw your attention to this safe harbor statement or disclaimer regarding forward-looking statements. But without further delays, it's my pleasure to hand over to Liisa. Liisa, please go ahead.

Thank you, Tuukka. And good morning and good afternoon on my behalf as well. And welcome to the Orion Q2 2023 event. Let's look at the key matters or activities from the second quarter. Very good news on our clinical pipeline. We are entering or have entered already to phase two clinical trial with our molecule Tazipimidine, which goes with the name ODM-105 for the treatment of insomnia. Also, we are preparing to start a phase one clinical trial with ODM-211. And I will say a few more words on those molecules later on. We also updated on the capital market day that our ECHL portfolio's peak sales potential is more than 200 million, which is clearly an increase from our original plan. Also, we were told that we are going to invest 30 million euros to increase our production capacity for easy halo devices along the high potential and also increase the capacity to manufacture darolutamide API. All in all, very positive news and projects. On the other hand, we have discontinued our business operations in Russia during the Q2. We have no inventories anymore in Russia. We carry no sales in that country. And total impact of Russia related items was approximately 25 million negative on our operating profit in the first half of 23 compared to the 22. And Then when we look at the numbers more closely, our net sales increased positively, 2.4%. Nubeka, of course, our main driver for the net sales. Animal health also positive, all in all. And the usual suspects on the negative side, like Simdux and Dexter. And unfortunately, this time also Entacapone. And then the decline in operating profit. That was heavy. A two-digit number, 23.5 percentages. So we came down from 153.4 from the 2022 first half, now to 102. Of course, when we compare the first halves of these years, Russia plays a big role in this. It was... partly in our plans, but of course, eventually we didn't know how and when exactly we are able to discontinue and close down our business operations in Russia. So the final figures only became evident during the last weeks. Then there is the lower margin due to price decreases, also product mix to some extent, and increased cost of goods that we have discussed earlier. Cash flow also down 55.1%. That is explained by the decrease in operating profit that we just discussed, and also by increase of working capital. that is now higher than in the first half of the last year. Of course, Nubeka plays a big role there, but other materials and our inventories are quite high right now. On net sales, a very positive development. Nubeka, 44.3 million euros. The whole other portfolio outside animal health, 23.7 million euros. And then animal health and fermion altogether, plus 20.7 million euros. There are also downsides. Dex metadermin continues as it has been declining, although all the time with smaller numbers. As the sales get smaller, the decline, of course, gets smaller at the same time. And then the exchange rates that I will talk more here on the next slide. And I think it's good for us to stop here and really go through all the details on this slide. Maybe it's good to remind, when we discuss the operating profit, that when I first mentioned that Russia generated 25 million euros minus for us on the first half of this year, so that 25 million is embedded in almost all of these columns in this picture. So it's really composed of different factors, not that much of a discontinuation itself, but different matters during the first half year. We can start from the product and service sales on the first one. Of course, there Russia plays a big role because we actually didn't have sales in in that country almost all during the first half. But Nubeka luckily brings a positive vibe here. The next one, minus 57.4 percentage, more million euros, million euros, is the big one. Of course, the loss of margin of the products that we've sold in Russia is included here. Also, the minus almost 20 million, that is a price difference of Nubeka transfer price to Bayer compared to the last year is embedded in this one. And then there are more costs that we've been generating during the first half. So three big parts in this big column of 57.4. Russia, Nubeka price difference and increased costs. Of course, Russia is a one-off item. So that really then belongs to the first half and shouldn't accumulate any costs or losses as we go along this year. Looking at the exchange rates of the 17.2, again, Russian rubble plays a big role with 12.3 million euros. But luckily Nubeka, of course, has generated new sales for us. And then other operating income and expenses as well. All in all, Nubeca is very positive on many fronts, but not quite enough to then substitute the losses on different fronts, for example, in Russia. Looking at our business divisions, innovative medicines, a huge growth, a very good one, Nubeca driven, branded products, down due to the timing of deliveries of entacapone and loss of sales of dvgl in russia an excellent excellent performance by generics and consumer health and you now you might think that why is that excellent you know it is declining here but If you take into account that within this division you have Simdax and Dextor, both declining, as you can see from the numbers, and also Russia has quite big impact on this division. I think this is an excellent, excellent performance. Animal health, almost doubling their revenues and fermion. approximately at par. What is noteworthy here is that innovative medicines now generate 17% of our net sales. I think last quarter was around 10%, so the share of innovative medicines is growing all the time, as it should be. Then when we look at our top 10 list. Nubeka, already discussed. Easyhalers, a 5% growth. All Easyhaler portfolio products grow in a very healthy way. What's new on this list is actually the entacapones. Entacapone products are decreasing almost 30%. And that is, to our understanding, really a timing of deliveries from Orion to our partners. We see that some of the customers around the world are really how would I say, managing their inventories. We see the high interest rates. And of course, some of the companies might also have high inventories after the pandemic. So there is clearly the dynamics is a bit different than at the comparative period last year. The other new thing on this slide is really the animal health products. The number five here, that's also declining almost. 25%. A bit of a same reason here. Also, management of inventories of our customers. High inventories after the pandemic and clearly some different dynamics applying to ordering behavior. And Divina series, as already discussed, suffers from a withdrawal from Russia. Biosimilars have entered our top 10 list. They come and go. Clearly, nothing dramatic or big to report on that front. Innovative Medicines, Nubeka, Clear. But then Ganaxalon will be the next launch for our Innovative Medicines division. And we now know that CHMP has given a positive opinion to our partner Marinus. on the first indication for the CDD. And marketing authorisation is expected in the coming weeks or months. So we are, of course, all the time preparing for the launch with the pricing and reimbursement processes, but anyone who has launched a product in Europe knows that it takes time and it has very different pace in different countries. So I'm sure we will be hearing more about this later on this year. Branded products, a good performance with Easyhalers, but as I already said, we see that Entacapone products, especially Staliibo, has a bit of a, how would I say, backlog of deliveries currently. And we'll see whether that then smoothens out during this year or is moved to next year. Generics and consumer health, a very good result if you look at the last year's first half and then calculate DEX and SIMDAX, as I said, and also the effect of Russia. So the basic generic portfolio in Nordic countries performed very well during the first half of this year. Animal health. After the acquisition of BMD, as we call Innovet, healthy growth on net sales here and Even though we see a growth here, without Inovet and VMD, we would actually see a declining sales in animal health, as you saw on the top 10 product list. There is a weakening demand, clearly, especially on the companion and animal health market. I think it's due to the increased cost of living. People will have to pay for their energy, for their food, for their driving and housing. And now we can really see the effect of that, you know, in the companion and animal market. Not to mention the livestock market to some extent. But there the effect is more the same as with intercomponent animal health. It has to do with inventories and ordering products. cycles. Fermion at par, slight increase in manufacturing, a lot of Fermion's capacity is now tied to darolutamide manufacturing. And this is of course the external sales, but lucky to have capacity also for growth there. Then the clinical development pipeline are two new or one new molecule and then one new indication on this list. ODM 105 for insomnia. Now anybody could ask that why would you develop something to treat insomnia when you work with oncology and pain? Well, insomnia is very often related actually to pain. So it's really difficult to distinguish which is the cause and which is the result. So we see that there is a link, not a very strong one, but there is a link. And the molecule per se, by its qualities, we believe would serve very well in this indication. The newcomer here is Odium-212, a TID inhibitor for solid tumors. This is a JAP-TID pathway in signaling of tumor growth, where this type of a molecule then would be able to have an effect. And here we plan to enter phase one during this year. We have also conducted a double materiality assessment in Orion with our stakeholders this spring. What this means is that we have assessed if our sustainability efforts are in line with those that are in line with our industry, so to speak, that are we doing the right things, taking into account the effect of our industry to the environment and other way around. Luckily, the outcome shows that yes, all the actions and efforts that we are doing are very well aligned with the environment. Of course, first for us is patient safety. That's our top priority at any given moment. The second is better environment. And there we work, of course, with the waste. How do we deal with the waste? And waste is a big thing for the API manufacturing, especially not that much on pharma industry, but for the API industry. And there you should then develop green chemistry, develop new ways of handling the waste that is generated by the API factories and all this stuff. we are currently doing. Then, of course, care for well-being professionals. And what do we mean with well-being professionals? We mean Orionis, so Orion employees. And here we measure and improve our work safety every day, every week. We have introduced the DEI. DIE basics and we take it very seriously that anybody who comes to work to Orion and all the Orionis will have to be able to be who they are in our working community. And of course, we plan for the future talent development and building the future capabilities. Ethics is most important for us. I mean, for any company, but if you're working in pharma industry, I think it should be one of your priorities and there we need to have the good corporate governance practices. data protection. And of course, when it comes to this type of a global industry, where much of the materials, parts of the supply chain are outsourced around the globe, it also means that you will have to be extremely transparent on that supply chain and be able to describe it at any given moment to your customers or buyers around the world. And first of all, of course, to ourselves. and work all the time towards a better supply chains, both from the environment perspective, but also from the social perspective. Regulatory compliance comes without saying. Now to the outlook for 2023. We specified our outlook based on the Q2 results. We still assume that we will be able to do slightly higher when it comes to our net sales. And the comparative number from 2022 is 1 billion 130 million euros. That's all clear and that's as it has been. Regarding the operating profit, we are now estimating that that will be slightly higher than in 2022. And the comparative figure here is 232 million euros without the money received from the pension fund. And the difference here is that earlier we said that it will be slightly higher, that the operating profit would be slightly higher or higher. So we've kind of specified it to be a bit more narrow, but we will grow with our operating profit and we will grow with our net sales. And this is what we communicated early this year, the factors that will contribute both up and down on our net sales and operating profit. I think these are exactly the things that we've been discussing today. They have realized, as we planned, the Russia, both on the net sales and operating profit, pricing pressure on DEX, SIMDAX. And then, of course, the operating cost and cost of goods will, and they have had an impact on the first half of the year, But more we see that now that we have moved to the next or the latter part of this year, it will be the effect of the inventory management and customer behavior for in some of the business that we probably were not able to estimate earlier this year. Markets changed during the year. So both the animal health and the entacapone have clearly improved. clearly shown that there can be changes during the year. Of course, we will have to take such changes into consideration when we look at the rest of the year. But Russia itself was one of and mainly has to do when we compare the first half of this year to the first half of the last year. Here you see the upcoming events, the next one in October 26th, and then 13th of February next year, we will be reporting the full year of 23. And I thank you on my behalf here.

Thank you, Liisa. And now it's time to take the questions. So we will first start with the conference call line. So operator, please, the floor is open for 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 Harry Sefton from Credit Suisse. Please go ahead.

Brilliant. No, that's great. Thank you. I have three questions, please. So firstly, on... the phase two study in insomnia for ODM105. Just once again, a bit more detail why you've chosen insomnia for this asset. Why do you think that this product can be differentiated versus current insomnia treatments? Or as you mentioned, are you maybe looking at a narrower patient population for insomnia, which might be insomnia associated with pain? My second question is on Russia. And so you've pulled out entirely, and this was, I think you said, a 25 million negative impact to EBIT in the first half. I just wanted to understand if any of that impact was a one-off cost associated with the discontinuation rather than a loss of business. And then what can we expect the negative impact to be for the full year 2023? So I'd anticipate that your second half, 22, was already feeling a negative impact for Russia. So should we expect the second half of this year to have a lower impact than the 25 million EBIT impacts you had in the first half? And then my third question is on R&D spend phasing. In the first half of this year, we've seen R&D spends moderately lower than you saw in the second half of last year. I just wanted to understand whether we should expect to step up in the second half as some of these new clinical trials start. Thank you.

Thank you. Maybe I'll start and Jari can then compliment, especially with the question on Russia. Then I'll start from your last question regarding R&D cost. Well, that's a question of timing. If you see a lower cost now for the first half, definitely when we start the clinical programs, both for the insomnia and then for the patients. Odium-212, the cost will be increasing to some extent compared to the previous year. And then regarding the Russia, yes, minus 25 million. That, as I said, is not really a cost of discontinuation. It's more a difference of sales we for the first half of this year we had almost no sales resulting almost no margins so it's really a loss of business from from this six months compared to the last year's similar period there were some one-offs like we sold some inventories to to empty our empty our stocks and all that. And then the other big thing item on the loss of sales and margins, in addition to that, is really the exchange rate. It was very favorable to us, you know, last, especially last year's second quarter. So the comparable numbers are show that. And yes, last year, the latter part of the year already suffered. We suffered from the loss of sales to Russia. So now that we are in the second part of this year, we shouldn't see that much of a change. And Jari, I can continue on that.

We still had some millions of sales in Russia during the last half of last year, but... fairly low numbers compared to the first half of last year. So the loss of business during the second half is not going to be that significant. And we actually had some negative impact during the second half of last year from the Russian ruble exchange rate. So that will kind of compare to this year now when there's really nothing left to be in Russian roubles, that will actually cause some small positive compared to last year. So overall, the impact of Russia for the second half compared to last year is going to be very, very minor changes. The 25 million is most of what there comes. And like Lisa said, the actual real costs related to getting out of Russia, they're a relatively small part of that. We sold some remaining inventories at very low prices, so they're some one-offs. we of course continued laying off the remaining part of people, so some extras there. But on the other hand, we also had this one-time gain when we sold the OTC business, so that 3.8 million was plus. So overall, I'd say that the cost of getting out of Russia actually pretty much were balanced off by this gain on selling the business. So the comparison really is compared to last year, not so much that there would have been extra costs.

Thanks, Jari. And then to your first question regarding ODM105 and why do we think it would work for treating insomnia. We know the molecule earlier from earlier studies, especially in animal health. And we know that it generates a very, if you could say, healthy sleep. for animals and for people. So we think that from that perspective, we can differentiate. Of course, it's very early to say anything at this stage. So let's see how it performs in these studies.

Brilliant. That's helpful. Thank you.

The next question comes from Anssi Raussi from SEB. Please go ahead.

Thank you, and hi all. It's Anssi from SEB. I have a couple of questions, and I go one by one. But the first one about costs. So your administration costs and sales and marketing costs were clearly higher than in Q1 this year. So was there anything... special here or how much was the Russian impact? Could you just open up a bit those rows?

Okay, maybe I can. Russia really played almost no role in there. There are several. I mean, one of the reasons, especially for the admin costs, is the fact that we transferred some people from other parts of the organization with the organization chains that took place at the beginning of this year. And those costs There are, for example, people who used to work for the manufacturing operations in the investment planning and so forth. And that group of people is now part of the corporate administration functions. So that added cost. So that was one element. We also did some changes in how we allocate costs. So for certain costs that we used to transfer from the administration and allocate them to other functions are now kept in the administration. And then also we mentioned that the cost for information management are increasing currently more systems more costs and also the fact that the accounting rules now say that if you use the cloud-based services those costs have to be reported as costs they are not investments like in in the old days when when you build a new system and invested in your own own systems then you have depreciated those costs over the use of the of the of the program now no such deviation of cost over the years, so it's all cost. So there are lots of these type of elements. And then, of course, the fact that we didn't have the innovate business last year during the first half of the year. So all the administrative costs and sales and marketing costs of those, that business is now reported as for this year, and that of course increases the cost compared to last year. So nothing really in a way dramatic here, lots of all kinds of little things here and there, and partly also timing of some consulting work and things like that. In the sales and marketing side, like I said, or also in the report, At the early part of last year, the cost accumulation was still relatively slow because of the COVID. So before we actually get everything started, that slowed down the development there. So those type of things which took place. But the headcount as such, with the exception of innovative people, in these functions has not really changed. So we haven't really added people. And of course, the overall cost inflation and the higher salaries. In many countries, the salary increases actually have been quite significant compared to last year. Not so much in Finland, but in many other parts of the world.

So basically, these are the levels we should maybe expect in H2 this year, as well, of course, including some seasonality.

So, I mean, some seasonality, but in principle, I don't think there will be any major changes up or down from the level where we currently are.

Okay, and maybe related to these cost items, so you are... quite a lot behind your last year EBIT so and you guide of course slight increase so besides this 30 million milestone payment what other main elements you see to reach your guidance like what will change in H2 expect smaller losses from Russia maybe

Yes, you are right there that, of course, for the second part of this year, we wouldn't have the losses of the Russia. That was a one-timer, if you can say that. For the first part, we also see a good performance of our generic portfolio, generics and consumer health. That's one. Nubeka is performing well. There is a strong growth on that front. And Dextor and Simdax, as we see that the sales is getting smaller and smaller, unfortunately, also the loss of generalization of those products is getting smaller. And Jari, is there something I forgot to mention here? Easyhaler. Easyhaler, of course.

Easyhaler definitely is planning to continue growth as well.

Yes.

But so far, I guess, are the main elements. So New Pekka, Easyhaler, definitely. And then maybe some timing issues related to some of these partner deliveries, which really had a negative impact on the first half. it probably not all of that will come back during the second half and some will be going to the next year but at least we shouldn't have as big negative impact on the second half as we had in the first half for those type of changes in the timing so it really comes from all of these things gradually

And maybe to add here that from the beginning of the year, we've been, I think, very consistent of telling that the first part of this year will be challenging. And then the second half will be a better one. So all in all, the full year, we will be able to grow.

And of course, if you calculate, I mean, we had 102 million during the first half of the year. and the other 102 million plus the 30 million milestone already takes us to the level of compared to the last year, four years, is 232 million, which means that then all of these things we were now measuring, the higher Nubeca and UFOs, they are then the ones which start generating the slightly higher.

Okay, that's clear. And the last one from me is about Ganax alone. Could you remind us, have you commented about your initial expectations or any peak sales potential in Europe? Any comment on that?

No, we have not given out any estimates for the peak sales of that product. And it's good to remind here what a good thing that you asked, that especially the first indication is very small for children with the specificity. specific epilepsy and with the specific genetic mutation. So that's why we are going very, how would I say, smoothly to the market. And our biggest aim is to really secure that the patients will have the product available to themselves. Then the second indication then is a very different one. So we'll see then about when we see the phase three results. But we have not given out any estimates for the revenues.

Okay, thank you.

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

Okay, hi, I have four questions. We'll take this one by one. Firstly, starting from cost inflation, do you still expect cost inflation related to Cox and OPEX to moderate after the first half of the year?

Well, I guess we are in a situation that the costs, I mean, of course, some costs still can increase, but then there are also areas like energy where the costs are down. So overall, we probably will not see much increase during the second half of this year compared to the year earlier. But of course, they will not go down to the level where they were during the early parts of last year. So we are now at a higher level than we were a few years back. But at the same time, we don't expect an overall big impact from that, increasing our cost base any more. But of course, I mean, one never knows, but that's at least currently the thinking we have in the overall portfolio of costs, because some are coming down, some are increasing. And like I mentioned, the salary increases, for example, some of them continue hitting us little by little this year and then next year, but let's say that the worst situation was from first half to second half last year and now it's more leveled off.

Okay, my second question is on the destocking headwind that you're mentioning with a negative impact on entacapone and animal health. Do you think we have seen the worst during the first half of the year or And do you have visibility on things improving during the second half of the year?

Well, I think it's very, very difficult to say if we have seen the worst. It's always difficult to estimate other companies' ways of managing their business. But this is what we've seen this far. And that's why we also wanted to specify our outlook. Awesome.

And I think it's probably likely that, I mean, especially if you are talking about kind of a permanent decrease in the level of inventories, it might take still the rest of the year in some of the customers to take their inventories down to the level they want, which means that then we will start kind of the sales picking up only towards the end of the year or early next year in some cases. But at least I think it's not very likely that we would see all of the negative we saw in the first half of this year to be gained during the second half of this year. So some of this will, at least for this year, will be permanent. And then we'll see whether there are some more permanent impacts. But at least today we still believe that in most of the cases the impact is for this year. And then next year we will see some rebounding of the business.

Okay, thanks. And then thirdly, regarding the guidance downgrade, could you still open up the reasons that led to this downgrade during the second quarter?

Well, I'll start with the, well, as I said, we started the year telling that the first half is a bit of a challenge, and then the second half will be a better one. The only thing that we now realized was really that it probably wouldn't be Exactly as good as we thought. And there are these timing issues for our partners on deliveries on our partners and also the softening of the animal health market. So those are the main changes why we did this change in our outlook. Otherwise, I think year has, as we said, mostly actually advanced as we planned. So everything has gone very well. We see a lot of our products proceeding extremely well on the marketplace. But you have to be honest with yourself that if you see something happening, you need to take that into account in your outlook then.

And of course, we are not talking about... Sorry. Yeah, go ahead. Yeah, I mean, and of course, one needs to be put in this perspective that we are not talking about necessarily very major changes in millions. I mean, from 230 level, one percentage is a couple of millions. 5% is 10 million, which very easily can happen one way or another, and that definitely is already moving the range quite a lot. So we are talking about changes in the views of in the neighborhood of not that many millions, but the other side positives, we clearly saw that those to some extent because of these changes in those couple of areas Lisa mentioned are now there. So the change is not really dramatic, but Some millions here.

Yes, we talk about single millions here. That's good to understand.

Just to be clear, you're not calling the Russian exit or expense development as reasons for the downgrade? No, not really.

They were, according to our plans, of course, a bit more than we expected. And we, as Jari explained, we don't think that we will see any bigger minus developments on that front for the second part of this year.

Okay, thanks. And then finally on ODM 105, can you please provide some color on the market potential as you're now disclosing insomnia as the target indication?

Well, insomnia is a very big challenge, especially in the Western world. But of course, for the market potential, I would need to know more about the molecule. And before I would comment anything like that, I would need to have the next study's results. Because it depends, of course, on the label and the patient group and all that.

Okay, thank you very much. I don't have any further questions.

The next question comes from Victor Sundberg from Nordea. Please go ahead.

Yes, hi. Thank you for taking my questions. I have three, if I may. So first on gross profit here, you write that it's significantly hit by your price decreases in your manufacturing price to buyer. As you write, this will be offset by royalties in the future. I just wonder how we should model this. When do you expect royalties to offset this price decrease, and are there any other price components in the manufacturing part that could be changed in this agreement going forward, or was this the final price decrease? That's my first question.

Well, I mean, ultimately, our cost will be the cost of goods sold, and those, of course, are recorded every time we ship. But when the delivery price is lower, then of course means that during the same period when we ship the product, we actually earn a little bit less margin. But buyer always then, according to the agreement, deducts their purchases from their royalties in the next quarter. So this is quarter by quarter type of movements. But of course, ultimately, this situation will balance off only when buyer has sold off all the inventories eventually, years and years from now. But now they are clearly in the inventory build-up phase, because also their sales are growing very rapidly. But the impact of this price decrease is very temporary, that only hits us kind of one quarter to another, so it moves it until now, because that price change took place in the summer. So from now on, we will not see any kind of a year-on-year impact from this price change anymore. So that was something which affected our numbers from third quarter last year until second quarter of this year. And after that, this situation is over. But of course, it will have some impact throughout the whole year when its balance is off, but mostly we are kind of over that level now. But of course, we still will see a little bit of lower margin from Nubeca as long as buyer continues to buy from us more volumes than they are during the same period selling out. But that of course is smaller impact, let's put it that way.

Okay, thank you. And on inventory stocking, really nice that you clarified a bit there. But I also wonder why we didn't see much of that in Q1, since that was also past the pandemic. I just want to get some more flavor on when you saw more increased lack of demand due to inventory stocking at your customers. Thanks.

I think this is... interesting question for many industries, not only for us that we start to see the effect. during the spring closer to summer now, you know, that the companies are really adjusting their inventories. And I think it's two factors, Jari, you can then tell more about it, but I think it's two factors. Many of the companies might have high inventories after pandemic. We all stopped, you know, during the pandemic to be on the safe side and then hit the higher interest rates. So it's kind of a double whamming for companies and they are trying to manage both of these things. as they go along. Thus, I don't have an answer really to your question that why now, but it seems to be also in other industries that we see it now.

And in case of Stalevo, we actually saw it already in the first quarter. So the sales there were already down to some extent. But I think it's really a question of timing that people start these programs to reduce their working capital, to release more cash out of them. And before those programs then start materializing in their purchasing behavior, there typically is a little bit of delay. And now we saw the impact of that delay hitting us to during the second quarter of this year when customers started to some extent cancelling their orders and or shifting their orders to later stage and so forth. So I think the programs probably were started somewhere late last year, but before they really materialized into these changes in the buying behavior that just tends to take some months time. And we are now seeing the result here.

Okay. Thank you. And also had a final question here yet again on ODM 105. So I apologize for asking yet another question on this topic, but I just wondered, you know, the current drugs use here, say Clonidine and Guanfacine that is used off-label also target the alpha-2 androgenic receptors. So I just wanted to understand a bit more how you will position this drug in insomnia, let's say against those current drugs being used at the moment.

Well, I think we'll be ready to answer that question a bit later on, probably next year.

Okay, thank you.

The next question comes from Graham Parry from Bofe. Please go ahead.

Hi, it's Graham Parry from Bank of America. So just going back to the Entacapone and animal health destocking, do you have a sense of what your underlying growth in is XRD stocking? So can you quantify that in any way at all? Secondly, what's causing weaker demand in animal health? Is this a temporary issue or sustained issue? slow down. So do you think that we'll see the companion animal side of the market pick up again second half or into next year? Or is this just a cost of living crisis issue? And then it's probably a bit early for 2024 guidance, but just thinking about the dynamics and the moving parts, if you take Russia out, destocking out into 2024, and if you're still seeing acceleration in New Becker, do you see a shape of your growth where you can see an acceleration in both sales and operating profit growth into 2024? Thank you.

Maybe I can start a little bit on the endocarpon and animal health. Of course, then one needs to remember that these are generic products. So those products have not had patent protection for years and years, which means that the underlying market for those products is not really growing. I mean, it's not decreasing either. And that's why, of course, these changes in the inventory levels of our customers hit us so hard because they don't really have any specific need to increase their levels of inventories because their sales have been stable for quite a while. And the only reason why they likely had a little bit higher inventory was that they wanted to make sure during the COVID times that they actually have product to sell. So that's, I think, is the explanation there, but there have not been any underlying growth. I mean, the Antacapone products lost the patent protection a decade ago, and some of the animal health products even longer time ago. So that's, I think, is... And maybe on the animal, there have been several other animal health companies actually telling about the same phenomenon currently about the weakness in the market. So we are not the only one who see the impact.

That's very true. It seems to be a very general phenomenon. And then regarding the 2024, it is very early. But I think you listed from your side, you know, how it looks like. But it's far too early to comment on that one.

But of course, the key driver definitely will be Newbega. I mean, there are no signs that Newbega growth would start slowing down or stopping at this stage. And if that product continues, then of course, that will be a major driver, especially because some of the negatives should not anymore reduce the overall impact of the Newbega growth. But of course, we want to grow the other businesses as well, wherever we can. And like we have seen this year, I mean, when you take out of our human side, say, with New Beka and then the declining product, we've actually saw underlying growth. And of course, we are aiming to continue in that area as well next year.

Great, thanks. And I've just got one follow-up, actually. If you just quantify the temporary ELP system costs that you talked about, so how much of that is the temporary impact in your costs in your OPEX versus the information management tools that, if I read it correctly, those would be recurring incremental costs, so if you just help us understand how much is one-off in the quarter on ERP, thank you.

I mean, there are some one-off, but I think mostly what we really are seeing is is costs that are higher. Of course, one way or another, we need to be able to offset those costs in more efficient operations in the other parts of the company, but those don't necessarily show up in the administrative cost line. But we are not talking about I mean, maybe some millions during the length of the program, which we will see definitely extra costs, but not anything dramatic. Mostly the biggest cost items there go to as investments. But then, of course, the depreciation of those investments over the next five years, we will see a fairly... fairly large numbers, so some millions at least per annum of additional cost. So definitely we will continue seeing a higher than in the past information management cost. There's probably nothing we can really do about that. But like I said, then we need to find the savings in some other parts of the company in utilizing those systems we are building.

Got it. Very clear. Thank you.

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

Excuse me. Thank you. I just wanted to thank Yari for all of your hard work over many years. He's been one of the most open and honest CFOs in terms of our communications. And I know this isn't going to be your last meeting, but I wanted to take this opportunity to thank you after it was announced that you would be leaving. But my two questions then, aside from that, will be very quick. Firstly, I wonder if you could give us your views on the new European regulations as a concept that in future you may need to agree to have all of your products launched within a couple of years or there will be some pricing or patent impacts. And secondly, Just your relationship with Bayer and Newbecker. You have the opportunity to co-promote the product. And I'm just wondering what level of investment you are putting behind Newbecker today, which is giving you more insights into oncology markets going forward. So just your level of involvement in the promotion of the product as it is now. Thank you.

Well, should I start with the European legislation and regulation? I think, as you mentioned, it's quite a tight requirement for the European or any pharma company to launch within a certain time. I think it's 24 months to be launched in all european countries uh i don't remember whether there was i i don't think it's a penalty but there is a premium if you do that so you can extend some of your uh patents or protection if you've done it in in such a way and you could even probably choose the product to which you want to extend it which of course offers some kind of a carrot you know to companies however Of course, Europe has very different business environments for pharmaceutical industry. So any company will have to then balance, you know, what is the best way to approach the European market. We'll see how it will then pan out. Then regarding Bayer and Nubeca, yes, we are doing a co-promotion in Europe and Orion has sales reps on the field, which is very beneficial to us because we, of course, have learned a lot about the market and have a very intimate relationship with our customers in most of the countries. I don't think we have ever shared, you know, the customers. cost structure? How have we done that?

But of course, I mean, what we have said is that because buyer is paying for the service, so in the profitability line, it's fairly neutral for us. So the investments we are doing and the people we have in the field, we get compensated for that. And the compensation more or less covers covers probably the cost, I mean, we have some tens of people, I mean, not 100 people or anything like that, so in tens of people around Europe. So in our scale, reasonable size of operation, but nothing really big one could say.

Exactly. For us, the main investment is clearly for the manufacturing and securing the supply.

Thank you.

The next question comes from Brian Balchin from Jefferies. Please go ahead.

Hey, thanks for the question. It's just on ODM 208. I think we've got phase three expected to initiate at the end of this year, but we're yet to see phase two data. So if you could just give us an update on that. And then also just on the timing, I see possible transfer of insurance. Thank you.

Now, we didn't get your last question. There was a lot of noise on the background. But I think for the first one regarding ODM 208, that is the plan currently. to start by the end of the year, the phase three studies. But what was the second question, if you are able to repeat it?

Just on the timing of the possible transfer of the insurance portfolio.

Thank you. Timing for...

Or the enlargement of the endocarpon portfolio.

Enlargement of the Parkinson's portfolio. I think getting new drugs to serve our patients with Parkinson's disease. We have actually launched in several countries in Northern Europe already a Levocabin. levodopa-carbidopa combination product and are developing some other combination products, new combinations, and hopefully we'll be able to launch somewhere around 25 or beyond that.

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 actually have a few questions from the webcast chat tool. Actually, Brian, who was just online, had some questions also through the webcast. So maybe these were the ones we didn't hear. So the first one is regarding the pension funds fund B. Any timing on possible transfer of the insurance portfolio of the Orion Pension Funds B fund? And wouldn't that help drive guidance by foregoing administrative costs?

The timing, I mean, there are certain clear regulations of when you can actually, it means always at the end of the quarter. And in this case, because this is more complicated than moving pensions from one pension insurance company to another, it will take roughly six months. So the timing and target is to have that transfer to take place during the last day of this this year, which then means that also the benefits will be booked at that date. Like we already specified in our review today, because this year, the last day of the year is Sunday, it means that actually the cash flow impact will only take place during the first day of next next year, but it will not really have any impact on the administrative cost in any real big way. We have managed the fund with extremely small number of people and you will not really see anything that would be significant enough that it would show up in the group level numbers.

Thanks, Jari. The second one was related to Entacapone and the decline in the first half of this year. Can you clarify that the negative is down to improving lead times post-COVID and also destocking? To what extent will this carry through to subsequent quarters?

Good question. And as we said, it's really difficult to say how it will carry out to the subsequent quarters. We've seen now this phenomenon and that's why we are a bit more careful with our outlook, but it remains to be seen then.

Thanks, Liisa. And then a follow-up regarding the ODM208. When we will see phase two results?

Well, it's actually an open study. So, of course, MSD and us, we are all the time, you know, reading the data. And that's very important when we are designing the phase three study. But when we are going to see the final results, I'm not going to comment that I leave that to MSD.

I mean, then it's a different question when the study results are available internally and when they actually will be published, because that sometimes is tied to the timing of the scientific conferences and so forth. But at some point next year, very likely.

Thank you. And then the last one from the webcast is from Iris Theman from Carnegie. You expect operating costs to increase slightly year on year in 2023. In the first half, OPEX were up by 14% year on year. So which cost lines do you expect to decrease in the second half versus first half in order to reach slightly higher OPEX in 2023?

I think there were these timings, especially on the IM and some of the cost side, I mean, consultancy and timing billing issues. So I'm sure we will see some improvement there. And otherwise, Ari, how do you...

No, I mean, of course, the R&D cost is always the challenging area to evaluate because it's so dependent on how fast some of the programs actually get started. We have now listed several programs that are about to beginning or just beginning and how those costs for those will start accumulating. We'll see, but... For the time being, I guess the assumption still is fairly clearly that the R&D costs will be slightly higher than they were last year. But that, of course, assumes that the costs really can materialize. Of course, last year then, one of the things we need to again remember is that we had then the InnoVet-related costs. They were already there during the second half of this year. Those costs which have now been increasing the cost base during the early parts of this year will not increase the cost base any more compared to previous year during the second half of the year. So that's also good to keep in mind.

Thank you, Jari. There are no further questions from the webcast, so I'll pass it on to you, Liisa, to your final remarks.

Thank you for coming here today. I know it's July and for many people it's even a vacation period. So thank you for your attention. And I wish everybody a nice and relaxing summer. Thank you.

Thank you.