Sandoz Group Ag S/Adr

Good morning, ladies and gentlemen, and welcome to the Sandoz call today. I will now pass on to Karen King, Global Head of Investor Relations, for her opening remarks.

Welcome to Sandoz's half-year results 2024. Earlier today, we issued a half-year 2024 report, including the financial statements of the company for the first half of the year. We also released a press release summarizing our sales performance in the second quarter, and our results for the first half. In addition, we published a supplemental slide presentation on our website earlier this morning, which we will follow on today's call. You can find all these documents in the Investor Relations section of our website at investors.sandos.com. Joining me on today's call are Richard Sanor, our Chief Executive Officer, and Remco Steenbergen, our Chief Financial Officer. Remco joined us on July 1st and is with us today for his first Sandoz Earnings Call. Our report, press release, presentation, and discussion include forward-looking statements. You should not place undue reliance on these statements. Such forward-looking statements are based on our current belief and expectations regarding future events and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward-looking statements. In this document, we present certain non-IFRS measures. These non-IFRS measures may not be comparable to other similarly titled measures of other companies and have limitations as analytical tools, and should not be considered in isolation or as a substitute for the analysis of our operating results as reported under IFRS. Non-IFRS measures are not measurements of our performance or liquidity under IFRS. They should not be considered as alternatives to profit for the year or any other performance measures derived in accordance with IFRS. For discussion purposes only, in today's presentation, Sales in this document refer systematically to net sales to third parties, and our comments on growth are expressed in constant currency. As a reminder, in the first half of 2023, third-party sales excluding sales to our former parent, as this was shown as a separate line item. Post-separation, sales to our former parent were classified as third-party sales. And with that, I'll now turn the call over to our CEO, Richard Steynor.

Thanks, Karen. It's a pleasure to welcome you to our second quarter and half-year 2024 results call. We had an exciting and promising half-year, and I'm looking forward to sharing our results with you today. The momentum in our business continues as we execute on our strategy. We are making considerable progress on our biosimilar launches, and at the same time, are advancing some of the key biosimilar products in our pipeline.

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and the biosimilar milestones in a moment. Our sales grew 7% in constant currencies in the first half of the year, driven predominantly by the fantastic progress we're making with our biosimilar business. I'm delighted we saw growth across all our regions, and we would like to take the opportunity to thank all my colleagues at Sando for this great achievement. And is this not it? We expect even more growth in the second half of this year. Our core EBITDA margin declined versus the first half of 2023, as expected, due to the inflationary impact of our cost of goods sold, which impacted us as the second half of 2020-23. Our core EBITDA margin improved significantly compared to the second half of last year, with H1 quarter by quarter driven by continued favourable by a similar product mix and the absence of further inflationary pressure. We look forward to the second half of the year. We expect our margin expansion to further accelerate from a continued favorable biosimilar mix and the benefits from our transformation program, which we initiated late last year. This robust performance gives us the confidence to raise net sales guidance to mid to high single digits and to confirm our core EBITDA margin guidance of around 20% for the full year. I am very proud that we keep on delivering on our top line now with our 11th straight quarter of growth. In the second quarter, we again saw strong growth of 9%, which resulted in a 7% growth for the first half of 2024. This is primarily driven by biosimilars and, once again, all regions contributed to growth, a testament to the strong execution across our organizations. the ability to use our scale to deploy our portfolio, and our deep competences to keep on launching successful new medicines. For the first time, price erosion did not impact the top line in the second quarter of 2024, and over the last four quarters, it has remained lower than what we have seen historically. Now, let's turn to the business. Our generics business grew 1% in constant currencies in the first half of the year, primarily driven by strong demand in our international region. In Europe, sales remain stable despite challenging year-over-year comparisons. We had strong sales of Apixvan in the first half of 2023, and due to IP litigation, we had to withdraw the product in the Netherlands in 2023. We also had an exceptional cough and cold season in the first half of last year, and a more average season in the first half of this year. While both items impacted our generics business in the first half of the year, they expect to resolve in the second half of this year. In North America, our generics business declined in the first half of the year, as our launches are phased in the second half. Therefore, we're expecting to see a pickup in the second half of the year, including the launch of Paclitaxel in the fourth quarter, which could be a sizable contributor. Our biosimilar business grew a fantastic 29% in constant currencies in the first half of the year. We are pleased with its exceptional growth as it reflects both the success of our new launches and the strong demand of our base biosimilar business. Hyrum Oz continued to win share in the U.S. and retained the leading market share amongst biosimilars. Tyruco, or Biosimilar Nathalizumab, has grown share and contributed to sales in Europe and and Omnitrope continue to experience strong customer demand in a constrained market supply environment. We're also progressing well on key biosimilar assets in our pipeline and are well positioned for our upcoming launches in 2025. Firstly, Y-Office at Ubonte, our biosimilar to Denosumat, received both European Commission and USA FDA approval. Y-Osteotroponty are the first and only FDA-approved biosimilars in the reference medicine, and we have settled on a launch date by quarter to 2025 in the U.S. Secondly, P. stiva, our biosimilar ustekinumab, was the first biosimilar ustekinumab approved in Europe. We already have a strong presence in immunology, and this product will allow us to leverage our existing infrastructure. We have recently all started to launch the products across Europe and have settled on a launch date in the U.S. of quarter one, 2025. Now, let me provide more color on Hymeros in the U.S. The launch continues to go very well. In addition to our private label agreement with Cadavis, where we have a preferred access to 65% of CVS, Caremark, commercial templates, and lives, we are winning share with our own branded Hymeros, and unbranded Adalunumab ADAS. The most recent IQVIA data shows that biosimilars have captured 19% of the market. If we just drill down on the Adalunumab biosimilar prescriptions, we have 81% share, which includes our private label arrangement with Cardavis and the number one position with our own branded Hymeros and unbranded Adalunumab ADAS. This puts us in a leading position. in terms of market access and paying coverage amongst add-on amount biosimilars. We are on formulary with all three major pharmacy benefit managers and are uniquely positioned by offering firstly the same dosing options as Humira, including a unique starter pack, two presentations, high and low concentration, to ensure broader access for patients, a premium device that is supported by a comprehensive patient support service and a specialty sales force, interchangeability, and a vertically integrated supply chain offering reliability and consistency. And we are a global leader with biosimilar adalunumab in terms of patient lives covered. Now, let's turn to Omnitrope. Omnitrope was the first biosimilar we launched in 2006, 18 years ago, and we're still seeing strong double-digit growth, which speaks to the sustainability of biosimilars. We are the market leader with the most recent share of 38% based on the latest available IQVIA data at the end of March 2024. This market has been supply constrained through the first half of the year, and we're prioritizing this critical medicine to ensure physicians and patients are receiving the supply that they need. Now, I would like to update you on Tyruco. We started rolling out Tyruco to markets across Europe at the end of 2023. This product will build over time because the product profile is complex and we want to ensure that an optimal outcome for each launch country with steadily growing share. Both tender authorities and healthcare professionals are valuing the availability of a more affordable biosimilar in the multiple sclerosis space with this positive feedback from both physicians and payers. In the U.S., we're still working with the FDA on our approval of the JCV assay and continue to target a year-end 2024 launch for this year. Since our capital market state of June 2023, we have consistently said there is an organizational efficiency component to our margin expansion goals of approximately 150 basis points. And I'd like to update you on the progress that we've made since. We've been working hard in transforming our organization to become a more fit-for-purpose, more agile, simpler, and more efficient organization. Coming out of a large pharmaceutical company with a much more complex and layered infrastructure, we have plans to reduce layers across the organization and simplify our processes. We spent the first half of the year identifying the scope of the opportunity and communicating with our works councils. We are now in the implementation stage and have started with the first changes. And we're already noticing the benefits in terms of our ways of working. This will be a multi-year program. We expect to incur costs of around $350 million, primarily related to personnel costs, with expected annualized run rate savings of around $200 million by 2026. We expect to see the first major saving benefits in our results, starting in the second half of this year. With this, I hand over to Remco for the financial performance and guidance.

Thank you, Richard. I'm pleased to be here with you today on my first Sandoz earnings poll to discuss our second quarter and half-year financial performance. After almost six weeks with the company as CFO, I can tell you there are fantastic opportunities ahead of us, and I'm thrilled to contribute to it to the max. And to Richard and all colleagues at Sondos, thank you very, very much for the warm welcome that you have given me. To all of you on the call, I look forward to meeting you in person in the coming weeks and months. As Richard mentioned in his opening comments, we had a strong first half of the year, and we are gaining momentum as we launch new high-value products. Sales growth for the second quarter was 9%, all coming from volume with no price erosion. And sales for the first half of the year grew 7%, with 2% price erosion, below the 4% in the first half of last year. Foreign exchange had a negative 2 percentage points impact in the second quarter, and a negative 1 percentage points in the first half. This was mainly the consequence of depreciation against the US dollar of several currencies in our international region, partially upset by depreciation of the Euro and Swiss franc. Let's now move to sales by business. Generic sales increased by 1%. Solid volume demand in international was partly upset by a tough year-over-year comparison. In Europe, we saw strong performance of Apixaban in the first half of last year, followed by the withdrawal in the Netherlands in August 2023. We also had an exceptional cough and cold season in the first half of 2023, compared to a moderate one in the first half of 2024. In the United States, as Richard mentioned, launches are phased in the second half of the year, including one larger expected launch of Paclic Saxel, with this impacted the sales growth in the first half. We expect the generic business in the U.S. to pick up in the second half. Biosimilars delivered strong growth of 37% in the quarter and 29% for the first half. We are incredibly pleased with this performance and with the strong progress that we are making with our Biosimilars. The growth was driven by the ongoing launch of Hyramus, similarly, and continued strong demand for our first-ever biosimilar Omnitrope and contribution from the recent launch of Tyruco in Europe. In the second half of the year, we expect continued momentum from biosimilars I just discussed and contribution to start from the recent launch of Ichifa or biosimilar Ustek Kinobap, We also will launch Tyruco for biosimilar natalizumab once we receive FDA approval of our GCV assay in the United States. Now, let's have a look at the performance of our three regions. All three regions delivered good performance in the second quarter and the first half of 2024. Europe grew 3% in both periods, gains from generics volume and continued strong demands from Omnitrope were partially offset by the year-over-year impact from the withdrawal of apixaban and the exceptional cough and cold season last year. North America grew 23% in the quarter and 14% for the half-year and benefited from strong biosimilar performance, primarily from the launch of Iramas and the acquisition of Simerly. Strong growth was partially offset by decline of the U.S. generic business due to the timing of launches. International grew 9% in the quarter and 10% for the whole year respectively. Due to strong volume growth across biosimilars and generics, with contributions from MyChemE and Fabro pricing. So it's clear that our hard work on biosimilars starts to pay off. With a continued quarter of strong double-digit biosimilar growth, biosimilars increased as a proportion of total sales to 27%, compared to 22% in the first half of last year. If you recall, at our Capital Markets Day last June of 2023, we set the goal of obtaining 30% biosimilar mix as a proportion of total sales by 2028. So we have started very well. Our regional sales mix remains consistent with over half our business in Europe, where we hold strong leading position, and the remainder equally divided between the North American region and the international region. Now, let's move on to margins. Let me first focus on the sequential change in margin before providing details on the year-over-year change in margin on the next slide. Comparing margin in the second half of 2023 provides a clearer view on our progress as we were still operating as a division in the first half of 2023 and the inflation on input costs only started to affect our cost of goods sold in the second half of last year. On a sequential basis, we're making significant improvement. Core gross profit margin of 50.4% is 170 basis points higher. For our core EBITDA, the sequential improvement is even stronger, with 210 basis points of growth. These improvements are driven primarily by favorable product mix from strong double-digit biosimilar growth, whereas the inflationary pressure on our positive results has only been minimal. For the second half of 2024, we expect this trend to continue, but more of that later. If we compare the year-over-year core EBITDA margin, we first need to normalize it for our treatment of third-party sales and standalone costs. Our core EBITDA margin in the first half of 2023 was based on third-party sales excluding sales to our former parents, which were classified as internal sales. Post separation, sales to our former parents are classified as third-party sales. Restating the first half of 2023 results in a 0.6 percentage points lower core EBITDA margin. In addition, the first half of 2023 only included part of our cost as a standalone company, whereas the first half of 2024 has the full cost included. Restating the first half of 2023 results in a 1.4 percentage points lower core EBITDA margin. Therefore, on a comparable basis, year-over-year core EBITDA margin decreased by 1.3 percentage points from 8.8% to 17.5%. The positive mix impact from strong double-digit biosimilars growth is more than offset by higher cost of goods sold due to the carryover of higher input costs in 2023. Price erosion increases sales and marketing to support launches and investments in the pipeline. Later, I will provide you with more insights on expectations for the core EBITDA for the second half and therefore the full year 2024. Let's first start with free cash flow. To provide more insights on our free cash flow from our core business, we're excluding the one of items and introducing the management free cash flow. This is a new format that we're introducing this quarter. In the first half of 2024, we increased inventory from our former parents. And other working capital and operating items remained stable despite strong growth. We have continued to invest in our future. CAPEX included investments in our new biosimilar facility in Slovenia and the expansion of our antibiotics facility in Kundo, Austria. This has led to a management-free cash flow of a positive 237 million which is higher than the first half of 2023 of $1 million. The reported free cash flow was $21 million, and compared to an outflow of minus $86 million in the first half of last year. One of the items mainly were the separation-related operating expenses, and the CAPEX incurred in the first half of 2024. Now, let's have a look at our balance sheet. For our debt financing, we benefit from a well-balanced maturity profile with an average maturity of gross financial debt of approximately five years. This has been financed with fixed rates for about 70%. This means that our net debt has been financed with fixed rates for about 90%. Our liquidity decreased as we paid our first dividend in May and acquired Similee. whereas our reported free cash flow was limited as we paid nearly 200 million one-off separation costs to. Our equity has remained stable around 8 billion and compares to a net debt of 3.4 billion. We have solid investment grades, ratings placing our company in a strong financial position to support our ambitions. Thank you very much for listening to me so far. And we're now moving to our full year 2024 guidance. I'm very pleased to inform you that we're increasing our top line guidance for the full year. We now expect net sales to third parties to grow mid to high single digits in constant currencies compared to mid single digits, which we guided so far. We're also confirming our 2024 guidance for EBITDA as a percentage of net sales, which is expected to be around 20%. As I said before, I would like to give you now some more insight as to why we expect poor EBITDA margin to increase in the second half of the year. First, this is due to continued favorable mix as biosimilars expected to become a larger proportion of our sales. Secondly, we expect price erosion and inflation on input costs both to remain limited. Thirdly, We expect further manufacturing efficiencies in the second half of the year. Fourthly, as we grow sales, we will leverage our fixed cost base. A good example is our recent launch of PGE Fine Europe. We are already a leader in immunology and can leverage our existing sales force without adding incremental expense. Lastly, our transformation program, which started in the first half of the year, will start to generate savings. As Richard mentioned earlier, We expect around $50 million of savings in the second half of 2024. Thank you for listening to me, and with this, I will hand it back to Richard. Thank you so much, Remco.

Indeed, our product mix is expected to improve further. Regarding product approvals in the second half of this year, as I mentioned previously, we recently announced the launch of Peace Chiba in Europe. This was the first biosimilar Oosterkinema approved in the region, and we're very excited to add this product to our strong immunology portfolio. We expect also to launch Tyruco or bisimilar natalizumab in the U.S. late in 2024, pending FDA approval of our JCV assay. And as I laid out in the beginning, we expect more to come in 2025. I would also like to remind you that what you can expect from us later this year. We have our strategic review update live in Zurich next month on September the 3rd, where we'll explain further our strategy our progress from the spin, and highlight key initiatives supporting our growth ambitions. Regarding our next financial update, we'll host our third quarter sales update on October 30, 2024. In summary, we are the global leader in generics and biosimilars and the number one biosimilar company in terms of market share based on IQ via data. We are a European champion with a presence in over 40 markets and are well positioned in the United States and through our international region in many markets around the rest of the world. We have the internal capabilities to execute on our pipeline and the scale to develop and attract strong partners to capture high-value, long-term opportunities. And we are operating in a large, growing, and attractive market. This means that we have everything on hand to deliver on our mid-term guidance both in terms of portfolio and pipeline, and opportunities to simplify our business. All of this with the objective to deliver superior value creation for our society by pioneering access for patients and our shareholders. Thank you very much for listening to us. With this, I will ask the operator to open the line for the Q&A.

Ladies and gentlemen, we will now begin our Q&A session. If you have a question, we ask that you please use the raise hand function at the bottom of your Zoom screen. Or if you're dialed in, please press star nine to enter the queue. Once your name has been announced, you can ask a question. If you want to withdraw your question, please lower your hand using the raise hand function in the Zoom app or via telephone, press star nine. Thank you in a moment for the first question. Our first question comes from James Gordon at J.P. Morgan. Please unmute your line and ask your question.

Hello, James Gordon from J.P. Morgan. Thanks for taking the questions. The first question was, so the four-year guide implies about five percentage points of core EBITDA margin expansion in H2, and that's quite a step up after about two percentage points you did today. And the slide was very useful. I think it's slide 25 showing the bridge. So it sounded like, if I heard correctly, that 50 million is the transformation. So is that the savings? And then roughly in terms of percentage points or basis points, how much do you think you're going to get from the other factors? So can you help us a bit with some numbers in terms of how much are you going to get from mixed efficiency SG&A and leverage? Second question is sort of connected to that. The guide is around 20% core EBITDA margin. How do you think about around? So would 19% be around? Or how close to 20? How narrow is your round? And then third and finally, There's been some talk about GOP ones, and you might go off to buy some of the GOP ones. Is that something that's going to be a focus of the strategy event? And how are you thinking about whether you'd invest lots in CapEx to make those or outsourcing them or the mixture of those two, please?

Thank you, James. I'll let Remco take the first two questions, and then I'll take the flip question.

Hello, James. Good morning. Remco here. I understand your question very well on the second half, right? We laid out, correct, in the graph three components, correct? Mix, leverage on the fixed costs, and the transformation benefits coming in. The transformation benefits are indeed 50 million, so that's indeed a reduction of the cost of 50 million. For the rest of the costs, we expect a relatively flat, a slight increase, but a relatively flat number compared to the first half, and then we have the mix. If you compare the mixed impact and the cost impact, it would be around 50-50 as we currently estimate to reach that 500 basis points improvement. I hope that answers that part of your question. Yeah, around 20%, correct? It is, as it says, around 20%. So, of course, we want to come as close to 20% to give you an exact number in this. It's exactly what we don't want to do because that's why we say around. But to rest assured, correct, 20 is the number we have in mind, and we want to go over this. And with the last question, perhaps we can get back to Richard.

Yeah, look, I mean, September, we intend to give more details. I think we've already disclosed that we clearly, this is a space that we're intending to go after. I think the important thing, there's a couple of things to think about. Really think about GLP-1s really in two or three phases. The first wave of GLP-1s coming off patent really start in Canada. with semaglutide, and then a number of the international markets for the diabetes indication. So you won't see a big step up there. So I think it would be interesting to see how that will evolve. And then it's not until sort of the early 2030s that you see the U.S. and Europe starting to come up. So it's not as though GFA1s all come off in one go. In terms of CapEx, again, this is an injectable product. We are investing heavily in injectable capabilities anyway. We're already in the auto-injector space, so this isn't a technology, certainly from that device point of view, that we're not unfamiliar with. And we'll tend to give you more clarity in terms of how we think about that over the next few years. But clearly, it's not something that's going to happen overnight. It's going to build over several years. Thank you.

Our next question is from Harry Sefton at UBS. Please unmute your line and ask your question.

Brian, thank you very much for taking my questions. My first one is on the US higher models dynamics. So you stated that this is a take-or-pay agreement with Codavis. I want to understand to what extent have the volumes in the second quarter exceeded the contracted minimum supply that you have in this agreement? And then I also just want to get your thoughts on your ability to supply meaningfully more. We've seen in the prescriptions that you have this step up and sort of maintain this high level of biosimilar penetration. But to what extent can you further increase your penetration rates there? And then my second question is on the biosimilar of Stellara. So you've announced the launch in Europe. It would be great if you could give us some details on what you're expecting in terms of the ramp-up in sales there. But then also in the U.S., you've set for February. Should we expect that this is going to be similar to the Humira market in that you're going to be relatively reliant on contracting directly with PBMs? And if you were to contract directly with a PBM, when should we expect to hear that sort of announcement? Would it be ahead of launch or would it only be after you've already launched off that February date? Thank you very much.

Thank you so much, Harry. So, yeah, look, I think clearly there's two parts in the U.S. on Hymer. We're delighted with the relationship that we've built with Fedaris. We're seeing strong demand for the product you're seeing. So I think really sort of the take-or-pay element of the contract now is really not that relevant. We're just continuing to support that. And then really I think your second part of the question is the growth. What I'm actually more particularly proud of, given the number of competitors in this market, is that if you strip out the Cadavis business, we're the number one by a similar player in this space. So we've been able to create our own brand momentum. And that's really where I see the growth. now coming as we build on that momentum. Clearly we're still on contract with the other two remaining PBMs and we're with our sales force looking to pull through incremental growth. So I don't necessarily see another big step like we saw coming through earlier this year with the deal with Cadavis, but I do see a steady progression now going forward. Regarding your question with Usta Kinnaman, clearly Usta, the deal we have with Usta is a very different kind of deal of we have with ourselves with Adalunumab. So you remember that Adalunumab is our product. We're vertically integrated. And whereas Ustekinumab is an in-licensed product from Samson Biopsies. So really, you know, it's a very different dynamic. What I would say, though, is clearly given our strength in the immunology field, the strength of our launch capabilities, we're confident in terms of how we would expect to see that. Clearly, you know, if we do do a deal with a PBM, we would disclose it at the appropriate time, but ultimately that's then a partnership deal with the individual PBM, so I can't really comment any further than that.

Thank you. Our next question is from Victor Flop at BNP Paris with Exxon. Please unmute your line and ask your question.

Hi. Thanks a lot for asking my question. Victor Flop, BNP Paris with Exxon. Just one question on my side. I was wondering if ever you could comment on what made you amend LAEA launch date to TBD. That would be very much appreciated. Thanks for that.

Sorry, I missed the product. I do apologize. Again, this is a complicated case. We're still going through the court proceedings. I think at this point it's clearly, I mean, the LOE was in July this year. This is the base pattern. There's a number of other peripheral patterns. So really launches between now and 2027 plus or minus. So I think at this point it's prudent just to give a broader range. So that's why we put TBD. Beyond that, I really can't comment any further on the question.

Our next question is from Simon Baker at Redburn Atlantic. Please unmute your line and ask your question.

Morning, everyone. Thanks for taking my questions. Firstly, on H1 itself, if I look at the performance on revenues exactly in line with consensus costs and net-bought EBITDA and earnings lower, and I just really wanted to understand to what extent that's That's us rather than you in a sense. Is this a case of phasing of costs in our assumptions was slightly adrift or was there anything underlying that was different? And particularly within that, other expenses was quite a bit higher than consensus was expecting. So any light you could shed on that? And one more question on the numbers. I wonder if you could provide a definition for other working capital. as defined in your management free cash flow slide. And then a second question on the broader environment. It'd be interesting to get your thoughts, firstly, on the July FDA draft guidelines on post-marketing changes to buy stimulus. There's an aim to smooth that process. How important do you think that is for your business going forward? And secondly, there's been a lot of political attention focused on the PBMs of late. So really, I know you've said in the past, Richard, that they've not a powerful enabling by a similar market. Do you expect any change to occur as a result of that political dilemma in the coming term?

Thanks, Simon. Thanks, Simon. If I take the FTA and the PBM question first, and then I'll pass to Remco for the financial questions. I think it's too early to say. I mean, look, I think clearly getting more clarity But I think, you know, I wouldn't see it material one way or another in terms of our business. So it's not changed our thinking about that. And you're right. I mean, clearly, you know, the sentiment and the questioning in terms of the PBMs and the role in the U.S. healthcare market, I think whichever side of the house you talk to, they have a similar view. Ultimately, the U.S. is a fascinating region. continue over the next few years. With that, I'll hand over to Remco.

Thank you, Victor, for the question. Of course, I have no access to all your Excel sheets and the calculations behind this, but my interpretation is the following on your question on the top line. We are very happy on the top line on the overall number. As we've seen, the biosimilarity is a bit higher than everyone expected and the index a bit lower. We think actually that's a good trend. If I look at the margin and the expectation, and the expectation was a little bit higher than we came in, my understanding is that the real background of the input cost coming in the cost of goods sold by many was assumed to be already probably in to a certain extent. Whereas in H1 last year, clearly we were still benefiting of all the costs of 2022. So the full impact of the cost of goods sold was coming in. That's probably a bit underestimated. I think the second element, if you compare it versus the second half of last year as well, the stand-alone costs are not fully in the results. That was not in H1 last year. That was also not to the full extent in H2 last year. But in H1, they're fully in. Therefore, we also added the comparison versus H2 last year, because there you can clearly see that the input costs are staying higher. flat, the standalone costs are going a little bit up. That's probably what you see in the standalone costs. Other than that, there are really the additional launch costs which are in. The rest is well under control. And the mix impact comes really visible when we do it for H2 versus H1. And that is also why when you extrapolate that to the second half of this year, we're confident, right? Because then the cost elements will really come in. On the higher cells, this mix improvement of biosimilars continues. So I think it's better for the understanding to compare really the sequential improvement from H2 to H1 and our expectation for H2. That's my take on what is behind, but of course I can't exactly see what everyone has done in their exercise. With regards to your question on the cash flow and the other working capital, it's not only the other working capital, it's also other elements which are outside the working capital, and that's mainly all the gross to net related liabilities. They are, of course, not in a definition of working capital because they are considered like provisions and accruals in the whole accounting terms, but we have combined that in one number, right? So it's the combination of the normal working capital plus the gross to net is the sum of what you see on inventory and the other. I hope that helps in a better understanding. Yeah, that's very helpful. Thank you.

Our next question is from Emily Field at Barclays. Please unmute your line and ask your question.

Hi. Thanks for taking my questions. I'll just ask two quick ones. You know, pretty notable that price erosion didn't impact the top line in the second quarter. I may have missed this in my remarks, but I think you may have said that you're assuming limited price erosion in the back half. I was just – I wanted to ensure just sort of, you know, how are you thinking about price erosion development in the back half and going forward? How much visibility do you have into that, particularly in generics? And then just, you know, thinking about the second half product mix shift and this having a beneficial impact on margin, is that more coming from continued mix shifting to biosimilars? Or are, you know, some of these expected new launches and generics going to be coming in at a higher margin? Thank you.

No, thank you, Emily. I guess that's a question. I mean, traditionally we've always said and we've always assumed about four or five points of price erosion. We've not really – we've seen over the last 18 months, two years, that nowhere near that. I think last year was sort of about 3%. Q1 was probably in the 2% range, and clearly the second – Q2 was actually flat, slightly positive. So I think we're not seeing a broader price. Now, I think some of that is clearly location and mix. Given the nature of these tend to be out-of-pocket products more frequently, your ability to take price is a little bit easier. But overall, I think we've seen pricing stabilize. And we don't see any signals that that's likely to change in the second half of this year. So we're relatively confident that that trend would continue plus or minus. And in terms of mixture, clearly I think we've always guided that buyers similar on average are about 20%. plane helps list the margin. But also products like Paclitaxel, when we launch that in the U.S., is clearly going to be more accretive than a more classic standard generic. So a bit of both, but probably more heavily weighted towards the biosimilar side. Okay.

Thank you. Our next question is from Graham Parry at Bank of America. Please unmute your line and ask your question.

Hi, can you hear me okay? Yeah, early. Okay, great. Sorry, so just going back to the question on GLP-1 CapEx, is there anything assumed for GLP-1 CapEx already assumed in the CapEx guidance that you gave that the CMD pre-spin, or should we expect a CapEx update at September 3rd at the Capital Markets Day? And then secondary on adalimum contracting for 2025, how far through that process are you now? Are you expecting to see any material shifts in your contracting position? Or should we be expecting to see a fairly dominant market share into 2025 in the adalimum? I buy some of the market sandals. Thank you. Thank you.

I'll take the other question and I'll let Remco take the CapEx question. I never use the word dominant. So anyway, I don't see it that way. So thank you, Graham. Look, we've never disclosed the nature of the contract. We said this is a multi-year contract. I don't see any

On the question on GLP-1, I think it's first of all important to understand that production capacity for GLP-1 could also be used for other products. So for the complex generics, it's a similar production capacity both on the devices as well on the whole filling and the elements. I think it's also important to understand that we will be buying the API, correct, and take the rest of the process, right? So over the coming years until the end of this decade, correct, we will have to evaluate how much production we will do in-house versus what we will do externally. We're in that process of evaluating. There is still this 1.9 billion out there of CAPEX we have given so far through 2028 that we will be evaluating in the second half of this year. how we will have the balance, how the overall cash flow position comes, and what commercially really makes sense, how to drive this capacity level up. So in the beginning of September, it's likely we will give you new guidance in this regard, but in the beginning of next year, we hope to be able to give a little bit more. But of course, all commercially driven, I think there's a fantastic opportunity here. So to pay back on anything we would

I hope that answers your question, Graham.

Yeah, thanks. And just actually maybe to follow up on the CapEx point, though, so is it fair to say that your CapEx for the sort of international launches, the kind of the earlier parts of the GLP-1 generic market would be easy to buy the CapEx that you have out to 2028, and it would be a post-2028 CapEx step-up that would be needed in the U.S. and European markets. Is that the best way to think about it?

I don't think that's unreasonable. Anything I said earlier on, really think about this sort of two or three phases. Clearly our main focus at this point is products like Semiclutide in Canada. That's with partners. So we have optionality in terms of their capacity or our capacity. As Remco said, in a sense, the capacity we're talking about here really is injectables, fill, finish and auto-injectors. That's a capacity we already have. So it's about how we invest. than something specifically for GLP-1s. And then as that evolves, and I think, honestly, I don't think nobody really knows how those markets are going to evolve once GLP-1 competition comes. Then we'll be in a much better position to think about what that will look like. We then enter the regulated markets in 2031, 32, 35, in which case the framework will be very different. We don't know what position the orals will take. You know, there's so many variables here. So our focus very much is sort of 26 to 28 markets. building incrementally what we can leverage from our own capacity partners, and then thinking about what that needs to look like as we enter the 2030s. So I think we're in a really nice position, as Renko says. Bailey, look, this is a super exciting opportunity. Great, thank you.

As a reminder, if you'd like to ask a question, please use the raise hand feature. Alternatively, if you've dialed in, please press star nine to raise hand. Our next question is from Nicholas Pawelak at Kevlar Shero. Please unmute your line and ask your question.

Hi, thanks for taking the question. So maybe two questions for me, which will be more related to the PBMs. The first one will be, do you think that even if you have this first agreement with Cordavis, would it be possible to replicate that with the other key PBMs in the U.S.? ? And the second question would be more long-term, but did this dynamic that you saw with HyRemos change anything in your pipeline strategy, meaning that you want to develop more biosimilar that will tend to be PBL's drive and market, or you want to stick to previous plans? Thanks.

No, thank you, Nicolas, for the question. I don't, but I think already one of the other PBMs have already disclosed who they intend to partner with. And so, look, our focus on sitting on Adaluma is partnering and working with Cadavis. So, we don't expect own label with other PBMs in the market. That said, we're still on formery with the other two PBMs and we'll continue to pull our own brand product through and work expanding the market there. Okay. In terms of strategy, I think let's take a step back. Ultimately, we've always said we think about our pipeline really from a European point of view. So all the biologics we've ever developed, we've launched in Europe. Everyone we've launched, we've ended up in a broadly number one, number two position. You know, this is a 10-year journey. I don't think any of us could predict. really focus on in Europe and then seeing the U.S. as an opportunity. And because even when you come to the U.S., there's uncertainty in terms of the launch date. If you look at a drug like Enbrel or LZ, this is a product that's freely available in Europe. And yet we still have a long and complicated patent journey. So I don't think we actually launched until about 2009. So I think, yeah, this really comes back to the strength of Sandos has been really centered in Europe, leveraging that, and then really driving those opportunities into the US.

Our next question is from Thibault Lutheran at Morgan Stanley. Please unmute your line by pressing star six.

Hello, thank you. Just maybe a few questions on your biosimilar pipeline, and in particular the partnership with Evotech, which was expanded recently. From my understanding, they are in charge of development and also manufacturing of the biosimilar. Can you just Tell us to what extent these products are going to be interlinked with their continuous manufacturing technology. Can you potentially put in place a dual sourcing later on with your own manufacturing capacity or with other CDMOs for this pipeline asset? And the reason I'm asking this is just because continuous manufacturing is still a relatively new technology and there might still be some regulatory issues you know, question marks associated with it until regulatory agencies are comfortable with it. So, you know, kind of question on this. And just also related to this, on this biosimilar pipeline, do we have even a very approximate timeline on when we should see the first biosimilar from this partnership or kind of the next wave of pipeline assets going through regulatory Thank you. Okay.

Thank you so much for your question. Really, I mean, the partnership with just Evotech is, you're right in a way, there's two parts to it. There's a development component and a supply component, and the two don't necessarily have to link. So we've worked with, started working with just really in terms of using them as a development partner. And that's progressing well. It's difficult. I mean, really, the frame on these products is much further out than the guidance period. So I can't really comment about terms of filing and expectations there. But, you know, I'm really pleased with the relationships that we have. I think the collaboration between our scientists and theirs is really, really strong. And then, you know, the continuous manufacturing, really, it's an option. You know, I'm delighted that we have access to this technology on a unique basis. It has the potential to transform costs and flexibility of supply over the long term. But certainly it's not a critical component of our supply program as we go forward and think about the development of those products. And if you think about our supply network at the moment, clearly we take the bulk of our supply from Novartis on a cost-plus basis. We're investing heavily in our own network now in Slovenia to have capacity there. And then also a blended capacity with partners like Just or Samsung that gives us a flex. So I think we're ultimately building a strategy of supply that gives us as much optionality and security of supply as well as cost leadership over the next few years. But thank you for your question. Thank you.

Our next question is from James Van Tempest at Jefferies. Please unmute your line and ask your question.

All right, thanks for taking my questions. Just two, if I may, please. Firstly, just to come back on pricing, can you comment on U.S.

pricing specifically and what you expect to see in the second half? And then my second question, again, is looking at the second half dynamics. You know, looking at the second half last year, and particularly Q4, it seems like it's a tougher base comparison. So how do we think about the growth phasing from here with the new launches and an exit rate for this year? Thank you.

Yeah, we only really ever talk about pricing on a global scale. We tend not to break it out regionally. I don't think ultimately, I don't know why you're asking, but there's so many ups and downs, it only becomes that useful when you break it down by region. But certainly I think on a macro level, we don't see any fundamental shifts in terms of the broader pricing base. And also bear in mind a bigger proportion of the U.S. businesses are coming from biosimilars, which tend to have a more stable pricing dynamic anyway. And then I guess the quarter and quarter of Q4 comp over Q4 last year. I mean, I think a lot of the negative impacts that we saw last year, I mean, Remco talked about a fixer ban, clearly the strong cough and cold season that we saw in 23, all of those effectively wash out. And so clearly I think puts us in a nice position as we go into Q4 this year. through, coupled with clearly the Eustachinumab launch, the Nostimab launch in Canada, Natalizumab launch potentially in the US. So, again, it helps strengthen our confidence, and hence why we ultimately raised the sales guidance for the rest of the year.

Our next question is from Victoria Lambert at Barenburg.

Please unmute your line by pressing star six.

taking my question. I've got... So the first one, but what is your Stellara share? Is this low single digits? And how are tender negotiations going? And then the second one is just how is your market share for some really... being growing share after you took over the ride. Just on Omnitrope, is your share up? I think it was around 34%. Thank you.

Thank you. Thank you, Victoria, for the question. I mean, it's still early days. I think we launched in June, literally about a week ago. So I'd love to give you the figures, but it's a bit soon. So probably more of a question as we get into the sales call Later this year, Simile brought it stable. We never really anticipated. Remember, the rationale for acquiring Simile was twofold. Clearly, it gave us a Lucentis biosimilar in the U.S. but it also gives us a commercial capability to launch ophthalmology products in the U.S. market going forward, of which Clilius Libreceptor potentially will be one of them. So we didn't really buy it for a particular growth. Essentially, it had achieved a reasonable market share, and we expect that to remain broadly stable. And then Omnitrope. I guess Omnitrope, you know, is, you know, I'm a big fan. I mean, this is our first ever biosimilar. In fact, I launched this. And in the fact that it's continuing to grow, and now we're the world's largest supplier of human growth hormone, and we're seeing that trend continue, A, it's a testament to the longevity of biosimilars, but also how important it is we focus and make sure we continue to supply this for patients going forward. So very proud of what we're doing and how that is continuing. So I don't see any significant change, and I would expect that to continue to grow over the next few quarters. So with that, I think that's the last question. I'd again just like to thank you all for your questions this morning. I look forward to interacting with you over the next weeks and months. Hopefully many of you will make our capital markets day in September in Zurich. I look forward to seeing you all then. So have a good day and thank you for your time.