ORION Holdings Corp. (OTCPK:ORINF) Q1 2024 Earnings Conference Call April 25, 2024 6:30 AM ET
Company Participants
Tuukka Hirvonen – Investor Relations & Financial Communications Officer
Liisa Hurme – President, CEO & Chairman of Executive Management Board
Jari Karlson – CFO & Member of the Executive Management Board
Conference Call Participants
Anssi Raussi – SEB
Sami Sarkamies – Danske bank
Graham Parry – BofA
Tuukka Hirvonen
Good afternoon, ladies and gentlemen, and welcome to ORION’s Earnings Conference Call and Webcast for the financial period of January, March 2024. First, I would like to apologize the slight delay. We were facing some minor technical problems which are now over and we can proceed on here.
My name is Tuukka Hirvonen and I’m the Head of Investor Relations here at ORION. In a few moments, our CEO, Liisa Hurme she will present the results of the reviewed period, after which you will have the possibility to ask questions from her and also from our CFO, Jari Karlson.
We will be first taking questions from the conference call lines, and then also after that we will take questions you can type in through the webcast chat function to us. Those who are presenting their questions through the conference call lines, we kindly ask you to state your name and the organization you are representing before asking your question.
And just before I let Liisa to step in, today, we have actually quite a special day today because this interim report is actually the last one that Mr. Jari Karlson will be delivering to you as the CFO of ORION Group.
Jari has been the CFO of ORION Group ever since 1st of September 2002. So more than 20 years and today is actually his 87th interim report or financial report he will be delivering. So while I let that sink in to you guys, I’ll draw your attention also to the traditional disclaimer about forward-looking statements and then hand over to Liisa.
Liisa, please, your turn.
Liisa Hurme
Thank you, Tuukka, and good afternoon on my behalf as well. And welcome to ORION Q1 results webcast.
Q1 for this year started very well with a strong top line growth of 11%. We reached €308.5 million of sales during the first quarter and €56 million of operating profit with 1% of growth resulting in 18.2 profit margin.
Cash flow was clearly better than in Q1 ’23. To that transfer of pension fund was one contributor and then a €30 million milestone that we received from Bayer was eventually paid in first quarter of ’23. And of course good sales of Nubeqa can be also seen here with royalties and product sales.
And regarding the operating profit growth of 1% or even being flattish compared to the revenues, we have as planned and as communicated invested more to R&D and also our sales and marketing and results of that can of course be seen on top line growth.
And here when we look at in a bit more detail, very good news regarding Nubeqa, almost €12 million of growth. Also Easyhaler if you look at here the column four almost as high growth both in percentage and in absolute value with Easyhaler product portfolio. Also the whole other portfolio excluding Animal Health and Fermion grew with 7.3% and Animal Health and Fermion were also growing nicely.
We see a slight decline with Entacapone product portfolio, but clearly the decline is slowing down compared to the previous year and hopefully will clear out as we go along this year. The usual suspects on the column one Simdax and Dexmedetomidine [ph] continued generic competition taking sales down here.
On the operating profit volumes are clearly growing, but margins are declining due to the previous slides explanations on Simdax and Dexdor decline. Very profitable products and the new ones are replacing those are not exactly as profitable.
Royalties, here you can see the effect on the operating profit and then fixed costs have grown 12.3% and that’s in line with our previous estimate for the R&D cost, sales and marketing costs. And here we can also say that some our IM costs have increased, somewhat we have a big program ongoing with the SIP [ph] renewal and some of our programs and data needs to be run in parallel systems during that.
Now, innovative medicines, plus 37.4% growth, a wonderful number. And let’s remember here that we start every year from the beginning with the royalty rate. So it’s really a cumulative royalty rate from the beginning of every year. So it kind of – both the royalty rate and the sales will grow as the year proceeds.
And we’ve seen all time high product deliveries to bear during the last quarter of last year and actually a second highest ever during this first quarter. So the prognosis is from that aspect very good.
And of course, as I said, other income is mainly from the research purposes and we are really investing more. And I will talk more about that when I get to the R&D pipeline. And we are continuing with Ztalmy to get the pricing and reimbursement in place in Europe.
Another business on a very good shape, even though with a slight decline of 2.2%. If we deduct here the effect of Dexdor and Simdax and Russia [ph] from previous year, we still had some sales in Russia in ’23, especially in the beginning of ’23, the basic portfolio in generics grew plus 5%. That’s very healthy growth. It’s assumed currently that generic sales in Europe grow between 4% to 6%. So we are exactly in that space with our generic business.
And in Finland, which is the biggest part of the generics, we were able to beat the competitors, especially in the reference priced market, and were doing also well in the OTC, healthcare and consumer health markets.
I think that I probably unfortunately skipped one slide here in between, Branded Products, another division growing with two digit numbers, almost 18% growth compared to the Q1 ’23, Easyhaler being a clear lead indicator and the growth product here with more than 30% growth.
It is driven by the green wave in Europe, especially in UK. But currently we are also seeing same kind of a demand in Germany and with Easyhaler product we can answer to this demand at the market.
Entacapone, I already discussed, almost par with previous year and Divina series, which for us is mainly a hormonal gel with estradiol is also growing compared to the previous year. All in all, a very good start for Branded Products, as well as for the innovative and for the generics. Which shows that all of our businesses are contributing to the growth of the group, ORION Group.
And then a bit smaller businesses. Animal Health not being shy at all compared to the other divisions, healthy growth there as well and Fermion keeping up with the external sales to other pharma companies. And Animal Health sales grew also both on companion animal side with sedatives, also launch of Bone Cat [ph] in Europe and then also on the livestock business now.
Clinical pipeline, the change here to the previous one is that we have now completed ODM-111 phase 1 successfully. We are expecting and preparing to report the results at some point next year in suitable scientific congresses. Otherwise the portfolio is as it has been this far.
Sustainability continues to be a very strong item for ORION. Of course, we are preparing as any other company for the CSRD reporting and here you can see some of the major themes that are important for us. It’s patient safety. We look at it from the supply perspective, of course, from the wider scope of pharmacovigilance and product quality as well. But in these days, it’s not self evident that the pharmaceuticals are and the medicines are available in pharmacies when you need it, and our service level is on an exceptional level environment. We continue work on that front. We are already head of our 2030 carbon neutral target for scope 1 and 2 in ORION and are now expanding to scope 3.
We’ve also put a lot of emphasis on social responsibility, building a roadmap in the company and including our stakeholders and groups that we work with and also of course, the safety putting focus on safety of our employees.
Now that you saw the quarter one result, which we are very proud of, our quarter one was better than we were planning. And based on that, we are specifying our outlook for 2024 and specifying so that we raise the lower limit from €270 million to €280 million. So we have a more specified narrow scope for this year from €280 million to €310 million of operating profit. The outlook for net sales remains the same as it was in the beginning of this year.
And to this outlook and our understanding of the year that has started, it’s important to understand that really all our businesses Nubeqa is a wonderful growth driver, but as you saw, Easyhaler is as important with the fast growth and all our divisions are growing in a healthy way if we deduct and decline the effect of Simdax and Dexdor. So all businesses are contributing to the growth of our net profit.
Here you can see on a slide the basis for the outlook which I already discussed. So Easyhaler Nubeqa growth entacapone product family more as a flattish. Easyhaler or Animal Health definitely growing and generics based portfolio as well growing.
What is challenging is really to predict the timing of Nubeqa royalties and product sales and some of the milestones. This year it’s the €70 million sales milestone. So thus we have a certain, how would I say, room for our outlook given these facts.
And R&D expenses are anticipated to increase significantly and significantly means that it’s on a different level than we are used to. It is understandable as we are going to start a phase 2 program for our pain molecule with several phase 2 studies and we have still several phase 3s ongoing with our partners. And also we have molecules in our research pipeline which actually demand much more, or consume much more of our budget since those are biologics and there we need to do the CMC work front ended. So clearly a more emphasis on R&D and also on sales and marketing which has resulted in growth in all divisions.
And this kind of puts together what I already said, that this, how would I say, makes it concrete and gives a framework for our strategy. We clearly have growing revenues and all divisions play an important role there and that allows us and enables us to spend more on R&D.
We want to build the company future beyond 2030s and also invest in other ways like sales and marketing, secure that we have enough production capacity and have enough production capacity. I’m sorry, we still have a bit of a technical challenge here. I was actually in this slide. Thanks Tuukka.
Also we want to invest to the production capacity as we are doing currently, increasing Easyhaler capacity, increasing our DBHL [ph] capacity and also our Nubeqa capacity at Fermion. So all these growing revenues enable increasing the investments, growing EBIT and also growing our dividend.
A clear package and we really work in this framework. And now I’m going jumping one slide over to remind you our financial objectives which relate to the previous slide of our strategy. Now they move totally independently. Anyway, when I say that the revenues will grow its growth beyond 8% on our CAGR. Also that we are able to grow faster with our operating profit, keeping the equity ratio at least on 50% and return of equity on at least 25%.
So this gives a very strict, nice framework for all our investments and growth initiatives. And then the dividend payout of between 50% and 100%.
Now I go back, let’s see how this works. It works well. And we come to the capital allocation focus telling the same story. A very, very good story here. Internal pipeline as a first priority, dividends, maintaining and increasing the capacity where it’s needed. Then in licensing or acquiring commercial or R&D assets, whatever is then suitable at which time and then acquisitions if they really fulfill a criteria to produce growth in a way we want in, for example, such geographies where we are not yet operating, or if they provide some kind of competence or capabilities that we need to fulfill our strategic targets.
Now I think it’s time to close on my half and invite Jari Karlson here with me to answer to your questions before we close the session, please feel free to ask any questions.
A – Tuukka Hirvonen
To the operator. So, operator, please, it’s time for the questions from the teleconference lines.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Anssi Raussi from SEB. Please go ahead.
Anssi Raussi
Thank you and hi, all. A few questions from me and the first one is about your minor upgrading guidance. Like, of course, you mentioned that the year has started slightly better than you had expected, but is there something which is like trending more positively than you had expected? Or was it something Q1 specific event, like just trying to figure out how the assumptions behind the guidance are developing?
Liisa Hurme
Thank you. A very good question indeed. I said that the Q1 was better than we planned. It comes from many places, so I’m not going to go and say separate things here. It was a bit better gross margin or gross profit on our sales. It’s slightly better Nubeqa royalties and excellent and slightly better sales from Easyhaler. So you could call those trends as well, or those are trending. So it gave us the opportunity to be more, a bit more accurate on our outlook.
Anssi Raussi
Okay, and now as you mentioned, the Easyhaler, like what was behind the strong growth in this product? Like extraordinary strong.
Liisa Hurme
Well, first of all, Easyhaler has enjoyed a strong growth since latter part of the last year. And there are several reasons, the most important being really this green agenda of health authorities in UK and same agenda seems to be forming in Germany. So these countries and the authorities have set a very high and demanding target for their carbon emissions, declining their carbon emissions and they have actually calculated that inhalators are the worst ones to produce carbon in their portfolio. So being able to provide a tripoder inhalator with a very, very small carbon footprint, or none at all, actually has provided us an opportunity to accelerate our sales.
Of course we need to remember that last year, first quarter wasn’t that good for Easyhaler. So the comparison comparable period wasn’t that strong. That of course kind of intensifies this growth percentage for this quarter.
Anssi Raussi
Okay, that’s clear. And then about ganaxolone. So can you give us any timetable for ganaxolone and have you included any expectations regarding this product in your guidance for this year?
Liisa Hurme
It would be great to give a timeline. It’s not up to us, it’s really up to the reimbursement and pricing authorities. So these processes take long time in Europe and you need to go country by country. So we are in process, can’t give you an exact timeline currently and thus it’s difficult to give an estimate for a product either.
Jari Karlson
But like we have said many times before, this first indication for ganaxolone is expected to be anyway, a very small, small one. So even if the launch had gone as planned, it still would have only very minor impact on our overall numbers.
Anssi Raussi
Okay, I understand. And hey, finally, thank you, Jari, it’s been a pleasure to work with you during this recent year. Thank you. That’s all from me.
Operator
The next question comes from Sami Sarkamies from Danske bank. Please go ahead.
Sami Sarkamies
Okay. Hi, I just wanted to start with thanking Jari for good cooperation over the years. I have five questions. We’ll take this one by one. Still want to go back to the guidance that was touched in the previous question. Have you assumed any more positive development during the rest of the year? Or is this guidance revision sort of backward looking that you have just sort of updated your assumptions relative to Q1 that went a bit better than expected?
Jari Karlson
Well, I guess, I mean, that part was already discussed, but I think one thing is that we started from maybe a relatively wide range and now when we are one quarter of the year is gone. So we gradually have more accurate view of how the year will look like, and that’s also behind. So nothing really has changed in the overall big, big picture.
But our overall view of how the year will be going is hopefully now a little bit more accurate than at the beginning of the year, and that’s also behind the specification. So we thought we’re confident enough that we could narrow the guidance a little bit and especially taking it – it upward from the lower end.
Sami Sarkamies
Okay. Moving on to other products, if we think about Easyhaler, as Stalevo and Animal Health, are you expecting Q1 like growth rates in the full year or other things that we should take into consideration when think about the rest of the year?
Liisa Hurme
Well, generally, as stated already in the outlook, we are expecting Stalevo c and entacapone product family to be quite flattish. It’s already the decline has stopped to some extent, you know that the decline that we saw last year and Animal Health should continue on the same trajectory that it’s been going on to date this year. And with Easyhaler, of course, this first quarter percentage might be a bit more than we will see because the first quarter ’23 was not good, was not at the same level as the rest of the year of ’23.
Jari Karlson
So we really saw during last year already nice growth that when we started last year, we were actually a little bit behind the year before – before and then ended up to relatively nice growth for the full year. So we really saw a very good second half of the year last year. And that’s why the percentage definitely will not be as strong as during this first quarter. But nice growth anyway, expected for the full year as well.
Sami Sarkamies
Okay, thanks. Then moving on to the pipeline regarding ODM 208, you’re planning to initiate a new phase 1 or 2 study with Merck. This will be in combination with other drugs for prostate cancer. Can you comment on which drugs we’re talking about and whether this could broaden the market potential for ODM 208 significantly?
Liisa Hurme
Well, indeed, yes, such a study is going to be started. Unfortunately, I’m not in place to comment that I leave commenting on to MSD on that program.
Sami Sarkamies
Okay. And then just wanted to verify, are you still on track to initiate phase 2 for ODM 111 during second quarter?
Liisa Hurme
We have stated that we will start the ODM, the phase 2 program for ODM 111 during this year. So we are still on track with that.
Sami Sarkamies
Okay. And then finally, do you have any comments regarding the situation at Marinus? I’m thinking about their recent setback with Ganaxolone?
Liisa Hurme
Well, again, I think this is something that Marinus is the right point to comment on. So I wouldn’t like to dwell in other companies matters.
Sami Sarkamies
Okay, thank you. I don’t have any further questions.
Operator
The next question comes from Brian from Jefferies. Please go ahead.
Unidentified Analyst
Hey, it’s Brian from Jefferies. I thought I’d just ask more on the pipeline. So, just on that Glykos partnership for up to three ADC’s, have you started R&D for those programs? Just trying to get a sense of timing for additional R&D and when we should expect to see something in the clinic.
And then just on those three ADC’s, would one of those relate to Glykos’s GlK ten asset in discovery targeting [indiscernible] Or are we talking about new targets here? Leveraging the M&A use cytotoxic payload, which I think is an improvement on the M&A use by [indiscernible]. Thank you.
Liisa Hurme
Well, I had a bit of a difficulties with the line, unfortunately, but I will try to summarize. And then you need to just ask again if I couldn’t get it, you were asking about the pipeline and timing on some of the programs there, and whether we are going to have new clinical programs starting this year that we have not stated anything yet on.
Clear. All programs are such that anything can happen and thus we don’t dare to publish or tell such data. Of course, we are hoping to bring new molecules to our pipeline within the next few years. And we have the biologics there in research and pre-candidate stage. I think you were referring to those when you were asking. Probably on the mechanism of those, but I would probably need to ask you to repeat the question or even write it down to there.
Unidentified Analyst
Okay. Just to check you heard it. With regards to the Glykos?
Liisa Hurme
We have a collaboration. Yes?
Unidentified Analyst
Okay. Yeah, that’s it then. I think you’ve answered it then.
Operator
The next question comes from Graham Parry from BofA. Please go ahead.
Graham Parry
Hi, thanks for taking my questions. It’s Graham Parry from Bank of America. Just first one, just to kick off on Easyhaler, was there any inventory build in there? I know you talked about the sort of easy base and then the green agenda in UK and Germany, but any inventory movement or any inventory build that was driving the sales in that line?
Liisa Hurme
Any inventory build.
Jari Karlson
Yes. I guess we at least are not aware that our customers would have been building their inventories. So as far as we know, it really is coming from the actual increase in the demand for the products.
Liisa Hurme
Yes.
Graham Parry
Great. Okay, Then on ODM 208, I know, you’ve reserved this sort of 60 million cost, but as you start phase 3 there, just at which point do you think that would be exhausted and you’d actually have to start booking R&D costs through the P&L? And would that be in 2024? Is that something you wouldn’t anticipate having to actually book P&L costs until ’25, ’26, assuming, of course, this isn’t converted to a royalty deal?
Liisa Hurme
Well, I can start and then Jari can continue. Just to remind that the deal with MSD is now a – is a collaboration and co-development deal and we are really developing together. However, we are not accruing costs on that development. Currently MSD is paying for that and yes, we have accrued €60 million to cover those in case needed. There is an option in the agreement that either side can turn the agreement from co-development to traditional licensing agreement.
And of course, if such option would be exercised, then we could release that €60 million from the balance sheet.
Jari Karlson
It really is dependent very much whether the option will be used or not. And so far the arrangement is such that until that decision is done, ORION will not accurate costs. Or of course, if we would calculate that the cost in that case would our share would clearly exceed the €60 million, then of course it might be a different thing, but at least not for the time being we are not in that situation. So the decision will be made once we know whether the option will be used or not.
And maybe to remind that the option is something that both either party can use. So even if ORION decides not to use the option, the MSD still can do it and the other way around.
Graham Parry
So what’s the timing and the decision tree on the option then? At this point, so. Which point, I guess, at which point do you know whether you’re going to need to start booking P&L costs for in excess of the €60 million?
Liisa Hurme
Well, if either party exercised the option, I’m sure both parties will let markets know that, but at this stage, we can’t comment on that.
Jari Karlson
And I guess the only thing we can say is that we have earlier told that in this year’s guidance, we have not included any of these ODM 208. It cost as part of our R&D. So that gives a little bit of picture of the timeframe. But what happens then beyond this year, then that needs to be communicated later.
Graham Parry
Got it. Okay. And sorry if I missed it. Just could you quantify the pension release benefits, cash flow?
Jari Karlson
Yes. Like you mentioned, on the last day of last year, the pension liabilities were transferred and we gained the approval from the Finnish Financial Supervisory Authority to transfer the cash during the Q1, and about €41 million worth of cash was transferred from the pension fund to ORION during that quarter. So that is included now in the positive and good cash flow for the first quarter of this year.
Graham Parry
Okay, thank you.
Operator
There are no more questions at this time, so I hand the conference back to the speakers.
Tuukka Hirvonen
Right. Thank you. It seems that currently we don’t have any questions online anymore, and I guess that there won’t be so quickly any follow ups on the conference call lines either. So I guess it’s time to state that every good story must come to an end. And unfortunately, from our side, good for you. It’s now time to wish Jari well deserved retirement. And thank you for all these years as a colleague and friend.
Liisa Hurme
Indeed, I want to thank Jari warmly on these years, not only years as a CFO, working with me in the events like this and every day, we work very, very closely. But I have had a privilege to work with Jari for more than 20 years, you know, as a colleague, and now we work very closely together. And I couldn’t find a – I hope I found a good CFO. But to date, I can only say that it’s really been brilliant and I have had a full trust and it’s been a privilege to start a CEO career with, with such an experienced CFO who has patience to explain things and take you through the initial steps. So I wish you all the best for your coming career. Thank you so much.
Jari Karlson
Thank you, Liisa, for your nice words. And I also want to thank many of the people in the audience who I have had the privilege to work with for so many years. It’s great to have a good analysts who know the company and asked tough questions for us to answer because that also helps us to develop our thinking. But these have been very nice years, and like Tuukka said, all good things come to an end at some point, and now it’s time to move forward.
Tuukka Hirvonen
Thank you, Jari. And thank you for the audience. Next time we will meet here on August 8, with the half year report. So have a good summer everyone.
Liisa Hurme
Thank you.
