Edited Transcript of APH.L earnings conference call or presentation 7-Apr-20 9:00am GMT

On to Slide 6. Our clearly defined business proposition. We’re operating a very well-established business model. We’ve been trading over 20 years now. We have a clearly articulated vision, purpose and strategy for growth. So our vision very much is to become a leading international health care business built around products that are clinically valuable to patients. With our purpose, making a difference to people’s lives through making a range of clinically valuable health care products available to consumers and patients around the world.

Slide 7, very briefly touches on our strategy, obviously, looking to maximize the brand potential and deliver organic growth through the business. And we do that through insight-led marketing activity to increase brand awareness, certainly on the consumer products, extending geographical reach through new distributor partners with our existing products and also, which is relatively neutralized, range development and extension. I want to talk to you a little bit about that on 2 of our key brands, and possibly a third that we’re looking at later on this year. So the opportunity in terms of the organic growth and where we’re doing quite well at the moment is around those consumer health care brands, as I say, underpinned by a good portfolio of prescription medicines as well.

We’re also known for acquiring new products and companies, and we will continue to do that as we move forward, trying to take advantage of operating synergies where we can both in geography and also by channel in both consumer and prescription medicines. We quite like our balanced portfolio. We think that, that’s quite useful, particularly in these times when we have a — quite a defensive pharma business but also a growth aspect to the consumer health care brands as well. And I think the thing for us is, as we said before, our products must be clinically valuable through our health care to consumers or to patients. So we’re still very much active and on the lookout for new products and companies to add. COVID, notwithstanding, and we’ll come to that a little later on. Underpinning that, we invest quite heavily in our people. I want to talk about the operation and some of the strides that we’ve made in 2019. And also, of course, acting responsibly in the way that we create value for shareholders.

So if you look at the full year CAGR in terms of growth on this business, a blend of organic and inorganic growth, just over GBP 40 million in 2015, and exiting at around GBP 144 million for 2019. So we’ve had some good growth within the business as a result of all our activity and that strategy really driving some good growth in the portfolio as you’ve seen. Really pleased that we performed exceptionally well on all metrics in 2019.

And with that, I’m going to hand you over to Andrew now, who’s going to take you through the finances and the results in a bit more detail. So Andrew, over to you.

——————————————————————————–

Andrew Timothy Franklin, Alliance Pharma plc – CFO & Executive Director [3]

——————————————————————————–

Thanks very much, indeed, and good morning, everybody. Now if you move on to Slide 9. So I’ll run through the key and high-level financial information, and Pete will then describe our business in more detail and then our near- and medium-term outlook. So June 2019, we’ve traded strongly with revenues increasing 16% to GBP 144.3 million, driven by strong growth in our International Star brands, particularly Kelo-cote and a full year’s trading of Nizoral, a medicated anti-dandruff shampoo product from J&J. On a like-for-like basis, in constant currency, revenues increased 8%. A quick note on see-through revenues. This number includes sales of Nizoral made by J&J on behalf of Alliance, where statutory revenue includes the margin on these sales. As the product licenses for Nizoral transferred to Alliance, there will be a mix of sales made by Alliance and those made by J&J. The see-through revenue provides a consistent measure of underlying sales performance during this transition period. Gross margin rate increased to 59.7%, 1% higher than last year due to product mix and improving inventory management and good control of operating costs resulted in an underlying EBITDA increasing 22% and PBT in growing 17% in the prior period. The charts on the right show the continued progress we made over the past 4 years through sales, EBITDA, PBT growing at a rate of between 14% and 15% on a 3-year CAGR basis.

Moving on to Slide 10. Our cash flow was very strong, and we generated free cash flow of GBP 29.1 million for the year, due primarily to the increase in underlying operating profit generated in 2019. And since 2016, our free cash flow has increased by a CAGR of over 30%. As a result of the strong cash flow generated, net debt reduced by just under GBP 27 million to GBP 59.2 million, and our leverage at the end of December was below 1.5x at 1.48x, which is comfortably below our covenant limits of 3x.

On an underlying basic EPS, this grew 12% to 5.09p. And whilst our underlying business remains resilient with strong financials and good covenant headroom, we’ve decided an improvement to this plan to devote to preserve cash, and therefore, have taken the decision not to propose a final dividend for 2019. However, we will continue to monitor the situation and reassert position later in the year and potentially declare a further interim dividend for 2020.

Moving on to Slide 11. This P&L summary shows our underlying results for the year. As mentioned earlier, our revenues were up 16% or 8% on like-for-like constant currency basis. This is driven by a continued strong growth at Kelo-cote, with sales up 38%; Nizoral, with sales up GBP 20 million or of GBP 20 million in our first year of ownership; MacuShield, with sales up 18% or 5% if we exclude certain one-off events, including distributor stocking; Vamousse sales of GBP 6.5 million, up 14% or 10% on a constant currency basis. And Pete will talk about these brands later in the presentation.

Gross profit increased the rate higher than revenue up 18% at GBP 68.1 million, with a profit margin slightly higher than last year. Operating costs increased as planned due to our full year of doing commissions, these are full year of transition service fee payables to J&J to support Nizoral, only 6 months was included in last year 2018; an increase in cost to support the scale-up of our operations in Asia Pacific and the wider business and sales and marketing expense to support the continued sales growth of international staff. As a percentage of sales, operating costs were in line for the year and represented 31% of sales. After Alliance’s investment in the year paid through, we generated EBITDA of GBP 39.4 million, up 22% and representing 27% of sales, ahead of last year’s rate of 26% of sales.

Our financing charge was GBP 3.7 million and higher than last year at GBP 4.6 million. This movement is due primarily to a GBP 1.4 million movement in currencies. Last year, we had gains of GBP 0.6 million, whereas this year, we have an adverse movement of GBP 0.8 million, coupled with the release of the deferred and contingent consideration balanced in the prior year. After allowing for these items, our PBT of GBP 32.9 million is up 17% on the prior year. This translates into basic underlying EPS of 5.09p, 12% higher than last year and a diluted EPS of 4.99p, up 13% in the prior period.

Moving on to Slide 12. Our cash flow was strong, particularly in trading at GBP 38.9 million, which reinforces a very good cash generation within the business. We made good control of our underlying working capital. We should continue the partial reversal of the planned inventory build made in 2018 in preparation for the Falsified Medicines Directive and Brexit. And after taking account of tax, interest and CapEx, free cash flow for the year was GBP 29.1 million. And today, this represents a 31% increase in a 3-year CAGR period.

On Slide 13, our overall net assets increased by GBP 22 million to GBP 274.2 million. The movements in the key balance sheet captions relate to a decrease in intangible assets of GBP 7 million due to currency movement and disposal of Xonvea and Flammacerium, a decrease in total working capital due to reduction in inventory, partly offset by an increase in receivables of GBP 1.8 million, which includes the balance of the Xonvea milestone payments due this year and an increase in other net assets representing our investments in our office and our ERP system, and at the bottom of the table, GBP 27 million reduction in net debt.

And moving on to Slide 14. This slide shows the reduction in our net debt during 2020. We started the year at a leverage of 2.33x and a net debt of GBP 86 million. And in the year, we generated cash from operations of GBP 39 million. And after allowing for outflows related to tax, interest, CapEx and dividend payments, we ended the year with a net debt of GBP 59.2 million and a leverage below 1.5x or 1.48, and so that’s kind of comfortably below our covenant of 3x. We expect free cash flow generated in 2020 to remain good, and we anticipate leverage to continue to reduce during the second half of the year such as the impact or [shape] of it.

Finally, as previously announced, we agreed a new GBP 165 million fully revolving credit facility with an enlarged syndicate of lenders from 3 to 5 banks. This replaces our previous maturities which run through to December 2020. This new facility is on improved terms and is available until 2023 in July with a 1 year extension option. Pete, now back to you.

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [4]

——————————————————————————–

Thanks, Andrew. So if we move on to Slide 16, please. Underpinning that performance, obviously, are some strong performances in many of our brands. I’m pleased to see good growth on Kelo-cote right through to Vamousse and a stable performance as we forecasted from the local brands. So Kelo-cote’s up 38%, another GBP 8 million on that; Nizoral holding firm at around GBP 20 million, obviously you have the 6-month effect in Nizoral after our first full year of ownership; MacuShield, up 18%; Vamousse, up 14%. So these International Star brands have clearly got some momentum in them. And we’ll talk about each of those as they come individually. Also, the local brands holding firm as we move forward. All these brands are established in inherently strong growth markets in terms of the international staff. And that’s where we put the majority of our promotional spend and very much looking forward to driving some growth out of Nizoral as we get that under our wings.

Moving forward to Slide 17, Kelo-cote. So currently, our #1 brand delivered, as I said, a very strong performance in 2019, just over GBP 30 million. Global market size for this is still around the same, GBP 225 million at manufacturing selling price, obviously, larger in markets. But Kelo-cote, as we’ve said before, the fastest-growing scar prevention treatment in 2018. We’re waiting on the 2019 data, but it’s going to be up there. The category fundamentals remain good, clearly driven by Asia Pacific and China, in particular, where scar treatments are growing at over 20% per annum, along with rising demand for cosmetic procedures and C-sections. And we’re still well placed to take advantage of the opportunities in that region, having built a very good network and a good primary and secondary care and also other consumer markets across Asia Pacific, including Korea, Hong Kong and Taiwan. And we’re seeing good growth through our locally implemented but globally driven marketing initiatives. This year, we brought our head of — the Head of International Marketing as well in 2019. So it’s great to have him onboard. And yes, we’ve rolled out many new websites for Kelo-cote, improved our packaging. We’ve got the brand launched in 2 new markets in 2019, Thailand and also Saudi Arabia. And we have plans to add another 17 markets over the next 3 years for Kelo-cote. So very, very pleased with the way that, that’s performing. We’ve entered into a global brand partnership with Smile Train, which is a charity that performs cleft lip procedures, cleft palate procedures around the world. And we’ll be donating product to hospitals in India and that’s been, hopefully, very good for the charity as well and part of our charitable giving for 2019. When we looked at this market and we reassessed the market and looked at the — how Kelo-cote’s growth trajectory has been going, we have noted opportunity for this brand up, you’ll see, from GBP 30 million up to GBP 50 million plus. So we still see significant potential in Kelo-cote, all things being equal. So very pleased with Kelo-cote’s performance last year and good headway for — good headroom for growth moving forward.

In terms of Nizoral, the second largest brand right now, we made this acquisition in 2018, as Andrew has alluded to, and everybody knows, it’s under a 2-year transfer agreement with J&J. That agreement is working very well. I’m very pleased to say that we’ve had our first shipment of Nizoral in Alliance logo and delivery. That’s taken quite some doing, but very pleased that, that’s now going out the door. We have our first 2 marketing authorizations transferred for Hong Kong and Thailand. If you remember, we’ve 14 different territories for this. In quarter 1, those have come through thick and fast. So the regulatory work is continuing to progress, I’m very pleased to say, on Nizoral. The product integration is also progressing well. Certain territories are going to take a little bit longer than June, probably towards the end of this year. But the main thing is that brand is holding up very, very nicely. The regional category growth, pre-COVID obviously, was around 8%, and the market size is still large. And so we’re very excited about Nizoral. We’ve conducted recently, quite a large piece of market research, which suggests a real significant opportunity for this brand, particularly in China, where it has quite a low market share compared to other brands out there. And also in India as well, where we’ve just signed a new partner for that market, and we’re very excited about the potential for the brand in both of those territories. So we, again, have Nizoral’s expectations up a little up to GBP 30 million plus for this brand. I think before we said it was a GBP 20 million to GBP 30 million brand run. We are quite confident that we can get it to GBP 30 million and maybe a little bit more than that. So again, when we get this in place, we hope to be able to grow Nizoral. But the transition, the take-home message from us is the transition is working well and the brand is holding up very nicely.

So our 2 smaller brands, but nonetheless important International Stars, MacuShield, again, tipping GBP 8 million, GBP 8.2 million for last year. The market size for this is large, but the category growth is modest at around 3%. Again, we hold with a GBP 10 million plus for this brand. We saw good revenue growth last year, but that was flattered by some distributor stocking changes in Ireland and also with regards to Brexit. Underlying growth of this brand is still around 5%, 6%. And I’m very pleased to say that we’ve launched this brand now in Italy, Turkey and Pakistan and alluding to some of the line extensions that we’re beginning to put in place for some of these consumer brands. We just launched a chewable formulation of MacuShield for those elderly patients and patients who find capsules very difficult to swallow. And that is — that’s been — had very good take-up in market already. We launched that in October last year, and the feedback has been great. So we’re looking to launch that outside of the U.K. into our other international territories as well.

Vamousse continues to perform strongly. Again, up 14% revenue growth against a market in the U.S. and global that went back to 1.4%. So that’s clearly booking the trend with this particular brand. So we have very good digital campaign behind this. We are beginning to get some significant distribution wins as well as the market continues to shift away from pesticide-based head lice treatment into pesticide-free. So we’re continuing to evaluate other markets for Vamousse. The U.S. is still a key stronghold for us and will be for some time soon. But certainly, a GBP 10 million plus brand as well for Vamousse. So plenty of room to go in our International Stars as we move forward.

If we go to Slide 21, underpinning that performance, I just want to touch on our operation and some of the things going on behind the scenes, if you like. 2019 saw the arrival of 2 new nonexecutives on to our Board. So Richard Jones and Jo LeCouilliard, both have been excellent additions to the Board and really making the mark. We started to launch new products in consumer health care. So as we’ve mentioned, we have MacuShield chewables. We’ve launched the first-line extension for Ashton & Parsons, dialed up a little bit for that. But that brand is 150 years old. And this is the first significant line extension that’s been done. And this is a teething gel, which is launched into the U.K. and already first year out of the blocks because of Ashton & Parsons strong heritage, has generated over GBP 400,000 of sales. So really, really interesting to see how these new line extensions go. We have some interesting ones in the pipeline as well for Nizoral. That will be a little bit later on. I don’t want to go into too much information on that, but certainly, some exciting things in the pipeline as we focus more on new product introductions to complement the brands that we already have in the market and modest spend in terms of development that can really support the lead brand.

I’m really pleased to say our employee engagement remains exceptionally high. We have an annual employee engagement survey, which we run every year. We’ve been doing that since 2011, and we delivered this year, yet another set of great results, which is very, very pleasing against the backdrop of our businesses. So it’s growing very quickly and also internationalizing as well.

And our social impact. So we — I mentioned the Smile Train partnership that we have. Our employees raised over GBP 30,000 to support Smile Train through their charitable efforts and donations. We’ve also donated over GBP 75,000 of product to international health partners as well and supported over 20 different charities this year as a result of all our charity giving. So that all goes on top of everything that we do within the business, too. But underneath, the business is in very good shape with, as I say, high engagement across the board.

Now if I turn to near-term outlook, in particular, COVID and as best we can say what the impact on the business is and where we feel things are heading. So Slide 23, I’m going to start with, firstly, the people side of things. So having had an APAC arm to the business and a significant for us business in China, we’ve been quite close to this, obviously, since the turn of the year. Firstly, we did expect, we took real early steps to safeguard our #1 asset, which is our people within the business. All offices are physically closed, except for our Shanghai office, which has now been back in operation for 4 weeks. It’s very pleasing that, that team is back to work. And I’d really like to extend my thanks and support to the entire Alliance team who have been brilliant at this time. We’ve invested quite heavily in Microsoft Teams. We did that last year. And that’s allowed us to really keep up on activity as our business moves from an office-based business to working from home and the connections are absolutely excellent, obviously with all the international travel restrictions in place. And on the people side of things, we’re still very much able — it’s not optimal, but we’re very much able to conduct our business as — on a day-to-day basis as we did before. You’ll know that we outsource all our manufacturing and distribution as well. So — but the coordination through that connected technology has been absolutely excellent. So on the people side of things, we’re in good shape.

Then we move to supply. I always look at supply first and making sure that we have enough product to sell. And so as we’ve mentioned, our supply chain is pretty robust. I think it’s one of the benefits of having a diversified supply base, so we don’t have all our equity in one basket. And as you’ll recall, we outsource all of our supply to numerous CMOs around the world. And so far, those CMOs have been operating relatively normally and in an orderly fashion, a lot of them making essential medicines. So that’s good news. The other news — and the other thing that we often work on as an industry is a batch manufacturing process where instead of adjusting time, so we will hold between 3 and 6 months of inventory depending on the product if we’re going directly into a market. On top of that, our distributors also need to hold between 3 and 6 months of inventory on top of that, so that they can cope with fluctuations in demand in the normal course of business as well. So, so far, our supply chain is holding up well, which is very, very encouraging, but we continue to monitor our supply base. We’re in constant discussion with our suppliers. We brought forward an active ingredient, where we felt it’s prudent to do so. We forward looked transport for orders over a certain amount to just secure our logistics capability. And small things like minimizing and managing our artwork changes, where we have a discretionary change to make actually, let’s hold off on that until we can — until the situation gets much more clear. So we are doing some things proactively behind the scenes to manage that on the small side of things, but on the larger side, on our supply chain, as I say, that’s relatively robust.

And if you look at our — where we spend our money around the world, 15% in the Asia Pacific region and China, 10% predominantly in the U.S. with the Vamousse but also Kelo-cote as well. And in the U.K., an ROI 20%, and in Mainland Europe, 55%. But as I say, so far, all our manufacturers have been operating relatively normally.

So that’s people and supply. In terms of demand on Slide 24, that is a little bit harder to call right now, as you can imagine. And I think if you look at the way that the pandemic is moving, it makes it very, very difficult for us to give you a real sort of easy and understandable forecast at the end of the year. We do anticipate trading will be weighted towards half 2 from what we’ve seen so far. Clearly, there’s been an impact in both China and also some of the Asia Pacific regions to a lesser extent. But I’m very pleased and encouraged to see, as I say, our Chinese business back in full operation and also some encouraging signs from some of our Chinese distributors as that key territory for us gets back into something like normal.

If you come from East and move West, our portfolio becomes predominantly a little bit more defensive with more prescription medicines as a proportion of the overall business. And this, again, is very hard to say the impact on EU and U.K. and what that’s going to be because it’s still quite early days with regards to lockdowns in particular territories. So as I say, and the labor is quite difficult to call.

I will say in a few instances, we are seeing increased demand for products, particularly on the prescription side, but also on the OTC side as well, and over the last month or so, as lockdown in Europe became progressively more intense. And I think, it’s very hard to say right now whether that’s expandable consumption or simply bringing forward of sales that we would’ve had anyway moving forward. So that’s about as much as we can say on demand. I’m sure you’ll have some more questions, but we’ll take those as they come.

If you look at our revenue split as well, so we showed you where the manufacturing base sits, but also in terms of our approximate revenue split, 20% in China, 15% in Asia Pacific. Our other international, which we — for this purpose of launch in the U.S. in there is around 20% of our business, 35% in U.K. and ROI and 10% in mainland Europe. So hopefully, that gives you an idea of the complexion of our business and the exposure across different parts of the globe. So we are monitoring this really closely, obviously, as everybody is right now. We’ve been living with it for quite some time and seeing how things have unfolded in China and how they’re unfolding in Europe. We are very active in terms of us working with our suppliers and also our distributors to try and mitigate impacts predominantly on our revenue coming in. We’re also keeping a very close eye on supply chain as well. And we do have this obviously discretionary spend in the business that we can look at potential profit and impact and mitigation of that. So we need to do that sensibly, and we need to do that proportionately. And we will continue to update you as the economic impacts become clearer and as the months and weeks progress. I’m going to hand now to Andrew. So that was sort of P&L side of things. I think also, at this time, it’s important to look at the balance sheet resilience as well. So Slide 25 turns to that particular part of our business. And Andrew, can you take this one, please?

——————————————————————————–

Andrew Timothy Franklin, Alliance Pharma plc – CFO & Executive Director [5]

——————————————————————————–

No problem. Thanks, Pete. So clearly, liquidity — good liquidity is key, particularly during this current situation. As mentioned earlier that we renewed our credit facility in July last year and now have a committed facility of GBP 165 million. This is spread across 5 banks. And this facility extends to July 2023 with an option to extend it by 1 for the year. As of the 31st of March, we held GBP 18 million in cash and the undrawn compared to this committed facility was GBP 85 million. At the end of December, our leverage is 1.48. As I said before, it is comfortably below our 3x covenant. And we do anticipate to generate good cash generation in 2020, which should reduce our leverage further, but not clearly at the pre-COVID rate that was previously expected.

In order to preserve cash, we have taken decision not to propose a final dividend for 2019. But as we said, we’ll keep it under review and reassess the position during this year. And finally, we’ve run various stress tests. And we do these tests normally, but it’s also important during the current times to impact — to review the impact of covenant compliance over the year. And even under the worst reasonably possible test, we remain within our covenants of 3x. So — and that perspective gives us good comfort that the business dynamics are working well even during its troubled times, and we continue to exit in 2020 with a lower debt and a lower leverage level.

Just moving on to inventory. And Pete has mentioned a couple of things already, but due to the types of manufacturing used in a number of our products, we typically hold around 3 months plus of inventory, and our distributors between 3 and 6 months, which is aiming there’s good levels of stock held in the territory. And a great amount of work has been undertaken by our supply chain and sourcing teams. And we’ve been able to secure all the supply expected for H1 and broadly 75% of the gross margin expected for 2020. And yes, this situation is evolving and particularly for H2, but we’re looking to secure materials or underwrite the purchase materials, and also looking further forward to ensure that we can mitigate any future potential compliance and supply constraints that may arise during the second half of this year.

Over to you, Pete.

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [6]

——————————————————————————–

Thank you, Andrew. So I have just 2 more slides, really. And one, it does go back to our medium-term ambition. So notwithstanding COVID, that remains the same. So we’re still looking to grow this business. Revenue supported principally by organic growth, but also carefully selected acquisitions. And with balanced portfolio, having both consumer health care and also pharmaceutical products within the business, it’s still very, very important to us now more so than ever. Having this geographical reach, the U.S. and APAC, that’s where we’re looking to build-out in terms of our acquisitions as we get back into those as the year hopefully progresses. And so that’s where we are.

I think the other thing to mention is we exited 2019, as you can see, with some significant momentum in the business which gives us confidence getting through what can be some quite difficult times for everybody ahead.

In terms of our summary, so as Andrew said, and as we’ve said before, that strong momentum generated in 2019, up 16% on revenue, 22% on EBITDA, leverage down under 1.5, very, very strong free cash flow within the business. That’s always been a hallmark of Alliance. As I say, that full year trading impact, difficult to quantify for COVID this year, but weighted towards H2. But you can see there about the underlying resilience and strength of the business with those strong financials and that liquidity covenant headroom, which leaves us very well placed to manage any short-term headwinds. So we’re very pleased with the way the business has performed. We’re very confident in things moving forward. And at that point, I think we’re happy to take any questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) And our first question comes from the line of Andrew Whitney from Investec.

——————————————————————————–

Andrew Mark Whitney, Investec Bank plc, Research Division – Analyst [2]

——————————————————————————–

I hope you can hear me because I’m struggling a bit with my reception.

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [3]

——————————————————————————–

It’s good.

——————————————————————————–

Andrew Mark Whitney, Investec Bank plc, Research Division – Analyst [4]

——————————————————————————–

It’s good? Excellent. I saw that your midterm ambition is to double the scale of the business. And you’ve kindly given sort of updated peak sales potential for some of your bigger brands, which is higher. I was wondering, are you able to talk about the — how long do you think that might take? What the shape of the curve might be on the doubling of the business? I guess, through the COVID uncertainty, I guess there might be some opportunities that present themselves out the other side once COVID has died down. And I’m just trying to get a sense of what inorganic — when the inorganic piece might kick back in to drive that sort of scale increase?

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [5]

——————————————————————————–

Yes, yes, yes. It’s obviously a very difficult one to answer. In terms of our time horizon, we are 3 to 5 years for that doubling of the business. That’s where we’re focusing on. And if we look at how we exited 2019 and the deal flow, that was certainly very strong. And we have seen things slow down. I think everybody has seen deal flow slow down in the marketplace. But as you say, it’s a really astute point. It’s going to be interesting to see how companies emerge out of this, and what sort of state different businesses will be in. But we certainly are looking to ramp that back up as quickly as we possibly can. When things get back to normal or back under, I can’t give you a time line on when that might be. In terms of the headline growth on the International Stars, that will certainly take us some way, but it will be inorganic growth that drives us forward.

——————————————————————————–

Andrew Mark Whitney, Investec Bank plc, Research Division – Analyst [6]

——————————————————————————–

That’s very helpful. And then just the tweaking up of the peak sales potential on the inorganic stars, is that — how much of that is related to the line extension piece? And how much of that is just actually, this is going much better than we’d originally thought? I’m thinking that the…

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [7]

——————————————————————————–

Yes. Good question. Yes. On Kelo-cote, it is doing better than we thought. But I think it’s fair to say, there are some line extensions that we’re looking to bring in for that particular brand. But if you look at momentum and where we’re generating that, the team are a lot more confident than they were perhaps 2 or 3 years ago, given what we know now about the business and the underlying dynamics of that, obviously COVID has excluded that strong fundamentals for the product.

If you look at Nizoral, I don’t really want to get too much away. We are in competitive markets for both Kelo-cote and for Nizoral. There will be a degree of line extension there and that will certainly help move the brand along. But when we look at the market research in more depth, our proprietary market research that we invested in at the end of last year, we see significant untapped headroom for a product that is very, very strong in terms of its offering and efficacy. If you look at the market shares it has in each of — I mentioned China and also India, they are very, very low compared to some of the other markets that Nizoral has been established in for quite some time. But — I mean it’s quite an order of magnitude difference. So there’s a heck of a lot to go out for that particular brand as well. The key thing is unlocking that in a way that is economically viable to everybody, but I think we have a strategy in place that will allow us to do that. So what’s given us a bit more confidence is our proprietary research, digging into that in more detail and also feedback from distributors who we’ve been working with for quite some time. We’ve hired an international marketing manager for Nizoral based out of Singapore, so all our work will be generated from there for this particular brand. That makes a lot of sense. Then there’ll be reporting into our Head of Global Marketing, who sits centrally and looks after both Kelo-cote and Nizoral, and he’s made a very, very good start in the business. So yes, very excited about both brands.

——————————————————————————–

Operator [8]

——————————————————————————–

Our next question comes from the line of Edward Thomason from Nplus1 Singer.

——————————————————————————–

Edward Thomason, Nplus1 Singer Capital Markets Limited, Research Division – Research Analyst [9]

——————————————————————————–

So 2 sets of questions for me, please. Just firstly, continuing from Andrew’s one about the line expansions. Is there — are we going to see any impact on the admin expenses or any investment that is required to achieve these line expansions?

——————————————————————————–

Andrew Timothy Franklin, Alliance Pharma plc – CFO & Executive Director [10]

——————————————————————————–

So to answer that sort of quickly, the answer is no. I think if you look at the work that we do, we can mop that up between our general A&P spend. So the — one of the great things about consumer business, and it’s also a hallmark of our business, is that line extensions need to be used judiciously. It is not like developing a new pharmaceutical product where you’ve got to go through phases and phases of trials, but you can do that much more quickly. So no, we don’t expect to see a significant uptick in A&P spend because of line extensions.

——————————————————————————–

Edward Thomason, Nplus1 Singer Capital Markets Limited, Research Division – Research Analyst [11]

——————————————————————————–

Okay. And then the second question I have just is on the local brands. So I can notice the change in the direct rate from the local brands that stay at a stable pace to modestly declining over time. I just wanted to try and gauge your — why the change in outlook? And what can we expect and then implementing the margin improvements in the long term? And also just if you can comment on the products that you’ve discontinued in that local brands business and the actual monetary value of those as well?

——————————————————————————–

Andrew Timothy Franklin, Alliance Pharma plc – CFO & Executive Director [12]

——————————————————————————–

Yes, yes. So I’m not going to go into the monetary value of what we’ve discontinued online, Ed. But what I can tell you is that there were quite a few brands in that portfolio that, for us, a relatively reasonable amount of sales in, but actually, profit-wise, weren’t generating too much. In a couple of cases, we had some loss-making products in there. So you would expect to see a modest margin improvement as a result of that pruning. That doesn’t mean that the headline sales will go back a little bit, but not in any degree. So we’re not worried about that portfolio at all, but we are proactively managing it. I think when you look at the SKU count within the business, it’s very easy to have your SKUs going up and up and up. And particularly when you’re putting line extensions on the front-end, the business naturally becomes different. And as you’re launching in different territories, it becomes a little bit more complex on the front-end. So you’ve got to look across the portfolio for that. But within those local brands as well, we do have some growth assets too. So we also have things like Ashton & Parsons, as I mentioned earlier, and some of the consumer brands in there. So we’re not, I would say, overly concerned at all about that. The metric has changed a little bit because we’ve been tightening up on what we — where we invest our time, frankly.

——————————————————————————–

Operator [13]

——————————————————————————–

Our next question comes from the line of John Dolan from Smith & Williamson.

——————————————————————————–

John Dolan;Smith & Williamson Financial Services, [14]

——————————————————————————–

So my question is regarding the CMOs. So you’re talking about volume currently operating normally. I’d be interested to hear some further info about whether they’re listed as the central businesses. You’re speaking about them currently producing essential pharmaceuticals. Is there any scope for governments to instruct them to prioritize those over the Alliance Pharma’s products? Kind of any further information about how CMOs are operated in…

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [15]

——————————————————————————–

Yes. Yes, of course. No, I get that. Yes, you…

——————————————————————————–

John Dolan;Smith & Williamson Financial Services, [16]

——————————————————————————–

About capacity levels, as well.

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [17]

——————————————————————————–

Sorry, I missed — sorry, I cut across you. What was the second bit of that?

——————————————————————————–

John Dolan;Smith & Williamson Financial Services, [18]

——————————————————————————–

The last thing, their capacity levels. If they’re running at max capacity or if there is an instruction to prioritize those, do they have scope to produce extra?

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [19]

——————————————————————————–

Right, John. There’s a lot in that question, right? So I think — and it’s a very good question you asked. So I’ll do my best to unpack it. Firstly, we work with over 40 different CMOs around the world. And obviously, some of those we have more product suite than others. That batch manufacturing process that I mentioned is helpful in this sort of scenario for us. You clearly picked up by the nature of the question that some governments are mandating things like hand sanitizer or essential medicines. You’re seeing the rhetoric build up in the U.K. even. We are forbidden from exporting certain medicines. And yes, governments can indeed come in and do that.

So without getting into too many specifics, what I can say on our lead brands, Kelo-cote for one, we do dual source that. So we have more than one site to manufacture for Kelo-cote. For Nizoral, that’s hedged because it’s manufactured in many different plants across the world depending on markets. So there’s a nice diverse splits on there. I think where you’ve got plants with redundant capacity that can turn their hands into things like hand sanitizer and the easier to make medical devices, yes, you’re definitely seeing that, but it’s not affecting our business right now and shouldn’t in the next couple of months at least, because we’ve seen a good healthy stock build that we can — done before we can use. Where the essential medicines need to be manufactured, it does depend on whether that plant actually makes medicines or not. You can’t just turn a medical devices company into manufacturing essential medicines, and there is a period of validation to go through, which can take some time, although it’s speeding up in certain instances.

So yes, it’s very difficult to get specific about each individual one. Safe to say that we are seeing instances of it, but it’s not affecting us. In terms of stuff coming in, you have to speak to the manufacturers themselves, which we do on a regular basis. And clearly, they’re following local guidelines wherever they can, and we absolutely endorse that. And yes, you’ll have seen the manufacturing splits across the world that we just showed. So quite a multifaceted approach, but I think you also see comments about companies now wanting to decentralize their manufacturing, so moving away from one plant into my different ones. So I’m not quite sure which one’s right and which one’s wrong right now. But all I can say is that we seem to be in a pretty good position.

——————————————————————————–

John Dolan;Smith & Williamson Financial Services, [20]

——————————————————————————–

Understood. One quick follow-up question. MacuShield and Vamoose, are they dual-source or multi-source products? Because that’s a single-source in U.S.

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [21]

——————————————————————————–

MacuShield is single-source but we sit on — and we strategically bought for quite a lot of API, and we’ve got quite a lot of finished goods for that. So yes, we’re fine with MacuShield. And Vamoose is manufactured in the U.S., and again, the components from those are U.S.-based. So that’s a single-source. But as I say, we’ve got good stock supply on that moving forward.

——————————————————————————–

Operator [22]

——————————————————————————–

(Operator Instructions) Our next question comes from the line of Martin Hall from Hardman & Co.

——————————————————————————–

Martin David Hall, Hardman & Co. – Head of Research [23]

——————————————————————————–

In what was obviously a very good set of numbers, well done, the one slight disappointment, I thought, was Nizoral, and although I totally appreciate that it’s not really in your hands at the moment. My question is really what you are going to do and the time frame to sort of kick start that back into action? You’ve addressed the costs of that and a little bit about what you’re going to do. But could you talk more about the time frame before you start to see the product getting more back into growth? And within that, where you have had the transition in Hong Kong, Thailand? Is it too early? Or can you say anything about how smooth that transition is and the rundown of J&J stock followed by the wholesaler stocking of your own branded material?

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [24]

——————————————————————————–

Martin, I’m really sorry, my line just dropped. They let me just back in. So can you hear me, okay?

——————————————————————————–

Martin David Hall, Hardman & Co. – Head of Research [25]

——————————————————————————–

I can hear you clearly.

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [26]

——————————————————————————–

Yes. Okay. So I think I cut out when you said the one disappointment was Nizoral. So that was a strategic drop of the line, I thought.

——————————————————————————–

Martin David Hall, Hardman & Co. – Head of Research [27]

——————————————————————————–

Do you want me just to try and do a quick repeat?

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [28]

——————————————————————————–

Sorry, would you mind? Yes.

——————————————————————————–

Martin David Hall, Hardman & Co. – Head of Research [29]

——————————————————————————–

Yes. I won’t go into the length of it because you’ve addressed the — how you’re going to kick-start it or try and kick-starting it. And there’s no material costs to that. So the part that I was looking for some help on this, what’s your time frame before you sort of see a kick-start back in Nizoral growth? And in the countries, Hong Kong and Thailand, where you are — now have your own product, could you just sort of talk a little bit or is it too early about the smooth transition from old J&J Nizoral into your own branded product?

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [30]

——————————————————————————–

Both good questions. And we’re already starting to see the recovery in China, which was one of the key — remember, when we did the acquisition, that was one of the key things that the numbers sort of hinged on. So — and again, we do see that potential in there. And that’s great to see potential, but you’ve got to capitalize on it. So we have a very good distributor in China that’s relatively new to J&J that we’ll be inheriting. So that will bid well for us moving forward. I think if you look at Hong Kong in particular, obviously, it’s quite small market. There’s been quite a lot of civil unrest as well last year, so we unlocked pure situation. But we do have now control of that brand, and we’ll be working very closely out of Shanghai — sorry, out of Singapore to support that partner moving forward. Also, with the rest of the portfolio, as soon as we start to get control of those, we’ll be doing all sorts of things in terms of packaging and placements and other things to help revitalize. Does that answer your question?

——————————————————————————–

Martin David Hall, Hardman & Co. – Head of Research [31]

——————————————————————————–

Yes. And so you expect — when you sort of — when it sort of comes under your control, you are actually hoping to sort of kick-start it quite quickly is what you’re saying as well?

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [32]

——————————————————————————–

Yes, we are. And these things take time. So the great thing about 40-year-old brand is it’s durable. The trick is trying to find new ways to grow it. And as I say, certainly, in China, we think we’ve got some of that. So we’re expecting, again, notwithstanding COVID in that region, some of the leading indicators to be positive this year for Nizoral. I agree, it’s taking a little bit longer than we expected to get across the line. But on the flip side of that, you can see it’s holding up very well, and we do know that there is that potential there for it.

——————————————————————————–

Operator [33]

——————————————————————————–

Our next question comes from the line of Sally Taylor from Numis.

——————————————————————————–

Sally Anne Taylor, Numis Securities Limited, Research Division – Director & Healthcare Analyst [34]

——————————————————————————–

Just on Kelo-cote. You talked about 17 markets — planning to sort of launch in 17 markets over the next 3 years. Are you able to provide a sort of quantum of real opportunity in those markets at peak? Or are there any specific markets you could highlight that, that could be a step change in opportunity for the brand, please?

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [35]

——————————————————————————–

Yes, I probably won’t go through this market by market. And there, yes, we have good coverage. So we have 65 territories already. So some of them are quite small. And as we’ve seen with other brands, such as MacuShield and also Kelo-cote, the sales are relatively modest to start with. So we don’t see that in one sort of knockout market that we’re going to enter into that will sort of rival China or anything like that. But it’s going to be a — some of many different small markets that all let out to help get us to our target of GBP 50 million. So — sorry, I can’t be a bit more specific on that at this point. But as they emerge, we’ll keep you updated. But even small markets like Saudi Arabia that we talked about earlier, can be very helpful for us moving forward.

——————————————————————————–

Sally Anne Taylor, Numis Securities Limited, Research Division – Director & Healthcare Analyst [36]

——————————————————————————–

That’s helpful. I was just looking for any sense on — in terms of how the product is used either in — sort of percentage either in C-sections, for example, or elective procedures for the cosmetic surgery and whether you’re seeing any signs of bounce back in China, perhaps where the lockdown coming out a bit better?

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [37]

——————————————————————————–

Yes. I’ve often been asked, can you translate what’s happened in China to the rest of Europe? And that’s a quite difficult one to call as you can understand it right now. But I think with — so the first part of your question was around how is Kelo-cote used. So we have a partner out there detailing in secondary care. And within that sort of secondary care channel, it’s used a reasonable amount in general surgical scars. But undoubtedly, the thing that’s driving China is the cosmetic procedures. So you’ve got a majority of elective cosmetic procedures, which make up — it’s quite hard to say right now, but at least half of the market for Kelo-cote. Then C-section scars, particularly prominent in areas like Brazil, some of the European markets, also China as well. But — yes, so it is a mix and that requires a different marketing sort of mix to mirror that. But certainly, you’re seeing growth in the aesthetic side of the business, which we’re very much benefiting from. And clearly, those sorts of procedures, at the beginning of the year, were not happening as much as they might. And we hope that, that will recover. And the feedback from our distributors are — is that they’re starting to see that not return exactly back to normal, but certainly recovered from February and March.

——————————————————————————–

Sally Anne Taylor, Numis Securities Limited, Research Division – Director & Healthcare Analyst [38]

——————————————————————————–

That’s really helpful. And then just final question, and I appreciate you’ve highlighted sort of good cash generation expected in 2020, but you talked about sort of weak — worst reasonably possible tests around stress testing. I don’t know whether you could provide any color or you’re willing to provide any color on that, please?

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [39]

——————————————————————————–

Yes. Andrew, do you want to take?

——————————————————————————–

Andrew Timothy Franklin, Alliance Pharma plc – CFO & Executive Director [40]

——————————————————————————–

Yes, sure. Yes. So I mean — and you’ll see it’s actually detailed in our report and accounts. So I have indicated 2 key tests we’ve been looking at, one is being, if we had a 25% reduction in sales from April to rest of the year, and the other one was quite extreme that if we’d have no sales at all during Q2, and what would that impact on our covenants and through our testing, we were below 3x. So that was great from a covenant test perspective. And clearly, these are the mitigations that we can put in place of spends in control over that. So those are the 2 key tests that were defined between us and our auditors as severe but sizable downside.

——————————————————————————–

Operator [41]

——————————————————————————–

Thank you. And as there are no further questions at the moment, I will hand the word back to our speakers for any final comments. Please go ahead.

——————————————————————————–

Peter Jonathan Butterfield, Alliance Pharma plc – CEO & Executive Director [42]

——————————————————————————–

No. I think that’s fine. Thank you to all for bearing with the technology, I think, barred me dropping out, it’s held up very, very well indeed. Also, thank you to Buchanan for sorting all the logistics for this morning. And once again, thank you to the Alliance team for doing a sterling job right now. So that’s all we have to say. I think we’ll draw it to a close there. Thank you.