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Edited Transcript of HIK.L earnings conference call or presentation 27-Feb-20 9:30am GMT

Full Year 2019 Hikma Pharmaceuticals PLC Earnings Call

London Mar 20, 2020 (Thomson StreetEvents) — Edited Transcript of Hikma Pharmaceuticals PLC earnings conference call or presentation Thursday, February 27, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Khalid Waleed Hosny Al Nabilsi

Hikma Pharmaceuticals PLC – CFO

* Sigurdur Oli Olafsson

Hikma Pharmaceuticals PLC – CEO & Executive Director

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Conference Call Participants

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* Emily Field

Barclays Bank PLC, Research Division – Research Analyst

* James Alexander Stewart Vane-Tempest

Jefferies LLC, Research Division – Senior Equity Analyst

* James Daniel Gordon

JP Morgan Chase & Co, Research Division – Senior Analyst

* Max Stephen Herrmann

Stifel, Nicolaus & Company, Incorporated, Research Division – Head of European Healthcare Equity Research & MD

* Paul Cuddon

Numis Securities Limited, Research Division – Director for Healthcare Equity Research

* Peter Verdult

Citigroup Inc, Research Division – Director

* Thibault Boutherin

Morgan Stanley, Research Division – Equity Analyst

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Presentation

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [1]

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So good morning, everyone. Welcome in this beautiful London weather. Just want to remind you, we are doing a webcast, so any conversation around the table will be heard around the world. So just keep the noise to a minimum around the table during the presentation.

And for the benefit of the people on the webcast, I’m Siggi Olafsson, the CEO of Hikma, and with me here today is Khalid Nabilsi, the CFO. I’m going to give you a quick update on the strategic progress we have made in Hikma, and then Khalid will take over and run through the financial results for 2019, outlook for 2020. And finally, we will open it up for questions and answers.

So 2019 has been another very good year for Hikma, with all our businesses performing well. Group delivered $2.2 billion in core revenue, up 6% over last year, demonstrating good organic growth. More importantly, this, combined with our focus on cost saving, is translating into a strong profitability with core operating profit up 10%. Across the group, we are really delivering more from our marketed products, benefiting from the breadth and the durability of our portfolios. At the same time, we’re launching new products and making good progress with pipeline development.

Let’s take a look at all of our 3 businesses. We start with Injectables. The injectable business performed well with a core revenue up 7% and achieved a strong operating margin of 38%. The chart on the left shows the key drivers of the injectable revenue in 2019. In terms of headwinds, we continue to see erosion of what we used to call the big 3: glycopyrrolate, neostigmine and thiotepa. These products went from contributing more than $150 million in 2017, and in 2019, they contributed closer to $30 million. You can also see that revenue from controlled substances has decreased year-on-year as more supply has returned to the market. Sales from these products decreased by around $20 million compared to 2018.

Despite these significant headwinds, our injectable business grew in 2019. We drove a good demand for our broad product portfolio of more than 100 products, shown here as a base business, leveraging the scale and the strength of our customer relationship. And importantly, we also delivered a strong sales from recent launches, with a steady stream of launches over the year. Additionally, in 2019, we partnered with Civica to provide the essential medicines in short supply to hospitals in the U.S. We started towards the end of 2019 and expect to see an increase in benefit in 2020.

On the right-hand side of the chart, we have drilled down into the contribution from recent launches in the U.S. On their own, many of our launches are very small opportunities, but together they have made a nice contribution over the years, delivering steady growth over time. The products we’ve launched over the last 4 years are now contributing 23% of the U.S. injectable revenue. Our U.S. business has a strong pipeline around 126 product, of which 58 are filed or approved and 68 are in development. We want to grow our portfolio of higher-value and more complex products, and much of our R&D focus is on those types of opportunities.

The continued strong performance of our injectable business reflects the breadth and the resilience of our product portfolio. We have one of the largest portfolios in the U.S. market, and they’re not overly dependent on any one product or even a few large products. And over the years, our portfolio, through new product launches, has become less and less concentrated as shown on the chart on the left of the slide. In 2016, the top 10 products in the U.S. contributed around 60% of the year of revenue. This decreased to 45% in 2019. We will continue to look at opportunities to further diversify our portfolio and reduce our concentration risk and expect this to keep decreasing.

In addition to benefiting from a diversified portfolio, we also benefit from limited competition on a number of our products. You can see on the right-hand side that more than half of our products have 5 or less competitors. For several years, a large number of injectable companies have been struggling with quality issues, and Hikma has a strong quality track record, which continue to set us apart from many of our competitors. Of course, we have to recognize that these products will face increased competition over time, which will need to be offset with new launches. We are committed to maintaining a steady stream of new launches roughly 10 to 15 per year under focusing on our R&D effort on increasing the number of complex and differentiated product in our pipeline.

Our European and the MENA injectable business have had another good year, and we expect this growth trajectory to continue. MENA Injectables delivered approximately 20% growth, driven by good performance across most of our markets and the success of our biosimilar program. As you know, we launched our first biosimilar, Remsima, in 2017 through our partnership with Celltrion. We are very pleased with what the product has delivered, and we continue to see increased demand for it. We also launched our second biosimilar from Celltrion in the region, Herzuma, and are now beginning to launch of our third biosimilar, Truxima.

In Europe, we expanded our manufacturing capacity in Portugal and have recently begun commercial production in our new high-containment facility. The facility will provide products for our MENA and European markets in the near term and for the U.S. market over time.

Now turning to Generics. Revenue grew 4%, and most importantly, we achieved a strong core operating margin of 17%. Our Generics business has performed extremely well in 2019, and the commercial and operational improvements we have rolled out over the past few years are clearly reflected in our results. This year, the team has done an excellent job in driving demand for our marketed products. Thanks to our strong customer relations and the improved service level, we were able to increase volume on existing contracts and win new business.

We have remained extremely focused on streamlining and optimizing our cost base. We started to see benefit on cost of goods through manufacturing efficiencies. In addition, in 2019, we saw the full year benefit of the closure of our Eatontown and Memphis facilities, which generated annual savings of around $20 million. We continue to launch products and look for ways to optimize our portfolio to focus on the higher value opportunities. This year, we also conducted a detailed review of our portfolio and discontinued a number of products that did not fit within our business.

While our marketed products continue to perform well, we need to ensure we have good pipeline to drive sustainable long-term growth. We are focusing on building a pipeline of more differentiated complex products. This year, we did a detailed review of our pipeline and identified projects that we think will give us a good return on investment. These products are technically challenging to manufacture and have limited competition.

We have 91 product in our pipeline, of which 30 are already filed. These includes products such as nasal sprays, dry powder inhalers and some Paragraph IV opportunities, which we expect to start launching from 2020 onwards. Filed products includes nasal spray of naloxone, generics of Xyrem, generic Advair and generic of Vascepa. We will continue to progress our internal R&D program. We are leveraging our existing manufacturing capabilities, investing in new technology as well as pursuing opportunities to co-develop and license products.

Our BD activities during the year focused, to a large extent, on expanding our nasal spray capabilities. We are leading — we are a leading supplier of nasal sprays in the U.S., with dedicated manufacturing capacity at our Columbus facility. This year, we acquired 2 nasal spray pipeline products, naloxone and epinephrine from Insys, along with a unit dose nasal spray manufacturing capabilities that have already been installed in our Columbus facility and are in the process of being validated. This morning, we announced the licensing of Ryaltris from Glenmark, a novel nasal spray for the treatment of seasonal allergic rhinitis, which is already filed with the FDA.

For the branded business, our focus is on strengthening our presence in our core MENA markets. The breadth of our reach in the region continues to position us as a partner of choice. We have a strong market position. Our local expertise and established position allow us to capture attractive growth opportunities in these markets and navigate challenging conditions if they arise. We also have local manufacturing facilities in 7 of our MENA markets and continuously invest in our processes and procedures to improve efficiency and ensure high quality. We have exited noncore markets and are increasingly focusing on our largest Tier 1 markets, which performed very well over the year.

As with our other businesses, we are developing our pipeline and focusing on our strategic therapeutic areas and markets. We continue to look for — to prioritize opportunities and to add more differentiated products. Our product portfolio for this business is increasingly focused on certain higher value areas, including oncology, diabetes, CNS and respiratory.

In 2019, we launched an exciting in-licensed respiratory product, Bufomix Easyhaler, in Jordan, and expect to launch 3 additional — in 3 additional markets in 2020.

For many years, partnerships have played an important role in our branded growth story. This is a key differentiator for us in the region. We have signed some exciting new partnership deals in 2019, including agreement with Gedeon Richter and Chiesi to add novel products to our portfolio. We will continue to focus on adding these types of opportunities.

To sum it up, 2019 was a very good year for Hikma, and we continue to execute on our strategy. This year demonstrates that we are successfully delivering more from a strong foundation. We strengthened our commercial capabilities and increased operational efficiencies, which is helping us to continue to drive strong demand for our broad product portfolio. We are investing in building a more differentiated product pipeline and portfolio to drive future growth. Our strength in R&D capabilities is what will allow us to achieve this. Overall, we are making a good strategic progress across our businesses. I’m pleased with what our terms have — our teams have achieved this year, enabling us to provide high-quality medicines, and I’m confident that by continuing to focus on these areas, we will deliver long-term sustainable growth.

And with that, I hand it over to Khalid to go through the finances.

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Khalid Waleed Hosny Al Nabilsi, Hikma Pharmaceuticals PLC – CFO [2]

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Thank you, Siggi. Good morning, everyone. As you have heard from Siggi, the group has delivered good growth across our 3 segments in 2019. Core revenue was up 6%. Core operating profit was up 10%. And given the strong performance with core EPS up 9%, the Board is recommending a final dividend of $0.30 per share, which brings our total dividend for the year to $0.44, up from $0.38 in 2018.

Turning to our injectable business. This business continues to perform well, with core revenue up 7%. Just over 70% of core revenue came from the U.S., which grew 5%. Competition increased on some of our products. Glycopyrrolate, neostigmine and thiotepa continued to decline, and we saw a slowdown in sales of some shortage products. We have been able to more than offset this with good demand for our in-market products and recent launches.

MENA sales were up 20% in constant currency. We saw a good performance across most of our markets as well as good contribution from our biosimilar products. In constant currency, our European sales grew 8%, primarily from higher contract manufacturing sales. We maintained a strong core operating margin at 38%, down from 40% in 2018, reflecting the change in product mix in the U.S. and strong growth in MENA.

Our generic business delivered revenue growth of 4%, primarily due to good demand for our differentiated products, which more than offset continued price erosion. Generic core operating profit grew 33% due to improvement in product mix and cost reduction, primarily from the consolidation of our manufacturing facilities in 2018. This more than offset higher marketing and R&D expenses. The generic core operating margin was 17%, up from 13% in 2018.

Turning to the Branded. In constant currency, our Branded business grew 6%. Our largest markets, Saudi Arabia and Egypt, performed well, reflecting our strong market position, good demand for our marketed portfolio and new launches. We also saw good growth in a number of other markets, including Morocco, Tunisia, Sudan and UAE. This more than offset lower sales in Algeria, which was impacted by an economic slowdown and led to distributor and pharmacists choosing to hold less inventory than normal. We also saw lower sales in Lebanon due to the current political situation. Branded core operating margin was 22.1%, up from 21.6% in 2018.

As for R&D and CapEx, we continue to focus on growing our pipeline. We invested $126 million in core R&D, up 7% due to higher investments in our generic and injectable programs as we build our pipeline of complex products. As a percentage of core revenue, core R&D was 6%.

Our CapEx spend was $119 million. More than half was invested in MENA on strengthening and expanding our manufacturing capabilities. Around $36 million was spent in the U.S. upgrading equipment and adding new technologies. We also completed construction of our new high-containment facility in Portugal.

Turning to the cash flow and balance sheet. The group continues to generate strong cash flow with operating cash flow of $472 million. Net debt reduced to $242 million, primarily due to the group’s strong cash balance, which significantly improved over the year. This includes $45 million of additional lease liabilities due to the adoption of IFRS 16. We continue to have a very strong balance sheet with a net debt to core EBITDA ratio well below 1x. As part of our long-term financing requirements, we are exploring refinancing options for our $500 million eurobond, which is due to be repaid in April 2020, including alternatives in the fixed-income markets. The group may also utilize its cash and unutilized revolving credit facility of $1 billion to repay the eurobond.

Finally, the outlook for 2020. We expect injectable revenue to grow in the low to mid-single digit in 2020. We expect core operating margin to be in the range of 35% to 37%. We expect generic revenue to be in the range of $700 million to $750 million and core operating margin to be around 20%.

Our guidance assumes that we will launch generic Advair in the second half of the year, and we have included $20 million to $40 million from Advair in that range. Excluding the benefit from generic Advair, we would expect the core operating margin for the generic business to be between 16% to 18%.

We expect Branded revenue to grow in the mid-single digits in constant currency. We expect the group core net finance expense to be around $47 million and the core effective tax rate to be around 22% to 23%. We expect group capital expenditure to be in the range of $120 million to $140 million.

Thank you.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [3]

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So let’s open it up for questions. If you could please wait for the microphone for the benefit of the people on the webcast to ask a question, maybe start with your name. Just put up your hand, and we’d be happy to run with a microphone to you. So open it up, James.

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Questions and Answers

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division – Senior Equity Analyst [1]

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It’s James Vane-Tempest from Jefferies. Just on guidance. Firstly, on the Injectables guidance. Just curious what you’re assuming in terms of shortages. I guess for the last year, I think you had given a range of 35% to 38% and did the top end of that. So now you’re saying 35% to 37%. And how much of that’s from the regions and changes in mix versus shortages?

And then second question just, I guess, the decision to include Advair as part of the guidance. Just wonder if you can help us understand either the risks around that or how we should think about sort of the overall opportunity and the decision to include in guidance today.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [2]

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So thanks, James. So first on the shortages and the impact on the guidance. I think, overall, you saw the controlled substances contribution last year went down approximately $20 million year-on-year in the injectable business. We expect that to continue into 2020 to really go to a fairly low level. But it’s also the market is changing. So there are new players in the market. So it’s difficult to say what is due to shortages from Pfizer Hospira versus where Fresenius is playing in the market. So our assumptions in the guidance is that we are taking down the controlled substances contribution quite significantly in the 2020. We obviously — there is — also, just to remind you, outside of the controlled substances, there is a significant shortages in the U.S. market.

As of today, there’s more than 200 products on shortages in the U.S. Of those 200, more than 100 are injectable products. And of these 100, Hikma has approval for approximately 50 of them. So there are opportunities even though they might not be in the controlled substances. And the growth of the base business you saw in 2019 is partly to do with overall shortages whereas Hikma can step into the market and help out when other people have manufacturing problems, not being able to supply the market.

So it’s difficult to guide on that because you never know what the shortages will be in 2020 because if I would know that, there wouldn’t be shortages, of course. But I think the market environment, we have seen that over the last 5 years, the shortages are not going away. We simply don’t know where they’re going to hit us in the year.

The question about the risk around generic Advair. I think, first of all, we feel we have a very good application with the FDA. We ran a new Phase III study with over 1,500 patients. We submitted that to the FDA at the end of November 2019. The review time of a major CRL, it’s between 6 to 12 months. Maybe the average is around 8 months, 9 months, so we expect, as Khalid mentioned, to launch in the second half of the year. What has changed since we last spoke was that Novartis Sandoz have announced that they are no longer pursuing the development of their generic Advair.

We feel good about the application. I think we have put in a reasonable number in our guidance that allow us to launch. It’s still a very big market. You have to remember that the Advair market today, including brands and generics, is approximately 160,000 units per week, so this is still — and in fact, the volumes are growing a little bit, not by much. At least the decline of the product has stopped versus the prior years with Advair was going down versus the increase in Breo.

So we feel good about the opportunity, but clearly, the risk is to get the approval by the FDA as always. But we feel good about that risk, and that’s why we included it in the guidance.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division – Head of European Healthcare Equity Research & MD [3]

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It’s Max Herrmann from Stifel. 3 questions, if I may. Firstly, just a little bit of update on where you view generic pricing in the U.S. for 2020. Obviously, you guided that you’d expect an increase in the decline in generic prices for your portfolio in the second half. That seems to borne out with the lower margin in the second half. So I wonder what your outlook was for 2020 in that regard.

Secondly, obviously the U.S. injectable guidance is — or the performance in the U.S. Injectables has been ahead of the other players like Fresenius. So just trying to understand the guidance there overall. Is it really because of the MENA sort of mix in that business and obviously the European contract manufacturing continuing into 2020? Or are there other things we should factor in why you’re outperforming the market there?

And then finally, and I guess somewhat related, you mentioned the launch of your biosimilar to rituximab. Is that — I’m trying to remember if that was — you expected that to be the larger of the 3 generics. And just maybe a little bit of an update on how your other 2 products are doing in terms of growing the market, because I think that’s something you’ve mentioned in the past?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [4]

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Thanks, Max. So I think if we talk about the generic pricing, as I guided to during our midyear update in August, the pricing pressure in the second half of 2019 was more than in the first half. Clearly, this sometimes happen especially when companies are under pressure, and we saw that it probably wasn’t nearly as bad as IMS reported. I think if you read IMS, it could be seen as second half was minus 11% versus the first half of the year. We guided to that the price erosion we saw for the full year was a price erosion between 5% and 7% in 2019. And that’s what our guidance include for 2020.

We are assuming no improvement in a way. We assume that 5% to 7% price erosion will continue in the market. I think that is the right level. The market is not getting any significantly better, but we have no — I think with our portfolio today, with our service level and how we have built the business on our differentiated portfolio, I think that’s a good number to think about going into 2020, and we feel comfortable on that guidance.

Around the U.S. injectable business, I think the U.S. injectable team, but also the global injectable team, has done an outstanding job. There are a few things to play to this. So we clearly had 2 headwinds in 2019, which was the reduction of the controlled C2 products, the strong injectable low periods, and the reduction in the big 3, which has really affected us because these were also a much higher-margin product.

Against that, we have grown — both the new launches have been more successful than we expected. But also the base business. And the base business is really going — which is the 100 products we have on the market. Part playing in that is we are not exposed like some of our big competitors as much to a product concentration. So many of our biggest competitors in the market, they really have a strong product concentration on 3 or 4 products, which have been under competition where, as I showed on the slide, our top 10 products today is only 45% of the U.S. revenue. So I feel that plays into it.

I think secondly, we play into the new launches. The new launches have been very good. And by the way, in early February or just earlier this month, we launched [daptomycin] in the U.S. market, which was a new step for us going into that market, and especially important now with everything going on around flu-like symptoms, even though obviously antibiotics don’t work on viruses. But it’s more usage in the winter within the flu season.

The MENA has — grew 22% last year. Part of that is biosimilars, but part of that is also just the overall growth in our markets. Good growth in oncology in Saudi Arabia and Egypt. So really, we have seen an overall strong performance. And the European business, as we have said, we have a steady business. It grew with our contract manufacturing, but we can, in a way, manage that business, how much we grow. We used the extra capacity in our plants to grow that business. So there is an opportunity to grow more in Europe, but it depends on the capacity we have for MENA and the U.S., where the margin is a little bit better.

So I think the outperformance we have done is due to less product concentration and the performance of our pipeline, because not many of our competitors are launching. We launched 14 products in 2019. We are guiding to 10 to 15 launches again in 2020.

And in terms of the biosimilars in the — in MENA, been doing extremely well. We’ve been very, very pleased. I think part of that has to done with the good partnership with Celltrion. I think Celltrion has done a really good job, also with getting us safety information. Celltrion has a big business in Europe, and we are able to use the safety information and adverse events, incidences, to promote the products in MENA.

We only have approvals in 8 markets so far. So not in the 18 markets in MENA, only in 8 markets. What we see in every market we come into on Remsima, and this is the biosimilar for Remicade, the market grows very significantly. I mentioned in our August call that in Morocco, the market itself grew 70%. In some of the other markets, they are growing 20% to 50%. And we get a good market share. Obviously, we come in at a lower price, but it’s a high-quality product, and the doctors are focusing on the quality of the product. And if there’s any differences in the side effects or safety profile of the biosimilars, which has come out, there’s no difference.

In terms of market size, remember that Remicade — biosimilar for Remicade, or Remsima, the market size before we came in was about $45 million. Rituximab, the market size before we come in is approximately $100 million. And in terms of Herceptin or Herzuma, the market size before we come to the market was approximately $185 million. So the products that we are introducing now in terms of the rituximab and Herceptin biosimilars, those are significantly bigger than the Remicade.

So this needs promotion. This needs active promotion. So in a way, this is right at the alley of what Hikma is really good at. We have a strong sales force. We have 2,000 sales reps and sales support over the MENA region. Obviously, not all of them are doing biosimilars for sure, but really the reputation and the quality of the sales force has helped us to grow this business.

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Paul Cuddon, Numis Securities Limited, Research Division – Director for Healthcare Equity Research [5]

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It’s Paul Cuddon from Numis. Just 3 quick questions. I just wondered if there’s any scope for more Civica-like agreements in injectables. On the generics side, your new agreement with Glenmark, is that sort of potential cannibalization of your kind of other part of your nasal spray business? And then finally, with all of the various opioid settlements and specialty generics units going into bankruptcy, I’m wondering if this is creating a potential opportunity for Hikma as a more stable supplier.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [6]

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Thanks, Paul. So first of all, on Civica-like opportunities, remember when we announced Civica middle of last year, people were a little bit skeptical. If we should do this, wouldn’t this upset the market? I think we said we are going in with 14 products, and we are going to see how it works out. We’ve been very careful in guiding on the benefits of Civica. I think Civica is a really good idea, a good company, where the focus is on products in short supply to have a secure supply for the hospitals. The hospitals that have signed up with Civica have increased significantly since we made the agreement. So they are doing a good job. But we are very early in that relationship. Remember, we signed up for 14 products. Our first delivery was just in the last few days of December. And then we will see throughout this year.

So I think it’s an experience — experiment that we are doing at the moment. We need to see how it comes out. But if it works out well, the market could also be affected with it. We still have a very good relationship. And the GPOs in the U.S. are very important customers, and they are doing a good job. And I think many of the GPOs are trying to do more of what Civica is doing for their customers. So they are also thinking about how can we step into being more of a partner with the hospitals in their short supply. So I think this — Civica, when Civica came in, woke up the market a little bit. So I think all the customers we have in the U.S. are changing a little bit how they think about the security of supply. And by thinking about security of supply, I think Hikma is very well positioned due to our quality record, but also due to our service level.

In terms of the agreement on — that we announced this morning with Glenmark, I think this is a step which we have talked about. This is obviously a small step in terms of trying to be more of a specialty company. We know the nasal spray area very well. The acquisition of the 2 products, naloxone and epinephrine from Insys, clearly development product still in the pipeline. Naloxone has been filed with the FDA. Those would be branded products. Those are 505(b)(2). Would need a sales force behind it. And then with this product coming online now, which hopefully we — it’s currently under review at the FDA. I think that is 1 more piece to the puzzle of, first of all, becoming a leader in nasal sprays, both in generics but also stepping into the specialty part of it. But also step, I think, for Hikma to become a little bit slowly but steadily more of a specialty company.

We have the understanding. We understand the market. In a way, to promote this product, you don’t need an overly big sales force. It’s a little bit seasonal how these products — obviously, with allergic rhinitis, it’s a seasonal product. But we feel this is right up our alley in terms of strength of Hikma, relatively small sales force, understanding the market well, understanding how to position it. So we’re excited. I think Glenmark is a great partner on this product. They have done a good job. And by the way, they have already launched this product in Australia by end of last year. So it’s already approved in 1 market, if not more around the world.

And around the opioid opportunities, I think we need to be careful. Clearly, there are challenges in the U.S. market in terms of generics, not only due to opioids but due to too much leverage and things like that. I think some of the customers are thinking about that because there is a lot of cash that goes back and forth in terms of how you operate and sell generics in the U.S. I don’t see any change in the market as of yet. We monitor that. But I don’t see that in the near future because many of these companies are trying to make sure that they continue to supply the market. So we keep an eye on it. There’s clearly an unrest in the market. There’s a lot to talk about, the high levers — high leverage in our peer companies. And I know customers think about it. But as of today, there hasn’t been any change in behavior of the customers due to that.

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Emily Field, Barclays Bank PLC, Research Division – Research Analyst [7]

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Emily Field from Barclays. Sorry if some of this was touched on the prepared remarks. Just regarding the Injectables guidance. Both on the top and bottom line, how much is in that guidance that could be perhaps considered idiosyncratic or more onetime factors? Or is this kind of what Hikma’s Injectables business would look like on a normalized basis? I know you guided to the low to mid-core operating margin normalized in the past. Just if you could go into a little bit more detail on that.

And then also just capital allocation priorities, your financial firepower continues to build over time. What would be the appetite perhaps to deploy that in a larger transaction? And also, if you see more opportunities in terms of adding to any of the 3 of your major business segments?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [8]

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So thanks, Emily. So on the injectable business, I think — remember when we had our Capital Market Day in October 2018, some of you were there, we guided to that the run rate of the profitability should be around the mid-30s at that point in time. We are obviously guiding a little bit better now, 35% to 37% in terms of operating profit. I think that reflects on basically a better underlying business we are seeing. That also reflects a better performance of the pipeline. You saw that — when you look at the slides, 23% of our contribution — revenue contribution in the U.S. are products launched in the last 4 years, which is very significant even though most of them, when they were launched, they were only $3 million to $5 million in revenue in the first year. So really, we have a strong base.

There’s no one-off that we see in the injectable business for 2020 we can talk about. There’s no big launch that we are facilitating. Again, we are guiding towards 10 to 15 new launches. Most of them are the size of $3 million to maybe $6 million in revenue for the first year. So we really have to do all these products to deliver the growth in the market. We are assuming maybe approximately 3% price, 3%, 4% price erosion in the market. So the injectable price erosion is less than on the commodity generic business for sure. But that’s because service levels are so important like we have talked about before.

MENA is still going to show a good growth. We see the MENA business growing, and that’s partly influencing the lower profitability because the margin in MENA is lower than in the U.S. So if I grow much faster in MENA than I grow in the U.S. market, that dilutes the margin a little bit. But it’s not so much of a dilution. But that is part of the reason why we went from 40% to 38% between 2018 and 2019. So really, I think, a strong underlying business. We clearly have to continue to execute on the new launches.

And then, obviously, an upside to this guidance would be more of a shortage situation in the market. So it’s so difficult to guide on a shortage situation, as I mentioned in the first question. The market tells us there will be shortages, but will I have inventory of those products? Am I able to take those opportunities? So it’s difficult. So that hopefully could improve the business going forward, if we can take those opportunities.

In terms of capital allocation, clearly we are at 0.4 net debt to EBITDA. So we are down to a very low debt. In terms of firepower, obviously that depends a little bit if you’re buying an EBITDA or not, but I think we are probably getting close to $2 billion in firepower. I think also at the same time, and I reemphasize this, as you saw in 2019, and I think we are probably the only company of our peers that grew purely organically year-on-year, both on revenue and the bottom line. Some companies do on bottom line, but to grow the revenue line, especially in the U.S. generics, is nearly unheard of.

So I think in a tough environment, we have a company that is growing organically. So yes, we have the balance sheet. I think we have the team in place to execute on a transaction. But because I have a growing company, as you saw in my guidance for 2020, we are not under pressure to execute on the transaction except if we feel it’s a strategically good transaction for the company. So M&A is opportunistic for sure. We are ready if the right opportunity comes around.

Just talk about the 3 businesses, how we think about it. In terms of the generic business, as I said, I’m okay to grow that a little bit especially if I find niche dosage forms, which we are not in today, like the acquisition of Insys, which made sense where we were not in a single dose or unit dose nasal sprays before, but we have now got that capabilities. There might be other dosage forms, which would make sense. I’m still not looking to be $2 billion, $3 billion U.S. generic company. I don’t think, because of the fluctuation in the market, that would mean more fluctuation in the overall performance of Hikma.

In terms of the injectable business, I’m both looking for — if there are generic opportunities, but it’s very difficult to find generic injectable opportunities because our pipeline and portfolio is so large that there is a significant overlap whenever we look at the portfolio. But if we would find it, we would clearly consider it. But we are exploring other specialty 505 opportunity where our good relationship with the hospitals would help us to promote that. And that could be in U.S., that could also be in Europe and MENA, but clearly U.S. could be a focus for that.

And in the MENA market, we are not looking for geographic expansion because we are in all 18 markets there. But we are looking, is there an opportunity to buy a portfolio, which could grow the business going forward? Maybe a company, but if there is a portfolio, if there’s a portfolio in the region where we could promote that with our sales force, because we have a big infrastructure. And as I said when I joined the company 2 years ago, my job is to find more products for the MENA team to promote instead of trying to cut cost too much. So I think that is the focus there. Branded products, IP-protected brands or branded generics, we are open minded, but how can I give them more to promote because that is really how we could grow inorganically. So balance sheet, good. I think the team is ready, but the opportunity needs to be right to make sense.

Any more questions from the room?

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Thibault Boutherin, Morgan Stanley, Research Division – Equity Analyst [9]

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Maybe to come back and…

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [10]

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Maybe your name first? No, just your name.

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Thibault Boutherin, Morgan Stanley, Research Division – Equity Analyst [11]

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Yes. Sorry. Thibault Boutherin from Morgan Stanley. Maybe just to come back on your strategy around — and your willingness to expand in specialty in the U.S. You’ve mentioned nasal spray and the couple of acquisitions you’ve made recently. Is there any other kind of dosage form or other kind of pockets of the market where you see opportunities?

And then secondly, I mean just a question on the coronavirus. You mentioned in your guidance that you are not expecting any disruption because you have limited exposure to China in terms of sales and operations. But I think a lot of your competitors have actually a significant exposure in terms of their supply chain to China. So could you just comment on the state of the generic industry in terms of export to China? And if we look at your product portfolio, is there a significant overlap with companies that could be disrupted by registration changes in China?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [12]

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So thanks. So if we talk a little bit about the specialty in the U.S., it needs to make strategic sense for us. So what I’ve given the examples to our investors, I’ve told people probably what it is not. It doesn’t maybe help you. But for example, I’m not looking for oncology assets for the U.S. because that’s being served by big pharma. I’m not looking per se for diabetes assets in the U.S. because there’s a heavy competition; you need a big sales force. We are not so much looking for a cardiovascular asset in the U.S. because you need a big sales force to do it.

So it’s a specialty asset that fits a company of Hikma size, where we can use the capacity, understanding and capabilities. It would be — it could be a specialty where you need a sales force up to 100, 150 sales reps. It could be a hospital products where we — or hospital products used within the hospitals that make sense, where we can use our relationship, our good relationship with the hospitals, with the clinical committees going forward. It could be a possibility. We are evaluating if it makes sense to look at some biosimilars. As an example, for the U.S. as you know, we haven’t invested a single penny yet into biosimilars in the U.S. So far, the market hasn’t taken off. I think, a little bit with pegfilgrastim now, there’s a little bit of movement. But in terms of biosimilars or for Remicade, it really is slow. So we are looking very carefully if that makes sense, what therapeutic areas would make sense to go into in those fields.

So I think the opportunity, as I said, I know what it is not. But I think we’re open-minded as long as it fits the criteria that we could execute, and the execution risk is balanced, that it’s big enough, that it makes a difference for Hikma, but also at the same time, it doesn’t take all our resources into a relatively small business.

In terms of the coronavirus, first to say, in terms of the supply for Hikma, we have looked at all our APIs and inventory. So at this point in time, it’s not affecting our supply at all. We look at this every day, by the way, with a team of people. We are also contacting our suppliers all around the world because, as you headline, there could be shortages in the market later on. We have, in fact, taken the decision to increase inventory of some of flu-related drugs, drugs that are used more in flu. Obviously, it’s not the antiviral that would work on a flu virus, but for nasal sprays and other things like that. So we’re increasing our API inventory on these products.

But for the industry as a whole, I think we need to monitor. For us, we have — we feel good over the next few months. But you have to remember, this is a very fast-changing situation, so if there is a lot of shortages in the market, the whole market will react to that. But as we sit here today with an understanding of all our API and the inventory we have, we are in a very good position. As I mentioned in the press release, we have a relatively small exposure to Chinese supply in our supply chain. And where we have, we have a very good relationship and plenty of inventory on hand. But obviously, if there is a big disruption in the overall pharmaceutical supply chain, we need to see how long your inventory last at that point in time.

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Peter Verdult, Citigroup Inc, Research Division – Director [13]

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Peter Verdult, Citi. Siggi, 2 questions. We don’t often talk about branded. I’ve almost talked about U.S. generics and injectables. But that was, I think, about second half performance where the biggest delta was versus expectations. It was Branded, which most of us just think mid-single-digit growth, flat margins. Just can we talk about maybe some of the upside potential there, both on the revenue side and margin side?

And then I picked up in the second half of last year, you talking a lot more about biosimilars in the U.S., and when you just, I think to Emily’s question, gave your BD priorities, no mention of biosimilars with Injectables. So where are we on that? Because obviously, we discussed before we can see the value of what Hikma brings to the table with biosimilars in MENA. Less obvious, what you can do in terms of value creation in the U.S., but could you enlighten us there?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [14]

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So thanks, Peter. So first of all, I couldn’t agree more. Basically, the performance of the Branded team was outstanding this year. This really — I think they’re showing even in a tough environment, which obviously — Algeria, one of our biggest markets, the political instability there was very significant. What that meant is that the street sale, what I’d call, continued. But the wholesalers and the pharmacies have a very, very low level of inventory. So the sale out was significantly less. That being said, it highlights how the business model work by being in all 18 of the MENA markets. When 1 market is a little bit slow — or in fact 2 markets, Lebanon and Algeria, there were 2 markets that did extremely well: Saudi Arabia and Egypt. So they balanced it out.

Part of the performance is still a very good performance of our well-established brands in the region. We are still promoting them. They are still growing. We also saw some pickup in new launches. Overall, we haven’t been very good in revenue of new launches because we have been able to grow the old brand so much that the focus of the team hasn’t been so much on the new launches, where they changed in 2019, and we gave more resources to the new launches, again, without hitting the big performance.

I think in terms of pipeline, we filed over 170 products in those markets. Clearly, in a branded market, you can’t launch more than 5 to 6 products per year. Nobody will launch 14 products like we did in the U.S. injectable market. But overall, I was very pleased with the performance. And then for the future, the in-licensing business development deals we did in MENA from Gedeon Richter on the antipsychotic, with Chiesi for Egypt, and for these products, which needs a promotion behind them. Antipsychotic is doing extremely well in the U.S. We obviously need to see how it does it MENA when it comes to the market. It’s not in our 2020. We are still waiting for approval. It takes time.

But overall, I’m pleased with what the MENA team has done because it’s a little bit like — it’s been — it’s the core of the company and has been delivering low- to mid-single-digit growth top line, about 20% profitability. And suddenly, you see them moving a little bit better, 7%, 8% growth now over the year, and the profitability between 21% and 22%. So I feel we need to continue, but it really is a good market.

And maybe the last point on MENA, if you look at our peers in MENA, outside of big pharma, most of them were declining in the region. They really had a tough time. So we really outperformed our peers very significantly in the MENA market because it’s not an easy market. And some of our peers were over-relying on Algeria as a market. But when you are in all 18 markets, it really is a strong benefit.

On biosimilars, we basically — we are looking very carefully into it. We — I haven’t said — I think I’ve said that we need to decide in the next 12 to 18 months if we wanted to be in the U.S. The train has — is starting to move a little bit. It’s still not a very exciting market. But in 2023, when Humira comes off patent, this could be a big market. And for us not to take part in it, what is there else?

So I think we are looking at it. This — we are not looking to build R&D capacity or capabilities ourselves at this point in time. I think we are too late and too many companies have invested in that already. There are good products out there for sure. I think for me, I think about it a little bit in the therapeutic areas. I’m not sure today it’s a good strategy just to go for all therapeutic areas in biosimilars. I think you need to choose maybe 2 or 3, where you really build knowledge to be able to influence the decision-makers.

And I think just to give a compliment to a competitor in the market, I think Coherus has done an outstanding job on pegfilgrastim, where they really is the first and mainly only company that have really made an inroad in the market and have understood how these products will be prescribed in the market.

So we are actively thinking about it. But it’s also the question: If not this, what would we do else? Because clearly, we need the fourth leg. As I talked about last time, there needs to be a fourth leg to allow us to grow. We have a good growth over the next few years. But when it comes to 2023 onwards, what is the fourth leg that continues the growth of the company?

Any more questions in the room? Any questions from the webcast?

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Operator [15]

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We have one question from James Gordon of JPMorgan.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division – Senior Analyst [16]

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James Gordon from JPMorgan. A few questions, please. One will be just at generic Advair. So if I look at the implied margin, because you’ve given us what the revenues and the margin will be with and without generic Advair, it’s like a pretty high drop to about 90%. Can I just confirm that the way it will work is that you won’t have the 15% pay away to Vectura or Boehringer going through? And can you also remind, are there any milestones you need to pay out upon approval? And do those go through the P&L?

The second question would be on Injectables. You’ve given guidance for low to mid-growth globally, but the ex U.S. business is growing. I think it’s grown about 13% last year. Does that assume the U.S. business is about flat? And is that sort of the run rate going forward, that Injectables as an ex U.S. growth business pretty much flat in the U.S.?

And then 2 other financial questions. That litigation expense, is there an assumption that you do have litigation expense in the generics division this year? And how much could that be? And then a final question, refinancing. How much might you be able to take the coupon down if you do your refinancing this year, please?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [17]

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So thanks, Jim. So on generic Advair, clearly — so the royalty to Vectura and BI are on the balance sheet, opening balance sheet from that transaction. So the gross margin affecting the P&L is the real gross margin at the end of the day. It has — as our guidance reflected, has a higher gross margin than the average business for sure. And there is a milestone payments to BI already on the balance sheet that will be on approval of Advair.

In terms of the injectables, the U.S. business is growing. As you see from our slides, the overall U.S. business is growing, which is quite amazing, and I’m very proud of the U.S. business growing. You can see that on slide — on Page 5, we grow in the U.S. business from — 5% in the U.S. and 22% in MENA. Clearly, MENA was a smaller market. So we really feel good about the U.S. injectable business. The growth — with a headwind of less of our controlled substances, less of the top 3 products from 2017, but with the growth of the new launches and the base business, I think we are doing significantly better than our peers in the market, based on earnings so far. In terms of the ex-U. S., MENA, growing very well, 22% and Europe growing 9%. So overall, a very strong performance with 7% growth of the overall global injectable business.

In terms of litigation expenses, as any generic companies, we have a significant budget for litigation expenses. We obviously are in IP trials on Vascepa and other things. We have built into — there is a cost to defense in the opioid lawsuits, which is built into our guidance. We don’t expect to go to trial in 2020. But to defend on over — we have mentioned, in over 600 lawsuits out of over 3,000, like every company that has controlled substances on the U.S. market, so we have built that into our guidance as undertaking litigation expenses for 2020 going forward.

And on refinancing, Khalid, maybe?

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Khalid Waleed Hosny Al Nabilsi, Hikma Pharmaceuticals PLC – CFO [18]

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Thank you, Siggi. In terms of refinancing, as you know we have unutilized debt facility. So this is one — we can use this. At the same time, we are evaluating all options in the market. Currently, if you look into the pricing in the market it’s — of course, given the size of Hikma, the profile that we have, of course, we should get a better pricing. But it all depends on the tenor. It all depends on the size. So currently, markets are not, I would say, that favorable in the last 2 weeks. But once we decide, if we decide to go to the market, of course, we would assume that we will get a better pricing on the bond.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [19]

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Any more questions on the webcast?

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Operator [20]

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We have no further questions. I’ll hand back to you.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [21]

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And [Lea]?

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Unidentified Participant, [22]

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We have on the webcast, yes. So 2 questions. One is: Can you please elaborate a bit on the potential $20 million higher CapEx in 2020 and capital allocation in general, given the company’s very solid balance sheet? And the second question is: Other than generic Advair, is there any other generic respiratory products the company is preparing for?

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Khalid Waleed Hosny Al Nabilsi, Hikma Pharmaceuticals PLC – CFO [23]

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Yes. In terms of capital allocation, if we look into this year, 2019, we have spent already $120 million. So next year, it’s — some of the investments that we have taken into consideration that will increase our investments in Algeria. So this will have — we are building an oncology plant there. So this is all taken into consideration in our guidance. There are some upgrades to our MENA facilities. This is why we are increasing by around $20 million.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [24]

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And on additional respiratory portfolio, I think we signed, approximately a year ago, an extension to the Vectura co-development agreement to include 5 additional Ellipta products that we have started to work on with Vectura. By the way, Vectura is a really good partner. We’ve been working with them. Obviously, we have learned a lot from each other, working on generic Advair. And now we have started to work on the next 5 of the Ellipta products. Those are not near terms. The Orange — the first Orange Book patent on the Ellipta portfolio is not until 2025. So it’s a long-term development plan. But we really feel the opportunity. I think how much we have learned from generic Advair gives us a very good base.

It’s been painful. It’s been painful for our investors to wait for the approval for sure. But I think with the knowledge and expertise we have today, we are very well set with our partners in Vectura to build a good DPI portfolio within Hikma over the next few years.

So if there are no further questions in the room, I just want to thank everybody on the webcast and in the room for coming. I know it wasn’t the nicest day to take a taxi this morning, but thank you so much for coming.

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Khalid Waleed Hosny Al Nabilsi, Hikma Pharmaceuticals PLC – CFO [25]

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Thank you.

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