Edited Transcript of HIK.L earnings conference call or presentation 7-Aug-20 8:30am GMT

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

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Thanks for that. So if we start on the complexity, I think overall, I think the natural part of the complexity is that the more complex products you have, the fewer competitors you have in the market, which should, in a way, in the business model, lead to a better gross margin. Also, at the same time, more complex products are more expensive in development. I probably don’t need to remind any of you of how development of generic Advair where our second Phase III study costed approximately $40 million. But also, as we talk about (inaudible) there’s still only 1 generic on the market. And we estimate to be the second one on the market. So overall, I think, over time, this takes time. The time from when we initiate an R&D on a complex product until approval is 3-plus years as a minimum. So it takes time to impact the overall gross margin with this. But that’s the ultimate goal. That’s what we are working towards in terms of the viability of our margin. The stability of the margin is to increase the complex products, both on Injectables and U.S. Generics. And in the Branded world, we’re doing a lot more of in-licensing of innovative products. And we mentioned the Sun Pharma in-licensing of Ilumya earlier this year. So it’s all basically focused on our underlying strategy. More complex products gives us more stable gross margin and profitability.

In terms of the feedback from customers on onshoring and the preference for U.S. domestic manufacturer, it probably is not at that level yet. But what we saw through COVID is the importance of having a secured supplier. And I have mentioned it to most, if not all of you, that on the Injectables side and somewhat more on special products, on the Generics side, this has led to a less of a price erosion because the cost to our customers not to have the product available versus a few cents on the bottle is very important. And we saw that now in the Injectables. We talked about that the pricing environment for the Injectables in first half was more stable than we expected. And part of that is because the customers are looking for a secure supply. As of today, I don’t know if you looked it up, but I looked up this morning, there’s 114 injectables that are on shortages in the U.S. So that always leads to this issue. So I think, obviously, by us having injectable manufacturing in Cherry Hill, which is very flexible. And I’ll give you 1 example. During COVID, we were in constant conversation with the GPOs, with the hospitals, with the hospital pharmacists around the protocols and what drugs they needed. So even before we got the orders from the customers, we knew where we should manufacture next. These protocols have changed since then. So what was most being used in March and April is not the same drugs that are being used today to treat COVID patients in the U.S. But by having a manufacturing plant in Cherry Hill with a good customer service has allowed us the flexibility. So it’s not the political aspect on U.S. domestic manufacturing, but it’s more around the flexibility and the security of the supply.

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Patrick Andrew Robert Wood, BofA Merrill Lynch, Research Division – Director in Equity Research and Head of the EMEA MedTech & Services Team [4]

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Super. And for the record, I love the prerecorded notes at the start, and I wish more of my companies did that.

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Unidentified Company Representative, [5]

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So our next question is from James Vane-Tempest.

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

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You’re on mute, James.

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division – Senior Equity Analyst [7]

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You unmuted me now, have you?

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

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Yes. You’re good.

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division – Senior Equity Analyst [9]

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I’ll just have 2 as well, please. You mentioned, I think your guidance says 5% to 7% price erosion. At least kind of looking at some of the analysis of the NDAC database, it looks as if it’s probably low single-digit to kind of flat. So I’m just curious why you still think that’s kind of more mid-single-digit analysis?

And then secondly, I guess the executive order signed overnight for the central medicines. Just wondering how much of those are produced in the U.S. versus Portugal and what you produce in MENA to export to the U.S.?

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

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Yes. So around the U.S. generics, you’re right. So our experience in the first half, we saw a price erosion probably between 1% to 3% on our U.S. Generic business, so low single-digit price erosion. The reason basically, we maintain our guidance on the overall price erosion is twofold. First of all, the experience from last year. Remember, exactly a year ago, you and I sat face-to-face, in person even, and we had the same. We have the 3% price erosion in first half of 2019. The second half of the year, we saw a much broader price erosion. So we ended the year between 5% to 6% price erosion for 2019. There’s nothing in the card that couldn’t happen now especially if the COVID goes down, if there will be more regular environment. So that’s the main reason why we think that also, if you get more competition on our key products and things like that. So I think it’s a reasonable thing based on our experience from 2019 that this is not unreasonable estimation. We hope for better numbers, but this is exactly what we saw in the previous year.

Around the executive order that was signed last night in Ohio, I think outside of the politic, we are extremely well positioned to supply our products in the U.S. We have a large manufacturing plant in Cherry Hill for Injectables, where we manufactured about 2 — we can manufacture around 250 million units, and we can manufacture more, but that’s what we are manufacturing there on a yearly basis. and of the progress where I’ve been saying, we’ve been supplying the market 11 out of the 13 products that were used for patients on ventilators in March and April. All of them were manufactured in Cherry Hill as an example. So they were not — there’s still an important products coming in from Portugal. A lot of the (inaudible) products come in from Portugal because that is our expertise there. And going forward, we just opened Hikma 4 in Portugal, which is opportunity to expand our oncology portfolio, which would come outside of the U.S. But in terms of the emergency medicine, a lot of them are manufactured in the Cherry Hill.

And in terms of the Generics, our plant in Columbus manufacture approximately over 90 products of all our volume in Generics. So we are very well set outside of any politics around this. I think Hikma, due to our investment both in Columbus and Cherry Hill, we are extremely well set around supplying products to the U.S. market from U.S. manufacturing site.

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Unidentified Company Representative, [11]

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Our next question is from Pete Verdult.

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Peter Verdult, Citigroup Inc., Research Division – MD [12]

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Can you hear me?

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Unidentified Company Representative, [13]

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Yes.

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

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Yes.

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Peter Verdult, Citigroup Inc., Research Division – MD [15]

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Great. Great. Peter here from Citi. Just a few questions, and some you won’t be surprised by. Just on Advair, we’re now in August, you’ve been very consistent with your messaging since last year that you hope for an approval in H2. Just wondering why you haven’t been able to refine it a little bit now that we are, hopefully, close to the end game. I just wanted you to characterize your discussions and maybe refine when you think we might get a decision on Advair.

Secondly, the balance sheet in terms of the last few times we’ve got together. We’ve talked about the fourth leg, be it biosimilars or specialty, just updated thoughts there on the environment to do something interesting at the balance sheet.

And then lastly, just some product-specific questions. Naloxone spray, Ryaltris, when the Insys products that you acquired, when could they start actually hitting the market and making an impact to the P&L?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [16]

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So thanks, Pete. So on generic Advair, the first thing to say, with many, many analysts and investor ask is, is the FDA really reviewing doses at the moment. Don’t they have bigger fish to fry in terms of vaccines and treatment of COVID? So we have worked very closely with the FDA. There is nothing that indicates that COVID is delaying the review of our doses.

In terms of where the review stands, there’s nothing outstanding on us. We are just waiting for feedback, further questions from the FDA, if they will come. We feel as comfortable as before in the second half approval of this product. I still think there is a significant need in the market and opportunity for this product. So really, in your interactions with the FDA, the FDA will never tell you what they’re doing. They’re doing their review. It’s in many different divisions. Obviously, because this is a complex generic product, they call for consult from different departments within the FDA, which makes everything a little bit more complex in finalizing the review. But overall, there’s no indication there should be a delay in any way or form. But also, I don’t have any confirmation from the agency when I should expect the approval. So that’s why we’re maintaining our view. Nothing has changed our view of second half approval for this product.

In terms of the balance sheet, as you rightly said, we have been doing well on the balance sheet. Clearly, we have the strong cash flow in the first half of $292 million. Our net debt-to-EBITDA is 0.8x at the moment, even after we bought the part of the shares from BI. So I think the balance sheet is in pristine position. I think also at the same time, M&A, I think due to COVID, there was a little bit of a delay in M&A, I want to say. We were exploring so many opportunities, but it is — I think people are waiting a little bit what’s happening. Many of the specialty assets are, I think, because of impact of COVID on specialty assets that needs to be promoted, many of companies that were considering divesting those have put those on hold to see when the COVID lifts, if there will be a lift in the revenue. So we see that a little bit in the market. But overall, as I said, we explore. We are not sitting just on thinking about the balance sheet. We’re exploring. But also, I remind you, Pete, the issue for us is we are showing organic growth between ’17, ’18, ’18 and ’19 and now ’19 into the new guidance on 2020. So there’s no desperation of having to do a transaction. But also, if the right transaction would come, we wouldn’t hesitate to move forward. We have a very great support from our Board of Directors. We have finished all the integration that needed to be on Roxane. You can see the operating profit on our Generic business is maintained to be in the 19s, 19.5% in the first half, which I think is a reflection of the integration that we have done there. But also at the same time, there’s a tiny bit of delay due to COVID, but clearly an opportunity, and we are ready to go if we identify the right opportunity.

In terms of the different products, I think with naloxone, remember that came from Insys. That was submitted last years when we imported. But what we had to do is we had to take down the Insys manufacturing line in Texas, move it to the Columbus, Ohio, rebuild it there and then manufacture 3 batches to revalidate a new stability. So we have submitted that all to the FDA. So we will obviously get a new action date on that some time for next year. So we need to see on that. On Ryaltris, that review is ongoing. We don’t know the exact date.

And in terms of, maybe the last one is, the development of epinephrine nasal spray. We haven’t kicked off Phase III. We are in — currently, we have submitted a consultation document to the FDA around the design of our Phase III study. So that’s where we are on the epinephrine. So epinephrine has some way to go before it would come to the market. But naloxone and Ryaltris are basically the product that we are focusing on following up with at the FDA level.

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Unidentified Company Representative, [17]

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Our next question is from James Gordon.

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James Daniel Gordon, JPMorgan Chase & Co, Research Division – Senior Analyst [18]

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James Gordon from JPMorgan. It was just a question about Injectables. So the guidance implies quite a slowdown in the second half, I think Injectables growing about 4%. And the growth was pretty healthy in the first half. You’ve hopefully given us a chart that shows what it looks like quarterly in the first half. But can you talk about what the exit rate, the exit growth rate was for Injectables? And how much has it really slowed towards the end of Q2 that might explain why H2 is going to be so much lower than H1.

And I know you’re doing some contract manufacturing for Gilead. The guidance would seem to imply that that’s not really going to make much of a contribution if I look at the implied slowdown. So is that going to be very material? Can you give us any commentary that might help us try to model that opportunity, please?

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

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Yes. So James, so if I just take you through the first 6 months of the year on the Injectables, I think that’s on the demand. So we have the regular demand in January into middle of February. By the end of February, we felt that the hospital started to build a lipid of an inventory. Then in March, clearly, that was when we had the biggest demands from the hospitals and everybody on the Injectables portfolio, especially on the emergency product. That was very much the case into early April. And then from early April, I think many of the hospitals, they started to bleed down the inventory, the extra inventory on Injectables. Also, the protocols on treatment changed. When you came to the end of April and early May of COVID patients, so the treatment changed at that point in time. We saw May and June, a relatively slow demand, but not at all bad. And we felt at that point in time and that at the year — at the end of the first 6 months, we feel that there are regular inventory levels at our customers. So there’s no extra inventory. Anything that was bought extra in March and April have bleeded out by the end of the first half. So there was a little bit of a movement.

The issue is that the elective surgeries went from being regular in January and February to nonexistent in March and April. And they’re very slowly coming back. So the elective surgeries in the U.S., we have that in one of our slides, there’s still about just over half of them are back in track, and it’s different between different states. And in our guidance, we estimate, really, the elective surgeries, which is the key to our base business, will not come back as we saw it in 2019 until just before the end of the year. And that’s the reason for the softer second half of the year. We don’t build any COVID second wave in a way. And we assume that the elective surgeries really don’t come back on track.

If you think — obviously, the contract manufacturing for Gilead, I think, is a reflection of the trust in our quality in the investment that we have made in Portugal and obviously, the due diligence Gilead has done on us to trust us to do this manufacturing. We don’t talk about any numbers. Everything is confidential around this. But just to help you to put it into perspective. So we delivered 42% operating margin in the first half of the year. We are guiding 38% to 40% for the full year, which means the second half of the year is 36% to 38%, very crude mathematics, I know, but just for the sake of argument, which means that we are estimating that the second half of the year is at the operating profit we assumed at the beginning of the year. So basically, we are assuming with the CMO, with a slowdown in elective surgeries. But with the new launches, we have 6 new launches in the Injectables, and we are on track to deliver 10% to 15% as we guided for the year. With those positives, plus the contract manufacturing, we feel that we can deliver, even with the soft elective surgeries, what we started the guidance with the 36% to 38%, delivering a full year operating profit, 38% to 40%. So I hope that helps you a little to put it into perspective how we think about it first half versus second half.

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Unidentified Company Representative, [20]

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Our next question is from Thibault.

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Thibault Boutherin, Morgan Stanley, Research Division – Equity Analyst [21]

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I have a few questions on generic Vascepa. According to Amarin, hearing is starting on the second of September. So I just wanted to know if you had any comments to make in terms of likelihood for the decision to be reversed in the (inaudible) costs. Then obviously, if the all hearing is starting in September, there is a possibility to have an outcome for this appeal by the end of the year. So would you be ready to launch at that time if you win the appeal?

And then on the results a few days ago, Amarin made some comments around the fact that they don’t believe generic makers have the supply to actually get into the market. If you could comment on your ability to supply from day one when you decide to launch?

And then lastly, still on Vascepa. Amarin said it took them a few years to ramp up their operating margin from the kind of low 50s to 80%, so just want to know if you can comment on your expectation in terms of margin ramp of this product? And are you sharing any supplier with basket with Amarin in terms of the kind of active ingredients for Vascepa?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [22]

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So I think, first of all, I’m a little bit different than the CEO of Amarin. So I don’t comment on my expectation on the results of a judge. I think I’m not qualified in any way. I’m not a lawyer in any way. So for me to comment on that, I think, will be highly inappropriate to say the least. We’re going to have the oral argument through phones on September 2. And we expect that the results could come as early as fourth quarter, maybe more likely in first quarter of next year, could be at the latest in the second quarter of next year.

Also, it’s interesting that the CEO of Amarin seems to know so much more than I do about the supply of the generics. And he also had a very deep understanding but we were surprised when the outcome of the legal case in Nevada, which he also commented. So I don’t have the same understanding as he has. As I’ve said, I already have a supply ready to go to the market. If I would decide today, I could launch such risk. So we have a supply ready to launch at risk. We’re also building the inventory to be able to take a fair market share in the market. But I’m not going to share with Amarin what my intended market share, that also depends on the other generics. If anyone else talked already, so anyone will be approved before the decision by the appeals court.

So overall, I think on operating margin, what I’ve said, we expect a little bit lower margin in the beginning. We — and we’ve been very open about that. But also we need to keep in mind that there is plenty of API suppliers today. When Amarin was originally developed this product, there was a limited supply. Where today, there’s much more supply of the API than Amarin had in the beginning. So I think that is a very different situation. So — but I can’t comment on the thoughts that the CEO of Amarin has. It’s just over and above my pay grade to do that.

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Unidentified Company Representative, [23]

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Our next question is from Christian.

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Christian Glennie, Stifel, Nicolaus & Company, Incorporated, Research Division – Analyst [24]

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Can you hear me?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [25]

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Yes.

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Christian Glennie, Stifel, Nicolaus & Company, Incorporated, Research Division – Analyst [26]

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Yes. Just a couple of follow-ups on generic Advair, if I can. Just to clarify, have you actually got a PDUFA date, a formal date as such? And I know you’re not sort of necessarily disclosing it, but is that part of the process? Or is it just a decision expected as when the FDA do their review?

And then in terms of the opportunity, the market opportunity, any comment, observations you think Mylan, obviously with (inaudible) ramped up to about 1/3 of the market, but flat lined for some time now at that sort of level. You’ve got (inaudible) generic, about 20%. So there’s still a 50% branded market there. And actually recently, more recently, volumes of the product overall have actually been going up in the first half of this year, some of that COVID related. But just some thoughts there around that opportunity on generic Advair.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [27]

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So Christian, so on the generic Advair, so what the FDA gives us, they give us a range on PDUFA dates for products like this. And as I’ve said to our investors from the beginning, it’s usually between 6 to 12 months, with the average around 9 months, 9 to 10 months. So that’s exactly why we guided. So the 6 months started about a month ago. So it’s those ranges that we are relying on and have communicated. But the FDA gives you a range on dates.

In terms of the market itself, so as you rightly pointed out, GSK has approximately [50 gross] market share in the U.S. and that is due to their contracting with the payers and the PBMs. That is a very expensive exercise. And it’s expensive when you have 1 generic entrant, but it’s a lot more expensive and you have the second generic entrant. So I can’t foresee what GSK is going to do when we enter the market. But usually, in a situation like this is, there are some accounts that the brand company gives up because of the huge expensive to maintain, to keep the payers hold on when the second entrant of generic comes to the market. So as I’ve said to everyone, I haven’t been able and will not guide on our estimated market share of this product when we come in, simply because I think the biggest impact will be how much market share GSK wants to maintain. They can maintain it by paying to the PBMs, but how long are they willing to do it? Because the strategy, I shouldn’t be talking about the GSK strategy, but the strategy would make sense is with the first generic entrant is to keep markets here also to move patients to a [lift a] portfolio. Now that movement has stopped. So what’s the benefit of maintaining a big market share, I doubt a little bit. But that would be the biggest impact on us when we enter the market is how much market share GSK wants to maintain. And then, of course, as I’ve mentioned previously, I think it then comes down to our device versus the Mylan device, et cetera, et cetera, how we position it on the market. But it’s a very fair point. And I wouldn’t expect to be much movement in market share either until year-end when you renew the contracts with the PBMs or when we come to the market. I think it will be pretty flat, just due to the — how the PBMs have blocked the generics. Because the generics are simply only available to [50%] of the patients in the U.S.

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Christian Glennie, Stifel, Nicolaus & Company, Incorporated, Research Division – Analyst [28]

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A quick follow-up, if I may, on remdesivir. If I read it rightly, is it fair to say that, that opportunity is not necessarily in your guidance or your numbers, that is more sort of potential upside depending on how that plays out? And is there a risk — obviously, come back to the executive order has been made in Portugal, is there a risk that maybe that doesn’t actually happen given that exact order?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [29]

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No. So basically, we have built a little bit into our guidance. So part of it is in our guidance, for sure. I think, obviously, the opportunity will depend on the COVID, how much COVID will be. It will be built on Gilead sales themselves. So — but I think the executive orders are more around the essential medicines. If there’s a shortage on the life-saving medicine, I don’t think protocol matters in that field at all. But overall, there is — we have built some into our guidance. But the opportunity is for Gilead to answer what is the opportunity for the product because we’re simply the contract manufacturer and deliver to Gilead the product to be supplied to the market.

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Unidentified Company Representative, [30]

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Our next question is from Paul.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [31]

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Paul, you ned to be unmuted. There we are.

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Paul Cuddon, Numis Securities Limited, Research Division – Director for Healthcare Equity Research [32]

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There we go. Got it on the end. Just focusing on capital allocation, given your very strong balance sheet position, especially the expansion of European Injectables into broader markets. I wonder given your success when you have domestic manufacturing, whether that’s going to influence the strategy for those larger European markets.

And secondly, on MENA, and again, building on the success of biosimilars. I wonder whether more in-licensing of biologics is something that is sort of increasingly being prioritized.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [33]

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Yes. So I think in terms of capital allocation, we always — this is — really has been the strength of Hikma, and I will hand it over to Khalid a little bit later about this. But we have invested in our manufacturing capacity and capabilities in a way ahead of the curve. I think Hikma 4 speaks highly about that. We have (inaudible) in that plant, which helps us now to be able to take on a manufacturing like for Gilead on remdesivir, which is needed to be (inaudible). So we always have maintained that, that we want to be ahead of the curve.

Our guidance, remember, for the full year on CapEx is $120 million to $140 million. We are a little bit behind just simply due to COVID. It is not that we are trying to save money. We are behind because in some countries, you simply cannot do constructions or order equipment. But — so we’re still maintaining that guidance because we really, in a way, we really want to spend that money. But we — our estimation now is we probably will be at the low end of that CapEx guidance. But you’re right. I think there’s one thing is to invest in capacity, the capabilities. We want to do it, obviously, in the U.S., where we have been emphasizing in Cherry Hill and Columbus, but we also see the opportunities in all the markets. And we see that now even in some MENA markets where we are seriously considering maybe if we should put a high-quality injectables plants to service the MENA market, which would help us in Portugal, because we are exporting a lot from Portugal to MENA. That would also release some capacity that would allow us to use Portugal more for the European market. So there’s a constant opportunity. The good thing about it is we have been ahead of the curve in doing this. Obviously, the increase in demand now showed us that we are well set. But if this continues, we clearly need to build ahead of the curve.

In terms of the biosimilar, so first of all, biosimilars in MENA did very well. The Injectables business in MENA, overall, did extremely well. Our growth in the 20s, which is very good. We have a great performance in Saudi Arabia for Injectables. I think in one of the notes I was reading, there was a concern that oil price might impact our sale in Saudi Arabia and Algeria, really, it is, as I’ve highlighted to you before, it only has to do with maybe the governmental hospital tenders, if anything. And it’s more the size of the tenders. But during pandemic, that hasn’t affected us at all. But the biosimilars in MENA have been doing very well. They even have performed because my — not a concern, but I looked out if basically the sale would delay due to COVID because we’re talking about Remicade or biosimilar of Remicade or Remsima, which needs to be delivered in an infusion center or a nursing home or by a doctor, so it’s not as easy as Humira. So it could be easily seen due to COVID where elective surgeries are not happening that people wouldn’t get their infusion. But we really saw a steady market share of Remsima during the first half.

In terms of further opportunities, so we have 6 more products with Celltrion where we have a first right for MENA. In terms of other markets, we have been exploring the U.S. market. A year ago, I was quite negative on biosimilars in the U.S. I think the experience, what we have seen now, I think the balance sheet of Herceptin, the biosimilar of rituximab that have come out, I think Teva has done a good job. I think in Coherus has done a good job. So Mylan is also coming to the market. I feel — I’m a little bit more optimistic on the biosimilar market. It’s a long-term play. It’s a long-term strategy, what you do. You cannot go into every therapeutic area. You need to be focused. You cannot treat this like a generic. So you take everything going off-patent in the next 5 years. You have to think what therapeutic area you want to build up as an expertise. But I’m much more positive on the opportunity of biosimilars in the U.S. than I’ve been before, and we have had a really good experience from the MENA markets.

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Unidentified Company Representative, [34]

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Our next question is from KC.

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Krishna Chaitanya Arikatla, Goldman Sachs Group, Inc., Research Division – Research Analyst [35]

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I have 3 questions, please. The first one, it might be a bit early to talk about 2021. But if you could frame the moving parts for the Injectables portfolio in 2021 and if you think you will still be able to grow the business in 2021?

The second one on Zortress and Afinitor, clearly, they’re doing really, really well. But how should we think about additional generic competition? Do you expect this to be a 3- to 5-player market in 2021? Or do you think there would be a higher number of players there?

The third one, it’s interesting you talk about CMO opportunities. Do you see Hikma playing in the CMO space for vaccines as well? Because we have seen a couple of fill and finished contracts being awarded to CMOs. Have you considered them? And do you have the capacity to undertake such an exercise?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [36]

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So KC, thanks for that. So I think if we start to talk about 2021, I was quite proud I could guide you to the second half of 2020 based on all the uncertainty in the market. So I have so little visibility into 2021. I think what you need to think, before COVID hit, I think the consensus amongst the people on this call, you were roughly at $980 million. I think that’s how you need to think about it is what’s the impact of COVID, how you think about the overall business. But I really cannot help you. I think we still have a pipeline. We still estimate we will launch 10 to 15 products. But due to all the moving parts, especially down to COVID, when the elective surgeries will kick in again, which are very important to our business, that is really what’s hindering me in giving you — and I wouldn’t anyway guide you to 2021 at this call. But think about it, I think, start by how would the business look like without COVID, and obviously growing from there with the new launches, et cetera, like we have seen over the last few years, if that helps a little bit.

In terms of Zortress and Afinitor, clearly, these have been a good opportunity. I think in Zortress, we are alone on the market. We have launched 3 out of the 4 strengths. There are 2 other companies that have filed, but they haven’t received approval. We haven’t seen anyone else. Obviously, now the patent is gone, so there could be somebody filing the (inaudible) 3. But at the moment, there’s 2 pending approval on that.

And on Afinitor, also there, there have been — we have launched 3 out of the 4 strengths. And there, I think there is more competition because that’s simply a bigger product. So overall, this has been a good launch. I think this also highlights that the FDA continued to approve products during COVID. We launched these 2 very important products during COVID, and we were able, I think, to do that quite successfully. So at the moment, on Zortress, we are exclusive, but it’s not due to any 180 days exclusivity. It’s simply because nobody else has received approval. And we expect that the 2 filers that also challenge the patent, they could get approval any time. So that’s a little bit our thinking around that.

Around CMO. So CMO has always been part of Hikma. We try to utilize the extra capacity that we have to contract manufacturer. We are very much sought after as a space because there’s so much volume that goes through our plant. We are inspected nearly every year by the most significant regulatory agencies, and we supply a lot of volume to the market. So we are very sought-after as a CMO. We don’t foresee to be a CMO for vaccine. We simply are not in that field. We haven’t wanted to go into the fill and finish of vaccine. I think there are other companies that are better suited for that. On the other hand, we have done a fair bit of, as you remember, we had done it also in solid oral when we did the Roxane acquisition in 2016. We have been a partner of PI over some period of time. And also, especially now we see it on the Injectables side, it’s a very sought after — but we also want to be careful. we don’t want to hurt our own business. And so the priority, obviously, is always to our own business to maintain the supply in the market, to be able to supply to the patients the drugs that we have developed and are manufacturing. If we have extra capacity, we are more than happy to utilize that for any contract manufacturing. But it’ll never be the core of the business. But we’re also more than happy to utilize our investment by taking in the right, which fits our technology capabilities and capacity.

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Krishna Chaitanya Arikatla, Goldman Sachs Group, Inc., Research Division – Research Analyst [37]

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If I could squeeze in a follow-up. On Boehringer Ingelheim, you have a supply agreement with them, if you could just briefly tell us if that is linked to BI owning a stake in? Or how should we think about that part of the business? It’s not massive, but in case it means anything?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [38]

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No, it’s a relatively small — but it’s not linked to BI’s shareholding in the company, so it’s totally separate. So — but it’s getting smaller and smaller, but it’s not linked at all to the shareholding of Boehringer.

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Unidentified Company Representative, [39]

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Our next question is from Emily Field.

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Emily Field, Barclays Bank PLC, Research Division – Research Analyst [40]

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You kind of answered part of what I was going to ask from the last question. But I was just kind of wondering, in the context of overall injectables manufacturing capacity, how much of the total is sort of allocatable to CMO? And then how much of that is going to be used for remdesivir? How — if you can give us any indication of how long you expect to be doing this for Gilead? Obviously, there’s a lot of flux with potential other monoclonal antibodies coming down the road. And also I think you made this clear, but it’s a global supply agreement and that you’ll be supplying the U.S. and Europe.

Secondly, there was a little bit of a bump in the scripts for dexamethasone upon the publication of that study. Do you see sustained demand for that product for COVID patients in the back half of the year? And is that accretive to Injectables margins? Because obviously, there’s a few competitors in that product.

And the last one is, as with this year, there’s going to be a lot of moving parts into ’21. Similarly, for kind of how you approached guidance for ’20 with Advair with conditional guidance for (inaudible) do you expect that you would issue conditional guidance based on Vascepa for next year, like, i.e., with and without?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [41]

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So Emily, a lot of good questions. So first of all, the allocation to CMO is minimum in terms of volume. It’s probably less than 5% of our overall volume. It is tiny, for sure, less than 10%. I don’t have the exact number. But we have partnership with 6, 7 companies, and our priority is always our own manufacturing.

With regards to the volume on the tenure with Gilead, that is up to them. We are just servicing them. If there is a sale for them and they need the supply from us, I’m sure they will come to us to supply them. So we can’t guide you on that and any details around that. Obviously, it’s a confidential information with Gilead.

And in terms of the supply, that is the decision. Where the supply goes is the decision of Gilead. But the Portugal plant is approved for U.S. It’s approved for Europe and for most international markets, too. So the flexibility is to take the supply to the location where it’s needed. But the decision is fully Gilead where it’s [while] would go.

In terms of dexamethasone, we are one of few companies on the injectables side. We haven’t seen a big pickup there. Especially, there’s hardly any pickup in the first 6 months because the study just came out late June. So there was hardly any pickup there. I think we have seen a little bit more pickup because we are a much bigger supplier on the tablet side. So on the U.S. generic side, we have more than [50 gross] market share in the U.S. market. Nobody knew about this product. But this, I think, speaks highly about the size and the scope of the portfolio we have that we are able to — certainly, there is a clinical certainty with 600 patients that benefit from this. We have that ready for the market. Also on the tablet side or on the solid oral side, we didn’t see — we haven’t built any benefit in the first half because this just started and we control the ordering. I think we have to see. I think remember, hydroxychloroquine where everybody got a lot excited about 16 patient clinical trial that was published in France. Obviously, behind this, we have 6,000 patients, so there’s a lot more thing. But overall, I think we’re not expecting any — that this will drive our performance upwards. Obviously, we’re ready if that happens. If the patient needs this drug, we will manufacture both injectables and tablets. But our expectation is this will not move the overall guidance number.

The moving part of 2021, I think if we — we guide for 2021, by the end of February, I think there’s more than 50 (inaudible) likely, we will have a decision by the judge by then. So I don’t like to break out one product from my guidance. I obviously — because I don’t guide on individual products. So we cross that bridge when we come to it if a decision by the judge will not be in place before we guide for 2021.

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Unidentified Company Representative, [42]

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Our next question is from James Vane-Tempest.

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division – Senior Equity Analyst [43]

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Firstly, I was just curious if you’re able to give me a sense of how much of the first half Injectables growth came from the Civica agreement.

Secondly, Siggi, I think you sort of said a full year, within 12 months, there’d probably be a decision on the strategy for U.S. biosimilars. And I guess your language today suggests that perhaps that’s a bit more interesting. I’m just curious what kind of scope that could take because, certainly, for the next 3 or 4 years, it’s quite competitive in terms of the number of new products kind of coming out. So will this be very much a 5- to 8-year view rather than a near-term view?

And then my final question is just with an upcoming election, if there are changes in U.S. taxes, I guess given your structure, are you able to give us a sense what a 1% increase in the U.S. headline corporate tax rate would be to your business?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [44]

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So first of all, we don’t break out individual customers, we — also Civica. So basically, we started supplying Civica a little bit by the end of December. There, we have since then been supplying them. They have grown. What I mean by that is when we signed the agreement with them, they have 800 hospitals linked to their system. That is now up to 1,100 hospitals. They are still obviously learning. We have been very pleased. We have worked very closely with them. But overall, we don’t give out the individual. But as I said before, it’s not a big impact on the overall U.S. numbers yet. This will be a growing business. But also, I want to mention that Civica was, I think, an important step. But also, what that led to or maybe it didn’t lead to it, but at the same time, the DPOs stepped up their game. So the DPOs are thinking on the same line as Civica. So we saw that, especially during COVID, that the DPOs want to be much more of — as our partners. They see with us, as I mentioned, the treatment protocols. They wanted to take the transaction. There will always be a transactional relationship, but they’ve been much more as a partner like Civica has been doing. But also just because I know quite a few of you look at IQVIA data way too often, I just want to state that here. But part of the reason why Civica data — Civica doesn’t report to IQVIA, also our direct sales to the hospitals is not captured by IQVIA. So this is why I’ve been warning that don’t rely too heavily on — I think movement between years is reliable. But when you analyze it to death, the volume in every week or every month, it really could lead you to the wrong conclusion. But Civica, I think we’re very happy with the partnership, and we think it will grow over time.

In terms of our biosimilar thinking, James, you’re absolutely right. I wouldn’t foresee Hikma being part of the portfolio that would come out before 2023 or so. I think for the next 2 years, as we haven’t signed with anyone to go into those products, there’s already, I think, 11 Avastin biosimilars filed in the U.S. I really don’t want to be the telephone. It simply doesn’t makes sense for us. So I think it’s more medium- and the long-term opportunity on the biosimilars. And maybe Khalid, if you talk a little bit about the taxes and what 1% would impact, yes.

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Khalid Waleed Hosny Al Nabilsi, Hikma Pharmaceuticals PLC – CFO [45]

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Thank you, Siggi. Now it’s very hard to assess the — how much impact would have tax by 1%. First of all, we don’t give guidance on the profitability by region. And there are many moving parts in terms of products, what is going to be used, whether from Portugal or whether from the U.S. or whether from (inaudible). So as you saw over the past few years, we managed to keep our tax, effective tax rate below the 23%. So this is our target, if you want to model for next year. Of course, we are targeting to improve on that. It depends as well on the profit mix coming whether from the U.S. or whether from Europe, but we see that this is going to be maintained on the medium term.

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division – Senior Equity Analyst [46]

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I just have a quick follow-up on that. So is it fair to say that given the MENA business and the base that you have there, it would be sort of, I guess, a dilutive to the impact? So in other words, from many companies, a 1% increase in the tax rate, it might impact earnings more than 1%. So is it fair to say there would be less than 1%?

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Khalid Waleed Hosny Al Nabilsi, Hikma Pharmaceuticals PLC – CFO [47]

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I would have to look into this and come back to you on it. But I don’t have this analysis at this stage.

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Unidentified Company Representative, [48]

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Our next question is from Pete Verdult.

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Peter Verdult, Citigroup Inc., Research Division – MD [49]

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Maybe for Khalid or for Siggi. I mean, look, if we do get a vaccine developed next year, and hypothetically, we all went back to “the old ways.” Just interested in your thoughts as to what Hikma will be doing differently? When you think about how you’re spending money, the expense base pre-COVID, obviously, we all realize that travel has gone up the spout, entertainment’s gone up the spout. But if we get back to normal, what do you think from a business practice perspective you will change at Hikma versus prior practices? What will come back, what will change for Hikma?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [50]

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So I think — I believe we will have a vaccine sometime next year. I don’t know when. And also, I think it’s importantly, how we can get to the people that most need it.

I think what has changed in the company. So let’s first say what changes we made during COVID. So first of all, if you look at our expense line, our expense line basically was balanced. So we spend a lot more on transportation and movement of goods under employee costs. Because we paid extra bonuses to our employees to show — to be in the manufacturing plants during the middle of COVID. But against that, we also saved a lot on sales and marketing and on travel, to name few. So I think the balance in our expense line was kept very well.

I think in terms of what will change, the most obvious one is around the virtual promotions of medicine. I think that’s where we have trained the customers. We have trained the doctors. As I mentioned in the presentation you saw this morning, we have had up to 1,000 doctors attending our conferences through Zoom versus doing them live locally. I think there will still obviously be visits to local doctors. But I think all pharma companies, this is not only Hikma, I think all pharma companies will change how they allocate people on the ground that visit doctors face-to-face versus digital or virtual promotion versus the conferences and things like that. So I think that will change. How that will be? We need to look into that, but we are really working hard on that now.

In terms of the second thing, which is very close to our heart. I think it’s been broader that we have had a little bit higher inventory than many of our peers that the working capital has been high in Hikma because we can afford it. I think that was one of our biggest benefit during COVID. We have plenty of inventory of API. We didn’t run out of stock in any of our top 10 products, in any of our 3 businesses. So really, the supply chain was able to operate in the best possible way due to the extra inventory. There is always a balance. I just can see the evil eye from Khalid when I say these things because obviously, we want to monitor working capital. It’s not like we can have or endless inventory on hand because then you have to write it off due to expiry. But this has given us a flexibility. And I think the thinking around inventory of pharmaceuticals, you — instead of thinking about it just-in-time inventory, you probably think about it just-in-case inventory. So if you think about individual products and how much inventory you have just in case something will happen in the business.

And then the third thing is around how we work. Clearly, most of our office employees have been working from their home. Still, today, especially in London and the U.S., people are working from home a lot. In Jordan, people are back in the office because Jordan has opened up a lot more. But I think there will be some functions that will continue to be possible to work from home. But I also feel I’m lacking a little bit the opportunity of interacting with people in the office. That’s why I’m in London today, by the way. I traveled from the U.S. and did the whole thing. I took 14 days quarantine up in Iceland to see my mother-in-law, to be able to — because Iceland is a safe country, so I could come to U.K. But I felt it was important. And that’s the thing around COVID is this interaction amongst management team, this brainstorming, that is something that I really want to get back to the business. And I think we are not the only company thinking like that. There are functions that we can easily work from a distance. There’s function also where we benefit in working together as a group.

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Peter Verdult, Citigroup Inc., Research Division – MD [51]

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So all CEOs have to go to Iceland and stay with your mother-in-law? Is that right?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [52]

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Yes, absolutely. The thing is she would welcome them (inaudible)

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Unidentified Company Representative, [53]

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There are no more questions in the queue. (Operator Instructions)

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC – CEO & Executive Director [54]

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Yes. We only have 2 minutes left. Any last question before we close?

If not, I just want to say thank you all. We are, of course, available for any talks, calls, whatever. It’s been a pleasure. And let us know if you have any follow-up questions, we’d be happy to respond to that. Thanks a lot. Speak soon. Bye-bye.