Earnings Call Transcript - INDV Q3 2020

Operator, Operator

Thank you all for joining us today for the Indivior Third Quarter Results Conference call. I will now turn the call over to our Chief Executive Officer, Mark Crossley. Please proceed.

Mark Crossley, CEO

Thank you. Good morning, and good afternoon, everyone. Thanks for participating in our call to review our third quarter results and progress. I'm Mark Crossley, Chief Executive Officer of Indivior. I'm joined today by Ryan Preblick, our Interim Chief Financial Officer; Christian Heidbreder, our Chief Scientific Officer; and Javier Rodriguez, our Chief Legal Officer. In a moment, Ryan will cover the key financial drivers and detail our fiscal year 2020 guidance. Let me first provide my perspective on our performance, outlook, and priorities. My key takeaway is we're successfully navigating through the challenging COVID-19 environment while continuing to press forward on the strategic priorities that we believe will create long-term shareholder value. As you're aware, we took a major step to create greater certainty for all stakeholders by settling with the DoJ. This agreement is expected to be approved on November 12, and we look forward to moving on from this to, again, focus all our resources on patients. Additionally, we executed on three critical business priorities to help ensure we're positioned to outperform in a normalizing environment as and when the pandemic subsides. First, despite severely limited access to healthcare providers, the agility of our teams helped us to deliver a strong operating performance, including 90% year-over-year growth in SUBLOCADE through the first nine months of the year. Our progress across the business to date provides us with sufficient visibility to reinstate fiscal year 2020 guidance, and we now expect to be profitable on an adjusted pretax basis for the full year. Second, we initiated a number of strategic alignment actions in September to address the group's cost base and enhance our long-term profitable growth profile. These actions will help us maximize the substantial patient opportunities we see in the U.S. for SUBLOCADE in the organized health system channel while also further focusing R&D on real-world generation for SUBLOCADE and PERSERIS and on progressing our early-stage addiction assets, all while maintaining our strong commitment to integrity and compliance. Third, we continue to focus on our balance sheet strength. Our financial flexibility and greater certainty are allowing us to invest behind the growth of our depot technologies as well as to meet our legal and compliance obligations. This is especially important as it appears that the COVID pandemic will be a factor into 2021. Overall, I'm very proud of our team's progress and accomplishments in the face of the pandemic and thank them for their continued resilience, perseverance, and unwavering dedication to patients suffering from addiction around the world. If I now look specifically at our performance in the quarter, we reported a modest adjusted operating profit, which was ahead of our internal forecast. SUBLOCADE's net revenue increased to $33 million in the quarter. This included a contribution from ex-U.S. markets of $2 million. U.S. SUBLOCADE enrollments grew modestly, in line with our planning assumptions we communicated in July. Organized health systems continue to account for the majority of SUBLOCADE's growth. This important channel continued to grow as an overall percentage of SUBLOCADE's U.S. net revenue. We're making good progress in penetrating the channel with our internal organized health system access and activation KPIs, remaining on track with pre-COVID targets. We continue to expect this channel will become a majority of SUBLOCADE's net revenue. On this point, let me take a few minutes to remind you of why we are so excited by this opportunity. First, consolidation and vertical integration among healthcare providers is driving an ever-increasing proportion of our patients into OHS channels; second, given the scale advantage, organized health systems have the ability to handle the administration and reimbursement of complex specialty treatments like SUBLOCADE, so there is minimal logistical burden for prescribers. This advantage unlocks more rapid adoption among active prescribers on a patient per healthcare professional basis. Turning back to the quarter. We benefited again from a resilient share performance from SUBOXONE Film. Despite this continued resilience, we continue to prepare for an eventual reversion to industry analogs as there are three generics in the market, and our clinical specialists continue to solely promote SUBLOCADE and PERSERIS. My final comment on the quarter is to underscore my earlier comments on the strength of our balance sheet, where we ended September with gross cash of just over $900 million. That's $800 million if we adjust for the first payment of $100-million plus interest escrowed for the DoJ agreement. Moving forward, with unprecedented and unforecastable pressure from the pandemic as well as the existing balance sheet commitments, we continue to place a high value on maintaining financial flexibility to invest behind our depot technologies. Looking forward, we, like all of you, are hopeful that 2021 will see the beginnings of a sustained return to normality across the globe. For the time being, of course, uncertainty remains the watchword, so we will continue to manage the business prudently for the benefit of all of our stakeholders. I do, though, want to end on an optimistic note and to express my confidence that based on our strong operational and strategic performance, together with the decisive actions we have taken to maintain our financial flexibility, we are well-positioned to deliver accelerated growth and deliver on our patient-focused vision once the pandemic starts to subside. In the meantime, our priorities are clear. First, we're maintaining our leadership voice in opioid use disorder. Our vision and mission are now more important than ever as COVID appears to be reversing some hard-fought gains against the disease as opioid overdose deaths are again growing as patients suffering from addiction face isolation associated with the pandemic, which makes them more prone to relapse. Second, we're investing to create a durable growth platform that we can fully leverage as the operating backdrop starts to normalize. Here, I want to emphasize that our teams are pulling at all of the right levers so that as we enter 2021, we're in as strong a position as possible to take advantage of a normalizing operating environment. Third, we're delivering on our commitments. This includes the recent savings actions as well as those compliance commitments we have agreed as part of our recent settlement. Lastly, and probably most importantly, we continue to ensure availability of our medicines to patients around the world as well as make decisions to protect our people in the face of the epidemic as they are the most valuable asset Indivior has. With that, I'll turn it over to Ryan for a rundown of the financials and details on our fiscal year 2020 guidance.

Ryan Preblick, Interim CFO

Good morning, and good afternoon. Overall, our financial performance was solid, especially considering the challenges brought about by the COVID-19 pandemic. Our top and bottom line results were ahead of our expectations, including a modest operating profit on an adjusted basis, and our cash position remains strong. As Mark noted, we have reinstated full year 2020 guidance, and we expect to be profitable this year. I'll detail our guidance assumptions in a moment. But first, taking a closer look at the third quarter, starting with net revenue. Overall, we saw an expected decline versus the previous year. As you may have read, the story hasn't changed much here. While overall net revenue has continued to outperform our expectations from the resilience in SUBOXONE Film, continued overall share erosion compared to a year ago and the discontinuation of the generic film program last year were the principal factors of the net revenue decline in the quarter and year-to-date. The decline was partially offset by net revenue growth, mainly from SUBLOCADE, which grew 74% to $33 million versus the year-ago quarter and almost doubled to $91 million from the year-ago nine-month period. Focusing on the U.S. market dynamics for a moment, SUBOXONE Film share averaged 21% in the quarter, which is down only 5 share points from 26% in the year-ago quarter and down only 1 percentage point from the previous quarter. While the share resilience is certainly welcome and reflects the competitiveness of the product, we continue to caution that it is not a controllable dynamic, and we are continuing to plan the business based on the share ultimately eroding to industry analogs. As we move into 2021, despite the worsening opioid crisis, greater formulary scrutiny by payers could accelerate erosion of our branded share from current levels. Touching on the Rest of World business, net revenue declined 8% in the third quarter, in line with our expectations. We did see a modest net revenue contribution of $2 million from SUBLOCADE in the quarter. However, we continue to expect a modest decline in net revenue for the full year, mainly due to continued austerity pricing on our legacy tablet volume in Europe. Turning to the gross margin of 82% in the quarter on an adjusted basis, this is down modestly from 83% in the year-ago quarter on the same basis. The Q3 2020 margin rate was impacted by mix, principally from the stronger film net revenue of which a higher portion is coming from the lower-margin government channel. We also experienced some modest manufacturing variances. Looking at operating profit. On an adjusted basis, we generated $30 million in the quarter, which brings our year-to-date operating profit to $56 million. Considering the challenging operating backdrop we have faced this year, including continued generic competition, higher legal costs related to the DoJ and the COVID pandemic, this is a very solid result. As Mark discussed, we completed additional actions in response to the COVID pandemic to further focus the business on our highest value commercial and R&D opportunities and to reduce our cost base. We expect the result to be a strengthening organization overall, with continued focus and resources to support the growth of our key treatments through and beyond the COVID pandemic. In this regard, if the operating environment were to normalize sooner than expected, we would look to deploy a portion of our savings to accelerate net revenue growth for SUBLOCADE in the U.S. Turning to third-quarter net income. On an adjusted basis, this was $19 million, bringing year-to-date net income to $33 million on the same basis. The quarter benefited from operating expense control and lower spending due to the COVID pandemic, due to travel and entertainment as in-person access and gathering restrictions remain obstacles. These benefits were partially offset by finance expense related to the term loan. In 2019, we were able to substantially offset the finance expense with returns earned on our cash balance. As you know, the short-term rate environment and our ability to earn meaningful returns have diminished with the federal government's overall borrowing rate actions in response to COVID. Our cash balance was $929 million at the end of September versus $908 million at the end of June. The slight increase mainly reflects the continued resilience of SUBOXONE Film. SUBOXONE's relatively stable share position is continuing to effectively replenish government rebate payables through further net revenue contribution. This is having the effect of pushing out the timing of the payables related to government rebates unwinding as we had expected, if branded SUBOXONE Film performed in line with observed industry analogs related to generic launches. Our net cash position at the end of September was $693 million. Once the DoJ settlement is finalized on November 12, we will be required to make a $100 million payment plus interest. As such, the cash amounts at September 30 do not reflect this required payment. After this payment, we will still have a substantial cash buffer, providing us good flexibility to navigate through the COVID uncertainties while continuing to build a solid growth platform for our depot technologies. Turning lastly to guidance. We are providing full year 2020 guidance. With only two months left in the year, we have relatively good visibility at this point to provide you our performance expectations. Our overall net revenue and pretax income guidance primarily reflects the stronger-than-expected market share performance year-to-date from SUBOXONE Film. Solid U.S. market growth and expectations are relatively unchanged. Market share in Q4 informs our stable expectations for U.S. film revenue for the remainder of the year. Turning to our new depot technologies. Our expectations for SUBLOCADE net revenue are $120 million to $125 million. Our base case for SUBLOCADE net revenue is for continued sequential modest new patient enrollment growth and therefore, modest sequential net revenue increase in Q4. However, our range also considers the possibility of a sequential decline in the current fourth quarter in the event of COVID environment results and new healthcare access restrictions that we may see from localized outbreaks. Looking at PERSERIS for 2020, we would expect a relatively flat performance versus Q3, giving us a full year 2020 range of $12 million to $15 million. With regard to the Rest of the World business, we continue to expect a net revenue decline in the mid-single-digit percentage range for full year 2020. Turning to OpEx. We expect a range, excluding provisions and charges, of $470 million to $480 million for the year. Guidance here includes a number of pushes and pulls. On one hand, it incorporates initial savings from our recently completed strategic alignment actions. On the other hand, it factors in increased marketing expenditures for SUBLOCADE and higher R&D expenditures as clinical studies come back online. While the net effect implies an uptick in sequential OpEx spend, you should note that some of these planned investments to grow the business are variable in nature, and depending on how the operating backdrop develops in the U.S., spending could ultimately be low. Based on the foregoing assumptions, we now expect to generate a pretax profit for the full year on an adjusted basis. With that, I'll turn it back over to Mark.

Mark Crossley, CEO

Thank you, Ryan. That concludes our formal remarks on a strong third quarter, which saw SUBLOCADE return to both quarter-over-quarter growth of 14% and year-over-year growth year-to-date of 90%. I'll hand it to the operator to facilitate questions and answers.

Operator, Operator

And your first question comes from the line of Harry Sephton from Jefferies.

Harry Sephton, Analyst

To begin with the organized health system channel, you noted its strong performance. Can you provide more details on the percentage of SUBLOCADE sales from that channel and the growth percentage currently being seen in the OHS channel? Additionally, regarding SUBLOCADE, what preparations are you making for the potential Brixadi launch in December? Lastly, on the financial side, the gross margin appeared weak despite the exceptional items. Could you explain what is causing the lower gross margin?

Mark Crossley, CEO

Thanks, Harry. And I'll go ahead and take the first two, and then I'll ask Ryan to handle the gross margin question. I think with regards to the organized health channels, the percentage that's in organized health associated with SUBLOCADE a year ago, at the half year 2019, we talked about it being 15%. And then at the half year, we talked about it accelerating to 30%. What we're seeing here at the end of Q3 is approximately 35% of the revenues coming from there, and the majority of our growth that we've seen on both a quarter-over-quarter and a year-over-year basis is coming from those channels, which are of higher importance in which we've increased our investment to accelerate. If I go to your question on the Brixadi launch, I think, again, this is one where we have to step back and look at the broader market, and we have a double-digit growing market. We have a very low penetration for patients that are suffering from opioid use disorder, with a very small percentage of them, 20% to 25%, actually in treatment at any one time. And we've had a paradigm of treatment which has been suboptimized for a number of years moving forward. And I think in that context, we continue to focus on operations associated with SUBLOCADE, creating trial, repeat, and getting exposure to our medication, which we think breaks that paradigm that previously existed. If I think through adding another long-acting into the space, I think given that landscape, there is plenty of room for multiple players in that sort of paradigm. We've seen it in other spaces where multiple voices have at times accelerated the change to long actings. So with that, I'll hand over to Ryan with regards to the gross margin fluctuations quarter-to-quarter.

Ryan Preblick, Interim CFO

Yes. So that's a fair question. And just to start off, just want to reiterate that we believe by the end of the year, we will be back to the mid-80s in terms of our gross margin expectations. All we're seeing in Q3 is just primarily tied to the mix of our business. We had a strong quarter on the film, which, as you know, has the lower margin at this point, as well as some slight plant variances in terms of production, but the majority of those are bound and the margin is tied to the mix.

Harry Sephton, Analyst

Okay. That's very helpful. And just one quick follow-up on the Rest of the World business. Do you have any timings around the launch of Subutex's extended release in the European markets?

Mark Crossley, CEO

Harry, we're currently, as you know, in Canada and Australia, and the rest of the launches that we're contemplating, we're awaiting to see where reimbursement comes out. We expect those to be coming throughout 2021. As you know, we've done a decentralized sort of procedure over there, so those will be staggered out depending on the individual jurisdictions.

Operator, Operator

And your next question comes from the line of Nick Nieland from Citi.

Nick Nieland, Analyst

I've got three, please. Firstly, can you comment on the realized pricing for SUBOXONE and SUBLOCADE because both of these seem to have been better than our expectations, at least? Is this more sort of a stocking effect? Or is this a positive net pricing environment? And can you comment on how this is going to look for the rest of the year in 2021, especially with the potential launch of a competitor coming in December? Secondly, on the pipeline, you dosed the first subject in your election I trial in July. I wonder when we might hear about results of that trial. And can you also comment on your two early-stage projects and when you might see those into the clinic? And then finally, just on the finalization of the DoJ agreement on the 12th of November. Is this merely a formality? Or is there any risk around this event for the terms of the agreement?

Mark Crossley, CEO

Thank you, Nick. Let's start with the DoJ. I think from a DoJ perspective, we see this as a bit of a formality. We have agreement across all of the different organizations within the DoJ, the FTC and the state AGs, and it's just going to the judge for his formal acceptance. So we expect that to occur on November 12. I think what I'll do is I'll hand over first to Christian with regards to OX1 development, and then your question with regards to further on the GABAB. And then we'll transition to Ryan with regards to the broader pricing environment. So Christian, if I could ask you to talk through the OX1 and then the GABAB?

Christian Heidbreder, CSO

Absolutely, Mark. So we are currently dosing healthy volunteers in what we call a single ascending dose protocol. This is a fairly long study because we are basically investigating several doses that are going to be completed as per the planned protocol around the third quarter of 2021, at which point you may expect to see some results of that single ascending dose study. 2021 will then, depending on the outcome of that study, be dedicated to the start of what we call the multiple ascending doses, again in the third quarter of 2021. So that is for the orexin 1. For GABAB positive elastic modulator, we are initiating what we call a late lead optimization program, which means that we identified some lead molecules that are now ready to go through further evaluation or optimization. 2021 will be totally dedicated to that late lead optimization program, at the end of which, hopefully, we will have a couple of candidate selection molecules that will be ready for IND-readiness activities towards the end of 2021 and the beginning of 2022.

Mark Crossley, CEO

Thanks, Christian. I'll hand over to Ryan to talk through the pricing question that you had, Nick.

Ryan Preblick, Interim CFO

Yes, just to clarify, there were no pricing changes between Q2 and Q3, and our strategy remained fundamentally the same. Two primary factors could be influencing this: one is the business mix as we expand into certain channels, and I also want to point out that the volume you see in the release reflects sales out into the marketplace, whereas our total net revenue figures are based on sales to our customers. This may result in a disparity.

Nick Nieland, Analyst

So just a follow-up there. Do you anticipate any net pricing impact from having to basically compete with a new competitor from December for SUBLOCADE?

Mark Crossley, CEO

We've got great access across and have been told that pricing is not an issue with regards to that access. In the specialty arena, we're a relatively low-priced product and have relatively low rebating. And we see in other site-oriented areas where the price isn't typically the issue that the battleground is typically regards to efficacy. And we think in an area such as opioid use disorder, where so many people around not just the U.S. but around the globe are suffering from this horrible epidemic, we're hoping that everyone gets access to treatment, and we're able to base it on efficacy moving forward.

Operator, Operator

And your next question comes from the line of Paul Cuddon from Numis Securities.

Paul Cuddon, Analyst

Firstly, I mean, just on SUBOXONE Film in the U.S., are there any major kind of accounts or formularies we should be aware of that have potential to fall away into FY '21? And secondly, on SUBLOCADE. With telemedicine prescribing now kind of a more commonplace, and I suppose, likely to stay kind of into perpetuity, does that sort of impact the logic for SUBLOCADE as a means to kind of reduce clinic workload and burden? And so is the actual kind of attractiveness of SUBLOCADE reduced in this telemedicine era?

Mark Crossley, CEO

So I'll start with that one, Paul, and then I'll hand off to Ryan to handle the Film question. With regards to telemedicine, I think we applaud the DAA and the agencies that put that in place, especially in the pandemic, where isolation has really accelerated the disease and it's accelerated the ability for people that are struggling to get in for treatment. I think as you've highlighted, many of those people come in, and they're getting on sublingual because of the nature of telemedicine, where a doctor can see that patient digitally and give them a script and go to a regular pharmacy versus SUBLOCADE, where it requires an in-person visit for administration of the medication itself. It is a chronic relapsing disease addiction, and we are continuing to see growth on SUBLOCADE, as you saw in the third quarter, 14% quarter-over-quarter growth as people continue to increase both the patients per healthcare professional and we continue to get further broader HCPs prescribing. And so while patients initially get help with the increased oral, eventually with the chronic relapsing nature, they can turn to SUBLOCADE to help them maintain their treatment. So Ryan, could you help with the Film?

Ryan Preblick, Interim CFO

Yes. So just a couple of things on the film: One, we are still quite happy with the cash generation of the Film business, but keep in mind that we no longer promote the Film product. What we're anticipating, as we get to the end of Q4 into Q1, is the plans will start taking a look at their plans as they get into next year, and that's where we think some of the key final decision will be made, what products they want to keep on their formularies. Keep in mind that we did lose Express Scripts in July. What will most likely happen, or you would assume would happen with generics is they would put a full block on a branded product. So net-net at this point, again, we've done nothing fundamentally different in our business to prevent the share getting back to analogs, and we'll see how this plays out as we go into 2021.

Paul Cuddon, Analyst

Okay. And then just another question. I mean, you have provided some OpEx guidance into 2021 as well, a reduction over the kind of 470 to 480 baseline, but that must assume a kind of certain level of revenue. So could you provide, not your baseline revenue assumption that goes with those costs, but some means for us to be able to flex that OpEx for the various elements, if you outperform on revenue on SUBOXONE.

Mark Crossley, CEO

Paul, fully respect your question. I think given the circumstances, the external forces on the business, I think that's probably a question best answered when we get to February with the full year results, and we're a bit more informed. And that's normally when we handle the issue of guidance for the 2021 year.

Operator, Operator

And your next question comes from the line of Max Herrmann from Stifel.

Max Herrmann, Analyst

Firstly, I wanted to get a feel for what you're seeing in Australia, where I believe both yourselves and Camurus are promoting the long-acting buprenorphine injectables. So how that market is sort of acting as a test case for perhaps what we might see in the U.S. or reasons why it might be different there? In terms of Express Scripts, obviously, over the summer, you highlighted the loss of the Express Scripts from the coverage plans. I was surprised that, that didn't really impact on the prescription. So some sort of understanding why that couldn't have the loss in share that you might have expected from that? And then just on this organized health systems and channel being clearly the route to treat patients at the moment and gain more traction there, how does that make you view the overall market? And do you expect that the OHS systems will end up taking more and more patients, and therefore, you can address the whole market? Or are you effectively going to be limited to a subset of patients because of the drift of only some of those to the OHS systems.

Mark Crossley, CEO

Thanks for the questions, Max. I'll address the two SUBLOCADE points and then pass it over to Ryan to discuss the ESI loss. In Australia, we are currently a follower in the market, and we are introducing the SUBLOCADE approach there for the first time following Camurus' launch. As you can see from the results, we are experiencing strong penetration, but it will take time to establish our presence concerning SUBLOCADE and to educate about the two nanograms per milligram of treatment and the 70% to 80% occupancy. Furthermore, we believe that there are no other medications available that offer these benefits, which excites us as we continue to collaborate with physicians in Australia and other countries worldwide regarding SUBLOCADE's advantages. Regarding organized health systems, we recognize that they can ease the administrative burden on physicians in retail settings, making it beneficial to focus on that area. We have over 25,000 physicians within the 500 targeted organized health systems we aim to engage with, representing over 1 million patients, with more than 50% of them located within these health systems. While we will maintain a presence in retail, our emphasis will be greater on organized health systems. However, we do have several prescribing physicians in retail, and this doesn't mean we will entirely redirect our focus. It is important to note that retail growth will require some policy changes before we can expect rapid development there. We envision an alternate injection facility similar to what exists for schizophrenia, where healthcare providers can prescribe without handling much administrative work. Patients could then go to a different facility for treatment, but that legislative change is still in progress and will take time to implement. Thus, we will concentrate on the organized health systems first, where there are more prescribers, with over 50% of patients located there. When we gain access in these systems, we anticipate an accelerated patient experience per healthcare provider compared to retail. That's why our short-term focus is there, Max. Now, I’ll turn it over to Ryan to explain the dynamics of the ESI.

Ryan Preblick, Interim CFO

Yes. So with ESI, as you recall, they did represent about 10% to 15% of our business. And since they did pull us over their formulary in July, as you mentioned, we have retained a large component of that share. However, the trade team breaks it down into two pieces: one, they either call it a softer block or a hard block. And what we're thinking now, it's more of a softer block as we progress through the second half of 2020 because with this patient population, these payers tend to be somewhat more careful with trying to switch patients mid-treatment. So our thought, without being able to talk to ESI one-to-one about their rationale, our thought is they're letting the current patients fulfill their treatments on SUBOXONE Film, and then they're going to reevaluate at the end of this year going into 2021.

Operator, Operator

There are no further questions at this time. Please continue.

Mark Crossley, CEO

Okay. Well, with no more questions, I'd like to thank you for your continued support of Indivior and its team. We look forward to further engagement at the upcoming conferences regarding our role as the leaders in addiction, and the exciting growth thesis that we have. Thank you, and have a good day.

Operator, Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.