Earnings Call Transcript - INDV Q1 2023

Operator, Operator

Good morning, good afternoon, everyone. Before we begin, I need to remind everyone that on today's call, we may make forward-looking statements that are subject to risks and uncertainties, and that actual results may differ materially. We list the factors that may cause our results to be materially different on Slide 2. We also may refer to non-GAAP measures, the reconciliations for which may be found in the appendix to the presentation that is now posted on our website at indivior.com. I will now turn the call over to Mark Crossley, our Chief Executive Officer.

Mark Crossley, CEO

Thank you, Jason, and good morning, good afternoon, everyone. Thanks for joining our first quarter results call. Here with me today are Ryan Preblick, our Chief Financial Officer; and Christian Heidbreder, our Chief Scientific Officer. I will start the call with an overview of the results for Q1 and a progress report against our strategic priorities. Ryan will then provide more detail on the first quarter results and updated fiscal year 2023 guidance. And then following that, we'll move to Q&A. Turning to the key messages, we delivered an excellent start to 2023 driven by strong execution against our profitable growth strategy, which is primarily focused on increasing SUBLOCADE's prescriber depth within our organized health systems. Our first quarter total net revenue grew 22% led by SUBLOCADE. The strength of our top line allowed us to absorb incremental growth investments behind SUBLOCADE in the U.S. Justice System channel while still delivering operating leverage. As a result, our adjusted operating profit grew 31% in the quarter. We also successfully completed the acquisition of Opiant at the beginning of March. This important strategic step strengthens our addiction portfolio with the addition of OPNT003, which we expect to become the next generation agent for opioid overdose reversal subject, of course, to regulatory approval by the FDA. I'm also pleased to report that we fully integrated the Opiant commercial and R&D teams. And with our combined experiences, capabilities, and footprint, our teams have hit the ground running as we prepare for potential FDA approval and then launch. You'll also note that we've updated our fiscal year 2023 guidance for the Opiant acquisition as well as our updated share assumptions for film. As a result, we've increased our fiscal year 2023 net revenue expectations. Ryan will share more detail on these and other fiscal year 2023 guidance items in a moment. Finally, a quick note on the legacy litigation, which I know is top of mind among our stakeholders. While I'm constrained in what I can say due to the ongoing nature of these matters before the court, I can confirm that discussions continue with the parties as we actively try to bring greater certainty for our shareholders at an appropriate value. Doing so will allow us to focus all of our efforts on meeting the important needs of patients suffering from substance use disorders and serious mental illness. Moving next to our report card for the first quarter, we continue to make excellent progress against our strategic priorities. First, SUBLOCADE net revenue of $132 million grew 12% versus the previous quarter and 55% versus Q1 last year. Sequential dispense growth was 16%. This strong double-digit performance was driven by our ongoing strategy to increase prescribing depth in the 500-plus organized health systems that we've accessed. Organized health systems now account for approximately 80% of SUBLOCADE's growth. Additionally, we saw an increased contribution to SUBLOCADE net revenue from the U.S. justice system channel as more facilities were activated. You'll also note that SUBLOCADE patients at the end of the first quarter were approximately 95,000. This is just over one-third of the way toward the estimated 270,000 patients we are targeting to achieve our $1.5 billion plus net revenue goal for this important treatment. While we are pleased with our progress, it still only represents 3% of the 3.1 million people diagnosed with opioid use disorder. Moving next to diversification and starting with PERSERIS, we continue to see growth in unit volume and an increase in the number of new healthcare professionals prescribing in our territories. Net revenue of $8 million shows a 60% increase compared to Q1 2022, although it was negatively affected by wholesaler destocking when comparing to the previous quarter. Overall, we are pleased with the key performance indicators, which remain very positive, including underlying dispense growth and sample demand in inpatient acute care psychiatric facilities and outpatient clinics. Together, we are confident in our full year net revenue outlook for PERSERIS. Turning to net revenue outside the U.S., strong growth from new products, including both SUBLOCADE and SUBOXONE Film, contributed to a 5% increase in overall net revenue from the Rest of World. SUBLOCADE has continued to show solid progress with a net revenue contribution of $9 million. Our markets outside the U.S. remain strong, including the launch of SUBLOCADE in the Nordics in late 2022. We are looking forward to launching SUBLOCADE in Germany in May and are focused on achieving sustainable growth for our Rest of World business with SUBLOCADE and SUBOXONE Film. Regarding diversification, we have successfully closed and integrated the Opiant transaction, and I will soon provide more detail on our plans for OPNT003. We are pleased to have acquired Opiant's asset portfolio and team, which bring significant experience in addiction medicine development across various delivery platforms, including depot, oral, and now nasal delivery technologies. Under Christian's leadership, the R&D teams have integrated well and are progressing quickly with our key programs. By combining our portfolios, Indivior now has a stronger pipeline to address the urgent needs of patients with substance use disorders. Our fourth strategic priority is to optimize our operating model and capital allocation. Our financial position remains strong despite cash outflows related to the Opiant acquisition and the completion of our second share buyback program. As for the additional U.S. listing of our shares, we expect to complete the necessary regulatory requirements and aim for a NASDAQ listing in June. Before concluding, I want to give a brief status update on the Opiant acquisition. We closed the deal on March 2 and quickly integrated Opiant's teams. Nearly two months in, I'm pleased with how we have united as one company focused on patient needs. Our immediate opportunity is OPNT003, which has a PDUFA action date of May 22. Let me make the standard cautionary comment that this is subject to FDA approval. Assuming everything proceeds as expected, we are planning for a launch in Q4. Our updated fiscal year 2023 guidance reflects increased investment for the OPNT003 launch. In light of recent interest, I want to address the recent OTC approvals for naloxone. We support efforts to improve access to all FDA-approved medications. However, OPNT003 will not be an OTC product, if approved, so our primary launch efforts will focus on public interest markets such as law enforcement, first responders, health departments, schools, and corrections. This is due to the unique profile of OPNT003, which was designed to address the overdose epidemic caused by fentanyl and other synthetic opioids. We believe we can effectively reach these key markets with a small, focused, and efficient sales team. Regarding pricing, we are still finalizing our strategy, but we aim to price responsibly while considering the innovative nature of the product. Although our fiscal year 2023 guidance does not anticipate significant net revenue from OPNT003 due to the expected late-year launch, we remain confident in its peak net revenue potential of $150 million to $250 million and expect it to be accretive to earnings after the second full year of launch. In conclusion, the team has made an excellent start to the year with strong growth in SUBLOCADE and PERSERIS, as well as a continued recovery in our ex-U.S. markets. We look forward to the launch of OPNT003, pending approval, and have raised our fiscal year 2023 net revenue guidance. Lastly, we are working diligently to eliminate uncertainties for stakeholders as we address legacy legal matters and focus on our business objectives. Now, I will turn it over to Ryan.

Ryan Preblick, CFO

Thanks, Mark, and good morning and good afternoon to everyone. We had a very good start to full year 2023 and are pleased with our continued execution. During the quarter, overall double-digit top line growth was once again driven by the strong performance of SUBLOCADE. Our reported and adjusted operating profit also increased versus the prior year, reflecting our increased net revenue from the investments in sales and marketing we have made over the last year to accelerate the growth of our long-acting injectables. We also maintained our financial flexibility with approximately $803 million in cash and investments at the end of the quarter. Before discussing the financial results for Q1, I do want to spend a moment discussing the accounting of the Opiant transaction now that the deal has closed. The final purchase price was $146 million, plus approximately $12 million in exceptional deal and transaction costs. Substantially, all of the purchase price is reflected in intangibles on the balance sheet and we expect to amortize this through COGS over the current 15-year patent life expectation of 003. The amortization expense will be treated as exceptional and is noncash and nontaxable. The possible liability for the contingent value rights will be assessed quarterly and will be amortized in the same manner. I will now provide some more detail on the drivers of our performance in the quarter and discuss our revised guidance. Starting with the top line. Total net revenue grew 22% versus the year-ago quarter and by 24%, excluding the impact of FX. The increase was primarily due to SUBLOCADE, which grew 55% versus Q1 2022 to $132 million. By geography, total U.S. net revenue grew by 27% and currently represents 83% of total company net revenue. Net revenue in the Rest of the World was up 5% year-over-year at actual FX rates and 13% if you exclude FX. As Mark mentioned, growth of SUBLOCADE net revenue outside of the U.S. was strong, up 50% versus the year-ago quarter to $9 million. Our progress with SUBLOCADE and SUBOXONE Film outside the U.S. continues to offset the decline in the legacy tablet business. Total SUBLOCADE net revenue for the first quarter of $132 million was up 12% sequentially, reflecting stocking in Q4 that did not reoccur this quarter. Dispenses were up 16% sequentially, showing strong underlying growth. This performance is consistent with our full year guidance of $550 million to $600 million. Moving to PERSERIS. Net revenue of $8 million was up 60% versus the first quarter of last year and was within our expectations. As Mark noted, there was some destocking dynamics in the quarter, which impacted the sequential comparison. Underlying prescription growth and other supporting KPIs continue to be strong and underpin our net revenue guidance for the year. Turning to SUBOXONE Film. Average share in the first quarter was approximately 19%, which is essentially flat sequentially. We continue to expect an accelerated rate of SUBOXONE Film market share decline in full year 2023, reflecting underlying erosion at a similar rate to the last 2 years, approximately 2 share points, together with the assumed impact from an approved fourth generic entering the U.S. market in the second half of 2023. As a reminder, we do not promote SUBOXONE Film in the U.S. Moving down to P&L. Our first quarter adjusted gross margin was 85%, up from 82% in the prior quarter and prior year. This was driven by favorable manufacturing variances such as FX and a higher mix of SUBLOCADE net revenue. We continue to expect gross margins to be in the low to mid 80%s range for the full year. Adjusted SG&A expenses were $117 million in the quarter, up 7% versus Q1 last year, primarily reflecting the overall cost inflation and commercial investments to accelerate SUBLOCADE access in the U.S. Justice System. R&D expenses were $27 million in the quarter, reflecting phasing of SUBLOCADE studies, manufacturing capacity expansion and other pipeline activities. In a moment, I will discuss our revised view of expenses for the year considering the addition of the Opiant business. Our adjusted operating profit of $71 million in Q1 was up 31% versus the prior year, primarily based on higher net revenue, partially offset by the higher operating expenses I discussed before. Turning to our balance sheet and capital position. We maintained our solid liquidity position and ended the quarter with gross cash and investments of $803 million, down from $991 million at year-end. The reduction in cash and investments primarily reflects the net purchase price of $124 million for Opiant Pharmaceuticals, including the transferred cash balance and $74 million primarily in annual scheduled payments for the DOJ, RB, and DRL settlements. Cash generated from operations, excluding these settlement items was $58 million. Turning to guidance for full year 2023. We have updated our full year 2023 guidance to reflect the increased expenses from the acquisition of Opiant and heightened net revenue expectations primarily due to the continued delay of the anticipated U.S. launch of the fourth film generic. We now expect this launch to occur sometime from mid 2023 onward, but we do not have any visibility or market intelligence on the exact timing. Guidance for SUBLOCADE and PERSERIS net revenue remains unchanged, as do our expectations for gross margin and underlying operating expenses before adding Opiant. Our revised guidance for operating expenses assumes regulatory approval of 003 by the FDA on or before the PDUFA date of May 22, with a launch in the fourth quarter of this year. Given the expected late 2023 launch for 003, we believe the impact on net revenue will not be significant for the full year 2023. Considering these factors, we are raising our overall net revenue range to $970 million to $1.040 billion from $950 million to $1.020 billion. The new guidance suggests net revenue growth of 12% compared to last year. Regarding our updated operating expense guidance, we now expect SG&A to be between $530 million and $540 million, up from $490 million to $500 million. This increase mainly reflects the addition of Opiant's commercial teams, including sales, access, and medical affairs personnel, along with the planned launch and marketing expenses for 003 in Q4 2023. For R&D, we now anticipate a range of $90 million to $100 million, up from $80 million to $90 million, reflecting the inclusion of Opiant's R&D personnel and their pipeline activities. Lastly, we expect adjusted operating profit to be slightly below the full year 2022's adjusted operating profit of $212 million due to the additional operating expenses tied to the Opiant acquisition, only partially offset by the increased revenue expectations. In closing, we are happy with our execution and financial results for the quarter. We believe our Q1 performance positions us well to meet our revised full year 2023 guidance and look forward to updating the market as the year unfolds. I will now hand the call back to Mark.

Mark Crossley, CEO

Thank you, Ryan. So in summary, a strong start to fiscal year 2023 by the entire Indivior team delivering against our strategic priorities, continued momentum behind SUBLOCADE, a raise in net revenue guidance based on the film resilience and integration of Opiant and preparation for the launch of 003, if approved, as well as planning for the U.S. listing on the NASDAQ in June. With that, I'll open up to the questions-and-answer period.

Paul Cuddon, Analyst

Thank you very much. I have two questions, please. Firstly, on the incremental quarter-on-quarter growth for SUBLOCADE into Q1 at sort of plus 12%. I just wonder if there's anything that you sort of want to flag for Q2? I mean could it be double-digit again in Q2? Or should we anticipate that Q1 had a bit of stocking? And then secondly, just on the gross margin, 84.5 was a bit better than we were expecting. I'm just wondering, is that sort of possible that that could continue kind of as the year kind of progresses? Thank you.

Mark Crossley, CEO

Thanks for the question, Paul. I'll handle the first one, and then I'll ask Ryan to comment with regards to the gross margin profile in Q1. Listen, we are extremely pleased with the progress in the delivery in the first quarter, really demonstrating that our organization health system strategy and our go-to-market structure that we pivoted to in fall of 2020 is working and working well. With over 90,000 patients using SUBLOCADE over the last 12 months, it just gives us continued confidence behind our peak net revenue goal of greater than $1.5 billion. It also with the way we started the first quarter gives us strong confidence in the range that we've given for the year and achieving that. We don't break down kind of the quarter-to-quarter sort of guidance on that, Paul. So I'll have to ask for a little bit of relief on that question. But again, we do have a lot of conviction behind the full year numbers.

Ryan Preblick, CFO

And then on the gross margin question, yes, there's no doubt that we did have a good gross margin percentage quarter and we look forward to the margins continue to expand as SUBLOCADE becomes the larger contributor to our profile. But I would caution that there was some FX benefit and some favorable production variances such as lower write-offs versus the prior year in the quarter and those may or may not repeat in the balance to go, hence, the reason why we are still confident in our guidance range of low to mid 80%s for the year.

Paul Cuddon, Analyst

Thank you very much and congratulations.

Mark Crossley, CEO

Thank you.

Thibault Boutherin, Analyst

Thank you for taking my questions. I have three. The first is about litigation. The press release mentioned that new offers and demands have been exchanged with the state in the context of the MDL litigation. I'm curious as to why the states have been singled out here. What about the other classes of purchasers and payers involved in the MDL? Why have they been excluded from these additional exchanges? That’s my first question. The second question is regarding the ex-U.S. sales for films and tablets. It appears that the numbers have stabilized for a few quarters now. Can we expect to see some growth here? Could you provide some insight into the drivers behind potential growth and what kind of figures we might expect? Lastly, I'd like to ask about your plans for the launch of OPNT003. Hikma attempted to launch a high-dose version of naloxone, an 8-milligram branded product called KLOXXADO. I believe that strategy is similar to what you are considering for your own product. However, their uptake has been relatively modest, which is quite far from the ambitions you have for OPNT003. Could you share details on how you plan to differentiate yourself, either through your go-to-market model or product differentiation, to drive uptake in this market? Thank you.

Mark Crossley, CEO

Thibault, thanks for the question. I think I'll start with the litigation and a little bit of commentary on 003 and then I'll hand to Ryan to talk about the trends that we are seeing in the film and tablet market between both the U.S. and Rest of World. On the litigation side, I think the key message here is that mediation with stakeholders continues to proceed with engagement from the court and we continue to aspire to bring certainty for all stakeholders at the appropriate value. If you look at the provision for the quarter, which we reassess every quarter across management with the Board and with the auditors, the provision with our best estimate has not changed. So we'll continue to progress moving forward. We expect further mediation sessions moving ahead. And that's about all I can say on this matter due to the ongoing nature of this matter before the court. So on the litigation, that's where we are. With regards to 003 and the naloxone market, I think what we're trying to do here with the launch of 003 is the team has created what we believe to be a transformational product in this space, utilizing a totally different active in the space with a very, very different product profile. Nalmefene, if you look at nalmefene versus naloxone, it has a higher affinity to the receptors, it tends to act quicker to get to peak values and its half-life is much longer, more in line and just beyond the typical sort of synthetic opioids that you're seeing. So the product is completely different, and we believe it will be the next paradigm of treatment for these synthetic opioids, which as you follow the market and you look at the over 200 deaths a day that are occurring, 90% of those are coming from fentanyl. So we think this is the product moving forward that if my daughter was out there, I'd want her to have it in her pocketbook. So with that as kind of the 003, I'll hand over to Ryan to talk through the films and tablets.

Ryan Preblick, CFO

Thanks, Mark. So in regards to the film business here in the U.S., we are still certainly surprised that the fourth generic hasn't launched at this point. We will certainly take the cash that's being generated from the film's resilience. But we do caution that we do plan, as we said in our guidance, that our assumption is that they will launch now at some time in the second half, and we are planning for further share erosion at that point. There's no fundamental reason why they shouldn't launch. And our objective is to keep a pulse on the marketplace and update you accordingly. In regards to the Rest of the World, really proud of the work that the Rest of the World team is doing, where they're stemming the losses that we've seen over the last couple of years where we've introduced film and SUBLOCADE into certain markets and you're starting to see, as we mentioned today, almost 12% or 13% year-over-year growth primarily tied to film and SUBLOCADE. So I think you're seeing some stronger tab business resilience, especially in large markets such as France. And then you're also seeing some of the nice performance on the new launches on film. And so when you combine all those, that's why we feel comfortable bringing up our total net revenue on the top line due to film and tablet.

Thibault Boutherin, Analyst

Thank you.

Mark Crossley, CEO

Thanks, Thibault. Appreciate it.

Max Herrmann, Analyst

Thank you for taking my questions and congratulations on a strong start to the year. I have three questions. First, regarding SUBLOCADE and the upcoming OPNT003 launch. Finally, I would like to follow up on SUBLOCADE sales. How do you perceive the mix between doctors currently prescribing it and those increasing their patient share, as well as adding new doctors? I'm trying to understand whether the main driver is the addition of new doctors or broadening the existing ones. What is the balance between the two?

Mark Crossley, CEO

Yes, it's a great question, Max. And really, I think the whole focus on SUBLOCADE, now that we've been on this journey for organized health systems for a couple of years, it's focused on depth. These large organized health systems have multiple subsidiaries out there and we are at the very early stages of driving depth of activation of those subsidiary accounts of driving more depth with current active providers as well as bringing, as you said ever so eloquently, new HCPs to the roster. And so the growth you're seeing is coming across all of those vectors, which gives us the confidence in the continued journey, both the confidence of our guidance for this year, but the confidence of being greater than $1.5 billion for peak net revenue guidance. So it's pretty good growth across all the vectors.

Max Herrmann, Analyst

Okay. Are there sort of lessons you can learn from sort of certain doctors and how they're prescribing to their patients and that you can then kind of replicate in other maybe sales regions that you can use best practice from one region to another? And I'm just trying to understand the lessons that you may be learning there between the different areas. Just to try and see what the lead areas may be achieving.

Mark Crossley, CEO

Yes, I agree, Max. At this point in our launch, as we work to transform treatment paradigms, we're still in the early stages with around a 3% market share, and we see significant potential for our asset. Throughout the year, the team has been gathering insights and communicating across various sectors to share effective strategies. We are also continuously updating our detailed resources to reflect this paradigm shift based on our insights, focusing on areas with strong prescribing practices as well as those where prescribing is emerging. We are integrating all of these lessons into our strategy as we aim to increase our market presence.

Max Herrmann, Analyst

And so the second question on SUBLOCADE is about the sort of relaxation of legislation, which will, I believe, allow you to use or dispense from a different location to the prescribing location and that will potentially enable you to have injection clinics or clinics that allow patients to be administered away from the prescribing position. Has that legislation now been implemented? And where is it in terms of you being able to actually leverage that? I think that was one of the key issues that you had with the initial launch in the prescription journey.

Mark Crossley, CEO

No. It's absolutely front of mind. And recall that the law changed in December, and it basically removes Data 2000, which has this requirement that's unique to the prescribing of buprenorphine that had it so that the prescribing physician had to actually administer the injectables. And I think it was a law that was put in place back when injectables weren't contemplated. So it was to deal more with the orals and trying to prevent potential diversion associated with those. But with the long-actings, the removal of the law we believe further normalizes the disease space similar to schizophrenia where patients can get a prescription from a psychiatrist who may not want to do the injection and they can go to an alternate site to have the injection done, we can now effectuate that for the treatment of opioid use disorder with SUBLOCADE. Now with that change in law comes a build-out of infrastructure and the ability to get there. So it's not something that's going to happen overnight. It will take time, but we see it as certainly as a tailwind for future growth and normalization of the disease space, Max.

Max Herrmann, Analyst

Okay, great. And then maybe just on the OPNT003 launch, how do you obviously approval potentially in May? What are the steps that you need to do to start to really get traction with these first responders? Is it going to be quite a long sales cycle? Does it take like you found with the criminal justice system, it can take quite a long time to negotiate those contracts? Can you start that process immediately on approval before the launch?

Mark Crossley, CEO

Yes. I think you're providing some clarity on the process, which differs significantly from the treatment side where securing access is the first step, followed by engaging physicians to discuss the advantages of the asset. In this case, you're primarily interacting with buyers, working through contracts and communicating the potential benefits of the asset to various first responders. Once approved, we'll have a final label that allows us to explain these benefits in detail. This cycle depends on their contracting and buyer processes, which can be more consistent over time. Therefore, this will require building over time. We haven’t provided year-to-year guidance, but we believe that this year, the revenue will be minimal. However, we remain confident about achieving peak revenue between $150 million and $250 million based on current feedback.

Max Herrmann, Analyst

Great. Thanks very much.

Mark Crossley, CEO

Thank you for the question, Max.

Unidentified Analyst, Analyst

Hello. I'm sorry if it has been already touched upon, but I just wanted to ask a little bit about the listing of the company on NASDAQ. Is there any long-term view in terms of the listing in U.K.? Is there a plan to move primarily listing to U.S. at some point? Or is it just going to be an additional listing?

Mark Crossley, CEO

Thanks for the question. And listen, this is an additional listing. We will still have our primary listing in the U.K. And just to remind the broader audience that the sole purpose of this is to bring additional exposure to both the company as well as the disease space in its largest opportunity market of the United States. So this is about that visibility for the company. And we are excited to be able to go live with that at some point in June. So thanks for the question.

Operator, Operator

Thank you. There are currently no further questions. I will hand the call back to Mark.

Mark Crossley, CEO

Thank you, Sharon. And with that, I'd like to thank everyone for their continued support of Indivior. We look forward to continued engagement throughout the year at conferences and at the next set of earnings results. Thank you very much.