Earnings Call Transcript - INDV Q3 2021

Operator, Conference Operator

Good day and thank you for standing by. Welcome to the Indivior Q3 Results Twenty Twenty-One webcast. At this time, all participants are in a listen-only mode. After the presentation, we will have a question-and-answer session. I must advise that this conference is being recorded today; it is the twentieth of October twenty twenty-one. I would now like to hand the conference over to your speaker today, Mark Crossley, Chief Executive Officer. Please go ahead.

Mark Crossley, CEO

Thank you very much. Good morning and good afternoon, everyone. Thanks for joining us. With me today to discuss our third quarter results are Ryan Preblick, our Chief Financial Officer; Dr. Christian Heidbreder, our Chief Scientific Officer; and Jon Wasserman, our Interim General Counsel. For today's call, I'll provide an overview of our strategic progress, after which Ryan will detail our financial performance and updated guidance. We will then move on to Q&A. Moving to slide three, I'll assume everyone has read the forward-looking statements, and I'll move on to key messages for the third quarter. Let me start by saying how pleased I am with our Q3 performance and progress. We continue to face a complex operating environment with the pandemic, but through maintaining our dedication and focus on executing our strategy, we delivered better than expected financial results. Most importantly, we've made further good progress on SUBLOCADE, our key value driver and top strategic priority. Over the past year, you have heard us articulate our go-to-market strategy centered on organized health systems. This strategic pivot in twenty twenty has really driven our momentum. The proof point is five consecutive quarters of double-digit increases in SUBLOCADE underlying net revenue and patient expenses. On the back of this momentum, we're again raising our full year twenty twenty-one guidance for total net revenue, largely on the strength of SUBLOCADE and continued SUBOXONE Film resilience. Ryan will take you through the details shortly. Looking more closely at our organized health systems strategy execution, as we learn more about engaging and activating these large customers, we're increasingly confident that we've established the right commercial strategy that we believe will drive us toward our one billion dollars peak revenue goal for SUBLOCADE. It's taken time, patience, and investment; we are starting to see the fruits of our labor come through across a range of KPIs that point to continued momentum. To illustrate our progress, the organized health systems category is already the main growth driver for SUBLOCADE, now generating about seventy percent of our growth and accounting for fifty-five percent of our net revenue. This is faster than our stated target for exiting twenty twenty-one at fifty percent. We're also pleased with the increasing pace of activation of organized health system customers. At the end of the quarter, we activated over three hundred organizations, up from around two fifty at the end of the second quarter. As a reminder, our goal is to activate five hundred priority organizations, so we're well over halfway towards achieving our target. As I outlined in July, we continue to invest where we see the biggest opportunities. This includes the criminal justice system, where we're building a dedicated commercial team. Our efforts here are well-timed as legislation centering on medically assisted treatment for incarcerated or newly released patients gained momentum. In addition to the Medicaid Ryan tracked, which is being considered in Congress, New York State just passed legislation establishing medically assisted treatment in all state prisons and jails. The legislation goes into effect in February twenty twenty-two and is a major intervention on behalf of patients. In fact, sixty-five percent of incarcerated patients suffer from SUD, while only five percent actually receive treatment. Meanwhile, despite the complications posed by the Delta Variant in the quarter, our commercial organization continues to see improving levels of healthcare professional engagement. In-person access was up to seventy percent in Q3, up from around sixty-five percent at the half year. This improved access is helping SUBLOCADE patient enrollments to continue to reach new highs and is also benefiting PERSERIS, as I will touch on shortly. I want to close my opening remarks with our report card that demonstrates the progress we're making against these strategic priorities. Starting with SUBLOCADE, we delivered Q3 net revenue of sixty-five million dollars, nearly double Q3 twenty twenty. When we look at this sequentially, this compares with sixty-one million dollars in the second quarter, but I remind you that included a large seven million dollars order from a criminal justice system customer. If we set that aside, sequential net revenue growth would have been around twenty percent, and with year-to-date net revenue reaching one hundred and sixty-nine million dollars, we're pleased to again raise our full year guidance for SUBLOCADE. Among the KPIs we track, the growth in SUBLOCADE net revenue is being driven by strong double-digit growth in U.S. patient expenses and in the total number of patients under treatment, as well as by increasing net revenue contributions from ex-U.S. launches, which brings me to the next strategic priority: revenue diversification. On this measure, I’m pleased to report we've made further progress with launches in new geographies for SUBLOCADE and SUBOXONE Film. Net revenue for SUBLOCADE in international markets was four million dollars in the quarter. We're also pleased with initial SUBOXONE Film net revenue from new markets in the European Union, and we expect its contributions to grow as we move forward. The combination of these product launches is helping us offset the declines we continue to see in the legacy tablet product. We also saw a welcome return to growth from PERSERIS, our monthly risperidone injectable targeting schizophrenia patients in the U.S. This reflected the progressive reopening of healthcare systems in the U.S., but I referenced earlier. We're seeing renewed month-over-month growth and are now increasing the investment behind this important asset to enable us to reach the two hundred million dollars to three hundred million dollars net revenue potential that we believe this differentiated product can deliver. Toward this end, we will be investing to double the PERSERIS sales force to achieve full national coverage in fiscal year twenty twenty-two. Our net revenue goal has always been predicated on national coverage, and with the U.S. healthcare system continuing to open, now is the right time to make this investment. Regarding the pipeline, as well as strengthening our evidence base for our long-acting injectables, we continue to progress our innovative early approaches to a range of addiction disorders. In particular, we're looking forward to the early twenty twenty-two start of the Phase 2b study of AEF0117, a promising asset for cannabis use disorder on which we have an exclusive license from Aelis. Finally, on our operating model, we maintained our focus on prudent cash management and asset optimization so that we can balance investment in the business with returning value to shareholders. By the end of the quarter, we had bought back shares for a total of thirty-one million dollars as part of the one hundred million dollars share buyback program we announced in July. Even after this outflow, we ended the third quarter with a strong cash position of over one billion dollars and net cash of over seven fifty million dollars. This leaves us strongly positioned to pursue our strategy both organically and potentially inorganically as we see the right opportunities. To quickly summarize, the team has delivered another strong quarter of execution, delivering against our strategic priorities, which exceeded our expectations. I'll now hand over to Ryan to take you through the financials in more detail.

Ryan Preblick, CFO

Good morning and good afternoon. Looking at the Q3 results in more detail on Slide eight, we had another solid financial performance. What stands out to me and what I will cover in more detail in just a moment, is first, Q3 strong net revenue growth of eighteen percent, which brings overall year-to-date net revenue to five sixty-eight million dollars, an increase of twenty-three percent compared to the year-ago period. Our growth continues to be led by SUBLOCADE's strong performance in the U.S. SUBLOCADE Q3 and year-to-date net revenue growth was ninety-seven percent and eighty-six percent respectively versus last year. And as you have heard, this performance, along with SUBOXONE's continued resilience, is allowing us to raise full year twenty twenty-one guidance. Second, we are beginning to see the step-up in operating expenses from the sales and marketing investments we are making behind SUBLOCADE to accelerate its leadership position in U.S. OUD treatment. As Mark discussed, we have also approved a significant investment behind PERSERIS to drive this treatment towards our stated peak annual net revenue goal of two hundred million dollars to three hundred million dollars. Our OpEx in the back half of twenty twenty-one will reflect these growth investments, and as such, we do expect to be at the higher end of our four seventy to eighty million dollars OpEx range for full year twenty twenty-one. Third, we have maintained our strong financial position, with gross cash at the end of the third quarter standing at over one billion dollars. This has allowed us to deliver on our number one capital allocation priority of investing in the business while also returning value to shareholders in the form of our share repurchase program. Now, looking at the P&L in more detail on slide nine, starting with net revenue. We continue to be pleased with the progression of our overall net revenue in the third quarter to one hundred and eighty-seven million dollars. The principal drivers of the strong year-over-year increase were the continued outstanding growth in U.S. SUBLOCADE net revenue and SUBOXONE Film resilience in the U.S. Q3 SUBLOCADE net revenue of sixty-five million dollars represents growth of twenty percent sequentially. When you exclude the large criminal justice system order of seven million dollars from last quarter's net revenue of sixty-one million dollars. On the same basis, expenses in the quarter increased thirteen percent. The difference versus the net revenue growth rate being the initial stocking from some new CJS customers and rebate accrual adjustments. Touching on PERSERIS, net revenue was five million dollars, up slightly compared to four million dollars in the previous quarter. As Mark said, we are seeing renewed sequential month-to-month growth with the reopening of the U.S. healthcare system. Quickly turning to U.S. Films performance, net revenue remained resilient at seventy-seven million dollars, which was essentially unchanged versus the year-ago quarter. This was primarily due to mix as volume from a small number of non-contracted payers remained steady in the quarter. U.S. Share was relatively unchanged compared to the previous quarter at twenty percent. Looking ahead, while the resilience of the film remains a welcome positive for both our net revenue and cash position, we continue to caution that there are no strategic actions we are taking to maintain current share and that we expect share erosion towards industry analogs over time. Closing up the net revenue discussion with the rest of the world, third-quarter net revenue of forty-four million dollars on an actual basis decreased eight percent compared to the year-ago quarter. The sale of the Temgesic Buprex business impacted net revenue by about two million dollars in the quarter, while continued competition in the legacy tablet market was the other major factor. These items were partially offset by net revenue from SUBLOCADE of four million dollars and modest sales of SUBOXONE Film. As our new products become more widely available and health systems normalize across the EU, we expect to reverse the net revenue declines we have historically seen in the rest of the world business and to return to growth. Looking at gross margin, Q3 eighty-six percent level was ahead of our low eighties expectations. This was due to better productivity and some one-time supplier credits we received in Q4. Also, in Q4, we expect gross margin to be in the low 80s, and as such, our gross margin outlook for full year twenty twenty-one overall remains in the low 80s range. Proceeding to operating profit, we saw a year-over-year improvement in Q3 on an adjusted basis of twenty-seven percent to thirty-eight million dollars. This result includes incremental growth investments in our LAI technologies. Q3 OpEx, which is defined as SG&A and R&D, was one hundred and twenty-three million dollars. This compares to adjusted OpEx of one hundred and one million dollars in Q3 last year. As we previously indicated, the growth investments we are making in full year twenty twenty-one are primarily focused on SUBLOCADE, including search engine marketing and the deployment of a dedicated team focused on criminal justice system customers. We've also begun this year to invest behind increasing the U.S. sales force to serve. Our goal is to achieve U.S. national coverage in full-year twenty twenty-two, in line with the expected broader reopening of the U.S. healthcare system. As Mark indicated, we will essentially plan to double the sales force. Continuing down the P&L, net revenue was twenty-seven million dollars reflecting a tax rate of thirteen percent while substantially ahead of the prior year, net income was down versus the prior quarter, mainly due to the increased investment levels we expect to see for the remainder of twenty twenty-one and a modest step up in net interest expense. Finally, in the quarter, you may have noted some exceptionals, the result of which is a wash between the items. First, we had a technical adjustment to our litigation provision, amounting to twenty-four million dollars, which is non-cash and includes modest interest. This adjustment is based on our most up-to-date expert judgment of the potential value we would owe. I would, however, like to call out two important points here. First, we continue to believe strongly in the validity of our four fifty-four patent, and second, that we had already posted cash collateral totaling eighty-two million dollars that exceeds the revised total provision amount of seventy-three million dollars. As such, we feel well-covered should our litigation efforts prove unsuccessful. Fully, we are selling this twenty-four million item as proceeds from the sale of the legacy Temgesic BUPREX business outside the U.S. for net nineteen million dollars and five million dollars of DOJ-related accrual reversals. Turning to the balance sheet on slide ten, we exited the quarter with just over one billion in cash. The main cash movements during the quarter were the sale proceeds of approximately nineteen million dollars net related to the disposal of the Temgesic Business and an outflow of approximately thirty-one million dollars relating to share repurchases. With regards to the share repurchase program, at the end of Q3, we had repurchased and cancelled approximately eleven point seven million shares at an average price of approximately one hundred and ninety pence. Finally, to wrap up on guidance on slide eleven, we are pleased to raise our total net revenue expectations to seven fifty million dollars to seven seventy million dollars. This is based on our expectations for continued sequential net revenue growth in SUBLOCADE and an essentially unchanged U.S. share position for SUBOXONE Film for the remainder of the year of around twenty percent. The midpoint of our revised total net revenue guidance, seven sixty million dollars, represents an approximately eighteen percent increase versus full year twenty twenty net revenue of six forty-seven million dollars. Within the total, we have raised and narrowed our expectations for full year twenty twenty-one SUBLOCADE net revenue to between two thirty-five million dollars and two forty-five million dollars from two ten million dollars to two thirty million dollars. This reflects better than expected business momentum we have seen so far this year, including with CJS customers. The midpoint of our new SUBLOCADE net revenue guidance represents a year-over-year increase of eighty-five percent. The other elements of our guidance, including gross margin and OpEx range, are unchanged. However, given our increased net revenue guidance, we are now also expecting our pre-tax income to be higher than we previously forecasted. With that, we are happy, and we are able to take your questions.

Operator, Conference Operator

Thank you, Ryan. We now open the Q&A session. And our first question today comes from the line of Max Herrmann from Stifel. Please go ahead. Your line is now open.

Max Herrmann, Analyst

Great. Thanks very much for taking my questions, and congratulations on a strong quarter. Three questions, if I may. Firstly, just wanted to understand a little bit about the SUBLOCADE performance. Obviously benefiting a little bit, I think you mentioned from additional criminal justice systems revenues in the third quarter. I wondered if you could kind of give us a clearer idea of how significant those were and trends are with this new sales force, and also the SUBLOCADE rollout in ex-U.S. Seems flat quarter-on-quarter, so, but obviously have just four million; it's hard to see exactly what the movement was. That's the first question. Secondly, just longer term, what do you think the business can do in terms of margin and how will that evolve over time, particularly given where you historically were? Obviously, those have dipped over the last few years with generic competition, but then as SUBLOCADE gains traction? Finally, just a little bit more detail on the patent litigation increase in provision, if you may. Thanks.

Mark Crossley, CEO

Thanks, Max. I appreciate the questions. Maybe I'll take the first two, and then I'll hand over to Ryan to talk a little bit about the provision. I think when it comes to the SUBLOCADE performance, we're really excited about the continued progress there: five quarters in a row of double-digit growth, and it is uniform across the organized health systems. If you think about the dynamics versus the second quarter to third quarter, with the seven million dollars that was in Q2, actually criminal justice was probably less than that in the quarter. Now we don't carve that out, but what we have seen is just continued strategic progress across all of our organized health systems in KPIs and continued momentum moving forward. So, I think it is exciting testament to the strategy that we pivoted our organization behind last year. On the ex-U.S. front, we're in Israel, Australia, and Canada and continue to make good progress in those markets, with regards to increased ACP engagement and increased patient usage. Unfortunately, we have seen in Australia where they're continuing to deal with COVID at a higher level than the rest of the world; they have gone back down into a country-wide lockdown, so that obviously impacts some of them there, but continued great progress on SUBLOCADE and the rest of our business too. When I think about margin over time, listen, we've made a number of what I would call working investments and increasing the strategic elements of the sales force, with the criminal justice system and getting PERSERIS up to a full national sales force. We've added in medical science to help with the new science that Christian and his team have created behind SUBLOCADE and the disease space in general. As we look to move forward, some of those will obviously annualize next year, and I think you'll see margins kind of come back to normal levels in twenty twenty-two. From a business standpoint, we're relatively scaled absent pipeline investments as they move forward. So, we'll guide on that when we get to February, but I think those are a few of the moving pieces with regards to that. So, Ryan, could you help Max with regards to the provision?

Ryan Preblick, CFO

Morning Max. Yes, the change in provision is simply a change to our management's best estimate that's required by accounting standard IAS number thirty-seven, and all really is during the normal case proceedings over the last couple of weeks. The damages experts from both sides had the chance to testify, and coming out of that, we were able to use this new intel to form the basis for this update. It doesn't change our position on our patent defense, and we will continue to fight this in court, as we previously communicated. It is a non-cash event because, if you recall, we have posted the cash collateral sometime last year up to eighty-two million dollars.

Max Herrmann, Analyst

Sorry, just to follow up, I thought the surety bond had been returned or something; just clarify on what the role is?

Ryan Preblick, CFO

Yes. So, I think we bought a year ago or a year and a half ago, we were required to fund the full cap amount of one hundred and eight million dollars, I think it was. During the proceedings, one of the bondholders did return close to twenty million dollars, twenty-five million dollars back to us, but that still leaves us outstanding cash of eighty-two million dollars.

Max Herrmann, Analyst

Okay. Thank you.

Mark Crossley, CEO

Thank you, Max.

Operator, Conference Operator

Thank you, ladies and gentlemen. Once again, as a reminder, your next question today comes from the line of Paul Cuddon of Numis Securities. Please go ahead. Your line is now open.

Paul Cuddon, Analyst

Hello there, guys. Thank you very much. I've just got, I think, three. The first one was just on the environment for SUBOXONE and just the pricing environment; the Q2 to Q3 revenue number for U.S. SUBOXONE seems to decline slightly. So I'm just wondering if that's close net type situation. I suppose it also kind of feeds into the market environment where we hear of increased funding and sort premium adjustment system, kind of focus on medically assisted treatment, and yet variable market growth is a bit slower. And then just also on the Aelis Farma collaboration and funding for the Phase 2b study, how well are they supported to run that study? Thank you.

Mark Crossley, CEO

So, I think Paul, thank you for the questions. I'll start maybe with the market growth things, and then I'll hand it over to Ryan on some of the film dynamics and then we'll ask Christian to comment on the U.S. Pharma. From a market growth standpoint, I think we have seen a bit of slowing of that market growth in twenty twenty-one to kind of mid-to-low single digits. But I think we have to think a little bit bigger picture with regards to the market dynamics. We're still in a tremendously underserved disease space, only about twenty percent penetration of treatment with overdoses that have grown over thirty percent year-over-year and are in excess of seventy thousand per year, which is just an amazing statistic in developed countries such as the United States. Behind that sort of environment, for whatever reason, is stigma or knowledge such a low penetration of treatment. We're seeing unprecedented sort of funding legislation activity to bring this to the forefront. HHS just put out an overdose strategy yesterday, and we talked a little bit earlier with regards to what's happening in New York State and the criminal justice system. So, while this year was a little bit low on market growth, the base year, or the year before, was mid-teens or maybe a little higher, and we think that that kind of average of those as we move forward, thinking to mid-to-high single digits sort of market growth still is where we see the market going. So with that, maybe Ryan talks about the film dynamics.

Ryan Preblick, CFO

Yes, good morning. I'll break your question down into two parts if you don't mind. So, A, you had a question about Q3 versus Q2 of this year. So fundamentally, the shares did remain flat about twenty share points; the decline versus Q2 was just the result of having some trade spend releases in Q2. Q2 is one of those quarters where we really began looking at our balance sheet accruals in the previous year to see how we did versus our assumption. So, there were some trade releases in Q2 that did not recur in Q3, but there were no external factors that would change that. And then part B, your question was the total film dynamic. So, we are certainly pleased to have the share remaining at the twenty percent, and we believe that it will remain there for the balance of the year. Because there has been nothing changed in a marketplace since Q2, there are still three generic players. We haven't promoted the product since twenty eighteen and still believe that COVID has had an impact on the share, as we discussed over the last couple of quarters due to patient continuity concerns and the benefit of Telehealth. One data point in New York State in Q4; they decided to put the film back on their formulary as a preferred agent. That was their decision. So, you may see an uptick in the film in Q4, but, net, the current film situation may or may not roll over in twenty twenty-two. That will come as a result of the states' formal decisions as they begin to ramp up. As usual, we continue to caution that we believe there's no structural reason in the market that the share with the three generic players should not revert over time, and we will certainly begin to give guidance in February at that plan. Thanks.

Paul Cuddon, Analyst

Thank you.

Ryan Preblick, CFO

Christian, could you just talk about the partnership and where we're headed on that asset?

Christian Heidbreder, CSO

Absolutely. We had a very good partnership with Aelis Farma, as you probably know. We established a joint committee on a monthly basis to really discuss the overall strategy with the main focus right now on clinical Phase 2b protocol, which has been finalized. This is a key collaboration with New York Psychiatric Institute with Dr. Principal Investigator. We also nailed down the non-clinical strategy that is all the toxicology studies that need to be performed prior to the start of the Phase 2b, as well as the completion of the Phase 3. Altogether, very nice progress there, protocol finalized and ready to go in the first quarter twenty twenty-two.

Paul Cuddon, Analyst

Okay, thank you. And could just make one quick follow-up on SUBLOCADE to what extent the fentanyl claim has opened up an opportunity for you within sort of AR sort of discharge and whether you can put some investments in there?

Ryan Preblick, CFO

Yes. I think that no claim obviously is quite pertinent, given what is happening with overdoses with over seventy thousand a year and about seventy-five percent of those, the data says, are synthetic opioids, fentanyl, and other types. It is quite pertinent. It is a buprenorphine-based claim, not a SUBLOCADE claim, but we think it is quite pertinent. We believe it's created some discussions within the medical community with regards to broadening the use of buprenorphine and SUBLOCADE, which is a buprenorphine product to address this.

Paul Cuddon, Analyst

Okay. Thank you, guys.

Ryan Preblick, CFO

Thank you, Paul.

Operator, Conference Operator

Thank you. There are no further questions at this time. Back to you, Mark.

Mark Crossley, CEO

Okay. Thank you very much. Well, listen, that concludes our Q3 results. I'd like to thank everyone on the call, both on the call and on the web, for their continued support of Indivior, and we look forward to seeing you at the various conferences and one-to-ones. Thank you very much.

Operator, Conference Operator

That does conclude our webcast for today. Thank you all for participating.