Transcript conference call

Q
Fagron Q1 2015 Trading Update
Company:
Fagron
Conference Title: Q1 2015 Trading Update
Presenter:
Ger van Jeveren
Date:
Thursday 9th April 2015
Operator:
Good day and welcome to the conference call regarding Fagron’s Q1 2015 Trading
Update. Today’s conference is being recorded. At this time I would like to turn the conference
over to Mr. Van Jeveren and Mr. Peeters. Please go ahead.
Ger van Jeveren:
Thank you operator. Good morning everybody, this is the conference call
regarding the Trading Update of the First Quarter 2015. We have a presentation shown on the
Fagron.com website at investors.fagron.com. This presentation is the basis of this conference
call.
So when you proceed to page 1 of the presentation.
We have an excellent start of the year, a total growth of 29.8% and organic growth of 16.8%,
10.5% at constant exchange rates. We achieved a very strong growth at Fagron Compounding
Services, the segment with the highest margin. We have a continued focus in 2015 on robust
organic growth and an active buy-and-build strategy and the construction of GMP-compliant
compounding facilities. We confirm our outlook for 2015.
Then we proceed to page 2 and there you see a slide where we elaborate on our unique position
in the global compounding environment. What we are now experiencing is that economy of
scale is really paying off. We see in Brazil competitors falling out due to the fact that they cannot
purchase pharmaceutical raw materials due to the volatility of the dollar and the strong pricing
of the dollar. We see that we can profit from a lot of cross-selling activities which really
accelerates our innovation speed globally; and when you look at operations we see that the cost
of quality is really increasing in our environment and that some competitors cannot follow that,
and are approaching us for, let’s say, to buy them eventually.
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When we go to page 3 you see our unique Fagron business model in the compounding
environment. There you see that, as we have said, we are increasing our share in the Fagron
Compounding Services sector from 22.4% in Q1 2014 to Q1 2015, it’s now 37.2% of total
turnover. That’s a very good sign as we stated. We see that a lot of hospitals are ready for
outsourcing and also that competitors want to start discussions with us about takeovers. Fagron
Trademarks is 10.1% of total turnover. We hope that it will grow in the future to 15% and
Fagron Compounding Essentials was 52.7% of total turnover. We think that in the near future
we are going to increase Fagron Compounding Services as a % of total turnover.
Then we proceed to page 4, we elaborate a little bit more on Fagron Compounding Services. We
achieved a strong turnover growth of 116.5% driven also by an organic growth of 41.7%. We see
an increased amount for sterile compounding, and by the way, we received the highest amount
of prescriptions in sterile ever, so that’s underpinning our focus on sterile. We are compliant
with the highest, most stringent quality standards such as FDA, GMP and 503B. It’s the highest
margin segment where we are active in. We are now finalising the new antibiotic facility in the
Netherlands which will be open in June 2015. Our new sterile state-of-the-art facility in Wichita,
US will open in January 2016. Our expectations are already confirmed by the demand because a
lot of the increased volume is coming from Wichita (Kansas), from our existing facility. More
hospitals are ready to outsource compounding, especially in Europe, so the trends seen in the
US years ago, is now coming to Europe where typically a lot of hospital pharmacies are making a
lot of compounding still. Especially sterile, oncolytics and so on. They are more and more ready
to outsource their compounding also due to the higher quality demands. These higher
compounding or regulation demands are leading to higher costs for new building or making a a
hospital pharmacy state-of-the-art. So the Boards of Directors of hospitals have to decide
whether they are going to invest in or divest compounding. In Fagron Compounding Services we
are actively looking into potential acquisition targets. As we stated, also competitors are
approaching us for negotiations, so that’s a good sign as well.
Then we go to Fagron Trademarks on page 5. Turnover growth is 8.8%, or 4.6% growth at CER.
It’s driven by the global launch of Fagron Advanced Derma and especially SyrSpend which is a
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perfect base for medicine suspensions. Growth is also driven also by the Global Fagron R&D
network of 300 pharmacists and 45 researchers. The global presence of the company boosts
cross-selling and innovation. We see more and more cross-selling across Fagron and we are
profiting a lot from that. As a result of that, we have a strong and extensive R&D pipeline and
roadmap. This pipeline and roadmap includes concepts such as psoriasis, alopecia, pain and
obesity. For example big pharma is using the Fagron Trademark SyrSpend for their clinical trials
underpinning the scientific value and also the scientific power of our Trademarks.
Then we proceed to Fagron Compounding Essentials on page 6. We achieved a turnover growth
close to 4.7%, CER 0.2%. We see there an improvement of margin due to the product portfolio
optimisation, centralised purchasing power, product efficiency and allocating to lesser
production locations. We are focused also on Fagron compounding innovations. As we stated
for example in Brazil we see that competitors are not catching up and are not able to purchase
even raw materials in China anymore due to currency effects; and also the cost of quality is
increasing heavily in the compounding environment making us more powerful for our
customers. We are looking also at potential acquisitions in the Fagron Compounding Essentials
segment.
So then we will explain the war chest. Jan is elaborating on that.
Jan Peeters:
Talking about acquisitions, as we mentioned earlier we are now looking actively in some
acquisition targets. After the divestment of Corilus which we did at the end of March, we can
state that now we have a war chest of roughly €100 million on the assumptions that of course
we reach our current outlook of €500 million of sales with an EBITDA margin of 26%, that our
EBITDA free cash flow conversion percentage is 50% and that we pay on average 5.5 times for
these acquisitions which is our historical multiple. Of course it includes the Corilus proceeds
which were realised at the end of March 2015 and after the payment and the earn-outs of past
acquisitions and the payment of the dividend of €1 per share which will normally be approved
by the Annual General Shareholders Meeting in May. So that will then give us a group war chest
for acquisitions mainly in sterile facilities, eventually non-sterile and also to reinforce our market
positions in the Essentials market.
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Ger van Jeveren:
Ok, thank you Jan. That leads to page 8, the final page where we confirm our
outlook. We expect to realise turnover from continuing operations of at least €500 million with
a REBITDA margin from continuing operations of 26%.
Ok, thanks. Operator, you can start Q&A.
Operator:
Thank you. To ask a question please press *1 on your telephone keypad at this time.
Please ensure that the mute function on your telephone is switched off to allow your signal to
reach our equipment. Again that’s *1 to ask a question. We’ll pause for a moment to allow
everyone the opportunity to signal.
We’ll now take our first question from James Vane-Tempest of Jefferies.
James Vane-Tempest: Hi, good morning. Thank you very much for taking my questions. I just have a
few if I can please. Firstly the earn-outs for past acquisitions, you mentioned a maximum of
€45 million in 2015. I’m just wondering if you could remind us what the total earn-outs are for
these transactions? I think from memory it may have been closer to €100 million which may
have been payable…
Jan Peeters:
James, the total earn-out until 2018 is €99 million which is the total, maximum earn-
outs and we normally don’t pay a maximum.
James Vane-Tempest: I beg your pardon, I didn’t quite hear over the line, and that would be payable
by did you say in 2018 in total?
Jan Peeters:
Yes.
James Vane-Tempest: Ok. Thank you. Second question is: Could you just give us an update on the
status of the warning letter you received in the US, your JCB facility and have all your other US
sites been audited?
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Ger van Jeveren:
Typically every 503B organisation in the US is receiving warning letters. That’s
an everyday practice James. It doesn’t affect any business whatsoever. The warning letter is just
to give notice to the market that for example there was a little issue, but normally it’s about
very small issues regarding quality. Although it looks harsh when you talk about a warning letter.
When something is really the matter or your operations are not functioning very well, they
immediately are closing you down. They stop you from working, so a warning letter is like dayto-day operations. That is an SOP that is not very well established and so on, but normally these
are highly standardised GMP FDA approved companies which are really complying to all of the
standards.
James Vane-Tempest: I understand that there are no quality issues and it’s more procedural in nature.
Does that mean your other sites in the US or some of them have received procedural warning
letters if it more of a day-to-day issue faced by the industry?
Ger van Jeveren:
No, but typically now the FDA is more focused on 503B facilities such as JCB
which we have in Wichita, Kansas, but that company is doing very well and we are working with
the FDA to solve that warning letter.
James Vane-Tempest: Excellent. Is that the type of thing you expect that could be solved perhaps by
the end of the year or perhaps longer than that? I’m just wondering when you think that you
might be able to resolve some of those procedural points?
Ger van Jeveren:
I will give you an update about that this week, ok?
James Vane-Tempest: Ok, thank you very much. A couple of quick follow-ups if I can. You mentioned
an improving mix in terms of the overall mix of the Fagron revenues, improving profitability. I
was just wondering as a backdrop of that in terms of manufacturing and overall higher costs
what the overall compliance impact is, how much of an impact that has on profitability despite
the positive developments of the mix of the business?
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Ger van Jeveren: You are correct. We see that we are profiting from a margin mix in the Fagron
company but we also are facing quality costs increasing. However we should underpin that and
cope with higher margins. You know people have to pay for the best quality and that’s how
we’re organised.
Jan Peeters:
James, we see an upwards trend in pricing typically in the 503B facilities which is even
encouraged by the FDA because the FDA also knows that good quality has a price.
James Vane-Tempest: Excellent, thank you. My final question before going back to the queue is the
5.5x EBITDA multiple you’re hoping to spend when you look at your acquisition war chest, I was
just wondering from a post synergy perspective whether that’s likely to be higher than what it
has been in the past just given the overall increase in compliance and costs faced by the
manufacturing side of the business recently?
Ger van Jeveren:
Jan Peeters:
Jan, please.
Yes, this depends case by case depending on how quickly we can integrate. Most of the
time we have immediate synergies in sourcing, so that’s like low hanging fruit; also in
implementing our lean and mean organisation structure which results quite quickly in these type
of synergies, although if we acquire these type of facilities, this is quite new in terms of
acquisitions, so we will also there have to go through a learning curve I think.
James Vane-Tempest: That’s great. Thanks very much for taking my questions.
Operator:
Thank you. We’ll now take our next question from David Vagman of Exane BNP Paribas.
David Vagman: Hi, thank you, good morning. One question about the organic growth: how should we
think about the development of the organic growth this year given that you achieved 10% in Q1
and that you will open this new antibiotics facility in the Netherlands in June 2015? That’s the
first question about organic growth. Second could you give us more explanation about the
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contrasting trends in terms of organic growth between Services on the one hand which is very,
very strong; and on the other hand Essentials. Thank you.
Ger van Jeveren:
First reaction on your last question, what we see also is that we are facing some
acquisition effect regarding organic growth. For example the pharmacies we bought last year
already ordered raw materials from the Fagron Group in Fagron Compounding Essentials and
that’s now being reported as internal sales. It’s intercompany sales which is not being reported
as turnover of course anymore. That’s the first effect and to be honest I didn’t understand your
first question, so maybe you can repeat that?
David Vagman: Yes, sure. It’s in terms of development of the organic growth. Should we expect organic
growth to increase during the year from the 10% that we saw in Q1 given that you will open a
new facility, antibiotic facility in the Netherlands. So basically the 10%, should it be seen as a
floor for this year?
Ger van Jeveren:
Yes, listen, we have said that we are going to achieve 10% organic growth in
2015 and also in 2016 and that’s the outlook we are giving. Maybe you could estimate that
there is an upside, however we want to be cautious. We want to deliver what we promise.
Thank you.
David Vagman: Thank you.
Operator:
Thank you. We will now take our next question from Matthias Maenhaut of ING.
Matthias Maenhaut:
Yes, good morning Jan and Ger. A question regarding the organic growth of
Fagron Compounding Services. Do I understand well that there is a positive effect from the
consolidation in the first quarter of the acquisition of Pharmacy Services and could you maybe
quantify the impact that it had on organic growth given your accountancy method for
acquisitions? That was my first question.
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Jan Peeters:
The acquisition effect is roughly 10 million so indeed after the second quarter there is
no acquisition effect anymore. As of now we don’t have new acquisitions, total growth and
organic growth will be the same.
Matthias Maenhaut:
Yes, but there has been a part that has been quantified under organic growth of
those 10 million if I’m correct?
Jan Peeters:
We took 10 million out. We corrected the historic sales with roughly 10 million in order
to calculate the organic growth. Of course if we achieve growth in an acquisition as we do since
the beginning, we also take that into account as organic growth.
Matthias Maenhaut:
Ok, and what has been the growth rate of the acquisition? Could you elaborate
on that?
Jan Peeters:
No, we don’t disclose that.
Matthias Maenhaut:
Alright. Then maybe a second question, in December there was an update that
you were going to actively collaborate with UCM regarding certification of some of your
compounding facilities. Could you give an update on how that process is proceeding please?
Ger van Jeveren:
Yes, so there are already 225 pharmacies in the US accredited to participate in
the UCM network. We see an increased amount of participants. This gives us also a perfect basis
to have negotiations with PBMs and the government. We are being considered as a very reliable
partner and we are profiting from this position right now.
Matthias Maenhaut:
Ok. Maybe one last one, there was recently a decision by Tricare that they are
going to update or change their rules for reimbursement or their processes for reimbursement
of compounding medication. It’s an initiative that has clearly been driven by a willingness to
contain costs. How do you look at that new process and do you anticipate any negative impact
on your sales?
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Ger van Jeveren:
First of all what is the most important outcome of that Tricare announcement is
that compounding is totally being reimbursed. In the past, messages were stating that big parts
of compounding were no longer reimbursed – that’s no longer the issue, so that’s already the
big win, the big gain for us. We are going to profit from that as well, so we are very happy with
that. Until this very moment we have proven every day that we are able to cope with an everchanging situation in the landscape of reimbursements in healthcare or especially in
compounding. So until this very day especially our US organisation is extremely powerful and
extremely capable of coping with changes in reimbursement schemes in the compounding
sector, so we are very well positioned to overcome every situation in the US right now which is
what we have proven in the last two quarters as well. Again and again this is our daily job for the
last 25 years, we are doing an excellent job, given the power of the Fagron US organisation we
are even more confident that we are going to be successful and that we will prevail.
Matthias Maenhaut:
Operator:
Ok, thank you.
Thank you. As a reminder please press *1 to ask a question. We will now take our next
question from Edward Donohue of One Investments.
Edward Donoghue:
Good morning, a few questions from my side if I may. I know you don’t break
things out on a geographic basis anymore but if you could sort of talk through some of the
trends in the US market versus Europe especially with regard to compounding services, that
would be most grateful to start with. Just to give an idea bearing in mind that you’ve been over
there recently I believe?
Ger van Jeveren:
Can I answer immediately and let’s deal question by question. We see that in
Fagron Compounding Services we see especially in the sterile environment that also competitors
are approaching us to start negotiations regarding acquisitions. We are happy to do so of
course. And as stated in this conference call, we achieved in Q1 the highest amount of
prescriptions in the sterile environment in the US ever; also in Europe by the way but especially
in the US, that underpins our capability to go with an ever-changing environment in the US. So
we are perfectly positioned to build out our sterile division in the US heavily in the coming years.
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Edward Donoghue:
Following on from that, if you look at the US pricing versus your budgeted
pricing expectations, if you just look at that overall architecture, how is that developing year to
date and the outlook with regards to that in the US, bearing in mind the various changes going
on?
Ger van Jeveren:
You know the sterile environment doesn’t face any reimbursement issues
whatsoever. That's only between hospitals and only cash, so that has nothing to do with
reimbursements whatsoever. Only relevant for the non-sterile Fagron Compounding Services.
Until this very moment we don’t see a decline in the amount of prescriptions that are being
compounded in our compounding facilities in the US, so that’s also a confirmation of the quality
of the organisation. We don’t see any negative impact on measurements ever until now.
Edward Donoghue:
Ok. That’s one way of looking at it and I totally agree with you, but that means
that volumes are ok but if you look at the pricing of those volumes, how does that actually look
versus your expectations for this year just to get an idea how things are tracking?
Ger van Jeveren:
No, I understand. So especially in the sterile environment we see opportunities,
good opportunities, strong opportunities to increase pricing because everybody is supporting a
higher quality level in sterile. We don’t want to take any risks meaning we are facing cost of
quality but we are also able to increase margins, so that’s the first one. On the second one, the
non-sterile compounding services, we see the same amount of volumes but we could face a
smaller price increase, but as we stated we are very, very low priced in the market which also
gave us a perfect position to talk with PBMs, government and insurance companies.
Edward Donoghue:
Ok, fine. Then just regarding the M&A pipeline you talk of. When would you
expect a conversion of that, of discussions into a closed deal?
Ger van Jeveren:
In the second and third quarter we are going to give some announcements.
Edward Donoghue:
Ok. Then just with regards to the spends that you indicated, roughly 100 million.
Bearing in mind your dollar denominated debt and the way you have your currency guidance set
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at 1.25, if I then actually rebase all the currencies to where we are now, does that change
anything with regard to your actual capacity to spend?
Jan Peeters:
No, it doesn’t change. Of course if we do an acquisition in the US, we also convert the
local EBITDA in euros, so it doesn’t really have an effect on that.
Edward Donoghue:
Ok, fine. Then the last question would be just on the moves between United
Health and Catamaran. With this sort of consolidation taking place in the industry, do you see
implications for Fagron?
Ger van Jeveren:
So for example, we have an agreement with Catamaran about reimbursement
of compounding. So that’s a contract for two years with an extension possibility of five years.
Regarding the consolidation that is going on, the only thing what we can say to you about that is
that there always is a necessity and a strong need for tailor-made medication globally and that’s
a trend we see everywhere in the world. That is the power of the product which proves our
capability to cope with every change in the landscape in healthcare. People need it.
Edward Donoghue:
That I believe. Do you actually have a relationship with United Health?
Ger van Jeveren:
No, we don’t have a relationship with United Health.
Jan Peeters:
Our pharmacies are accredited.
Edward Donoghue:
Yes, but potentially within their PBM business similar to Catamaran you could
actually extend the client base potentially via this deal?
Ger van Jeveren:
Exactly and of course we’ll go to work on that one as well. You know we see that
in the future in the US we expect that PBMs and insurance companies are going to buy each
other, vice versa or a PBM is buying an insurance company or an insurance company is buying a
PBM and that also gives power to consolidation. As we are the number one and market leader in
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global compounding, we think that we have strong power as well and that we are being
positioned as the perfect partner for such consolidations.
Edward Donoghue:
Excellent gentlemen, thank you very much indeed.
Ger van Jeveren:
Thank you.
Operator:
Thank you. We will now take our next question from Solange Timp of ABN AMRO.
Solange Timp: Yes, good morning. I have a couple of questions, the first one about your outlook of 26%
REBITDA margin because the press release says that Fagron improved the margins of Fagron
Essentials each year and also Fagron Compounding Services is the fastest growing part of the
business and it generates the highest margins, so with this information my question is how can
the guidance for REBITDA margin be lower than last year?
Ger van Jeveren:
It’s a very good question. We are cautious but we strongly believe in 26%. We
have said that for the next three years. When we are feeling the need to change that or to
adjust that you are of course being informed by a press release.
Solange Timp: Alright, thanks. Another question is about the current reimbursement state of
compounded medication in the Netherlands because most of the information is about
reimbursement in the US but more recently this also has been a discussion in the Netherlands
and as far…
Ger van Jeveren:
We are very positively surprised by the enormous emotional and powerful
reaction of Dutch prescribers regarding the reimbursement of compounding, so first of all the
measures are being withdrawn until the end of May. There are now in depth discussions
between prescribers, pharmacy organisations and us regarding these reimbursements and we
are now facing no effect at all. To state again: we are very positively surprised by the power of
this protest against the measures of the insurance companies and we think that we will
overcome the situation as a winner and yes, we don’t see till now an effect and we don’t
estimate it as well. We don’t expect it as well.
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Solange Timp: Can you already say something about what you expect after the end of May?
Ger van Jeveren:
We are still in negotiations with a lot of stakeholders although, as I mentioned
before, I think we will overcome the situation once again. It has been day to day business for the
last 25 years, so you are looking at something new – but for us it’s daily business. So it’s always
about reimbursements, it’s about proving the effect of compounding, that compounding is at
least much cheaper for the society as a whole but maybe sometimes a little bit more expensive
for an insurance company. For example we are making a lot of bladder infusions for patients
who can work because they are getting these bladder infusions. When they are not getting it
they cannot work, but the insurance company says it’s expensive. The employer said it’s making
my employee working, and at the end of the day we are always able to prove that with
compounding we improve the quality of life of the patient and that we are making him more
capable of doing his daily job and that’s really paying off.
Solange Timp: Alright, ok, thanks. I have another question about the press release because it says that
you see increasingly more stringent good manufacturing practice standards and could you tell
me how this is impacting the industry as a whole and if it is changing the competitive landscape?
Ger van Jeveren:
When you look at for example the 503B sterile environment which heavily
increased the requirements and demands of quality, we see that a lot of small pharmacies in the
US always had a bit of 503B activities. They are now forced to quit or just voluntarily stop with
these activities. We see that this sector of our business is coming to us, so pharmacies who have
a 503A and 503B capacity are now more willing to stop or forced to stop with these 503B
activities due to higher quality demands and requirements.
Solange Timp: Ok, so that’s positive for you?
Ger van Jeveren:
Very positive.
Solange Timp: Ok. I also have another question that’s a totally different thing. It’s about the obesity
concept you talked about because for example you say that you are operative in a niche market
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but then I think, big pharma focuses on obesity as well. So how do you differ from these
companies? Second what does it look like? Is it pills or a cure you need to do for a couple of
weeks just to get a better idea of the product?
Ger van Jeveren:
Typically we are very, very good in lifestyle welfare diseases especially in Brazil,
so Brazil is having a huge knowledge base about obesity concepts. These are being solved very
good already in Brazil. We now are starting to cross-sell these concepts, of course a little bit
adjusted to the US environment and the European environment. We are going to introduce this
in November this year and, if we are going to reach the same success as in Brazil, I think we have
a very good end of the year, let’s say that.
Solange Timp: Alright, yes. I believe it’s highly successful but could you just tell me what does it look
like because for a better understanding, is it a pill or is it a shake? I don’t know.
Ger van Jeveren:
You are already interested! That’s good. It’s based on the concept of different
APIs, totally mixed with a scheme and so on and we will inform you in the third quarter about
the introduction of the obesity concept, ok?
Solange Timp: Yes, great. Thanks.
Ger van Jeveren:
Operator:
Thanks.
Thank you. There are no further questions at this time.
Ger van Jeveren:
Ok, thank you all for participating in the conference call of the Fagron Q1
Trading Update 2015 and hope to talk to you soon. Thank you, bye bye.
Jan Peeters:
Thank you.
Operator:
Thank you. That will conclude today’s conference call. Thank you for your participation
ladies and gentlemen, you may now disconnect.
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