Becat roll-out benefits top-line growth

Laboratorios Farmacéuticos ROVI 10 May 2019 Update
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Laboratorios Farmacéuticos ROVI

Becat roll-out benefits top-line growth

Q119 results

Pharma & biotech

10 May 2019

Price

€18.00

Market cap

€1,010m

$1.12/€

Net cash (€m) at 31 March 2019

22.0

Shares in issue

56.1m

Free float

32.1%

Code

ROVI

Primary exchange

MADRID

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.7)

(3.0)

5.9

Rel (local)

0.6

(5.5)

19.0

52-week high/low

€19.40

€14.80

Business description

Laboratorios Farmacéuticos ROVI is a fully integrated Spanish speciality pharmaceutical company involved in developing, in-licensing, manufacturing and marketing small molecule and speciality biologic drugs, with particular expertise in low molecular weight heparin.

Next events

PRISMA-3 DORIA data

Q219

DORIA US NDA filing

H219

Enoxaparin biosimilar launch in select European countries

Ongoing

Analysts

Dr Susie Jana

+44 (0)20 3077 5700

Dr Daniel Wilkinson

+44 (0)20 3077 5734

Dr Sean Conroy

+44 (0)20 3681 2534

Laboratorios Farmacéuticos ROVI is a research client of Edison Investment Research Limited

Laboratorios Farmacéuticos ROVI (ROVI) reported Q119 operating revenue of €82.2m (+8% y-o-y), driven by strong growth in the speciality pharmaceutical business (+12%). Sales of its low molecular weight heparin (LMWH) franchise grew 34% to €37.6m, driven by the continued uptake of Becat (enoxaparin biosimilar) (+398% to €16.5m) and growth in domestic Hibor (bemiparin) sales (+4% to €17.6m). International Hibor sales struggled (-50% to €3.5m), but management believes this was a one-off stocking effect, and expects that full year sales should stabilise. Operating revenue guidance for 2019 has been raised to low double-digit growth. The next milestone will be finalised clinical data from the Phase III study of DORIA, ROVI’s long-acting formulation of risperidone for schizophrenia, which met its primary efficacy endpoint in March 2019. We value ROVI at €1.17bn or €20.9 per share.

Year end

Revenue* (€m)

PBT**
(€m)

EPS**
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

277.4

20.3

0.40

0.12

45.0

0.7

12/18

304.8

19.3

0.39

0.08

46.2

0.4

12/19e

341.0

19.7

0.34

0.06

52.9

0.3

12/20e

370.4

34.7

0.59

0.12

30.5

0.7

Note: *Total revenue including government grants. **PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Becat driving LMWH franchise growth

ROVI’s internally developed biosimilar enoxaparin, Becat, continues to benefit from ongoing roll-out in Europe by ROVI and its partners. We forecast Becat sales of €60.5m for 2019 and increase our total revenue forecasts from 10.0% growth to 11.9% growth, reflecting better expectation of Becat and the rest of the product portfolio. Acquired products should offset declines in the mature portfolio from 2019 onwards. Furthermore, ROVI expects toll manufacturing contracts to aid growth in this division. EBITDA increased to €11.9m (+17%), reflecting a reduction in R&D spend related to the Phase III study for DORIA.

DORIA Phase III top-line positive, full data next up

Phase III data for DORIA (long-acting risperidone injection) are an important near-term inflection point; final data are due in Q219 (the trial has completed). The schizophrenia market is vast and growing steadily. We believe DORIA’s profile will provide ROVI with a 5% share of the long-acting injectable (LAI) market and drive peak sales of US$412m (US and Europe) in 2027. DORIA is a high gross margin asset (85–95%) and will be the critical long-term driver of operating margins.

Valuation: €1.17bn or €20.9 per share

Our revised valuation of ROVI is €1.17bn or €20.9 per share (from €1.23bn or €21.9 per share). We have rolled our model forward and updated for net cash of €22m at 31 March 2019, which was affected by implementation of IFRS 16 and the near-term heparin-related gross margin erosion. Our valuation is underpinned by the sales potential of Becat and DORIA (assuming US and EU launch in 2021), with the base business remaining stable, with low single-digit growth rates. A stable dividend with a three-year average 35% payout ratio also adds value.

Q119 financials

ROVI’s Q119 highlights ongoing momentum in the speciality pharmaceuticals business. While management believes that the decline in international Hibor sales is a one-off effect for Q119 and guides that full-year sales should stabilise, we highlight that this could potentially be due to erosion as Becat launches across Europe (by ROVI in key EU markets and by partners elsewhere). The strong uptake of Becat has grown ROVI’s LMWH franchise significantly, which now represents 46% of the operating revenue in Q119 (Q118: 37%). An 80bp reduction to gross margin in Q119 (57.0% vs 57.8%) was a consequence of the increasing contribution from the LMWH franchise, rising costs of heparin raw materials (+30%) due to increased demand as competitors build inventories prior to launch, and the ongoing roll-out of Becat. We have adjusted our forecast gross margins for 2019 and 2020 to 54.5% (from 57.5% previously) to reflect this shifting dynamic, but forecast recovery in subsequent years as high gross margin asset DORIA reaches the market in the US and EU.

Exhibit 1: LMWH franchise quarterly performance

Source: Laboratorios Farmacéuticos ROVI accounts, Edison Investment Research

Toll manufacturing revenues declined by 11% to €10.7m, driven by declines in oral form drug manufacturing. However, the injectables business grew 22% to €6.1m. ROVI has capacity in this division and expects new contracts to drive mid-single digit growth overall in its toll manufacturing business. EBITDA increased to €11.9m (+17%), reflecting in part a reduction in R&D spend related to DORIA as the Phase III clinical trial costs start to reduce. R&D expenses will fluctuate as the reducing requirements for DORIA are offset by increasing investment in Letrozole ISM.

ROVI’s reported financial statements have been affected by changes in IFRS 16 accounting rules, which came into effect on 1 January 2019 and required operating leases to be recognised on the balance sheet as a financial liability. The primary impact of this was recognition of €21.0m in assets under property plant and equipment, offset by an increase of €21.0m in debt under financial liabilities for current (€2.1m) and non-current (€18.9m) leases, which has reduced ROVI’s reported net cash to €22.0m at 31 March 2019. Operating lease payments, which originally went through the SG&A line, are now recognised as depreciation (for use of the asset) and financial expense (for discounting of the lease), resulting in a €0.8m uplift in EBITDA for Q119 and aiding the €1.7m total increase in q-o-q EBITDA. For FY19 and FY20, we reduce our EBITDA forecasts as a consequence of the near-term gross margin erosion. We have reflected the changes due to IFRS 16 accounting and the acquisition of new assets into our financial forecasts (Exhibit 3), forecasting end-2019 net cash of €13.7m (vs €43.3m previously).

Valuation

Our revised valuation of ROVI is €1.17bn or €20.9 per share, from €1.23bn or €21.9 per share. We have rolled forward our model, and updated for exchange rates ($1.12/€) and net cash of €22m at 31 March 2019. We have also increased our Becat sales forecasts for 2019. We value DORIA US and EU using a standalone NPV calculation and derive value for the rest of the business using a DCF of our sales and P&L model excluding DORIA. Compared to ROVI’s current portfolio of drugs and footprint, the US opportunity for DORIA is large and a key valuation driver, accounting for 19.2% of our valuation (the EU opportunity for DORIA accounts for 11.2%).

Exhibit 2: ROVI sum-of-the-parts valuation

Value (€m)

Value per share (€)

DCF of base business

813.9

14.5

rNPV of DORIA

356.7

6.4

Valuation

1,170.6

20.9

Source: Edison Investment Research

Exhibit 3: Financial summary

Accounts: IFRS, year-end: December, €m

 

2015

2016

2017

2018

2019e

2020e

PROFIT & LOSS

Hibor revenue

 

75.1

79.7

83.9

91.3

96.8

99.4

Enoxaparin revenue

 

0.0

0.0

1.5

30.2

60.5

78.6

Other (Pharma & Manufacturing)

 

170.9

185.5

192.1

183.3

183.7

192.4

Total revenues

 

246.0

265.2

277.4

304.8

341.0

370.4

Cost of sales

 

(97.1)

(112.0)

(110.2)

(128.6)

(155.1)

(168.5)

Gross profit

 

148.9

153.1

167.2

176.2

185.8

201.9

Gross margin %

 

60.5%

57.8%

60.3%

57.8%

54.5%

54.5%

SG&A (expenses)

 

(101.7)

(101.9)

(108.5)

(113.2)

(122.8)

(129.7)

R&D costs

 

(16.5)

(17.5)

(28.3)

(32.4)

(32.0)

(22.0)

Other income/(expense)

 

1.0

5.6

(0.6)

(1.1)

0.0

0.0

EBITDA (reported)

 

31.8

39.3

29.9

29.5

31.1

50.2

Depreciation and amortisation

 

(10.0)

(11.0)

(11.5)

(12.0)

(15.9)

(20.5)

Normalised Operating Income

 

23.8

30.7

21.2

20.1

19.6

35.4

Reported Operating Income

 

21.8

28.3

18.4

17.5

15.2

29.7

Operating Margin %

 

8.9%

10.7%

6.6%

5.7%

4.4%

8.0%

Finance income/(expense)

 

(0.9)

(0.5)

(0.9)

(0.7)

0.1

(0.7)

Exceptionals and adjustments

 

0.0

0.0

0.0

0.0

0.0

0.0

Normalised PBT

 

22.9

30.3

20.3

19.3

19.7

34.7

Reported PBT

 

20.9

27.9

17.5

16.7

15.3

29.0

Income tax expense (includes exceptionals)

 

(1.1)

(1.8)

(0.3)

1.2

(0.8)

(1.6)

Normalised net income

 

21.8

28.5

20.0

20.6

18.9

33.1

Reported net income

 

19.8

26.1

17.2

17.9

14.5

27.4

Basic average number of shares, m

 

49.5

49.0

50.0

53.0

56.1

56.1

Basic EPS (€)

 

0.40

0.53

0.34

0.34

0.26

0.49

Normalised EPS (€)

 

0.44

0.58

0.40

0.39

0.34

0.59

Dividend per share (€)

 

0.14

0.18

0.12

0.08

0.06

0.12

BALANCE SHEET

 

Property, plant and equipment

 

81.8

82.8

89.1

95.8

123.7

128.8

Goodwill

 

0.0

0.0

0.0

0.0

0.0

0.0

Intangible assets

 

18.9

24.9

27.1

34.7

44.5

38.9

Other non-current assets

 

9.1

13.1

14.1

18.2

18.2

18.1

Total non-current assets

 

109.8

120.8

130.2

148.7

186.4

185.8

Cash and equivalents

 

29.3

41.4

40.7

95.5

68.5

41.4

Inventories

 

63.9

67.4

75.5

94.9

106.3

138.5

Trade and other receivables

 

57.0

53.8

49.7

60.2

60.7

60.9

Other current assets

 

3.9

4.5

2.2

3.5

3.5

3.5

Total current assets

 

154.1

167.1

168.2

254.0

239.0

244.3

Non-current loans and borrowings

 

32.6

20.8

27.0

16.6

35.5

31.6

Other non-current liabilities

 

7.2

7.2

6.4

11.1

10.6

10.0

Total non-current liabilities

 

39.8

28.0

33.5

27.7

46.1

41.6

Trade and other payables

 

45.7

59.9

52.9

68.2

59.9

63.9

Current loans and borrowings

 

10.1

13.0

16.2

17.6

19.4

3.9

Other current liabilities

 

3.3

3.6

4.1

1.7

1.7

1.7

Total current liabilities

 

59.2

76.4

73.2

87.5

81.0

69.5

Equity attributable to company

 

164.8

183.4

191.7

287.5

298.3

318.9

CASH FLOW STATEMENT

 

Profit before tax

 

20.9

27.9

17.5

16.7

15.3

29.0

Depreciation and amortisation

 

10.0

11.0

11.5

12.0

15.9

20.5

Share based payments

 

0.0

0.0

0.0

0.0

0.0

0.0

Other adjustments

 

(1.1)

(2.7)

(1.2)

0.7

(0.1)

0.7

Movements in working capital

 

2.3

12.7

(9.8)

(24.4)

(20.8)

(28.9)

Interest paid/received

 

(0.6)

0.0

0.0

0.0

(0.9)

(1.4)

Income taxes paid

 

(2.0)

(3.4)

0.1

(3.1)

(0.8)

(1.6)

Cash from operations (CFO)

 

29.4

45.5

18.0

8.5

8.6

18.3

Capex

 

(19.9)

(18.1)

(19.9)

(26.5)

(32.7)

(19.9)

Acquisitions & disposals net

 

0.0

0.0

0.0

0.0

0.0

0.0

Other investing activities

 

0.6

1.7

0.7

0.1

1.0

0.7

Cash used in investing activities (CFIA)

 

(19.3)

(16.3)

(19.2)

(26.2)

(31.6)

(19.2)

Net proceeds from issue of shares

 

(5.1)

(0.5)

0.5

88.0

0.0

0.0

Movements in debt

 

5.9

(9.7)

9.0

(9.2)

(0.3)

(19.4)

Other financing activities

 

(8.3)

(6.9)

(9.0)

(6.0)

(3.6)

(6.8)

Cash from financing activities (CFF)

 

(7.6)

(17.1)

0.5

72.5

(4.0)

(26.2)

Cash and equivalents at beginning of period

 

26.7

29.3

41.4

40.7

95.5

68.5

Increase/(decrease) in cash and equivalents

 

2.6

12.1

(0.7)

54.8

(27.0)

(27.1)

Cash and equivalents at end of period

 

29.3

41.4

40.7

95.5

68.5

41.4

Net (debt)/cash

 

(13.5)

7.6

(2.5)

61.3

13.7

5.9

Source: Laboratorios Farmacéuticos ROVI accounts, Edison Investment Research. Note: We have updated our financial model to include the new IFRS 16 accounting rules, which mean operating leases are recognised on the balance sheet as financial liabilities.

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This report has been commissioned by Laboratorios Farmacéuticos ROVI and prepared and issued by Edison, in consideration of a fee payable by Laboratorios Farmacéuticos ROVI. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Laboratorios Farmacéuticos ROVI and prepared and issued by Edison, in consideration of a fee payable by Laboratorios Farmacéuticos ROVI. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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United Kingdom

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United States of America

Sydney +61 (0)2 8249 8342

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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