Robust growth across key franchises

Laboratorios Farmacéuticos ROVI 8 November 2019 Update
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Laboratorios Farmacéuticos ROVI

Robust growth across key franchises

Quarterly results

Pharma & biotech

8 November 2019

Price

€24.6

Market cap

€1380m

$1.11/€

Net cash (€m) at 30 September 2019

0.2

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

15.5

14.4

46.4

Rel (local)

10.6

5.9

42.1

52-week high/low

€24.6

€17.0

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

DORIA NDA/MAA filings with the US FDA and the EMA

2020

LISA-1 and European approvals/launches.

2020/21

Analysts

Dr Susie Jana

+44 (0)20 3077 5700

Daniel Wilkinson

+44 (0)20 3077 5734

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

Laboratorios Farmacéuticos ROVI (ROVI) has reported operating revenue of €270.8m (+24% y-o-y) for the first nine months of FY19 (9M19), driven by substantial growth in the prescription-based pharmaceutical business (9M19: €199.2m, +27% y-o-y). The focus on new, proprietary products continues to benefit ROVI, as evidenced by ongoing success in the European roll-out of Becat (enoxaparin biosimilar), sales of which grew threefold y-o-y to €52.9m. Total LMWH franchise sales were reported at €122.6m (9M19, +44%), aided by Hibor sales growth in Spain. Management has guided to mid-single digit growth in operating revenues in 2020. We believe this is slightly cautious given the potential for growth across multiple areas of the business, despite the loss of some mature product sales. We value ROVI at €1.35bn.

Year end

Revenue* (€m)

PBT**
(€m)

EPS**
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

277.4

20.3

0.40

0.12

61.5

0.5

12/18

304.8

19.3

0.39

0.08

63.1

0.3

12/19e

364.6

40.2

0.68

0.17

36.2

0.7

12/20e

391.0

36.3

0.62

0.13

40.0

0.5

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

Strength in multiple franchises

ROVI’s low molecular weight heparin (LMWH) is a key franchise (~45% of operating revenues and Becat sales growth remains a key contributor. Becat continues its launch trajectory (by ROVI in key EU markets and by partners elsewhere) and during 9M19 was launched in Portugal, Poland and Costa Rica. Toll manufacturing sales grew 18% to €45.4m, driven by strong performance in the injectables business (+39% to €27.6m 9M19). We expect further new contracts to be announced in this division given the available capacity in ROVI’s injectable manufacturing plants.

ISM platform – more to come

Successful completion of the Phase III PRISMA-3 trial served as validation of ROVIs recent investment in R&D. Together with data from the BORIS studies, this completes the clinical trial programme for the NDA submission to the FDA in H120 and an MAA to the EU before then (we forecast launch in both markets in 2021). Preliminary Phase I data for Letrozole ISM presented earlier in the year confirmed the technology’s ability to provide a prolonged release version of letrozole.

Valuation: €1.35bn or €24.1/share

We increase our valuation of ROVI to €1.35bn or €24.1/share vs €1.33bn or €23.7/share previously. We make no changes to product forecasts but have nudged down R&D and significantly reduced SG&A for FY19, which has positively affected forecast operating profit for FY19. Our FY20 estimates are unchanged. In addition, we have rolled forward our DCF/rNPV model, and updated for FX and net cash of €0.2m at 30 September. Our valuation is underpinned by Becat’s strong growth potential, while the opportunity for DORIA in the US and EU is key, contributing 17% and 13% to our valuation, respectively.

9M19 financials: Strength in numbers

ROVI’s 9M19 results demonstrated substantial growth in its LMWH franchise and toll manufacturing business, driving a 24% y-o-y operating revenue increase to €270.8m. ROVI has maintained its previously upgraded FY19 revenue growth guidance to the high double digits and provided guidance for FY20 for the first time. Management expects a mid-single digit growth rate in operating revenue. We believe this is on the cautious side given the momentum in the LMWH business and capacity for growth within the toll manufacturing (specifically injectables) business.

9M19 revenue from the LMWH franchise grew 44% y-o-y to €122.6m (9M18: €85.4m), as shown in Exhibit 1. Becat sales were the main driver of franchise growth as ROVI continues to roll out the product across Europe (9M19: €52.9m). Hibor sales in Spain remain strong and increased slightly to €55.1m in 9M19 (+11%). These increases were slightly offset by a 24% reduction in Hibor international sales to €14.7m. Management expects international Bemiparin sales to remain stable in 2019. We believe ongoing investor focus should be on Becat as it launches internationally (ex US) and sales of Hibor in Spain.

Exhibit 1: LMWH franchise quarterly performance

Source: ROVI, Edison Investment Research

9M19 toll manufacturing revenues grew 18% y-o-y to €45.4m (9M18: €38.5m), with the period benefiting from higher manufacturing volumes for some customers. At the interim results, ROVI upgraded its toll manufacturing revenue forecasts for FY19 to a low double-digit rate. We continue to forecast toll manufacturing revenue of €60.6m in FY19 (FY18: €54.6m).

The product portfolio outside the LMWH franchise continues to perform well, with new products replacing mature and off-patent franchises. Notably, in 9M19 sales of Neparvis increased 63% to €15.2m, and Volutsa increased 19% to €9.7m, while ageing franchises Absorcol, Vytorin and Orvatez decreased 17% to €23.2m. In 9M19, ROVI acquired MSD’s dexchlorpheniramine maleate antihistamines (ROVI paid €13.5m to MSD) and Falithrom (ROVI paid €9m to Hexal), which is used for the treatment of thromboembolic diseases, for the German market.

Increasing LMWH raw material prices (+39% above 9M18 prices) and sales of the lower-margin Becat continue to affect gross margin. Gross profit increased by 20% to €157m, while gross margins declined by 170bp to 58.0%. SG&A costs grew 11% to €88.0m, driven mainly by the Europe-wide subsidiary expansion for Becat.

9M19 EBITDA increased to €47.5m (+83%), reflecting a significant increase in revenue and 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 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 €21.7m in assets under property plant and equipment, offset by an increase of €21.9m in debt under financial liabilities for current (€3.6m) and non-current (€18.3m) leases. 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 the lease).

Valuation

We increase our valuation of ROVI to €1.35bn or €24.1/share vs €1.33bn or €23.7/share previously. We make no changes to product forecasts but have nudged down R&D and significantly reduced SG&A for FY19, which has positively affected forecast operating profit for 2019. This has been offset by a 100bp reduction in gross margin forecast to 55.5% from 56.5% in 2019. Our FY20 estimates are unchanged and will be reviewed as we progress through the year. In addition, we have rolled forward our DCF/rNPV model, and updated for FX and net cash of €0.2m at 30 September 2019. Our valuation is underpinned by Becat’s strong growth potential, while the base business remains stable with low single-digit growth rates. The opportunity for DORIA in the US and EU is key, contributing 17% and 13% to our valuation, respectively.

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

Value (€m)

Value per share (€)

DCF of base business

940.2

16.77

rNPV of DORIA

410.7

7.33

Net cash at 30 September 2019

0.2

0.00

Equity valuation

1,351.1

24.10

Source: Edison Investment Research

Exhibit 3: Financial summary

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

 

2016

2017

2018

2019e

2020e

PROFIT & LOSS

 

 

 

 

 

 

Hibor revenue

 

79.7

83.9

91.3

96.8

99.4

Enoxaparin revenue

 

0.0

1.5

30.2

74.1

88.9

Other (Pharma & Manufacturing)

 

185.5

192.1

183.3

193.7

202.6

Total revenues

 

265.2

277.4

304.8

364.6

391.0

Cost of sales

 

(112.0)

(110.2)

(128.6)

(162.3)

(177.9)

Gross profit

 

153.1

167.2

176.2

202.4

213.1

Gross margin %

 

57.8%

60.3%

57.8%

55.5%

54.5%

SG&A (expenses)

 

(101.9)

(108.5)

(113.2)

(120.3)

(136.8)

R&D costs

 

(17.5)

(28.3)

(32.4)

(28.5)

(22.0)

Other income/(expense)

 

5.6

(0.6)

(1.1)

0.0

0.0

EBITDA (reported)

 

39.3

29.9

29.5

53.6

54.2

Depreciation and amortisation

 

(11.0)

(11.5)

(12.0)

(17.8)

(22.7)

Normalised Operating Income

 

30.7

21.2

20.1

40.1

37.2

Reported Operating Income

 

28.3

18.4

17.5

35.7

31.5

Operating Margin %

 

10.7%

6.6%

5.7%

9.8%

8.1%

Finance income/(expense)

 

(0.5)

(0.9)

(0.7)

0.1

(0.9)

Exceptionals and adjustments

 

0.0

0.0

0.0

0.0

0.0

Normalised PBT

 

30.3

20.3

19.3

40.2

36.3

Reported PBT

 

27.9

17.5

16.7

35.8

30.6

Income tax expense (includes exceptionals)

 

(1.8)

(0.3)

1.2

(1.8)

(1.7)

Normalised net income

 

28.5

20.0

20.6

38.4

34.6

Reported net income

 

26.1

17.2

17.9

34.0

28.9

Basic average number of shares, m

 

49.0

50.0

53.0

56.1

56.1

Basic EPS (€)

 

0.53

0.34

0.34

0.61

0.52

Normalised EPS (€)

 

0.58

0.40

0.39

0.68

0.62

Dividend per share (€)

 

0.18

0.12

0.08

0.15

0.13

BALANCE SHEET

 

 

 

 

Property, plant and equipment

 

82.8

89.1

95.8

121.7

124.2

Goodwill

 

0.0

0.0

0.0

0.0

0.0

Intangible assets

 

24.9

27.1

34.7

44.6

38.9

Other non-current assets

 

13.1

14.1

18.2

18.2

18.1

Total non-current assets

 

120.8

130.2

148.7

184.4

181.2

Cash and equivalents

 

41.4

40.7

95.5

49.6

55.2

Inventories

 

67.4

75.5

94.9

147.6

151.1

Trade and other receivables

 

53.8

49.7

60.2

71.9

69.6

Other current assets

 

4.5

2.2

3.5

3.5

3.5

Total current assets

 

167.1

168.2

254.0

272.5

279.4

Non-current loans and borrowings

 

20.8

27.0

16.6

35.5

31.6

Other non-current liabilities

 

7.2

6.4

11.1

10.6

10.0

Total non-current liabilities

 

28.0

33.5

27.7

46.1

41.6

Trade and other payables

 

59.9

52.9

68.2

76.8

78.7

Current loans and borrowings

 

13.0

16.2

17.6

19.4

3.9

Other current liabilities

 

3.6

4.1

1.7

1.7

1.7

Total current liabilities

 

76.4

73.2

87.5

97.9

84.3

Equity attributable to company

 

183.4

191.7

287.5

313.0

334.7

CASH FLOW STATEMENT

 

 

 

 

Profit before tax

 

27.9

17.5

16.7

35.8

30.6

Depreciation and amortisation

 

11.0

11.5

12.0

17.8

22.7

Share based payments

 

0.0

0.0

0.0

0.0

0.0

Other adjustments

 

(2.7)

(1.2)

7.4

(0.1)

0.9

Movements in working capital

 

12.7

(9.8)

(24.4)

(56.4)

0.2

Interest paid/received

 

0.0

0.0

0.0

(0.9)

(1.4)

Income taxes paid

 

(3.4)

0.1

(3.1)

(1.8)

(1.7)

Cash from operations (CFO)

 

45.5

18.0

8.5

(5.5)

51.3

Capex

 

(18.1)

(19.9)

(26.5)

(32.6)

(19.5)

Acquisitions & disposals net

 

0.0

0.0

0.0

0.0

0.0

Other investing activities

 

1.7

0.7

0.1

1.0

0.5

Cash used in investing activities (CFIA)

 

(16.3)

(19.2)

(26.2)

(31.6)

(19.0)

Net proceeds from issue of shares

 

(0.5)

0.5

88.0

0.0

0.0

Movements in debt

 

(9.7)

9.0

(9.2)

(0.3)

(19.4)

Other financing activities

 

(6.9)

(9.0)

(6.3)

(8.5)

(7.2)

Cash from financing activities (CFF)

 

(17.1)

0.5

72.5

(8.8)

(26.6)

Cash and equivalents at beginning of period

 

29.3

41.4

40.7

95.5

49.6

Increase/(decrease) in cash and equivalents

 

12.1

(0.7)

54.8

(45.9)

5.7

Cash and equivalents at end of period

 

41.4

40.7

95.5

49.6

55.2

Net (debt)/cash

 

7.6

(2.5)

61.3

(5.3)

19.8

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

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 research department of Edison 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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General disclaimer and copyright

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 research department of Edison 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.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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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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