Top-line growth, significant margin expansion

Laboratorios Farmacéuticos ROVI 29 July 2020 Update
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Laboratorios Farmacéuticos ROVI

Top-line growth, significant margin expansion

Interim results

Pharma & biotech

29 July 2020

Price

€29.6

Market cap

€1,660m

$1.08/€

Net debt (€m) at 30 June 2020

38.0

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

18.9

10.1

47.3

Rel (local)

17.8

3.8

87.4

52-week high/low

€32.7

€20.3

Business description

Laboratorios Farmacéuticos ROVI is a fully integrated Spanish speciality pharmaceutical company involved in developing, manufacturing and marketing small molecule and speciality biologic drugs, with expertise in low molecular weight heparin. Its pipeline of drugs is focusing on its proprietary ISM technology.

Next events

DORIA US NDA filing

H220

DORIA EU approval and launch

2020/21

Analysts

Dr Susie Jana

+44 (0)20 3077 5700

Dr John Priestner

+44 (0)20 3077 5700

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

Laboratorios Farmacéuticos ROVI reported H120 operating revenue of €191.1m (+8% y-o-y), driven by strong growth in heparins (+23% to €104.0m) and in toll manufacturing (+31% to €34.8m), which offset a decrease in sales of low-margin, mature specialty pharmaceuticals. EBITDA increased by 60% to €42.4m in H120, which reflects operational leverage plus a significant benefit from improved gross margin, and reduction in R&D and SG&A. For FY20, ROVI has maintained guidance of mid-single-digit growth in total operating revenues. Despite the overall strength of heparins and toll manufacturing revenues, the company remains prudent given the COVID-19 related uncertainties. During Q220 ROVI signed a collaboration agreement with US-based biotech Moderna to provide fill-finish manufacturing for Moderna’s COVID-19 vaccine candidate outside of the US, which could provide upside if successful depending on the undisclosed terms of the deal. The US NDA filing for DORIA remains on track for H220. We value ROVI at €1.64bn.

Year end

Revenue*
(€m)

PBT**
(€m)

EPS**
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

304.8

19.2

0.38

0.08

77.9

0.3

12/19

382.5

45.6

0.77

0.18

38.4

0.6

12/20e

394.5

54.3

0.88

0.20

33.6

0.7

12/21e

449.2

60.8

0.98

0.23

30.2

0.8

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

Significant growth in sales and operating profit

The H120 numbers highlight strength in sales across key franchises, and importantly margin expansion as costs reduced significantly. Sales of low molecular weight heparin (LMWH) products (Becat and Hibor) increased by 23% to €104.0m; sales have benefited from increased heparin use for hospitalised COVID-19 patients offset by fewer elective surgical procedures. Becat continues to benefit from the ongoing roll-out in Europe by ROVI and its partners (it is now available in 13 countries); we have increased our Becat forecast to c €100m in FY20.

Moderna deal benefits toll manufacturing

ROVI’s toll manufacturing division has benefited from consolidation and the redirection of its strategy toward high-value products. ROVI will provide vial filling and packaging capacity to support production of Moderna’s COVID-19 vaccine candidate to supply markets outside of the US starting in early 2021. ROVI expects the toll manufacturing business to post high double-digit growth in FY20; we forecast 18% growth in 2020 in this division given better visibility on contracts.

Valuation: €1.64bn or €29.2/share

Our revised valuation is €1.64bn or €29.2/share, vs €1.53bn or €27.2/share previously. We have adjusted our sales forecasts with a small increase in heparins and toll manufacturing offsetting declines in mature areas. The faster growth of higher-margin products and reduced opex for 2020 have positively affected future margin forecasts despite DORIA launch cost assumptions. Our valuation is underpinned by Becat’s strong growth potential, while the opportunity for DORIA in the US and EU is key, contributing 15.9% and 12.9% to our valuation, respectively.

H120 financials

ROVI’s H120 results highlight ongoing momentum in the speciality pharmaceuticals business within a challenging COVID-19 environment. The strong uptake of Becat (+35% to €49.3m) has grown ROVI’s LMWH franchise significantly; it now represents 54% of operating revenue in H120 (H119: 48%). Hibor (bemiparin) international sales grew 88% to €18.3m (H119: €9.7m), offsetting a 6% decline in sales in Spain to €33.3m (H119: €35.5m), which saw a greater impact from the reduction in the number of elective surgical procedures. This significant increase internationally was related to higher transfer prices to some partners (related to the rise in LMWH raw material prices); ROVI now expects international Hibor sales to increase by a high double-digit percentage in FY20. We note that the World Health Organization (WHO) has recommended LMWHs, such as Hibor and Becat, as essential medicines in the treatment of hospitalised COVID-19 patients. This is due to the documented COVID-19 related coagulopathies, which are believed to be a major feature of the underlying pathophysiology of severe COVID-19 that requires treatment. We believe higher sales of ROVI’s overall heparin franchise reflects increased use in COVID-19 patients offset by declines of usage in elective surgical settings (especially Becat in Spain). Exhibit 1 highlights the sales evolution within the heparin franchise. The majority of ROVI’s innovation products treat chronic diseases and therefore sales would be expected to remain stable in the short term. However, due to COVID-19 confinement measures, the company’s salesforce has been unable to promote its products, which may have contributed to the declining sales of mature speciality pharmaceutical products.

Since the start of the COVID-19 pandemic, ROVI has negotiated an additional €45m in credit facilities, placing it in a resolute position to meet any short- to medium-term additional cash needs. As of 30 June 2020, these facilities remain unused. The company also recorded €2.5m in personal and other expenses related to implemented COVID-19 measures.

Exhibit 1: LMWH franchise quarterly performance

Source: Laboratorios Farmacéuticos ROVI accounts, Edison Investment Research

Gross margin rose 1.4% from 57.4% in H119 to 58.8% in H120; the margin was positively affected by: 1) higher toll manufacturing sales’ contribution to improved margin at the group level; 2) an increased Hibor price; and 3) the improvement in Becat margin in Spain offsetting the drop in international Becat margin contribution. This is a significant turnaround as gross margin has been under pressure in recent years, but ROVI has been able to pass through the rising costs of porcine LMWH raw materials due to the backdrop of higher demand for anti-coagulants relating to COVID-19. ROVI expects LMWH raw material prices to stabilise during H220.

Toll manufacturing revenues increased by 31% to €34.8m, driven by a focus on sales of high-value products. EBITDA increased to €42.4m (+60%), reflecting significant operating leverage, improvement in gross margins and a 27% reduction in R&D spend (€10.8m in H120). R&D expenses will fluctuate from quarter to quarter as the reducing requirements for DORIA (lower Phase III costs, but regulatory filing costs and development of a three-monthly injection formulation are ongoing) are offset by increasing investment in Letrozole ISM. We have revised down our forecast €25.8m in R&D expenses for the year; ROVI has now guided to a low double-digit reduction for FY20.

ROVI has provided operating revenue guidance of mid-single-digit growth for 2020; we now forecast 3.1% growth in FY20 from 5.3% previously as increased Becat and toll manufacturing offset older product sales expectations and fewer elective surgical procedures due to the pressures of COVID-19. We have revisited our operating cost assumptions for FY20 and now forecast an operating margin improvement in 2020 to 13.0% (from 11.2% in 2019). We expect the margin to decline slightly in 2021 (to 12.9%), reflecting SG&A investment in international subsidiaries to support the DORIA launch, offset by lower R&D expenses. We expect steady margin growth in 2022 and beyond, mainly due to operational leverage and lower R&D costs offsetting DORIA-related launch costs in 2021.

Valuation

Our revised valuation of ROVI is €1.64bn or €29.2/share, from €1.53bn or €27.2/share previously. Our heparin product forecasts have been revised upwards while forecasts for several mature specialty pharmaceutical products have been brought down for FY20 and we have rolled forward our model and updated for net debt of €38.0m at 30 June 2020. The major source of valuation uplift relates to improved margin assumptions from FY20. We expect SG&A to rise in FY21 reflecting DORIA launch, but have reduced other opex to be in line with lower FY20 expectations. We value DORIA in the US and EU using a standalone NPV calculation (Exhibit 4) and derive value for the rest of the business by using a DCF of our sales and P&L model excluding DORIA (Exhibit 2). Compared to ROVI’s current portfolio of drugs and footprint, the US opportunity for DORIA is large and a key valuation driver, accounting for 15.9% of our valuation (DORIA’s EU opportunity accounts for 12.9%).

Exhibit 2: Three-stage DCF valuation of base business (excludes DORIA cash flows)

€m

Sum of for DCF for forecast period to 2026

393.5

Sum of DCF for growth 2027 to 2031 (transition period)

250.6

Terminal value

557.8

Enterprise value

1,201.9

Net debt at 30 June 2020

38.0

Value of equity of base business

1,163.9

Value per share of base business (€)

20.76

Discount rate

10%

Terminal growth rate

2%

Number of shares outstanding (m)

56.07

Sum of for DCF for forecast period to 2026

Sum of DCF for growth 2027 to 2031 (transition period)

Terminal value

Enterprise value

Net debt at 30 June 2020

Value of equity of base business

Value per share of base business (€)

Discount rate

Terminal growth rate

Number of shares outstanding (m)

€m

393.5

250.6

557.8

1,201.9

38.0

1,163.9

20.76

10%

2%

56.07

Source: Edison Investment Research

Exhibit 3 ROVI sum-of-the-parts valuation

Value (€m)

Value per share (€)

DCF of base business

1,201.9

21.44

rNPV of DORIA

471.1

8.40

Net debt at 30 June 2020

(38.0)

(0.68)

SOTP valuation

1,635.0

29.16

Source: Edison Investment Research

Exhibit 4: DORIA net present value

Indication

Launch

Peak sales ($m)

Value
(€m)

Probability

rNPV
(€m)

rNPV per share (€)

NPV DORIA US

Schizophrenia

2022

236

353.1

75%

260.4

4.64

NPV DORIA Europe

Schizophrenia

2021

176

284.4

75%

210.7

3.76

Source: Edison Investment Research

Exhibit 5: Financial summary

Accounts: IFRS; year-end 31 December; €m

 

2016

2017

2018

2019

2020e

2021e

PROFIT & LOSS

 

 

 

 

 

 

 

Hibor revenue

 

79.7

83.9

91.3

96.8

102.8

101.1

Enoxaparin revenue

 

0.0

1.5

30.2

80.9

99.5

124.3

Other (Pharma & Manufacturing)

 

185.5

192.1

183.3

204.8

192.2

223.8

Total revenues

 

265.2

277.4

304.8

382.5

394.5

449.2

Cost of sales

 

(112.0)

(110.2)

(128.6)

(166.6)

(169.6)

(197.2)

Gross profit

 

153.1

167.2

176.2

215.9

224.9

252.0

Gross margin %

 

57.8%

60.3%

57.8%

56.4%

57.0%

56.1%

SG&A (expenses)

 

(101.9)

(108.5)

(113.2)

(125.5)

(128.2)

(156.8)

R&D costs

 

(17.5)

(28.3)

(32.4)

(29.3)

(25.8)

(17.0)

Other income/(expense)

 

5.6

(0.6)

(1.1)

(0.2)

0.0

0.0

EBITDA (reported)

 

39.3

29.9

29.5

60.9

70.9

78.2

Depreciation and amortisation

 

(11.0)

(11.5)

(12.0)

(18.2)

(19.4)

(20.1)

Normalised Operating Income

 

30.7

21.2

20.0

46.5

55.8

62.5

Reported Operating Income

 

28.3

18.4

17.5

42.6

51.5

58.1

Operating Margin %

 

10.7%

6.6%

5.7%

11.2%

13.0%

12.9%

Finance income/(expense)

 

(0.5)

(0.9)

(0.7)

(0.9)

(1.5)

(1.7)

Exceptionals and adjustments

 

0.0

0.0

0.0

0.0

0.0

0.0

Normalised PBT

 

30.3

20.3

19.2

45.6

54.3

60.8

Reported PBT

 

27.9

17.5

16.7

41.9

50.0

56.4

Income tax expense (includes exceptionals)

 

(1.8)

(0.3)

1.2

(2.6)

(5.0)

(5.9)

Normalised net income

 

28.5

20.0

20.4

43.0

49.4

55.0

Reported net income

 

26.1

17.2

17.9

39.3

45.1

50.6

Basic average number of shares, m

 

49.0

50.0

53.0

56.1

56.1

56.1

Basic EPS (€)

 

0.53

0.34

0.34

0.70

0.80

0.90

Normalised EPS (€)

 

0.58

0.40

0.38

0.77

0.88

0.98

Dividend per share (€)

 

0.18

0.12

0.08

0.18

0.20

0.23

BALANCE SHEET

 

 

 

 

 

 

 

Property, plant and equipment

 

82.8

89.1

95.8

131.6

137.8

143.7

Goodwill

 

0.0

0.0

0.0

0.0

0.0

0.0

Intangible assets

 

24.9

27.1

34.7

45.1

50.7

51.3

Other non-current assets

 

13.1

14.1

18.2

16.6

16.6

16.6

Total non-current assets

 

120.8

130.2

148.7

193.3

205.2

211.7

Cash and equivalents

 

41.4

40.7

95.5

67.4

12.6

13.4

Inventories

 

67.4

75.5

94.9

158.8

218.4

243.1

Trade and other receivables

 

53.8

49.7

60.2

81.5

86.5

92.3

Other current assets

 

4.5

2.2

3.5

10.1

10.1

10.1

Total current assets

 

167.1

168.2

254.0

317.9

327.6

358.9

Non-current loans and borrowings

 

20.8

27.0

16.6

72.1

68.2

66.5

Other non-current liabilities

 

7.2

6.4

11.1

4.2

3.7

3.2

Total non-current liabilities

 

28.0

33.5

27.7

82.1

77.7

75.5

Trade and other payables

 

59.9

52.9

68.2

91.9

92.9

97.3

Current loans and borrowings

 

13.0

16.2

17.6

12.7

3.9

1.7

Other current liabilities

 

3.6

4.1

1.7

2.1

2.1

2.1

Total current liabilities

 

76.4

73.2

87.5

106.7

98.9

101.0

Equity attributable to company

 

183.4

191.7

287.5

322.4

356.2

394.1

CASH FLOW STATEMENT

 

 

 

 

 

 

 

Profit before tax

 

27.9

17.5

16.7

41.9

50.0

56.4

Depreciation and amortisation

 

11.0

11.5

12.0

18.2

19.4

20.1

Share based payments

 

0.0

0.0

0.0

0.0

0.0

0.0

Other adjustments

 

(2.7)

(1.2)

7.4

(0.4)

1.5

1.7

Movements in working capital

 

12.7

(9.8)

(24.4)

(63.7)

(64.0)

(26.8)

Interest paid / received

 

0.0

0.0

0.0

(0.1)

(2.1)

(1.8)

Income taxes paid

 

(3.4)

0.1

(3.1)

(8.1)

(5.0)

(5.9)

Cash from operations (CFO)

 

45.5

18.0

8.5

(9.0)

(0.3)

43.7

Capex

 

(18.1)

(19.9)

(26.5)

(40.5)

(31.2)

(26.6)

Acquisitions & disposals net

 

0.0

0.0

0.0

0.0

0.0

0.0

Other investing activities

 

1.7

0.7

0.1

0.1

0.7

0.1

Cash used in investing activities (CFIA)

 

(16.3)

(19.2)

(26.2)

(40.5)

(30.6)

(26.4)

Net proceeds from issue of shares

 

(0.5)

0.5

88.0

0.2

0.0

0.0

Movements in debt

 

(9.7)

9.0

(9.2)

25.8

(12.7)

(3.9)

Other financing activities

 

(6.9)

(9.0)

(6.3)

(4.5)

(11.3)

(12.6)

Cash from financing activities (CFF)

 

(17.1)

0.5

72.5

21.4

(24.0)

(16.5)

Cash and equivalents at beginning of period

 

29.3

41.4

40.7

95.5

67.4

12.6

Increase/(decrease) in cash and equivalents

 

12.1

(0.7)

54.8

(28.1)

(54.8)

0.8

Cash and equivalents at end of period

 

41.4

40.7

95.5

67.4

12.6

13.4

Net (debt) cash

 

7.6

(2.5)

61.3

(17.4)

(59.5)

(54.8)

Source: Laboratorios Farmacéuticos ROVI accounts, Edison Investment Research


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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 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.

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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.

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

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.

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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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