Financial outlook
From six-month interim report (Q2) 2020 released on 12 August 2020
OUTLOOK FOR 2020
In light of the results for the first half of 2020 and the ongoing effects of COVID-19, ALK is updating its financial outlook for 2020 and upgrading EBITDA and cash flow forecasts. ALK’s working assumption is that, during H2, the majority of markets will recover so that allergy patients are once again able and willing to visit healthcare professionals. ALK also expects that market conditions in the USA are likely to remain challenging over the short term. As a result:
- Organic revenue growth is currently tracking towards the lower end of the guided range of 8-12% in local currencies due to the US market conditions. However, a stronger than expected recovery in the USA, or elsewhere, cannot be ruled out at this stage. Planned product discontinuation is still reducing growth by 4 p.p.
- Operating profit (EBITDA) is upgraded and now expected to be DKK 300-350 million (previously 200-300).
- Free cash flow is upgraded and now expected to be negative at approximately DKK 200 million (previously negative ~300).
Revenue
ALK still expects growth across its Europe and International sales regions in 2020, with tablets as the key growth driver with growth of 30% or more, so that they are expected to become ALK’s largest single product category for the first time. In North America, the ongoing impact of COVID-19 means that the full-year sales-growth target for this region of 10% is currently viewed as unlikely.
Revenue growth is still expected to be strongest towards the end of the year, in particular, due to assumed timing of market recovery ahead of the high season for AIT treatment initiations and the expected timing of tablet shipments to Torii in Japan.
Gross margin
The reported gross margin for the full year is still expected to be roughly on a par with 2019, benefiting from increased sales – especially from tablets, with higher volumes absorbed by existing capacity – offset by changes in the product mix and increased lower gross-margin shipments of tablets to ALK’s partner for Japan, Torii. The gross margin also reflects significant costs associated with compliance efforts to secure robustness in product supply as well as with the implementation of the product and site strategy.
EBITDA
The upgraded EBITDA now reflects the effects of the coronavirus pandemic whereby capacity costs are expected to be lower than originally planned, particularly in R&D, where costs are currently forecast to be DKK 500-550 million (previously ~600 million).
Cash flow
The improved free cash flow now reflects higher earnings, lower corporate tax payments, and other changes to working capital (phasing of employee tax payments in Denmark). Working capital includes an expected repayment of accrued rebate adjustments related to previous years. CAPEX is still projected at DKK 250-300 million, with investments focused on streamlining the manufacturing footprint and further specialisation at ALK’s production sites.
Other assumptions
The outlook does not include any revenue from acquisitions, new partnerships or in-licensing of adjacent products and services, nor does it include any sizeable payments related to future M&As or in-licensing activities. The outlook is based on current exchange rates, resulting in an immaterial effect on both reported revenue and reported EBITDA.
From three-month interim report (Q1) 2020 released on 6 May 2020
OUTLOOK FOR 2020
In light of the strong first quarter, and despite the ongoing coronavirus pandemic, ALK is maintaining its original financial outlook for 2020. ALK anticipates that during H2, patients will once again become able to visit healthcare professionals without significant limitations and that ALK can begin patient mobilisation.
Assuming this happens, ALK still expects:
- Organic growth of 8-12% in local currencies, corresponding to full-year revenue of DKK 3.50-3.65 billion.
- Operating profit (EBITDA) of DKK 200-300 million.
- Free cash flow negative at DKK ~300 million.
2020 represents the final year of ALK’s three-year transformation and the company will continue investing in support of this programme. As a consequence, EBITDA and cash flow will remain subdued throughout the year.
ALK still expects further broad-based growth from its Europe and International sales regions in 2020, with tablets as the key growth driver with growth of 30% or more, so that they are expected to become ALK’s largest single product category for the first time.
This guidance assumes revenue in Europe will grow in single digits, primarily driven by tablets, while revenue growth from International markets will be fuelled by higher tablet sales in Japan and geographic expansion.
In North America, fluctuating sales of non-allergy-related products, the pause in shipments of PRE-PEN®, and the ongoing coronavirus situation, all mean that the full-year sales-growth target for this region of 10% is challenged, such that ALK now expects sales growth to be lower for the region in 2020.
The coronavirus and virus containment measures are expected to result in subdued growth in Q2, However, tablet sales are still expected to grow in double-digits albeit at a lower level than in Q1. Growth is still expected to be strongest in the second half of the year, in particular, due to the expected timing of shipments to Torii in Japan.
The reported gross margin for the full-year is still expected to be roughly on a par with 2019, benefiting from increased sales – especially from tablets, with higher volumes absorbed by existing capacity – offset by changes in the product mix and increased lower gross-margin shipments of tablets to ALK’s partner for Japan, Torii.
The effects of the coronavirus pandemic mean that capacity costs are expected to be lower than originally planned, particularly in R&D, where costs are currently forecast to be DKK 50-100 million lower than planned.
Free cash flow is still expected to be negative at around DKK 300 million, largely reflecting business investments and increased CAPEX in support of manufacturing upgrades for core legacy products. CAPEX is still projected at DKK 250-300 million with investments focused on streamlining the manufacturing footprint and further specialisation at ALK’s production sites.
Other assumptions
The outlook does not include any revenue from acquisitions, new partnerships or in-licensing of adjacent products and services, nor does it include any sizeable payments related to future M&As or in-licensing activities. The outlook is based on current
exchange rates, resulting in an immaterial effect on both reported revenue and reported EBITDA.
From annual report 2019 released on 5 February 2020
OUTLOOK FOR 2020
ALK expects broad-based growth across all sales regions in 2020, with tablets as the key growth driver and anticipated to become ALK’s largest single product category for the first time. Organic growth is projected at 8-12% despite accelerated portfolio rationalisations, with older, less competitive SCIT and SLIT-drops products being phased out in favour of documented, registered products. Progress is expected to be driven by strong, double-digit growth in tablet sales and growth in sales of continuing SCIT products, while the discontinuations of mainly European legacy products are expected to impact growth negatively by 4 percentage points, implying underlying growth on a like-for-like basis of 12-16%.
The better than expected results in 2018 and 2019, as well as the creation of a more resilient business platform, will allow ALK to continue its investments as planned in order to complete the transformation of the company. Accordingly, 2020 will see a substantial, planned increase in R&D costs, while the timing of investments for the production site strategy will elevate CAPEX for the year. As a result, EBITDA and free cash flow will continue to be subdued in 2020, the final year of ALK’s three-year transformation programme.
Revenue
Total revenue from ALK’s existing business is expected to grow organically by 8-12% in local currencies, which corresponds to full-year revenue of DKK 3.50-3.65 billion. Growth is expected to be strongest in the second half of the year, in particular, due to the expected timing of shipments to Torii in Japan.
The higher end of the revenue range includes:
- accelerated tablet sales growth across all regions, including fast uptake of the ITULAZAX® tree tablet
- continued market share gains due to the market shifting towards evidence-based AIT products
- further growth in sales of other products
- stable pricing and reimbursement conditions in Europe
The lower end of the revenue range includes:
- pressure on pricing and/or reimbursement systems, particularly in southern Europe
- a more pronounced negative effect from the European portfolio pruning
- sales fluctuations related to the timing of product shipments to Japan
- continued fluctuations in sales of legacy, non-tablet products in North America
The mid-point of the range assumes that revenue in Europe will grow in mid-single digits, corresponding to underlying growth of around 10% when disregarding discontinued legacy products. European tablets sales are expected to grow comfortably into double digits. European SCIT sales are projected to be largely unchanged due to the phasing-out of selected products, while SLIT-drops sales will decline due to product discontinuations and market dynamics, although this decline is expected to be partly compensated for by patients transitioning to tablets in France and Germany.
Reported revenue in North America is expected to increase by approximately 10% after the divestment of the US veterinary business at the end of 2019, while organic growth is expected to be slightly higher with growth in both tablet and SCIT sales.
Revenue in International markets is projected to continue to grow in high double digits on increased tablet sales in Japan and geographic expansion.
Growth in global tablet sales is expected to exceed 30%. Combined SCIT/SLIT-drops sales are expected to decline as a result of portfolio rationalisations, although underlying broad-based growth is anticipated for the SCIT portfolio, disregarding discontinued products. Combined sales of other products (including Jext®) are projected at above 2019 levels.
The divestment of the US veterinary business is expected to further impact reported growth negatively by approximately 1 percentage point.
Earnings
Subject to revenue development, earnings before interest, tax, depreciation and amortisation (EBITDA) is projected at DKK 200-300 million.
The reported gross margin is expected to be roughly on a par with 2019, benefiting from increased sales – especially from tablets, with higher volumes absorbed by existing capacity – offset by changes in the product mix and increased lower gross-margin shipments of tablets to ALK’s partner for Japan, Torii. ALK will continue to allocate significant resources to further quality upgrades and the implementation of its portfolio and site strategy, which designates each production facility as a centre of manufacturing excellence. These activities are expected to subdue the gross margin in 2020 but will lead to substantial, long-term improvements.
Capacity costs will be impacted by a significant, planned increase in R&D costs to complete the clinical development of the tablet portfolio and gather further evidence for the tablets’ use in asthma, children and adolescents. R&D expenses are estimated at around DKK 600 million, a substantial increase over 2019. Key initiatives are the European and North American registration trials with ACARIZAX®/ODACTRA® in children and adolescents suffering from allergic rhinitis and allergic asthma, as well as a registration trial for ACARIZAX® in China.
In light of the significant rise in R&D costs, the overall capacity-costs-to-revenue ratio is expected to be largely unchanged even though previous investments allow ALK to increasingly leverage its existing sales and marketing platform to support the roll-out of ITULAZAX® and additional market expansion activities. Administrative expenses are expected to be on a par with 2019.
Free cash flow
Free cash flow is expected to be negative at around DKK 300 million, largely reflecting the accelerated R&D investments and increased CAPEX in support of manufacturing upgrades for core legacy products. CAPEX is projected at DKK 250-300 million with investments focused on streamlining the manufacturing footprint and further specialisation at ALK’s production sites. CAPEX is also affected by the re-phasing of certain investments from 2019 to 2020. By comparison, 2019 cash flow of DKK minus 25 million included an inflow of DKK 53 million from the divestment of certain assets.
Free cash flow is also expected to be negatively affected by changes in working capital, including continued inventory build-up and a one-off repayment of accrued rebates.
Other assumptions
The outlook does not include any revenue from acquisitions, new partnerships or inlicensing of adjacent products and services, nor does it include any sizeable payments related to future M&As or in-licensing activities. The outlook is based on current exchange rates, resulting in an immaterial effect on both reported revenue and reported EBITDA.
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