Vectura Group PLC (OTCPK:VEGPF) Q2 2020 Results Earnings Conference Call September 15, 2020 4:30 PM ET

Company Participants

Will Downie – Chief Executive Officer

Paul Fry – Chief Financial Officer

Conference Call Participants

James Gordon – J.P. Morgan Cazenove

Amy Walker – Peel Hunt

Andrew Whitney – Investec Securities

Nick Nieland – Citigroup

Max Herrmann – Stifel Financial Corp.

Paul Cuddon – Numis Securities Ltd.

Julie Simmonds – Panmure Gordon


Good day, ladies and gentlemen, and welcome to the Vectura’s Interim Results for the Six Months Ended 30th of June 2020. Your speakers for today are Will Downie, CEO, and Paul Fry, CFO.

At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. We will only be taking questions from the phone line today. And any questions submitted through the webcast will be answered after the call.

[Operator Instructions]. I must advise you that this conference is being recorded today. And I would now like to hand over the conference to Mr. Will Downie, CEO. Please go ahead, sir.

Will Downie

Thank you very much. Good morning. And many thanks for joining us for Vectura’s interim earnings update for 2020 on what’s a very sunny day here in London.

Clearly, we’d prefer to do this meeting in person. But of course, with the ongoing COVID situation, like so many things right now, we’re conducting this call virtually. So, we appreciate as always everyone’s continued flexibility.

If we move to the next piece then, let me start with a couple of introductions. I’m joined here in our London office with Paul Fry, our Chief Financial Officer. My name is Will Downie. I joined Vectura’s CEO back in November of last year. And in that time, I’ve had the privilege of working together with our executive leadership team to really help shape and deliver our strategy as we become a leading player in the inhalation segment of the contract development and manufacturing space, or the CDMO market as it’s normally called.

If I move to the next slide, and really just before we start proceedings here today, I should, of course, bring your attention to the standard disclaimer slide, which is included in this presentation for completeness.

So, on page four then, really our objectives for the next 45 minutes are really threefold. Firstly, to take you through the financial performance of the company in the first half of the year and then to provide you with an outlook for 2020. And I’ll ask Paul to take you through that section. Secondly, I’ll then provide you with an update on the progress we’re making on execution of our CDMO strategy as we transform the company. And then, of course, there’ll be ample time at the end to answer any questions that you may have.

So, if we move to page 5 then, let me start by giving you the performance highlights for the first half of the year. From a results perspective, we’re very much on track with where we hope to be at the halfway mark. And I fully expect we’re going to deliver a very positive year for Vectura in 2020.

If you take a look at the P&L in the first six months, we delivered revenue of £89.7 million and EBITDA of £23.1 million. We’ve seen very solid performance for our lead product flutiform, which has grown almost 3% in the first half of the year, primarily driven by the strong end market growth in both Europe and Japan, offset by a decline in the rest of the world. And I’m very pleased to report that we’ve moved the business into a positive territory for both operating profit and earnings per share.

When it comes to the execution of our CDMO strategy, we’ve made very good progress to date. We’ve completed the build out of a fully staffed and very experienced business development team across both the US and Europe. And with this team in place, we’ve rapidly increased the size of our business funnel of opportunities. And from that funnel, closed 12 deals with 12 customers as of today. And I’m going to come on much later in the presentation to take you through the funnel and the deals that we’ve signed within the CDMO business.

And then, finally, to support the growth of that new CDMO business, we’re creating a very robust end-to-end enterprise internally, so that we can execute flawlessly for our new customers, as well as, of course, looking after our base business and the current core development programs with both Hikma and Sandoz in the main.

And then, finally, from a balance sheet perspective, we’ve further strengthened the cash position of the company. We have now a cash position of £82 million, which has increased almost £8 million from the end of last year in December. And then, we’ve returned in the first half of the year £9.2 million to shareholders. And we’re very close to completing the second tranche of our prearranged 10 million buyback program.

If we move then to the next page, it’s almost impossible right now to make any presentation without referring to COVID-19. So, what I thought I’d like to do is give you a quick update on how we’ve managed through the pandemic so far, and give you a sense of how resilient the business has been as we’ve moved through these unprecedented times.

Our primary focus, of course, over the course of the last six months has been, first and foremost, to protect the safety and the wellbeing of our staff. And I have to say, I could not be more proud of the entire team across our whole network within the company – the teamwork, the dedication, and the resilience of our employees has been exceptional. I really can’t thank them enough for their tenacity and their commitment over the course of the last six months.

Our second priority is to make sure that our supply chains have held up. And we’ve had uninterrupted supply of products to our clients and then ultimately to patients over the course of the last six months. And we’ve seen 100% stability of all products within our portfolio. We’ve had no shortages of products, APIs or components, which I think actually is a testament to the strong partnership we have with our suppliers and the excellent efforts of our operational team.

Certainly, we’ve been very focused on maintaining high quality standards at all times. And we’ve put in place very robust hygiene, and we’ve added distancing measures across all of our sites. And that’s allowed us to keep all of our labs and production facilities open throughout the entire crisis.

And last, but certainly not least, we’ve been focused on delivering for our customers to make sure that we can continue to carry out the formulation and development of our products, even though most of those interactions are being conducted in a virtual world.

So, what I’d now like to do is hand you over to Paul and he will take you through the financial performance for the year-to-date and then provide you with an outlook for the year.

Paul Fry

Thanks, Will. And good morning. I’ll move straight to slide 8. As Will has already said, we’ve had a good start to 2020 and we’re on track for a positive year. Top line revenue and EBITDA are slightly down the same period last year, but we expect both to turn positive for the full year as some of the largest second half revenue catalysts come through.

At a high level, product supplies continue to grow with flutiform up nearly 3% on first half 2019 and royalties have been pretty solid this first half, down just over 3%.

Development revenues are as expected down in the first half, with the growth there much more weighted to the second half, which is in contrast to 2019. EBITDA margin has held up well and we’re also able to report a positive earnings per share this half.

Cash generation has also been very positive, with £14.2 billion of free cash flow generated in the first half, allowing us to grow our cash balance to nearly £82 million and after making capital returns of just over £9 million.

Next slide. Before getting into the numbers in more detail, I wanted to briefly touch on how we’re reporting the income statement this year. As a business, we’re moving rapidly away from investing in our own product pipeline and towards a CDMO based model, where our resources are focused on generating fee for service type revenues.

And this has a couple of implications for the way we report the income statement. The first is that in common with other CDMOs, as we begin to book those fees, these fees for service revenues on the top line, then we’ll also book the cost to deliver those revenues into cost of sales.

This is not a change in the way we report and has a relatively small impact in the first half. But I pointed out because it will become increasingly important to CDMO revenues build over time.

And then, the second factor which is a change in the way we report is that we will – as we move away from being a product pipeline, or predominantly R&D focused business, costs that previously were considered as dedicated to R&D are now also supporting CDMO activities. And in particular, here I’m referring to administration or back office type costs, which we’ll now consider a shared cost, if you like, and will report from 2020 onwards under G&A in the income statement.

The flip side of this is that reported R&D will not only comprise costs related to our existing co-development programs, generic Ellipta with HIKMA and VR2081 with Sandoz being the vast majority of those, and to investments in our own proprietary device and technology platforms. Reporting R&D in this way makes us much more consistent with CDMO peers and should make cross comparisons between companies much easier.

As I said, this change to R&D and G&A is a change in reporting approach. So, we restated 2019 on this basis or the comparisons to 2019 you’ll see today on a like-for-like basis.

Also, very important to underline here, which hopefully you can see here in the chart, is that whether we had reported 2020 on the previous basis or on this new basis, the majority of lines on the income statement would not have changed, including most importantly, obviously, revenue and EBITDA, and this change only affects R&D and G&A.

So, on the next slide, you can see the income statement on the new basis I’ve just described. And as I said, all these lines are on a like-for-like basis and the only two that have been restated here are R&D and other expenditure.

As you can see, gross profit is down more than revenue versus last year. And reductions in R&D have helped offset this and maintain our EBITDA margin.

I’ll touch on the good performance of the flutiform margin in a moment, but this was offset by the adverse mix effects of low royalties and milestones, plus growth in the oral development services business, which to date still contributes a negative margin, and some one-off costs both in orals and in Breelib.

Milestone and royalties associated with the approval of VR315 would obviously improve the gross margin performance for the full year.

R&D was down 29% on a like-for-like basis following the discontinuation of investment in our proprietary product pipeline. Other expenses were up as we invested more in our selling and marketing engine, building out the senior team with some share-based payments and some negative FX impacts on the strengthening of the Swiss franc.

Overall, we made an operating profit of nearly £3 million in the first half 2020, resulting in a £0.3 per share earnings.

Next slide. Moving on to the next slide to product supply. Flutiform had a good first half, both in terms of partnered market sales performance and our own product supply revenues. And clearly, COVID has had an impact on buying patterns across the first two quarters of the year, with a high first quarter stock in by patients and pharmacies, followed by lower second quarter.

But across the two quarters combined, the ICS/LABA market, in which flutiform competes, grew well, with volumes up 7%. And to give that some context, volumes in the first half of 2019 grew just under 2%. And as you can see in the table here, both in Europe and Japan, flutiform volumes grew well ahead of the market.

In rest of world, which accounts for about 11% of flutiform in-market sales, we saw a decrease in volumes, which we believe is partially due to some tentative performance in that region. But despite that, flutiform volumes overall grew in line with the market.

And in terms of our product supply sales to partners, this translates into a good first half, with revenues up nearly 3%. I’ll come on to guidance later in the presentation. But given the visibility we have of orders for the rest of the year, we do expect that run rate to be lower in the second half. And this is mainly due to the stocking patterns of our partners this year, including Brexit preparations, stockholding policies and some shipping patterns.

Moving on to the next slide, turning to flutiform gross margin, here you see again a good performance in the first half with margins up 2.1 percentage points to 36.6%. And focused effort on cost management has really helped this performance. Some of that benefit has been one off. And setting that aside, underlying margin is in line with the same period last year of around 35%.

Our guidance on full year remains cautious, given some of the second half dynamics, which include additional Brexit associated costs. So, we’re continuing to guide to an underlying margin in the range of 30% to 32%.

Moving to the next slide into royalties and other marketed revenues, you can see here that this bucket of revenue held up pretty well in the first half, down just over 3%. The GSK Ellipta royalty and flutiform royalties continued to contribute to revenues here, with declines being driven by the old oral portfolio, some of which has been COVID driven, and Ultibro and Seebri beginning to decline as the products mature and the new triple therapies gain more traction.

Important to note that in the second half, we hope to record in this bucket the approval milestone and any royalties associated with VR315 generic Advair approval. And as a reminder, approval of that would earn us $11 million milestone and royalties on net sales in the mid-teens.

Finally, on the next slide, we cover development revenues, which were down in the first half, with the decline mainly due to the impact of the prior-year recognition of the filing milestone for Enerzair. But clearly, these revenues are yet to react to the intense effort that’s gone on during the first half, both to generate new CDMA revenues and to progress the co-development pipeline to achieve a couple of key milestones in the second half. And combined, these should see development revenues deliver overall growth for the year.

Turning now to R&D on the next slide. Here you can see on a like-for-like basis, a significant drop in R&D spend versus the same period last year. And this is not a surprise and reflects in a very tangible way the impact of shifting the business model away from the proprietary product pipeline. The reduction you see here is a direct result of the ceasing of investment in our proprietary product pipeline activity.

And what remains in R&D and will remain in R&D going forward are only two cost elements. The first is the cost associated with our existing co-development agreements, principle generic Ellipta with Hikma and VR2081 with Sandoz, where we continue to materially share the risks and costs of development and where a significant part of the financial return is in future licensing and royalty income.

And then, the second element is the investment we will continue to make on our own proprietary device and formulation technologies. And these are the investments which will ensure we continue to be differentiated and competitive in the inhalation space and continue to maintain and expand our intellectual property estate.

The next slide summarizes the key movements of EBITDA from first half 2019 to first half 2020 where, as you can see, the adverse gross profit movement I described earlier was largely offset by reductions in R&D.

Also worth pointing out there, we had a good conversion from EBITDA to operating cash and a very substantial improvement versus first half 2019. This was helped by working capital movements being more contained in first half 2020, but also fewer timing differences between revenue recognized and cash receipts. And this should be a continuing trend as we move more to fee for service model going forward.

Then on the next slide, we’ve laid out the movement in the cash balance from December 31 through end of June. And over the six months, we generated £14.2 million in free cash flow. Approximately $20 million was from operating cash flow.

We also had a one-off client reimbursement in half one of £8 million related to CapEx investment made on behalf of the client some years ago. CapEx was at a relatively normal level, whereas tax payments have been unusually high as a result of the payment timing difference between 2019 and 2020 of approximately £4 million.

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We also completed just over £9 million of share buyback in the first half across the two tranches of £10 million each. And as at the last trade, we’ve completed fully the first tranche and have approximately £1 million remaining of the second, which we expect to fulfill by the end of the year.

And then finally, on slide 18, I wanted to give you just an update on guidance for the rest of the year. As I said earlier, now we have reasonable visibility on flutiform orders for the remainder of 2020. We suggest the revenue should land in the range of between £92 million and £95 million. On this, we expect to make an underlying margin, excluding one-offs, of between 30% to 32%.

I’ve already mentioned 315 earlier in the presentation and we expect all other royalties and marketing revenues, excluding 305 in half two of 2020 to be broadly in line with the same period last year.

As we’ve said previously, we expect full-year development revenues for existing agreements to be broadly in line with last year when the new CDMO deal revenues will be on top. We expect the revenue effects of these new deals to begin to bleed through into the second half and estimate this impact to be in the range of £3 million to £5 million for 2020.

And then, for R&D, we’ve updated our guidance on to the new basis and would expect it to fall within the range of £23 million to £26 million for the full year.

And then finally, just to note that some potential restructuring has been pushed out this year. So, we expect exceptional cash costs to be minimal in 2020.

And with that, I’ll hand you back to Will to take you through progress on the strategy.

Will Downie

Great. Thank you, Paul. So, what I’d like to do in the remainder of the presentation is to take you through the progress we’re making as we execute on the strategy to become a leading inhalation CDMO.

So, if we go to page 20, I’d really just like to start by reminding everyone of the ambition we’ve got for the company over the course of the next few years, and it’s essentially threefold.

Firstly, to become the market leading company in the inhalation CDMO market space by using the combination of the deep scientific heritage that we have and inhalation expertise in order to diversify our customer base and our earnings profile.

Secondly, it’s to expand our capabilities, technology and innovation. And in doing so, making sure that we can drive a high performing culture at all times.

And then finally, in doing all of that to make sure that we deliver long-term, sustainable results for our shareholders.

If we go to page 21 then, so since I joined the company back in November, this is really what I’ve been focused on, firstly, by making sure that we create a very strong front end of the company. And by that, I mean making sure we’ve got a strong commercial engine of business developers, and at the same time repositioning the Vectura brand in the market. And the entire purpose of all of that is to open up the aperture of the business to make sure that we can work with more customers simultaneously at any one time.

From a scientific perspective, we’re going to continue to focus on innovation, so that we can bring the next generation of technologies and formulation capability to the market for our customers. And we continue to invest in equipment, capacity, and infrastructure to make sure that we can handle our increasing volume of new business.

And then, finally, from an operational point of view, we’ll continue to simplify the group, making sure that our processes are fit for purpose for the new CDMO model, so that we can provide the very, very best service possible for our customers in a very lean and efficient manner.

If I move to slide 22 then, so having worked in the CDMO space for the last decade, I know from experience that one of the key ingredients for success is to make sure that you’ve got a great front end of the business. And so, we’ve been doing exactly that in the last 10 months, recruiting a very experienced business development team. These are individuals who come to the company with a very strong track record of performance, and they really know what good looks like and they know how to drive success in the CDMO space.

And so, to help us to drive that effort, we have brought in a very seasoned commercial leader called Mark Bridgewater, who started with us in March, who spent more than 20 years in the CDMO space. And he’s really helped assemble an excellent team in the field.

So, we’ve now got business developers who cover the East and West Coast of the US, so that they can be close to where the customers are, but also close to where the innovation is taking place in biopharma today. So, in places like San Francisco, San Diego, on the West Coast, all the way from Boston and then down the eastern seaboard of the US.

And then similarly, in Europe, we’ve got a team covering all of the key pharma territories in the European Union and the UK. And I have to say the team has done a very, very nice job so far of building the funnel and driving early deal momentum.

From a marketing perspective, we appointed a new VP of Marketing earlier this year. And he’s really helped us to create a new distinctive brand for the company. And he’s executing a very professional marketing approach that’s helping us to engage with customers in a very different way from the way in which we would have communicated previously.

And then finally, we’ve been investing more in promotion to showcase our scientific expertise and deep domain knowledge in order to drive thought leadership in the inhalation space.

So, if I go on to the next page then. What I’d like now to do is to take you through the early results that we’ve been able to drive as we’ve pivoted to the new model. So, in this page, I’ve used a very simple schematic to actually show how the CDMO business works.

It’s really all about filling the funnel with the right business opportunities, trying to determine who are the right customers to work with and what are the right molecules to work on, so that we can help our clients solve their complex pharmaceutical challenges.

And in Vectura, we’ve got a very unique position of being able to bring together both device technology across multiple platforms, dry powder, inhalers, pressurized metered dose inhalers as well as nebulizers. And we’re combining that with product and formulation drug capability. So, we’re able to work with our customers and design in the device all the way at the early stage of preclinical feasibility studies to then help to take them through the various stages of clinical development.

So, in essence, what we’re trying to do shepherd the products of our customers all the way through from very early preclinical, all the way through to ultimately commercial scale up, so that they can then bring those products successfully to market. And then, in doing all of that, we get paid on a fee for service basis, with the value of the program increasing as the product moves through the clinic towards the market.

So, if we move to slide 24, and I won’t spend much time on this page, but coupled together with our business development efforts, we’ve really been investing in driving our market presence, so that when clients think about an inhalation challenge, we really want them to think about Vectura as being the first company they can and should come to.

I won’t go through all the numbers on this page, but the take home message here is that we’ve been driving a whole range of marketing activities to promote our deep know-how and scientific expertise in the inhalation field. And particularly during lockdown, we’ve doubled down on our digital marketing activities.

If we move to slide 25 then, now we start to get into the early fruits of our labor. And I’ll show you know what we’ve been able to achieve as we’ve grown the business funnel, and really started to diversify our customer base.

So, if I walk you through the charts on this page, what you can see is that we’ve quickly expanded the number of opportunities that we have. If you were to look back to December of last year, we were engaged with around 15 customers. Now we have opportunities with more than 50 clients today.

From a customer perspective, you can see that the lion’s share of those opportunities are with small to medium biotechs, which is not unsurprising. Much of the innovation that’s taking place in the pharmaceuticals today tends to be with small companies, and in some cases, completely virtual organizations.

You can also see that the opportunities we’ve got in the funnel span a whole broad range of patient indications. You might think of Vectura historically as being a classic respiratory company, working on asthma, and COPD. But you can see that we’re now engaged with our clients to potentially help them with a much broader range of patient populations where getting the product into the body through an inhaled route may be the most suitable, safe and effective way of doing just that.

And you can also see that we’ve got a broad range of disease states that we are currently engaged with our clients on, including, of course, as you might expect, COVID where we are hoping that potentially we may be able to help our customers with treatments for coronavirus.

From a technology platform perspective, you can see that we’re seeing very, very strong demand for our nebulizer platform. Second to that are dry powder and inhaler being the next driver of the funnel. You can see less so for pressurized metered dose inhalers, again, which is not surprising. It’s a fairly established technology. And therefore, the number of new molecular opportunities will continue to be less than what we see with our other two platforms.

But the real benefit of coming to Vectura is that we can work across a broad range of different technologies and work with our clients in an agnostic way to ultimately make sure that we select the right device for the right product to hopefully help them to bring their compound to market.

And then finally, on this chart, you can see that we’ve got opportunities all the way from preclinical through to later stage, almost half of our opportunities are in the preclinical phase where those are feasibility studies. And then, about 54% of our opportunities are in Phase I and Phase II development clinical trials.

So, if we go to the next page then, you can see here the number of deals that we’ve signed as we’ve pivoted to the new strategy over the course of the last eight months. So, so far, this year, we’ve signed 12 customer deals. Nine of those are feasibility studies. Two of those are Phase I/Phase II programs. And then, we have a full development program, which has the potential to earn both royalties and licensing milestones downstream.

You can also see that, out of the 12 customer deals that we have to date, many of them have more than one molecule that we’re already working on. So, already, we’re working on 22 molecules, both across biologics large molecule, as well as small molecule, primarily for nebulizers and DPIs.

And then, of the programs that we’ve signed that are the new CDMO programs, again, you can see that we’re walking across a range of indications from our traditional asthma and COPD, to cystic fibrosis, idiopathic pulmonary fibrosis, pulmonary arterial hypertension, postpartum hemorrhage, and COVID-19.

And as Paul said earlier, the signature of these deals will drive between £3 million to £5 million of revenue in the second half of this year, which will, of course, grow in the years to come as more programs come online and the products move through the development pathway.

If we go to page 27 then, what I’d like now to do is give you a bit more color on the deals that we’ve signed to date, so that you can understand some of the nature of what we’ve signed within the new business models so far.

Now, what I should say is that most deals within the CDMO market will be confidential in nature. And that’s for the simple reason that our clients want to keep those deals confidential because often they’re in a very competitive environment. And the last thing they want to do is share details of their product or the partners they may be working with. But in some cases, we will be able to share public information with you. And I’ll explain a little bit more about two of those deals on this page.

The first one is a very exciting program that we announced actually yesterday with Monash University in Australia. And this is a program where we’re going to be helping them to develop oxytocin in a dry powder inhaler to prevent postpartum hemorrhage – in other words, bleeding after having given birth.

Now, this is a condition that, unfortunately, leads to death of tens of thousands of women every single year, particularly in developing countries. And although oxytocin is a standard of care for all women today, the only way to give it is through an injection, which you can imagine in the developing countries is a real challenge because you need to get the injectable through to the patient through refrigerated storage and supply.

So, with a DPI, you don’t need cold storage. The administration is non-invasive. So, you can imagine the potential benefit that this mode of action and delivery could bring for this terrible condition. So, that’s the first public deal.

The second one is with Aerami Therapeutics. This is a deal that we announced back in June of this year. This is a full development, licensing and royalty program for imatinib for pulmonary arterial hypertension. This was actually a former Vectura product that we had within our own portfolio, and we’re now monetizing the value of that program following the change of our strategy and we’ll be working with Aerami to develop that product on our FOX nebulizer platform.

And then, on this page, I’ve highlighted another three confidential deals. Again, just to give you a feel for some of the deals that we’ve signed up to date. The first is a global development program with a US startup company. This is a program and a dry powder inhaler. And we’re at the moment preparing them to go into first-in-human studies.

The second is a program that we’ve just finished a very wide ranging feasibility study on a basket of molecules with a German pharma company. And the client at the moment is deciding which of those molecules they want to move forward into the clinic and into Phase I.

And then, thirdly, is our Phase I program that we have with another US based company, where they want to repurpose a currently marketed product in a dry powder inhaler.

So, I hope this gives you a flavor of the types of early deal activity we’ve had over the course of the first eight months of our strategy.

Now, on the next page, as we build the business up and we grow the CDMO business, what we at the same time need to make sure that we do is that we have our internal processes and resources lined up to support that growth, so that we can deliver it in a sustained way.

So, on this page, and I won’t go into much detail at all, the take home message here is that we’re putting in place streamlined, efficient, and simple end-to-end processes that will support the business all the way from the very first interaction we’d have with a customer all the way through to carrying out the work for them in the lab and in our production facilities.

And we’re also at the same time making sure we’ve got the right capacity in the right place at the right time to make sure that we can catch that new business and execute the business as it comes in.

So, as I come towards the end of the presentation today, I’d make the following concluding remarks. I would say that as we’ve transformed the company into a leading inhalation CDMO specialist, we’re very pleased with our financial performance to date. And we fully expect to deliver a positive set of results for the full fiscal year in 2020.

You’ll see from our financials that our year is second half weighted, especially with the potential milestone that we should receive for VR315 generic Advair before the end of the year. And in addition to this, we’re continuing to see the strengthening of our balance sheet and our cash position in the first half of the year, and that will continue throughout 2020.

We’re very pleased and we’re in full execution mode, I would say, to deliver the new CDMO strategy. And I think we’ve made good progress and the team has done a really good job so far. We’ve now got a very experienced business development team in place both in the States and here in Europe. They have already built a very strong funnel of opportunities, and they’ve been able to sign 12 customer deals to date.

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And all of this is underpinned with a really strong operational plan that I think is going to help us to sustain long-term growth for the business.

So, with that, I will thank you all for your time today. And I’ll now hand you back to the operator for the Q&A session. Thank you.

Question-and-Answer Session


[Operator Instructions]. Your first question is from the line of James Gordon from J.P. Morgan.

James Gordon

One about how flutiform is doing and another about the transition to the CDMO business model. So, on flutiform, so in-market sales grew 9% in the second half last year and decelerated a bit to 5% in H1. So, just interested – I know there’s stocking and there’s movements around that and also a difference between in-market sales and supply sales. But in terms of the second half of this year, is the guidance implying that in-market sales growth to decelerate a bit more? And is that how you’re thinking about sort of longer-term flutiform as maybe like a trending towards the low single-digit growth product? So, where are we going in terms of what flutiform is doing is the first question.

And then, the second question was about the transition to the CDMO business model? So, encouraging progress there and the guidance you’ve given for the second half performance. But can you sketch out a bit more about sort of what does a typical deal look like in terms of how long you get paid for? So, would it be fair to assume that some of these early stage feasibility deals would have quite a high attrition rate? Or might there a time to extrapolate from them and say, if you’re doing £3 million to £5 million in the second half of this year, we’re going to annualize that and then grow it for future years?

And then, just a final thing on the CDMO business model, I noted with the – the deal with imatinib, you actually get a royalty on the product. Is that sort of the exception to the rule or could it be that you actually end up with longer-term economics in some of these products as well, please?

Will Downie

I’ll let Paul take the first question on flutiform, James, and then I’ll come back to the CDMO question.

Paul Fry

As you said, in the first half, if we look at the in-market sales for the partners, actually flutiform had a good performance because it outperformed the market. The first half has been a slightly unusual. And I’m sure you’ve seen that across a number of products. So, that ICS/LABA market in general had a very, very strong first quarter. Obviously, COVID related. And then a weaker second quarter. And then when you take the two together, that actually turned out to be a pretty good first half. Obviously, quite how that evolves in the second half, nobody’s quite sure. So, whether that comes back to a more normal kind of year or whether some of that first quarter actually proved to be an upside for the year overall is very difficult to say right now.

And then, obviously, the translation from in-market sales to product supply is not a simple read across. There’s a timing delay, obviously. We ship product to our partners long before they actually sell it. And also, as you say, there’s some stocking patterns that affect that.

What we did see at the end of last year, and again, in the first quarter this year, really a continuance, was our partners taking some conservative views on stock levels for Brexit, and in general their stock positions I would say, generally, which actually proved probably it was a smart move given what happened around COVID. And then, in particular, in Japan, where they were moving from air freight to sea freight, they needed to put a lot more stock into the channel and that’s taken some time to feed through and bled through into the first quarter as well. So, that’s one of the reasons why you see a strong first half.

Whether then we see in the future, how quickly or what the, if you like, in-market sales direction, how that would translate into product supply, it’s difficult to say. All we can say right now as we look into the end of 2020 is we’ve got obviously the order pattern that we’re getting from our partners for this year. And we’ve tried to give you some sense of how that might turn into revenue this year for product supply.

I’d say next year, we’re not giving you any specific guidance on that. I just think, broadly, flutiform remains an important brand for the partners and continues to be a promotional focus for them. But inevitably, it is becoming a more mature product. Faces more competition. There’s some generics, Symbicort in Japan, there’s some triples now, obviously, which will have an impact. So, I think we won’t expect Flutiform to be quite the growth engine in the future that it has been in the past. And really, that’s where the investment in the CDMO model should take up the slack.

Will Downie

James, then on the second question of – actually, a few points you made within the CDMO question, I would say, in terms of the average deal, they’re really all varied. It very much depends on the molecule, depends on that the challenge of the program itself. But what we’ve seen so far is we’ve signed nine feasibility deals. And then a number of those will go into Phase I.

If you looked at the pharmaceutical average across thousands of molecules, you would get to an average attrition rate. But for us, I think it’s too early and too premature to say what that conversion will be. But as they move through into Phase I and then the rest of clinical development, if they are successful going through Phase II and Phase III, then the value of a deal, obviously, will increase in value as it moves through.

On your second point around £3 million to £5 million and should you just analyze that, we’re not providing guidance just yet for 2021. What I would say, though, is you’ll see a continuation of our activity so far. So, we’ll continue to build a funnel, convert that funnel into deals that will close. Some of the programs we’ll sign will continue to be successful and move through clinical development. Some will, because of the very nature of drug development, will fail for various reasons. And that’s why it’s really important to build a robust funnel because the result is an attrition rate inherent within drug development, within the industry as a whole.

And then, finally, on imatinib, is the royalty unusual? So, this was our own product. So, we’re monetizing what was a Vectura pipeline program. And so, with that, you have a deal, which I would say is, is more fully rounded with the development services, which are more of the fee for service that we’ll see within the CDMO model, as well as milestones. And then, ultimately, there’s a single digit royalty on that as well.

That’s not to say we won’t get royalties for CDMO deals. Every deal is different. Every client is different. And it really does depend on the nature of the program itself.

But I would say the lion’s share of what we will do in terms of what you can expect is most of those CDMO deals will be straight fee for service. So, we get paid for the work packages that we complete for our clients. And you get paid up to the point where the program either fails or you get paid up to the point where it continues through clinical development.

So, hopefully, that gives you a good feel for the kind of nature of the deals and how it works out.


And your next question comes from the line of Amy Walker from Peel Hunt.

Amy Walker

I’ve got three questions that I’ll ask them individually to make it a bit easier. The first one, on your CDMO contract signed in the first half, Will, I think it mentioned that there were four in H1 and then eight more in the two to three months since, which feels like some impressive acceleration. How should we think about that? Is the run rate of more than 10 new contracts per half year sustainable? Was that exceptional? Do you think you could do better? Just how to think about that? That’s my first question.

Will Downie

It’s a very good question. And if you think about how it works, in the first half of the year, we were recruiting the business development team. We then had Mark Bridgewater, our Chief Commercial Officer, he came on board in March. And so, pre June, we had the four deals and that was driven by the smaller team we had in place. And then, post June, as we’ve built out that whole team, that’s why we have another eight deals signed up.

I would say that it was good progress to date. I’m really pleased with what the team have been able to do. But there’s never a steady state in the CDMO industry. It depends on the molecules, the potential ones that are out there. Sometimes you have a whole flurry of deals come towards you at any one time and then you might go through a quieter period. But I think 12 deals done in an eight month period is pretty good going, especially for a company that has pivoted to CDMO strategy.

But certainly, when you look at building the funnel, closing deals, negotiating the right deal terms, it’s a long cycle business, and so it’s always about making sure that you’re building your deal flow over the course of time, but at the same time making sure that you can match up your capacity internally within the lab, so that you can deliver on the work. And so, there’s a fine balance between making sure that you’re signing the right programs and that you’ve got the right capacity in place in order to deliver them.

But I would say, when you look at the 12 deals in 8 months, that’s probably a pretty good representation of what we’ll see going forward. And those deals, of course, vary in value, and that will be the norm for the business going forward.

Amy Walker

Just a follow-up on that last comment and on James’ question, when you say they vary – I know this is difficult, but is it sort of very high concentration in the ultimate value between two of the 12? Or are they all within, I don’t know, 20% of each other? Just how much concentration, if there’s any way you can quantify that for us, is there?

And aligned with that as well, the £3 million to £5 million that you’ve talked about just for these 12 deals, in a world where – I know this is unlikely, but in a world where all of those progressed to the next clinical stage in aggregate, what would the peak revenue for all of them combined on an annualized basis be, if you could answer that?

Will Downie

I would say, in terms of concentration or otherwise, I kind of think of it more as feasibility studies tend to be quicker studies done over the course of weeks or months. And the quantum value of those is low compared to a Phase I study or a Phase II phase or a Phase III study, and the value increases as you go through clinical development. So, with the 12 deals signed today, 9 of them are feasibility. Two are Phase I. And then, the other one is the full development licensing and royalty agreement. So, to kind of get a view of the difference in the types of deals, but also that the value of those deals is driven by that as well.

I think just on the guidance piece of it, it is a little too early to say and a bit of a blunt instrument to see. Just take the £3 million and £5 million, double it and you get to a run rate and then add something else on top.

The way I look at the business is, you want to make sure you’ve got a very healthy funnel all times and that the funnel is full of the right types of programs where we think the propensity of our success is going to be high because of the nature of our formulation and development capabilities as well as the right device. And so, it’s always about building the right funnel and then converting that funnel into deal flow that you then match up your capacity with.

So, as I say, we’re not giving guidance just yet. Too early to do that, quite honestly. But I think over the course of the years to come, we’ll be able to give you much more granularity on those deals as they come through. Most of them will always be confidential, by the way, because that is the way it always is in the CDMO. But with track record and with more time under the belt, you’ll get, I think, a better appreciation of exactly what that looks like.

Amy Walker

And then, my last question is just about the deployments of your capital going forward. I think you even, Paul, both mentioned that the current buyback is now nearing completion. So, should we expect or bake in more returns to shareholders? Are there opportunities for acquisitions? You’ve, obviously, been very busy signing new contracts, but have you evaluated any targets over the course of 2020 so far? And if that is of interest, can you give us any hints as to what sort of areas specifically you might want to add in?

Paul Fry

I’d say, if you look at – obviously, the cash balance has grown nicely, which is great. And this is probably a time for us to be slightly conservative around cash just given the uncertainties in the world right now. I’d say also, we should reflect on the fact that we’ve handed back probably close on 10% of our market cap in the last 12 months. So, we’re actually looking forward – probably, right now, I don’t think we’ll be rushing to another capital return soon. But obviously, we consider capital allocation all the time. And we will consider special returns, but we’ll consider that alongside can we use that cash to grow the business and we’re very bullish and ambitious about the company and the strategy. And if we can deploy that cash to grow the business, either organically or inorganically, then that will certainly be an important factor for us.

Amy Walker

And can I just push you, Paul, have you been active in assessing M&A opportunities during the course of this year? Or has that not been a focus over the last 6 to 12 months?

Will Downie

I would say, the last lion’s share of our activity has been on setting the company up for success, running the company well. And most of our focus has really been on organic growth.

That said, in the background, of course, we are looking at the market. We are looking at opportunities that are out there. And if the right opportunity was to come along that would fit strategically with the business, then we would consider it. But our main focus is on organic growth and just running the company well right now.


And your next question comes from the line of Andrew Whitney from Investec.

Andrew Whitney

Just a couple on the CDMO business. You said – I believe you said that the business development function was fully staffed, I think, for the time being. I was just thinking in terms of delivery. And I know probably the mix of feasibility versus later stage projects will probably evolve over time. But I’m just thinking from an operational delivery perspective, both in terms of staff and capacity, have you got what you need at the moment to serve the sort of near-term opportunity? Or do you need to either recruit or tweak the business in other ways to make sure you can deliver those, what you expect in terms of contracting over the next few years? So, that was that was just one.

And then, just two, short other one, which was – just in this virtual world, in the sort of virtual COVID world, are people holding off making contracting decisions at the moment because they can’t do DD or something like that? Or would you expect to secure more contracts going forward just as the world loosens up a bit?

Will Downie

Good questions, Andrew. I’d say, firstly, on the delivery front, so we have strengthened our executive team. We brought in an individual called Sharon Johnson earlier this year. And so, her job is, she is EVP of delivery management. And so, she’s working with the rest of our team and product development and operations to make sure we’ve got the right capacity in the right place, so that we can catch that business and digest it.

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I would say, in the short term, we have the capacity. But as we grow the business over the course of the next few years, we’ll need to look at increasing our resource and then to look at equipment, infrastructure, and capacity. But at the moment, we’re okay. It’s more around working on the processes and gleaning those out in a streamlined fashion, so that the team can work on – and this is primarily a product development team, can work on many more projects at any one time, which is different from our previous business model work. Obviously, Vectura was working on just a few programs at any one time.

So, I’d say, today we’re okay, but we’re certainly bringing in more resources to augment the excellent team that we have internally. And I think the combination of those in the short term is good enough. For the long term, we will invest to make sure that we can grow the business.

On the second question. Living in a virtual world hasn’t slowed any activity when it comes to opportunities or deals [indiscernible]. And I think that’s primarily driven by the fact that – and this isn’t Vectura and it’s not pharmaceuticals, per se. I think it’s just everyone working out how do you operate within a virtual world.

And so, our BD guys haven’t been able to sit face to face with clients in the way in which they normally would. But at the same time, business developers actually used to working remotely, they always work from a home office. They’re situated close to where the customers are rather than a head office or a [indiscernible] for that matter. And so, I would say, so far, hasn’t got in the way at all.

It maybe makes the contracting process just a little bit more difficult because you have to maybe go through three conference calls rather than one face to face. But in terms of negotiating deals, getting them done, getting the contracts in place, it really hasn’t gotten in the way of things at all. I think people have just figured out, it’s the new norm, how do we deal with it, and then how do we satisfy our clients. And at the end of the day, our clients are still out there with their molecules. And whether they are able to do things face to face with us, they still want to get their product through clinical development. And for those who are later stage, they want to get them to market.


Your next question comes from the line of Nick Nieland from Citi.

Nick Nieland

I’ve got three please. So, the first one was about COVID-19. And you partly answered it in your presentation, but I just wondered if you could expand a bit and talk about the potential opportunities that could come from COVID-19, given your technologies on dry powder inhalers and biologics and nebulizers, et cetera. I wonder if you could talk about what we could see sort of coming through there over the next couple of months.

The second one was on the GSK litigation. I wonder if you could just remind us of what to expect in your financial statements in terms of royalties and perhaps payments from GSK, if the litigation goes your way and the timing of that.

And then lastly, on VR315, you were speaking with a fair amount of confidence about the approval of that product in the second half. I just wonder if there’s any interaction you’ve had with either Hikma or the FDA that would underline that confidence. Thank you.

Will Downie

Why don’t I take the first and third one, then I’ll hand to Paul for the GSK question? So, on COVID-19, you’re quite right. You can see about 20% of our opportunities today are on COVID opportunities. And they are primarily for nebulizers. Little bit of potential for DPI. It’s too early to say quite honestly which ones will be successful and which ones might make it and also because of the very confidential nature of our clients wanting to keep under wraps the molecules that they have. It’s tough to see which ones will make it, but needless to say, people have come to us because they have the potential for treatment. They know that we are a very, very specialist and experienced inhalation house. And so, if we can help them and we’re able to, through a combination of our device and also our drug development help from them, we will absolutely do it. I know that’s really vague, but it’s because of the confidential nature of – things tend to be like that in the CDMO world. And certainly, with those COVID opportunities, they’re no different.

On 315 then, I would say we’ve been consistent throughout the whole year in saying that we would hope to see approval in the second half of this year. So, we’re not changing our statement around that at all. Of course, we’re in constant dialogue, working together with our partner Hikma and, in turn, Hikma are in constant dialogue with the FDA. And so, we feel good about the package that we – or Hikma feel very good about the package that went into the FDA. And I think it’s just a question of timing. But ultimately, I caveat everything and saying it’s with the FDA. So, ultimately, it’s their decision. But we feel good about the product, feel good about the program, and we’re still saying second half of this year.

Paul, do you want to take the GSK one?

Paul Fry

Sure. We’ve guided and haven’t changed our expectation that we hope to see a decision on the appeal by the end of the first quarter next year and the next step in that process is an oral hearing, which is set for the 5th of October. And then, just to remind you on the background, so the jury trial was back in May of last year. And as a result of that, we were awarded essentially royalties of 3% uncapped. And for the period in question in the court case, which was mid-2016 to the end of 2018, that amounted to just under $90 million. And there’s another – basically, that’s half the period. So, you can imagine that the second half of that period would be in a similar order, perhaps with some growth in the products on top of that.

There’s some supplemental damages in the order of $10 million and interest, which, at the time of the judgment, was around $7 million, but that obviously will accumulate over time.


And your next question comes from the line of Max Herrmann from Stifel.

Max Herrmann

Three, if I may. One, just clarification. One on the CDMO business. In terms of on the CDMO business, in terms of capabilities, obviously, a lot of the CDMO players have commercial manufacturing capabilities without contracting out. I know that for, let’s say, flutiform, you’ve previously contracted out and I believe you’ve done the same for the devices in the AirFluSal product line. Just trying to understand what your view is on the longer-term CDMO commercial capabilities that you may need to put in place.

Secondly, just on – clearly, historically, Vectura and the predecessor companies, Skyepharma, have had IP and we’ve seen that obviously generate value in the business. Obviously, some of that IP is now coming to fruition or to expiry. I wondered how you view the current IP in the Vectura portfolio and how that potentially could be helpful for the CDMO business in terms of – as you’ve seen, sometimes get royalties on deals and that tends to link to IP.

And a final question, just a clarification on revenues. Is the guidance just – it sounds simple, obvious question, but are you guiding to stronger second half in terms of total revenues than in the first half because seeing the sort of Breo royalty with the milestones is a bit of a wash and then you’re talking about lower revenues coming in the second half from the supply chain for flutiform. So, just trying to balance those out.

Will Downie

I’ll take the first couple of questions. Then I’ll hand to Paul for the revenue ones. So, in terms of commercial capability, and by that, I presume you mean commercial manufacturing, so I would say we’re totally focused on our sweet spot, and the sweet spot of Vectura is absolutely all the way from early development, preclinical, through to Phase III and then commercial scale up.

So, we do to an extent. We do commercial scale up. We don’t go through, as you say, all the way through to large scale commercial manufacturing. But that’s still our focus. Right now, heads down focused on organic growth. We don’t want to be all things to all people. We want to expand and open the aperture of the business based on what we’re good at today. And I would say that’s going to remain our focus for the next – in the short to medium term for sure.

On IP, IP is very, very important. Now, whether that’s device IP, whether it’s know-how, whether it’s IP that you can command within the development space as well. So, I would say, from an IP landscape point of view, we will continue to keep that as a priority. It absolutely helps in many ways. And it helps our clients. It helps us often. And so, that will remain at the heart of this company. IP is important. And as you say, sometimes that that results in different types of arrangements with royalties, et cetera. But first and foremost, you need to keep that, as a proprietary technology driven innovative company, IP is important today and will continue to be important for the future.

Paul Fry

Max, we’ve I think given guidance now most of the revenue items. So, hopefully, that will be helpful and you can play that through. But I think it’s fair to say, as we’ve said in the statements, that there’s quite a lot to come in the second half. The CDMO piece that we talked about, some co-development milestones. But, obviously, the big swing factor that will determine quite a lot of the revenue there will be 315 just because of the size, in particular, of the approval milestone.

Max Herrmann

Maybe just a follow-up on the IP side. Are you seeing some of those discussions that you’re having is specifically related to some of the IP that you may have rather than know-how that you clearly have in the respiratory space?

Will Downie

Yeah. I would say, internally, from an IP perspective, we’re always looking for ways to protect ourselves and create value. But in conversations with clients as well, they want to make sure ultimately that they – what’s important to them is coming to the right provider who can really help them with the complex challenges they may have.

Now, there may be of a formulation and development nature, they might be from a device point of view. And so, making sure that we’ve got the right IP in places is helpful for us, but often very helpful for our clients as well.


Your next question comes from the line of Paul Cuddon from Numis.

Paul Cuddon

I’ve just got two. Firstly, what is going into the feasibility assessments? Obviously, from Vectura’s perspective, you want everything to be feasible. And then, on the sort of later stage and I think building on Max’s question really, are your business development team coming back and saying, ‘Hi, Will, really wish we were able to do this as well for our client’ yet, or would that be sort of too early to say? Thank you.

Will Downie

Paul, sorry. Could you just – the second part of the question, just so I’m clear, what was that?

Paul Cuddon

Just generally, for later stage, your Phase III and beyond potential customers, is there anything else that they’re asking from you? Is there anything in your offering you’re missing at the moment?

Will Downie

On the feasibility front, when you’re doing a feasibility, it’s all about trying to establish quickly and early on whether the molecule is one that has chance of success. And so, in the labs, our development team are looking at things like pharmacokinetics and they’re looking at the product from the perspective of which device may be the right one for it to go on to. And you’re doing all of that kind of early, largely in vitro lab work to figure that out. So, they tend to be relatively short studies over the course of weeks or months depending on the program. And there, you’re trying to work out whether the project is one where you think you can move it through into first-in-human trials. So, those nine deals are doing exactly that right now within the ecosystem of Vectura.

In terms of the BD team, they’re very focused. What you don’t want to do is sell anything you don’t have. It’s important that the capability that we have as an organization today is one that the team are out there selling today. Now, that said, of course, there are times when a client will come to you looking for different technology and a different solution. But I think it’s really important that you don’t oversell. I think making sure that you’re providing an offering for clients based on something that you’ve got a track record of having done before, gives you credibility. And it also gives the customer peace of mind that you’re not overextending yourself in terms of what the expectations are that they might have. And so, yeah, there are times when our team will come back to say, this is something we may want to consider for the future, this is something that would be nice to have as part of our armamentarium, but by and large, it’s making sure that the business development team is lined up with our scientific team, so that we’re helping our clients solve their problems with what we have today.

From a strategic perspective as a company, it’s then for us to decide whether we want to augment that in the future, and that can mean new equipment. It might mean a different capability. But, no, I would say that the team is just really, really focused head down on what we do today and trying to do a really, really good job for our clients.


Your next question comes from the line of Julie Simmonds of Panmure Gordon.

Julie Simmonds

Firstly, you talk about many of the projects you’re working on having nebulizer as sort of where you’re looking at now. Is that because those projects are at the feasibility stage, and that’s sort of the best way of testing out whether the compounds work or would you expect them to go through to be nebulizer devices?

Will Downie

So, often that’s what happens. Clients will come to you – and a nebulizer is actually quite a nice and speedy way to figure out whether the properties of the compound are ones that you can put on to a device technology platform.

So, what will happen is some of those programs will continue as a nebulizer. For various reasons, that will be deemed to be the best device. And in some other cases, you can actually go on a dual pathway, you could have a nebulizer and a DPI for the same compound. In some cases, you may decide that a DPI is a better option than a nebulizer itself. And so, there’s that kind of – that decision tree will continue as you go through development. But, yeah, some of them might stay in a nebulizer forever and go through clinical development, some may well flip over to a DPI.

But I think the beauty of Vectura is that we can provide that range of technology. So, in effect, when we’re speaking to clients at that very early stage, we’re being very agnostic. In many ways, you let the molecule decide and the molecule together with our capability will ultimately decide which platform is the best for it to end up in.

Julie Simmonds

Just one more. All the investment you’re doing as far as growth of R&D – or your R&D is concerned, how much of that next year will be going to your development of your technologies and how much of it goes into the pipeline product?

Will Downie

We haven’t provided that split, Julie. I think it’s probably sort of in the roughly equal sort of – would probably not be a bad assumption.


There are no further questions at this time. Please continue.

Will Downie

Very good. So, if there are no further questions, I would thank everyone for your time today.

Just a quick couple of final comments. So, we’re pleased with the progress we’re making on the execution of the CDMO strategy. We really look forward to delivering a positive set of results for 2020 as we diversify our customer base and really start to open up the aperture of our business.

So, I would just finally thank you for your time, and we look forward to updating you in the future. Thank you.


That does conclude our conference for today. Thank you for participating. You may now disconnect.