Vectura Group PLC (OTCPK:VEGPF) Global Agreement with Hikma to Develop Generic Versions of GSK's Ellipta Portfolio November 8, 2018 4:30 AM ET
James Ward-Lilley - CEO
Roger Heerman - EVP, Commercial and Business Development
Martin Oliver - EVP, Generic Programmes
Paul Fry - CFO
Stefan Hamill - Numis
Nick Nieland - Citi
Laerke Engkilde - Laerke Engkilde
Christian Glennie - Stifel
Andrew Whitney - Investec
Samir Devani - Rx Securities
Good morning, ladies and gentlemen and thank you for standing by. Welcome to today’s Vectura Group Plc Update Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 8th of November 2018.
And I’d now like to turn the conference over to your speaker today, James Ward-Lilley, CEO of Vectura Group. Please go ahead.
Thank you and good morning. Welcome to everybody on the call this morning. You would be pleased to hear I’m not going to be saying too much, and I’m going to hand over to a couple of the guys who’ve really been instrumental in getting this deal done along with many others in the group, but I will hand over to Roger Heerman, who’s our Executive Vice President for Commercial and Business Development, to talk through the deal structure and then to Martin Oliver, who leads our overall generic programs, this and the rest of the generic portfolio within the Vectura Group.
Before I do, I’d just make a couple of introductory comments. Obviously, we’re very pleased with announcing this deal today. This is something which we had planned earlier in the year and is firmly in line with refocused investment strategy behind our expanding nebulized portfolio and also the refocus in our generics area. I think it also reflects the building momentum we have in the business. It’s something I talked about regaining momentum at our interim results and also with the positive posted 647 Phase 2 pediatric results, I think shows a demonstrable execution of our strategy and delivery against the commitments we made for the year. Clearly, the partnership agreement with Hikma is important. This was a competitive process. There was interest in this from a number of both respiratory generic players and non-respiratory generic players who clearly see there is an opportunity in this more complex generic space, which is rarefied and where we believe there is less future competitors, given the barriers to entry and high level of interest in that. But also it’s Hikma in itself, obviously confidence in the opportunity, but also implied confidence also in our existing VR315 program.
So, with those introductory comments, I would like to hand over to Roger to talk around the opportunity overall and the deal structure. Roger?
Thank you, James. And for those on the call, I’m on slide three. I appreciate everyone joining this morning.
I’d like to just take a few moments to review kind of the markets for these products and also some of the deal terms of deal we announced this morning. Obviously, we’re very excited about the deal that we’ve announced and I think it’s great for the Company.
So, first, I think at the interim’ as we talked about this that there is a significant commercial opportunity for inhaled generics in both the U.S. and globally. As we announced this morning, it’s a global deal. But just to look at the U.S., there is $23 billion market size for inhaled products in the states, more than 65 million inhalers in key DPI and pMDI classes, and despite this is less than 1% of these products that are currently generic. As I said at the interims and as we continue to believe, we are getting closer and closer to seeing kind of the generics open up -- the inhaled generics open up in the states. As we all know, we’re well positioned with Hikma on the 315 program to take advantage of the nearer term generic opportunities, but the deal today takes us further and sets us up for both the emerging classes that are coming as well as the near-term for products. On the bottom half of the slide, it just shows the expected growth of these new classes, the LABA/LAMAs and the triples.
If we go to slide four, we have a little more granular detail on that. The deal targets five products that have significant global potential, $5.5 billion by 2024. You can see the products there. Three of them are expected to be multibillion-dollar products that we would be looking to genericize, which show great opportunities, and the other two products are of reasonable size.
So, with that, I will turn over to some of the deal terms. As you saw in the press release this morning, we received an upfront payment, I am on slide five here, of $15 million. There is another $5 million payment that we will be receiving once we transfer product to Hikma, which enables them to begin clinical manufacture. And then, there’s another $75 million in development milestones across the products as they develop through the normal development path that you would expect for these types of products. In addition, as I said, these are sizeable opportunities. And as we reach -- as we and Hikma reach cumulative net sales at various triggers, we will receive additional one-time sales milestones.
In terms of the other revenue we receive on the products, we’ve agreed a profit share arrangement of mid-teens -- a mid-teen percentage for each product in the portfolio. And one of the other things I just want to cover is that Vectura will contribute towards the development activities for the portfolio, but we’ve done that in the deferred way where we will contribute towards up to $70 million in development activities, but as a reduction in our profit share mechanism after the launch of the first commercial product, so this is how we structured that piece of it.
With that, I will turn it over to Martin Oliver who is going to go through a little bit about the device, and then we will summarize and take questions.
Thank you, Roger. So, I’ll talk through slide six and talking about now. And here we show the relationship between our history and learning from previous programs, but the core part of this deal is the device technology and its propriety position for Vectura builds on that history and the DNA that we’ve had from the GyroHaler moving through to the LOMI. And it is important that history in helping us the accelerate development of these programs, and actually validates the technology and the ability to execute these complex developments activities in the U.S. And actually on the device itself, it’s important to note that we have had some interactions with the FDA and got that positive feedback on the potential for an AB rated product here.
If I move on to slide seven, we will just talk a little bit about what that means for Vectura, and it is really this deal is helping to establish our position further and leading in this technology field. It is a significant increase in our generic portfolio for the development, and actually provides some significant potential for us in the short, medium and long term revenues, and gives the uplift from Hikma on their confidence about the use of our technology, not just for these products, but for our 315 U.S. program as well.
So, with that, I’ll hand over back to James who will start the Q&A.
Yes. I’d just like to thank Roger and Martin for your quick summary there. As Roger said, I think this is a very interesting portfolio evaluation. We’re very placed with Advair and to take that opportunity, which although in terms of price, we’ve seen continued erosion, but the volume opportunity for the ICS/LABA segment remains very significant throughout 36 million devices and it’s been pretty stable for the last few years; in fact, there’s been some growth. And the key growing product in that class is the once daily Breo. And so, we start to move in. We, as you know, have a program for Advair and Symbicort, Advair with Hikma; with Breo that’s the next emerging ISC/LABA. And then, obviously with this program, we get that plus Anoro and then plus also Trelegy, which is exciting. Those are three biggest opportunities in the space.
Before we get into the Q&A, maybe I’ll just like to introduce, Paul, Paul Fry who’s also with us in the room today. He’s Vectura’s new CFO. So, welcome Paul. Maybe Paul, you want to make a couple of comments just in terms of accounting elements of the deal.
Good morning. Yes. Just a quick couple of comments on a couple of -- the way we recognize some of these deal terms in the books. So, in terms of the upfront, as we said earlier, $15 million on signing so -- and we will receive that in this financial year. We’ll bank that in this financial year; a further $5 million upon transfer to Hikma, which we expect in the next two to three years. But, in total, $20 million we will recognize in the revenue line over the next three years approximately, starting with £5 million this year and roughly the same amount next year in the following year.
Just in terms of the royalty equation, as we said it’s kind of mid teens on a net distributable profit. Just to make that simpler, that sort of works out as a low teen sort of royalty-like on sales. And in terms of our contribution, we will be contributing over the next few years for the development roughly around -- not more than £10 million, if all five products are developed; and less than that if fewer than five products are developed. And so, it essentially washes our face pretty much on the development up and until FDA approval. But following that FDA approval of first product, we will contribute back to Hikma up to $70 million of their development costs, again, if all five products are developed; less, if less -- fewer products are developed. And that will be recruited effectively by a two-thirds reduction in that royalty rate for the first two to three years, up to maximum $70 million.
Thanks, Paul. Very clear. So, I’d like to hand over to the operator.
Stefan Hamill from Numis, your line is now open. Please go ahead.
Good morning. Congratulations. Two questions for me. Firstly, you’ve selected Hikma but you’ve indicated that it was a competitive process. I just wondered whether you could summarize why you selected Hikma, was it case of synergies across generic Advair program, financials or was it both.
Yes. No, as I said, it’s a competitive process. This is a very attractive segment. As I said before, we’ve seen a shift, and I think everyone understands the overall space and some of the less -- the more commoditized space that generics is a tough space, particularly in the states, and the need for a substitutable generic, it doesn’t mean you a very rapid switch. But the respiratory space, we know the FDA had guidelines which are challenging, we know that. And obviously you’re all aware of those challenges, which we, Sandoz and Mylan have all faced and are addressing with Hikma ourselves with VR315. But, that challenge represents the opportunity as well. It’s a huge opportunity, as Roger said, in terms of volume and value. So, there is a high level of interest in getting into the space. And we believe we’ve demonstrated with AirFluSal with the recent Symbicort approval in Europe, we are one of the few players who can get these things approved. We’re very confident in the 315 program.
In addition, we’ve taken this device and had feedback, as Martin said, from the FDA. This could be already an AB-rated substitutable device. And with that that has obviously been an important part of getting this deal done. We started this process about year ago, starting engagement with partners. And as I said respiratory and non-respiratory generic players were interested. Our choice of Hikma came down to, as you said, Stefan, it’s a combination of things. Number one, we needed someone who had credibility and ability and confident -- we were confident who could develop these things and see them though and manufacture them and commercialize them. The second is an ability and commitment to funding potentially five programs; this is significant undertaking. The third is financial class. So, we look to all three of those things from a deal perspective. Clearly, financials were important and weren’t unimportant, but it’s a combination of all of those three elements which came across.
So, Hikma, they have manufacturing capacity. And that manufacturing capacity also we believe, as we said in the press release, enables them to accelerate the development. So, there are some specific synergies which come with that Hikma arrangement as well as of course is the lower frictional costs of established relationships and so on. But, this wasn’t a shoo-in and we didn’t just say we should go to Hikma because we have that relationship by any means.
Thank you. And just one more if I could. You haven’t sort of mentioned specific timelines, but you have emphasized Breo. And I guess, looking at the patent estate there, the last drug patent looks like it goes into 2025. Is that sort of a realistic timeline for that program?
We haven’t been specific, Stefan, because we’re still in early stage of development. These things can take a number of years. This is a complex development. We’re in the process of addressing the FDA’s requirement in a today unprecedented pathway. And so, I don’t think it’s helpful to be specific on timelines. The Orange Book patent, as you indicated, are those date, but we’re not going to specify date, because I think that will be premature. As we move forward with the development, clearly, we will focus on those things and be able to more specific as time goes on.
Thank you. Your next question comes from the line of Nick Nieland from Citi. Please go ahead. Your line is now open.
Hi. Thanks for taking my questions. So, you said you had some feedback from the FDA, suggesting this could be an AB rated substitutable device. Could you perhaps just give a bit more detail about in what context and what you’ve discussed about the device and why that conclusion has been made? Just to follow up on the patent question, I know you don’t want to give timing, but, is the -- do you believe that you would be able to launch after the expiry of the composition of matter patent even though there were formulation and device patents that go 2027 to 2030? And then, the last question is what specifically have you learned from your generic Advair experience that you can apply to these programs with Hikma? Thank you.
Thanks, Nick. I’ll hand over to Martin. Martin, if you want to just talk around the device and maybe the learnings, that would be good. I’ll just talk on the patents briefly.
Yes. So, the interactions with the FDA, I think the FDA over the last year or so, couple of years, have started to be very specific and more maybe customer-orientated to the industry in helping guide the interactions and what they are looking for, for these types of complex products. We’ve been involved in those discussions with the FDA along about partners, and we have a great understanding of what they are looking for. So, in terms of the types of products, what the FDA really wants to see is the ability for patients to use these devices and the generic versions uninstructed. So, the device has to follow the same instructions or use the operating steps because the same is the reference product. And we’ve been able to produce a device deign that we think meets those criteria and have initial discussions with the FDA around that. So, we are confident that we’ve got the buy-in of regulatory authorities at this point.
The one other point I’d just add, if I may, Martin. We are confident that our device can deliver single, dual and triple combinations. So, without going to the details the formulation and the inside of the device, we are confident that this is a multi-dose and multi-product device which can take care of the portfolio. Now, obviously, it was critical for this program and critical for our partners to feel confident now.
And I think just taking that last question about the Advair experience, generic Advair experience, we have learned a lot, I think between ourselves and our and partners, and I think other people in this process are learning about the fine tuning of the regulatory process as well. It’s really important to note that we are only one of three players operating on the generic Advair space, not regulatory space. And there are learnings that have become public, and the FDA are out talking about some of those things. And I think that is also just the basic knowledge of interaction with the FDA on these complex products, which we’re the first people to go through this process with the FDA. The FDA are learning, we are learning, and some of that is unwritten, unguided. And I think that’s put us in the excellent position to help to accelerate the development of the next phase of products for us.
Thanks, Martin. As we’ve said before, Nick, we received a significant number of questions on CMC and the device type, none of which were requiring significant amount of new work to be done largely with documentary. And all of those questions have been responded to. So, the outstanding issue really is still the completion the clinical program, which is up and running and recruiting, so more news to follow on that next year. Suffice it to say, as Martin said, all the documentation requirement and also the clinical trial requirement, there is lot of learning, which we’ve applied. And it’s great that we’re doing that with Hikma, which gives us confidence on 315 but also on the set of programs. And as Martin said, some of that’s in the public domain, a lot of that it’s not in the public domain and is learned, and that gives us I think a very strong competitive position.
Just on the IP side, Nick, you’re quite right, there is a range if IP molecule formulation, device and so on. We’re well aware of the Orange Book. As I said, we’re not guiding to timelines. And it would be inappropriate to do so at this stage. That’s how we should have said. I think the Anoro molecule formulation patent is around 2025 in the Orange Book for -- sorry Breo. But that’s not guidance that we’re giving in terms of timing, it’s too early to do that.
Thank you. Your next comes from the line of Laerke Engkilde from JP Morgan. Please go ahead. Your line is now open.
Good morning. This is Laerke Engkilde on for James Gordon. Thank you for taking my questions. A couple, please. Firstly, how much visibility do you have on what is needed to show equivalence to the Ellipta products? Do you have -- sort of do you need FDA guidance, documents, or are there any important differences to Advair? And secondly, do you plan on targeting geographies where Hikma are not currently focused, like Europe, Asia where they don’t necessarily have as much distribution setup? Thank you.
So, Martin, do you want to talk about the product or the equivalent side? And Roger, maybe you want to talk about territories?
Yes. So, taking the FDA side of things for equivalence and actually it is a good point about global nature of the deal. But, if we just focus on the FDA guidance by equivalence, they have published their thoughts around what is needed to show equivalence, and we have got product-specific guidelines for many products, say, in the U.S., not all this guide that we’ve mentioned today have had guidelines published. But we understand what the FDA wants in this space and are actively involved with talking to the FDA around some of these requirements. So, we do understand that in the U.S. it will still need a clinical study along with PK study and lab data. In Europe, we have much more confidence around the regulatory pattern in general sense and where PK data and lab data should be sufficient to get bioequivalence rating for these products.
Roger, do you want to cover the other territories, so to speak?
Yes. I mean, as we announced, this is a global deal. Hikma were very interested in doing a deal that was globally -- I won’t comment or I think questions of their plans should be asked to them. But, it is a global deal and we obviously understand, as Martin said, the development path for those and certainly can support that as we have experienced with our other generic partnerships.
We are aware that there are some territories where Hikma doesn’t necessarily have the commercial presence and it’s something we want to discuss with them to make sure they exploit that, whether it’s them or somebody else.
Thank you. Your next question comes from the line of Christian Glennie from Stifel. Please go ahead. Your line is now open.
Hi. Thanks. Good morning. Most of my questions have been answered. But, I suppose it’d be helpful to layout a little bit more detail in terms of the steps of the development from here, as you sit today, as you step through obviously lab data, PK data, clinical trials, get a rough sense for the development program and timelines here?
Obviously, as we said, we’ve laid out the steps that are there. One of the most important aspects we talked about the initial milestones that’s coming through is about transferring the technology, our device technology through to the Hikma facility that will make the products. And so, we need to get through that process, establish the technology and then start to work through each of the five products what’s needed in terms getting to laboratory equivalence, then PK and then the clinical study steps. But, as we talked about, of first step is getting back to manufacture facility up and running and ready to make the supplies for us to do the product specific testing. And that’s slightly different from VR315. So, VR315really more of that and then transfer that to the later stage, in this case, we’re transferring that earlier. There are pros and cons to that. In some way it’s quite helpful because it means all of that trial activity and technology is done from the starting point.
And actually that’d be one of the learnings in terms of interactions with FDA on generic Advair and they’ve very publicly talked about how some of the other companies have done a late transfer into manufacturing plants. So, the key here for us is, having that commercial scale capability to make the registration batches and the test products really help facilitate that regulatory phase a bit further on.
Thanks. That’s helpful. And then just to confirm, that transfer and that milestone, that $5 million milestone, would that really relate to Breo as the lead program here, or does it relate to a more broader set of data and technology?
Breo is the priority at this stage, and that’s what we’re clearly wanting crack on with. The priorities are clearly behind the three biggest products. But that’s not necessarily the overall sequence.
Okay. And then, maybe in terms, just opportunities you ask on 315 in terms of timelines of trial data, still on track early next year?
We haven’t been specific on timing at any point during next year. We said, that depends on the rate to recruitment and obviously that being successfully completed. It’s on track; recruitment is taking place. We will see the data next year, resubmit and be in a position; we believe we get data to go in the market in 2020, so no change.
Thank you. Your next question comes from the line of Andrew Whitney from Investec. Please go ahead. Your line is now open.
Hello, James. Thanks for taking my question. Just a quick one. I am just thinking about time line, development timelines, again. How much slack in the timing? Let’s say that you can get comfortable, there may be an opportunity to launch in mid-’20, that’s just for argument sake. How much slack in the development timeline is there? Would you be ready long in advance of that in terms of a fileable package or an approvable package? And the reason why I’m asking that is just to get an understanding, are we likely to hear other businesses targeting the same opportunity and we’ll hear that in the relative near term because actually the timeline to get everything in place is quite tight for a mid-2020 launch? Did you get the question?
Yes. I get the question and I’m still not going to give you the timing at this time. I think that and the pervious one were versions of that same question. But, to try and answer your question specifically, there isn’t a lot of slack. We were keen to get this deal done because it’s an important deal financially. We think it’s an attractive deal, both short and long-term for us, but also it needs to get done. I mean, the work that needs to be done, as Martin just said, in terms of transfer of the technology, the clinical manufacturing, scale-up, industrialization and then bioequivalence studies for a single and dual program, let alone a triple program needs to get going now. As I said, that choice of partner, going back to Stefan’s first question, was important to say both in capacity and financial capability and personnel capability that was important to have, but there is not a lot of slack in there. And obviously, we are targeting to get on the market as quickly as we can, recognizing Orange Book patents and so on and so forth. So, that’s where we are. We know that the flip side of my points on competition, this was a competitive process. We have interest involving, as I said, respiratory generic players, and non-respiratory generic players where we believe we are in the lead here. It’s not to say other people aren’t doing some work and we won’t hear about, that’s just we are not aware of that at this stage.
[Operator Instructions] Your next question now comes from the line of Samir Devani from Rx Securities. Please go ahead. Your line is now open.
I’ve just got one left actually, which is just a clarification of the comment that Paul made. You helpfully mentioned that we should look at it as a low-teen royalty. I guess I’m just trying to understand how you get from a mid-teen profit share to a low-teen royalty, because that would obviously suggest only 1% or 2% of cost, and perhaps you could just clarify that for me?
Well, I can take it offline. But, yes, the cost is supposed to be low. And when you do the calculation, that’s kind of where it comes out, so, yes.
Thank you. There are no further questions. Please continue.
A - James Ward-Lilley
So, thank you, operator. If there are no further questions, again, I’d like to thank the team. I think this is a very good deal for Vectura. It’s actually what we said we were going to do. As I said, it’s about executing against our plan in terms of news flow, it’s executing against our strategy. I think, obviously, there is very significant long-term value for this deal, but there’s also significant cash and upfront value from this and reflects our rare capabilities in this space. And we are very pleased to be and moving forward with what would be the strong partner. And it again reinforces our confidence, my confidence in 315. So, with that as a final wrap-up, I’d like to call this to a close and thank you all for listening in. Thank you.
That does conclude our conference for today. Thank you for participating. You may all now disconnect. Speakers, please stand by.