Ipsen S.A. ADR (OTCPK:IPSEY) Q4 2018 Results Earnings Conference Call February 14, 2019 8:30 AM ET
Company Participants
David Meek – CEO
Aymeric Chatelier – Executive VP & CFO
Conference Call Participants
Richard Vosser – JPMorgan
Operator
David Meek
Good morning, good afternoon, and welcome to the Ipsen Full Year 2018 Results Conference Call, and thank you for joining us today. We’re very pleased to share with you our outstanding results for 2018 and our positive outlook for 2019.
But before we begin, here is our Safe Harbor statement, which outlines the routine risk and uncertainties contained within this presentation.
Beginning with the agenda. I will provide an overview of our full year 2018 results, Aymeric will take us through the details of our financial performance and 2019 financial guidance before I wrap up the presentation and open the call for questions.
2018 was a year of solid execution as we delivered on our threefold growth strategy: growth on the top line, growth to the bottom line and growth of our pipeline.
On the top line, we achieved industry-leading group sales growth of 20%, driven by Specialty Care sales growth of nearly 25%. There was strong performance across all major products and geographies, including Somatuline, which achieved blockbuster status in 2018.
On the bottom line, we achieved significant margin expansion with core operating income growth of 31%, as we benefit from the increasing leverage from the launches of Cabometyx in Europe and Onivyde in the U.S.
And finally, on the pipeline, the value proposition of Cabometyx continues to increase with the European approval for second-line liver cancer in November 2018. We also made good progress advancing key pipeline programs for new chemical entities as well as later stage lifecycle management programs.
We’re also actively pursuing business development and expansion efforts to bolster our pipeline and tackle unmet needs for patients. After the licensing deal with MD Anderson last May for an innovative oncology asset, the successful execution of additional transactions remains the top priority for the company.
Looking at a snapshot of the business. Specialty Care now represents 87% of total sales, while Consumer Healthcare represents 13%. Oncology, the fastest growing therapeutic area and the largest contributor to growth represents 68% of total sales.
In terms of geographic split, North America, the fastest growing region with 38% growth in 2018 now represents 28% of total sales [Technical Difficulty], other European countries at 20% of total sales and the rest of the world represent the remaining 18%.
Our oncology business now represents over two thirds of total sales and at 30% growth for the year. It’s the largest contributor to the excellent performance of our Specialty Care franchise.
Somatuline continues to lead the oncology portfolio with strong momentum globally, reaching the milestone of blockbuster status in 2018.
North America is being driven by volume increases in both new patients as well as total patient market share gains. And Europe, despite being a more mature market, is still experiencing double-digit growth. We’re very pleased with the performance of Somatuline and expect the favorable trends to continue in the coming quarters.
Next, the launch of Cabometyx in second-line renal cell cancer is progressing well. It is positioned as the TKI of choice in gaining market share. For first-line renal cell cancer, we have secured reimbursement in 7 countries including Germany and the U.K.
We will continue to launch in additional countries in both first and second-line RCC over the coming months, and we’ll also start securing reimbursement for second-line liver cancer.
The competitive environment for renal cell cancer is evolving rapidly, with the first IO combination approved in Europe in the frontline setting earlier this year and more data emerging from IO combo trials.
Due to its unique mechanism of actions, we continue to believe Cabometyx has a solid place in the treatment paradigm, especially as monotherapy standard of care in the second-line setting.
We continue to closely monitor this exciting space and importantly, we’re encouraged that patients are being presented with more effective treatment options in the frontline settings.
Moving on to Onivyde. We are achieving significant synergies with the U.S. Oncology commercial team. And at the end of 2018, Onivyde secured top-tier formulary status on the clinical pathways in a couple of the largest independent group practices. We are steadily growing market share in second-line metastatic pancreatic cancer and increasing the duration of treatment.
Turning to our pipeline highlights. In terms of recent product approvals, for Cabometyx, we received European approval for second-line liver cancer; and for Somatuline, we received European approval for the improved device which is an even easier to use and a more stable device, a benefit to both injectors and patients.
As for key mid-stage oncology pipeline programs for Cabometyx, there is the ongoing CheckMate 9ER Phase III registration trial in combination with Opdivo for first line RCC, and the recently initiated COSMIC-312 registration Phase III trial for first line liver cancer with atezo. This trial should help us secure entry into the China market which has a high prevalence of liver cancer.
For Onivyde, we have 2 Phase II trials ongoing for first-line metastatic pancreatic cancer and second-line small cell lung cancer. We expect topline results for both Onivyde trials and the CheckMate 9ER combo trial in the second half of the year.
Turning to neuroscience and starting with our key product, Dysport. Growth of 12.6% in 2018 was driven by strong double-digit performance in both the therapeutics and the aesthetics market, which combined, represent over €500 million of end market sales under the Dysport brand.
For therapeutics, there is strong momentum in the U.S. as well as in the rest of the world, including the resupply in Brazil.
In the aesthetics market, Galderma continues to be an outstanding commercial partner, and we are also seeing strong growth from territories where Ipsen commercializes the products ourselves such as Russia and the Middle East.
As for the neuroscience pipeline, we are advancing 2 Phase II trials for hallux valgus, more commonly known as bunions; and vulvodynia, a painful gynecologic condition. Both of which have a significant unmet need and no approved therapy adoptions.
In our earlier stage pipeline, we are accelerating our recombinant neurotoxin programs. The fast-acting toxin has completed Phase I, and the long-acting toxin is currently in preclinical development.
Now turning to the pipeline. As I mentioned earlier, building an innovative and sustainable pipeline is a high priority for the company. We are accelerating the development of several new chemical entities, which are highlighted in orange on the chart.
Though relatively early, some of these programs could quickly advance through clinical development. We’ve hosting an Investor Day focused on R&D in May, where we look forward to sharing more details on these and other key pipeline programs.
Now taking a closer look at our systemic radiation therapy program. We are developing radio-label diagnostics and therapeutics for true precision medicine through a theranostic approach. We have recently strengthened the team with industry-leading expertise to accelerate and efficiently develop our programs.
The first program is Satoreotide, which is currently in Phase I/II development for neuroendocrine tumors. This potential best-in-class radiopharmaceutical for NET is an SSA antagonists with potential superior efficacy as compared to an SSA agonist. It is a platform technology which may be able to target multiple indications with tumors expressing SSTR2.
The next program is IPN1087, which is currently in Phase I development for pancreatic cancer. Like Satoreotide, it is a radiopharmaceutical theranostic which can be expanded to multiple indications with tumors expressing NTSR1.
We’re proud to establish a formal relationship with the Pancreatic Cancer Action Network or PanCAN and will leverage their scientific and medical expertise to accelerate the development of IPN1087.
Building an innovative and sustainable pipeline is a top priority for Ipsen, with the goal of delivering 1 new molecular entity or a meaningful indication every year.
Internally, we are optimizing our portfolio management and accelerating key programs, and externally, we are focused on externally sourcing new, innovative assets.
Fueled by our strong balance sheet and cash flow generation, we have significant firepower to fund additional BD transactions. We are looking for first or best-in-class assets with global rights in our key therapeutic areas of specialty oncology, neurosciences and rare diseases.
And while we acknowledge that the environment is competitive, we believe we have certain advantages such as our strong development and commercial capabilities in our core therapeutic areas. We continue to believe that we can successfully find, secure and integrate additional meaningful assets to fuel continued growth.
And now, I’d like to turn the call over to Aymeric, who will review the financials in more detail.
Aymeric Chatelier
Thank you, David. So I’m very pleased to present our excellent financial performance for the full year 2018.
First, as David said, we achieved good sales growth of 20.1% at constant exchange rates, driven by our Specialty Care growth of 20.7%, and we exceeded €2.2 billion in sales.
Somatuline with $1 billion in sales 2018, which represents €847 million grew by more than 24% in 2018, with the continued strong momentum driven mainly by volume and continuing market share gains, both in the U.S. where we now exceed 30% market share and also in Europe, where we now exceed 50% market share in many countries.
Dysport also grew by more than 13%, driven by continued strength in both the aesthetic business, including the businesses with our parter, Galderma and in the therapeutic markets across most geographies. And it’s interesting to note that in the U.S., we had a 50% growth in 2018.
Decapeptyl had a fantastic year with a growth of 8%, driven by volume growing growth and market share gains with new indications in Europe and despite some continued pricing pressure in China. If we now look to our new oncology product launch, Cabometyx grew by 22% sequentially in the first quarter of 2018.
The majority of the sales of Cabometyx in 2018 were coming from the second-line renal cell cancer indication, with growing market share in the key European countries and launched in other geographies, as well for initial sales in first-line RCC in some countries, as we continue to secure reimbursement following approval in Europe for this new indication.
Regarding Onivyde, we continue to see sequential growth in the U.S. and increasing sales synergy from the U.S. oncology team. Our consumer healthcare business grew by 2.7% as consultation rates, restating from the new contractual setup of Etiasa, which was down 2.9% as reported.
This was clearly driven by the strong performance of Smecta, growing by 5%, thanks to both new formulations and also new probiotics under the Smecta brand, and also the contribution of the products acquired in 2017 including Prontalgine.
Now looking at the foreign exchange. As you can see in 2018, foreign exchange had a negative 3.5% impact on the top line, due mainly to the devaluation of the U.S. dollar, but also of the devaluation of other emerging currencies against euro.
Now with the goals of our U.S. business and the strong performance of Somatuline and Onivyde, the U.S. dollar amounted 30% of our sales. And as you can see, more than 57% of our sales are now in non-euro currencies.
Despite the significant impact on top line in 2018, there was very limited impact on the profit due to our hedging strategy and also our cost in local currencies.
Now turning to our operating expense items. Cost of goods sold, as you can see, as a percentage of sales remained flat at 20.4%, driven by the positive mix shift from our growing Specialty Care business with higher gross margin contribution, mainly Somatuline and Onivyde, which was partially offset by annual Cabometyx royalty that we pay now at 22%.
R&D cost increased by 14% in 2018, as we continued to invest to accelerate our key programs in oncology and neuroscience, but also building our medical affairs and oncology capability to support our strong pipeline of new products and innovative assets.
Sales and marketing as a percentage of sales decreased by more than two points, as we are clearly realizing leverage from Cabometyx and Onivyde launch, at the same time, investing to support the growth of Somatuline and Dysport.
And finally, G&A expenses remained flat as a percentage of sales, reflecting the impact of the transfer [ph] corporate structure to support the group transformation, including in 2018 the relocation of our U.S. headquarter.
As a consequence, as you can see, we show in 2018, a significant margin expansion of 3.3 points, which is 2 years in a row, an improvement of more than 3 points of our operating income margin, driven by the excellent performance of the Specialty Care business, leveraging the strong sales growth while investing to support the commercial products and also investing to grow our pipeline in R&D.
As you can see, Consumer Healthcare’s slightly lower margin did not impact the evolution of the group margin as well as FX, thanks to the hedging position and the local cost in local currency.
On the whole, we are very pleased with the margin investment achieved in 2018, reflecting our strategy to leverage our top line growth to improve our profitability in 2 years and so reaching now almost 30% profitability in 2018.
Now turning to the item below the core operating income, which is growing by 31%. As you see, our operating income is also increasing by 31% after amortization of intangible assets, mainly from Cabometyx and Onivyde as well as some other operating expenses and restructuring, mainly related to the relocation of our U.S. commercial headquarters and also the termination of some R&D studies during 2018 first half.
Our consolidated net profit increased by 42.6%, including lower financing cost and also a positive impact of the U.S. tax reform on our effective tax rate, which improved by almost 2 points.
As a consequence, our core earnings per share grew by 35%. But in 2018, we continue also to improve our cash flow. So in addition to the strong performance in capital share growth and operating income margin improvement, we continued to improve the conversion of the profitability into cash flow to reduce the debt. We generated over €450 million of free cash flow, an increase of 48% over 2017, mainly driven by our excellent operating performance with an EBITDA above €700 million and good performance in terms of managing working capital despite an increased level of CapEx.
After payment of the dividend, restructuring cost of the net investments, mainly investments related to milestone paid to excellency for Cabometyx. We ended 2018 with a net debt at €242 million as compared to €463 million at the end of December 2017.
So we clearly are have a strong balance sheet with now, a leverage ratio at 0.3 times and increased capacity for acquisition and business development.
Based on that very strong momentum of the business, we are expecting for 2019 to continue to grow our top line at double-digits, and we are positioning our guidance today that our sales will grow at least at 13% at constant exchange rate.
This is going to be driven by the continued momentum in Specialty Care business. And we also note that the exchange rate this year may have an impact of positive of 1% based on the current level of exchange rates.
We expect also further growth of our core operating income, with a core operating margin around 31% of sales, leveraging our top line growth while investing in R&D to support our growing pipeline of products.
Important to note that the forecast does not include any impact of incremental investment in pipeline expansion initiatives beyond existing internal programs.
With this objective in 2019, we are on track to deliver our 2020 financial target of sales greater than €2.5 billion and core operating income margin greater than 30% 1 year earlier.
As a conclusion, we clearly achieved in 2018, an excellent and a record finance performance at each end, with strong sales growth, profit growth, cash flow generation, leveraging our top line and converting our probability into cash flow to reduce debt.
Therefore, the board is focusing to keep the dividend at €1 per share for 2018 to further support our growth ambition to continue to build and grow our pipeline through business development.
And now, I will turn the call back to David for the conclusion.
David Meek
Thank you, Aymeric. We have a number of R&D milestones coming up in 2019 as we continue to advance our pipeline and accelerate key programs.
Importantly, we expect topline results for a few key mid-stage lifecycle management programs. The Onivyde Phase II trials for first-line metastatic pancreatic cancer and second-line small-cell lung cancer as well as the Phase III trial for Cabometyx in combination with nivolumab for first line RCC.
We will cover these and key other programs in more detail at our upcoming Investor Day focusing on R&D programs in May.
To close, our 2019 objectives are clear. In terms of top and bottom line growth for Specialty Care, we aim to maximize our market share gains worldwide for our differentiated best-in-class products.
For Consumer Healthcare, to continue the sales growth and the OTX transformation. The continued topline growth along with the optimization of cost to leverage our commercial capabilities will drive further margin expansion.
As for the pipeline, we aim to focus and accelerate key internal R&D programs and importantly, to identify, execute and integrate successful business development transactions in order to build an innovative and sustainable pipeline.
And as I mentioned earlier, this remains a top priority for the company. In terms of culture, we will drive further transformation and ambition to leadership in people. And with all these elements combined, we will deliver superior value to the patients we serve and our shareholders.
And now for the operator, we are ready to open the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from the line Richard Vosser [JPMorgan] Your line is open. You may ask your question.
Richard Vosser
Hi, thanks. Richard Vosser from JPMorgan. Three questions, please. Just talking about M&A, just thinking about the stages or the project level that you might be thinking about with M&A. Obviously the MD Anderson deal was relatively early. Should we think about deals if you can do them this year at that sort of stage or later sort of Phase II, Phase III?
Second question, just on Cabometyx. Just thinking about a little bit more color, if possible, in terms of what sort of market share you have in second-line, what sort of growth you’re seeing in the individual countries, and whether there’s any sort of stocking for the launch of new countries in the fourth quarter number.
And then thirdly, just on Adenuric. Perhaps, you could talk through your expectations on the royalties and profit share for Adenuric and when we should expect that to — or those elements to finish in other revenues during 2019? Thanks very much.
David Meek
Okay, Richard, thanks a lot for the questions. Yes, we’ll tackle those 1 by 1, M&A, Cabo. I’ll tackle the M&A.; Cabo, Aymeric and I will share, and Adenuric, Aymeric will cover that for you.
So regarding M&A, as we discussed, BD is a top priority for the company and we’re assessing numerous opportunities as we speak. And to answer your question specifically, Richard, we’re looking at all stages of clinical development. Ideally, we want assets with proof-of-concept. So mid-stage assets, programs and partnerships like the MD Anderson deal we did last May.
The asset now has an approved IND and it’s going into the clinic this quarter, and we’ll continue to do more of those and think of that string of pearls approach. We’ll have larger pearls and smaller pearls, so we are looking at mid-stage and even later stage programs as well in oncology, neurosciences and rare diseases.
Aymeric Chatelier
Regarding Cabometyx. So your first question, you asked two questions on Cabometyx and in the market share. Clearly, we continue to grow market share in the key European country marks, and the market share is very depending by country by country but we are above 25% and we are clearly the First TKI in second-line, and we continue to grow. There is clearly no inventory in the performance of Q4.
What you have noticed is that we started to launch in frontline in terms of countries like Germany or even the U.K. So you start to have the cumulative impact of many other countries launching in second-line but also the first country to start launching in frontline.
Regarding Adenuric, so Adenuric just to make sure that everybody get that, we do not account for Adenuric as part of our sales because Adenuric is a product where we have a copromotion with Menarini. And all the accounting is in other revenue and this is clearly a combination of royalty and profit sharing.
What you should expect is clearly an impact in 2019 as we’re going to face lots of exclusivity for that product starting in Q2 of this year. And the total revenue that we have for the product is about €40 million.
Richard Vosser
Thank you.
Operator
Your next question comes from the line of Gary Holford [ph]. Your line is open. You may ask your question.
Unidentified Analyst
Okay, guys. Gary Holford. Just following on from Rich’s question on BD. Clearly, the market was [indiscernible] deal last year. And I wonder if you could just talk through the key reasons why that didn’t occur. Is it primarily related to asset availability, competitions, affordability? And then just going forward, how soon this year might we expect, hope for request?
And then on 2019 guidance, can you assume on the starting generic market entry this year, and if so, how big an impact could that be in your mind? Do you expect generics will come in the U.S. as well as Europe? And any statements you can make on the state of generic competition in that market in general? Thank you
David Meek
Okay, Gary, we will take that. So for BD transactions last year, we did mentioned and you mentioned the MD Anderson transaction. So last year, the beginning of the year, we revamped our business development team. That team is now primarily located in Cambridge in the U.S. They’re probably the largest ecosystem we have of innovation in the world at the moment. So that team of search and evaluators, negotiators and so on was beefed up in early 2019.
We’ve looked at quite a few programs across the oncology landscape, neuroscience landscape and the rare disease landscape. And while we’ve been very active at search and evaluation, at this point in time, we have not found that program that’s been the right strategic fit for Ipsen.
And when we define our – the lens that we look to look at BD opportunities, is it a strategic fit, being oncology, neuroscience or rare disease, and is it financially viable for the organization, and then can we integrate it into the organization? And we look at those three key criteria and at this point in time, we have not found that major program that fits those three criteria that would be a good strategic opportunity for Ipsen. It is a key priority for the organization and it will remain a key priority to build our pipeline.
So to accelerate our internal assets that we have as well as to bring in new assets to the organization. We have the firepower, we have the capacity of over €1 billion to bring in assets into the organization, and we expect to deploy that capital when it’s the right opportunity for Ipsen.
Moving along to the generic market entry of the somatostatin analog. There are – at this point in time, we do not expect a generic entry into the market for Sandostatin or any SSA in 2019, and our numbers reflect that.
The latest news we have is there could be a generic entry of a Sandostatin. We don’t know when that could be, but we don’t expect anything this year.
As you know, the manufacturers of generic somatostatin analogs have had challenges over the years. It is primarily CMC and manufacturing challenges that continue to crop up during the – either the development process or even the review process.
So at this point in time, we do not expect the generic somatostatin analog in the near term, and we continue to monitor this situation every day.
Unidentified Analyst
Thanks…
Aymeric Chatelier
On guidance, 30% growth will not affect any generic entry.
David Meek
Thank you. Next question please.
Operator
Your next question comes from the line of Emily Field. Your line is open. You may ask your question.
Unidentified Analyst
Hi. Just a few questions. I believe you guys took just under 10% list price increases for Somatuline and Onivyde in the U.S. And sort of with your competitors talking about the U.S. becoming a deflationary environment, I was just wondering is that something that you view as sustainable over time on an annual basis?
Secondly, does your 2019 operating margin target include the impact of any potential business development? And then also, I know you guys have talked about €1 billion in terms of aggregate, €1 billion in aggregate firepower, but that would really have you just over 1 times your trailing 12-month EBITDA. So I was just curious if, for the right transaction, if you would be willing to go to something like 2 to 3 times as some of your peers have for the right transaction?
And then just a kind of a different question on potential generics for Sandostatin. I was just wondering if you had any conversations with the payers in the U.S. with regards to what could potentially happen should one launch. If you expect that obviously, there are differentiated labels, but do you expect that there would be any step edits and/or forced switches away from Somatuline?
Aymeric Chatelier
Great. So thanks for a number of questions there. So Aymeric and I will tag team on those. I would say, let me answer the last one first on the LoE because it will come up probably from multiple folks.
We explained the LoE situation. We do not expect generic entry this year of any SSA. Regarding conversations with the payers, what we have done at this point in time and we expect to happen in that – in an LoE situation where there could be say, generic SSA, we expect new patient starts potentially, assuming the right price.
So patients would enter a formulary or the asset would enter a formulary status, potentially in a favorable position. So when that brand name product is prescribed, it could be substituted with the generic for new patient starts.
The fact that these patients have neuroendocrine tumors with acromegaly, it’s typically taken many years for these patients to cycle through their healthcare system, be properly diagnosed and then be properly treated. And we will — the physicians and so on that we talk to, they really don’t like to switch these patients.
Remember, it’s chronic therapy, the dosing mix of the patients have, they’ve gotten to the right dose with the right product, they’re comfortable with the delivery system. So we don’t expect many switches because the physicians say they’re probably not going to switch these patients even with the generic, which we think is actually one of the commercial barriers for a generic. We do expect a slow ramp of a generic entry into the marketplace and there would be cannibalization from the branded products.
So if there’s a generic Sandostatin, we don’t expect significant erosion of a generic — of a somatuline. It will be erosion from the branded product. So that’s where we are at this point in time with our conversation in the U.S.
But the step edits, we would expect many more patients will go on the frontline, many more patients – I’m sorry, newly diagnosed and newly treated, many of those patients will receive a generic of the branded product.
Aymeric Chatelier
Maybe if we take your other question on the BD. So we enjoy that our BD firepower is increasing as we generate more cash. We are clearly growing our EBITDA. So our firepower today even at 2 times debt-to-EBITDA is clearly above the €1 billion.
Now, is there an acquisition of cash where we can spread that to 2.5 or 3 points, I mean this is something we may have to consider depending on the opportunity. At this stage, I mean, we are committed to deliver within this envelope of 2 times debt to EBITDA.
Regarding the 2019 margin. Clearly, this margin does not include any BD. So this is the biggest additive otherwise that we do for our guidance.
David Meek
And regarding the list price changes that were made in the U.S. on January 1. These were the list price changes. The actual net price change will be very low single-digit net price change for these products, taking into account rebates and contracts.
So the net selling price is actually very low single-digit increase for both Onivyde and Somatuline, just as we saw last year. So the real gains in sales for Somatuline and Onivyde last year were exclusively volume gains. So we expect the same in 2019 as well.
Unidentified Analyst
Great. Thank you.
Operator
Your next question comes from the line of Eric Le Berrigaud. Your line is open. You may ask your question.
Unidentified Analyst
Yes. Thank you. First question is on Cabometyx. Actually, the other day, Exelixis said that the ipi/nivo are being approved in first-line with increasing the rate of patients of the number of patients going into second-line and that Cabometyx was having almost 90% market share in second-line.
Is it something you think will happen in the same way in your territories or any reason to think differently? And if so, is it something that you’ve factored in when you first made your assumption for peak sales of Cabometyx in RCC or does that provide any upside in your view?
Second thing, as you started discussing pricing in Europe for first-line RCC and for HCC, are you having some tough discussion about maybe some price cuts for Cabometyx in a kind of volume to price ratio, or not yet?
Thirdly, on Onivyde, there is a sequential growth for the first time since you took the product. So you explained that the main reason behind that is sales to the partner. Can you split maybe the underlying sales and the sales to partner to see to what extent there is any way some kind of underlying growth in the U.S.?
And very last, small CapEx in 2019. We’re expecting some step-up in CapEx in ’18, and we add to that. What should we expect from ’19, please?
David Meek
Great. Okay, I’ll answer the first two questions on Cabometyx on sequencing and sampling. And then Aymeric will answer the last 2.
Yes, what’s playing out with the data in the recent data that has emerged with IO combination trials coming out of the various ASCO GI, ASCO GU and ESMO in the last fall. So this is playing out as we expected and that is that the IO combinations, whether it’s IO nivo/ipi or as we just saw now with IO axitinib, these are playing out as expected.
And so what Exelixis reported the other day was almost 90% market share in the second-line setting after ipi/nivo was prescribed in the frontline setting. So we do expect over time that the IO combos, whichever IO, whichever combo, will take the majority of the market share in the frontline setting for RCC.
What that does, that would create a bigger window of opportunity for Cabometyx in the second-line setting because if a patient receives any IO in the frontline setting, the patient will not receive an IO of any source, mono or combo, in the second-line setting.
And that’s what Exelixis is starting to experience with Cabometyx in the U.S. We do expect that same trend to happen in Europe, but I want to be clear on the timelines for this. This is important. Ipi/nivo just received registration early this year, so in 2019, in Europe, with the EC approval. This will be the year of reimbursement for ipi/nivo.
The other trials they just read out, the KEYTRUDA trial, the combo trial. First they have to file in Europe, which they have. So this will be the year of registration and then 2020 will be the year of reimbursement.
So by the time the IO combo market gets pretty crowded in Europe with 2 or more entries, it’s 2021.
So the dynamics we expect to be the same with just a time delay in Europe, so we do expect similar dynamics. In the meantime, with Cabometyx, we have registration and reimbursement in some markets in the frontline setting and we have wide reimbursement throughout the world in the second-line setting. We’re gaining market share in both the second-line setting and the frontline setting right now.
But we do expect IO to take the lion’s share of the business over time and increasing over time as ipi/nivo gets — achieves registration, which creates a bigger window of opportunity for Cabometyx in the second-line setting, and that’s in our models.
Regarding pricing. When we do seek a new indication, mainly in Europe, there is a slight price haircut for that new volume. And that price haircut is in the mid-to-high single digits, and that’s from the frontline to the second-line reimbursement.
If we have a frontline reimbursement and an HCC reimbursement, it’s mid-to-high single digits, depending on the marketplace of the gross price of US6000 [ph] per month for Cabometyx. So it is a slight price decrease in most of the markets to get that new volume. I’ll turn it over to Aymeric for the questions with…
Aymeric Chatelier
Maybe to conclude on the question whether there is upside to the peak sales. I mean, it’s too early to say at least, given the discretion we have on the pricing and also on the country is then able between the frontline and second-line for Cabometyx. But we are very confident to reach the 300 [ph] for RCC on third-party when we see an opportunity in HCC.
Regarding Onivyde. I mean, the answer will be the same as – every 6 months, I get the same question about splitting the sales of Onivyde between partner, now Servier and used to be end of U.S. sales. So I’m not going to provide the split but I can tell you that, I mean, the sales to Servier will continue to grow as Servier is launching in many more countries outside the U.S.
The shippers provides some of the stocking and some of the phasing and the positive phasing in Q4. But regarding our U.S. business, I mean, we continue to see sequential growth and gains in market share for Onivyde in the metastatic pancreatic cancer.
Regarding the CapEx in 2019, you are right that we expect CapEx to continue to grow, mainly because we are supporting the growth of our top product and mainly the manufacturing.
And clearly, we are investing significantly to catch up the capacity for Somatuline and also to increase our capacity for Dysport, given the growth of the product but also the growth of the global infrastructure of the group. So you’re right that 2018 was a significant increase and you should expect further increase going into 2019 regarding CapEx above 20% growth.
Operator
Your next question comes from the line of Matt Weston. Your line is open. You may ask your question.
Unidentified Analyst
Thank you very much. Three questions, if I can. The first regarding 2019 guidance. You’ve made it very clear that it doesn’t include any assumption for BD on the investment that might be required. Can I just ask that question slightly differently?
Within your current R&D budget, do you think there is space to accommodate new projects? Or you think it’s currently fully allocated and therefore, any BD that may come will require incremental spending?
Secondly, we’ve seen the statements are clearly positive that you should achieve midterm guidance 1 year early. I guess that leads to the question, should we anticipate new midterm guidance, obviously not seen today. Is that something that could be a feature of the May Investor Day? Or is that something that you would rather avoid, given the uncertainties of SSA potential generics?
And then the final question, a little bit off the wall. Brexit is looming. As I understand it, sole source of supply for Dysport comes from the U.K. We’ve already seen in your 4Q, you have to make a payment to Galderma for failure to supply in Latin America.
How confident is management that you will be able to have continuous supply of Dysport for yourself and your partner in the circumstances of a complicated Brexit? Thank you.
Aymeric Chatelier
Okay. Thank you, Matthew. I will start to — I will answer your question about R&D budget. So the answer is going to be not any surprise, I think, from you that we are permanently reassessing priorities within our R&D program. And as you’ve seen in 2018, we did terminate some studies.
So clearly, we have always room to accommodate for some limited additional projects during the year. But clearly, I mean, the guidance is specifying that if there is any significant additional program, that will clearly impact our R&D budget.
David Meek
So regarding the guidance, Matthew. Now that we have 2019 guidance out there and to your point, we are surpassing our 2020 guidance 1 year early. Our focus in May will be an Investor Day with a focus on the R&D pipeline. And I think at that point in time, we’ll clearly – we’ll be able to give some clear direction on strategy, on key assets in the organization at that time for 20 – well, we’ll talk about 2019 guidance there and then we’ll talk about the R&D pipeline and give just some directional guidance on strategy as well for that period.
Regarding Brexit, we’re in advanced preparation. We’ve always planned for a hard Brexit scenario in the event the U.K. becomes the third country to the EU beginning in March. And our utmost priority is to ensure no disruption to the patient supply.
And as you mentioned, for everybody’s knowledge, Dysport is manufactured in the U.K. and we distribute to more than 85 countries around the world, and it’s a key priority. So what we’ve done in the meantime, we’ve taken steps to transfer back batch control and release activities for the EU to other offices in the EU such as Dublin, is an example.
We’ve increased the stocks of medicine held both in the U.K. and in the EU to minimize any potential disruption of patients’ supply. And we’ve already transferred a marketing authorization or product license for the EU markets to other offices in the EU, and we’re planning for eventual license divergence at this stage.
So I think we’re in pretty good shape right now in the event of a hard Brexit, especially with Dysport. And it’s not just Dysport. Dysport happens to be manufactured in the U.K.
We also have to worry about products being imported into the U.K. as well. So we need to make sure that there’s adequate supply of products like Somatuline as well on both sides of the border, and we’ve taken those steps.
Aymeric Chatelier
And maybe just to make sure there’s a good understanding of the Latin America, I mean, the Brazilian. This is something that’s happened in 2017. So in 2018, we benefited off a resupply of the market as we were unable to import during part of 2017. And this was only related to specific importation issues with local Brazilian authority.
Unidentified Analyst
Understood. Thank you, Aymeric. But if I understand it right, maybe I’ve read the release wrongly. I think you have to make a payment for Galderma, so I presume lost sales during that period, that you do have a supply requirement within your contract that needs to make Dysport available to them.
Aymeric Chatelier
Yes, you’re right that the settlement, as a consequent of this importation issue, we had a discussion with Galderma and that we settled by adding a payment that was booked in our 2018 financial statement. And that was a consequence of the discussion we had with Galderma, which was – in H2 [ph]
Unidentified Analyst
Many thanks indeed. Extremely clear.
Aymeric Chatelier
I mean, this is a compensation for the sales that they were not able to do because of the importation issue that we had during 2017.
Unidentified Analyst
Great. Thank you, Aymeric.
Operator
Your last question comes from the line of Del Le Louet. Your line is open. You may ask your question.
Unidentified Analyst
Yes, hello. Hi, good afternoon. Delphine Le Louet speaking. Two quick ones. The first one on gross margin. I was wanting to know the exact effects of the mixed product and the projected mix that we’ve seen on the gross margin. Could you quantify that exactly?
Second question just with Onivyde in the U.S. And I was wanting to know how much it contributes to the North American growth? Thank you.
Aymeric Chatelier
Delphine, so we may – we now have difficulty to answer your two technical questions. I mean, on Onivyde, I mean, we are not communicating specifically as we said on the performance of U.S. Onivyde. I mean globally, as you know, you can probably make the match. I mean, Somatuline delivered 38% performance in the U.S. I think Dysport is delivering something like 50% performance in the U.S. And so Onivyde, I mean, is having, on top of my mind, I mean, a significant performance which is almost doubling the level of sales last quarter 58%.
David Meek
Yes. And I want to say too, you asked about North America. Just we’re — I just want to make sure we’re talking on apples-to-apples, yes. It was the U.S., it’s all U.S., the North American sales. We have the U.S. right, so it’s all U.S. sales only. Those are the sales we reported, okay? Then the…
Aymeric Chatelier
And just to make sure, Onivyde will have 1 extra quarter in 2018 in the growth rates that you have. Regarding the gross margin, I don’t have the quantification of the various effects, but the biggest one is clearly the positive impact of the growth of Somatuline, as you know which are very high gross margin as well as Onivyde.
And on the other side, I mean, Cabometyx, not only is growing but as you know, we did start to pay the full royalty rate of 22% in 2018, where we were paying before 20% at the beginning of the year and during 2017. So clearly, Cabometyx and the launch is impacting negatively, offsetting the positive impact of Somatuline and Onivyde.
Unidentified Analyst
Thank you.
David Meek
So it appears we – sorry?
Operator
There are no further questions at this time. Please continue, sir.
David Meek
Well, thank you all very much for joining us today, and we look forward to a strong growth in the top line, the bottom line and the pipeline in 2019, and we look forward to seeing you on the upcoming roadshow. Thank you, everyone.
Operator
That does conclude our conference today. Thank you for participating. You may all disconnect.
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