AptarGroup, Inc. (ATR) Earnings Call Transcript & Summary

If I can just add because I wanted to make sure we hit your margin comments also. So just to complement what Gael was saying, the pipeline is very diversified. It is -- if you kind of look at the weighted pipeline in terms of what does it comprise, right? It's respiratory, it's biologics. It's the systemic nasal drug delivery that Gael's talking to, its injectables, ophthalmic, et cetera. And the reason I really wanted to complement Gael to add that on is because it's not going to be any one molecule, any one therapeutic area, any one delivery route, it's very diversified. And when you think about the top items there, these are the highest margin parts of our portfolio. So when you think long-term margin profile, which is, kind of, where you're going, it is well supported just based on what is in our pipeline today and the weighted value actually skews upward.

One other exciting area of pharma is the GLP-1 space. Can you talk about the opportunity in intranasal or pulmonary delivery and if Aptar is playing a role there?

So our business model is customer-led. I mean we work with pharma company. We support them to accelerate and derisk their drug development program. In the space of GLP-1, everybody is focusing on injection and oral, we participate to that growth. But nobody was really moving there. So because we've got the capability to say, hey, why not taking an API and working around the formulations to nasally deliver GLP-1 or to look through the lungs. We've got the formulation capabilities. We've got the technical platform capabilities, why not doing this? So we've done it. We file the patent and so on. We're going to be looking whether we can partner with some companies because we don't look at going to the end. That's not where we are. And that was also a way, Daniel, to prove our thought leadership. Whenever it goes through the nose or the lung, we are more than a component, and we can really support you guys in your drug development. So will GLP-1 delivered through the nose will be a huge -- I mean administration pathway? I don't know. It's a good example of what we can offer. Let's look pragmatically speaking, how can we support biotech, a big company that could be interesting by the work we have done and let's look at that one. I mean there are many cases when you think about Enbumyst where we work with the lab -- I mean when you do excess body [ fluid ], you can take your pill or you go to the hospital and you've got an IV. We work with them to say, maybe you can have a treatment through the nose. So that's the same principle to support customers whenever they consider a potential alternative pathway.

And it sounds like some of that early work may start on your own, but you will look to partner that with the customer.

Ideally, we want to start with early-stage biotech. How can we support you? Obviously, the earlier we start, the earlier we're going to spec our drug delivery platform, once you start generating data and if you do a good job and you are a true partner of choice, you're going to continue the course of the developments. And then you look at your revenue extraction model being slightly different. Fees for service, but why not also extracting your fair value from the work you are doing through access fees, milestone payments, change of control and why not drug royalties. So that's also a way to strengthen our pipeline, have a defensive moat around our product and to generate different revenue streams.

Got it. Maybe talk a little bit -- because you do play across the life cycle of a drug, maybe talk about a little bit conceptually about how the economics for Aptar evolve as a drug goes from brand to generic maybe to OTC. Is that -- there's a lot -- there's evolution that's going on in the respiratory market with the new propellants, how does that all interplay in your business?

Okay. So we are actively focusing on the life saving -- the life cycle management, sorry, for our customers. So you're right, the drug will start with an originator. Some years after, you're going to get generic players and maybe the regulatory bodies will say from prescription, we can move OTC. This is what happened with Naloxone and with Emergent, the originator, but this is also what happened with many, many customers with whom we are working. So our algo is 90% of our business is really with the natural growth of the molecule, the ability to support this life cycle management and to provide support to generic company to enter that space and they are working with us. And then the additional growth rate will be really back to this innovation accelerator, convert additional market to our solutions and the pipeline conversion. In the example of the new propellant, the world is going to switch from current propellant to a new one, having less of an impact to global warming. The entire world is going to change, where Aptar is playing a role is to define the right technical platform that's going to be compatible with the new formulation because the formulation with the new propellant will behave differently. How to make sure that we're going to be fully compliant, number one. Number two, the regulatory pathway might be different. And we, at Aptar, working with the FDA in the U.S. to define the guidelines for pharma to come with an approval for a propellant switch because at the end of the day, it should be fully compliant, fully safe for the patient. So we are supporting our customers there, not only with the device, but with the services and that's our business model. This is from formulation to patients.

And then maybe just turning to the injectable side, I think there's also an evolution, particularly in Europe with respect to Annex 1 compliance. How does that impact you?

So the European regulatory agencies are raising the bar. The Annex 1 is really a requirement for all players in that ecosystem to be more, I would say, in line with the best product to be delivered on the market. So we are fully compliant with Annex 1, number one. We raised the bar everywhere in our different manufacturing sites. We've got a good pipeline build with Annex 1 because all our customers should comply with the regulation, and they are looking at partner, Aptar being one of them, to make sure that we've got the organization to be in line with Annex 1 in order to give them the comfort that Aptar is the right partner to be fully Annex 1 compliance. So that's a good pipeline build for us, and that's where we are fully committed to.

Got it. Maybe Vanessa just talked a little bit about balance sheet, Aptar has relatively low leverage as a company, low amounts of debt. How do you, as a management team, prioritize returning of capital, organic investment and M&A as you look to the future.

Yes. So we have a very strong balance sheet. As you've pointed out, so we have discussed our leverage corridor being between 1x to 3x EBITDA. And the -- think of the leverage corridor as the range of leverage that we would expect to be within under normal steady-state conditions. So if we went above 3, we would expect to delever back down to be in that range. If we went below 1, we would expect to get back within the range. So that's our corridor. And as of the end of last quarter, we're about 1 -- just under 1.5 in leverage. So low on the leverage scale, as you mentioned, which gives us a lot of flexibility. In terms of how we deploy capital in terms of our priorities, our first priority is always to invest in the business, invest in the business, in R&D, in innovation, digital technologies, capital investments that will help to not only sustain the business but also drive profitable growth and obviously return. So that's always the first priority, organic and inorganically, in terms of where we deploy our capital. And then once we have done that, we obviously then prioritize return of capital back to shareholders. And in that vein, we're actually very proud of our dividend program. We are in -- we're 32 years of annually increasing dividend. We do participate in share buybacks. I would say that is the more flexible discretionary part of our capital allocation framework. Although if you look at the last 18 months alone, we've returned about $700 million of capital just in the last 18 months to shareholders, roughly $180 million in dividends and the rest being in share buybacks. So we've been pretty active on that front. But what I would say, just to your question about looking forward is what you can expect from the management team is to continue to prioritize those opportunities where we see that, of course, we're going to generate significant returns to the organization and ultimately our shareholders.

We've talked about a lot of different -- Aptar's exposure to a lot of different therapeutic areas, modalities, whether it's nasal or pulmonary, ophthalmics, injectable. If you look out, you're at the, kind of, beginning of a new journey. If you look out 3 or 5 years where would you expect to see the most exposure impact to your business. And also in addition to modalities, there's also therapeutic areas that we talked about that's pretty wide ranging. Where -- would you prognosticate into the future that will have the impact?

So from a pipeline perspective, I would say, 3 years, I don't know whether this is a good indicator. You know that in pharma, everything is taking a little bit longer. That's all the work done around the nose to brain is pretty excited. So building the science, building the analytical framework to support the company. I mean when you think about some neurodegenerative issues with the Wake Forest University School of Medicine last year, I mean, we published a joint research and demonstrated that nose to brain, we've got a way better deposition rate of insulin and taking a pill or injections because you need to bypass the blood-brain barrier. So there's a lot of very interesting tractions, where not only this is a new pathway, but also the technical platform being different because you need to have a different delivery mechanism. So that's one area of interest. Obviously, all the SNDD, chronic disease treatment through the nose, through the lungs. We are working a lot around biologics as well. That could be an alternative pathway. And we are pretty excited to continue the work in the injectable space. In the injectable space, we are a component player. We have to be clear there. We supply stopper, plunger for prefilled syringe or needle shield protection. We provide a certain level of services behind and we participate in full to the growth of that market. So -- and it's strategic for us, but I wanted to be fair on that one. So we see the injectable having a lot of potentials because the market is looking for good, reliable partner, working with them for biologics trends for Annex 1, having a global footprint that we invested a lot in order to be present in China and the U.S. on top of Europe. So we're going to be pretty exciting, looking at injectable moving up. And it's going to be a lot already there. And helping the market to transition to the new propellant. We are also investing a lot more through the lungs, for the lungs with biologics, larger molecule that does require different kinds of [indiscernible] or [indiscernible] of drug delivery payload system, and we are actively working on this.

Well, I think -- look, this is a health care conference, so we've spoken a lot about the Pharma business. So I appreciate that. I mean what certainly comes across is and perhaps is underappreciated is how deeply embedded Aptar is in the development and delivery of critical medicines. And so both from a component supply standpoint, services as well, so that certainly came across in your remarks today. Any final thoughts from you, Gael?

I will add something -- I mean we have not discussed patients, but that's maybe something that is underappreciated. I mean, everything we are doing at Aptar is patient focused. And when you look at the developments, we are offering user experience back to our customers. The economics about a product. We are providing human factor to our customers. We are providing on-boarding solution, the complexity of the world and with the shift from clinics to at home or to virtual settings, very challenging for a new patient to onboard and to have a good adherence rate. So we're working a lot on many times when you've got big players, Aptar is the one in the room with their commercial and their business development team to discuss patients because we do understand how the patient is going to behave and what kind of on-boarding solution. And we've got data showing that the better you are onboarded, the longer you stay the course and the sooner you're going to refill your script. And last, all the digital elements. We've got patient communities, for example, we've got an app that is used by over 3 million patients on a worldwide basis for migraine treatment. So how to track, how to understand, how to improve and potential issues. We've got this patient community. We are operating on behalf of Biogen. I mean we are the operator from a digital standpoint. So I truly believe that better understanding a patient in these environments, better supporting remote monitoring, having patient community is helping ready to position Aptar as a trusted partner with companies, not only as a drug delivery expert, having the ability to provide formulation, analytical and regulatory support, but also to put the patient at the center of everything.

On that note, thank you, Gael and Vanessa.

Thank you very much.

Thank you.