Hikma Pharmaceuticals PLC (HIK) Earnings Call Transcript & Summary

So good morning, everybody. Welcome to the people here in the room. You made it through the weather to visit our office. So it's great to see people face-to-face. And also, welcome to the people on the line. We are very pleased to talk to you today both from a personal point of view of seeing people face-to-face for the first time in 2 years, but secondly, to talk about the great results that we had in 2021. I'm not going to go through the results. I think you saw the press release and you have the presentation this morning. A strong growth in all 3 businesses in 2021. A lot of new launches, many business development deals. A challenging environment still in the U.S. But overall, I think the performance was really, really good in all 3 businesses, and a strong guidance for 2022. So with that, I was just going to open it up for question and answer, and maybe we start in the room here. And then, of course, we go online a little bit later on when we are running out of questions in the room. So who wants to start? Yes?

Maybe just...

[indiscernible] using the mic today. [indiscernible] people on the line.

Emily Field from Barclays. Maybe just to start, the deflationary environment in Generics, I believe you're talking about low double-digit inflation for 2022. Sort of the factors driving that, if you expect that to persist. Or kind of what you think is a more normalized environment for generic price deflation?

Yes. So what we saw in 2021, we saw a gradual worsening of the pricing environment. And you see that on the slides we put up this morning, that 2020 was a particularly good year in a way. We have the price erosion of around 4% for the Generics business in 2020. We guided 6% to 8% or mid to high single digits last year, pricing, and our pricing came out just about 8% for the full year in 2021, maybe 8.5%. So just about 8%. So -- but we saw that throughout the year, that there have been -- the focus of the customers have been the security of supply in 2020. So there were very few tenders or auctions happening in 2020. So I sometimes say there was like a pent-up demand from the customers of tendering out the portfolio. So we got so many tenders coming in, in the first half that impacted then the second half in terms of pricing. So that's how it started. I think also, maybe some of our peers have inventory issues because there were less volume in the market in -- during COVID due to less diagnoses. We are back to normal volume in the market, as we showed in our slides. So we have the feeling that some of our peers have inventory issues and therefore pushed down the price a little bit in the market. In terms of how long will this last, you never know. But I believe, and I've been doing this now for just over 20 years, the pricing in the U.S. is cyclical. It really is cyclical. And I've been very close to the market in the U.S. since 2010, and you can see that you usually have a maximum 2 challenging years and then you usually have 3 very -- 3 to 4 very decent years. We have '16 and '17 which was challenging years from pricing. We had '18, '19 and '20, quite good years. We had the chains of the store [indiscernible] in '21. And we are forecasting a low double-digit pricing for '22 based on the tenders that we see and the expectation in the market. So I'm still optimistic on the market. This is cyclical, and I hope -- I'm hoping also like if there's any extra inventory of our competitors, that will flush through, hopefully, in the first half of the year. So I'm optimistic about the market. But clearly, we are in a little bit different environment today than 24 months ago, for example. Somebody has to go low down.

Pete Verdult, Citi. Three questions by myself. PANDAs, Teva talking about PANDAs, change in FDA regulations where drugs that are approved pre-'84 are now being converted to a sort of 505(b)(2). So that could have implications for a generic company in terms of post-marketing, surveillance or potential litigations. So I think they're saying they might have to withdraw at least 30 products potentially from the market, and some of them are on the shortage list. And I think there are two that stand out for Hikma, dexamethasone and digoxin. So I just wondered if that is on your radar or not. And then specifically to Hikma. On the Generics outlook, I mean, the margin is pretty impressive. You have always said 20% is good and you're guiding to 25% or, let's say, 24% to 25%. Is that all just product mix or something, let's just say, it's just because you're not spending as much? I just wanted to get a sense there because it does feel that you're finally conceding that the revenue outlook for things like Advair and [indiscernible] might not be as big as people hoped? And then lastly on the buyback. I mean in the past, you said, look, it's a bit like giving candy to a kid. It's a short-term impact. What is the signaling or thought behind doing the buyback now? Just to help prop up the earnings outlook? Or how should we interpret that buyback?

Do you want to start on the buyback, Khalid?

Yes, I'll start on the buyback. I think in terms of our capital allocation priority since the Capital Markets Day in 2018, we have four priorities. One is investing in organic growth, M&A, BD, acquisition. And this has not changed. Today, our balance sheet is very strong. We have a very low leverage even within the -- our industry. We have the flexibility. So a buyback of 300 million -- up to 300 million is not going to affect our ability to pursue further acquisition. And you saw during this year we had a couple of -- we have signed some licensing deal, acquired a few products. We did Custopharm. So it's not going to have an impact on our financial flexibility. So it's -- in a way, the Board and the management, we believe that the market is not reflecting the intrinsic value of the company, and therefore, maybe a share buyback just shows that we believe in the prospects of the company and the future.

And so, excuse me, how quickly is it going to start?

And so it's going to -- we are going to do it over -- before the end of this year. So it's going to spread over the -- during this year.

And on the older ANDAs approved prior to 1984, as you said, Peter, in your question, it's only affecting two products for us, which are relatively small. I think also to keep in mind is, I don't think the FDA wants us to take these products off the market because there will be a shortage on the market, especially on these two products that we have. Digoxin is a life-saving drug. But I think most of the applications are very old in the market, and it would be very bad for the market. And the second thing, on dexamethasone, it's very important, especially now during COVID, but it's a relatively small product outside of COVID season. So I -- we keep an eye on it. I'm not sure it will be as drastic as Teva is painting it. But out of the 85, 86 products we have in Generics, it's only 2 of them that we are monitoring at the moment. And for digoxin, I doubt if it will come through. We are ready for it. But...

I don't think it's [indiscernible].

Okay.

[indiscernible].

[indiscernible]. So the question is basically if the bio study is all done. But we need to check. But I don't think digoxin is at risk. Dexamethasone might be at risk, but we need to look into that. In terms of the Generics margins. So remember when I joined 4 years and 4 days ago, the company, I basically set out my ultimate goal in 5 years' time would be to have a gross margin in the mid-40s and the net operating profit in the 20s. And we have achieved that. Even in a year where we are guiding to a double-digit price erosion, similar to what we saw in 2017, we are guiding to net operating profit 24% to 25%. And that highlights to you what we have done to this business. This is not the same business. If I remind you of the numbers in 2017, our net operating profit was 3.6%, and our gross margin was 36%. So now we are guiding 23% to -- 24% to 25% net operating profit in a similar pricing environment as we are focusing. So totally different business. In terms of investment, we're continuing with the investment. So it's not we are getting to this level by cutting the R&D or cutting the sales. We are launching big specialty products. We hope we will bring Ryaltris to the market sometime around middle of this year. We have the approval in hand, but the supply is not available yet from Glenmark. Glenmark is responsible for the supply for us. So our best estimation is probably soon in third quarter that we'd be ready. So we will miss the main holiday season. So -- but we need to start to build that sales force. We are expanding our promotion of KLOXXADO. So really, it's not cost cutting. It's control of the cost, of course. I think you saw that the gross margin for the Generics in 2021 has never been higher. We showed 47% gross margin, and show me any peers that don't have injectables with like-to-like comparison with these really amazing results. And it's about the work the team has done over the last 4 years. So I feel I have maintained -- I have never committed to say it's going to be in the mid-20s. But I think this business -- even in tough years like this, this business should continue to deliver net operating profit in the 20s. I'm very confident about that.

Thibault Boutherin, Morgan Stanley. So my first question on generic Xyrem. So I think it's included in the guidance you would launch in the middle of the year. Just if you could give us a little bit color on what you're expecting in terms of market share uptake, timing of competition launch and I guess the kind of mid- to long-term outlook for this generic in terms of -- does it have a longer-tail value than usual generics or not?

Yes.

Just also on KLOXXADO, if you could maybe give us a little bit of color on the early trends in the launch. What is different compared to what you're expecting before launch and the strategy you explained to us in the past months and quarters? And maybe just to finish on the biosimilars. So some of the biosimilar agreements you've made have only trials ongoing in China. And just if you could tell us more about your confidence of obtaining FDA approval with these trials when we saw what recently happened with Eli Lilly and Innovent drug recently. Was the FDA busy or not? It doesn't seem to be ready to approve at least branded biologics based on a survey conducted excluding China.

So let me start on your last question around the biosimilars. So last year, we signed 2 biosimilar deals with Bio-Thera on ustekinumab and with Gedeon Richter on denosumab, both really good companies, a very impressive development. In terms of Gedeon Richter, they are doing a global trial. I'm not even sure they have a site in China. In terms of Bio-Thera, they have patients in China, but they're running their trial in six different countries. So it will not be solely based on Chinese population in the Phase III study for sure. Overall, we read the guidance from the FDA, and this issue came around the Eli Lilly analysis of their innovative product. I don't think it affects the biosimilars per se. But no matter what, we are running a global trial for both products. So we don't think that will be an issue for neither development. But you keep an eye on it. But I think it's a specialty product issue, but I'm more confident, of course, by having a global trial behind the development work for these. Your first question, if you could just repeat it, Thibault.

Yes. So the first question is on -- first one on KLOXXADO. KLOXXADO. [indiscernible].

Let me take KLOXXADO while we are looking. The other one?

Xyrem, Xyrem, Xyrem.

Xyrem. Yes, let me do Xyrem. So Xyrem. So we -- obviously, we have no guarantee when it's launched. We are saying mid -- around midyear. It could be listed into the second half of the year, of course. But our best estimation is around midyear. So it's difficult to give the exact timing. Xyrem or sodium oxybate is a specialty product in a closed system. So we have seen now that the branded companies tend to retain a significant market share when you come into the market, and the best example is Advair today. I think GSK in fourth quarter was 52% market share. So our expectation is that the brand will maintain some market share due to the closed system and so few payers around this product. Because if only 1 payer decides to stay with Jazz, that could mean 60% of the patients. So this is a very different situation. When you're modeling it, you need to think about that. We obviously don't know and we will know it when we launch the product. But that is what we have seen as an action. We're keeping an eye on it. But remember that we included in the guidance that the timing of the launch is difficult to say because that is based on the decline of Xyrem. So I'm not going to help you to model this in too much detail, but you have to recognize that if an acceleration takes place, the volume has declined quite significantly on top of that, that the brand might keep some of the market. But we are ready to go. The good thing is this is an authorized generic. So we will get the supply from Jazz whenever this is reached, this level. And we also have access to the REMS program. So we are ready to move whenever the calculation tells us that we can have an accelerated approval. We feel it's going to be, as I said, around midyear, but let's -- we haven't even seen the sales numbers in January yet. So it's monitoring how the sale is going because it's not like you can pick up Xyrem and IQVIA, I'm sure you know. In terms of KLOXXADO, we are very pleased with the feedback on KLOXXADO. So we are working now in twofold with the communities where we are going to different states in the U.S. and buying into their police departments and get it on their register. We've had a good feedback because the feedback, especially from the emergency workers and police departments, they like to have a higher dose instead of having to give 2 doses of 4 milligrams because that is 2 things they have to have on their belt. We -- but there is [indiscernible] cycles in the States, so it takes a little bit of time. Remember, we only launched this at the end of August of last year. But we are really pleased with that. On the prescription thing, they have started to come. You can see that there is slowly -- every week, there's more and more. There's a growth in the prescription. Still relatively low. But we also got one of the major pharmacy chains in the U.S. to keep it in stock as an emergency medicine in their pharmacies. So that is a big win for us. So it takes time, but it's as per expectation or a little bit better. It is a good thing. Maybe the follow-up question, has the generic version of Narcan impacted our sales? It really hasn't. Because the generics solely focus on the prescription market, generics wouldn't go into the communities. You need a totally different sales force, and it's costly. So the impact of the generic 4 milligram which Teva introduced to the market and the AP really hasn't impacted our sales as we expected.

Christian Glennie from Stifel. Just to follow up then, I guess, on a couple of products. We expected a step-up last year or at some point generic Advair, generic Vascepa. We've seen generic Advair around 8%, Vascepa 12% to 14%, I think. What is the expectation then? I mean have you got supply sort of on Vascepa? What's the expectation with both products as it relates, obviously, to your guidance for the generics overall for that?

Yes, so if I take both products. So in terms of icosapent, the challenge here is we got the third player in the market that's now actively marketing at the moment. So Apotex has introduced by the end of last year as a new entrant to the market. We don't know if Teva is coming or not. They have approval in hand, but they haven't launched their product. So at the same time, there's still a shortage in -- of supply in the market. If you look at IQVIA for fourth quarter, you still see that Amarin remains about 80%. Apotex is still at 0 because they just launched by the end of December, so they don't register yet. But they are active in the market in early this year. I think we came up 14% and Dr. Reddy is at 6%. So you can still see that there is a shortage everywhere in the market. We are working everywhere to increase our supply. I think for the time being, we expect increase a little bit through the year. But the step-up in increase would mean -- to our expectation would mean -- a big step-up would mean that the FDA has to inspect some sites both for us and maybe for the others. So that's the reason because the queue of the FDA to get the quality inspection for foreign plants is very long at the moment, and this is not a priority. So there could be some time until you see a big step-up in the generics with a significant API supply in the market. So three-player market. It's quite competitive but only at around 20% of last year, probably a little bit more now in terms of business. In terms of generic Advair, the -- Teva got approval in December. They haven't launched yet. But I read the analyst notes, as you did, about them. So they are expecting to launch soon, whatever soon means. In the market, obviously, Mylan and Prasco. In terms of others that could come in to keep an eye on, I think LAMET, in their press release on their second quarter earnings, they said they're expecting a letter from the FDA in February, and there's not many days left of February. So let's see what the letter says. And then Cipla has indicated that they are waiting for feedback on their deficiency responses from the FDA. So it is -- there are more companies thinking around it. In terms of our market share, so we -- I think in fourth quarter on average, we had about 20% of the generic market. So 10% of the total market if you count it like that, roughly. We -- I think we -- you will see it's still an increase because it's been a gradual increase. And so that -- we have plenty of supply. We don't have any shortage of supply. We have manufacturing lines. We probably could supply nearly the whole market if it would be needed. But overall, it is going to be more -- significantly more competitive product in 2022 than it was in 2021.

Do you have [indiscernible] figure revenue-wise?

I don't guide on revenue on individual products. It depends also on when Teva comes and if Cipla comes or anyone else. But -- so there are so many things outside of our control that can affect it.

Siggi, it's Paul Cuddon from Numis. Just pivoting to the Injectables business. I'm just wondering if you could provide a bit of an overview of the pricing environment kind of around the world within Injectables. The margin is taking a bit of a step down next year. To what extent is that sort of a cautious assumption reflecting maybe the contract manufacturing? And where might that lead in the next few years? And then just generally on your customer service proposition, closeness to the hospitals. I mean is anybody starting to match that to your levels?

Yes. So good question. So overall, the Injectables business did extremely well in '21. And the reason I say that is that the comparator in 2020 is very tough because we were selling, especially in the first half of 2020, so much of the COVID-related treatment. So the comparison -- remember, midyear, we were not growing in the U.S. And on full year basis, our U.S. business grew 4%, which is very significant because we had a strong comparator in 2020. In terms of our U.S. business, we've been doing very well. We launched 15 products in 2021. We continue to gain market share. So we became #2 in the market. We overtook Fresenius in terms of volume in the U.S. market. So Pfizer is still the biggest, but we became #2. In terms of our service level, there, really second to none. We have been really, really good in dealing with that. In terms of the margin, so I think '21, we did 37.6% or -- yes, 37.6% net operating profit, which is a really strong profit. You have to always keep in mind that U.S. have the highest profit and MENA and Europe have a lower profit. And both MENA and Europe are growing faster than the U.S. So there will be a little bit dilution, all this, on the net operating profit. There's more dollars at the end of the day, but the faster I grow in Europe and MENA versus the U.S. market, there will be a little bit of dilution in the business. In terms of '22, we are excited about that. In terms of the new launches, we expect to be in the similar numbers as previously, 10 to 15 new launches for the U.S. Injectables. The growth in Europe will continue. We expect to have our first revenues in France. And with the small acquisition we did in Canada, of Teligent Canada, bankruptcy of the assets of Teligent Canada gave us a little bit of platform to launch our own products. We have registered 9 products already in Canada. But we have not launched it because if you launch only with 9 products, you are loss making. So we wanted to sit on our hands until we have a big enough portfolio to offer. In MENA, we will continue on the biosimilars getting more approval, and that can really drive the growth of the Injectables in MENA in '22. Especially on Herzuma and rituximab, we are getting the approvals through in more and more countries every year. And still, Remsima is performing very well. So in terms of the profit, I've always maintained that you should think about the Injectables' 35% as the base. We always hope to do a little bit better than that. Shortages in the market usually mean you do a little bit better. You can't build in shortages into your forecasts. I think you know that. That would be -- because for example, Fresenius, even though they have challenges after Melrose park plant, it really hasn't benefited anyone because they have done a good job in managing that quite well. So overall, I'm very excited about the Injectables. We will -- we have the first sale of our compounding. So compounding, we kicked that off. We have now a manufacturing plant that is fully running with validated processes. The challenges are that you need to license in every state in the U.S. So we are just starting. So we are between 5 to 10 states at the moment. So we expect that, that will come through the year. Some of the states require us to have the FDA to visit before, so then we need to wait for the FDA to visit. So this is why in '22, don't expect a big contribution from this. This will be the start year. And hopefully, midyear, the -- my thinking is I can give you more of a focus of long term what this business can do. We will see more of the market. We will have better information from the hospitals. But this is the kickoff that we see in '22.

Just adding to the -- to the margins. In 2021, there was some impact in the Injectables margin coming from [ EPIC ] . So if you exclude that, and there is an appendix, some explanation about the hyperinflationary impact which affected the injectable board, the margin would be higher, like 38.9% in constant currency. So slightly higher than 2020 as well.

So just [indiscernible] -- just on price. You focus on generic price deflation and things like that. So -- and a lot of investors will ask me, well, where does life injectables fall into?

So we are still remaining that it's low to mid-single digits. We're not seeing the pricing impact there because I've always said and maintained that the service level that we have and the relationship and how we have been able to step into when others have not been able to deliver has allowed us to -- helped us to maintain pricing better on the injectables side than on the non-injectables side on the U.S. generics. So I'm much more positive on the injectable pricing environment in the U.S. than maybe on the non-injectables. If you could pass it. [indiscernible].

[indiscernible] questions on the line. I it's all right, we'll move back.

Yes. So operator, if you'll open the line for questions online.

[Operator Instructions] We now have our first question from Max Herrmann from Stifel.

It was just really a follow-up on the Injectables, again on the pricing just because we've seen this week from Fresenius' commentary about tougher pricing environment in their injectables business. And I know you said your customer relationships mean you don't expect to change from your previous guidance. So I just wanted to try to understand if their relationship's not as strong. Or what is the difference that they're seeing a change in the market? So I just wanted to understand where you're not seeing that change.

Yes. So the issue is between Fresenius and Hikma. The key difference is the portfolio that we have. So our portfolio, we have over 120 products, but all of our products are relatively small. So when we get the competition on a single molecule, that doesn't affect us nearly as much as when Fresenius. Fresenius has at least 5 very, very big products in the hundreds of millions in revenue. So when they get the competition or new entrants on these bigger molecules, they obviously have reflected in more price erosion that you see in the market. So the buildup of the portfolio -- I think Fresenius has a really good relationship with the customers. I don't think there's a big difference there. But it's really the buildup of the portfolio why we are reporting a little bit different numbers of how we see the pricing in the market. Therefore us, having a much -- a very large portfolio but really no blockbusters to talk about, then I would love to have their blockbusters. But also, at the same time, in a tough pricing environment, it is better to have smaller products and a lot of them.

Okay. And then just a final -- the last question was just on Custopharm. Can you -- I may have missed this, but can you update us in terms of the completion and what the process is at the moment in terms of the regulatory review with the [ FTC ]?

Yes. So -- yes. So by the way, Custopharm is not included in the Injectables guidance. Obviously, we don't know the exact numbers today, so -- and we don't know exactly when we close. So it wouldn't be right to try to guide for those numbers. In terms of when this transaction close, it's at the same time, as we've said, when we announce. So we expect it by midyear, hopefully in the second quarter of this year. We're working closely with the FTC. Nothing is quick in this process. But really, there's no outstanding issues. We are very comfortable on the transaction itself, and we expect that to happen in second quarter.

We now have our next question from James Vane-Tempest from Jefferies.

Just starting with Injectables. Apologies if I missed it, but can you give us a little bit of clarity around the 35% to 37% margin? Is this based on regional mix? Or is it more based on new launches? Just to give us a flavor of that. I'm just looking at '21. I guess despite Europe and MENA growing really, really well, which we know are low margin, you're still in the middle of your guidance. So -- I mean, if your underlying U.S. margin is going up just given the growth that it delivers and where you came in at the full year. And then the second question is just on Custopharm. I appreciate it's still to close. You're not guiding specifically. But just as a scenario to help us, if it was to close, say, in the middle of the year, can you give us a sense in terms of what the contribution would be to the business?

So on the margin itself, it is -- overall, it's still a strong margin. In terms of the 35% to 37%, it has to do with the regional mix, a little differentiation. There is an increase in the cost of transportation, there's a little bit of increase in cost of manufacturing that we're dealing with in this business because you have to remember for the U.S., half the volume that we sell in the U.S. is coming from Portugal. So there is a tiny bit of increase in that cost. But you really cannot push back to the customers. It's nowhere near that some of our peers are seeing because we have a good control. But that's part of it. Part of it is that the biosimilars in MENA are growing the fastest. And biosimilars, because we are sharing the profits with Celltrion, naturally has a lower profitability. And then part of that is also how the contract manufacturing comes in overall. But overall, there's no big change in the business. That means that the profitability is going way down. It's small things here and there. The regional, a little bit of increase in transportation costs, and then more sale of the partnership drugs, which means not really impacting our operating profit. Second question, if you'll remind.

It's about Custopharm.

Custopharm, yes. So Custopharm. So the FTC doesn't allow me even to visit them. So I really don't know what their budget is for 2022. So that's why I'm very blindsided. Remember, when we announced the transaction, we said that a rough estimate of the revenue for full year 2021 was $80 million, and that's really all I have. I have no update on that per se because we need to treat each other as competitor until the transaction closes. But that we -- in a way, James, the only indication I can give you is what we announced when the transaction was announced in September.

We now have our next question from Nicholas [indiscernible] from Barclays.

Just I had a quick question on the R&D. I know that it's difficult for you to guide towards revenue specifically on the individual products and business lines. But just thinking about what guidance looks like for 2022, some of the brokers have been explaining that they expect R&D overall to increase. How do you kind of see R&D and also the allocation across the regions as well? So we should expect to see probably MENA and Europe with the greatest allocation to R&D?

Yes. So R&D is roughly -- we don't guide on R&D, by the way. But what we have been delivering through the -- since I joined the company at least is approximately 6% of revenue on R&D. Could be a little bit less, a little bit more, but that's really the -- what has come out over the last few years. I can't guide you on 2022. In terms of where the most money is being spent, we spent -- when you look at the numbers, we spent a little bit more. We spent more on Generics and Injectables than we do in MENA. And the simple reason for that is so big portion of our pipeline in MENA is also business development. So we do our own development, but also we compensate or basically mix the two together where we have specialty products in the pipeline which is done by our partners. So around -- we have delivered around 6% of global revenue, more on Generics and Injectables versus MENA. So that's really how far I can take you in terms of the allocation of the R&D. Okay, Pete.

Okay, Pete.

Peter Verdult, Citi. Just two questions. Maybe to start, Khalid, on cash flow, pretty strong. Just...

Crazy.

All right. So...

Very strong.

Quite strong. On a serious note, you've -- during the crisis, you made it clear that you had high inventories and you knew that was putting you in good stead. But of course, there's been profit growth. But is there anything -- meaningful change in the inventory levels that you're holding receivables/payables that is helping? And then secondly, for both of you maybe on the MENA region. Just any -- can we -- I know there's hyperinflationary effects. But if we put that to one side, anything you want to highlight in terms of country performance? And then more broadly, you've had this long-standing strategy of holding the cost base, delivering a better portfolio. I mean it feels to me like it was years ago that you did for [indiscernible], [indiscernible], the [ Brasilia ] deal. When might we dream that actually you start -- that starts to sort of translate into better top line performance and margins maybe just finally getting off that bottom of around 20%?

Do you want to take that?

Yes, I'll start. In terms of cash flow, there was a focus from the beginning of the year, all the management team, on how we want to manage inventory levels. Because if you look into 2020 versus 2019, it went up. And we had actually a project that we've done with all the segments and involved many of the supply chain, purchasing team, finance to look into how we are going to optimize our inventory level. And you can see this drove our inventory down and really drives the increase in our operating cash flow. It's one side. It's not just the cash flow as well receivables. Now we have much more control over our receivables. We put in place certain controls that -- when countries can sell at different level of authorization and control mechanics to their credit limits, which helps as well controlling the receivable balances in a way. So all of these helped with the targets that we are setting to the regions as well, and how they are going to achieve their cash flow targets helped improve our cash flow. And we've been working on this since some time, not just in this year, and we've been delivering year-on-year on our cash flow. So it's nothing, I would say, specific other than the inventory, but it's much more controlled and bringing the inventory into a more normalized level.

Yes. And also, I think on inventory, we are very selective what we keep more inventory of because of delay in transportation and things like that; became a shortage of rubber stoppers for our Injectables business. And then we say get more rubber stoppers. So it's not like finance takes everything down. You can see that our inventory '21 is a little bit more than 2019 but lower than 2020. Isn't that right?

Yes, yes, 2020 is -- was more.

2020 was very high because the pandemic was going on and we let it a little bit loose. It was better to have more inventory than less. So there was an opportunity to fix that a little bit in '21. In terms of MENA, the country I'd call out which did amazingly in '21 but also in '20 was Algeria. Algeria now is our star market in MENA. So well executed on all fronts. They introduced a new oncology plant. We've got 8 products from a brand-new plant to the market. And the beauty in Algeria is you are alone. If you manufacture locally, then others cannot import it. So you -- I think we grew Algeria 42%, if I remember correctly. So very strong growth. But we also grew in Egypt. Not at the same level. And these are at Tier 1 markets. In Saudi Arabia, Saudi Arabia is still a very strong market. But what happened in 2021 was that the government restructured the governmental tenders. So there was a delay in the tender. So the tender part of the business didn't perform maybe as well, but I'm saying that's a timing for me. When...

[indiscernible]

So there were 6 or 7 different tenders in Saudi Arabia for different parts, different hospitals, different regions. So they now have one central tender for the whole country. And by doing that, there is a delay in the tendering business that's happening. So it will benefit us going forward. But the retail side of the business in Saudi did very, very well. It was encouraging. Jordan did well, probably the best performance in Jordan that we have seen at least since I joined the company. So we feel really good about the MENA. In terms of profitability, so if you take out the hyperinflation, they delivered a low 20s as a profitability. The hyperinflation, I'm sure you saw it, it took me forever to -- I still don't understand why it's done like this, but the hyperinflation obviously increased our revenue but decreased the profitability. So the branded business delivered in constant currency, a low 20s profitability, which is where it has been, to your question, please. In terms of where -- when we can raise that into the 23%, 24%, we don't know. But as you can see, it is -- no matter how we deliver on the business, it seems to be eaten up by FX and our hyperinflation accounting and things like that. So that's my biggest thing. We launched with Gedeon Richter the [ Rylan ] (sic) [ Ryaltris ] in the first country end of last year. It takes a long time to register products in MENA, up to 3 years approval time in many of the markets, especially for specialty drugs they don't recognize. So we're hopeful. The ultimate goal is we want to be just over 50% branded generics, just under 50% specialty drugs. But also, you have to keep in mind that when I introduce specialty drugs, I'm sharing the profit with the partner at the same time. So hopefully, there is a step-up. And the step-up is more better utilization of my OpEx, better utilization of my sales force because we have a big sales force. We have 2,000 sales reps and sales support. And I need to grow and better utilize. It's like an overhead in a plant. The more I manufacture, the less the overhead is impacting. It's the same I'm thinking about for the MENA region. But it just takes a little bit -- it takes time.

So what you've got is obviously cash flow. Do you think that...

Even better. You should see the inventory of rubber stoppers we have. It's beautiful.

Yes. But the volumes in MENA as well is increasing. So it's -- the business itself is doing very well, as Siggi mentioned. Now you get bit and pieces from FX from different countries. So it's like 18 countries; each country has its own currency. So -- but it's -- in a way, we are managing that. And I think this year, we are targeting to improve as well.

This is the last point on MENA, is that -- so I think 5, 6, 7 years ago, between 60% and 70% of our sales there was antibiotics. Now over 50% is chronic medications and antibiotics is down to 20% to 30% of our sales, which tells you that this strategy of bringing in more chronic medication, relying less on the old -- the old brands are still good. They're still very valid, but the growth is more in the chronic medication because the movement is less. So I'm really pleased with that. We showed that on the slides that over 50% of our portfolio being chronic medication. It's a huge improvement of the portfolio markup that we have for the business. Any more questions online? Nothing? Any more questions in the room? Yes?

Thibault Boutherin, Morgan Stanley. Just two more questions.

Yes.

So the first one just on the operating margin for the branded business. When you think about the kind of normalized base of low 20s for 2022, will we see some sort of negative base effect in the first half, which means that you'll probably be below this kind of normalized margin because of the penetration hanging on in the first half? That's my first question. And the second question, just on the compounding business. If you could tell us a little bit more about is this a kind of new industry? So who are the competitors? Can you switch off the markets? And just kind of give us a little bit more details on what you're doing here.

Do you want to start?

On the first question, I think if you look into the H1 and H2 in a way how much we achieved, there's a lot of, I would say, controlled costs in the second half in order to manage our -- and this is like we put a plan into how to reduce our costs and control our costs, which helped as well the margins. But a big chunk of the inflationary impact took place at year-end because -- it took us by surprise, to be honest with you, because the currency in Sudan was stabilizing and then suddenly, the CPI index showed a different result to the stabilization of the currency. So a big chunk of the FX took place in the second half and, therefore, affected the margin. If we exclude that, you would see more of a normalized level on margin for the second half and margin would be stronger than the first half for the branded business.

So in terms of the 503B business, the -- it is a big and growing business. So it's estimated -- there was an FDA conference -- virtual conference last year about this business. It's estimated that the total market is between $2.3 billion and $4.6 billion. So the reason nobody knows it's a direct sale to the hospital, this doesn't hit any wholesalers. So how it happened is that you have a courier from your plant straight to the hospitals because it's on -- made for each patient in a way. In terms of the environment, so in the U.S. today, there are 67 companies that say they're into 503B, and they have approximately 75 manufacturing plants for this business. The biggest company is QuVa, Nephron, C-A-P-S, CAPS. Those are the top three, I think, in terms of the business.

Revenue they generate.

They are not public, so we can guess. I honestly don't know. I think QuVa -- no, I don't know. I think it's in the -- probably in the hundreds of millions, the biggest ones, maybe 100-something millions. But I -- it's a pure guess from my point of view. In terms of the portfolio opportunity, it's pretty big. There are different opportunities. And also, when there is a shortage in the market, what the FDA allows the compounders to do is to compound this product for the hospitals if there's a shortage on the lifted front. But the first focus is sterile-to-sterile compounding where you take a drug and you make it into a bag when it's not in bag and you mix it. What we heard and the reason why we stepped into it is when we met at the hospitals, the hospital pharmacists, the doctors and the nurses, there's been -- this industry has been inundated with quality issues. And if you go online and go on the FDA website and you look the 483s and warning letter that this industry has had, it's a long reading. This is like all volumes of Harry Potter that you -- so there is a long reading. And they came to us and said this is not a reliable industry. It's a way of utilizing the quality system you have for the pharmaceutical companies on the SOPs, the validations, the stability testing to change this industry into something different and really revamp it in a way that will step up, of course, the quality but also will give the hospitals more trust in the products that's coming in. So that's really where we came to this. It is that there is a need in this growing market for a high-quality supply. We have a big and beautiful plant. I'm really hoping, if this **** pandemic goes away, that I could invite you to see the plant maybe this year or early next year because we are ready. It's running. Estimating we will have 100 people there. In the video that went on social media, you can see a little bit of video from the plant itself, where it is. But the idea behind it, it's a big market. We have to obviously start from 0. We have this idea. We thought about doing an M&A because it takes a long time to start from 0. But we went against that because what you take is the quality records of the companies that you're buying and -- instead of starting fresh and taking maybe an extra 1 or 2 years to build the drugs. That was how we thought about it. But the thinking is it's the quality of the pharmaceutical industry we are introducing into the 503B business.

Oh, yes.

If you'll take a microphone.

Yes, just a very quick one, and I expect the answer is no given the mix of your business. But is there any potential impact, direct or indirect, from Russia-Ukraine conflict?

No. That's the quick answer, other than the impact on the share price today.

Yes, we knew that.

Yes. Yes, it's all Ukraine today.

It's Keyur Parekh from Goldman. A couple of kind of questions for you. One is kind of you've announced a $300 million buyback, which is kind of reflective of this great cash flow you've had last year. But what level is it also reflective of, in your view, lack of inorganic growth opportunities kind of across the industry? One of the things kind of people want you to do is grow faster. So is this $300 million in buyback kind of because you're not seeing enough growth opportunities? You think you can do $300 million plus everything else kind of you want to do? That's question number one. The second is, if press reports are to be believed, kind of there could be a different owner to one of the large generic players by the end of the year. It could be in private equity hands. How do you -- if that was to happen, how do you think that kind of changes the competitive environment kind of for the broader industry? And what does that mean kind of for Hikma? And then lastly, as you kind of enter this new market on 503B, how should we think about the margin profile for the business kind of over the next few years because you've kind of -- you said you'll evaluate it inorganically entering that market versus doing it organically off a very low base. But I'm presuming it's going to be margin dilutive for you kind of in the next couple of years. But any kind of help there would be helpful.

Yes. So let me start on the last first. So in terms of the margin, so clearly when you're starting and kicking off a business and you hire 100 people to have a very little sale, there will be a little dilution to the margin this year. But overall, when we are up and running and then this business is going and when we have the licenses, we wouldn't expect this to be dilutive. It's basically only the start-up cost that is impacting the margin. You want to take the [indiscernible]?

Yes.

You start and I can add.

Yes. In terms of the share buyback, if you look into this year, we've done -- 2021, we've done several like Custopharms. And we've done two deals on the biosimilars. So we have a couple of, I would say, business and BD activities, and the team is still looking into several opportunities, of course. So a buyback of $300 million is not going to impact us in terms of doing any organic or inorganic growth because the firepower that we would have is still up $1 billion or something. Even our net debt today is 0.6x. The share buyback is going to increase at a minimum level, and it's not going to affect our ability to do bigger acquisitions. So it's just how the management believe that the market is not really seeing the intrinsic value of the business and the value of the business and the multiples that we are creating here.

So -- and on Sandoz, I -- so if you look at the profile of Sandoz versus our profile, you really are only overlapping in U.S. They are 55% European company, and then they're all around the world. They don't have a big business in MENA. So the U.S. business, yes, we are competing with them on the injectables and on solid oral in the U.S. I don't think it's changed it so much. They have been declining double digits in the U.S. over the last few years versus where we have been growing double digits. So they have a very different portfolio of products they are dealing with. They sold their solid oral business. They got it back. So there have been many challenges that they have been facing. So I don't think a new owner of Sandoz will fundamentally affect us. I think it will be a lot of integration, I think, to take place to make this into a stand-alone company. So I'm not sure it will be operational by year-end. But overall, I think the impact on us is very little to nil overall.

Just following up. So that 505(b) -- 3, you said when you get to...

503B, yes.

When you get to that kind of steady state, it'll -- it won't be margin dilutive.

Yes.

How long before you get to that steady state?

So I'm hoping that -- so it will be a -- so it's so small this year. It's just a tiny bit market dilutive this year. Next year, I'm hoping that we will already not be dilutive. It might not be accretive next year but maybe in the third year it could be a tiny bit accretive if the plan goes ahead as we expect. Any last questions? Very good. So I just want to thank you all. Great to see you face-to-face. And thanks to the people on the phone. Hope we can see you all soon face-to-face again. Thank you.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.