Hikma Pharmaceuticals PLC (HIK) Earnings Call Transcript & Summary

Good morning. I'm James Gordon, JPMorgan European pharma and biotech analyst. And today, I've got the pleasure of introducing the Hikma presentation. You're going to hear from Bassam Kanaan, Corporate Development and M&A. And then we're going to do a breakout setup here, where we're also going to be joined by Susan Ringdal, Global Affairs and Strategic Planning. Thanks very much for coming today and looking forward to the presentation.

Good morning, everyone. I'm very happy to be here. The usual disclaimer to start with. Actually, I've been in Hikma for 20 years. And in this period of time, we went from a small company founded in Jordan, with sales of less than $100 million to a global company listed on the London Stock Exchange with sales of $2.5 billion. It has been an incredible journey for me and a privilege to be part of this growth. Today, I truly believe that our business is stronger than ever and that we have excellent prospects for growth. So this will be, I hope by the end of this presentation, I can convince you with that, too. For those not familiar with Hikma, let me give a quick overview. We are a diversified global generic pharma company with 3 impressive businesses. These 3 businesses bring diverse revenue streams and portfolios. Underpinning each business is our strength in operations and manufacturing. We have 32 plants spread across our geographies, enabling us to respond quickly to customer needs. We also have a high commitment to quality where we have an excellent track record. And our portfolios are broad with little concentration. Lastly, our strong balance sheet, our net debt-to-EBITDA actually is around 1, and the strong cash flow generation offers financial flexibility to continue to invest, including looking at M&A opportunities. As you can see here, these strengths have enabled us to maintain a strong track record of revenue and profit growth. Over the last 5 years, our revenues have grown at a CAGR of 7%, and our core operating profits at a CAGR of 13%. We have also delivered an average return on investment of around 17%. We're very proud of our strong performance, and our ambition is to achieve even more. This slide shows the breakdown of our revenues and operating profit by segment. Our Injectables, which is a global business where we sell in the U.S., MENA and Europe, is our largest and fastest-growing business today, representing just under half of group revenue and nearly 2/3 of group operating profit. So it is the highest growth and the highest margin and the highest value part of our business. The Branded business focuses on the MENA countries and makes up around 28% of total sales and 22% of operating profit. And the third is the noninjectable generics business, which represents 27% of sales, which are all actually in the U.S. So the noninjectable is the U.S. business and contributes around 17% of operating profit. I'll take you through each of these businesses, what makes them special and where we see the opportunities for future growth. Let me start with the Injectable business. This is a truly differentiated world-class business. In the U.S., we rank #3 in terms of market share by volume. This is after Pfizer and Fresenius. And we have an extensive and broad portfolio of more than 130 products. Over the past 10 years, we have delivered revenue CAGR, revenue growth, an average of 13%, and EBIT margins consistently above 37% since 2014. We have done this while making significant investments in all aspects of this business in order to ensure we can continue to deliver strong future growth. We're very confident in our target to deliver a high single-digit revenue growth over the medium term for this business. Let me talk about the growth drivers that we see for the business, the Injectables business. First, on R&D, we are increasing our investment in in-house product development and adding capabilities to develop higher barrier-to-entry products. With the acquisition of Custopharm last year, we have added further expertise in the development of complex and first-to-market generics and expanded our pipeline substantially. Second, through BD, we are forging partnerships to help add complex products and to build on our capabilities. A great example of this are the deals that we have done for the biosimilars. In MENA, we have signed 6 biosimilar agreements with -- and a biobetter, actually, with Celltrion. Three of the -- those agreements were launched, products launched, and 4, we just signed the last 2 months, and they will be launched over the next 5 years. So there's an opportunity to grow this side of the business substantially. We have also signed 2 bio-innovative products, most recently with Junshi on a PD-1 product, which we announced last week where we took the exclusive license to sell this product for the Middle East, North Africa region. And in the U.S., we have partnerships with Gedeon Richter in Hungary and Bio-Thera. These products will increasingly be an important part of our growth for both the U.S. and MENA. There are also new markets, which is the third part -- the third growth driver. And where we are expanding into markets like Canada, Europe, and of course, Spain at first. So in Canada, for instance, we did an acquisition last year of a company called Teligent. Our position in Canada today is very small. But over the last -- the next 5 years, we expect to be a top 5 player in the Canadian market. Also in France and Spain, as I mentioned, we opened an office, a business there. And our business is small to start with today. But as you know, these markets in Europe offer a substantial business, in terms of market size, and they are fragmented markets. So we have -- we really have an opportunity in those markets to expand our market share and increase our sales for the Injectable business. Also, as part of the third growth driver are adjacencies. These are areas where we think we have a competitive advantage and we would like to enter into. For instance, we entered into the compounding business in the U.S. last year. We announced this time last year actually, and we have started already selling compounding. And I will talk a little bit more about that on the next slide. So what is compounding, and why do we think it is a great opportunity? Sterile compounding is the process of combining and mixing ingredients in a sterile environment to create medications in a ready-to-administer format tailored to the needs of health care providers. There's a significant opportunity here with market size estimated to be around $2 billion. Actually, the estimate is between $2 billion and $4 billion. It's not -- there's no published data, but we, through conferences, we estimate that it's at least $2 billion. We believe we have a real competitive advantage there through our strong sterile manufacturing expertise and ability to vertically integrate our supply chain. Together with our existing strong customer relationships, we believe we can change the game in the compounding space in the U.S. There's a few players in the U.S. in the compounding business, even though it's a big market, and I believe we will be one of the main players in a few years. So you can see from what I just presented just on the Injectable business, there's a lot going on, many levers for growth, all of which will enable us to achieve our target, which we are confident that we will achieve, of high single digit over the next 5 years. Now turning to Branded, which is the second business. This is another very unique business. The business supplies branded generics in the MENA market. The business model is that you have -- you promote the generics. And also, we offer in-licensed products, patented products across the Middle East, North Africa region, which, as you know, is one of the highest growing markets globally. We recently became #3 in market size -- in market share in the Middle East, North Africa region. This is behind Sanofi and Novartis. This is, I believe, a great achievement. Maybe only 5 years ago, we were #5. So within a fully short period of time, we see growth, we were -- we're now the third largest player, including the multinationals, and the first -- the largest regional player. We differentiate ourselves by our long history in the region and strong local presence. We also have the largest manufacturing footprint among our competitors. This is increasingly important as governments in the region promote local manufacturing of products. In this business, we also have a diversified portfolio. And to market it, we have 2,000 medical reps across the region. This is probably one of the largest sales force for any company in the region. This business also offers a very exciting growth opportunities. And as with the Injectables, we are confident we can achieve high single-digit CAGR over the next 5 years. Maybe I should talk a little bit about the growth for the Branded business, the growth drivers that we see. Key to the future growth of the Branded business is pipeline development and execution. We expect to continue to sign new partnerships for innovative products, and this is being done also with the new product portfolio where we're developing our own R&D capabilities in the MENA region. So we're doing both. We're developing our own branded generic products. And as I mentioned before, we're working on partnerships to in-license innovative products and launch them across the region. A third of our business for the Branded is actually in-licensed innovative products. Today, we have a high-quality pipeline that we expect will deliver a steady stream of attractive products in the coming years. Local manufacturing is a particular strength of ours with 23 plants, there's 23 plants across the region. We will benefit from incentives and protection given to local manufacturers and be able to quickly register and launch new products. I can give an example, for instance, where we were the first to launch oral oncology products in the region. And this we were able to do because we could develop our own API manufacturing and our own oral potent drug manufacturing facilities. And with this, you are able to be the first to register the product. So now we have -- together with the pipeline, we have probably the broadest portfolio in the region of oral oncology products. Our unparalleled commercial strength also makes us a partner of choice in the region, as I mentioned before, and I can see actually in this conference, where our MENA team has been incredibly busy. I mean I haven't seen so many meetings for the team over the last 2 or 3 days and over the coming 2 days. It's been really exciting. A lot of companies being aware of us and our capabilities in the region are actually calling us to see if we can work with them. So as I mentioned before, the outlook for the Branded business is very strong, and we are expecting solid growth to continue into 2023 and beyond. Now the last one business is the Generics business. As I mentioned, this is all U.S. This is noninjectable oral products, generic products in the U.S. So this business, we have started since 1990, but it really grew through an acquisition we did in 2017, where we acquired the Roxane business from Boehringer Ingelheim. Since then, efficiency, service levels and margins have improved and we have grown the portfolio also, very solid business. But more recently, market conditions have been challenging for us. And in 2022, we faced severe price and volume erosion. Our management team, where we have a really top team there, who's really involved, knows the generic business very well. They were able to respond with these headwinds by restructuring the business and reducing our cost base. So even with these difficult market conditions, which many, many think will continue, actually, we're not planning that this will turn around. Hopefully, we're seeing stabilization or a little bit of less -- a little bit less price erosion. But even with that, our guidance for 2022 is for solid mid-teen margins for the full year, which is a pretty respectable achievement or margin in our industry. And the business, very importantly, continues to generate healthy cash flows. Let me tell you 3 key areas that will help us navigate the industry headwinds, which I just mentioned, and to ensure that the business is more resilient going forward. This is for the Generics business. First, we will continue to add more differentiated products in our pipeline through internal R&D, with focus on respiratory products. So we have a niche in this business and the plans of being able to produce respiratory products and white powder inhaler and also nasal sprays. So as part of our plans, it's to go to a more differentiated, higher barrier-to-entry products where there's less competition. In the near term -- actually, we do have a pipeline. And in the near term, the products will generate growth and will hopefully return us to growth. We expect that there will be growth in 2023. We expect and we have launched just a few days ago, the generic Xyrem, which is a large market of $1.3 billion. So we launched the authorized generic where we have exclusivity for 6 months. So we do expect [ roughly ] this year, and we do have a pipeline to continue having a resilient business. Second is that we will continue to build our specialty portfolio. So we have currently 3 products, more in the ENT [ news ], specialization. These are products we promote in the market. So they are stable in terms of pricing and margins. So what we would like to do to stabilize the business and improve the margins, we're growing this franchise this part of the business. And we hope that in 5 years, we will -- the specialty parts of the business will make up 30% of the total. The third element or the third action we're taking is that we want to see how we can grow our contract manufacturing business. We currently have business with a few clients, including Boehringer Ingelheim, but we want to see how we can use the Columbus -- the facility which we have, which is really a top-notch state-of-the-art facility. One of the probably the most impressive facility I have seen, and I've been to many. We want to utilize this facility to grow the contract manufacturing for companies going forward. As I mentioned about the facility, this is a key differentiator and we're looking out ways to really leverage on that. Let me just say a few words on this point, but more on a global level. In terms of our manufacturing network, which sets us apart in terms of our capabilities, geographical footprint and quality track record, we will continue to invest, and we are investing in expanding some parts of these facilities and expanding capacities where we think there is potential for growth. As I mentioned before briefly, we are the #1 supplier of nasal sprays in the U.S. We also have 2 dedicated lines of dry powder inhalers and a dedicated facility for high potency products. Having U.S.-based sites also allows us to respond extremely well to U.S. demand fluctuations. And it's also with -- for people who want to produce in the U.S. and they're made in America, this would be a great facility to leverage on. Outside of the U.S., we have a rapidly expanding injectable facility in Portugal that we believe to be one of the largest sites for the production of lyophilized products in the industry as far as the injectables. This fits well with our expanding portfolios and pipeline and with the demand that we are seeing for contract manufacturing. We also do contract manufacturing in the injectable part of the business. For instance, we have Gilead as a client where we do manufacture remdesivir, a COVID product for them. Now just before I wrap up, it's also important to talk a bit about our pipeline development priorities in each of our businesses. And this slide provides a snapshot of what we currently have in our pipeline. Across the group, we are increasing the complexity of our internal R&D pipeline through the introduction of new technologies. For the U.S. Injectables, as you can see, we have a total of 78 products in the pipeline, 36 of which are already filed with the FDA. These products are across different forms and include bags, prefilled syringes, powder filled and pens. For the Branded business, in the Middle East, North Africa region, we have 119 products in our pipeline with focus on high-growth oncology and chronic therapeutic categories like diabetes and CNS and cardiovasculars. And for Generics, we have a total of 23 products, including nasal sprays, respiratory and oral solid products. So as you can see, our pipeline is strong, and we have a clear plan for even further product development going further. To wrap up, I'd like to say, as I mentioned at the beginning, that we have 3 solid businesses and a clear and compelling strategy for growth. We are particularly excited about the prospects of our Injectables and Branded business where we are confident that we can deliver high single-digit organic growth over the medium term over the next 5 years. We're also confident that we can build resilience into our Generic business through our focus on specialty products and contract manufacturing, as I mentioned before. In addition to this, we have a strong balance sheet that will give us the financial flexibility to find further growth opportunities through M&A. So the growth that I've highlighted is all organic. We have a very strong balance sheet, and we can use that to even go faster with M&A opportunities. Thank you very much.

Thank you very much. And so we've now got about 15 minutes that we'll do a Q&A here, and we're also joined by Susan Ringdal as well. Does everyone have any questions in the room? Just the microphone going to the person with the hand up.

Thanks so much for your guys' time today. Question on the U.S. Injectables business. It looks like from reading investor decks, a lot of your peers are looking to target this space as well. And I'm just curious why wouldn't this space become like the oral solids where you got a whole bunch of different players and pricing is negative and you just kind of compete essentially on price?

I'll repeat the question, which I think the question was, I'm paraphrasing, could U.S. Injectables become like U.S. non-injectable Generics? Could it commoditize because it looks like an attractive space for other companies? And might you see more price and volume pressure?

It's a question that is on our mind, and you would anybody would ask this question, but we do not believe so. As I -- the Injectable business, we have critical mass. We're one of the top players. And more importantly, even though there are 70 players across the market, but it is a very high barrier-to-entry product. The main difference between oral and sterile manufacturing, which is what injectables -- manufacture of injectable products entails much more sophisticated and much more attention to quality. So it's a very high barrier to entry. And we have seen that across the -- in our history, especially for the Injectables, not many people can sustain -- not many companies can sustain the high quality track record that we have.

Maybe I would just also add. If you go back 10 years, I think people would have asked the same question. And there was a lot of interest in injectables and a lot of people announced that they were moving into the injectable space. But we really haven't seen any of those players that talked a lot, and then have talked a lot for many years about injectables really gain a lot of traction in the space. So we see people coming in on 1, 2 or a small number of products, but we haven't seen that many players get as much traction in the market. And the price erosion has been pretty stable for the past 10 years in the low to mid-single digits, so it has been quite consistent.

Any other questions in the room? Or else, I'll go to the e-mailed questions. There's a question from the gentlemen there.

How does the inflation affect your pricing? Basically, can you pass your price -- pass the inflation to your pricing to your wholesaler or your customer?

So it's more difficult to pass the pricing on. I think what we've done over 2022 is really looked at our cost base and tried to manage costs as much as possible, try to look at efficiencies across the business. And we have been able to manage inflation, I would say, reasonably well. The business where we have seen the most inflation has been in the Injectables business because we do manufacture in Portugal and then are shipping globally. So I would say, and of course, energy prices in Europe have been more volatile than other parts of the world. So -- we have seen some impact from inflation, but it hasn't been that material on the business. But it is more difficult to pass that through in terms of pricing.

Anyone else in the room? Then I'll go to e-mail questions. So one question that's come through is that Hikma has pursued a consistent strategy for many decades. But could the company be reaching a limit on growth within existing markets? And what is the plan to look at new markets, adjacent product strategies or new large acquisitions?

Yes, I think as I mentioned in my presentation, we do -- we have very little in Europe, for instance, injectables in Europe. And Europe offers a good market, especially for high-quality injectable products. And we -- it is a fragmented market. We do have -- we are aware of the opportunity there. And in the past, we had given maybe more attention to the U.S., which is a much bigger market. But now we're looking at Europe. Recently, we opened an office in France. We plan to penetrate the Spanish market also. So we're looking at Europe, in particular, for the Injectables business. In the MENA, we're also expanding market share. We're expanding our footprint even further looking at countries like Turkey or the sub-Sahara markets, which are close to the North Africa region. Have I missed anything?

I mean I guess the only thing I would say is that the sort of medium-term growth targets that we've been talking about for the Injectables and the Branded business of the high single digits, this is organic. So we feel very confident that we have a very solid plan for delivering that growth from an organic point of view. And then there's lots of potential, obviously, using the balance sheet to find additional opportunities.

Thank you. The gentleman with his hand up over there, please.

Thank you for the time. During your prepared remarks, you called out the AG for the sodium oxybate product from Jazz. I was just trying to see if you can give any color on your expectations for that for the coming year. Jazz has just called out that there is some relatively large payments made back to them, and would just love any color you can provide.

So I think at the moment, there's relatively little that we can say about it. We just launched it last week. We probably will be able to give a bit more detail when we announce our results at the end of February. But what we have said is that there is a sliding scale in terms of the royalties to Jazz, and we see the best opportunity in the first 6 months when we have exclusivity. So at that point, I would say the royalties are the most favorable for us and then beyond the exclusivity period, then they will begin to tail off.