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. And we're going to hear from Hikma's new CEO, Riad Mishlawi. Thanks a lot for joining us today, Riad, and look forward to the presentation.

Thank you. All right. I was thought to project my voice because I'm too tall for the microphone. So good morning. Thank you very much for coming here. My name is Riad Mishlawi. Very happy to be here today. This is my first time presenting at JPMorgan in the conference. I've been -- as James has said, I've been newly appointed CEO. I've been in this role for 133 days, but who's counting. Previously, I was the President of the Injectables in Hikma for quite some time. Today, I'd like to give you a brief overview of the business and our recent performance, then set out how we are going to look at the future and our various levers for continued growth. Just a couple of things about our company. We are a diversified global generic pharmaceutical company with 3 structured businesses, 3 impressive businesses, actually, all the leading market positions. The global Injectables is our largest with sales and manufacturing in North America and Europe and MENA. In MENA, we have the focused Branded business, which manufactures and sells branded generics and in-license innovative products across the MENA region. And the non-injectables retail Generic business in the U.S., manufactured in the U.S. and marketed in the U.S. Underpinning each of our businesses are a broad portfolio of products and manufacturing strength and a culture with unwavering commitment to quality. This culture is embedded in everything that we do, and I think this is what sets us apart. Talking a little bit about the performance. Hikma has performed extremely well over the last 5 years. If you see from those graphs, firstly, we have consistently delivered strong revenue growth and have achieved 5% revenue CAGR over the last 5 years. Despite some headwinds that we had in our Generic business in 2022, we're able to turn it around, and we have all 3 businesses now performing really well. We will be announcing our results next month. More importantly, we have delivered consistent growth in EBITDA over the last 5 years, consistently achieving one of the highest margins in the industry, around 28%. Third and finally, our cash generation is always very strong. This supports the very robust balance sheet that we have that is -- leverage really consistently low will allow us to have a firepower to invest in our business organically and inorganically. Trying to simplify what our what our strategy is here. I've been the CEO for this, as I told you, in this position for not too long, and I had been talking and meeting with everybody in our team to see what our strategy is, what we have to do. So the strategy that we have been following for the past few years is still very valid strategy. It's still good, albeit we can do something better, maybe we can have some tweaks, some -- maybe focus on execution, expediting some of the projects that we have, trying to see what we can do to continue doing what we've been doing, but just do it better. As we see here, our -- simplistically, we're looking at the strategy in 3 different pillars. The first one is excellence and then diversify, differentiate and lastly, people and responsibility. And then we broke those down into 6 different levers, 6 different priorities. First one is Enhance. Enhance is about focusing on our operating efficiencies, leveraging our expertise across the group and ensuring the 3 businesses are operating in the best efficient and -- best and efficient manner possible. The second one is Leverage. Leveraging is more ensuring that we're maximizing what we have today. We have a very broad portfolio in all 3 businesses and excellent commercial capabilities. We will focus on what our customers need and get the most out of the existing product base. Develop is very critical. You will see it in every strategy that we have. We're talking about development of products. Today, we invest about 6% to 7% of our revenue in R&D. And we also have business development teams in each of the businesses, forging partnerships. We know we can't make everything ourselves. So partnerships is important. This way, we can enrich our pipeline with both our own complex generics and partnered ones. Expand is about doing more with our expertise. We have recently expanded Injectables business into Canada successfully. We have gone into France, Spain and the U.K. in the last 2 years, and we've been growing those markets consistently. We're growing other adjacencies in the business that we have contract manufacturing and sterile compounding is just to name a few. We think those will be meaningful in the future for the growth of Hikma. Our people, of course, are the bedrock of our success. And I believe by empowering our workforce and ensuring our culture is unified across the group, we will continue to thrive. I have been meeting a lot of people across the company in recent months, listening to their suggestions and try to leverage their ideas and their talents across all geographies. Finally, we act responsibly. We are a business whose purpose is increasingly to access affordable medicine to everyone, and we will keep working on that, making a positive impact to the patients and our communities. So before I go on in details on how we intend to execute the strategy of each business, I want to step back and give you a brief description at a very high level of each of those 3 businesses. First one is Injectables. Injectables is our largest business in terms of both revenue and profit. This business manufactures and supplies sterile injectables across North America, MENA and Europe, with over $1 billion in revenue, an impressive 9 years -- 9% 10-year revenue CAGR. We've also consistently delivered industry-leading core operating margins in the mid-30s and above. The Branded business is our oldest business and largest by manpower and by coverage. It was founded in Jordan over 45 years ago. We are one of the largest pharma companies in the region with 20 plants and very broad portfolio of products. Many innovative companies are attracted to our presence and deep knowledge and expertise in the region and offer us an opportunity to commercialize their products alongside with our branded generic products. We are seeing good recent growth in this business, excellent margins, and we're very excited for the opportunities ahead. Finally, the Generics is our U.S. non-injectable business. We have a state-of-the-art manufacturing facility in Columbus, Ohio, from which we supply a broad range of products to the U.S. market. We have expertise in more complex products there such as inhalation, nasal sprays, and we are one of the largest suppliers of nasal sprays technology in the U.S. Now let's look a little bit closer on how we are going to apply the strategy in each of those businesses. Starting with the Injectables. It's something that I know the most. So firstly, we continue to invest in R&D. This is our future. So more products, more portfolio, increasing differentiation of our portfolio is going to be key. While the conventional pipeline is critical to our growth, we have been launching 10 to 15 products year-on-year every year. These are smaller products that we would try to complement them with more differentiated products, more complex and more 505(b)(2) products. For example, we invested a lot in prefilled syringes, IV bags and other ready-to-use products that are increasingly, we believe, is going to be in demand in the health care -- by our health care customers. New adjacencies, we're always looking at areas how can we benefit from our expertise. So we're looking at the adjacencies. I mentioned before, Injectables right now, we're growing our sterile compounding business in the U.S. This is a natural expansion -- extension to what we do today. We have a great knowledge in sterile manufacturing, how to make them, how to test them in the best practices possible, to become a reliable player in this market is something that we are looking for. We think it is doable. We think that we can address an unmet need of our customers in the hospitals. This is an exciting and large market, and we are confident of being able to build a leading position in the coming years. We're also leveraging our expertise and capabilities in sterile manufacturing and our quality records to build a contract manufacturing business. We have done this successfully over the years. We think we can capitalize on it and expand on it. Thirdly, this is a global business, and we are really focused on continuing to strengthen MENA and Europe. In Europe, for example, we're increasingly leveraging our global portfolio as well as deploying dedicated R&D to the region to help drive growth. Geographic expansion is a key theme of this business, and we are pleased that the progress is being -- is growing and being very positive in both U.K., France and Spain today. In MENA, similarly, we have been growing very steeply there. We have seen our portfolio do very, very well. We're taking market share. We're growing new markets. A great example would be what we did with our biosimilar partnerships with Celltrion. Now we're one of the leading companies in biosimilars in the region. Finally, we keep investing in more capacity and in-house capability. This is something that we believe we're good at. We believe we're good engineers. We're good in manufacturing. We do it well. We do it with quality, with great quality design, and we have done very well over the years. We have big manufacturing plants that have been producing more and more every year and adding to it. Last year, for example, we added 2 lines, one in Portugal and one in Cherry Hill, those are fast lines running at 600 units a minute, if you can imagine. But those two lines are in place right now and they are producing. Also, we're expanding our MENA injectables. We are building new plants now both in Morocco and Algeria. And soon, we are breaking ground to build another one in Saudi Arabia. Moving to the Branded again. We're going to start also with R&D. Again, R&D, you'll see it in all of our businesses. It is the priority for all our businesses, portfolio is going to be definitely a priority. We're going to focus on developing more and more product in treating chronic diseases. This is an area where the growth of this business depends on these diseases, such as diabetes, respiratory, cardiovascular illnesses as well as significant focus on oncology products. We have a dedicated R&D facility in MENA and we always aim to be first in the market. It helps also because we do have also an API manufacturing facility. So we're able also to leverage our API capabilities to produce products that we will be the first of the market in this area. Secondly, we continue to be an important part of the health care ecosystem in MENA. We regularly host events, panels, conferences and bring together health care professionals and key opinion leaders to educate and build awareness. MENA usually is about 5 to 10 years behind the U.S., and we can leverage our knowledge in the U.S. and Europe and try to implement it and leverage them in MENA. Business development is key in that division. We're increasingly seeing innovative companies looking to partner with us. We are one of the few one-stop shop for companies that don't have a commercial or regulatory presence in the area. We signed several agreements in 2023 and have many more in the pipeline. In fact, we just announced a new partnership this week with Guardant Pharmaceuticals to commercialize the next-generation cancer diagnostic solutions for oncology. It's an important growth area for Hikma. Again, we're trying to go from being a supplier of medicines to be a solution provider as well. Finally, our manufacturing footprint in MENA is expansive, enabling us to cater to the specific needs of our markets and also benefit from our local manufacturing. We have several programs in place to expand capacity and also to add new manufacturing technology. We have added more oncology capabilities in the last few years and are leveraging engineering expertise from across the group to increase automation and enhance efficiencies and scale. Today, we have a lot of projects going on in Tunisia and Algeria and Saudi Arabia. In all of our areas, we keep adding more facilities, we keep adding more technologies to make sure that our operation is extremely strong and efficient. Finally, in Generics, we have a lot of opportunities we think in that business. We're investing in R&D again. We think that we have an opportunity there. We have a lot of technology in that that we can utilize. We're adding more complex generics to complement our core expertise, such as nasal sprays and respiratory products. There's more work to be done to get our pipeline in shape. We're making sure that we leverage our capabilities and have other parts of -- we have in other parts of our business. We think that we have a technology that is unique in that division, and we want to capitalize and add more and more products through R&D, both organically and inorganically through business development. The base business has a broad portfolio with some excellent products. Our commercial team has been very effective in defending and expanding our leading positions in many of our products. We pride ourselves with our customer service, quick response times and flexibility. Thirdly, we have our world-class facility in Columbus. If you haven't seen it, it's a great facility to see, which has excess capacity and can be used for contract manufacturing. In addition to making our own products, we're able to attract partners looking for U.S. domestic and higher-quality manufacturing. CMO can be a great foundation for that business. We're trying to leverage this and trying to see if we can create that pillar that another avenue for growth for this division as contract manufacturing. Finally, we have been steadily growing our specialty business, including our naloxone nasal spray Kloxxado. We are also looking to add more specialty product to this unit to our own R&D as well as partnerships. We believe we can consistently deliver at least $100 million to $120 million of EBIT in this business every year at minimum, with scope to increase this as we pursue more opportunities. Finally, bringing this all together, I truly believe that Hikma is in excellent position for growth today. I'm excited to ensure we deliver on our strategy. We have 3 high-quality businesses, broad portfolios and extensive manufacturing footprint and unwavering commitment to quality. In addition to that, we have a solid balance sheet and excellent cash generation that give us the potential to accelerate our growth plans and, of course, a track record of delivering value. I'm excited for the future and look forward to continuing to deliver growth in 2024 and beyond. Thank you.

Thanks, Riad, and we'll now go to the Q&A part of the session. Does anyone have any questions from the audience? In that case, maybe I'll start us off with a question. So you mentioned a relatively brief time to learn the role as CEO. But what, if any, changes have you made as CEO? Are there any changes you foresee yourself making?

Well, I mean, the -- I've been in the company for quite some time. So I -- the changes that I'm doing is not really so -- I don't think they are that severe or that changing, except I think we want to get to tweak it a little bit better, look at our strategy, see what we can do better. When I ran the Injectable facilities and the Injectable business, we really concentrated on technologies. We think technology, being able to do things that others can't do is key. So we're trying to implement this throughout our -- all of our divisions, trying to concentrate on R&D. I think R&D maybe could be better. We should have -- I think we could have done a better job in bringing out a better portfolio, but it's not too late right now. We have, I think, the right talent to do it, but we need to focus on it, accelerate some of the projects. So I think looking at R&D, looking at the future, looking at being efficient, looking at our strategy today, how we can tweak it, how we can accelerate it is just basic things and that's exactly what I'm concentrating on. Of course, people is going to be also key. Trying to see how can we organize ourselves to be more effective. Going around, we have many facilities around the world. As you know, we're a global company, 29 different facilities. Listen to the people, listen to suggestions. They really know best. So listening to people always gives you good suggestions and try to implement them and maybe organize ourselves in the best way possible. So this is my focus for the next year or so.

And do you see yourself at some point saying that this is a particular plan that you launched or anything like that? Or more just iterative as you go along?

Different plan, different strategic plan?

Yes, sometimes I say this is right. This is my project a nice name for it, and this is what I'm going to do to revolutionize things. Could we see a Riad plan? Or is it more just as you go along?

I'd like to find a Riad plan. We're looking at what can we do, what can we do more. I think we have the money, we have cash. Our balance sheet is healthier than a lot of other companies. There are opportunities out there. I think the key is going to be how can we find them, how can we jump on them and how can we integrate them and do -- make value out of them. This is going to be our focus right now. But when we do that, that will be the Riad's plan, but that's what we're trying to do.

And so 3 divisions at the moment, you've got Injectables, you have Branded and you have Generics. But at times, there's been talk about further divisions. One area I've heard you talk about before is compounding. So maybe it's worth just reminding exactly what we mean by compounding, but then also, where is Hikma on this compounding plan?

Yes, sure. So compounding would be one of the -- it could be a division, but it's too small right now to quality division. So I think it's more in incubation right now, it's trying to grow. We started it as a greenfield. If you don't know what compounding is, it's just very, very simple. So we -- sterile manufacturing, manufactures ampules, syringes, vials, bags. But most of those need another step before they actually get administered to the patients. They get compounded, they get mixed with diluents, whether it's sodium chloride, the WFI or get sometimes QS to the right concentration. So all that takes place usually at the hospital. Hospitals don't really like to do this. It's a big liability. It's something that they're not -- it's not their expertise. The FDA is becoming more and more demanding on the areas that you have to do this with, the methodology, the personnel, the training and the validation and so forth. So compounding is the step where you actually take those products and turn them into ready to use for the -- for the hospitals to use. We think it is very much a natural extension to what we do. We make in our core business those vials, those bags. And all we need to do is now get them to the step where it is easy to be administered, put them in the bags at the right concentration or syringes. So we thought this is very similar to what we do. We know those products well because we make them. We know how to test them, which is really the hardest part about the whole thing. And we have the same customers that we use for our core business. So this is why we started this business. But as any greenfield business, this takes time. So we started a couple of years ago. It is growing, it's becoming better, but it does take time. We brought equipment, equipment takes a year to 1.5 years to be installed and be validated. We have 50 states that we have to be approved in. Now we have about 48. So we have a couple of states more. There's a lot that we have to do to get going. We have to get the trust of the hospitals to trust us. It's important for the hospitals to trust us because many times, they had been burned by suppliers that didn't really pan out to be the right quality. So they -- it's hard for them to just switch. So we need to gain the trust. That's going to be a lot of leg work, a lot of actually doing a lot of work from our point to get them to trust our quality system. But we really believe in this business, and we believe that there is a lot of need for it, and we think that the future is, we're going to be one of the leaders in this business.

And as well as time, what about investment? Is this something that's going to require a lot of CapEx? Or might you need to make a lot of acquisitions to really get going?

For the compounding?

Yes.

Well, it could be. We looked at acquiring other compounding centers. It does really accelerate through. But if you're going with a unique quality program, you need to convert this new facility that you buy, a new business that you buy to your own quality systems. And sometimes, it's harder to get something that has already been trenched and then this is -- it's harder to get something like that and convert it. So we think that we can grow organically. We think we need to build more of those compounding centers as we go. It does require some capital expenditure, but I wouldn't think it is big, it's huge. I think the foundation is set right now. It's going to be a lot of effort from the commercial side to get more clients. But I think from the operations side, we're pretty much set right now. Of course, there's always growth that we can do. There's always more equipment that we can buy, more centers that we can cover. U.S. is a huge place, and we could have one on the West Coast, one in the South. This is something that we'll have to look at in the future.

And how should we think about profitability if you move into compounding? So for your efforts at the moment, what's the profitability profile? And longer term, what would it look like versus your existing businesses?