Hikma Pharmaceuticals PLC (HIK.L) Earnings Call Transcript & Summary

That's right. [indiscernible] you've been investing more in generics or Rx R&D. When does that boost start coming in? Is that a '26 story? Or do we need to be a bit more patient?

Yes. So as you know, I always say our business is like Christmas trees. You plant a tree today, so you can set up in 7 years. You have to anticipate, you have to be patient. You have to -- nothing that you do today is going to get your results tomorrow. You have to wait. In our case, in Rx, it's exactly what we're doing. But the good news is we can tell you what we're submitting. So we did tell you that we are submitting a very interesting product like epinephrine, nasal. Very unique product, extremely valuable one. Very easy to administer and a huge demand and potential on it. We have done all the studies successfully. We had a lot of conversations with the FDA. And we're anticipating submitting this product towards the end of this year, which means that this -- if you give it 18 months of the regular review time, if all goes well, I think we should have it within that range of time. And that will give a big boost to the Rx. it's not the only product that we're submitting, but this is a product that I can talk to you about because we made that public. But I can tell you that bringing Hafrun in, that was her focus. She revamped the entire R&D department. She brought in new people, it's a lot of focus. We're working on interesting products. We're submitting a lot of products. And I think the result of all that is going to be apparent soon. But while we're doing this and spending more on R&D, we're still getting great results for the Rx. I mean it's not like it's suffering because we're taking away the money and putting in R&D. We're putting more in R&D, significantly more on R&D still. We're coming with really high teens profitability margins, operating profit. So it's doing a lot better than we ever thought. And the contract manufacturing effect that is going to bring to it is definitely going to take -- to make this division extremely interesting.

The next question is from Victor Floch with BNP Paribas.

So maybe first one on tariffs. So I mean, it's fair to say that concerns for the EU pharma, that meaningfully eased since Liberation Day. But on the flip side, it's fair to say that it's now broadly assumed that the EU pharma manufacturing capabilities will have to be rebalanced overseas. So in this context, just wondering if you've seen any significant uplift in terms of interest for your CMO offering. So this was my first question. Then on U.S. compounding, I think you framed it as a key driver for the midterm -- sorry, for the long term and your $5 billion 2030 guidance objective. Should we expect at some point that you will be able to refine the [indiscernible] contribution from this business to top line and potentially [indiscernible] guidance that would help us to better capture this opportunity? And finally, on liraglutide. So I think last quarter, you've added to the fact that the expected end of semaglutide compounding could be a tailwind for your liraglutide generic as it will represent a low-cost option compared to the [indiscernible] list price of [indiscernible] down. So in the meantime, we [indiscernible] seen that the company is still very much alive, capturing something like 50% of the semaglutide markets. And also we've seen Lilly and Novo going for direct-to-consumer cash channels. So just wondering if we -- if you still believe that it could like materialize as a tailwind for liraglutide, and with semaglutide generics, do you think that you could drive like growth with liraglutide even though company is still very much alive? So that's all for me.

I'll start to answer some of them, Khalid will help me with some. Let me start with the tariffs. Again, it's not clear for us what -- how tariff is going to come about. I mean we heard that there were some agreements with Europe. We heard the 15% there. But we really don't know if that includes the generic drugs, if that includes something else, or excludes. This is still unclear for us. We're trying to clarify it. We're trying to talk to the government to see if -- but unfortunately, the confusion is not only limited to us, everybody else, a lot of people are confused. So we hope that this will be cleared soon. And then we'll see if this is going to give us to be any effect on us or not.

But even if it has an impact on the industry, we are well positioned, as Riad mentioned. So we are well positioned in terms of our manufacturing plants are in the U.S. The Bedford expansion that we have, even for the Injectable business, will be ready in the coming, let's say, 18 months. So we'll be able to benefit from that.

Yes. So we have built the business for -- to make sure that the local companies, they operate in the local market. So a lot of the U.S. revenue that we get is generated [ and born ] in the U.S. So there would be -- if there is tariffs and if it's [indiscernible], as I said before, it will affect us. It will affect all the industries. It will affect a lot of the peers that we're competing with, a lot of them. I think the effect on us will be there, but it will be as minimal as you compare it to our peers. That's something we're looking for. I think the government is they are looking at the tariffs and they are careful about how they are going to implement it. Because as you know, shortages in the U.S. is still there, especially in the injectables. If you are going to put the tariffs, you have to be very careful not to increase that problem or create [indiscernible] on that. So this is why there's a lot of bet and forth on this one. Sometimes we hear it included, sometimes we hear it's excluded. Sometimes we here if the API is Chinese, sometimes we hear that if you transform, the API is not. So there is really a great unclear definition on how the tariff is going to be implemented. Again, I think the government has their challenges as well, and that's why there's a lot of back and forth. As far as the U.S. compounding, our compounding business is doing great. I think we are in the right direction. A few things are happening in compounding. And I don't know if you guys are following the compounding business, but the compounding business has been very much challenged by the FDA in the last few years, last 2 years in particular. FDA just don't want compounding to be a different business or have a linear rules than the core business. So if you are doing injectables, these rules apply. They don't care if you're doing it by compounding or you're doing it aseptic to aseptic or doing it from aseptic to non-aseptic. The rules apply. In the past, when the compounding started, there were some rules that were a little bit lenient, I would say. They were a little bit more you can get away with. Right now, the FDA is coming back and withdraw those rules. And they are going to -- they're putting their foot down and they're saying the way you have to act that way, or else. And that created a lot of warning letters. It created a lot of people going out of business and a lot of pressures. So if you look and read about compounding, you'll see a lot of our peers, even the largest, have gotten warnings letters in the last 2 years. Fortunately for us, we are creating a compounding in the way that we learn how to do aseptic business, which is our core business, and we just copied what we do, but on a smaller scale. So when it comes to compliance, we have probably one of the cleanest record in compliance. So that's from the compliance point of view, which is very critical and a big risk in compounding. So that has been put to bed. We've done a lot of investment to make sure that this is done. Of course, it's not easy, when you have a batch, we make our average batch, in Cherry Hill, for example, it's 1 million units. Our average batch in the compounding center is 300, 400 units. So to scale that down is incredible. You have to use everything differently. You have to use a lot of manual steps. But that has been now done. We've gotten all the approvals of all the states. We've gotten the blessing of the FDA. We know what we need to do. From last year to this year, we had tripled the revenue of this center. But it's way short where we need to be. Our aspiration, we think that we can be the leader of the compounding business in the United States. We need to do it slowly. This is a very critical one. You don't want to make a mistake. And in this industry, trust is very, very important. Your clients need to trust you. They depend on your product. You're not going to stop an operation because the bag of [ Xanthanol ] did not come in and you cannot do a heart surgery that you're going to make a $600,000 from it, and now because of $20, you don't want to be canceling that. That they don't want, and that, you do it once and they will cut you out. So you need to build your trust. That is that what we're doing. And it's very much proven by the fact that we have tripled the revenue there. We're short from our goal. We think our goal would be big. We think that we should be, in the next 2, 3 years, we should be really hitting the hundred of millions, hopefully 100 million soon, and build on that one. So there's a lot of automation that has to happen. We have equipment that are on order for the center. I think there is a lot that we learned in the last 2 years what we need to do. We thought it would be very typical and similar to the business that we have. It's not. It's the relationship, the way that you sell, the way that you make, the way that you [ inspect it ], all of that is different. But we all know that now and the -- it's only going up from now on. So compounding I'm happy about. The future is bright. And we are really implementing our strategy exactly as we designed it. Finally, the liraglutide and the semaglutide question. I'm not sure if you know that the semaglutide will not be off-patent until 2031, in some cases, 2030. But it's not in the near future. So it's not going to be at a time when you are going to have liraglutide and semaglutide, both generic and both competing. Of course, semaglutide when it comes to generic, liraglutide will have very weak case for. Nobody is going to take a daily product when they can do it weekly. And who knows, by then, you can take 1 maybe every year. This industry is advancing so much. They said that the oil is going to come up now, very effective. And so this industry is moving. Today we know that liraglutide is doing well. Semaglutide is patented and with a very high price. And we are managing to get some revenue at the liraglutide. And that's all we hope for and we're managing this as the industry evolves and as competitors are coming into the market.

Our next question is come from the line of [indiscernible] with [ Libero].

Just 3 questions, if I may. First of all, just on the Branded margins, obviously, you had quite strong margins in the first half. You're guiding to margins for the year sitting at around 25% or so. You've obviously got a stronger growth coming through in the second half. So I'm just trying to understand what are some of the drivers that are going to impact the margins in the second half in the Branded division. Second question is just around the Injectables business, and you've called out in the past calcitonin and testosterone as products where you've seen some competition. And you said you've reacted to that. I'm wondering if you could just let us -- or give us a sense of whether that pressure is ongoing or whether you're seeing that pressure beginning to stabilize. And then the last question was just on vancomycin. I'm just wondering if you could give us an update on the black box and whether you've had any progress on that front.

Do you want to take the first one?

I'll take the first one. So the Branded business, it's a similar case to last year. Last year we had a strong weighted H1, and we delivered margins in line what we have this year. This is mainly was due to the timing of the tenders. So this year is going to be similar to last year, but maybe to a lesser extent. I would say the Branded business is delivering an excellent performance. I think maybe it's slightly now, given that there's no currency impact, maybe this will improve a little bit on where we've guided initially. But it's going to be around the 25%. So it's on the top end of our guidance, I would say.

For the Injectables, the 2 products that we have difficulties in, or, let's say, we face competition and I think we did say that in April, is testosterone and calcitonin. We did anticipate the product coming in. We've been in a leading position with testosterone for years. It was just a matter of time before somebody comes. There are 7 right now people that are in the market. So for us to be able to continue the lead on the testosterone for the past years was magical. So it was only a matter of time before this is not going to hold. I mean it doesn't mean that we are -- we lost the entire thing. It is -- we still have it, but of course, with the competition, prices are going to suffer. This is a very tough product to make, and that's why -- and expensive to make. So it's not an easy product. But the margins are very, very healthy. Of course, if you are going to lose some of that margin, you have to replace it maybe with more volume or less margin. That's exactly what we have been done. This is why you see -- and this is why it's such a great indication when you see our revenue had gone up. It shows that we can replace, by volume, we can replace the higher margins with medium margins but more volume just to replace what we had lost. Calcitonin, I would say the same exact thing. But I think the product mix that we refer to is not the loss of those -- the margins of those products. It's the fact that we have other geographies with lower margins growing faster than the ones with higher margins. You saw that MENA and Europe had grown at a much higher pace than the U.S., at a lower margin than the U.S., so -- and what we anticipated. So [indiscernible] and Xellia, of course, where we're adding a significant revenue with healthy margins, but with less margins than our organic products. So with that, the combination of that, that really had a little bit of pressure. Not much, but we offset a lot of it. But still we're discounting a very small number related to that. And finally, for the vancomycin. We did get approval for the vancomycin for removing the box. And the new products without the box is called TYZAVAN now. It's going to be a branded product, patented, unique to the market. And that will be replacing our product that we used to call [ Vancoready ], which used to have the black box. So we are in the transition doing so. We are expected to launch TYZAVAN in -- towards the end of the year. And as you know, it's a branded product, so it needs to be detailed. But we are very optimistic that this product, as soon as we get the momentum going, it will be a very, very big and interesting product for us. But yes, there's no black box on TYZAVAN. It's safe to be used with everyone, including [indiscernible].

Our last question is from [ Siddharta Mowbray ] with Barclays.

Continuing with the last question, TYZAVAN was approved. But then like what I got from my call with IR, is there is still some inventory left for [ Vancoready ] and you would like to exhaust that inventory before you can launch TYZAVAN in a meaningful way. So I just wanted to know how much of that inventory is left and like would this spill over in the next year? My second question is on the contribution of 503B compound and your CMO business into your $5 billion peak sales ambition in -- yes, I mean in the future here. How much of that would come from these 2 businesses? And what would be the impact on margins? And third, if I may ask you like one last question. A lot of manufacturers, branded manufacturers, have been talking about DTC sales. Do you want to give any color, if such thing is implemented, what would be the impact on Hikma's generic business? Would it be a headwind or a tailwind to you?

Sorry, sir, please could you just repeat the third part of the question?

Yes. So the first question that I asked was about TYZAVAN. And I mean basically, what we are told is like there is still some inventory left for [ Vancoready ] and we would like to exhaust that inventory. So how much of that is left?

Just the third part.

Yes, the third question was about DTC sales. Like a lot of branded manufacturers have been talking about DTC sales in the U.S. What would be its impact on the generic business of Hikma and like do you see this as a headwind or a tailwind for yourself? Direct-to-patient sales is what I mean.

Well, I'll talk to you -- I'll talk to the TYZAVAN. TYZAVAN today is being manufactured by third party. So the flexibility of dealing with manufacturing, with the forecast and inventory and all that is not as flexible as if we make it ourselves. So as you know, if you have a third party making it for you, you have to give them the forecast ahead of time and you have to give them a committed forecast. This is number one. The second thing is TYZAVAN and those bagged products, the label and exploration and all that is printed straight on the bag. So you have to not only be able to anticipate, but you have to commit to it with the label on it. So there's a lot of parts that you have to pay attention when we put orders in, when you -- how much risk you're going to have and how much [ dating ] are you willing to sacrifice because you're not going to make the product ahead of approvals and wait until the approval happens, which we do in some cases. But in this case, the expiration date is printed on the bag. So if you do it before the approvals and wait, you might only get a few months left by the time you have approval. So the risk is big. And of course, this is not made by you, so the flexibility is not there. And that's why the strategy is to get all the inventory done with [ Vancoready ] while we are making the change to TYZAVAN. This is going on as we speak. TYZAVAN is being manufactured today. And we are depleting all of our [ Vancoready ] before we have the TYZAVAN up. We don't want the customer to have 2 types of products. We want the product to go away and replaced by a better formulated product without a black box. As far as our goal of the $5 billion in 5 years, I think we're very much compliant with that and we reiterate that and we think we can get that. It's not an impossible goal at all. As you see, our revenue is growing, our -- all our divisions are striving to get there. So we have no worry about that. Now how much CMO would the $5 billion include? It would be a significant part of our business. I cannot tell you exactly how much. But I would say it would be a lot more than what we're doing today. I don't know if that is going to tell you much, but I really can't tell you an exact number because it depends on many things. Contract manufacturing is going to be coming. We have today contract manufacturing in our businesses, as you know, today. We are adding a significant contract manufacturing in Columbus that will be making this critical product for a branded company as we had announced before. That will add significantly to the revenue of contract manufacturing. And from the Injectables point of view, as Bedford gets completed, we believe that a lot of contract manufacturers that we deal with today would want more volume that we are limited to give to today because of our limited capacity and our capacity is more working for us than the contract manufacturers. But we will be happy to add more volume to them once the Bedford facility is complete. So with the Bedford facility and with the CMO in Columbus, we believe that a significant amount of contract manufacturing will be added to the business that we have today. How much of the -- how much of the compounding business is going to be in the $5 billion? I hope -- I don't know, I hope a lot. Let's see. We are working very, very hard in this business because we see there's an opportunity there. This is not going to go away. This is a need that hospitals actually really, really need. They've been very hesitant to trust somebody. And whenever they trust someone, they get big warning letters and big compliance problems with the FDA. The biggest leader of compounding today has gotten 2 warning letters in 2 years in a row, and a lot of other ones that have closed some facilities and a hit with warning letters in others. We have been spared. We have been compliant and we have been doing that very slowly because we don't want to get into that position. So I think we are now -- we built a great foundation to build a great business on. And I hope by 2030 this business will be significant and doing really well. And the last thing is direct business. We love direct business. I think it's great if we can do it, and we are doing it. And we're trying to increase it. But there are a lot of difficulty. Today, our dependency on GPO and the business is about 50% in the Injectables. And the Branded is a lot more when we go through the PBMs. Direct business is difficult because of the contracts that hospitals have with the GPOs and how the business really runs. So there's some compliance that hospitals need to have. So if you are a hospital that works with a GPO, you have some commitment to be in compliant to continue taking volumes from them, and they give you some credit to the volume that you take from them. So with that, it makes it very difficult for them to buy directly from you. They have to go to the wholesaler. They have to go through the GPO contracts. So we like it, we like to increase it, but there are some difficulties in logistics of how to go about. We do have a significant one today, more than our peers in direct, and direct selling to our clients. Yes. Lastly, I think I would say that the compounding business is direct, and it has to be direct. By law, you cannot go to a wholesaler. It has to be straight from your manufacturer to the customer. So as we grow this business also, direct sales also going to increase.

There are no questions from the line. I'll pass the conference back over to Riad Mishlawi for any further remarks.

Well, thank you very much and thanks for your questions. I think I just want to reiterate what I said in the beginning. We have a better business today than we've had 3 months ago, or than we had last year or the year before. We have grown the business significantly. We have put the foundation to grow the business. But we know that this business is not a business that the reaction or the result happens immediately. It does take time. Today we are investing in this business. And you can see how we are investing in this business. We're increasing our R&D spend. We had changed the organization and the people in the organization. We identified our needs. We identified that R&D is something that needs to be improved. And we did exactly that. We created, we brought leaders that understand R&D. And we are giving money to spend on R&D. We've created a portfolio selection committee that knows exactly what products to go after. We enhanced our BD team, and now BD is going beyond what we know. We are going to China, we're going to India, we're going to Europe. We're going to all where the opportunities are to see if we can bring in technology and expedite the approvals or the portfolio that we have. We have been increasing our infrastructure. We'll be spending around $200 million in capital expenditure every year. And that's for a good reason. You can see Bedford facility, now we'll have state-of-the-art facility in Ohio. We have Cherry Hill that we are adding more and more lines. It's extremely modern now with a lot of robotics there and making a lot of products. Same thing with Portugal, we're adding another plant in Portugal. Our capacity is not only being built, but it's being utilized. In the Injectable, our capacity is being utilized at a very, very high level. In the Rx, our capacity is being utilized by us. And it will be also utilized a lot of it by the contract manufacturer. So the money that we're spending on capital expenditure in both IT and automation, in capacity, in equipment, all that is going to benefit the future. It's benefiting us now, but we can see the future is definitely going to be benefited, especially with the indicators that we see today. Our volumes today or our capacity today is at a very high level, especially in the Injectables. Our demand is there, you can see 12% increase top line. It shows you that the demand is there. So there's no worry about where that is going to be utilized. Our contract manufacturing demand is very, very strong. We have a lot of contract manufacturers coming to us, especially on how we are positioned. We have [indiscernible] contract -- client redundancy in the U.S. and in Europe. We have plants that are capable to do the same thing. So if you want to have a safe product, you make it in the U.S. and you make it in Europe, you're very -- you reduce your risk significantly with this redundancy. So we have all what it takes for us to grow and we are growing and we are showing the growth. But again, you have to spend before you see results. We are spending and we are continuing to show good results. So it's not that we are spending and sacrificing the margins. On the contrary, we are spending and we're still bringing in higher revenue, higher margins and the top of the industry. I mean I look at a lot of our peers, we had head of our peers' results in the quarter. You look at other results. Still with the downgrade, the slight downgrade that we did in the Injectables, we're still on top of our -- on the top of the chart when it comes to margins and growth in revenues. So we think we have a good business. We think the future of the business is fantastic. And whatever we're doing today, we'll be doing it better tomorrow. Thank you very much.

That concludes the Hikma interim results. Thank you for your participation. You may now disconnect your line.