Hypera S.A. (HYPE3) Earnings Call Transcript & Summary

Good morning. Welcome to the Hypera Pharma conference call to discuss the recent transformational acquisitions made by the company. Mr. Álvaro Stainfeld, Chairman; Mr. Breno Oliveira, CEO; and Mr. Adalmario Couto, CFO and Business Development Officer, are currently here with us today. [Operator Instructions] This slide webcast is also broadcast at www.hypera.com.br/ir. We would like to inform that statements during this conference call may constitute forward-looking statements. Such statements are subjected to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those set forth in the forward-looking statements. I'll turn the floor over to Mr. Álvaro Stainfeld, who will begin his presentation. You have the floor now, Mr. Stainfeld.

Thank you. Good afternoon. I'm honored to announce on behalf of our Board of Directors with Breno and Adalmario, we are proudly announcing the acquisition of brands in Brazil and Latin America. These are leading brands are unrivaled in the consumer health segment and leading Prescription products, some of them patented, which are strategic acquisitions to our company. This unique Takeda portfolio and the acquisition of Buscopan, announced back in December, have a transformational effect on our platform. Once concluded, they will take Hypera Pharma to the largest pharmaceutical company in Brazil, the #1 company in the Brazilian market. It will be more diversified in the consumer health, prescription, skin care and generic products that will consolidate our leadership in consumer health and strengthening our Prescription portfolio. These 2 segments, Consumer Health and Prescription drugs, are the most profitable segments in the Brazilian pharmaceutical industry. Brazil has over 200 million inhabitants, one of the fastest aging populations that favors the increase of medicine consumption. This industry has shown its resilience despite the economic slowdown. We now have growth opportunities that are a result of economic uptake in the country. We believe that Hypera Pharma has a unique platform to benefit from this opportunity. We are very confident and very excited that this is a single acquisition opportunity. And we'll maintain our continuous focus on innovation and new product developments. We are expanding the company and creating a unique platform. And we are keeping our promise to promote health, so people can live longer and better, and we keep on serving our consumers, patients, doctors, drug stores, distributors, and that will entail significant value to our shareholders for many years to come. The Board of Directors is extremely confident that this leadership and the entire Hypera Pharma family have the know-how and the expertise, the experience to successfully extract the full potential of these businesses and to expand our platform, both in the mid-term and the long term. I'll turn over to Breno. He'll be giving you more details on the transaction.

Thank you, Álvaro. Good afternoon, everyone. We are very proud to announce this acquisition of this brand portfolio from Takeda. This is the largest acquisition in our history. Just like Álvaro said, this is -- these are transformation acquisitions. Once concluded, we'll be the largest company. We are moving from the fourth to the top position in the Brazilian market, a BRL 5.8 billion sell-out, a 9% market share. A relevant presence in every segment of the pharmaceutical industry, Consumer Health, Prescription, skin care and Generics that reinforces our positioning as a strategic partner to our top customers. The consumer health market, where we are already leaders, will consolidate that leadership positioning, with almost BRL 2 billion sell-out at a 20% market share, almost twice the size of the second competitors and more than 3x the size of the third competitor. We have 2 of the top 3 brands: Buscopan, Neosaldina, leading brands. They will be joined to Benegrip and Coristina D, Epocler and Engov among other brands. In Prescription drugs, we move from the sixth to the fourth position, very close to the third place. With strong investments and a robust pipeline, both focused on Prescription. We'll gain more market share and reach the third position very soon. And for the first time, our portfolio will include patented drugs, exclusive position in attractive segments with higher than the marketplace growth rates. This is strategic portfolio to the company now because of the potential synergies that Adalmario will be detailing shortly, but for the additional potential growth that this brand portfolio will add to the company. This portfolio has grown consistently at a 14% growth rate in the past 5 years, above market average that remained at 11% in the same period. These brands and our platform has even greater growth potential that will contribute to increase the growth of the company even further. After these acquisitions, we include 4 new power brands, above BRL 100 million in sales. We have 15 power brands now. Out of those, 6 sell over BRL 200 million. These are leading brands in their segments, which instill confidence in consumers. Our focused investments in marketing and R&D., these brands will speed up their growth, just like it happened in several other brands in our portfolio. The Buscopan family, sales above BRL 300 million, has more than 75% market share. It's a synonym of that category and the #1 brand for doctors. Neosaldina, BRL 270 million brand is referenced a benchmark for headaches. Nesina, a product that has sales over BRL 200 million, marks the company in the diabetic industry. This is the fastest-growing brand within the diabetes. Dramin, over EUR 140 million, that's #2 for stomach aches, strong among doctors and a huge potential for growth. This is a fantastic portfolio, very concentrated. Few brands, and they are very relevant. There are only 12. 5 of them account for 80% of sales. Despite representing 30% of sales for the company today, given its concentration, we believe this will be low complexity integrations. The total sell-out is BRL 1.3 billion, 60% comes from Consumer Health and the remaining 40% from Prescription drugs. And there are opportunities to leverage both products in both markets. In Consumer Health, brands who have the support of our merchandising team, the largest in the market, over 1,000 people on the field and the best coverage in drug store. We'll keep on improving the availability of these products in drug stores throughout the country. On top of that, the OTC brands will benefit from our R&D structure and the introduction of new products. Our strategic goals are the same in Consumer Health. With our in-house advertising agency, we'll have more efficiency in media costs, better strategic alignment and more agility to produce TV ads and digital ads. Several production products have a huge potential to increase our productivity, adding brands that are supplemental to our current portfolio in several medical specialties. These brands will leverage through reputation of Mantecorp pharma. We are pleased to have a new team of about 200 people, highly skilled, that will be part of our marketing, medical demand and merchandising teams. They'll help us strengthen our positioning amongst doctors, giving more visibility to our brands and drug stores. After this acquisition, 2 patented products will be part of our portfolio. One is Nesina, a diabetic -- a diabetes drug with patent for at least another 10 years. The diabetes market is one of the fastest-growing market, almost at 20% a year. Nesina is a drug that's getting more and more market share and the category, growing over 100% in the past 5 years, our axis is the state-of-the-art drug with a patent that will expire in 2027. We are very strong in the respiratory segment with Predsim, Rinosoro, Celestamine, and Alektos will increase our presence in that category with an important medicine for respiratory diseases. Before I turn it over to Adalmario, let me talk about the acquisition in Mexico. Mexico accounts for 12% of the portfolio and that operation represent less than 3% of the total sales, albeit, our focus remains in Brazil. Having said that, this Mexican platform is very attractive to us. It's a streamlined portfolio, 80% of sales concentrated in 4 brands, attractive margins, a 12% growth in the past 3 years. We have a talented team of about 80 people in sales and marketing, and this platform can become an opportunity to distribute several products in Mexico. I'll turn it over to Adalmario now who will be talking about the financial details of the transaction.

Thank you, Breno. Good afternoon, everyone. We are very excited to announce this transformational acquisition. Álvaro and Breno have talked about the strategic rationale. Let me share figures about these 2 transactions. Back in December, we couldn't talk about it because we had to wait for specific deadlines. On Page 14, let me make a few considerations. The total acquisition from Takeda was at $825 million, about $36 million of initial working capital. It will be necessary to run the operation. The total payment will be USD 789 million. For -- in the case of Buscopan, it was BRL 1.3 billion. In the Takeda case, we are still considering raising alternatives so that we are not exposed to exchange rate. Payments will be made out in U.S. dollars and our financing is in reals, just like the products that are in reals and Mexican pesos. As the expectation -- as for timing, Hypera's Board of Directors has approved, and we're just waiting for the Brazilian authorities. We're not expecting any problems. This specific timing hasn't or haven't been defined yet. In the case of Buscopan, we submitted the documentation to Brazilian authorities 2 weeks ago. And we expect that approval to come out by the third quarter of this year. In the case of Takeda, we expect the approval to happen before this year's end. Let me talk about the sources. We have a firm finance credit line with a top line bank that amounts to BRL 3.5 billion. This is a long-term line, 6 years at very attractive cost. Taking this opportunity, we have the lowest interest rates in Brazil. The company has issued an BRL 800 million payment with a 5-year deadline. With this deadline, our available cash that was at BRL 2.2 billion last year and a pro forma of $1.6 billion. After the payment in January, we do have the necessary resources to pay for these 2 acquisitions, not considering the additional cash generation throughout this year. We believe that this healthy financial position and our net cash generation, these factors enabled the company to make these 2 acquisitions. Takeda's acquisition is the largest the company has made. And we are not significantly changing our capital structure. Leverage will be below 2x the EBITDA, considering the contribution margin of these 2 acquisitions, and that will enable the company to deleverage quickly in the next years. We're not compromising our CapEx investments. We are maintaining our industrial capabilities, and we are maintaining our innovation pipelines, ensuring the sustainable growth of the company in the midterm and the long term. After these acquisitions, we'll have additional revenue, above 30% when compared to Hypera today, a relevant synergy potential to capture value in the short term after the closing is confirmed. The major integration benefit from both acquisitions will be the tax and cost structures with the potential of net revenues and to internalization of some manufacturing processes, once the deal is finalized. We also count on our expertise in working with established or well-established brands. And when we align that to our sales and marketing structure, we can speed that growth even further, speed it up. Having said that, we are very pleased to count on a new team of almost 300 employees highly trained to help us in promotion and sales to help us promote our own brands amongst doctors and in POSs so that we can leverage the sell-out of the entire Hypera portfolio. It's clear that we do have several opportunities ahead of us. The synergy expectation is about BRL 250 million to BRL 280 million yearly to be captured through the first year once the deal is finalized. This amounts to almost 20% of our net revenues, when we combine the 2 and about 50% of our EBITDA. And that's consistent with our integration track record of previous acquisitions and the know-how that is part and parcel of our M&A know-how. The company is very used to executing these integrations. In summary, after these 2 acquisitions, we'll become the largest pharmaceutical company in Brazil in retail, a 30% growth in sales, above 50% growth in EBITDA. With an additional brand portfolio, focusing on innovation, we have a potential to grow sustainably above the pharmaceutical market average. When we look at the valuation, the combined transaction value will be BRL 4.820 billion, reducing the premium of BRL 455 million. That's above the assets. When we combine net revenues is BRL 1.150 billion and added us after synergies between BRL 720 million and BRL 750 million, the multiples are very attractive at the combined transactions, well over 4x sales, 9.4 EBITDA after synergies and 6.1x and 5.9x after synergies. In conclusion, these operations bring synergies aligned with our strategy to expand our market share, new categories with potential to grow above market average, increasing our program numbers with leading brands in different segments. Very often, these are benchmarks in the category. We are more than doubling our market share in the Consumer Health segment with a strong cash generation that we expect added to the potential of these 2 acquisitions. Our Board of Directors expect to maintain the same dividend policy we've adopted in recent years to grow dividends per share in the next years to come. We expect that these acquisitions are beneficial for both top line and also bottom line right after the first year of the transaction. I will turn it over to Breno for his final remarks. And then we'll have a Q&A session.

Thank you, Adalmario. Let me summarize a couple of these transformational acquisition. This is the largest and the most diversified pharmaceutical company with a unique portfolio with high-growth potential, attractive margins that will help us increase our revenues by 30% and the EBITDA at about 50%. It's a unique opportunity to leverage this market or these brands in our sales and marketing platform, with our expertise in line extensions, creating product family, management portfolio by category and with the investment support in marketing at the POS that these brands deserve. These transformational move generates additional value to our shareholders by capturing synergies in sales, costs and SG&A with a potential growth of double digits. Our capital structure will remain very healthy. Net debt is below 2x the EBITDA and a long-term profile. The company has a strong cash generation to helps us -- that will help us maintain the dividends, not compromising CapEx investments that will -- that are key for the long-term growth of the company. We still believe the growth potential for Brazilian pharmaceuticals market that will be driven by the uptake of the economy and a secular process of the aging of the Brazilian population. Hypera Pharma is the company that is best positioned to capture these opportunities. We have the most attractive margins, and we are the company that invests the most in innovation and production in Brazilian pharmaceutical market. We are the only company that has its relevant presence in every segment, OTC, Prescription, Similar products and Generics. We have invested and we keep on investing to create this unique platform that cannot be replicated, and we'll keep on investing to guarantee sustainable growth in the next 5 to 10 years. Thank you very much. We'll now start our Q&A.

[Operator Instructions] The first question comes from Mr. Javier Martinez from Morgan Stanley.

My question is about synergies. This is the #1 highlight of the acquisition. My question is to Adalmario. You said you'll keep on manufacturing the products for Hypera. Is that compatible with the tax synergies you expect?

Yes. We do have a contract to have them keep on manufacturing the products, but we intend to internalize some steps of that production process. We'll then have the tax benefits that we expect. We'll keep on producing initially. But when we take over a couple of steps of the process, something that we can implement from -- after the deal is finalized. You can't do much before. But we can benefit from that synergy in the short term.

Yes. Let me just add to that comment. The contract has a maximum term. We'll plan to start transitioning that production as early as possible.

You say they'll be producing the molecule and you do the packaging. Is that it?

Yes, exactly. That's the intention.

Joseph Giordano from JPMorgan asks the next question.

Congratulations on the acquisition. My question is about the synergy. During a reverse -- or making a reverse calculation, can I come to the conclusion that half of the synergy would come from the tax incentive in Goiás? And my second question is about how can you connect this new product portfolio with the company's pipeline? Maybe using these brands that you're acquiring that are well established. That's the super brand concept that you have in place, right?

This is Breno. You know what those synergies like in our structure, in operations and the benefits we have in the state of Goiás. Most of it is not coming from the tax benefit, but it plays as a relevant role. Most of the synergies come from the integration of the operations. As to your question about the pipeline, it makes a lot of sense to us. These brands on our platform for both R&D and sales and marketing, they have a lot of synergy. We've been selling Buscopan for quite some time and Takeda. And companies are focused on other strategic areas for them. They state that very clearly at Takeda, oncology, rare diseases. So these brands lack the necessary attention. Luckily that in our hands, we'll be able to give them the necessary attention, both in terms of market investments and also to place them in our R&D platform to detect opportunities for new projects, projects that were in the back drawer in these companies, and we can now focus on them. So that we can really sort of introduce these new medicines very quickly. I think I understood your question, didn't I?

Yes, you did.

Next question comes from Mr. Fred Mendes from Bradesco.

I have 2 questions. Was there any competition in that view? Of course, you cannot answer for third parties. Let me try to understand the rationale. A much lower valuation. It's very good, of course, deal. I would like to -- I have the impression there was not much competition based on the price you paid for? And my second question is about the integration. Can you give us a step-by-step description of what's going to happen? I know you have to wait for the approvals, but what can we expect after that?

It don't make any sense, Fred, to talk about the process itself. What matters is that it made sense to us. In terms of valuations, just like Adalmario explained, even not including future synergies. Once you consider the synergies, this is even better. As Álvaro said, it made all the sense in the world, strategically, based on the brand portfolios. This is our core business, right? And they have the best margins. So both strategically and also from these synergies point of view, it made a lot of sense to us. And you had a second question, what was it?

My question about the integration. Once the deal is finalized and approved, I would like to better understand that step-by-step process. I believe that you have some synergies in 2021, what can we expect down the road?

As I said, Fred, during my presentation, it's a very streamlined portfolio. It is a Buscopan, 2 meds, Buscopan and Buscofen, it's a product family. They also have a very streamlined and structure in Consumer Health. So it's a very easy integration. For us, the approvals are made. In the case of Takeda, it's a very simple portfolio. You have the products. 5 of them account for 80% of sales. Again, a very simple integration. There are people from marketing, sales and medical presentation, these people will be joining our teams. So integration is rather simple. In less than a year, we'll be able to integrate 100% once the approvals are made, of course.