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

Good morning. Welcome to Hypera Pharma's Second Quarter 2021 Results Conference Call. Today with us, we have Mr. Breno Oliveira, CEO; and Mr. Adalmario Couto, CFO and IRO. We would like to inform you that this event is being recorded. [Operator Instructions] Today's live webcast may be accessed through the company's Investor Relations website at hypera.com.br/ir. We would like to inform you that statements during this conference may constitute forward-looking statements. Such statements are subject 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. Now I'll turn the floor to Mr. Breno Oliveira, who will begin the presentation. Mr. Breno, you may begin your presentation.

Good morning, everyone, and welcome to our results conference call for the second quarter of 2021. I'd like to begin my presentation by discussing our growth, starting on Slide 3. For the third quarter in a row, we have had organic sell-out growth. We grew in double digits and got organic market share. This quarter, it was 23.3%, or 1.1 percentage points, above the market. In our financial results, as Adalmario will mention soon, our net revenue grew by 44%, which was a growth of our gross revenue versus the previous quarter. We increased our EBITDA margin, excluding the expenses line, to 34%, and our net income grew by 20%. This performance is the result of the initiatives that we have made to boost our long-term sustainable growth, and the highlight here is, our launches have been speeding up over the last years as well as our production capacity and also our investment in marketing or leading brands. Prescription products have been a highlight this quarter and its sell-out growth was above the market growth once again. This performance was benefited by a growth in chronic medication, which is a segment that has been expanding over the last years with significant launches as well as dermatology and vitamin D. In Consumer Health, our main highlight has been a growth in vitamins and supplements, which is a market that has been growing above the consumer health average for the last years. And this had a strong growth ever since the pandemic began. We have continued to expand our market share significantly with new line extensions and going into new routed categories such as vitamin C that we just recently went into. In Similars and Generics, our growth still is boosted by our strong capillarity as well as our increased production capacity and the investments we've made in the Neo Quimica brand. I'd like to underscore that in our innovation pipeline, we have some very important launches which will contribute to our coverage in Generics and will allow us to go from 50% to 60% of total molecules in the market by the end of this year. Total investments in innovation and R&D, including what has already been capitalized, was BRL 370 million in the last months, 39% above what was recorded in the same period last year. The innovation index, which is a percentage of the net income for launch products, was 33% in the second quarter of 2021 versus 31% in the second quarter of 2020, using the same comparative basis. We launched some very important products this quarter. In Consumer Health, for example, we launched Blumel, a natural product line for treating and preventing influenza. Benegrip immuno complex and immuno energy are extensions of the Benegrip brand for the prevention segment. We also reinforced our product portfolio with 2 very important acquisitions: Bioage and a portfolio of 12 products from Sanofi, which I'll discuss on Slide 5. Bioage is a high-performance brand in dermocosmetics for professional use. With this acquisition, we've gone into an aesthetic market. And it has a direct-to-consumer platform with over 100,000 monthly accesses and 55 franchisees, which will boost our sales and contribute to creating loyalty in these professionals. We currently have 200,000 professionals in this area versus 20,000 dermatologists. Bioage is a leader in this segment, and this is a high-growing segment for the next years. So this acquisition is aligned with our strategical goal of strengthening our presence in skin care through innovative products and brands. Our sell-out is above BRL 400 million and has been growing close to 30% with several launch opportunities and new segments. So this month, we've created a new business unit for skin care specifically, which will be led by Vivian Angiolucci. She has been a CFO at Hypera, and she has also led the business use for Generics and Biosimilars in the past. On July 12, we also signed an agreement with Sanofi for the acquisition of 12 OTC and Prescription products in Brazil, Mexico and Colombia, which I will discuss on Slide 6. Brazil represents around 2/3 of the income for this portfolio, and our sell-out was around BRL 220 million last year. In Brazil, the products acquired include, in Consumer Health, some leading brands such as AAS, Cepacol, Pepsamar and Naturetti. In Prescription Products, we'll have Buclina, Hindantal, Aturgyl, Hexomedine and Sulpan as our brands. With these acquisitions, we're strengthening our leadership in Consumer Health even further and also our participation in Prescription Products. These brands are very complementary to our portfolio, and they reinforce our position in strategic categories for Hypera. AAS, for instance, will be used as an umbrella brand for new associations between acetyl salicylic acid and other molecules in the hypertension market, which we are already developing in our innovation pipeline. For Cepacol, this is a great opportunity. Not only will we strengthen the brand which has not been marketed for years, we also have a potential brand extension to other related categories. In Prescription Products, we've brought in the Buclina brands for appetite stimulation and Hidantal, which is specifically for the treatment of epilepsy. And this underscores some important categories such as gas -- gastro and central nervous system, which are very important areas for Hypera. So these brands will count on our robust business platform, which will allow us to capture important synergies on the short and long term, as I'll mention now on Slide 7. First, our relevance at the point of sale and during medical visits. We now count on the biggest pharmacy visiting team in Brazil, a distribution that reaches 96% of points of sale. And we're absolute leaders in OTC medication, which should boost the performance of these brands on the short term already. In medical visits, we have over 100 -- excuse me, 1,100 employees, which make many visits every day, twice as much as the rest of the market and which will also promote some of the prescription medication we're acquiring. Our portfolio will also count on our R&D structure, which will allow us to launch important line extensions for the next years. We believe that with the go-to-market platform from Hypera, we can boost our growth for these products. This has been seen with Buscopan, for example, and with some other brands we acquired from Takeda. Moreover, we have to highlight the operational synergies that we're capturing with this acquisition. First, the tax and cost area. When we transfer the prediction of this portfolio to our Anapolis plant. We hope to conclude this process by the end of 2024. With expenses, we're going to capture results in the short term because we will absorb this acquisition on our current platform without needing to hire new teams. We now move on to Slide 8, which will give us more details on that transaction. The value was $190 million or BRL 990 million considering the FX of 5.20. It will be paid when the acquisition is concluded after the monetary authorities have approved it, and we already hedged about 40% of the value to be paid. This portfolio generated an EBITDA of BRL 165 million in 2020, and we estimate synergies of BRL 35 million, which will come to a total of BRL 200 million in EBITDA in the 2020 basis. We're paying 4x sales and 5x EBITDA after synergies, which makes this acquisition very interesting for our shareholders. The acquired shareholder -- excuse me, the acquired portfolios already have high margins, and we can leverage them even more when we put them into our business platform. We continue to invest in accelerating our growth without losing sight of our commitment in making our business profitable. Of course, we never forget paying our shareholders and the well-being of our stakeholders, which are on the next slide. Our interest on our own equity was BRL 194 million, or BRL 0.31 per share, a growth of 5% versus what was declared in the second quarter of 2020. Once again, we received a certification from GPTW, or Great Place to Work, and we got CEO from Women On Board, an initiative supported by [ UN ] women for the representation of women in our Board. We published our annual report in 2020, the first following the protocols for sustainability reports, or GRI, which has information on the main highlights and initiatives in environmental, social and governance aspects, complying to our mission in being the best and most comprehensive company in Brazilian pharmaceutical industry so that people will live more and better. We'll now pass it on to Adalmario, who will go into the results for this quarter.

Thank you, Breno. Good morning, everyone. So looking at our results in sell-in or our net revenue, our growth was nearly 44%, and this was boosted by the consolidation of the acquisition of Buscopan and the Takeda brand portfolio. This quarter, we consolidated 100% of the portfolio we acquired. When we compare it to the same basis last year and exclude acquisitions, it was a lower growth of around 10%, a positive impact from the price readjustment we have from April 1 with a slightly higher volume when we compare to the second quarter of 2020. The highlights for this quarter came from our excellent performance in the dermatology portfolio, especially for acne products and moisturizers, which grew 45% in sell-in. And we were also impacted by the [indiscernible] portfolio acquisition last year. We also had relevant growth in sell-in and Generics and Biosimilars and Prescription Products as the acute medication portfolio recovered along with our leading brands such as Predsim, ANVISA, [indiscernible], Mioflex and [indiscernible]. Considering our margins, gross margins were over 65% this quarter, which is in line with the same period last year. And here, we suffered a positive impact from the brand mix, which helped us to recover these margins this quarter. Without considering our acquisition, our gross margins would have been 2 basis points lower, especially due to increased costs in transformation and increased cost for inputs and also the foreign exchange variation last year. Considering our expenses, we had an increase in marketing, about 60%, given the higher investments we made in media for the new brands that came into our portfolio and the highest -- the higher level of free sample [ CTP ] and funds to support recent launches. We also expanded our medical visit teams, which was about 1,250 professionals, 150 higher than last year. In SG&A, we see the acquisitions and the synergies they brought of the last 2 years. There was a significant reduction in the percentage of that revenue and a greater dilution of commercial expenses as well as R&D and administrative expenses. So with that, we finished our quarter with an EBITDA margin of nearly 39% and a 32% growth when we compare to the same quarter last year. If we exclude the effect from other revenues, our EBITDA margin was close to 34%. Our financial results showed an increase in expenses and increased leverage for the company and also the increase in [indiscernible], which is the main index that we use for our debt. So our net income was nearly BRL 480 million, a growth of 20%. The results for this quarter is in line with our budget for the year, and this gives us the confidence that we should reach all of the metrics in the guidance we sent to the market in early April. When we look at the company's cash flow in the last slide, we can see that cash generation this quarter was more than enough to cover all the investments that we made in CapEx, R&D, which are in the intangibles line here and also our hedge and taxes on declared cash. When we look at [indiscernible], this also is included in the CapEx line, which is why it's positive. So when we look at the CapEx invested in the expansion and maintenance, it was around -- of our plans, it was about BRL 113 million. But here, we're also including other factors. So with that, the company's cash position went from BRL 1.7 billion in the first quarter to over BRL 2 billion at the end of June, a net debt of BRL 4.6 billion. Our debt profile still has an average term of over 3 years with a very attractive cost and a very good cash cushion, which will allow the company to honor its commitments without any additional debt for the next years. We're still assessing what the best alternatives are for this and what will be our needs for higher debt, considering the newest acquisitions of the Sanofi brand. And to conclude with our working capital, we had a 16% increase in client receivables; 5% in inventories, finished goods and raw materials; and a slight reduction in suppliers. Although we increased our investment in working capital by about 17%, it was still much lower than our revenue, which contributed towards a reduction in investments in working capital, which was at around 40% and dropped down to 36% at the end of June. With that, we'll pass it on to Breno for his closing remarks.

Thank you, Adalmario. So I'm very pleased with the company's results this quarter. In the second quarter of 2020, our portfolio was deeply affected by the pandemic, and we had a slight retraction in our sell-out. But this quarter, although some important markets still have not recovered to their pre-pandemic levels, such as anti-influenza medication and acute use medication, we had a growth of 23% in the same comparative basis, which shows a double-digit growth versus 2019. In the second quarter, we also concluded the first stage in the integration process between the Buscopan and Takeda portfolio and which is in line with what we were considering. We are on track to deliver the guidance that we promised for 2021, and we're very excited about the potential value generation for our shareholders with the new product portfolio acquired from Sanofi. Now we'll focus on reducing the company's leverage, bringing in the production from the acquired portfolios, and we'll continue on our organic growth strategy by exploring new markets and new distribution channels as well as innovation and line extensions for the fantastic brands we have in our portfolio. Thank you for listening, and we'll now continue with the questions-and-answer session.

[Operator Instructions] Mr. Robert Ford from Bank of America will ask the first question.

Congratulations on your results. But what was the market share for this quarter, excluding the acquisitions? And also, you mentioned that acquisitions will contribute towards your leverage. So specifically, how far along are you in integrating the Takeda acquisitions? And what do you expect when it comes to synergies?

Bob, thank you for your question. And well, to answer your first question on market share. As we mentioned, we grew slightly above the market value in the second quarter, about 23% versus 22%, which was the market growth. And our market share is about 9% on a consolidated basis.

Is that without the acquisitions?

No, this is our total market share. So this is the same comparative basis without considering acquisitions. Because last year, we didn't have that under our management. So about your question on the synergies with Takeda, this is all within our expectations. So for Buscopan, for example, basically, all synergies are being captured. We are internalizing production and that should be concluded at the end of last year, the first quarter of 2022. So this is going to go through some stages right now, but most of the synergies are being captured right now since we are producing secondary packaging in our plant in Anapolis and Takeda as well. Over the second quarter, we started producing secondary packaging in Anapolis. And now in the third quarter, we'll have the full results of that. But for Takeda, to get 100% of the synergies there, this will only happen in the next 5 years as we transfer all of our production to Anapolis. So according to our supplier agreement, this transfer will happen in the next 5 years. But a good share of those synergies are being captured, especially by integrating marketing and sales teams and also producing secondary packaging in Anapolis.

Okay, Breno. And if you allow me another question. You spent some time with the business now, and I'd just like to know if your expectations have changed.

Bob, they have. I think we had high expectations for this portfolio and the performance it's had so far has confirmed our expectations. As I mentioned briefly in our call, when we look at all of the comparative advantages, the advantages I mentioned for Sanofi's portfolio, well, they're also true for Takeda's portfolio. So as we start promoting the brands and reactivating them, the ones that have not received any relevant marketing investments. For example, this quarter, we had the first campaign for [indiscernible] under our management. So by having the product in more points of sales since we have a great channel were very strong besides the channels we already have. We now have independent channels through our teams. As I mentioned, we have the transfer order teams, which can reach 96% of Brazilian pharmacies. So with all of that and also the medical visits team, Takeda had a team, but it was much smaller than the one we have. So we can promote the product in a much more efficient way than they did before. So we had high expectations for this portfolio, and we've been able to reach our targets in our business plan for these products.

Joseph Giordano from JPMorgan will ask the next question.

Breno and Adalmario. So first, we see that the company is still capturing the opportunities from mature portfolios that you can accelerate in Brazil. So do you still see other pharmaceutical companies doing the same that is using this market opportunity, taking whatever expired relevant patents there are that still have a relevant share of the market. And also, if you could tell us what your firepower will be for the future? Just so we can understand what to expect, what level of leveraging would you accept to capture any market opportunities that you see? And my last question is about the last quarter. When we look at our gross margins, we see that acquisitions contributed a lot to your gross margins. But I'd just like to understand, what sort of effects we should see in the future? Will we see Generics growing above average for the company, for example? So that's what I'd like to know.

Joe, thank you for your questions, and I'll answer the first two and let Adalmario answer your question on gross margins. So your first question was about other opportunities for divestments in multinationals. We see that this is a clear trend, and we had these 3 acquisitions. And besides the ones we mentioned, there were a couple of other processes over the last years, some investments in multinationals. And we believe that this trend will continue. The big pharma companies in the last years have been changing their strategies and focusing on some core businesses for them. So this is what happened with Sanofi, with Takeda, and we believe, it will continue in the future. As you know, acquisitions are in our DNA. At first, we're focusing on deleveraging. So we want to make it under 2x so that we can, in the future, participate in other opportunities that might arise in the market. I'll let Adalmario answer your last question on gross margins.

Joe, so regarding gross margin, this quarter specifically, we had a contribution from the acquired brands portfolio, which helped us to increase our gross margins. But we continue to invest significantly in the Generics and Biosimilars segment, which will probably grow when you compare it to other market segments. It's the fastest growing one, in fact. And it still has a very low basis. When you look at the entire Brazilian market, when it comes to value, Generics still represents under 20% of the total market, but it has been growing significantly. So for us, it's a very attractive segment and business unit. It generates a lot of synergies and cost efficiency for us. But at the same time, we have been adding to our brand portfolio. We've had some acquisitions which are not only iconic brands, which lead their own categories, also represent products that have very high margins that generate a lot of cash. And although we are increasing our leverage, it's a brand portfolio that allows us to deleverage the company very quickly. So overall, when we look at our balance, and since this is the company that has the most diverse portfolio in the Brazilian pharma industry, this also allows us to work on this level of gross margins, which is quite high, 65%. And for the rest of the year, we believe it won't vary that much. It will be around the same level, close to what we saw in the second quarter of this year.

Leandro Bastos from Citi Bank will ask the next question.

I'd just like to talk a bit about the Sanofi acquisition. I have a couple of questions. First, Breno, if you could tell us about what your expectations are for the operational margins? If you could tell us how much of the EBITDA comes from Brazil. And so that's one question. And about synergies, there are a couple of questions. First, what is the timeline that you have to capture these potential synergies? And also, if you could tell us about the 3 main fronts. So tax, costs and revenue, how much do you expect in each one of these fronts? That's all.

Leandro. Well, about margins, we have a mature portfolio with very high margins -- gross margins, which is not very different from the products that we have in our own portfolio. We did -- it did not have a lot of investments in marketing these products, which explains the high margins they have. Regarding synergies, we basically see that the main thing, our fiscal synergies, so we're going to have some tax benefits for these products as we manufacture them in Anapolis. Sanofi did not have these tax incentives. And this will all be captured, as I said, over the next years, and we hope to conclude this process by 2024. Regarding Brazil, Brazil represents about 2/3 of our sales. And it will probably be a bit higher when it comes to margins, but this is not a very relevant difference. I don't know if that answers your questions.