J. B. Chemicals & Pharmaceuticals Limited (506943) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the conference call of J. B. Chemicals & Pharmaceuticals Ltd., hosted by the company to discuss its entry into ophthalmology. This call is on the 22nd of December 2023. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jason D’Souza, Executive Vice President at J. B. Pharma. Thank you, and over to you.

Thank you, Yashashri. Good afternoon, and welcome, everyone, to the conference call of J. B. Pharma to discuss the company's foray into ophthalmology. We have with us today Nikhil Chopra, CEO and Whole-Time Director; and Kunal Khanna, President Operations at J. B. Pharma. Before we begin, I would like to state that some of the statements in today's discussion may be forward-looking in nature and may involve certain risks and uncertainties. I would also like to state that during this call, we will entertain questions only pertaining to the ophthalmology acquisition and we would not be able to answer any other questions. With this, I would like to hand it over to Mr. Nikhil Chopra to begin the proceedings of the call.

Thank you, Jason. And good afternoon, ladies and gentlemen, and thank you for joining us on today's call. As you are aware, J. B. Pharma has entered into a trademark agreement with Novartis Innovative Therapies AG in perpetuity for select ophthalmology brands portfolio for India region. This is effectively January 2027, following the consideration of USD 116 million, which is payable on or before December 31, 2026. The transaction also includes a promotion and distribution agreement with Novartis Healthcare Private Limited for the same brand portfolio for 3 years commencing December 2023, a consideration of INR 125 crores is associated with this. I'm excited with the development as it positions us at J. B. well within the ophthalmology segment and the overall market. Not only does this deal enables us to raise 2 ranks in Indian pharma market, most importantly, J. B. enters the fast-growing ophthal segment and is now ranked among the leading players in this segment. Five of the brands are #1 in its molecule category, as you would have -- many of you would have seen in our investor presentation, and 4 brands are in top 3. The molecule segments are growing in a range of 10% to 20%, which is faster than the IPM growth. As per IQVIA MAT October 2023 data, the combined sales contribution from the portfolio was at around INR 207 crores. As a therapeutic segment, ophthalmology has consistently outperformed IPM and thus sits right in -- within our objective of having a diversified, high-potential, high-growth product mix domestically. This portfolio helps us tap into the growing segments such as anti-glaucoma, anti-allergics, antibiotics and NSAIDs within ophthalmology. At an overall level, you will acknowledge that ophthalmology itself is the third fastest-growing therapy in IPM with a 15% 3-year CAGR. Thus, there are numerous reasons why we believe that the acquired portfolio will complement our growth agenda well as India is home to a large and expanding pool of patients that require continued eye care and there's a rising awareness around it. We are also witnessed to enhance infrastructure and diagnostic for eye treatment. Combining the advancements in surgical techniques, eye surgeries have become more accessible. The government trust in the area is under [ key drivers ]. I would like -- I would now like to touch upon how this agreement impacts us favorably across multiple aspects of business. The strong brand equity follows for higher IPM even in short term, which will be complemented by absorption of Novartis field force, and we have plans to further expand the footprint. But post grant of perpetual license, which happens in December 2026, January 2027, this acquisition is gross margin accretive. I would like to share that the operating margin profile here will be significantly higher than our domestic business margins post the grant of perpetual license. All in all, this complements the overall -- this complements the outlook we have on business. With this strategic agreement, J. B. Pharma now has a portfolio of leadership brands within ophthalmology, underlying our emphasis on growth through our powerful brands. On that note, I conclude my opening comments. We would now like to open this forum for an interactive session for next 15, 20 minutes, and we'll be happy to respond to all your questions on the announced transaction. Thank you all for patient hearing.

[Operator Instructions] We have a first question from the line of Harith Ahamed from Avendus Spark.

So my first question is on the September MAT sales value that you've disclosed of around INR 208 crores. So how should I think about the primary sales for modeling purposes? Is it in line with this INR 200-odd crore number?

Harith, the way to look at it is call the external market reflection is PTR. And one can look at a normal margin profile between the distributor, retailer and the company. So in that sense, it's consistent with what the margin distributed to the channel is.

Okay. Okay. So one of the reasons why I asked this question is because whenever I said the AIOCD MAT value, it's a significantly lower number.

So basically, from the PTR, just kind of deduct the distributor margin, and you will have a sense of what the primary numbers are.

For reference point is the way we look at, we follow IMS IQA number. So that will be a good reference point.

Okay. Okay. You talked about the gross margin and operating margin for the acquired portfolio after we execute the perpetual license agreement, which I believe is in January '27. So till then, under the promotional distribution agreement, how should we think about margins, especially gross margins, typically for in-licensed products we've seen around 20% or 25%, 20% to 30% range? So is it going to be similar?

The way to look at this is the gross margin profile in the short term for the interim 3 years will be very similar to the conventional in-licensing margins, which are -- which exist in the industry. Overall, what we are looking at is absolute EBITDA, cumulative EBITDA of close to INR 75 crores to INR 100 crores over the next 3 years, after which the operating margin profile, as Nikhil stated earlier also, will be significantly higher than our domestic or standard -- domestic business margins.

Okay. And lastly, when I look at the growth profile of this acquired portfolio over the last couple of years basis, the numbers that you've disclosed in IQVIA MAT numbers, if it's around 10%. Now if I would think -- if I look at our acquisitions in the recent past, you've managed to turn around these acquired brands and accelerate growth. So we look at a similar acceleration here versus the last couple of years growth of around 10%? And will that require more MRs to be added to achieve that growth?

So we are certainly looking at boosting this business and acceleration of the historic growth rates. The way to look at this is we are quite certain as we absorb the current field force and expand on the footprint in the near term, we should be looking at mid-teens growth over the near to midterm.

[Operator Instructions] We'll take our next question from the line of Nitin Gosar from BOI Mutual Fund.

So wanted to understand how should we look at the agreement, the way it has been drafted in two parts. So is there any obligation with regard to patent or something, which is stopping us to buy out the brands upfront? How should we think about it?

There is no obligation with respect to any patent as far as perpetual license is concerned. One has to understand that these trademarks, which have been acquired, are global trademarks, which what is -- would be kind of as part of their overall global ophthal divestment process, is individually divesting in different geographies, right? The organization was more comfortable in handing over the perpetual license 3 years hence, to be clear about what the global implications could be. And that's why the grant is effective 3 years from now.

Got it. Got it. Second is with regard to understanding the agreement or the arrangement over next 3 years, were Novartis still has the ophthal team? Or does it -- J. B. also continues to add or build up ophthal team alongside of Novartis team?

So for this particular ophthal portfolio, which we are acquiring from Novartis, we are absorbing a team of close to 100 from Novartis. Over the next 12 to 18 months, we will be evaluating on expanding that footprint. The current number, which we'll be absorbing from Novartis stands closer to 100. Over the next 12 to 16 months, we can look at increasing this to between 130 and 140.

Okay. And P&L implication of the same? Because we are onboarding the cost of those employees, so we'll have the cost sitting in our books, but we'll continue to get gross margin, which are similar to the in-licensing one?

That is right. Since we'll be absorbing this manpower, it will have impact on our manpower cost, but given that we are looking at gross margin, which is in line with the conventional in-licensing margin profile; and as stated earlier, given for the next three years, cumulative EBITDA will be somewhere close to INR 75 crores to INR 100 crores. One has to understand that the YPMs, the productivity per rep in this business is very, very high. So that does get a significant fixed operating leverage. And despite lower gross margin profile, one is still a bit titrated.

Got it. And last one, are there any milestones which could be required to be achieved to close this deal? Or this deal is now casted and there is no change in the valuation profile as well going forward?

This deal is pretty much casted, no change in valuation profile. It's just the nature of the deal, given some of the global dynamics that for the first three years, we are in an in-licensing agreement and then -- and post that, there is a perpetual license grant.

[Operator Instructions] We'll take our next question from the line of Abdulkader from ICICI Securities.

So just one question to start with, on the chronic brands, what you have acquired. So based on the data what you've shared, it more looks like these are pure kind of mature brands sitting at a sizable market share. So when we talk about a mid-teen growth, what is giving us confidence that in spite of the market being quite small when you talk about the chronic portfolio, would be still growing in mid-teens?

So Abdul, if you look at, overall, the burden of disease and if you look at ophthalmology market, it is close to INR 4,000 crores. And we with around INR 200 crore revenue hold 6% to 7%. And the burden of disease of glaucoma is so high that we see a good opportunity in terms of what we can do with our existing brands. Equally, we have -- within post chronic, we also have antibiotics and combination eyedrops and also, we have anti-allergics and NSAIDs. So overall, I think what J. B., over a period of time, has demonstrated not only with this transaction, but also with -- historically, if you see, whether it is probiotic market, women health market, all those acquisitions that we have done, we are confident enough to try to maintain growth.

Sure, sir. And sir, just a final one, if I may. So on this funding the transaction, I mean, how do you plan to fund -- I mean it's quite a distant away, but do you think you will return cash positive till the time you have to make this USD 116 million payment?

Abdul, just for information, we are right now today cash positive, okay? So anything and everything will be funded from internal, will be done.

We have our next question from the line of [ Sayantan Maji ] from UBS.

So just carrying on from previous participant's question, so if I look at your chronic portfolio, the market share, especially in the chronic portfolio for the molecules that you've acquired is already high. So do you expect the categories itself to grow at a faster pace? Or do you expect that there is potential to expand the category similar to how you had thought for heart failure that a lot of population is undiagnosed and hence, the category itself can grow? Do you think that this can happen for some of your chronic acquired brands?

So it is a mix of both. If you look at what we have demonstrated over a period of time in our entire chronic therapies whether it is in hypertension, heart failure and what we are trying to do in the world of lipid-lowering agents, similarly for glaucoma-based brands that we've acquired, earlier what I have stated that we have identified unmet needs. We are looking at the entire burden of disease with glaucoma and the relationship that we want to develop with our -- with ophthalmologist, equally, what was stated in the commentary, with currently high YPMs, and in short term, we are looking at how can we boost that. And eventually with J. B.'s strength, we will look at how do we improve our footprint. All this will help us in terms of improving our market share and driving better growth as compared to the way ophthal market is growing. And this is why we have acquired. So please understand, the entire hypothesis of anything and everything that we acquire at J. B. is to grow the entire category better than the market growth. And fortunately, what we have acquired is in the leadership area. So leadership area, obviously, you have to put efforts in terms of creating firewall for the competition and looking at how differently you can create the brands, you can look at the brands and with the specialty and eventually look at how do you grow over the category. This is the task that we've taken.

Okay. Okay. And also, when you are suggesting that you will expand the field force space, say, by 30% to 40% over the next 1.5 years, so where will this extra field force be deployed? Is it that a new class of prescribers you would target? Or are there any geographies where probably these brands are underpenetrated? So just wanted to understand where will that field force be deployed?

Essentially, it's going to be new geographies targeted by us. Currently, as we understand, almost 75% to 80% of the ophthalmologists coverage is serviced by the current team. So certainly, new geographies, which gives us access to the remaining 25% to 30% is what I endeavor with.

Okay, clear. And one last question. So if I look at the covered market of the brands that you've acquired, it's close to INR 1,000 crores. The total market for ophthalmology is INR 4,000 crores. So the difference, the gap that is there right now of INR 3,000 crores, is it the same therapies but different molecules? Or are these different therapies altogether, where do you plan to probably expand your portfolio once you start getting some traction with -- in ophthalmologists? Because Novartis brand are well -- should be very recognized with ophthalmologists, so do you think there's a scope to expand into, say, some other sub-therapies within ophthalmology?

Absolutely, there is potential to expand into different sub-therapies. Having said that, when one looks at covered market, it should not be looked at molecule-specific covered markets, one should really look at indication-specific covered markets. So from an indication standpoint, we are still covering almost 2,500 crore to 2,800 crores of the ophthal market, which has been stated. Now there will be opportunities for us to do life cycle management to launch combinations of existing molecules, which currently Novartis is not servicing. So that's the way one really has to look at it.

Okay. And what would be the remaining, say, INR 1,000 crore, INR 1,200 crore market, which probably you are not addressing right now with this portfolio?

So these are different combinations of the similar drugs in acute and anti-glaucoma, right? So there would be prostaglandin combinations and things like that, antihistamine combinations, which will be natural progressions for us over the next 12 to 18 months.

We have a next question from the line of Bino Pathiparampil from Elara Capital.

So if I understand correctly, this INR 964 crores will be paid in December '26 and INR 125 crores will be paid right now, is that correct?

Yes, that is correct.

Okay. And sir, if I heard correctly, you said the cumulative EBITDA over next 3 years till the perpetual agreement comes in, will be INR 75 crores to INR 100 crores?

That is correct. That's cumulative over the next 3 years.

Three years. So are we paying like INR 125 crore for this INR 75 crores to INR 100 crores of EBITDA, am I missing something here?

Not at all. Not at all. This is marketing, distribution and licensing fee, what we are really paying for. EBITDA is completely different, based on our operations, what we sell in the market. INR 125 crore is the licensing fee for the next 3 years. And post 3 years, there is some tech support, quality reference standards, which will be established for us to kind of acquire the perpetual license, which will be very critical in a transitioning phase.

Yes, I understood. But effectively, we are paying INR 125 crores for a cumulative EBITDA of maybe INR 100 crores, right?

We are saying -- so basically, what you're coming to is INR 125 crores being paid for the next 3 years, right? That's correct.

Correct. And in return, we are making EBITDA of only INR 100 crores?

Yes. Cumulative EBITDA of INR 75 crores to INR 100 crores. That's correct.

Okay. And third, this INR 125 crores would be amortized over the next 3 years?

INR 125 crores will be amortized over the next 6 years.

We'll take our next question from the line of Punit Pujara from Helios Capital.

Sorry for some disturbance that's going on. So could you elaborate on the life cycle management which you touched upon? And could you do it in the current in-licensing space? Or do you have to do it post January '27? That's my first question.

As long as -- as far as life cycle management is concerned, we can do it right away. We don't have any limitations on new product launches, entering new indications, there are no restrictions for us.

Sure. That's helpful. Second question is, so how many number of specialists are currently covered by the portfolio that you had in-licensed? Is there any target that you are calling out on the same?

So the total universe is close to 22,000 ophthalmologists. The standard coverage based on the current field force size is closer to 15,000 to 16,000.

Understood. And although from the language it is very clear, but I'll still ask for the clarification. Is there any royalty to be paid post Jan '27 because it's still a perpetual in-licensing?

There's no royalty. There is an upfront consideration of $116 million. That's it.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments. Over to you.

So let me once again thank all of you in terms of coming and attending the call today. What I would like to conclude is in terms of now with this entire opportunity, we, at J. B., enter into a very progressive segment that is ophthalmology, which is the third largest, fastest-growing segment today in Indian pharma market. And what I shared in my commentary that this comes with leadership position, 5 of the brands out of total 10 brands that we have acquired are #1 in their category. And also, it does not disturb our capital structure as of date because we are cash positive, and the value which we have to pay is at the end of 3 years, that is $116 million. And overall, the business 3 years from here at the time of perpetual license grant, is significantly highly margin accretive as compared to our [ dom form ]. This is where we stand. Once again, looking at how do we make this opportunity bigger and create value for our stakeholders and serve more and more number of patients across now in the field of ophthalmology from the quality eyedrops, which comes from the house of Novartis and eventually from J. B. Thank you. Thank you all.

Thank you. On behalf of J. B. Pharma, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.