Multiples Alternate Asset Management Private Limited (ZYDUSLIFE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the telecon of Cadila Healthcare Limited, which is scheduled to discuss sale transaction of Animal Health Established Markets undertaken by the company. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. [ Akhil Gupta ] from the Investor Relations team of Cadila Healthcare Limited. Thank you, and over to you, Mr. Gupta.

Thank you very much. Good evening, ladies and gentlemen, and welcome to the Cadila Healthcare Limited teleconference to have a discussion on the transaction of sale of Animal Health Established Markets Undertaking. For today's call, we have with us Dr. Sharvil Patel, Managing Director; Mr. Ganesh Nayak, COO and Executive Director; Mr. Nitin Parekh, Chief Financial Officer; and Mr. Harish Sadana, Chief Strategy Officer. With that, now I would like to turn the call over to Dr. Sharvil Patel.

Thank you, and good afternoon, ladies and gentlemen. I do wish that you and your family continue to remain safe and healthy during this time of the pandemic. At the beginning of this presentation, let me talk about our strategy as we envisioned. So at the beginning of this year 2020, we had initiated a strategy exercise for the group by asking ourselves a few questions. How will Zydus look like in 2030? What will be our business composition as we move forward? What geographies we would like to play in? Where we will compete on scale and where would we be looking at customer intimacy? Also, what will be the state and contribution of our various innovation programs that Zydus is betting to go on? And many other questions around the organization, including talent, capital allocation, quality and size of the balance sheet to mitigate any delays and setbacks that may come our way. Coming out of the exercise, we concluded that our strategy for the decade of 2021 to 2030 should have the following core elements. For India geography, we are targeting both our human health and consumer wellness businesses to significantly scale their operations while maintaining healthy EBITDA margins. We foresee U.S. geography to be a good mix of generics and specialty going forward. We intend to build a portfolio of assets in the branded space, both from our own pipeline and the opportunistically taking inorganic bet. Also, we look at some of our emerging markets in Asia and Latin America to scale up and deliver sustainable revenues and EBITDA numbers. We are also advancing our clinical programs for Saroglitazar for 2 indications of PBC and NASH in the U.S. market and European market. We are also working on developing the next wave of biosimilars and intend to take a few of them for the global filing, and we are also targeting a large scale up of our vaccine program during this period. Overall, we believe that by 2030, Zydus will look very differently from what the Zydus is of today with a large chunk of revenues coming from new business lines like NCEs, biologics, vaccines. Coming to our animal health business, as part of our global strategy and to achieve the next phase of growth for this business line, we transferred it into a separate entity, known as Zydus Animal Health and Investments Limited in FY '20. The business was divided into 2 undertaking. One was to focus on India and certain other countries known as Animal Health Established Markets Undertaking. The other undertaking, namely Animal Health Emerging Markets Undertaking was to work on the new growth avenues in the regulated markets of United States and Europe. This stance was done to afford specific trust and greater focus on the animal health business, aided by improved customer focus, which would help provide greater visibility of the performance of the business and also attract the right talent at the global level. The aim was also to expand animal business -- health business by exploring strategic choices, such as leveraging a stock product pipeline as well as its new manufacturing facility and forging technical and marketing alliances, including joint ventures, the global regulated market. In a way, we were looking to drive the growth in a similar way as we did for our consumer wellness business in the previous decade, both by exploring organic and inorganic opportunities and also inviting the participation in equity from the investors to accelerate the growth journey. With this objective, we initiated to look for strategic and/or financial partners for our animal health business, who share the same values and growth ambitions for the business with an intention to invite them to take equity stake in ZAHL. Early on in the process, we discovered that valuing these 2 undertaking separately and independently was a better operational and economic option than valuing the entity as a whole. And thus it -- and that is how we advanced this exercise wherein, at the end of the process, the consortium led by Multiples Alternate Asset Management has emerged as the most suited partner to take Animal Health Established Markets Undertaking to its next round of growth. Accordingly, ZAHL has entered into a business transfer agreement and other ancillary agreements to sell and transfer the Animal Health Established Markets Undertaking on a going concern basis to the consortium led by Multiples through an SPV in the name of Zenex Animal Health India Private limited for a slump consideration of INR 2,921 crore on a cash-free, debt-free basis subject to certain closing date adjustments. Over the last 3 decades, our animal health business has grown to become a pioneer and market leader in the Indian animal health industry with Multiples and its consortium partners committed to growing the business. We are sure that it will continue to grow and strengthen its position in the industry. ZAHL will continue with its efforts to invest and build its animal health business in the regulated markets of U.S.A. and Europe. We plan to utilize the cash, which will be generated from this transaction for pursuing the strategic objectives in India and U.S. geographies and advance our innovation-led programs in the NCEs, biologics, vaccines, biosimilars and specialty area. In the short term, the cash will help us deleverage our balance sheet by reducing our debts to below the INR 1,000 crore mark. The transaction is expected to be an EPS neutral. Thank you. And now over to the coordinator for the question-and-answer session.

[Operator Instructions] The first question is from the line of Surya Patra from PhillipCapital.

Congrats on the transaction. Obviously, the objective is known. But if you can share what was the kind of EBITDA profile of the business? And what is the kind of number of -- what is the revenue base that we would be losing with this transaction? And also, what is the kind of advantages or disadvantages that the remaining animal business that would be there for the company? So what advantage and disadvantage it can see because of this transaction?

So let me answer the second question first. You have plans to build a U.S. franchise of the animal health business. The U.S. franchise will be more driven towards the companion animals, whereas the India business is more driven by the livestock and poultry side of the business. So they are very different in the nature of products that get developed. Also, we have set up a new facility, which is commissioned and has already taken regulatory batches for filing for the U.S. for something known as ANADA, which are the equivalent of ANDAs for the U.S. generic and we have started our efforts on filing that. So we have a plan in the next 3 to 5 years to not only file a good number of an -- ANADAs, but also then launch them subsequently in the U.S. market and create a U.S. business out of this. So that is the current strategy. And then also, we will leverage the same capability to find partners in Europe also if needed for some of this portfolio. But by and large, the effort is strongly focused towards the U.S. market where we have the local knowledge, the distribution understanding as well as a team that can help us build this business. With respect to India, this business contributes about 3%, 3.5% of our sales and about 4% of our consolidated EBITDA. So it's a meaningful business, but it is not very large. In terms of FY '21, which are still not audited numbers. So we still don't have the audit numbers, but maybe Nitin Bhai or Vishal can add to the FY '21 EBITDA and sales.

Yes, sure. So '19/'20 audited sales was INR 513 crores, and EBITDA was INR 88 crores. And in 2021 financial year, our provisional estimated numbers is sales of INR 600 crores and EBITDA of INR 150 crores.

Yes. And since we are transferring assets also and along with it, we are transferring manufacturing plant, can you share what will be the gross block of that and what asset that we are sharing, apart from the asset quantitatively?

I mean Vishal can give you those numbers later, we don't have those numbers handy. It's not a very significant part. For a clarification, there is a plant in Haridwar, which we had acquired somewhere in 2016 from Zoetis. Then [ Mandvi ] is occurring to India and certain emerging markets. That is a part of the transaction. But there is another plant, which is in SEZ, Ahmedabad, which is to manufacture products for regulatory market like U.S. and Europe. That is a separate business undertaking and not part of this transaction.

My next question, Sharvil sir. You have mentioned that the money that is getting in the process of the transaction will be utilized for reducing the debt. And you have mentioned that in the opening remarks, it will reduce to kind of INR 1,000-odd crore levels for gross debt situation. Is it the case?

That is right.

Okay. So that means we are already at a kind of a near about INR 4,000-odd crore kind of gross debt level that we are currently at this juncture?

We are talking about net debt levels of less -- close to INR 4,000 crores.

[Operator Instructions] The next question is from the line of Kunal Sha from Emkay Global.

Congratulation. So the first question is on the tax implication on the proceeds. So what would be the tax that we have to pay on this transaction, on the proceed?

Hello. Yes. So maybe Vishal or Nitin Bhai, you can answer. I think it will be subject -- you can answer that question.

I think that it will be around 25% tax rate, which is what ZAHL is subject to.

25%. But it would be on the capital gains, right?

Vishal?

We request the participants to please stay connected as the line for Mr. Nitin Parekh was disconnected.

Vishal, you may answer then.

So would the tax rate on the capital gains only? Or like the profit on the sale of the business? And in that case, what would be the net asset of the undertaking that we are selling?

So we will be paying 25% tax on the gains.

On the gains. And what would be the net asset for the undertaking?

Roughly, the calculation of tax is about INR 200 crores.

Okay. And the second question is on the second undertaking, which would focus on the U.S. and Europe business. What kind of investment we have already put into that undertaking? And will it need more investment? And when we'll start seeing the revenues for that undertaking?

I know that, that details we have still not given.

The suitable is to talk about that business, that [Technical Difficulty]. As I said, we also have a facility that is coming. So that's been, I mean, that's already been done, thereof building R&D team that is looking [Technical Difficulty]. And as we come closer to our passing plan in a meaningful manner and the commercial plan, obviously, we'll update you about it and it is in the early investment side.

The next question is from the line of Ranvir Singh from Sunidhi Securities.

Sir, a few clarity. You said that animal health care business would be total INR 600 crore in sales. So what part of it is being sold? So what was that established market proportion of the sale?

Whole established markets, of course, is the only business that is when today, [Technical Difficulty] is under development and [Technical Difficulty] no revenue associated with it.

Sorry, I missed the word. You said how much?

So the entire sales of INR 600 crore is from the business, which is being sold.

Okay. So that seems a little bit -- in 9 months itself, if you extrapolate, the total animal health care business is around INR 600 crores. If you just annualize 9 months number we see. Maybe INR 605 crore or something. So that means other business is very negligible.

There is no other businesses yet. It is only in development stage. It takes 4 to 5 years to start a new business in the U.S.

Okay. Okay. And secondly, that INR 150 crore EBITDA we have, then how can this be an EPS neutral?

So the cash which will be received will be temporarily be used for certain investments. On the long term, because if we go for various strategic investments, it will be EPS accretive. But for right now, for the temporary period, we believe that there is not going to be much change in terms of the EPS. It will be almost neutral.

Okay. Okay. Fine. And is there any debt in that animal health care business?

No, there is no debt.

The next question is from the line of Prakash Agarwal from Axis Capital.

Yes. Congrats on the deal. I just wanted to understand the thought process better. I mean this is to streamline and focus on the key markets, which is U.S. and India and better capital allocation strategy. I mean for Cadila, we never think that cash is a problem for you to invest into biosimilar or vaccines. So how do we see this? I mean do we see a fast track R&D going forward and fast track of monetization of the same? Or how do we see that?

So Prakash, as part of our overall strategy, we have, obviously, very well-established businesses and geographies, and then we have a lot of emerging and developing businesses and some businesses, which are very stable and good. Now as part of our next 10 years' vision, we see that if we want to make all businesses relevant to the size and scale of what our company should be and with the requisite amount of capabilities in terms of talent also. Now when we looked at all of those opportunities, we found an opportunity to scale up Zydus wellness and we were able to do so in the last 2 years. We were also looking at similar opportunities in the animal health space. However, in the animal health space, one, it is not such a -- I mean, there are not enough players one is to say and not lot of opportunities in terms of finding partners. Also, the whole purpose of it was, obviously, that we don't want to be a minority stakeholder, so then we said that the transaction doesn't makes sense that way. However, if you take a next 10-year point of view, we know that significant revenue and value is going to be driven out of the innovation portfolio that we are developing. And so our strong focus is from the Cadila point of view, be more to be driven on that and the value proceeds of this will definitely help us in accelerating our vaccine program, our R&D program also and making sure that we are good in terms of any eventuality. So while one looks for everything as the best case scenario, one has to also build for difficult times. And I think we are by this also helping ourselves in terms of isolating that problem.

Okay. So it's more like a 10-year call and streamlining the business, where you see the buildup happening going forward?

Yes.

The next question is from the line of Charulata Gaidhani from Dalal & Broacha.

Yes. Congrats on the good deal. And my question pertains to how much is the -- can you quantify the gross block for animal health?

So as I said, we -- right now, we don't have the ready number. My key pad being on the gross block would be less than -- about less than INR 100 crores, actually in terms of fixed assets. So it's not a very significant part of the block.

Okay.

As you know, we had acquired in 2015 Zoetis with a land building, poultry machinery as well as certain products now, et cetera, which was INR 170 crores and there will be depreciation over a 5-year period on that.

Okay. And any intangibles or R&D spends that would be going into this business?

Yes. This along with the undertaking all the trademarks, brands associated with this particular business, they are also part of the transaction. This business is mainly the business of brands that way. This is the way you should look at.

Okay. So what would be the value of intangibles?

No. So for us, it's all self-created. So that will then depend on the purchase or in terms of allocation. We -- for us, there is no separate sale of any other components. It's the sale of entire business undertaking, consisting all the immovable, movable, tangible, intangible, branch, licenses, contracts and everything. So that is the lump sum consideration, which is slump sale deal and there's no individual values assigned to any of the assets or liabilities.

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

And congrats on a very good deal. Sir, can you just brief us on what was the valuation framework, which was used to arrive at this deal value?

So this was a bidding process. So Moelis and Co. acted as the investment adviser to us. And formally, the process of price discussed when we received the nonbinding offers and then binding offers from many players. And then after looking at all the offers that we received and further negotiations. And considering the credentials and the doability of deal, et cetera, on the various considerations, then we found Multiples consortium to be the best suited partner also to take to the next level of growth for this business.

Okay. No, this is very helpful. But in terms of specifics, do you think this deal gets priced on basis of what DCF? Or is it price to sales or EV to EBITDA? Just have some basic framework that one uses for these kind of deals.

Well, so we don't know how the buyer would have priced it for us. It was a bidding process. What it ultimately translates, if I take my 2021 estimated number of sales of INR 680 crore and EBITDA of INR 150 crores, something like 19x, 19 plus times of EBITDA and about 5x the revenues.

Okay. Fair enough. I get that. And sir, second thing is, I know you've spoken about the areas of focus going forward. But would there be any change to your plans now in the sense that now you can pick up 5 biosimilars and do a global trials? Is that the way you're thinking about it? Or could you accelerate some M&A ideas that you were not able to do so far. So any thoughts on this?

So definitely, Sameer, the main -- one of that will definitely be global biologies -- biosimilar program that we are looking for, for the '25, '26 time frame. And we have already identified some programs for that. Also acquisitions in the specialty space in the U.S., which we are very keen to do will continue and will get further momentum also from our side. And by and large, and also the large clinical development programs that we have for our specialty business in the U.S., including Saroglitazar, we'll get a further boost in terms of what we want to do. And more recently, but something that has always been part of our vision as to how do we scale up our vaccines business. So now we are definitely -- obviously, we are doing so on the COVID front, but we are looking at how do we scale up our AMR, typhoid conjugate and our the flu vaccine, which has become a very critical vaccine in post-COVID era as well.

Okay. Great. Great. And final question. Now 3 years forward, how would the balance sheet look like in the sense that all that you've spoken of, would that be funded through internal accruals? Or you're thinking of levering it up again? And what's your comfort level on that?

So currently, we are comfortable with our internal accruals. We don't immediately see the need to do any other levers.

The next question is from the line of Harith Ahamed from Spark Capital.

The numbers you've shared for the divested business, top line of around INR 600 crores and EBITDA of INR 150 crores for FY '21, there seems to be a significant improvement in the margin profile of this business in FY '21 from around 17% in FY '20 to 25% in FY '21. So can you give more color around what drove this improvement?

So I think if you've seen post-COVID and during this whole trial times, any companies that had strong operational efficiencies and strong brands have done well, animal health business has been one of the businesses that has very strong reputed brands in the country. It is among the top 2 or 3 companies in the country. It has a very good reach and distribution. And the rural part of the economy also did very well and continue to do well. So all in all, I think not only did they do a good job on the sales and profit, but also receivables and all of the health parameters. So it has been a very steady and stable business and with strong brand equity, which helps during the times of COVID.

And this 25% is more like a new normal base level margins for this business. And this is a sustainable level in your...

Yes. Yes. No, definitely, it is. So it has new opportunities in exports. And obviously, it continues to have better operational efficiencies and scale in India. So it will continue to deliver on that. And it will -- our current plan talks about further improvement on that.

The next question is from the line of Prakash Agarwal from Axis Capital.

The question has been answered. Thank you.

The next question is from the line of Kunal Randeria from Edelweiss.

Sir, first question, if you can share some of the sidelines on some of the main investments that you are going to make, not like the biosimilar is in developed markets or share of EBITDA in NASH over the next 2 to 3 years? And if possible, maybe share the quantum of investment that would be needed here?

I don't think we can give you that details right now. But definitely, on the NASH and PBC, both trials are underway and already centers have been allocated, and we will be starting recruitment very soon. So that is on track in terms of our development. We had said that end of '23 is where we look for NDA submission on PBC and maybe '25, '26 on NASH. So that is what we still we can achieve. On the biosimilar program, beyond India, we are looking at developing India and emerging markets. We are nominating maybe 2 or 3 biosimilars for the global development, which are post '25, '26 kind of launches and some little later. And for that, the current plans are under development. And as we come closer to a larger investment cycle, we will obviously talk about it in a quarterly update. And beyond that, everything is as we have been operating.

Sure. So would it be fair to assume that your R&D is likely to go up substantially then in the next 2 or 3 years?

So, R&D in absolute terms will definitely go up. We still believe that with our revenues growing equally, we can -- we still believe that we will be around that 8% to sales number for the current foreseeable future.

Right. Sure. And Dr. Sharvil, if you can just maybe educate us a bit on how this animal health business that you have projected for the U.S. market, how does it work? I mean what about filing time lines? What is -- how does the distribution work in the U.S. and so on? So I'm just trying to understand a bit more the rationale of treating this business, with deal.

So 2 things. One is the rationale is obviously, this is not -- this business currently doesn't -- we don't have any revenues associated with it. So it is in the early stages of seeding. The business is -- I mean, the distribution is very similar. There are a handful of distribution points by which you go through it, similar to the -- like generics distribution that is there. The filing is like you file a NDA, you file ANADAs, which are requiring a little bit more work related to animal studies and others into species and others. So that is a little bit different there than what we're going to do. So I think the whole strategy for us is to make sure we are selecting the right portfolio, which can see a good uptick, both in the substitution point of view, but more also we create some of our own sort of branding also in the U.S.. For that, we already have a business plan that we are undertaking. I would say, today, it will be a little too early to talk about those plans because these are not in the near term. But as we come closer in the next 2 years, when we are seeing more commercial-ready plans, we can definitely talk a little bit more about it. Today, it will be a little bit too premature to give those kind of strategic details out, which we would like to keep under wrap.

I understand that. Just lastly on this, what is the kind of competition in this space in the U.S.?

So it is less severe than generics, but it is a far more evolved market.

The next question is from the line of Dr. [ Rishi Kumar ], an individual investor.

Could you share with us what kind of outlay would you have for your vaccine business in the near future?

So currently, most of our funding has already been done for our vaccines. The others investment, a lot of parts and facilities have been added. But in the next couple of years that you have made this cycle of investment, we can discuss it. But currently, by and large, it is the current portfolio we have already invested in.

Okay. So for your upcoming, this COVID vaccine also you don't need fresh investment, right?

For the current scale, we have invested. If we have to increase that, looking at the need of that, then we will look at further investments.

That was the last question. I would now like to hand the conference over to Mr. Akhil Gupta for closing comments.

Thank you, everyone, for joining the teleconference and for your continued support. We look forward another interaction in investor call for our quarter 4, '21 results soon. Wishing for you and your loved ones' health and safety at this time. Thank you, and have a good day.

Thank you. On behalf of Cadila Healthcare Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.