Phibro Animal Health Corporation (PAHC) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Balaji Prasad. I lead the specialty pharma coverage for Barclays. A part of this responsibility also is covering the animal health space. And so today, we have with us the management team from Phibro, and we have Jack Bendheim, CEO, President and Chairman; Damian Finio, CFO; and Daniel Bendheim, EVP of Business Strategy. Jack, Donny, Damian, thank you all for taking your time to join us today. A pleasure to see you here.

Thank you.

Thank you.

So the format will be a fireside chat one where we can get into Q&A directly. So for those who have dialed in, I -- there will be no Q&A session post the session. So let me just kick off by asking you a few questions right on the livestock side in the U.S., right? Over the past 1 year, it's been a rollercoaster ride with livestock with various species doing well and all. So as we come out of 2020 and look into 2021, can you discuss the trends that you're seeing recently on the cattle and swine side? We seem to be done with almost all of the processing issues that we had last year and limping back to normalcy slowly. Is that a fair way to look at things?

Yes. I think it's quite fair. I think if the -- if you looked at most of the disruption that we read about and were in the processing facilities. And I think that was heavily in the swine facilities. I think pretty much it's back to normal. I mean the industry is complaining a little bit about some new regulations that might require them to space people further apart, which will cause them to slow things down. But that might not happen. And I would say business is basically back to where it was pre-COVID.

Got it. So as we think about livestock overall, growing historically at around low single digits to mid-single digits, do you think that we should be getting back to that kind of a trajectory now? And is that what your expectation is?

So the overall driver of the single-digit growth that we've seen so many years has to do with consumption in some countries and production in other countries. So I would say that while we're trending back to the historic low-single digit, there'll still be some upsets because for some countries coming out of the effects of COVID will take longer than other countries. So -- but in the U.S., I think because of the nature of the business and coming out what happened here, I think there's a good chance we will see sort of the low end of low single-digit growth for next year.

Great. And in the U.S., there seems to be some interesting trends with poultry demand seeing a significant inflection. And QSR chain seem to be seeing a spurt in demand in chicken items, and so they've started offering this more. And what does this mean for your business and considering the business segment which you're fairly exposed to?

So it's sort of funny. I would say, overall in the world, yes, poultry is the #1 sector. It might not be the #1 sector in the U.S. I would say dairy cattle, the hot business, is today possibly a more important sector. But when you look at the chicken business, you look at a chicken, it comes in different parts. And certain times a year, parts of those chickens get moved and demand is higher than to the other part. Ultimately, all parts of the chicken are consumed. So whether it's exported, whether it's ground into a raw material for companion animals, everything is consumed. And chicken is priced accordingly. So I think we will see sort of quite dynamic poultry industry in the United States in '21. I think bigger effects will be the increasing cost of grain. But the flip side of that is as the country heads back into restaurants, I think people will be so happy to be back in restaurants. They won't see the price of chicken if it's $1 high or $0.50 higher or lower.

Sure. And will that be a meaningful growth driver for you, especially as you look out at kind of fiscal 2022, and let's say, in a couple of quarters from now?

I think we will go fast. I mean, our internal discussions, in our 3 segments in the Animal Health space is, on average, grow faster than the low single digits looking around the world for production animals. I think we talk about our MFA space to grow in the low single digit, but our nutritional specialties and our vaccine business, we expect to grow in double digits. And that's because of ease of introducing new products, introducing to new markets. And so we're quite optimistic that we will go -- overall grow faster than the industry trend on the production animal side.

Great. Jack, I think one of the things which quite a few of your peers called out recently was the significant strength that they had expected in China as part of the regarding process which we all have been anticipating now for nearly a year, and we are there now. So we are seeing your peers do well on the China side -- on the China swine side, and the expectation is that this will be a long-term durable driver. And so for you, particularly, where are you in that process now, especially with registration, getting your product set? And when could we start seeing that being a tailwind for Phibro?

So overall, I am not as optimistic as my peers are on the resolution of African swine fever in China. I think [ Tiller ] is a vaccine that will help control that virus. China will be spotty. So yes, from a complete cessation in production of pigs in China of a couple of years ago to the big investments to create a very, very high level of biosecurity, yes, more pigs are being raised on farms today than were a year ago or 2 years ago. But overall, as you're reading some of the articles, African swine fever has broken out again in different regions of the country. Some of it is being caused by people using illegal vaccines, but people are driven to use illegal vaccines because there are no vaccines available. So the problem exists. And -- but what I think what it means, and we're -- I'm not complaining, is that it's very, very helpful for the U.S. production and Mexican and Brazil production of pigs because China remains a very, very big importer. So if the Chinese are not producing the pigs, they're being produced elsewhere in markets where we're serving, in markets where our competitors are serving. So I think that the missing registrations, which you mentioned, which we have, which will keep us out of the market for another 1.5 years and 2 years, won't have such a huge impact. And it's giving us also an opportunity to put some newer products in China to utilize the sales force that we have and the infrastructure we have. So we're going see some growth in China, but I think we're going to see better growth in other parts of the world because of China.

Got it. So could you call out a few of the international markets from where you could see better growth, Jack? And as we started, I mean, we've always seen -- in the recent, seen significant variations between Latin America, APAC and U.S., too. So could you call out some of the key trends that you're seeing in the international slide on which segments could be contributing more to growth versus, let's say, the U.S. market as a reference?

So for us, we're going to see some significant gains in the cattle business in South America as we do have better penetration of both the feed yards as well as a range cattle. We're going to see continued growth in similar markets in Australia. In South Africa, we're going to see growth getting into new products for us in aquaculture, which will happen both in the Far East, ex China as well as in South America. I think we're going to see strong growth in the United States in nutritional specialties, which we built a suite of these products, enhanced by our acquisition of Osprey. So we are getting a bigger and stronger position in direct-fed microbials that will be a growing part of our business. I don't know, Donny what did I skip?

Well, I'd say -- and then on the flip side, I think what you've talked about in the past is those countries that are not going to recover as well from COVID that the economies themselves are tiering and will continue to be in recessions, we're going to see more or less less poultry demand from those countries. So we expect a little bit of that shock to continue.

Got it, Donny. Maybe on the ASF component and the response that you had. Jack, it's probably been a year since we heard of any update on the vaccine side, not just from you, but from quite a few of the other developmental efforts which are happening in Canada, in Germany and in the U.S., too. So are there any significant developments on the ASF side, the vaccine side that we have not heard of or could expect?

The developments have so far been negative. I mean, China has made a big effort in developing a vaccine, but that looks like not having been successful, which is what the driver is from reading about illegal vaccines -- Chinese vaccines coming into the marketplace. I can't really speak about the other parts of the world. I know our own development work. Our own development work because of COVID sort of ground to a -- I wouldn't say a halt, but halting. We are unable to send our people to China to work on development. And as you know, you can't take the virus out of China. So it's hard to do with the kind of development work, which is important to do. We've done some work in China this year with managing it like we're managing this conversation, but it's going to be slow. So I think we're not going see on our side any clear indication whether we are on a successful path or not until the end of '21. And I think if it's true for us, it's true for the other, whether it's government leg or private companies are also working on African swine fever.

So maybe on these product-specific discussions, could we also touch upon a couple of other products, OmniGen Pro? And I think last we spoke about, you said that you're targeting to exit 2021 reaching out to around 25% of U.S. cattle. Is that still on -- target on goal, is that something that you're factoring?

I think our historic success with OmniGen, the first generation, was with around 25% of the U.S. herd. U.S. herd is always around 9 million. And I think we had penetrated over 2 million. Then with the shift in the United States away from smaller farms, and we were quite successful into larger farms, the importance of OmniGen became less of a factor because single animal health -- single health of a cattle was less important than the productivity of the herd. And obviously, the importance of a single cow is has to do with the economic well-being of farm. So you have 50 or 100 cows, you're more concerned with any single one of them in getting sick. If you have 5,000, it's hard to look at and measure any single one, but you're measuring milk production or -- so we've come up with a second generation. We call them the -- besides the name OmniGen Pro. But we have reformulated the product and concentrating now, not just in Animal Health, but also equally important on the productivity, on production. And we're starting to see a pickup there. Here's where COVID and not being able to sit with the customers in the barns is -- affects us. It affects our ability to promote the product. But I think we've already started making inroads. I don't have the exact numbers. I don't know, Damian, or Donny, if you have how we're doing?

I mean we don't release that level of detail of the product, but it hasn't hit the -- it hasn't gone back to the historical high of OmniGen at this stage, but it is trending growth.

Right. So that comes back to that, I would say, our expectations is to get back to that market share with the combination of both the new OmniGen, OmniGen Pro as well as the older OmniGen.

Got it. That's helpful. And as we look -- shift from nutritional specialty to the vaccines business, again, you pointed to some pretty aggressive growth over here. And could you also maybe speak about specific -- call out, specific products, which will help you meet your delivery system or -- and also the relevance of your Irish facility? So obviously, you're on track for commissioning in the middle of the year this year or is there any COVID-related delays there?

So if you're referring to our Sligo facility, our new facility in Ireland?

Yes.

We've done the construction. Now it's waiting on the registrations. And I think our expectations have not changed. And we think within the year, plus or minus. I mean, yes, COVID prevents the inspectors from leaving the comfort of their homes and coming out to the plants to do the investigations they need to do, but it's still planned. So our hope is to start being able to produce products in Sligo within the next 1.5 years, and there we see a ready market. We've spoken about that in the past for a quick ramp-up in sales from Sligo. The delivery system of vaccines is a new development of ours called pHi-Tech, which is a battery-operated vaccine device. So just think about it in a second. Right now, if you want to vaccinate poultry, you bring in outside team, they come in the morning, 4, 5 a.m. in the morning, and they're doing this. And believe me, by 2:00 p.m. in afternoon, they're not doing this as well as they did in the morning. And what this device does, it works as well from 4 a.m. to 4 p.m. or whenever they want to quit. So the customers are very excited about this because it means that the vaccines they're paying for will be delivered to the right spot in the bird. They won't waste vaccines. And vaccines is far more expensive than the device. We've been very slowed down because this is something you have to try out on the farms. COVID has blocked any entry to farms. We created a pretty good Webex system being able to contact and show the device. So we're in trials in about 12 countries in the world, but the ramp-up is slow. But this could be a significant part of our business in 3 years once we put COVID to bed and have new development.

Got it, Jack. Maybe shifting gears slightly on the last few minutes left thinking about the companion animal segment. Clearly, you've seen the growth which has come out from your peers on the back of this, and I'm sure that you want to be a part of this business and which you have articulated in the past. So can you speak a bit more about any particular strategic initiatives that we could look forward to in the near future as you try to move further ahead into the space? And how we should think about your capital allocation into the segment?

Go ahead, Donny?

Sure. So as you noted, I think we're probably the largest multinational company out there that until recently, at least did not have a pet division. So -- and there really is maybe not as synergy as far as a brand name is concerned. But on the back end, on the regulatory, on the manufacturing, things of that nature, there's a lot of talent that we have that we can bring to it and we are bringing to it. So it makes sense for us to enter it. So we've launched one product, Rejensa, which is an over-the-counter product, but sold exclusively through the vet channel, and that's done well for us. And like everything else, it's been affected by access to the vet. But even despite that, it's been growing 6 months -- doubling about 6 months over 6 months and coming from a low base, but we see that as being -- in the mid- to long-term, being a significant impact for our business. But beyond that, we are looking at licensing -- in-licensing products. So we've announced the deal a couple of years ago about in-licensing a unique line vaccine delivery system. That continues to be stalled by COVID, the research on that, but that, again, we'll be unstuck soon. We also announced and excited -- something we're very excited about a licensed a compound for atopic dermatitis, early stages. A lot of focus on our team, and we're doing the things that need to be done and working very diligently on that. And that's also years away, but the opportunity there is obviously tremendous. I think, in general, what we're seeing is we're seeing a tremendous amount of deal flow. A lot of ideas are out there. We're probably not coming up with the ideas on our own. We are going to be in-licensing. But at the same time, I don't think that we're going to be buying pet businesses. The fact is there's Zoetis out there. There's multiples out there that are much higher than our multiples. So it's hard for us to compete with that, and it's kind of forced us a little bit earlier upstream as far as licensing. And I think what we're seeing is folks who got one-off products are usually amenable, those are probably the most amenable to working with us. If you have a platform approach, it might be a little bit more difficult at this stage. But we're seeing tons of ideas, and I think we'll continue to invest in this space. But having said that, I think as far as capital allocation, while we've been very open and talked about our capital allocation for the pet space, we have the ongoing capital allocation to the production animal space that's kind of -- we don't necessarily talk about it as much as because that's day in and day out stuff that we do. So we continue to look to be growing all parts of our business. And we're excited about what our companion animal business could bring to bear within the next 3 to 5 years.

Donny, that's an extremely helpful response. And maybe as I think about it clearly makes sense. And when -- you did call out that I mentioned the derma care, atopic dermatitis product. And just in the previous session, I had Kindred's management on the call. And we're seeing about atopic dermatitis market potentially being $2 billion to $2.5 billion from the current $1 billion market it is now, just purely in the biologics side. And then you also have the other products and atopical side enrollment. So would you be able to give a bit more color about this compound that you have in-licensed recently? And maybe an extension of the question, do you see more such opportunities be it in the U.S. or elsewhere where you have companies with one-off products and looking for a licensing partner?

Yes. Well, I'll -- for the first part, the atopic dermatitis, we're not talking -- we're not at this stage discussing more about with specific API we have on the properties. But suffice to say, we are with Kindred that the market -- as Zoetis themselves had said. Zoetis did a tremendous job taking a market that was probably $400 million, $500 million and expanding it to where it is today. And there's still a lot of noncompliance out there or pet owners who don't necessarily recognize that their dogs have an issue. So we do think that the market, by the time we get out there, will be significantly larger than it is today. And today's market itself is obviously a very large market. There are a lot of ideas out there. And there are a lot of people who have interesting ideas. And there's, frankly, one of the things that we've seen is there's not that many places to go because there's -- the industry is consolidating so greatly at this stage that one of the strengths that we believe that we bring to the table right now is the knowledge that when someone brings to us a product, there's not a competing product within our pipeline already, and they don't have to fear the effort that we're going to put in to make it successful. So I think, because of that, we -- we're very encouraged. And we've heard inventors or companies talk about that as an advantage of reason why they want to do business with Phibro. So we have shown our commitment to this space, and I think folks are recognizing that there are some advantages to working with us.

That's very helpful, Donny. And as we leave the 2,100 mark, I think probably that's a good spot to leave the conversation. And of course, be safe, be engaged further beyond this. So again, Jack, Donny and Damian, thank you so much for your time. I hope you had a productive conference and look forward to staying in touch.

Thank you.

Thank you.

Thank you.