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

Makes sense. And on the flip side, is there any opportunity there in terms of vaccine development?

We are -- we have an active vaccine R&D effort. So there is potential but nothing that would be baked into our guidance specifically. But we'll continue to look for that. So even though it's not our business right now, it doesn't mean it couldn't be in the future with the vaccine progress that we've made elsewhere.

Okay. All right. Sticking on the infectious disease front just because it's topical. Been a couple of cases of BSE in cattle, particularly in Brazil. A way is we heard is there still some debate back and forth in terms of what imports or exports be banned to other countries, particularly China. Do you have some exposure there? Can you just talked about some of your [ LatAm ] growth?

Yes, we talked about this, you and I, I think, back in March, right? And we said, at the time, I think there was already an embargo, so they could not -- Brazil could not export to China. And I think I had answered we thought we were -- for planning purposes, we said 30 to 60 days. I think it ended up being a little shorter than that, right? It was about 3 weeks. So we saw it at the time as more of a timing delay and it would just push sales out to our fourth quarter, which ends June 30. I think it ended earlier. I think March 23 was the exact date, and so that was a little less than what we thought. So I think, again, we think it's just a bit of a timing blip, and we'll see the demand in the fourth quarter, which is typically our strongest quarter in the beef cattle markets in Brazil. Just again, due to seasonality, that's how it typically works. So I think we're glad that's behind us, and now we should have a strong end to the year.

Okay. And then last but not at least on the infectious disease front, we've covered poultry. We've covered beef. What about swine, African swine fever?

Right. So I think we all know there was a surge of ASF in China in March. We still don't have a product on the market in China to address African swine fever as does anybody else. We continue to work with another company on trying to find a vaccine. I think I mentioned last time, progress had been slow partially due to COVID, partially due to just strained relationship between China and the U.S., and nothing's really changed in the last 3 months. So we've read about some speculation of whether it will mean production goes down and you start to see prices shift up or down. I've actually read both sides. So I'm not sure what you've heard. But right now, that doesn't impact us actually on our side, but just curious to look at the market and see where it lands. But right now there's a bit of an outbreak that they're trying to address, right?

Are you seeing any impact from any other regional outbreaks? There's small flare-ups across Europe. There's flare-ups in Vietnam, and that's been going on for a couple of years. There's some flare-ups in the Caribbean, but really the one you're still monitoring is China.

Yes. And the ones that you mentioned aren't really big markets for us to begin with so not enough to have a material impact.

Okay. All right. Noted. On that front, let's touch on the companion animal portfolio. You touched on Rejensa a couple of times previously. I want to make sure we spend a decent amount of time on that. Yes. I mean can you give us an update on growth trends? It's been multiple quarters now with that product on the market. So what are your learnings?

Yes. So Rejensa continues to do well. We had said when we put out our guidance back in August that we thought sales would double over the prior year, if you recall. I think we'll come up a little bit short of that target but still really strong growth. So it won't quite be doubling, but again, really strong year-over-year growth. So that product continues to do well. We're picking up new vet clinics, and we're seeing a good percentage of reorders as well. So all good signs on that product. We're excited about the companion animal development pipeline. So no products have dropped out since we last spoke. We have a couple of different projects that we're looking after. I'll just review a couple of them. So oral care, cats and dogs, it's a big market, about a $2 billion market. For a company our size, even a modest 5% market share, quick math, 5% to $2 billion, $100 million in sales, good margins. When our guidance is $113 million to $118 million of EBITDA this year, it could really move the needle for us, again, in the medium term. But it's a big market, and we're happy with the progress we've made on the product that we're developing there. Then we've got pain and dermatology both for canines, both about $1 billion market. Again, happy with the progress that our projects made there. I think you and I talked before, I -- we haven't given a lot of detail beyond medium term. So -- but they continue to be medium term and continue to progress. The other one we're excited about, which is the nearest term relative to the other products I just mentioned that are in development is our gene therapy for mitral valve disease. 8% of the dogs in the United States at some point in their life will get mitral valve disease. That percentage is even higher in certain breeds of dogs, particularly smaller ones. We're working with a company called Rejuvenate Bio to progress this drug. At one point, they had mentioned conditional approval or conditional submission to the FDA -- or I should say, submission for a conditional approval, sorry, to the FDA by the end of the calendar year. They haven't press released, from what I know, anything different than that. It's probably a little bit of an aggressive deadline but somewhere around that, the nearest term. That's a smaller market, about $200 million market. So we have a deal with them, so where they're developing the drug, we'd be the commercial arm. So we're excited about that. And then there's a smaller Lyme disease drug in the pipeline as well. That's about a $100 million market. So overall, we're happy with those 5 projects. They continue to progress. And for us, that would become the fourth product category under Animal Health at some point in the medium term, so it'll be right alongside vaccines, nutritional specialties and MFAs and other. But right now, since we only have one product, Rejensa, as part of nutritional specialties.

So I really appreciate that color. That's really helpful. One thing we've discussed in the past, when you talked about your companion animal build-out and future investment, is commercialization strategy. And just going through some of those -- some of the ones you hit on, gene therapy versus derm versus pain versus oral care versus Rejensa, you can see slightly different strategies you want to pursue to go to market. So what are you thinking there in terms of as you add to that portfolio, second, third, fourth, how that impacts your go to market, your commercial organization?

Yes. Fair question. So there's some overlap and some differences in the customer base of those, right, versus vet clinic versus more like a specialist. So as you know, I think what -- with Rejensa, we took a unique approach, I think, in that, although it's an over-the-counter product, you can only get it through the vet clinic. And we have an exclusive deal with one of the bigger distributors in the U.S. We haven't named who it is, but it's one of the bigger ones. And right now, so our sales force is a contract sales force through them, and they get a portion of the revenue that we collect on Rejensa. That was a way for us to get in front of vets and for them to get to know the Phibro brand by being able to keep that revenue stream within their clinic knowing that they're not competing with the Chewys of the world to buy that product. So that's been pretty helpful. I think as we hit some of these bigger markets, that strategy, I'm sure, at some point will change. Going back to my pharma days. It usually goes from a contract sales force to a mix of contract and internal until you get to the point where there's economies of scale and you bring it all in-house. So those are all decisions we'll have to make as we approach the market and we see how this pipeline progresses. But for right now, we're really happy with the distribution agreement we have for Rejensa, and it will evolve over time, I would say.

And your comments on Rejensa ramp, you touched on new clinics, reorders. Anything you can say in terms of market penetration? I don't know if there's any stats you'd have. It's -- you can think about it in terms of pets. You can think about terms of clinics, geography. Sort of how should we...

I don't have any fun metrics to quote. I'd just say it continues -- we continue to expand the number of clinics where the product is offered. And so that growth has continued, right? So I think we're covering and we continue to add reps to cover more clinics. So we're finding the more clinics we bring on, the higher the volume and the more demand that we have. So it's been a nice growth over since the launch.

And what's the bottleneck from it expanding faster? Is it just you want to have like a measured approach with that distributor or...

Yes, I think we've been doing our -- we try to keep it cash flow positive or more, better than breakeven as a stand-alone business and not be funded by the rest of the portfolio. That's been the goal, to keep it self-funding and keep it growing. And again, it's also -- it's our first product in companion animals, so that relationship with the vet, we think, is really important in getting the Phibro name out there. So in addition to the dollars and cents, it's just the relationship in getting another market and build out our companion animal team. I mentioned to you last time, too, we added a new Board member that -- Alejandro Bernal, who's the CEO of PetDx. So again, he brings that companion animal expertise to the Board now.

Yes. Absolutely. Any questions from the audience? All right. We'll keep going. So kind of just dovetailing that from your comments on investment in companion animal, let's talk about the P&L and the OpEx in general. You talked about what you're seeing in Mineral Nutrition. You touched on what you're seeing from a demand level in animal -- broadly in Animal Health and companion specifically. Can you talk about your investment priorities? Yes, there's only 6 weeks left in the quarter, and you're not going to guide to the next fiscal year, but still maybe just take a step back and give us some broad strokes.

Yes. I think the investments that we're making in the 3 areas I mentioned, nutritional specialties, vaccines and companion animals, will continue into fiscal year '24. We also -- we're talking about R&D projects at the moment, but there's also capital investment. In our facilities, we manufacture more than 70% of our products right now. Some of those are more capital intensive than others. So in addition to maintenance CapEx, we're adding more manufacturing capacity at our facility in Quincy, Illinois. We have a project ongoing in Israel as well. We just added the autogenous facility in Brazil. So we continue to make investments in -- the capital investments as well to expand capacity as the top line and volume continues to grow. So I think that will continue into fiscal year '24. Exactly how much, we'll talk about in August and maybe go through a little bit more detail where that money is going and capital allocation. But I think it's fair to say that we'll continue on the same path.

What about from a commercial organization, SG&A type of footprint? Any particular areas?

Now our major driver has been the strategic investment, so it's been the intentional increase in SG&A. I mean the other biggest line item we have is labor, and obviously, there's labor increases. We have people, boots on the ground in, I think, 37 countries. There's different macroeconomic pressures in each of those, although some are global. Not all are. There's hyperinflation in Argentina as an example. There's been issues with the economy in Turkey as well. So those continue to monitor. So we continue to invest in our people. I think our headcount growth -- if you could look, we just issued our ESG report. What's today? Tuesday. It was yesterday actually, right? Just yesterday, our headcount, I think year-on-year is up maybe 2% or 3%. So there's been a little bit of headcount growth. Part of that is with the acquisition of the company I mentioned in Brazil and some of it's just regular growth and filling some vacancies that were hard to fill during COVID. So I think we're doing a good job managing our cost base and saving the incremental growth in SG&A for strategic investments rather than just OpEx.

Okay. The other part of the cost equation, pricing power and obviously inflation from a COGS perspective. But on price, a lot of moving pieces over the last couple of years, both from sort of actual product to ASP but also freight surcharges and things like that. Are we seeing a period where that's really normalizing post COVID?

Yes. I think our top line growth reflects the fact we've had the ability to raise price and done a pretty decent job with that. But as I mentioned in my percentage I gave you in the opening comments, our percentage growth on the bottom line is less than top line. So we've been able to cover some of those costs and have a little bit of growth, but not all of that price increase is dropping to the bottom line. If I looked at the sales growth and said how much is price and how much is volume, it's roughly like 75% price, 25% volume. So we've got volume growth, but we also have price. The freight, you're correct. I think we are seeing some of those lanes clear up and some of the freight costs start to come down. They were really at a high maybe this time a year ago. Some of those we were passing through, so you actually won't any impact on the P&L because it's had a net neutral impact when we were passing it through anyway, right? So even if it goes down and we stop passing it through, so that increment was being passed through anyway. But overall, I think freight is a big part of our, I guess, bottom line, and -- but a good portion of that, again, is intercompany freight as well, which wasn't being passed through. So we'll see some margin improvement as if I just was to isolate internal freight between our manufacturing facilities and where we sell. So that obviously was not being passed through. So as those costs come down, that will help.

Okay. All right. And I think we've also seen a few assets exchange hands in the animal health space in recent weeks, recent months. Whenever that happens, there's the opportunity to maybe bite off a product here and there. You've looked at that in the past. I know you've -- both for the traditional livestock business but also for companion. Anything you want to comment there in terms of opportunity to bolster via M&A?

Yes. I think there's a couple of concepts there. One is that maybe there is an opportunity to pick up a product or 2, as I said, and we'll see when the time comes. The other thing is maybe from a market perspective, maybe there's less options now to invest in animal health for public companies. It's one more reason to invest in Phibro. And then as far as does it change our view on companion animals, the investment we want to make and the products that we have in the pipeline? I would say no. And given it's a medium-term opportunity, between now and then, I think the market will continue to evolve, which often happens when there's an industry that's got good CAGRs versus the rest, right? So I think there'll be more consolidation, more change, and we'll just continue to monitor it and decide how that impacts, if at all, our launch plan for any of the drugs I mentioned. So I think from that turn, nothing's changed from our strategic standpoint and maybe it could be upside for Phibro.

And whenever any of this consolidation does take place, does it result in any disruption, meaning if an asset changes hands in that 6 months, a year while that's happening, is there an opportunity for you to maybe gain a little bit of market share in any specific products?

Yes, I think there's always an opportunity for that. I think when you look at our portfolio, it's so diverse. We're not heavily reliant on, say, 1 or 2 products, right? We have over 800 products, 80 countries. So although, yes, would we see that and would it move the needle enough to mention? Probably not, I would say. So that's -- yes, that's the pro of the diversity of our portfolio, I would say.

Yes. Any questions from the audience? Last poll? All right. With that, we'll close with our standard question. Sort of what do you think is underappreciated? What do you think is misunderstood? What's sort of the take-home message you like to leave people with?

Yes. Thank you. I would say we know we trade at a discount versus our competition. We often say internally, it's -- our pipeline is not being valued properly. It's not reflected in the share price. Part of that is because we haven't said a lot about the pipeline other than what you heard me say today. So I think as we get more confident in the timing of some of those products and the potential market value of some of those products, we're hoping that will work its way into the share price as that anticipation builds. So for right now, I would say that's probably the primary reason why we feel that we trade at a discount because the company has been pretty stable, been able to grow sales, grow the bottom line. But we need to start building the excitement, I think, in the portfolio externally that we have internally.

Yes. That's really interesting. Great. With that, thank you so much, Damian. Appreciate it.

Thank you, Michael. Thank you, everybody.