M&A Announcement

Mar 2, 2020

Slides

Good morning. Welcome to Ipera Pharma Conference Call to discuss the recent transformational acquisitions made by the company. Mr. Alvaro Stenfeld, Chairman Mr. Bruno Oliveira, CEO and Mr. Adam Mariocoto, CFO and Business Development Officer are here with us today. This event is being recorded and all participants will be in a listen only mode. We will have a Q and A session for investors and analysts only. Further instructions will be given then. Your questions should be then submitted to the IR at irrepera dot com. Br. This live webcast is also broadcast at www.hypera.com.brir. We would like to inform that statements during this conference call may constitute forward looking statements. Such statements are subjected to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those set forward in the forward looking statements. I'll turn the floor over to Mr. Albo Steinfeld, who will begin his presentation. You have the floor now. Mr. Steinfeld? Thank you. Good afternoon. I'm honored to announce on behalf of our Board of Directors with Brenno and Agamaro, we are proudly announcing the acquisition of brands in Brazil and Latin America. These are leading brands unrivaled in the consumer health segment. And leading prescription products, some of them patented. We charge strategic acquisitions to our company. This unique Takeda portfolio and the acquisition of Buscopan announced back in December have a transformational effect on our platform. Once concluded, they will take Hippara Pharma to the largest pharmaceutical company in Brazil, the number one company in the Brazilian market. It will be more diversified in the consumer health, prescription, skincare and generic products that will consolidate our leadership in consumer health and strengthening our prescription portfolio. These two segments, consumer health and prescription drugs, are the most profitable segments in the Brazilian pharmaceutical industry. Brazil has over 200,000,000 inhabitants, one of the fastest aging populations that favors the increase of medicine consumption. This industry has shown its resilience despite the economic slowdown. We now have growth opportunities that are a result of the economic uptake in the country. We believe that Ipiropharma has a unique platform to benefit from this opportunity. We are very confident and very excited that this is a single acquisition opportunity. And we'll maintain our continuous focus on innovation and new product developments. We are expanding the company and creating a unique platform, and we are keeping our promise to promote health so people can live longer and better. And we keep on serving our consumers, patients, doctors, drugstores, distributors and that will entail significant value to our shareholders for many years to come. The Board of Directors is extremely confident that this leadership and the entire Hiptera Pharma family have the know how and the expertise, the experience to successfully extract the full potential of these businesses and to expand our platform both in the midterm and the long term. I'll turn over to Bruno. He will be giving you more details on the transaction. Thank you, Alvaro. Good afternoon, everyone. We are very proud to announce this acquisition of this brand portfolio from Takeda. This is the largest acquisition in our history. Just like Alvaro said, these are transformation acquisitions. Once concluded, we'll be the largest company. We're moving from the fourth to the top position in the Brazilian market. A R5.8 billion sellout, a 9% market share, a relevant presence in every segment of the pharmaceutical industry, consumer health, prescription, skincare and generics. That reinforces our positioning as a strategic partner to our top customers. The consumer health market, where we are already leaders, will consolidate our leadership position, which almost BRL2 billion sell out 20% market share, almost twice the size of the second competitors, more than 3x the size of the third competitor. We have two of the top three brands, Buscopo, Neos Audeina, leaking brands, they will be joined to Vimekriti, Coricinade, EPOCLARE and ENGOLVE, among other brands. In prescription drugs, we move from the sixth to the fourth position, very close to the third place. With strong investments in a robust pipeline, both focused on prescription, we'll gain more market share and reach the third position very soon. And for the first time, our portfolio will include patented drugs, exclusive position in attractive segments with higher than the marketplace growth rates. This is strategic portfolio to the company not only because of the potential synergies that Delmaro will be detailing shortly, but for the additional potential growth that this brand portfolio will add to the company. This portfolio has grown consistently at a 14% growth rate in the past five years, above market average that remained at 11% in the same period. These brands Keraldo platform has even greater growth potential that will contribute to increase the growth of the company even further. After these acquisitions, we include four new power brands above BRL100 million in sales. We have 15 power brands now. Out of those, six sell over BRL200 million. These are leading brands in their segments, which instill confidence in consumers. Our focus on investments in marketing and R and D, these brands will speed up their growth just like it happened in several other brands in our portfolio. The Busco Pan family, sales of both during the mid in rails, has more than 75% market share. It's a synonym of that category and the number one brand for doctors. The Azotea ten seventy million brand is a reference, a benchmark for headaches, Nirvana, a product that has sales over $200,000,000 marks the company in the diabetic industry. This is the fastest growing brand within the diabetes. Dramine, over €140,000,000 that's number two for stomachaches, strong among doctors and a huge potential for growth. This is a fantastic portfolio, very concentrated, few brands and they are very relevant. There are only twelve, five of them account for 80% of sales. Despite representing 30% of sales of the company today, given its concentration, we believe this will be low complexity integrations. The total sellout is billion dollars 60% comes from consumer health and the remaining 40% from prescription drugs. And there are opportunities to leverage both products in both markets. In consumer health, brands will have the support of our merchandising team, the largest in the market, over 1,000 people on the field and the best coverage in drugstores. We'll keep on improving the availability of these products in drugstores throughout the country. On top of that, the OTC brands will benefit from our R and D structure and the introduction of new products. Our strategic goals are the same in Consumer Health. With our in house advertising agency, we'll have more efficiency in media costs, better strategic alignment and more agility to produce TV ads and digital ads. Several production products have a huge potential to increase our productivity, adding brands that are supplemental to our current portfolio in several medical specialties. These brands will leverage the reputation of Antecorp Pharma. We are pleased to have a new team of about 200 people, highly skilled, that will be part of our marketing, medical demand and merchandising teams. They'll help us strengthen our positioning amongst doctors, giving more visibility to our brands and drugstores. After this acquisition, two patented products will be part of our portfolio. One is Levena, a diabetic. A diabetes drug we've gotten for at least another ten years. The diabetes market is one of the fastest growing market, almost at 20% a year. Nirvia is a drug that's getting more and more market share in the category, growing over 100 in the past five years. Alexis is the state of the art drug with a patent that will expire in 2027. We are very strong in the respiratory segment with Prosino, Renosor, Serastamine, Tiolexis and Alexis. Will increase our presence in that category with an important medicine for respiratory diseases. Before I turn over to Del Maro, let me talk about the acquisition of Mexico. Mexico accounts for 12% of the portfolio and the operation will represent less than 3% of the total sales of Ipira. Our focus remains in Brazil. Having said that, this Mexican platform is very attractive to us. It's a streamlined portfolio, 80% of sales concentrated in four brands, attractive margins, a 12% growth in the past three years. We have a talented team of about 80 people in sales and marketing, and this platform can become an opportunity to distribute several products in Mexico. I'll turn over to Del Mario now. He will be talking about the financial details of the transaction. Thank you, Bruno. Good afternoon, everyone. We're very excited to announce this transformational acquisition. Alvaro and Bruno have talked about the strategic rationale. Let me share figures about these two transactions. Back in December, we couldn't talk about it because we had to wait for specific deadlines. On Page 14, let me make a few considerations. The total acquisition from Tequero was $825,000,000 about $36,000,000 of initial working capital, it will be necessary to run the operation. The total payment will be $789,000,000 For TKC Buscopan, it was BRL1.3 billion. In the Takeda case, we're still considering hedging alternatives so that we are not exposed to interest payments will be made up. Eight, and our financing is in reals, just like the products that are in reals and Mexican pesos. As the expectation is for timing, Hypera's Board of Directors has approved and we're just waiting for the Brazilian authorities. We're not expecting any problems. The specific timing hasn't or haven't been defined yet. In the case of Buscopreno, we submitted the documentation to Brazilian authorities two weeks ago, and we expect that approval to come out by the third quarter of this year. In the case of Taquera, we expect the approval to happen before this year's end. Let me talk about the sources. We have a firm finance credit line with a top line bank that amounts to BRL3.5 billion. This is a long term line, six year at a very attractive cost, taking this opportunity that we have the lowest interest rates in Brazil. The company has issued an BRL800 million payment with a five year deadline. With this credit line, and our available cash that was at BRL2.2 billion last year and a pro form a of BRL1.6 billion after the payment in January, we do have the necessary resources to pay for these two acquisitions. Not considering the additional cash generation throughout this year. We believe that this healthy financial position and our net cash generation. These factors enable the company to make these two acquisitions. Raquelo's acquisition is the largest the company has made, and we are not significantly changing our capital structure. Leverage will be below 2x the EBITDA considering the contribution margin of these two acquisitions. And that will enable the company to deleverage quickly in the next years. We're not compromising our CapEx investments. We're maintaining our industrial capabilities, and we are maintaining our innovation pipelines, ensuring the sustainable growth of the company in the midterm and the long term. After these acquisitions, we have additional revenue above 30% when compared to Ipera today, a relevant synergy potential to capture value in the short term after the closing is confirmed. The major integration benefit from both acquisitions will be the tax and cost structures with the potential of net revenues and to internalization of some manufacturing processes once the deal is finalized. We also count on our expertise in working with established or well established brands. And when we align that to our sales and marketing structure, we can speed that growth even further, speed it up. Having said that, we are very pleased to count on a new team of almost 300 employees highly trained to help us in promotion and sales, to help us promote our own brands amongst doctors and in POSs so that we can leverage the sellout of the entire Hipera portfolio. It's clear that we do have several opportunities ahead of us. The synergy expectation is about to BRL280 million yearly to be captured after the first year once the deal is finalized. This amounts to almost 20% of our net revenues when we combine the two and about 50% of our EBITDA. And that's consistent with our integration track record of previous acquisitions and the know how that is part and parcel of our M and A know how. The company is very used to executing these evaluations. In summary, after these two acquisitions, we'll become the largest pharmaceutical company in Brazilian retail, a 30% growth in sales, above 50% growth in EBITDA. With an additional brand portfolio focusing on innovation, we have a potential to grow sustainably above the pharmaceutical market average. When we look at the valuation, the combined transaction value will be R4.820 billion dollars reducing the premium of R455 million dollars That's above the assets. When we combine net revenues, it's BRL 1,150,000,000.00. And EBITDAS after synergies between BRL720 million and BRL750 million, the multiples are very attractive of the combined transactions. Lower 4x sales, 9.4x EBITDA after synergies and 6.1x and 5.9x after synergies. In conclusion, these operations bring synergies aligned with our strategy to expand our market share, new categories with potential to grow above market average, increasing our brand numbers with leading brands in different segments. Very often, these are benchmarks in the category. We're more than doubling our market share in the consumer health segment With the strong cash generation that we expect added to the potential of these two acquisitions, our Board of Directors expects to maintain the same dividend policy we've adopted and received to grow dividends per share in the next years to come. We expect that these acquisitions are beneficial for both top line and also bottom line right after the first year of the transaction. I will turn it over to Bruno for his final remarks, and then we'll have a Q and A session. Thank you, Mario. Let me summarize a couple of these transformational acquisitions. This is the largest and the most diversified pharmaceutical company with a unique portfolio with high growth potential, attractive margins that will help us increase our revenues by 30% and the EBITDA at about 50%. It's a unique opportunity to leverage this market or these brands in our sales and marketing platform with our expertise in line extensions, creating product family, management portfolio by category and with the investment support in marketing at the POS that these brands deserve. This transformational move generates additional value to our shareholders by capturing synergies in sales, costs and SG and A with a potential growth of double digits. Our capital structure will remain very healthy. Net debt is below 2.5x EBITDA and a long term profile. The company has a strong cash generation to help us maintain the dividends, not compromising CapEx investments that are key for the long term growth of the company. We still believe the growth potential of Brazilian pharmaceutical market that will be driven by the uptake of the economy and the secular process of the aging of the Brazilian population. Hiperopharma is the company with its best position to capture these opportunities. We have the most attractive margins and we are the company that invests the most in innovation and production in Brazilian pharmaceutical market. We are the only company that has its relevant presence in every segment, OTC, prescription, similar products and generics. We have invested and we keep on investing to create this unique platform that cannot be replicated. And we'll keep on investing to guarantee sustainable growth in the next five to ten years. Thank you very much. We'll now start our Q and A. Thank you. This is Joy for investors and analysts. The first question comes from Mr. Xavier Martins from Morgan Stanley. My question is about synergies. This is the one highlight of the acquisition. My question is to Del Mar. Said they'll keep on manufacturing the products for Hipera. Is that compatible with the tax synergies you expect? Yes. We do have a contract to have them keep on manufacturing the products, but we intend to internalize some steps of that production process. We'll then have the tax benefits that we expect. We'll keep on producing initially. But when we take over a couple of steps of the process, something that we can implement from after the deal is finalized. You can't do much before, but we can benefit from that synergy in the short term. Yes, let me just add to that comment. The contract has a maximum term. We'll plan to start transitioning that production as early as possible. You say they will be producing the molecule and you do the packaging. Is that it? Yes, exactly. That's the intention. Joseph Giordano from JPMorgan asks the next question. Morning, Brendon, Del Maro. Congratulations on the acquisition. My question is about the synergy. Doing a reverse or making a reverse calculation, can I come to the conclusion that half of the synergy would come from the tax incentive in Goias? And my second question is about how can you connect this new product portfolio with the company's pipeline, maybe using these brands that you're acquiring that are well established. That's the super brand concept that you have in place, right? This is Bruno. You know what the synergy is like in our structure, in operations and the benefits we have in the state of Goias. Most of it is not coming from the tax benefit, but it plays a relevant role. Most of the synergies come from the integration of the operations. As to your question about the pipeline, it makes a lot of sense to us. These brands on our platform for both R and D and sales and marketing, they have a lot of synergy. We've been selling Pusco Palm for quite some time in Cartiera And companies are focused on other strategic areas for them. They state very clearly at Taquera, oncology, rare diseases. So these brands lack the necessary attention. We believe that in our hands, we'll be able to give them the necessary attention, both in terms of marketing investments and also to place them in our R and D platform to detect opportunities for new projects, projects that were in the back drawer in these companies. And we can now focus on them so that we can release or introduce these new medicines very quickly. I think I understood your question, didn't I? Yes, you did. Next question comes from Mr. Fred Mounji from Bradesco. I have two questions. Was there any competition in that deal? Of course, you cannot answer for third parties. Let me try to understand the rationale. A much lower valuation. It's very good, of course, deal. I would like to I have the impression there was not much competition based on the price you paid for it. And my second question is about the integration. Can you give us a step by step description of what's going to happen? I know you have to wait for the approvals, but what can we expect after that? It didn't make any sense, Fred, to talk about the process itself. What matters is that it made sense to us in terms of valuation, just like Delmario explained, even not including future synergies. Once you consider the synergies, this is even better. As I said, it made all the sense in the world strategically based on the brand portfolios. This is our core business, right? And they have the best margins. So both strategically and also from these synergies point of view, it made a lot of sense to us. And you had a second question, what was it? My question about the integration. Once the deal is finalized and approved, I would like to better understand that step by step process. I believe that you have some synergies in 2021. What can we expect down the road? As I said, Fred, during my presentation, it's a very streamlined portfolio. It is at Buscopan, two brands. Buscopan and Buscopan, it's a product family. They also have a very streamlined structure in consumer health. So it's a very easy integration for us via Brudos Amed. In the case of Takeda, it's a very simple portfolio, 11 products, five of them account for 80% of sales. Again, a very simple integration. We got people from marketing, sales and medical presentation, these people will be joining our teams. So integration is rather simple. In less than a year, we'll be able to integrate 100% once the approvals are made, of course. That was very clear. If I may, let me ask a third question about Mexico. I know it's not substantial, so you keep on maintaining the same strategy. Are there any opportunities to expand even further in Mexico organically or through M and A? As we said, in Mexico, it's a small operation. Both within Takeda's portfolio, it was small. It's even smaller in our platform, less than 3% of repair sales will come from Mexico. As I said, it's a very interesting platform in Mexico. It's been growing, highly concentrated, 80% of sales come from four products, 80% margins that can be a platform to take other Hipera products to Mexico. This is something we'll consider internally. That was very clear. Irma Scott from Goldman Sachs asks the next question. My first question is about the distribution synergies. Where do you detect the gaps that get in the way in the penetration? Of course, these are very strong brands already. What drugstore chains, what type of customers, where do you believe the greatest opportunities will come from? Of course, the focus has been in the acquisitions in recent months, and this will continue in the following months. Also waiting for the closing and preparing for the integration. Can you give us an update on the pipeline of new products? Should we expect any boost this year or maybe next year? Irma, let me talk about the synergies. Let me tell you where the potential is. Number one, media. OTC brands require a lot of media investments. As you know, we have our in house ad agency. So we deal with media outlets directly. Our bargaining power is much better. Our competitors have to go through regular ad agencies, so we have advantages there already. There's another opportunity for growth, sales growth, which is to bring those brands and plug them in our sales platform. We have the largest sales force, almost 1,000 people visiting stores, promoting our products and the point of sale. Our coverage is over 80%. And these guys will benefit just by being within that structure will increase our distribution, especially in small stores. And we have a very strong position when compared to our competitors. Let me just point out that the company strategy remains the same, organic growth, investments and innovation. So we'll keep on investing in innovation despite these acquisitions. R investments are very relevant. We are the number one investors in R and D. And we are not hurting our organic growth capabilities. Quite the opposite, these brands will speed up our pipeline. We can introduce more and more brands or products. Let me take the opportunity to ask another question. These brands you acquired in Brazil, they also exist in other markets, right? How do these contracts operate? What kind of agreement do you have to sign with these companies to develop line extensions or new formulations below those umbrella brands like Muscatraz, for example. Actually, most of these brands from Taquerra are regional brands. They are in Brazil and Latin America. They are not global brands. Buscopan is different. Buscopan is a world global brand. We have exclusive rights to use that brand in Brazil. We can promote the brand and we can have line extensions. So we own the brand and we have exclusive rights to use it in Brazil. There's nothing that will get in the way of using those brands here. That's a different story when we think about using the brand elsewhere. So we have complete freedom to introduce new presentations or to have line extensions. Yes. In our pipeline, we have a few products that we were already developing. They can become great line extensions for the Boscoben brand. Is there any other link to whatever they develop abroad for the Pozcopen brand? Or do you have no connection whatsoever? With the acquisition of the brand in Brazil, they no longer hold the right of the brands. So they have nothing to do with the Buscopan brand. There are some supply contracts, just like Bruno said, we'll be gradually transferring production from their facilities to our facilities in Annapolis. Mr. Ruben Cotto from Santander. With this new portfolio that is growing faster than that of Hyperas, what's your expectations as to growth for the next years to come? It's not a guidance, but you thought about 1% to 1.2% or 2%? And my second question is about production capacity. Will these acquisitions change your expansion projects in Annapolis? Do you need further extensions or not? Takeda's portfolio or the entire portfolio, Takeda plus Oscopan, will help us reach our growth expectation that is from 2% to 3% points above market average. It's easier to achieve that goal because you have some specific products, especially those that are patented. They provide very good growth perspectives. That does not change our strategic growth goals. They'll help the company reach that goal more easily. I don't know whether I made that clear. Actually, with these acquisitions, we can speed up our innovation plans. We are entering categories that are growing more than the market average, just like metabolic and diabetes. Most of the molecules in this segment still have a patent. We have several projects in our pipeline. We believe that this category has great potential to grow above market average. It's a large category and will become even more relevant. We cannot only speed up our entering the segment, but we are entering with the molecule that is patent protected anyway. It's very interesting segment. And we're now part of those categories that are more dynamic in terms of growth. Mr. Thiago Macruz from Itau BBA asks the next question. I think you've answered the question I was going to ask. My question is about patented drugs. I would like to understand whether you are willing to focus on these and on this category. Anderson, this is Bruno. Our focus is not in R and D, in developing new molecules. Our R and D focus is in the incremental R and D. That's the largest return on investment. The return on investment is a lot bigger. However, these are very attractive markets. If we do have similar opportunities, we'll consider them that can bring something different to the Hiperos portfolio. Thank you. This concludes the Q and A session. I'll turn it over to Mr. Bruno Oliveira for his final remarks. As I said, we're very proud to make this announcement that Takeda acquisition was the largest acquisition in the history of Hipera. These are transformational acquisitions. We have been investing heavily in the growth of our platform. This is a unique platform that cannot be replicated. We will keep on investing so that we can ensure our growth in the next five to ten years. Thank you for attending this teleconference call. Our IR team is available to answer any questions you may have as to the transaction. Thank you very much and good afternoon. This concludes the Peripharm's teleconference call. Thank you for attending, and have a good afternoon.