Earnings Call: Q2 2021

Jul 26, 2021

Good morning. Welcome to Ipera Pharma's Second Quarter 2021 Results Conference Call. Today with us, we have Mr. Bruno Oliveira, CEO and Mr. Ado Mario Coto, CFO and IRO. We would like to inform you that this event is being recorded and all participants will be in a listen only mode during the company's presentation. After the closing remarks, there will be a question and answer session for investors and analysts when further instructions will be given. Should any participant need assistance during this call, please dial star 0 to reach the operator. We'd like to inform you that questions can only be asked by telephone. So if you are connected through the webcast, You should e mail your questions directly to the IR team at riepera.com.br. Today's live webcast may be accessed through the company's Investors Relations website at ipeta.com.br/ IR. We would like to inform you that statements during this conference may constitute forward looking statements. Such statements are subject 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. Now I'll turn the floor to Mr. Breno Olivera, who will begin the presentation. Mr. Breno, you may begin your presentation. Good morning, everyone, and welcome to our results conference call for the Q2 of 2021. I'd like to begin my presentation by discussing our growth, starting on Slide 3. For the Q3 in a row, we have had organic sellout growth. We grew in double digits and got organic market share. This quarter, it was 23.3 percent or 1.1 percentage points above the market. In our financial results, as Adelmario will mentioned soon, our net revenue grew by 44%, which was a growth of our gross revenue versus the previous quarter. We increased Our EBITDA margin, excluding the expenses line, to 34% and our net income grew by 20%. This performance is the result of the initiatives that we have made to boost our long term sustainable growth. And the highlight here is how our launches have been speeding up over the last years as well as our production capacity and also our investment in marketing our leading brands. Prescription products have been a highlight this quarter and its sellout growth was above the market growth once again. This performance was benefited by a growth in chronic medication, which is a segment that has been expanding over the last years with significant launches, as well as dermatology and vitamin D. In consumer health, our main highlight has been a growth in vitamins and supplements, which is a market that has been growing above the consumer health average for the last years. And this had a strong growth ever since the pandemic began. We have continued to expand our market share significantly with new line extensions and going into new relevant categories, such as vitamin C that we just recently went into. In similars and generics, our growth still is boosted by our strong capillarity, as well as our increased production capacity and the investments we've made in the NeoKymica brand. I'd like to underscore that in our innovation pipeline, we have some very important launches, which will contribute to our coverage in generics and will allow us to go from 50% to 60% of total molecules in the market by the end of this year. Total investments in innovation and R and D, including what has already been capitalized, was RMB370,000,000 in the last months, 39% above what was recorded in the same period last year. The Innovation Index, which is a percentage of the net income for the launch Products was 33% in the Q2 of 2021 versus 31% in the Q2 of 2020 using the same comparative basis. We launched some very important products this quarter. In consumer health, for example, we launched BlueMail, a natural product line for treating and preventing influenza. BENEGRIPI Immunocomplex and Immunoenergy are extensions of the BENEGRIPI brand for the prevention segment. We also reinforced our product portfolio with 2 very important acquisitions, BioAge and a portfolio of 12 products from Sanofi, which I'll discuss in Slide 5. BioAge is a high performance brand in derma cosmetics for professional use. With this acquisition, we've gone into an aesthetic market and it has a direct to consumer platform with over 100,000 monthly CES's and 55 franchisees, which will boost our sales and contribute to creating loyalty in these professionals. We currently have 200,000 professionals in this area versus 20,000 dermatologists. BioAge is a leader in this segment, and this is a high growing segment for the next years. So this acquisition is aligned with our strategic goal of strengthening our presence in skincare through innovative products and brands. Our sellout is above $400,000,000 and has been growing close to 30% with several launch opportunities and new segments. So this month, we've created a new business unit for skin CARE specifically, which will be led by Vivian Angelucci. She has been a CFO at Ipera, and she has also led the business unit for generics and biosimilars in the past. On July 12, we also signed an agreement with Sanofi for the acquisition of 12 OTC and prescription products in Brazil, Mexico and Colombia, which I will discuss on Slide 6. Brazil represents around 2 thirds of the income for this portfolio, and our sellout was around $220,000,000 last year. In Brazil, the products acquired include in consumer health, some leading brands such as AAS, Cepacol, Pepsomar and Naturreti. In prescription products, we'll have Buclina, Idantao, Atrjio, Exomedine and SOPAN as our brands. With these acquisitions, we're strengthening our leadership in consumer health even further and also our participation in prescription products. These brands are very complementary to our portfolio and they reinforce our position in strategic categories for Ipera. AAS, for instance, will be used as an umbrella brand for new associations between Acetylsalicylic acid and other molecules in the hypertension market, which we are already developing in our innovation pipeline. For Cipacol. This is a great opportunity. Not only will we strengthen the brand, which has not been marketed For years, we also have a potential brand extension to other related categories. In prescription products, We've brought in the buccalina brands for appetite stimulation and edentao, which is specifically for the treatment of epilepsy. And this underscores some important categories such as gas, scores some important categories such as gastro and central nervous system, which are very important Arias for Ipera. So these brands will count on our robust business platform, which will allow us to capture important synergies on the short and long term, as I'll mention now on Slide 7. First, our relevance at the point of sale and during medical visits. We now count on the biggest pharmacy visiting team in Brazil, a distribution that reaches 96% of points of sale. And we're absolute leaders in OTC medication, which should boost the performance of these brands on the short term already. In medical visits, we have over 1100 employees, which make many visits every day, twice as much as the rest of the market and which will also promote some of the prescription medication we're acquiring. Our portfolio will also count on our R and D structure, which will allow us to launch important line extensions for the next years. We believe that with the go to market platform from Ipera, we can boost our growth for these products. This has been seen with Buscopan, for example, and with some other brands we acquired from Takeda. Moreover, we have to highlight the operational synergies that we're capturing with this acquisition. First, the tax and cost area, when we transfer the production of this portfolio to our Annapolis plant. We hope to to conclude this process by the end of 2024. With expenses, we're going to capture results in the short term because we will absorb this acquisition on our current platform without needing to hire new teams. We now move on to Slide 8, which will give us more details on that transaction. The value was 190,000,000 dollars or R990 $1,000,000 considering the FX of R5.20. It will be paid when the acquisition is concluded The monetary authorities have approved it, and we already hedged about 40% of the value to be paid. This portfolio generated an EBITDA of BRL165,000,000 in 2020, and we estimate synergies of BRL 35,000,000 which will come to a total of dollars 200,000,000 in EBITDA in the 2020 basis. We're paying 4 times sales and 5 times EBITDA after synergies, which makes this acquisition very interesting for our shareholders. The acquired shareholder excuse me, the acquired portfolios already have high margins and we can leverage them even more when we plug them into our business platform. We continue to invest in accelerating our growth without losing sight of our commitment in making our business profitable. Of course, we never forget paying our shareholders and the well-being of our stakeholders, which are in the next slide. Our interest on our own equity was $194,000,000 or $0.31 per share, a growth of 5% versus what was declared in the Q2 of 2020. Once again, we received a certification from GPTW, our great place to work, And we got a seal from Women on Board, an initiative supported by UN Women for the representation of women in our Board. We published our annual report in 2020, the first following the Protocols for Sustainability Reports, or GRI, which has information on the main highlights and initiatives in environmental, social and governance aspects, complying to our mission and being the best and most a comprehensive company in the Brazilian Pharmaceutical Industry, so that people will live more and better. We'll now pass it on to Adam Mario, who will go into the results for this quarter. Thank you, Breno. Good morning, everyone. So looking at our results, in sell in or our net revenue, our growth was nearly 44 percent, and this was boosted by the consolidation of the acquisition of Buscopang and the Takeda brand portfolio. This quarter, we consolidated 100 percent of the portfolio we acquired. When we compare it to the same base as last year and Exclude acquisitions, it was a lower growth of around 10%, a positive impact from the price readjustment we had from April 1st with a slightly higher volume when we compare to the Q2 of 2020. The highlights for this quarter came from our excellent performance in the dermatology portfolio, especially for acne products and moisturizers, which grew 45% in sell in, and we were also impacted by the Grimark portfolio acquisition last year. We also had relevant growth in sell in and generics and bio similars and prescription products as the acute medication portfolio recovered along with our leading brands such as Predsine, Visator, Meoflex and Alevia. Considering our margins, gross margins were over 65 this quarter, which is in line with the same period last year. And here, we suffered a positive impact from the brand mixed, which helped us to recover these margins this quarter. Without considering Our acquisition, our gross margins would have been 2 basis points lower, especially due to increased costs in transformation and increased costs for inputs and also the foreign exchange variation last year. Considering our expenses, We had an increase in marketing, about 60%, given the higher investments we made in media for the new brands that came into our portfolio and the highest the higher level of free sample CTP and funds to support recent launches. We also expanded our medical visit teams, which was about 1250 professionals, 150 higher than last year. In SG and A, we see the acquisitions and the synergies they brought over the last 2 years. There was a significant reduction in the percentage of that revenue and a greater dilution of commercial expenses as well as R and D and Administrative Expenses. So with that, we finish our quarter with an EBITDA margin of nearly 39% and a 32% growth when we compare to the same quarter last year. If we exclude the effect from other revenues, our EBITDA margin was close to 34%. Our financial results showed an increase in expenses and increased leverage for the company and also the increase in SILIQ, which is the main index that we use for our debt. So our net income was nearly 4.80 million, a growth of 20%. The results for this quarter is in line with our budget for the year, and this gives us the confidence that we should reach all of the metrics in the guidance we sent to the market in early April. When we look at the company's cash flow in the last slide, We can see that cash generation this quarter was more than enough to cover all the investments that we made in CapEx, R and D, which are in the intangibles line here and also are hedge and taxes on declared cash. When we look at Citicoyena, this also is included in the CapEx line, which is why it's positive. So when we look at the CapEx invested in the expansion and maintenance, it was around Of our plans, it was about $113,000,000 but here we're also including other factors. So with that, the company's cash position went from $1,700,000,000 in the first quarter to over $2,000,000,000 at the end of June. A net debt of R4.6 billion dollars Our debt profile still has an average term of over 3 years with a very attractive cost and a very good cash cushion, which will allow the company to honor its commitments without any additional debt for the next years. We're still assessing what the best alternatives are for this and what will be our needs for higher debt, considering the newest acquisitions of the Sinofi brand. And to conclude with our working capital, we had a 16% increase in client receivables, 5% in inventories, finished goods and raw materials and a slight reduction in suppliers. Although we increased our investment in working capital by about 17%, It was still much lower than our revenue, which contributed towards a reduction in investments in working capital, which was at around 40% and dropped down to 36% at the end of June. With that, we'll pass it on to Brenu for his closing remarks. Thank you, Adomario. So I'm very pleased with the company's results this quarter. In the Q2 of 2020, our portfolio was deeply affected by the pandemic, and we had a slight retraction in our sellout. But this quarter, although some important markets still have not recovered to their pre pandemic levels, such as anti influenza medication and acute use medication. We had a growth of 23% in the same comparative basis, which shows a double digit growth versus 2019. In the Q2, we also concluded the first stage in the integration process between the Buscopan and Takeda portfolio and which is in line with what we were considering. We are on track to deliver the guidance that we promised for 2021, and we're very excited about the potential value generation for our shareholders with the new product portfolio acquired from Sanofi. Now we'll focus on reducing the company's leverage, bringing in the production from the acquired portfolios and will continue on our organic growth strategy by exploring new markets and new distribution channels, as well as innovation and line extensions for the fantastic brands we have in our portfolio. Thank you for listening, and we'll now continue with the questions and answer session. Thank you. The floor is now open for questions from investors and analysts. Bruno Oliveira. Mr. Robert Ford from Bank of America will ask the first question. Thank you. Good morning, everyone, and congratulations on your results. Breno, what was the market share for this quarter, excluding the acquisitions. And also, you mentioned that acquisitions will contribute towards your leverage. So Specifically, how far along are you in integrating the Takeda acquisitions? And what do you expect when it comes to synergies? Hi, Bob. Thank you for your question. And well, to answer your first question on market share, As we mentioned, we grew slightly above the market value in the Q2, about 23% versus 22%, which was the market growth. And our market share is about 9% on a consolidated basis. Is that without the acquisitions? No, this is our total market share. So this is the same comparative basis without considering acquisitions, because last year, We didn't have that under our management. So about your question on the synergies with Takeda, this is all within our expectations. So For Buscopan, for example, basically all synergies are being captured. We are internalizing production, and that should be concluded at the end of last year, in Q1 of 2022. So this is going to go through some stages right now, but most of the synergies are being captured right now since we are producing secondary packaging in our plant in Annapolis and Takeda as well. Over the Q2, we started producing secondary packaging in Annapolis. And now in the Q3, we'll have the full results of that. But for Takeda, To get 100% of the synergies there, this will only happen in the next 5 years as we transfer all of our production to Annapolis. So according to our supplier agreement, this transfer will happen in the next 5 years. But a good share of those synergies are being captured, especially by integrating marketing and sales teams and also producing secondary packaging in Annapolis. Okay. Thank you, Bruno. And if you allow me another question, You spent some time with the business now, and I'd just like to know if your expectations have changed. They have I think we had high expectations for this portfolio and the performance it's had so far has confirmed our expectations. As I mentioned briefly in our call, when we look at all of the comparative advantages, the advantages I mentioned for Sanofi's portfolio. Well, they're also true for Takeda's portfolio. So as we start promoting the brands and reactivating them, the ones that had not received any relevant marketing investments. For example, this quarter, we had the first campaign for Neozao Gena under our management. So, by having the product in more points of sales, since we have a great channel. We're very strong besides the channels we already have. We now have independent channels through our teams. As I mentioned, we have the transfer order teams, which can reach 96% of Brazilian pharmacies. Cies. So with all of that and also the medical visits team, Takeda had a team, but it was much smaller than the one we have. So, we can promote the product in a much more efficient way than they did before. So, we had high expectations for this portfolio and We've been able to reach our targets and our business plan for these products. Great. That was very clear. Thank you. Thank you, Bob. Joseph Giordano from JPMorgan will ask the next question. So first, we see that the company is still capturing the opportunities for mature portfolios that you can accelerate in Brazil. So do you still see other pharmaceutical companies doing the same that is using this market opportunity, taking whatever expired relevant patents There are that still have a relevant share of the market. And also, if you could tell us what your Firepower will be for the future. Just so we can understand what to expect, what level of Leveraging, would you accept to capture any market opportunities that you see? And my last question is about the last quarter. When we look at our gross margins, we see that acquisitions contributed a lot to your gross margins. But I'd just like to understand what sort of effects we should see in the future. Will we see generics growing above average for the company, for example? So that's what I'd like to know. Thank you. Joe, thank you for your questions, and I'll answer the first two and let Adomario answer your question on gross margins. So your first question was about other opportunities for divestments in multinationals. We see that this is a clear trend and we had these 3 acquisitions. And besides the ones we mentioned, there were a couple of other processes over the last years, some investments in multinationals. And we believe that this trend will continue. The big pharma companies in the last years have been changing their strategies and focusing on some core businesses for them. So this is what happened with Sanofi, with Takeda, and we believe it will continue in the future. As you know, acquisitions are in our DNA. At first, we're focusing on deleveraging. So we want to make it under 2 times so that we can, in the future, participate in other opportunities that might arise in the market. I'll let Adomario answer your last question on gross margins. Hi, Joe. How are you? So regarding gross margins, this quarter specifically, we had a contribution from the acquired brands portfolio, which helped us to increase our gross margins. But we continue to invest significantly in the generics and bio similar segment, which will probably grow when you compare it to other market segments. It's the fastest growing one, in fact. And it still has a very low basis. When you look at the entire Brazilian market, When it comes to value, generics still represent under 20% of the total market, but it has been growing kindly. So for us, it's a very attractive segment and business unit. It generates a lot of synergies and cost efficiency for us. But at the same time, we have been Adding to our brand portfolio, we've had some acquisitions, which You know, our not only iconic brands, which lead their own categories, also represent products that have very high margins that generate a lot of cash. And although we are increasing our leverage, It's a brand portfolio that allows us to deleverage the company very quickly. So overall, when we look at our balance and since this is the company that has the most diverse portfolio in the Brazilian pharma industry, This also allows us to work on this level of gross margins, which is quite high, 65%. And for the rest of the year, we believe it won't vary that much. It will be around the same level, close to what we saw in the Q2 of this year. Great. Thank you, Adam Ario and Breno. Thank you. Leon Drupazos from Citibank will ask the next question. Hi, everyone. Good morning. I'd just like to talk a bit about the Sanofi acquisition. I have a couple of questions. First, Breno, if you could tell us about what your expectations are for the operational margins If you could tell us how much of the EBITDA comes from Brazil? And so that's one question. And about synergies, there are a couple of questions. First, what is the timeline that you have to capture these potential synergies. And also, if you could tell us about the 3 main fronts, so tax, costs and revenue. How much do you expect in each one of these fronts? That's all. Thank you. Hi, Leandro. Well, about margins, we have a mature portfolio with very high margins gross margins, which is not very different from the products that we have in our own portfolio. We did not have a lot of investments in marketing these products, which explains the high margins they have. Regarding synergies, we basically see that the main saying our fiscal synergies. So we're going to have some tax benefits for these products as we manufacture them in Annapolis. Sanofi did not have these tax incentives. And this will all be captured, as I said, over the next years. And we hope to conclude this process by 2024. Regarding Brazil. Brazil represents about 2 thirds of our sales, and It will probably be a bit higher when it comes to margins, but this is not a very relevant difference. I I don't know if that answers your questions. Yes. And also if I could ask another one. In percentages, are there any class that you see have a higher concentration and that might receive some investments from the Takeda portfolio. Well, we're still going to begin this process with the authorities, but we don't expect to divest with this acquisition. So as I said these are complementary categories to our own portfolio, and we don't believe there will be a need to divest differently from what happened with Buscopan and Takeda. Okay, thank you. Thank you, Leandro. I am Muscardini from Morgan Stanley will ask the next question. Hi, everyone. Good morning. I have a couple of questions related to innovation. What is the level of innovation that you have in Sanofi's portfolio? I believe it's very I imagine that it's very low, but I'd just like to confirm that with you. And when we consider the Takeda and Buscopon portfolio, how much increase should we expect from the launches in that Tolio. And when will the company's levels go over 30%? Hi, Caio. So to answer your first question, we Haven't seen any launches in this portfolio acquired from Sanofi that was very relevant in the last 10 years. So These are truly mature brands that are very well known and Sanofi was not focused on investing in innovation for these brands. So Similarly to what we did with Buscopang and Takeda, we have a few brands or some categories that fit into our portfolio that we had already been developing in our pipeline. So we can make use of that for these brands with these brands acquired by Sanofi, so that we can improve brand extensions. Let me give you an example. For Takeda, we should have about 3 launches this year for line extensions from the brands we acquired, and one of them has recently been made one of the biggest launches we have here, which is Elektrus, a biolastin molecule. So it's going to be pediatric EYLEPTUS. It was recently launched. It was launched last week. Doctors are very excited about this new presentation and we believe that it will have a lot of potential. We have a 2nd generation molecule in a new presentation. So, we still have 2 other launches to make on 2 brands in our Takeda portfolio, which have been acquired. For Buscopan and Buscopan, the same goes. So we had already been working on one brand, Neopopan. We had a number of projects to extend this brand, and now we have been quickly been able to plug it into the acquired brands as well. So We'll probably see some news in the next 6 months. And your last question was about our innovation index. As you can see, We are seeing brand launches accelerating this year. So if everything goes according to our expectations, We should launch over 100 new products this year. And that will continue the innovation level above 30%, close to 35% for the next years. That's great. Thank you. Yes, I'm not sure if I answered all of your questions. Thank you. Irminskaras from Goldman Sachs will ask the next question. Hi, good morning. I'm sorry if you've answered this already, but it wasn't clear to me if you discussed the Sanofi portfolio outside of Brazil. I assume you're going to continue with the same plan that you used for the Takeda portfolio, where you continued after the launch. And I'd also like to ask about your market growth, the 22% you mentioned. What is your expectation for market growth this year. It started in the low teens earlier this year, and now it's slightly above 20%, and of course, there were increased prices. But I'd just like to get a feeling of What you think about market growth for this year? And also, With these 22 percent of the market growth, how much of it was ballooned by increased prices? Thank you. Hi, Irma. Good morning. So to answer your first question on the portfolio outside of Brazil, as you know, We're still focusing on Brazil and will analyze the best opportunities for this portfolio. We're getting ready to take this portfolio by having good infrastructures in other countries, starting our offices there, and we're going to assess it. We might license the brand for other players and maybe even sell it or have a partnership outside of Brazil, but this is still being assessed. Regarding the market growth. It was about 50% volume, 50% price. As you mentioned yourself, there was a relevant price hike in the 2nd quarter. And the estimated growth for the market was about 10%, so low double digits. The comparative basis for the Q2 was weaker for us and for the entire market. So we believe it will be at the same low double digits level for 2021. And our expectation is to grow mid teens and sell out in 2021, recovering a part of the effects we had in 2020. That's great. Thank you. Mauricio Cepeda from Credit Suisse will ask the next question. Good morning, Breno and Adao Mario. Congratulations for your sellout growth, which seems to be very sustainable. And I'd also like to ask about marketing expenses. Considering medical promotions, Besides going back to regular promotions, did you also get any sales force from Takeda? And do you intend to optimize this from a broader prescription portfolio. So that's my first question. And So looking at consumer marketing, I see that this grew significantly. Ado Mario even mentioned that this was due to new brands being promoted, the acquired brands. But was there any other factor that drove this? Do you expect your sellout to accelerate? Will this be the new normal or will you gradually remove these marketing expenses. And also Irma had asked about volume growth. We heard that some there were some discounts because of the dollar variations and how this decreased a bit. So what is your perspective? Is the average market price going up or down. And what do you intend to do? Do you intend to increase or reduce your average price? Thank you. Hi, Sipeda. I'll take your first questions and Breno will take the last one. Regarding investments in prescription, I think overall, the main effect we see is a base effect. If you compare this quarter with the Q2 of 2020, basically, that's when we started seeing the effects of the pandemic. So medical visits were suspended. Our entire team started doing remote visits. We also had collective time off for most of the team and a lower level of free samples, events, conferences. So that was the main effect. This quarter here, we already see it recovering. We see that most of the team is already recovering to win actual to actually a higher level of visits than we had last year. Some teams are doing 100% face to face visits, but there was also a hybrid model that we adopted in the beginning of the pandemic. So That also increased the productivity for the team. But basically, we're working at a very normalized level and events and conferences are starting to recover with doctors. Regarding media, we also have that base effect. So last year, during the pandemic, we also reduced that level of investment entirely. So now we see that investments are going up again. And this is also strengthened, as Breno said, by our first campaign, for example, with Neosaugena. So, The rationale behind the acquisitions is to recover our marketing and media investments behind these brands, which we believe were not at the ideal level. So I think recovering these investments in media and visitation will accelerate our sellout level. That's our goal at least. And to answer your question on the average discounts, I don't have the data with me right now, but that is a trend that we're seeing. Costs have gone up significantly, as you see. This is quite clear in our figures. Our competitors have a very similar cost structure to ours. So all APIs from our competitors are also imported. And increased prices from April this year were not enough to offset the foreign exchange impact. It corrected to a level of about 5 BRL on average. So It's expected that discounts were reduced, and I think that it will depend a bit more on how Foreign exchange will be stabilized in the future, but you can get this data from the folks in Investor Relations. We don't have the data here, but this is a trend that we're seeing and it should continue for the next months quarters. Great, that's very clear. So just to confirm Your more aggressive promotional strategy will continue from what I understand. Yes, I think so that this quarter, we're at a normal level when it comes to marketing expenses. And for the rest of the year, it will probably continue around the same level. Great, thank you. Thank you. Please hold while we poll for questions. Thank you. The Q and A session is now closed. We will pass the floor to Mr. Bruno Oliveira for his closing remarks. Well, everyone, I think we covered all the ground we wanted to in our presentation and also in the questions and answer Thank you for listening. Thank you for being interested in Ipera. And We're available through our Investor Relations team to answer any of the questions you may still have about our acquisitions and about our results for the Q2. Thank you, and have a great day.