Hypera Sa S/Adr

Good morning, ladies and gentlemen, and welcome to Ipera Pharma's conference call, where we will discuss the results of the third quarter of 2022. We have with us Mr. Bruno Oliveira, CEO, and Mr. Adomario Couto, Executive Director of Investor Relations, or IRO. We would like to inform you that this event is being recorded, and you may watch it on the company's Investor Relations website, ipera.com.br/.ri. we would like to inform you that all participants will be in listen-only mode during the presentation. Afterwards, we will have the questions and answers session when further instructions will be given. Before we continue, I would like to underscore that some of the information mentioned in this conference call may refer to projections or statements about the future. They are subject to risks, known and unknown, and uncertainties that can lead them to not come to pass or defer substantially from what was expected. Now, I would like to give the floor to Mr. Brenno Oliveira. We'll begin the presentation. Mr. Oliveira, over to you. Good morning, everyone, and welcome to our conference call for the earnings of the third quarter of 2022. I'll begin this presentation talking about our sales and our growth on slide three. Our sellout went up 17% this quarter, growing across all business units dedicated to pharmaceutical retail, slightly above the market performance this quarter. In the last two years, we have had double-digit organic growth rates across all quarters. And this is due to our portfolio with leading brands, higher launches in the last few years, and increased production capacity. In the first nine months of the year, our sellout went up 22%, four percentage points above market. This performance was essential to reach a record net revenue this quarter of over 2 billion Brazilian reals. Up 25% versus last year. Our EBITDA margin reached 35.5% this quarter. This quarter, we also invested over 130 million Brazilian reals in innovation, R&D. And we had some important launches that I'll discuss on slide four. Among all of the launches this quarter, I'd like to highlight Ondif for nausea with an exclusive oral dispersible film without any need for liquids with a very pleasant taste. And Pikbam, the first drug launched in the Brazilian market after the Apixaban patent was released. We also launched Ondasterone and Apixaban, Ondif and Picaban molecules in our generic brand, NeoChemica. One of our long-term goals is to go into this business. The third quarter also marked our entry into the cannabidiol market. We launched our first drug based on cannabidiol called Full Spectrum. Hypera Pharma is the first big pharma company in Brazil to launch it in Brazil. And we will present other presentations in the future to make for a full portfolio of cannabidiol medications. As I mentioned last quarter, we have increased the speed of launches of this product. We will add 100 new products in 2022, which should increase our gross revenue by 1.6 billion Brazilian reals when we reach peak sales in five years. We are committed to sustainable growth in paying our shareholders and with the well-being of our stakeholders. This quarter, We declared 195 million on interest on owned capital, and we advanced our ESG agenda. We concluded the creation of affinity groups focusing on gender, ethnicity, people with disabilities, and they will contribute to increasing diversity in the company. We also had three health meetings in Sao Paulo and Annapolis, to prevent diseases such as hypertension and diabetes in these regions. This quarter, we also had our third compliance day, which this year underscored the importance of ethical conduct in the company's daily activities. The recent initiatives that we have made focusing on sustainability have contributed to increased our score in the ESG ranking at Standard & Poor's by 21% in the last year. Now, we will talk about the main advances we had in our initiative for the institutional market on slide five. The net revenue of the non-retail market went from $35 million in the third quarter of 2021 to $101 million in the third quarter of 2022. Even removing the contribution from immunoglobulin this quarter, it has more than doubled year on year. And this is the result of the initiatives implemented by the new business structure to potentialize the growth of our current product portfolio in this area. This quarter, we also launched Cifepima, Ciferoxima, and Baxulfatrine. And we also concluded an expansion product for injectables in Annapolis. We're also advancing in creating a dedicated RMD area for the non-retail market to support our innovation pipeline, which now is counting on approximately 90 molecules that will be launched in the next years. We're also building a new plant 100% dedicated to oncology. I will now pass it over to Adel Mario, who will talk about this quarter's results. Thank you, Breno. Good morning, everyone. For the first time, our net revenue went over 2 billion Brazilian reals in a single quarter, up nearly 25% versus the same quarter last year. Removing the contribution from the Samofi brand, our organic growth was 20%. and this was the result of strong demand for IKRA products, market share gains across nearly all business units, especially hospital and skin care. Our gross margin was slightly below what we presented in the third quarter of 2021, and this is due to a mixed effect as product sales for the non-retail market grew. And this has a lower impact on our EBITDA margin. Marketing investments are less relevant in this channel in comparison to retail. The company's main expense lines, marketing and sales, grew below sales, as we had seen in previous orders. And this effect is happening for several reasons. especially the gain we had from synergies in the portfolio we acquired from Sanofi and also the positive performance of the brands acquired from Takeda. We also received contributions from the non-retail market. In sales expenses, our total investment in R&D went up by nearly 50% of what was invested in the third quarter of 2021. It's also important to highlight that this quarter, we received a tax benefit of 21 million Brazilian reals. So with that, we had a record of 727 million in the quarterly EBITDA, up 37%, and an EBITDA margin above 35%. Interest payments have impacted our bottom line due to the company's higher debt level. And this is due to payments for the acquisitions and higher CDI levels in this period. So our net Profits was nearly, excuse me, our net income from continuing operations were nearly $470 million this quarter. There are still two months left until the end of the year, but our performance until September reinforces our confidence in reaching our revenue EBITDA and net income guidances for 2022. We'll now continue with cash flow and indebtedness on slide seven. Our EBITDA conversion into operational cash flow was 93%. We reached another record of 678 million Brazilian euros in cash generation, which allowed us to make all the investments needed to expand our production capacity in Annapolis and also develop new products to sustain the company's future growth. We were also able to have an acquisition which brought us know-how and technology to produce Scopola meat, which is not only a new business line for the company, but it was also a strategic acquisition supplying the main input for the formulation of Buspapa. After these investments, our free cash generation was $253 million, and we captured more debt through the issuance of a CRI, $750 million. So we conclude this quarter with a comfortable liquidity level with a great cash generation above $2.2 million and a net debt of $6.6 million. billion, 2.5 times our EBITDA in the guidance for 2022. We will remain focused on the company's main financial priorities, maintaining robust liquidity levels, increasing cash generation, deleveraging our balance, and reinvesting our excess cash to support our sustainable and organic growth through our innovation pipeline. I'll pass it over to Breno for his closing remarks. Thank you, Adelmario. We're very happy about the results from the third quarter, and we're very optimistic about the business perspectives that the company will have for the short and the medium term. We're still focused on our organic growth goal above market rates, and we're confident that we will reach all guidances for 2022. launches are going on full steam in line with what we define for the year and we are penetrating important markets very quickly. So I'd like to thank all of our team for their dedication and commitment to our results and for their contributions so that we could become the biggest pharma company in Brazil. Being leaders in this market is a major achievement but reaching this level with profitability and with record operational cash generation is even more satisfying thank you and we'll now pass it over to the questions and answers thank you we will now begin the questions and answer session for investors and industry analysts if you'd like to ask a question please raise your hand if your question has been answered you can Lower your hand. Please hold while we poll for questions. The first question will be asked by Bob Ford from Bank of America. Go ahead, Mr. Ford. Thank you. Good morning, Breno and Adel Mario. Congratulations on your results, and thank you for taking my questions. The press release mentioned a B2B market related to the cardiovascular system and the central nervous system. So how much of this would be in your pipeline? How much of your pipeline is connected to patent expirations? And what should we consider for this market? What will be the addressable market? Hi, Bob, I'll take your questions. As we said during the hype day, a big part of our pipeline is concentrated on prescription and generic products. That represents about 75% of our total pipeline. Among the prescription product market, which is now the biggest part of the market, Products for chronic diseases represent 60%. So, cardiology is very relevant and the central nervous system, which are the biggest therapy areas in the market. So, naturally, our pipeline would follow. We have a bigger concentration of products for these categories as well. The market size is more relevant, but we also see segments and Given the demographic changes and behavioral changes in society, we should see higher growth and more dynamic growth for the next years. So these are two therapy areas that we are betting on. And many of our projects are concentrated on these areas. On cannabidiol. This product was launched in late September, so it is already available in some major chains. We're starting medical promotional efforts. We see great potential in this new class of products, in this new category that is coming to Brazil. It's still a very small market in Brazil, so product sold from the pharmacy it's about a 40 million real market there's also an access market with direct sales to patients but it's not very relevant in brazil yet so this is a market that we are starting to um I mean, we're still educating the medical class, but we believe we have a lot of potential for many indications. It can be considered a side treatment with other drugs. So we're very confident that we will play an important role in developing the market in Brazil. And Antonio, what should we, consider for ramp ups? How will targets be ramped up? Well, as we said, right now, we are prioritizing the development of our pipeline through partnerships. So this year, we have been able to launch five new products for the institutional segment, most of which are antibiotics. For next year, What we mapped is seven to nine new products for 2023, but it may be higher as we have partnerships. So launches should accelerate in 2025 and 2026 when we will begin to put into the market products developed by our R&D. Great, thank you. Thank you, Bob. The next question will be asked by Stella Stenliff from JP Morgan. Go ahead, Stella. Hi, everyone. Good morning. Thank you for taking my question. Regarding organic growth, we see that it has followed in the same line as the market. Why do you believe it kept on the same level? Are we expecting this to continue, or was this a seasonal effect? Thank you. Hi, Stella. We don't believe that it will grow above market rates every quarter. This is our long-term goal, but it's hard to guarantee it with every quarter. We had some factors that contributed this quarter. One was external, so the performance of one of our competitors through a specific product, semaglutide, or Ozempic, which has been growing a lot for the diabetic market. It went up 93%. It's a big product, and that contributed to more than one percentage point. Without that, it would be 16% for the entire market. So this is a patented medication that we're also working on our pipeline so that when the patent expires, we can also include the molecule in our portfolio. Another factor is a bit more internals. we had the acquisition of the new portfolio with Neos Aldinia and Buscopan in the analgesics market. And that decelerated this third quarter, and that ended up weighing down our results. But we do not believe that this will be a constant factor. It was one-off, and we believe that we will grow above market rates because of the performance in the second and third quarters. And for next year, with all of the launches and investments, we also expect it to grow above market rates. It's that target of 2% to 3% above the market rates. So I don't believe that the third quarter will affect that goal, but we know that it won't be the same every quarter. We have a comparative basis. For the third quarter, we had good performance. So that's it. We believe it was a one-off situation, and we'll continue on our target of growing two to three points above the market rates. Great. Thank you. Our next question will be asked by Mauricio Cepeda from Credit Suisse. Go ahead, sir. Hi, Bruno and Adel Mario. Good morning. Thank you. So I'm going to ask a little bit about your cost. I know that you had a high participation in non-retail. You had an impact on your gross margins. But I'd like to know if you have felt other types of pressure, if you still are pressured in the supply chain and packaging commodities, APIs. What is the supply chain like? Is that affecting your cost as well? Also related to that, we saw that C-Med published resolution number seven this year, allowing for more price flexibility for some products until the end of the year. Do you believe there will be a trend for C-Med to be more flexible in the future? What do you perceive on that sense? Do you think regulators are trying to encourage more availability of drugs in the market? Hi, Sid Beto. With regards to cost, this quarter, the main cause was the mix of products, and this is expected because As the institutional market grows, especially with the current portfolio that we have, that is more dedicated to the institutional market, we will have more pressure on our gross margins. But as we always say, we don't see much of an impact on that in our EBITDA margin. With that being said, Concerning raw materials and packages, we have some pressures in some segments and some raw materials, some inputs specifically, but nothing of concern. Some are growing. Some are in the post-pandemic level. Another point that helps is the exchange rate that seems to have leveled out. So we are being less pressured. And as prices go up, we will recover our margins. So I don't think that costs are a concern short term. In the beginning of the pandemic, we were very careful with our raw material inventories. It also impacted our cash, although we had great cash generation, but our inventory levels went up in the company. And now that we are at a more normal level, we will gradually reduce our safety inventory that was built up in the last years. We will need to be very careful about doing it in the next months. About the regulators. We don't believe there will be many changes in how regulators see price controls, and as these products are resupplied especially products related to covid which had a bigger impact on availability then it will likely go back to the usual rules from the regulators on price but do you believe any active principles can be approved for the future we see that there have been many molecules where that has happened. Do you see that happening? Well, we believe it will continue happening. It has been improving in the last few months, but it's a matter of balance. We have a very long... Lead time, you know, raw materials come from India and China. And when it is missing, logistics in production go out of balance. But I don't think there's a shortage of raw material. It's a matter of time for it to be adjusted. Great. Thank you. The next question will be asked by Vinicius Figueiredo from Itaú BBA. Go ahead, Vinicius. Good morning, everyone. Thank you for taking my question. The first point I'd like to touch on refers to one of the questions that was asked on market growth. If we could break down our sellout at Ipera per category, specifically on generics, In the third quarter, we observed a gain in market share. So if you could tell us a bit about competition in prices, in generics specifically, that would be great. And I'd also like to ask about the cash conversion cycle. So in the third quarter, we started seeing levels above the normal level for inventory. So if you could tell us a bit about that, it would be great. Thank you. Let me take your first question, Vinicius, and then I'll let Adelmario answer your second one. We don't look at our growth per business unit, but in this quarter, we gained market share across all segments, across all business units, except for consumer health. And that is what I had mentioned before. We believe that this is a one-off. About the price dynamics, the generics market is the most competitive one we have. What we're seeking here is to have the lowest cost, the lowest production cost, the lowest API cost. That's what we seek in order to be competitive. But we don't see higher or lower pressure in the generic segment in the recent past. It's a competitive market, and we believe it will continue to be competitive. We're going to do whatever we can to continue to be competitive. And we believe that we can. In order to grow in the market, you need to have new molecules, and that's the effort we're making in the pipeline. Launching products and being at the forefront of the launches, which is what happened with Pixabend. We're very successful. We are the only ones in this market, and We will enjoy it until the competition comes. Hi, Vinicius. And to answer on the cash cycle, working capital investments are related to higher safety inventories above the average that we had in the past. There are many factors that are leading us to this strategy. From the beginning of COVID, we have had a higher level, especially due to some interruptions and higher lead times in delivering raw materials. More COVID cases in China, lockdowns. China continues with its zero COVID policy, and that may delay some APIs. So for now, we feel very comfortable in continuing with above average safety inventories. Another thing that will impact is the acceleration of new product launches. So to ensure that it will be successful and that we will have the conditions to not only have inventories but also replace a product in the market, it's important to have higher than average inventories. If the demand is above the expectation, we can still meet it. So those are the two main reasons. If the COVID situation and if the war normalizes in the next quarters, we will have the opportunity to reduce our inventory levels gradually. Great. And if I can ask a follow-up question quickly. You mentioned inputs, and do we know how much China represents of your imported inputs? About 50% of APIs. And when I say APIs, that's 40%, 45%. Great. Thank you. Thank you, Vinicius. The next question will be asked by Gustavo Miele from Goldman Sachs. Hi, Brenno and Adel Mario. So I have a couple of questions. First, I'd like to match your R&D with the strategies that you had. In the hype day, you mentioned line extensions and how much they are becoming more predominant in your launches schedule for retail. What I'd like to understand is if this gradual change in what you are launching in the company, shifting gradually to line extensions, how it matches your R&D for the future. So should the company spend marginally less in R&D looking at the future without getting in the way of the quality? Does that make sense? I'm just trying to understand that. the company's R&D. And a second question is about capital structure. So we are at a high leverage level, but this doesn't seem to be recurrent. This is because of the acquisitions that you've made. So what do you expect? expect for the future? What would be a normal level? And how does it match our interest rates in Brazil? Since your cash generation has been very strong, do you intend to stabilize at how much looking at the medium term? That's all. Thank you. Next, I have to answer your first question, R&D versus launches, line extensions. We don't believe that it's too connected. Line extensions are a strategy of what brand we will use for each product, product in the pipeline. So if we will use a pre-existing brand or if we will create a brand from scratch. So we always try to use an existing brand to optimize investments in media and medical visits. and promotion and points of sale. So R&D will tend to keep at the same level or grow because the projects we have are bigger and they're more relevant for the company, regardless of using line extensions or new brands. Obviously, line extensions also allow you to have new packages, new pharmaceutical presentations that have a greater R&D, but we tend to see more products and incremental innovations having a greater weight in our portfolio and higher sales potential with this pipeline. To answer your second question on capital structure, yes, leverage went up with the latest acquisitions. But the only thing that was unexpected was that interest rates went up more than anyone expected. So with that, the impact to our financial revenue was greater than what we imagined. And it's taking a little bit longer for it to deleverage than what we had initially imagined. But we are at 2.5 times. That's true. And we believe that we can lower this without compromising our CapEx investments in R&D. And throughout the next year or year and a half, we believe that we will be closer to a local level, which is our aim, two times. Great, thank you. As a reminder, if you'd like to ask a question, you can raise your hand. Please hold while we pull for more questions. The next question will be asked by Artur Alves from Morgan Stanley. Go ahead Artur. Hi everyone. Good morning. I'd like to know a little bit more about your SG&A margins and how it will be affected by the current changes. Thank you. Hi Artur. We didn't understand your question. There is a tax benefit currently called lay to bang, which reduces your expenses with R&D when there is a deduction. So it's coming in to the sales expenses line where we have R&D expenses. That is what is dispersed. I'm not sure if I understood your question. So what will it be like in the next few quarters? How will it continue being booked? Well, we don't have a forecast for that. It will depend on the results we have. So we don't have a forecast for that. We have these benefits every year. Of course, we try to optimize it as much as we can, but we don't have a forecast for what we will see in the next years. Great, thank you. Thank you, Arturo. Once again, if you'd like to ask a question, you can raise your hand. Please hold. As there have been no further questions, this concludes our Q&A. We will now pass it over to Mr. Brenno Oliveira for his closing remarks. Mr. Brenno, go ahead. I'd like to thank you all for being here, for listening to our conference call, and I'd like to make our investor relations team available if you can answer any questions you may still have. Thank you, and have a great day. This concludes the company's conference call. Thank you for listening, and have a great day.