J B Chemicals & Pharmaceuticals : Earnings Call Transcript – Entry into Ophthalmology segment

JB Chemicals & Pharmaceuticals Limited

Conference Call Transcript

December 22, 2023

This transcript is published as is what we have received from our vendor who manages the conference call. We would request you to go through the audio recording in case you want to reconfirm anything that has been mentioned in the transcript

Moderator	Ladies and gentlemen, good day and welcome to the Conference Call of JB
	Chemicals & Pharmaceuticals Limited hosted by the Company to discuss its entry
	into Ophthalmology. This call is on the 22nd of December 2023.
	As a reminder, all participant lines will be in the listen only mode and there will be an
	opportunity for you to ask questions after the presentation concludes. Should you
	need assistance during this conference call, please signal an operator by pressing
	'*' then '0' on your touchtone phone. Please note that this conference is being
	recorded.
	I now hand the conference over to Mr. Jason D'Souza - Executive Vice President at
	JB Pharma. Thank you and over to you.
Jason D'Souza	Thank you Yashasree. Good afternoon and welcome everyone to the conference
	Call of JB Pharma to discuss the company's foray into ophthalmology.
	We have with us today Nikhil Chopra - CEO and Whole-time Director and Kunal
	Khanna - President Operations at JB Pharma.
	Before we begin, I would like to state that some of the statements in today's
	discussion may be forward-looking in nature and may involve certain risks and
	uncertainties. I would also like to state that during this call, we will entertain questions
	only pertaining to the Ophthalmology acquisition and we would not be able to answer
	any other questions.

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	With this, I would like to hand it over to Mr. Nikhil Chopra to begin the proceedings
	of the call.
Nikhil Chopra	Thank you, Jason and good afternoon, ladies and gentlemen, and thank you for
	joining us on today's call.
	As you are aware, JB Pharma has entered into a trademark agreement with Novartis
	Innovative Therapies AG in perpetuity for select ophthalmology brands portfolio for
	India region. This is effective only January 2027 following the consideration of USD
	116 million, which is payable on or before December 31st 2026. The transaction also
	includes a promotion and distribution agreement with Novartis Healthcare Private
	Limited for the same brand portfolio for 3 years commencing December 2023, a
	consideration of Rs. 125 crore is associated with this.
	I am excited with the development as it positions us at JB well within the
	Ophthalmology segment and the overall market. Not only does this deal enable us
	to raise 2 ranks in Indian farmer market, most importantly, JB enters the fast growing
	Ophthal segment and is now ranked among the leading players in this segment. Five
	of the brands are number one in its molecule category as many of you would have
	seen in our investor presentation and four brands are in top 3. The molecule
	segments are growing in a range of 10 to 20%, which is faster than the IPM growth.
	As per IQVIA MAT October 2023 data, the combined sales contribution from the
	portfolio was at around Rs. 207 crore.
	As a therapeutic segment, Ophthalmology has consistently outperformed IPM and
	thus sits right within our objective of having a diversified high potential high growth
	product mix domestically. This portfolio helps us step into the growing segments
	such as anti-glaucoma,anti-allergics, antibiotics and NSAIDs within ophthalmology.
	At an overall level, you will acknowledge that Ophthalmology itself is the third fastest
	growing therapy in IPM with the 15% three-year CAGR.
	As there are numerous reasons why we believe that the acquired portfolio will
	complement our growth agenda well as India is home to a large and expanding pool
	of patients that require continued eye care and there is a rising awareness around it.
	We are also witnessed to enhanced infrastructure and diagnostic for eye treatment
	combined with the advancements in surgical techniques, eye surgeries have become
	more accessible. The government trust in the area is under key driver.
	I would now like to touch upon how this agreement impacts us favorably across
	multiple aspects of business. The strong brand equity follows for higher IPM even in
	short term, which will be complemented by absorption of Novartis field force, and we
	have plans to further expand the footprint. Friends, post grant of Perpetual License,
	which happens in December 2026, January 2027, this acquisition is gross margin
	accretive. I would like to share that the operating margin profile here will be
	significantly higher than our domestic business margin posts the grant of Perpetual
	License. All in all, this complements the outlook we have on business. With this
	strategic agreement, JB Pharma now has the portfolio of leadership brands within
	Ophthalmology underlying our emphasis on growth through our powerful brands.
	On that note, I conclude my opening comments. We would now like to open this
	forum for our interactive session for the next 15-20 minutes and I will be happy to
	respond to all your questions on the announced transaction. Thank you all for patient
	hearing.
Moderator	Thank you very much. We will now begin the question-and-answer session. We have
	a first question from the line of Harith Ahamed from Avendus Spark. Please go
	ahead.

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Harith Ahamed	First questions on the September MAT face value that you that you have disclosed
	of around Rs. 208 crore, so how should I think about the primary sales for modeling
	purposes? Is it in line with this Rs. 200 odd crore number?
Kunal Khanna	Harith, the way to look at it is all the external market reflection is PTR and one can
	look at a normal margin profile between the distributor, retailer and the company. So,
	in that sense it is consistent with what the margin distributed to the channel is.
Harith Ahamed	So, one of the reasons why I asked this question is because when I checked the
	AIOCD MAT value it is significantly lower number?
Kunal Khanna	Yes, so basically from the PTR, just kind of deduct the distributor margin and you will
	have a sense of what the primary numbers are.
Nikhil Chopra	For reference point is the way we look at we follow IMS-IQA number, so that will be
	a good reference point.
Harith Ahamed	You talked about the gross margin and operating margin for the acquired portfolio
	after we execute the Perpetual License Agreement, which I believe is in Jan 27, so
	until then, under the promotional distribution agreement, how should we think about
	margins, especially gross margins typically for licensed products is seen around 20
	or 25%, 20 to 30% range, so is it going to be similar?
Kunal Khanna	The way to look at this is the gross margin profile in the short term for the interim 3
	years will be very similar to the conventional in-licensing margins, which exist in the
	industry. Overall, what we are looking at is absolute EBITDA, cumulative EBITDA of
	close to Rs. 75 to Rs. 100 crore over the next 3 years after which the operating
	margin profile, as Nikhil stated earlier also will be significantly higher than our
	domestic business margins.
Harith Ahamed	And lastly, when I look at the growth profile of this acquired portfolio over the last
	couple of years basis, the numbers that you disclosed the IQVIA MAT these numbers
	if it is around 10% now, if I look at our acquisitions in the recent past, we have
	managed to turn around these acquired brands and accelerate growth, so should we
	look at a similar acceleration here versus the last couple of year's growth of around
	10% and does that mean there should more MRs to be added to achieve that
	growth?
Kunal Khanna	So, we are certainly looking at boosting this business and acceleration of the historic
	growth rates. The way to look at this is we are quite certain as we absorb the current
	field force and expand on the footprint in the near term, we should be looking at mid-
	teens growth over the near to midterm.
Moderator	Thank you. We will take our next question from the line of Nitin Gosar from BOI
	Mutual Fund. Please go ahead.
Nitin Gosar	Just wanted to understand how should we look at the agreement the way it has been
	drafted in two parts, so is there any obligation with regard to patent or something
	which is stopping us to buy out the brands upfront? How should we think about it?
Kunal Khanna	There is no obligation with respect to any patent as far as Perpetual License is
	concerned. One has to understand that these trademarks which have been acquired
	are global trademarks what would be kind of as part of their overall global ophthal
	divestment process is individually divesting in different geographies, right. The
	organization was more comfortable in handing over the perpetual license 3 years

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	hence, to be clear about what the global implications could be and that is why the
	grant is effective 3 years from now.
Nitin Gosar	Second is with regard to understanding the agreement or the arrangement over next
	3 years were Novartis still has the ophthal team or does JB also continues to add or
	build up ophthal team alongside of Novartis team?
Kunal Khanna	So, for this particular ophthal portfolio, which we are acquiring from Novartis, we are
	absorbing a team of close to 100 from Novartis. Over the next 12 to 18 months, we
	will be evaluating on expanding that footprint. The current number which we will be
	absorbing from Novartis stands closer to 100. Over the next 12 to 16 months, we
	can look at increasing this into 130 to 140.
Nitin Gosar	And P&L implication of the same because we are onboarding the cost of those
	employees, so we will have the cost sitting in our books, but we will continue to get
	gross margin which are similar to the in-licensing one?
Kunal Khanna	That is right. Since we will be absorbing this manpower, it will have impact on our
	manpower cost, but given that we are looking at gross margin, which is in line with
	the conventional in-licensing margin profile and as stated earlier, even for the next
	three years, cumulative EBITDA will be somewhere close to Rs. 75 to Rs. 100 crore.
	One has to understand that YPMs, the productivity per rep in this business is very
	high. So, one does get a significant fixed operating leverage and despite the lower
	gross margin profile, one is still EBITDA accretive.
Nitin Gosar	And last one, are there any milestones which could be required to be achieved to
	close this deal or this deal is now casted and there is no change in the valuation
	profile as well going forward?
Kunal Khanna	This deal is pretty much casted, no change in valuation profile. It is just the nature of
	the deal given some of the global dynamics that for the first 3 years we have an in-
	licensing agreement and post that there is a Perpetual License grant.
Moderator	Thank you. We will take our next question from the line of Abdul Kadar from ICICI
	Securities. Please go ahead.
Abdul Kadar	Sir, just one question to start with on the chronic brands, what you have acquired, so
	sir, based on the data what you shared it more looks like these are pure kind of a
	mature brands sitting at a sizable market share, so when we talk about a mid-teen
	growth, what is giving us confidence that in spite of the market being quite small,
	when we talk about the chronic portfolio, you would be still growing in mid-teens?
Nikhil Chopra	So, Abdul, if you look at overall, the burden of disease and you look at ophthalmology
	market, it is close to Rs. 4,000 crore and we with around Rs. 200 crore revenue holds
	6 to 7% and the burden of disease of glaucoma is so high that we see good
	opportunity in terms of what we can do with our existing brands. Equally, within post
	chronic we also have antibiotics and combination eye drops and also we have
	antiallergics and NSAIDs. So, overall, I think what JB over a period of time has
	demonstrated not only with this transaction, but also historically if you see whether
	we see probiotic market, women health market, all those acquisitions that we have
	done, we are confident enough to drive maintain growth.
Abdul Kadar	And sir just a final one, if I may, so on funding the transaction, how do you plan to
	fund? It is quite a distance away, but do you think you will turn cash positive till the
	time you have to make this US $116 million payment?

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Nikhil Chopra	Abdul, just for your information, we are right now today cash positive. Anything and
	everything that will be funded from internal funding will be done.
Moderator	Thank you. We have our next question from the line of Sayantan Maji from UBS.
	Please go ahead.
Sayanthan Maji	Just guiding on from previous participant question, so if I look at your chronic
	portfolio, the market share especially in the chronic portfolio for the molecules that
	have acquired is already high, so do you expect the categories itself to grow at a
	faster pace or do you expect that there is potential to expand the category similar to
	how you had thought for heart failure that a lot of population is undiagnosed and
	hence the category itself can grow, do you think that this can happen for some of
	your chronic acquired brands?
Nikhil Chopra	So, I think it is a mix of both. If you look at what we have demonstrated over a period
	of time in our entire chronic therapies whether it is in hypertension, heart failure and
	what we are trying to do in the world of lipid lowering agents, similarly for glaucoma
	based brands that we have acquired, earlier what I have stated that we have
	identified unmet needs, we are looking at the entire burden of disease with glaucoma
	and the relationship that we want to develop with the ophthalmologist equally what
	was stated in the commentary with currently high YPMs and in short term we are
	looking at how can we boost that and eventually with JB strength, we will look at how
	do we improve our footprint. All this will help us in terms of improving our market
	share and driving better growth as compared to the way the ophthal market is going
	and this is why we have acquired. So, please understand the entire hypothesis of
	anything and everything that we acquire at JB is to grow the entire category better
	than the market growth and fortunately, what we have acquired is in the leadership
	area. So, leadership area, obviously you have to put effort in terms of creating firewall
	for the competition and looking at how differently you can look at the brands and with
	the specialty and eventually look at how do you grow all the category. That is the
	task which we have taken.
Sayantan Maji	And also when you are suggesting that you will expand the field force space say by
	30% to 40% over the next 1-1.5 years, so where will this extra field force deployed,
	is it that the new prescribers you would target or if are there any geographies where
	probably these plants underpenetrated, so just wanted to understand where will that
	field force be deployed?
Kunal Khanna	Essentially, it is going to be new geographies targeted by us. Currently, as we
	understand, almost 75 to 80% of the ophthalmologist coverage is serviced by the
	current team. So, certainly new geographies which give us access to the remaining
	25% to 30% is what our endeavor will be.
Sayantan Maji	And one last question, so if I look at the covered market of the brands that you have
	acquired is close to Rs. 1,000 crore, the total market for Ophthalmology is Rs. 4,000
	crore, so the difference, the gap that is there right now of Rs. 3,000 crore, is it the
	same therapies, but different molecules or are these different therapies altogether
	where you plan to probably expand your portfolio once you start getting some traction
	with ophthalmology because Novartis plants should be well recognized with
	Ophthalmology, so do you think there is a scope to expand into some other sub-
	therapies within Ophthalmology?
Kunal Khanna	Absolutely, there is potential to expand into different sub-therapies. Having said that,
	when one looks at covered market, it should not be looked at molecule specific
	covered market, one should really look at indication specific covered market. So,
	from an indication standpoint, we are still covering almost Rs. 2,500 to 2,800 crore
	of the ophthal market, which is being stated. Now, there will be opportunities for us

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	to do lifecycle management to launch combinations of existing molecules which
	currently Novartis is not servicing. So, that is the way one really has to look at it.
Sayantan Maji	And what would be the remaining say, Rs. 1,200 crore market which probably you
	are not addressing right now with this portfolio?
Kunal Khanna	So, these are different combinations of the similar drugs in acute and antiglaucoma,
	right, so there would be prostaglandin combinations and things like that,
	antihistamine combinations which will be natural progressions for us over the next
	12 to 18 months.
Moderator	Thank you. We have a next question from the line of Bino Pathiparampil from Elara
	Capital. Please go ahead.
Bino Pathiparampil	If I understand correctly, this Rs. 964 crore will be paid in December 26 and Rs. 125
	crore will be paid right now, is that correct?
Kunal Khanna	Yes, that is correct.
Bino Pathiparampil	And if I heard correctly, you said the cumulative EBITDA over next 3 years till the
	perpetual agreement comes in will be Rs. 75 to Rs. 100 crore?
Kunal Khanna	That is correct. That is cumulative over the next 3 years.
Bino Pathiparampil	So, are we paying like Rs. 125 crore for this Rs. 75 to Rs. 100 crore of EBITDA? Am
	I missing something here?
Kunal Khanna	Not at all. This is marketing, distribution and licensing fee what we are really paying
	for. EBITDA is completely different based on our operations, what we sell in the mark.
	Rs. 125 crore is the licensing fee for the next 3 years and post 3 years, there is some
	tech support, quality reference standards which will be established for us to kind of
	acquire the Perpetual License which will be very critical in the transitioning phase.
Bino Pathiparampil	But effectively, we are paying Rs. 125 crore for a cumulative EBITDA of maybe Rs.
	100 crore, right?
Kunal Khanna	So, basically, what you are coming to is Rs. 125 crore being paid for the next 3 years,
	right? That is correct.
Bino Pathiparampil	And in return, we are making EBITDA of only Rs. 100 crore?
Kunal Khanna	Yes, cumulative EBITDA of Rs. 75 to Rs. 100, that is correct.
Bino Pathiparampil	And this 125 would be amortized over next 3 years?
Kunal Khanna	125 will be amortized over the next 6 years.
Moderator	Thank you. We will take the next question from the line of Punit Pujara from Helios
	Capital. Please go ahead.
Punit Pujara	Sir, could you elaborate on the lifecycle management which you touched upon? And
	could you do it in the current in-licensing space or you have to do it post Jan 27?
	That is my first question.

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Kunal Khanna	As far as lifecycle management is concerned we can do it right away. We don't have
	any limitations on new product launches, entering new indications. There are no
	restrictions for us.
Punit Pujara	Second question is, sir, how many numbers of specialists are currently covered by
	the portfolio that you have in-licensed and is there any target that you are calling out
	on the same?
Kunal Khanna	So, the total universe is close to 22,000 ophthalmologists. The standard coverage
	based on the current field force size is closer to 15,000 to 16,000.
Punit Pujara	And although from the language, it is very clear, but I will still ask for the clarification,
	is there any royalty to be paid post Jan 27 because it is still a perpetual in-licensing?
Kunal Khanna	No, there is no royalty. There is an upfront consideration of $116 million. That is all.
Moderator	Thank you. Ladies and gentlemen, that was the last question for today. I now hand
	the conference over to the management for closing comments. Over to you.
Nikhil Chopra	So, let me once again thank all of you in terms of coming and attending the call today.
	What I would like to conclude is in terms of now with this entire opportunity at JB, we
	enter into a very progressive segment that is Ophthalmology which is the third largest
	fastest growing segment today in Indian pharma market and what I shared in my
	comment is that this comes with leadership position 5 of the brands out of total 10
	brands that we have acquired are number one in their category. And also, it does not
	disturb our capital structure as of date because we are cash positive and the value
	which we have to pay is at the end of 3 years that is $116 million and overall, the
	business 3 years from here, at the time of Perpetual License Grant is significantly
	highly margin accretive as compared to our dom form (domestic formulation). This is
	where we stand. Once again looking at how do we make this opportunity bigger and
	create value for our stakeholder and some more and more number of patients across
	now in the field of Ophthalmology, from the quality eye drops, which comes from the
	house of Novartis and eventually from JB. Thank you. Thank you all.
Moderator	Thank you. On behalf of JB Pharma, that concludes this conference. Thank you for
	joining us and you may now disconnect your lines.

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