Hester Biosciences Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Animal health drove the quarter, poultry dragged: Animal Healthcare surged on lumpy skin disease vaccine demand and health product expansion, while Poultry Healthcare declined 22% as the industry recession persisted longer than expected.
• Gross margins fell 3% on a one-time write-off: Margins on health products improved sharply in both divisions, but a INR 1.6 crores write-off of expired poultry vaccine stock pulled the blended number down.
• PPR tender unlocks a INR 40+ crore revenue line: Supplies began in January 2023 and are scheduled through March 2024, representing what management calls an all-time high and unprecedented sale.
• A INR 100 crore COVID-19 vaccine plant sits idle, awaiting clarity: Built to supply Covaxin bulk antigen, the BSL-III facility now needs an alternate product line; management will move once it is certain the original purpose is dead.
• What to watch next quarter: Whether the poultry cycle actually turns upward in Q4 or Q1 as management expects, the pace of fill-finish facility commissioning, and any decision on the COVID-19 plant's alternate use.

Animal Healthcare: The Quarter's Engine

• Lumpy skin disease response: Hester supplied roughly 95% of India's Goat Pox Vaccine requirement to immunize cattle against lumpy skin disease, reaching every state, with 95% to 90% of states receiving 100% of their supplies from Hester.
• Health products scale-up: Sales were boosted exceptionally well by adding significant headcount to the sales team and launching more products over the last six to nine months.
• Goat Pox stint continues: Management expects the Goat Pox vaccine business to keep running, and the government is evaluating whether to make lumpy skin disease vaccination a yearly immunization program.
• LSD vaccine technology in the pipeline: Hester is acquiring the technology for the lumpy skin disease vaccine itself from IVRI; once developed, it would supply the LSD vaccine directly rather than relying on the cross-protective Goat Pox vaccine.
• Private trade push: Management's stated endeavour is to push all vaccines, even those supplied under government tenders, hard through private distribution; in one or two states, Goat Pox vaccine sales in trade already exceeded the government channel.

Rajiv Gandhi: "In a free economy as what we are in India, we companies should actually invest in promoting all these vaccines in the trade by themselves and try to generate business rather than being dependent on tender business."

Poultry Healthcare: A Cycle That Overstayed

• 22% divisional decline: The poultry industry remains in recession because input costs exceed the revenues farmers earn from selling meat and eggs, reducing production and therefore vaccine usage; consumption is not the problem, production is.
• The cycle has run longer than usual: Management acknowledged the downturn has persisted beyond typical duration, but believes a turn is imminent because the industry cannot sustain itself indefinitely at these levels.
• Health products grew despite the downdraft: Health product sales rose even as the overall poultry segment shrank 22%, because Hester's market share in health products is low, making it easier to gain traction in a non-growing market, whereas vaccine market share is already high.
• Egg prices at all-time highs confirm the supply squeeze: High egg prices reflect a demand-supply mismatch driven by production shrinkage, not demand expansion.
• Recovery bet: Management hopes to see drastic changes in Q4 or by Q1, citing the logic that the industry must find its level.

Rajiv Gandhi: "I think the poultry have been always telling that it will recover, recover, but it can't go beyond a point, because at the end of the day an industry has to sustain itself, water finds its own level. And I'm sure the poultry industry would turn around sooner than later. So I really don't think that -- I mean, this can't go on-and-on."

PPR Tender: A Multi-Year Revenue Anchor

• Tender won, supplies live: Hester won the national immunization program tender for sheep and goat against PPR; supplies commenced in January 2023 after a delay attributed solely to governmental reasons.
• Scheduled through March 2024: The government has provided a complete supply schedule, and if it proceeds as planned, Hester should supply PPR vaccines worth a little over INR 40 crores, an all-time high and unprecedented sale for the company.
• FAO organizing a global PPR conference: A major conference of all PPR manufacturers worldwide is being organized by FAO in March to discuss fund availability and the eradication program rollout.
• Combined vaccine in development: Hester is working on a combined PPR plus Goat Pox vaccine for sheep and goat, which would strengthen its tender and trade positioning.
• Funding visibility: Management sees reasons to believe funds will come through for the PPR program, as they did for the lumpy skin disease campaign.

Pipeline & Capacity: Building for the Next Leg

• Fill-finish facility delayed, not derailed: The drug substance and bulk antigen manufacturing facility has already commenced; the fill-finish facility was delayed by main equipment supply but will commence for sure in the beginning of Q1 FY24, doubling poultry vaccine capacity once ready.
• Avian influenza vaccine commercialized: Hester acquired technology for low-path Avian Influenza (H9N2) from IVRI and is in the process of commercializing it; management expects this to keep the positive trend going and push it higher.
• Brucella vaccine improvement underway: An improved version is in development.
• Pet Care division launched: Front-end operations started in Q2 FY23; 10 products launched in the last two quarters, with another 3 therapeutic products coming in Q4 to capture seasonal demand; field force will double to cover twice the current territories.
• Nepal plant rationalization: Smaller-dose vaccines produced in India are being shifted to the Nepal plant, and most vaccines produced in Nepal are now exported to Africa from there rather than from India, a transfer of business to rationalize capacities.

The Idle COVID-19 Plant: INR 100 Crores in Limbo

• Built for Covaxin, now searching for purpose: The BSL-III facility was constructed with the Department of Biotechnology and BIRAC under the COVID Suraksha program, in collaboration with Gujarat Biotechnology Research Centre, to produce bulk antigen for Covaxin for Bharat Biotech. With COVID on a reducing trend, the company is now evaluating alternate options.
• Alternate paths identified: Options include producing bulk antigen for other human vaccines (which would require adding a fill-finish line), talks with human vaccine companies for antigen purchase or loan licensing, or producing bulk antigen for veterinary vaccines using the existing veterinary fill-finish line.
• Decision gated on clarity: Management will embark immediately on an alternate product line once there is full clarity that Covaxin drug substance will not be manufactured.

Rajiv Gandhi: "While it does sound a little strange that we have INR 100 crores investment project and we are not yet sure on the project, but the fact remains that this was created to make..."

Africa & International: Early-Stage, Long-Dated Optionality

• Hester Africa operational, but tiny: The Tanzania facility generated sales of less than INR 0.1 crore against an optimal capacity of more than INR 2 crore; African economies face a lack of finances and demand creation has not materialized in the past.
• LSD vaccine from Africa is the near-term prize: The lumpy skin disease vaccine produced in Hester Africa is cited as one of the biggest sales prospectives in the coming months.
• Three-channel Africa strategy: Management plans to pursue FAO tenders, individual country tenders, and trade business in each country; it is currently building a distribution network for the trade channel and sees a very big opportunity as the first mover.
• FAO expanding beyond PPR: FAO is now releasing tenders for other vaccines (CCPP, CBPP, LSD, etc.) in smaller quantities and is working toward consolidating its funding plan.
• Indonesia still on the radar: The option remains and the company would still want to look at that opportunity.

Rajiv Gandhi: "But on the other side, we look that as a very big opportunity, because we are the first to do it."

Guidance & Commitments

Key Metrics