Hester Biosciences Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Sales fell 18% on tough comps and product bans: The Goat Pox vaccine (GPV) spike from the lumpy skin disease outbreak did not repeat, and the regulatory prohibition of Ketoprofen forced withdrawal of two animal health products, together driving the headline decline.
• Underlying animal health grew 17% ex-prohibition: Stripping out the banned products, the animal healthcare division showed healthy expansion, and the newly launched CuRx LA substitute is expected to lift Q4 and beyond.
• Poultry turned the corner after seven quarters: The entire poultry segment, not just the trade channel, returned to growth at 8%, supported by stable consumer demand and meat/egg prices; management sees double-digit growth ahead.
• Africa is stalled by dollar shortages, not demand: Egypt, Ethiopia and Nigeria all face foreign exchange constraints that are blocking reasonably large orders, making the recovery timeline dependent on macroeconomic relief rather than commercial execution alone.
• What to watch next quarter: Whether CuRx LA gains traction fast enough to offset the banned products, any resolution of dollar availability in the three constrained African markets, and the pace of the poultry upswing carrying into Q4.

The Top-Line Decline: What Broke and What Didn't

• GPV normalization was the biggest swing factor: Q3 FY23 was the best-ever quarter for the Goat Pox vaccine because of emergency demand from the lumpy skin disease outbreak; this year, demand shifted to a planned government immunization program, creating a sharp comparative drag that will not repeat in the same way.
• Regulatory prohibition hit two products directly: The ban on Ketoprofen for animal use forced discontinuation of CuRx injection and iSumovet, removing a chunk of health product sales with no immediate replacement.
• CuRx LA launched as the fix: The long-acting substitute was introduced last quarter, backed by over 200 launch meetings engaging 4,000-plus customers; the revenue impact is expected to become more visible in Q4 and beyond.
• Line extensions are the second leg of the repair: The company is launching line extensions of existing products to mitigate the sales loss from the withdrawn brands, though management gave conflicting timelines on when the full negative impact would be neutralized.

Priya Gandhi: "I think it is very difficult really to say, I can't tell you in 1 or 2 quarters, but I mean already it is showing very promising results and in Q4, whatever efforts that we have taken in terms of the launch strategies that we had in the field, etc. is definitely going to show us results in the next Q4."

Poultry: The Turnaround That Matters

• Growth returned across the entire segment: After seven quarters where only the trade business showed growth, Q3 saw an 8% rise spanning the full poultry division, driven by sustained consumer demand and stable meat and egg prices.
• Feed cost tailwind is helping: Management noted that feed prices are stabilizing or declining while egg prices remain up, improving the economics for poultry farmers and, by extension, vaccine demand.
• Double-digit growth is the internal expectation: Management sees high growth ahead and is confident the positive trend will continue throughout the next financial year, though it declined to put a specific percentage commitment on the record.
• Newcastle Disease modified vaccine adds a competitive edge: The recently launched modified version improves efficacy rather than market share directly, but it lets Hester compete more effectively with multinationals offering a similar product, which should translate into better financial performance.

Rajiv Gandhi: "We as a company we are looking at a high growth, but it would not be appropriate for us to make a percentage commitment on a call like this because it would just be rather inappropriate to make a call without we have done all our calculations everything internally, but we see a double digit growth for sure."

Africa: Demand Is There, Dollars Are Not

• Three large markets are effectively blocked: Egypt, Ethiopia and Nigeria all carry reasonably large orders but are constrained by a shortage of foreign exchange, preventing conversion of demand into revenue.
• No rupee trade route exists for these countries: Management clarified that only Tanzania has a rupee trade agreement with India; the company is not in a position to trade in rupees in Egypt, Nigeria or Ethiopia, so the dollar constraint is a hard barrier for now.
• PPR strategy is pivoting to the private channel: Rather than waiting for UN-funded tenders, which face their own financial constraints, Hester is building distributor networks and creating demand in the private sector, where realized rates are higher than tender rates.
• Registration work is the near-term catalyst: The company is aggressively pursuing product registrations in African countries; once three or four products are registered in Hester's own name, it plans to hire local salespeople in each country to push volumes.

Rajiv Gandhi: "Countries do not have foreign exchange. In fact, 3 of the countries where we have reasonable large size orders, namely Egypt, Ethiopia, Nigeria, all the 3 have a dollar constraint at this point of time."

Profitability: Margin Held, Mix Shifted

• Gross margin was steady at 67%: The top-line pressure did not flow through to gross profitability, which held firm despite the product mix changes.
• EBITDA and PAT fell 7% and 5% respectively: The decline was driven by a rationalizing product mix that shifted profitability, the withdrawal of the two animal health products, and the absence of one-time spot sales (PPR vaccine, GPV) that had lifted the year-ago quarter.
• Hester Africa losses are a cost of the build-out: Unmet sales targets in Africa meant fixed and variable costs were incurred without the corresponding revenue; management is hopeful that East African vaccine demand and international PPR tender supplies from the Africa plant will improve the picture in coming quarters.
• Pet Care dipped in the quarter but is up 91% over nine months: The slight Q3 decline reflects a broader post-COVID pet market downturn with reduced pet ownership and demand, though the division is still building its foundation and a new product category is in the works.

Pipeline and Facilities: No Big Capex, Just Repurposing

• The BSL-3 human vaccine facility will be repurposed, not sold: Management was emphatic that there is no plan, desire or thought of selling the facility, which is one of the only BSL-3 laboratories in the country; an application has been filed with the Department of Biotechnology to repurpose it, with concurrence expected within a month.
• Veterinary use is the preferred path: The company would rather produce a veterinary vaccine in the BSL-3 facility because it can use the existing fill-finish infrastructure and capture more value addition; management also expects post-COVID regulatory norms to push more veterinary vaccines into BSL-3 handling requirements.
• Recombinant vaccines are in the works, but timelines are open: The team is developing poultry recombinant vaccines and a Brucella recombinant vaccine acquired from IVRI, with some being developed in-house; management said it is difficult to give a timeline at this stage.
• Capex will be minimal: All vaccines in the pipeline can be produced without additional capital expenditure; the only big-ticket item under consideration is a pilot R&D plant, and even that is still at the thinking stage.

Rajiv Gandhi: "No, there is no plan, desire or even thought of selling of any of these facilities. It is a facility to generate antigen, whether it is human, whether it is veterinary and antigen generating facility is more or less common."

Regulatory Reality: Tighter Norms Are Here to Stay

• Veterinary regulation is converging with human standards: Post-COVID, regulatory norms for veterinary products have become nearly as stringent as those for human vaccines, with external factors around testing requirements and IVRI processes making development timelines much longer.
• BSL-3 is likely the new floor for many vaccines: Management anticipates that going forward, many veterinary vaccines will require handling in BSL-3 facilities rather than BSL-1 or BSL-2, which positions Hester's existing BSL-3 asset as a potential competitive advantage.
• The Ketoprofen ban is a case in point: The regulatory prohibition that forced withdrawal of CuRx and iSumovet illustrates the new environment: sudden, non-negotiable, and with direct revenue consequences that take time to offset.

Priya Gandhi: "I think after COVID also the regulatory norms even in the veterinaries here have become just as close to as stringent in human while it is great in terms of a kind of promises of quality but at the same time there are certain external factors also with respect to the regulatory requirements."

Guidance & Commitments

Key Metrics