Hypera Pharma: Time to Buy Brazil's Largest Pharmaceutical Company?
B3: HYPE3, OTC US: HYPMY
Today we are going to talk about the largest pharmaceutical company in Brazil: Hypera Pharma (B3: HYPE3, OTC US: HYPMY).
Who will I be a partner with?
The company has common shares (HYPE3) listed on B3. It's ADR is traded OTC as HYPMY.
Shareholder composition of Hypera Pharma:
21.38%: João Alves de Queiroz Filho (Controlling Block)
14.74%: Maiorem S.A. de C.V. (Controlling Block)
0.12%: Alvaro Stainfeld Link (Controlling Block)
10.40%: Capital International
5.12%: Votorantim S.A.
0.23%: Treasury Shares
48.02%: Free Float
Who is João Alves de Queiroz Filho (‘Junior’)?
In 1969, he and his father created what would become Arisco, famous for its seasoning, a recipe given to his family as payment for a debt.
In 2000, he sold Arisco to the American company Bestfoods, manufacturer of Hellmann's, for US$490 million. Soon after, Bestfoods was acquired by Unilever.
Arisco had a subsidiary that manufactured steel wool, called Assolan, but this business was not of interest to Unilever.
So he bought Assolan back in 2001 and that started what is now Hypera Pharma.
He is one of the richest men in Brazil, with a fortune valued at more than US$2 billion.
Who is Maiorem S.A. de C.V.?
A vehicle owned by 4 large Mexican investors, Maiorem joined the company's shareholders in 2007, one year before the IPO, through a primary issue of shares.
In this way, Maiorem injected R$482 million and took 38% of the company's capital, while Júnior, with 61% and the management, with 1%.
This amount was used to pay the cash installment for the acquisition of DM Indústria Farmacêutica in 2007, marking the entry into the OTC medicines market.
Maiorem’s shareholders are:
40% Roberto Hernández Ramírez. He currently serves on the Board of Citigroup.
24% Alfredo Harp Helú. Cousin of the richest man in Mexico, Carlos Slim. He also owns Avantel, the 2nd largest telecom in Mexico.
24% Heirs of José Aguilera Medrano.
12% Esteban Malpica.
The 4 built the brokerage Acciones y Valores (Accival), which, in 1991, bought the second largest bank in Mexico, Banamex. In 2001, Banamex-Accival was acquired by Citigroup.
What is Hypera Pharma?
Founded in 2001 with the acquisition of Assolan, the then Hypermarcas was initially known for having a large portfolio of personal hygiene, cleaning and food brands, such as Assim, Salsaretti, Finn, in addition to Assolan.
In 2007, they entered the pharmaceutical market with the acquisition of DM.
Between 2008 and 2011, they expanded their operations in this market with the acquisition of Farmasa, Neo Química and Mantecorp.
Between 2015 and 2017, they sold the cosmetics segment to Coty, condoms to RB, and disposables to Ontex (Bozzano, Jontex, Olla, Cenoura & Bronze, Pom Pom, Monange, …).
From 2018 onwards, they focused exclusively on the pharmaceutical market, acquiring in the following years the portfolios of Boehringer Ingelheim, Takeda, Bioage, Simple Organic and Sanofi (Buscopan, Buscofem, Nesina, Neosaldina, Dramin, Cepacol, AAS, …), in addition to having open a unit for the institutional market.
Hypera Pharma is the largest pharmaceutical retail company in Brazil since 2022, operating in all areas of this (RX, OTC, generics, dermo).
The company's strategy is to have a portfolio of unique and irreplicable brands. Many of its products are the best sellers in the segment, or second place.
The Top 10 brands represent less than 40% of sales.
More than 400 products launched since 2018.
Business units:
Consumer Health (OTC). 30% of net revenue. #1 in market share.
Prescription Products (RX/OTX). 33% of net revenue. #4 in market share.
Similar and Generic (GX/Similar). 23% of net revenue. #2 in market share.
Skincare (GX/Similar). 9% of net revenue. #2 in market share.
Institutional Market (Institutional). 5% of net revenue. New initiative.
My Point of View:
What are the market's fears?
Reduction in 2023 Guidance and pessimism with 2024 Guidance
The company may have a significant impact on its profit due to the review of tax benefits
Now let's assess the situation more calmly:
Guidance:
The main reason for frustration with the 2023 Guidance was a milder winter than usual, causing a 30% reduction in flu cases, with 37% of Hypera's medicines being anti-flu.
The market tends to perpetuate the status quo, when in fact most things are cyclical. If there were fewer flu cases in 2023, we will likely see a significant increase in 2024, relative to the historical average.
Tax benefits:
One of the problems was the limit for the distribution of JCP, which was resolved in Jan/24 by a solution from tax lawyers to capitalize a large part of the tax benefit reserves.
The other is the tax benefit linked to ICMS, which can impact net profit by ~30%. This question is still open, but isn't this already in the share price?
Strengths:
The company is part of a market that is growing faster than GDP, a market with resilient double-digit growth despite going through volatile times. This is difficult to find in our cyclical Brazil.
Defensive and resilient business model, with strong growth potential, high margins and solid cash flow generation prospects.
Strong brands. Who doesn't know Buscopan, Dramin, Neosaldina,...?
Growth will come mainly from launches, M&A and institutional
The entry of Votorantim, which publicly seeks segments with resilience, cash generation and growth potential, is a validator of the quality of the business.
Mexican partners with a strong financial background are another validator of the quality of the business
It's a great company, but...
Is it time to buy?
It is worth it?
Is it cheap?
After all, is it to buy this stock or not?
What is the price to buy and sell HYPE3 after all?
I'll show you all the rationale, in detail.
Let's go.