Alembic Pharmaceuticals Limited (APLLTD) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '23 Earnings Conference Call of Alembic Pharmaceuticals Limited. We have with us today Mr. Pranav Amin, Managing Director; Mr. Shaunak Amin, Managing Director; Mr. R.K. Baheti, Director, Finance and CFO; Mr. Mitanshu Shah, Head of Finance; Mr. Jesal Shah, Head of Strategy; and Mr. Ajay Kumar Desai, Senior VP Finance. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. R.K. Baheti. Thank you, and over to you, sir.

Thank you, Yashasvi. Good afternoon, everyone. Thank you all for joining the third quarter results conference call of Alembic Pharmaceuticals. I'll start with the financials. During the quarter, our total revenue was up by 19% to INR 1,509 crores, EBITDA was INR 236 crores and net profit is INR 122 crores. EBITDA margin for the quarter was 16%. For 9 months FY '23, EBITDA was INR 476 crores and net profit was INR 189 crores. The company, like in the previous few quarters, continued to expense out previously amortized R&D in erstwhile Aleor, now Derma division, amounting to INR 13 crores in the current quarter and INR 144 crores for 9 months period. The company's profit before that should have been higher by INR 13 crores in the quarter and INR 144 crores in 9 months, and profit after tax would have been higher by INR 11 crores and INR 119 crores, respectively, before considering this effect. Residual intangible assets in books is now just INR 11 crores, only INR 11 crores. Our consolidated profit before tax would have been INR 168 crores and INR 382 crores for Q3 and 9 months period before considering above effects. EBITDA on likewise basis for 9 months FY '23 would have been INR 574 crores, which is 14% of sales. EPS for the quarter before non-recurring item is INR 6.76 per share versus INR 8.74 for the previous quarter -- previous corresponding quarter, that is Q3 of last year, while for 9 months, it's INR 15.68 per share versus INR 25.39 in the previous year. Our borrowings continues to be in almost the same zone. As on 31st of December, it is INR 686 crores; as on March 22, it was INR 630 crores. But we have cash on hand of INR 146 crores; March '22 was INR 61 crores. So net debt equity gets further improved to 0.10. Now I'll request Shaunak to take you through the India business presentation. Shaunak?

Yes. Thank you, Mr. Baheti. Good afternoon, everyone. For the quarter, I think we continued with the same level of performance. I think we had a top line growth of 12% with quite... [Technical Difficulty]

Ladies and gentlemen, we lost the connection of Mr. Shaunak Amin. Please stay connected while we reconnect him. Ladies and gentlemen, thank you for patiently holding. We have Mr. Shaunak Amin back on the call. Sir, Please go ahead.

Yes. Okay. So we did INR 545 crores for the quarter. As per the IQVIA, IMS numbers, industry grew by 10% and Alembic reflected a 15% growth, which again is in line with -- outperformance compared to industry. On the specialty segment, our performance was significantly higher and we recorded 14% growth versus a 10% growth for the industry, largely driven by 3 key therapies: gynecology, anti-diabetics and ophthalmology. On Q3, the acute part of our business grew by 21% versus industry growth level. And within, I think, 2, 3 components of anti-infective, we recorded a 24% versus a 12% for the industry as well as in cough and cold, which is another large important segment for the industry -- for Alembic. We grew by 16% versus industry growth of 10% as per the IMS. Animal health care continues a run of strong performance by recording a growth of 19% over last year quarter 3 internally. I will hand over the discussion to Pranav for his comments on the international results.

Thanks, Shaunak. The U.S. business, as you all know, it continues to remain challenging on account of the competitive intensity, but we did manage to grow the business at 10%. Some of it was led due to the current strong flu season that we saw in the U.S. market. Our goal is to work on improving the efficiencies and execution in the midterm. We're looking at cost reduction as well as reducing R&D grid moving forward for the U.S. market. R&D expense is INR 157 crores. Ex of the onetime Aleor product write-off, it's INR 144 crores, which is 10% of sales in the quarter. Whereas for the 9-month period, R&D expense is INR 586 crores. And ex of the Aleor onetime, it is INR 442 crores, which is also 10% of sales. We filed 4 ANDAs during the quarter and cumulative ANDAs are 246. We also received 9 approvals in the quarter and cumulatively have 178 ANDA approvals. We launched 2 products in the U.S. and plan to launch another 2 in the fourth quarter. In terms of regulatory agencies and compliance, the USFDA conducted an inspection at our onco facility, F2, and issued 4 observations. We have replied to the observations already and sent our responses. After that, we have already received 3 ANDA approvals from this particular site. USFDA also inspected our new oral solid dosage facility, F4, in December. They issued 5 observations. We have sent our responses, and we have already received an approval for one product from this facility. In terms of pure numbers, as I mentioned, the U.S. generics grew by 10% to INR 432 crores for the quarter and 10% to INR 1,200 crores for the 9-month period. In dollar terms, we were at $52 million, which was a growth of about 1%. Ex-U.S., generics grew by 7% to INR 206 crores for the quarter, and it grew by 3% to INR 602 crores for the 9-month basis. The API business had a good quarter, a robust quarter and grew by 65% to INR 326 crores for the quarter, and it grew by 19% to INR 853 crores for the 9 months. What's important is both the ROW and the API business have both come out strong ways in the last year. Hence, it's been a decent performance in these verticals. With that, I'd like to open the floor, open for Q&A. Thank you.

[Operator Instructions] We have our first question from the line of Prakash Agarwal from Axis Capital.

First question on -- you had some 7 to 9 approvals and there are 2 launches. So are we waiting for the launches for the new facilities? Or we have already started launching in January to March quarter? And if so, the expenses quarterly run rate would be how much?

So Prakash, from the new facility, we haven't launched as yet. We will launch from one of the facilities in the quarter, hopefully this month. And the rest are in progress right now. So we will see -- from F2, the onco facility, is where we will launch this quarter.

Okay. And this Diclofenac product is from -- have you launched this? And from which facility it is?

So Diclofenac is a Aleor product, and we haven't launched it as yet. It should be in the next couple of weeks that we launch it.

Sir, can this be sizable on our base?

It's a decent product. As far as I believe, I don't have the exact figures with me, but it's a good product and it's a decent opportunity.

Okay. And what would be the quarterly run rate since you'd start -- Aleor is already on, I think, in terms of expensing, but a couple of other facilities also I understand they will start expensing out? Or...

So up to 31st of December 2022, no expense was charged off. It continues to get capitalized because now the commercialization of these facilities will start from this quarter onwards. And we will start charging off as and when they get into the commercial production. But as was informed by Mitanshu earlier multiple times, our annual run rate on all these facilities is about INR 200 crores.

INR 200 crores all the facilities put together?

All the facilities together. Yes, yes.

But it will be not fair to understand that it would be a INR 50 crore kind of cost every quarter. It will be in tranches before it touches the run rate of INR 50 crores, right?

That's right.

And Prakash, Mr. Baheti is talking about cash expenses here of INR 200 crores, and they will be another depreciation on that.

Yes, operating expense and the depreciation on the overall gross block up.

Yes.

And this gross block pertains to how much? Is it in the range of INR 2,000-odd crores?

So we have about INR 1,200 crores of what you say hard assets, and the rest is pre-op expense, accumulated pre-op expense.

Okay. Understood. And this product also, this Pregabalin, also comes from Jarod. So that also you're awaiting EIR? Or it should be ready for launch for this quarter?

So Pregabalin is a product that we are already selling currently from an existing facility, the F1 facility. It's already a commercial product. This was a site transfer that we did from here. So we'll just decide when to start commercial operations from F4. We'll probably bundle up a few products together and then we'll start the commercial operations.

Yes. So there's no hurry there. Okay.

Yes, there's no hurry there. Yes.

Okay. And lastly, on the -- the API piece is doing fairly good. So you mentioned that fiscal '23, there is sufficient visibility. If we want to look at beyond, then how does it look?

So this quarter is a little lumpy, because, as you know, we do CMO business for a large MNC. And sometimes those orders come once in a while. So that was -- a big chunk of that order came in this quarter. But ex of that, also there's been a growth of about 30%, 40% if you take that part -- part of it out. On a year-on-year basis, as I've been saying, the API business should grow at least 10% -- 10% to 15% for the year.

From fiscal '24, I mean.

I think we're seeing that trend. I'm seeing that. So even next year, you'll see about, I would expect, at least a 10% growth on the API business.

Okay. But this run rate is possible in Q4 also?

No, it won't, because, as I said, it's still lumpy. This one big business that we had and we have a few more dispatches in this quarter. Sequentially, it is -- if we take that one-off, it's still lower than last quarter.

Okay. But Y-on-Y growth is possible?

Yes, yes, absolutely.

We have our next question from the line of Damayanti Kerai from HSBC.

My question is for Pranav. So you mentioned in your opening remarks that due to persistent challenges in the U.S. market, you'll be more efficient in R&D costs going ahead. So what is your thought process here? Because right now also we are spending around 10 percentage of top line towards the R&D. So how or where you can bring efficiencies? And if you can also tell us like what kind of returns you are seeing over -- for investments which were done, say, last 4, 5 years back? That's my first question.

Yes. So 2 things. One is what we're doing is, the R&D spend -- we're trying to optimize the projects that we have in terms of R&D in terms of shorten the issues that we're facing in the U.S. market. So some of the high-risk projects is where we are putting on the back burner. At the same time, we're also increasing some of our projects for the ROW markets because there we've been doing pretty well and consistently growing at about 10% for the last few years. So we will start adding projects there as well. In terms of ROE, Jesal, you want to talk about the...

So on a percentage basis, a couple of quarters back -- or I think last year it was about 14% of sales, which has come down to 10%. But also that's not a right reflection because sales has not -- our sales is a depressant, if I can say so, because of the U.S. situation. Volumes have gone up, but the price realizations are low. In absolute number, in spite of all these cost increases, inflation, we have reduced the expense. And I think we will further prune the projects and prune the fixed costs. So that effect or that impact would come in '23, '24. That's what Pranav wanted to convince.

Okay. Just because...

It's very difficult to do that ROE analysis of R&D because a couple of products can take care of the entire R&D expense. And so -- but you are right. I mean, many of these new launches which we have done in recent past, except a handful of them have not been great success because of the price erosion.

Okay, sir. That's helpful. I just wanted to check. Any number in your mind like where you would like to build down your R&D as a percentage of sales, say, 3 years from now?

So like the scale up takes time, even the pruning takes time. You need to do it carefully. But I think, okay, we can target a reduction of 15%, 20% from the current cost in the next year.

Next year's expense, 15%, 20% reduction can we seen on the R&D cost...

Absolutely.

Okay. Baheti, I have just one clarification on amortized residual R&D for Aleor. So you mentioned INR 11 crores is remaining, which will be done in next quarter or so. And after that, nothing is left on the Aleor...

Yes, that's it. You are right.

Okay. My second question is on input cost pressure. So can you comment like what are we seeing in terms of pricing trend for raw materials, feed costs, et cetera, compared to last year's quarter?

They should be more compressed than the...

So in international business, we have not seen a significant increase in raw material cost. But as a percentage of sales realization, the cost has gone up largely because -- as I said, largely because of erosion in prices. In domestic market as far as this quarter is concerned, they are pretty stable. They've still not gone to the pre-COVID level, but I think they are stable or has come down a bit for the domestic market.

And my last question is on India business. So most of the therapies you have seen outperformance versus the markets, except gastrology. So anything specific to call out there?

So Shaunak, would you respond? Or you want me to continue?

Yes, if you -- I didn't understand [indiscernible] give some idea.

Sorry. You're not audible, Damayanti. Can you use your handset, please?

Yes. So I was just asking like anything specific on the gastrology segment, where we have seen, I'll say, a slower performance versus the market growth?

Shaunak? His line is also a little stuck. So you are right. I mean -- and you have very correctly observed. Gastroenterology is the only probably division -- large division where we have done worse than the market and worse than our own expectation. There were some leadership issues. There were some inventory issues of the old times. We have done all these corrections, and we expect that '23, '24 should be a much better year for that division also.

[Operator Instructions] We have our next question from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Just a clarification first. So the one-offs that has been called out with respect to Aleor, right, only Aleor? Or is there anything else? I joined the call late. So if you could clarify?

No, no, it's only Aleor. And that's only INR 13-odd crores this quarter.

All right. And sir, secondly, among the peer set, a couple of companies have got significant regulatory issues and that has to some extent led to shift of their supplier base, particularly on the injectable side. So are we going to see a good business benefit out of it? I mean, historically, we definitely have tried to do good benefit of such events. So anything going forward?

Yes. So it's a good question. I think strategically what -- where we've done well is when there are regulatory issues in the industry that leads to shortages. And we've been able to do well on the shortages when we do see it. Injectables, it's still early days for us because it's just -- we just got the first few product approvals. Once we commercialize it and then once -- rest of our portfolio and our filing speed picks up on injectables, yes, definitely we could see that. Strategically, one of the reasons we did get into injectables is because there is -- there has consistently been shortages and compliance issues. So we thought there would be opportunities. So long run, yes, we do hope to see some.

So anything over next 12 to 15 months given that -- or let me put it other way, given the current quarterly run rate of 50, 52, how do we see FY '24?

So it's tough to say right now. I think the whole thing depends on how the new launches go. Like this time, as you've seen, we've got about in rupee terms a 10% growth. That's predominantly because while we had erosion, at least -- we had erosion on the quarter compared to last year, but we also had some new launches that picked up some steam. So it's a combination. And with injectables, as we launch more and more injectables, that will keep adding to our basket. Of course, FY '24 will be a little tougher one because we will have a little bit of a pressure on the profit due to the 2 new facilities coming up on stream.

Understood. Understood. But that is because of taking the expenses from balance sheet to [indiscernible]. But the opportunities on the U.S. side remains strong?

Yes, that remains. Yes, absolutely.

Okay. For the next 12 to 18 months?