Alembic Pharmaceuticals Limited (APLLTD) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '24 Earnings Conference Call of Alembic Pharmaceuticals Limited. We have with us today, Mr. Pranav Amin, Managing Director; Mr. R.K. Baheti, Director of Finance and CFO; Mr. Mitanshu Shah, Head of Finance; and Mr. Ajay Kumar Desai, Senior Vice President, 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. Good afternoon. I thank everyone to join our third quarter results call, straightaway I'll go to financials. During the quarter, our total revenue for the company grew by 8% to INR 1,631 crores. EBITDA also moved up and is INR 269 crores, which is 16.5% of sales and net profit grew by 48% to INR 160 -- INR 180 crores. During 9 months period, in the ending of December 2023, our revenue grew 11% to INR [ 4,712 ] crores, EBITDA is INR 697 crores, which is 15% of sales and grew by 22%. Net profit is INR 438 crores, it grew by 42% versus Y-o-Y. Before considering nonrecurring items of corresponding period, EBITDA and net profit are not exactly comparable with the previous year's corresponding numbers as almost INR 64 crores and INR 180 crores of cash expenses and INR 1,437 crores of depreciation has been extended out in Q3 and 9 months respectively for new manufacturing facilities, which as you are aware, earlier capitalized. So from 1st of January 2023 onwards, we have started charging of all expenses to P&L. Our gross margin sale is around 70%, which is healthy. EPS for the quarter before nonrecurring items is INR 9.18 per share versus INR 6.76 corresponding period last year. Cash flow and borrowings. The company generated a healthy cash flow of INR 652 crores over 9 months period, December 2023. After meeting this CapEx as well as working capital requirements, net cash inflow was INR 309 crores, which was used in paying dividends and repayment of borrowings. The gross borrowing is reduced to INR 575 crores as compared to INR 686 crores for December '22. The company has about INR 156 crores of cash in hand versus INR 146 crores last year same period. I will now hand over the call to Pranav for discussing both India business and the International generics.

Thank you, Mr. Baheti. Despite the muted demand in the antibiotics and respiratory market, the India business grew by 9% to INR 596 crores, with specialty therapies performed better than the market. Gynecology, gastro, antidiabetic, and ophthalmology therapies outpaced the market growth. We performed relatively better than the market in antibiotic and respiratory segments on higher base in the previous year Q3. New launches continue to do well with promising future launches across key segments. Animal Health had a fantastic quarter, and this is a business that's been doing very well for us. It grew by 32% during the quarter. Coming to the International business. We had a very satisfactory quarter with exceptional growth in the ex U.S. generics. The U.S. business also grew 9% on the back of 11 launches. The U.S. business is looking at a better [ wicket ] right now with new facilities already commercialized. As they ramp up, we will get a lot of operating leverage and cost improvements are also on track. There is no further large CapEx needed for the International business, and we will have only maintenance CapEx as well as some API expansion, including in therapies such as GLP-1 and debottlenecking. The API business has been very strong for us over the last couple of years. The de-growth this quarter was due to lower offtake from a few select customers since it's getting lumpy. I expect another quarter or two maybe weaker, then I think we should be back to our regular growth rate that we've demonstrated in the past. R&D expense was at 7% of sales, at INR 114 crores for the quarter. As we've been saying in the call, the last couple of years, goal was to bring this down, and we are constantly optimizing this and improvements on track. We filed 5 ANDAs during the quarter and cumulatively ANDA filings at 257. We also received 7 approvals and launched 11 products. We should launch over 5 products in the next quarter as well. The business -- the U.S. generics business grew 9% to INR 474 crores for the quarter. The ex U.S. grew by 32% to INR 272 crores. And the API business de-grew by 11% to INR 289 crores. With that, I would like to open the floor for question and answers.

[Operator Instructions] The first question is from the line of Rashmi Shetty from Dolat Capital.

Congratulation on good set of numbers. One question on the other expenses excluding the R&D, other expenses was pretty low. And my assumption is that last time you all said that INR 60 crores to INR 70 crores, we are already expanding new facility costs. So is there any one-off included in this? Or it is basically because of the cost improvement program? And what are those cost improvement programs and whether this now will be sustainable or not in the future?

So Pranav can also take this. So I didn't understand your exact numbers, but I think what we have said is, R&D just we'll keep it at around INR 500 crores or so for the year, and we are on track. We have already started charging of all the expenses from new facilities, which were earlier being capitalized. And the numbers are in line, and I think they are the numbers, which somebody can take this...

Okay. In our U.S. business, what kind of price erosion we are seeing? Whether, we have already done 20 launches in 9 months, and I think that was the guidance. Any more launches are we expecting in quarter 4?

Yes. So 2, 3 things. One is, tough to say on the price erosion in the market because it's a factor of multiple products. Generally, it is a little lower than what we had last year, but it still exists. It's product to product that can range anywhere between 5% to 30% depending on the incumbent who comes into the market. But it's a little better, so we don't comment on -- it's very tough to give a number for the price erosion. As regards to new launches, yes, I think we will continue doing it. And then, my opening statement, I said that we will launch about at least 5 products in the fourth quarter as well.

How many products? Sorry, I did not get it.

Five products, at least 5.

Five products. Okay. And what is the guidance for FY '25 for the launches?

We haven't given a guidance, but I expect at least 10 to 15 launches.

10 to 15 launches. And last question is on tax rate. What should we take it for this year because the 9 months because of the deferred tax, the tax rate has come down. So if you can give that and what should we take it for the next few years?

So that's -- I mean, computed number on profit for the purpose of taxation, so I think we'll get some coverage on impairment losses, et cetera, and that's how the tax rate is low.

Sir, any number would you like to share for FY '25? It should -- is it that we should take 17%, 18% in FY '25?

Yes, I think so. Yes, that's right.

The normalized tax rate, right?

Correct.

[Operator Instructions] The next question is from the line of Damayanti Kerai from HSBC Securities and Capital Markets India Private Limited.

My question is again on R&D. So looking at 9-month number, you are very much in line with your earlier guidance of INR 500 crores or below. So how should we look at your R&D approach ahead? Because obviously, you are optimizing R&D costs, but like how do you build up pipeline for U.S. And you can also talk about like the kind of products where you are spending majority of your R&D focus as of now?

Yes. So if you see our broad R&D spend, right, I think what has happened is, we don't give a segment-wise breakup. But I can give a flavor of where we are and where we intend to be. So I think about 5, 7 years back, it was only OSD. As you went in today, if you look at it, you have OSD, you have the [ KPS and ] the chemistry bill. You have injectables, derm, you have ophthalmic, these are the broad areas that we are spending on. What's happening is OSD as a percentage has -- of the total mix has come down. Derm has come down because derm was chosen portfolio that we had to do, we've done a bulk of that portfolio, so derm has come down quite a bit. So those are the 2 areas where we've seen a reduction, where we've seen either flat or gentle increases on the chemistry side and the injectable as you build up a more portfolio of injectables. And injectables will continue growing moving forward, injectables and ophthalmic.

Okay. So OSD, derm, as you said, has come down in a way like you are trimming or optimizing costs here and spending more on newer growth areas like injectables. So as of now, can you just give us some indication say out of 100, how much is derm plus OSD as a part of your pipeline? And how much is the newer...

As I said, we don't give this breakup, because it keeps changing, and it gets lumpy also, so we don't give this breakup of segment-wise R&D spend.

Okay. And Pranav, did you mention, in your opening remarks, that you are focusing on -- or you are working on GLP-1 drugs also. If yes, can you comment a bit more about it?

Yes, so I think that's an interesting area that is there. The Q4, the launches are still a little away, but these are interesting APIs and formulations. We've got peptide capability as well. So hence we're looking at entering the segment. We started with it so we can get some of the filings done and we'll see how it goes.

Sorry, filings you haven't started. Like it's in development right now, but you are targeting most of the opportunities here?

Yes.

Okay. And my second question is on your utilization on the newer plant. So in your press release saying like you will be seeing better pickup or better supplies from the new plant in coming quarters. So like, how much you have covered the space so far in terms of utilization for new plant?

So utilization still -- okay. Again, you have you to peel through the layers to see the utilization. In certain areas, we are doing pretty okay, in certain areas -- okay, most of them, we are still -- we're quite low, and we will pick up as we go along. The way I anticipated is ophthalmic, we should be near like practical, what is a good capacity utilization in another 6 months. Our vial line should be okay in another 6 months. On the oncology side, we're seeing good pickup in -- on oncology injectable side, we're seeing good pickup. And the 2 areas where we will have some capacity, which will take a little longer, but that's okay that's just the nature of the business because these are later expiring products is on the OSD side of the oncology and on the PFS side of the injectables.

Sorry, which part of injective injectable, I didn't get?

On the PFS, pre-filled syringe.

Pre-filled, okay. Okay. Got it.

Yes, as a capacity utilization where there's some products, which will more than take care of the cost if we get those launches, but the capacity utilization I was talking about.

Okay. And for next year, you said 10 to 15 launches in the U.S. So I assume with these kind of launches like 25 this year, if you do like another 5 in fourth quarter and then in '25, you're targeting 10 to 15. So that should be reasonably picking up your plant utilization right?

Yes, absolutely. I think what's happened with launches this year as we gradually get market share and with the new launches that come in next year, we'll help with it. Apart from this, we also have some CMO opportunities we're pursuing for some of the lines. So those have also helped with the plant utilization.

Okay. That's helpful.

[Operator Instructions] The next question is from the line of Anushka Vora from Vimana Capital.

Congratulations for the good set of numbers. So I had a couple of questions. I have just recently started tracking the company, and I had a couple of questions. The first one was amongst all the geographies, will the ex U.S. be a major growth area going forward?

Yes. So the ex U.S., we have a little different strategy. And if you see the last few years, I think -- the last 5 years, I believe, our CAGR is about 15%. So we've been growing pretty well in these territories. I think the large territories that we participate in, how we participate through partners is Europe, Canada, Australia, Brazil, South Africa. These are the big ones that we do. And I think we've done pretty well in that, and I think that will continue growing as a territory.

Okay. That was very helpful. And my second question is around the API business. So how is that API business performing from a realization and a margin point of view? And how do we see this realization going ahead? Is this majorly going to be volume-driven?

So the API business has been a pretty good business for us. I think in the last 4, 5 years, if you look at the CAGR, it must be about 8% to 10%. So slowly and steadily growing. We have a very good quality of API business, and that I mean is, we have a good bunch of customers all over the world that we've done pretty well. I anticipate moving forward this business will also continue growing. But I think a quarter or two maybe a little lower, little slower because we had some big business, which has been lumpy, which comes once every 3 to 5 quarters. And that's what causes a big bump. So I think maybe that won't be there, which -- and so quarter 2 may be a little lower and we'll start increasing it again. API business is a good margin business for us. It's a decent EBITDA, decent margin for us.

The next question is from the line of Chirag Dagli from DSP Mutual Funds.

Just you've launched about 11 products in the third quarter. Overall, over the last 2 years, you probably have about 30-odd products launches. And typically, you've said that you gradually build up market share. In how many of these that you've recently launched, is your market share still suboptimal where you think you can go up.

The way I'd like to answer this question is and what I've always said that, it's not always a question about market share. It is a question about what price do you get in the market? Just pure market share doesn't make sense. You don't burn up our capacities only to sell at cents. So it really depends. We don't have a target market share that we get into. We want to see where we can make the most money. And I think from when we approach it that, yes, there are some products where we're a bit lower than the market, but I do know that as time goes by, we will get opportunities on them. So -- but you're right, we do go a little slower. So I think I don't have a net figure for you. But yes, we could do better in some products, but depends on what price.

Understood. And this $57 million a quarter kind of a number that we've done, is it like absolute base Pranav? Or is there still anything which you fear can be lost in terms of pricing, et cetera?

So I think with the U.S., what happens is, I think this is the new business. So there's no sartans, there's no huge chunks of that in the business anymore, right? I mean we get few small onetime opportunities, which you get every quarter, so that continues. So it is the base. And it is going to even keep moving forward, you have to anticipate this would be the new base. $54 million, $55 million could be the new base. But I can't predict that because it really depends on the next guy. Some new incumbent comes, decides to drop the prices even further, then that may -- when we may walk out of the business. We may say that it doesn't make sense with the penalties to do it. So as of now, yes, this is the base, it seems.

Understood. And from -- just from an environment standpoint Pranav, any new thoughts that you have for the U.S. market in terms of what's changing? Whether we are better placed or do you still continue to think that...

So yes -- no, good question, Chirag. I think as I said in the -- yes, I think, the U.S. market is looking a little better compared to where we were a couple of years back, 2 years back, 1.5 years back, it is looking a little better. There is still, I think, supply -- being a good supply partner is still being -- is still valued in spite of the price erosion that you see. And it's just -- I think we have all the items in place, all the things are in place because of the front end, which looks for opportunities. The back end, which can respond to the opportunities. So I think it's looking a little better, the U.S. market. Having said that, the returns are down compared to what they were 3, 4 years back; hence, a lower R&D spend on the U.S. side.

Understood. Have you got any long-term contracts now?

In the U.S. generics?

Yes.

No. We haven't gone into any of that because -- we're looking at it to see if it makes sense, while principally a long-term contract would make sense, but I think one must read the fine print, and we're evaluating those if it make sense for us.

But -- so competitors are getting long-term contracts, you are still evaluating. Is the way to think about it?

We have evaluated it. I don't like some of the fine prints. Hence, I haven't jumped into it.

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Tushar, your line is unmuted. You can please proceed with your question.

Yes. Am I audible now?

Yes.

Yes.

Sorry for this. Sir, just on the U.S. business, again, like at this base business of $57 million, so would we be profitable or like at a breakeven?

The U.S. is profitable.

So in the pecking order...

So U.S. is profitable for us.

So domestic would be at a -- being a legacy business, I'm assuming it would be in the range of 25% EBITDA margin. But overall, we are...

We don't give a breakup -- so we don't give a breakup of EBITDA margins. I think we've already have a guidance.

Our next question is from the line of Mr. Bharat Celly from Equirus.

Congrats for the good set of numbers.

Sorry to interrupt. Mr. Bharat, your line is not very clear. If you are using the speaker mode, may we request you to use the handset mode.

Is it better?

Yes, sir.

Congrats for the good set of numbers. Just wanted to understand on U.S. generics, so have you seen any growth in that base volume -- base business volume?

On the volume business side, in the U.S., yes, we are seeing an increase in the volumes of the business that is there. I think on a 9-month basis, we are definitely up compared to last year.

Okay. And since you mentioned that you are still not clear around taking a new [ NBO, ] so new contracts, so what is the particular reason for that? Is it the pricing part or...

Sorry. So -- okay. So let me just back step a little bit and to the question that Chirag asked earlier, what is happening is that some of the buyers are trying to get into a long-term contract, right? Now in terms of long-term contract, lot of them have approached us. We are still evaluating and we're still negotiating with them because one has to lead the print, right? I think as a company, we have to see in the long run, what is beneficial for us as a company and where the liabilities could be. And that is why we're just waiting and watching. We don't want to jump into it as yet.

I get it. And sir, when we talk about U.S. market, how do you see, sir, from the new launches perspective, when we launch a new product, what sort of price erosion you see? When the price erosion for the incremental new products are very high, how do you feel?

I think price erosion is tough to say. It depends product to product. Say an incumbent may come and we've seen on product recently where we were there in the market and suddenly a new person came and they dropped it about 40% to 50%. So you can see that kind of erosion also. But generally, it really depends. It depends on who the competitors are, what the volumes are, what the shares are. It's very tough to comment on that.

I get that. And Baheti sir, actually we have seen almost like INR 20 crore incremental effects, you can see, but just wanted to pick your mind that there have been some OpEx optimization measures since we have taken that measures or there is something else the reason?

So I didn't get you question because your voice is also little -- it is cracking, but what did you say?

So I'm asking, ex of our R&D expenses, our other expenses have actually gone down by INR 20 crores sequentially. So is it because of some cost control measures or there is something else which is leading to this? And how should we see it going forward?

No, I don't think so. I think I mean everything is normal in business. I mean, I don't think there's any particular reason for any impact. Maybe in pharma, Q2, Ajay can confirm. But in pharma, Q2, always we had some higher promo expense than Q3, probably that is the only reason.

I think Mr. Baheti, the other thing is on -- there's a little bit of saving on the RM and the sourcing side. I think that may be reflected.

So that again will come up into the other expenses, Pranav.

Yes, yes, yes.

The next question is from the line of Vishesh, who's an individual investor.

Hello?

Yes, sir.

First of all, congratulations for the good set of numbers. I've got 2 questions here. First, could you please quantify the overall revenue from your new facilities like in a whole, for, let's say, financial year '24?

No. We don't give product-wise details or the facility-wise details, that's very difficult to provide.

Okay, okay, okay. No problem. And -- okay. And sir, can -- when can we like see a good operation leverage regarding the new facilities?

I don't think facilities are doing, what are you saying?

Like operating leverage.

You're saying when do we expect to see operating leverage in the new facilities?

Yes, yes, right. When can you see like...

So I think someone earlier asked a question about capacity utilization in the new facilities. Now the new facilities are all operational. The capacity utilization right now is pretty low. And what I meant operating leverage is as we go along, right, and as you have more product coming out, you have more opportunities, and that will not raise the operating leverage, your cost will come down, your [indiscernible] will come down and that will help operating leverage and which will ultimately reflect in the margins of the company as well.

The next question is from the line of Rishabh Duggal from Finowealth Financial.

Congratulations, sir. I have just one question. So what's your view on the U.S. business, sir? Will it be product-based or number-based going further?

Sorry, I couldn't -- I would just -- can you just repeat that question? I couldn't hear.

Am I audible?

Yes, yes, you're audible. I had an issue on my end. Can you just repeat it, please?

Hello?

Yes. Rishabh, your line is audible. Can you please repeat your question?

So my question is, will the U.S. business, will it be majorly driven by better product mix? Or what will it be?

So I think the U.S. business, what will happen is as you get the number -- as you have a broader portfolio, as you have more products getting into the market that is right. One of the reasons why we made these investments into new capabilities such as injectable, peptides, oncology is incremental competition there is much lesser on the OSD side. And also on this, as you go towards more complex products, you will hopefully see lesser price erosion and bigger product opportunities. That's the way we're approaching the U.S. market.

As there are no further questions, I would now like to hand the conference over to Mr. R.K. Baheti for closing comments.

Thanks. As always, it's a pleasure to interact with all of you and we will continue do so quarter after quarter. Thank you very much for joining again, and see you next quarter. Thank you.

Ladies and gentlemen, on behalf of Alembic Pharmaceuticals Limited, we conclude this conference. Thank you for joining us. You may now disconnect your lines.