Alembic Pharmaceuticals Limited (APLLTD) Earnings Call Transcript & Summary

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" HSBC Global Investment Research

" Motilal Oswal Securities Limited, Research Division

" Equirus Securities Private Limited, Research Division

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" IIFL Research

" B&K Securities

" Dolat Capital Market Private Limited,

Ladies and gentlemen, good day, and welcome to Q2 and FY '26 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, Executive Director; Mr. G. Krishnan, Chief Financial Officer; 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. Krishnan for his opening remarks. Thank you, and over to you, Mr. Krishnan.

Thank you, and good evening, everyone, and thank you for joining the second quarter results conference call. Let me briefly take you through the numbers for the quarter before handing it over to Shaunak. So moving on, we continued the good start for the year into the second quarter. Revenue for the second quarter grew at 16% year-on-year to INR 1,910 crores. Growth was across the business, driven by higher volumes and new product launches and expansion in ex-U.S. markets despite continued pricing pressure in U.S. generics and API. Gross margin was at 73% for the quarter, remaining almost flat compared to the previous year. EBITDA before R&D expenses were at INR 503 crores for the quarter, representing 26% of EBITDA margin compared to the previous year of 23%, reflecting better operating leverage resulting in year-on-year EBITDA growth of 32%. R&D expenses increased by 41% year-on-year to INR 187 crores for the quarter. These figures are in line with the guidance that we had given for the full year at about INR 600 crores to INR 650 crores per year. During the quarter, we also completed the acquisition of Utility Therapeutics, marking our entry into the U.S. branded drugs market with Pivya, the product targeted for urinary tract infections and granting marketing exclusivity in the U.S. The transaction includes an upfront payment of about $4 million, milestone payments of $4 million each linked to the U.S. launch of Pivya and achievement of certain specified revenue milestones, along with profit sharing arrangements with the sellers. The net working capital stood at INR 2,921 crores compared to INR 2,734 crores as of March '25. And this increase is a factor of increased operating intensity driven by new launches and the new facilities that we opened in the last few years and volume-driven growth. Net debt as of 30th September was at INR 1,280 crores compared to INR 967 crores in June '25. The increase in net debt was a reflection of borrowing to fund working capital and the acquisition of Utility Therapeutics. And correspondingly, the interest cost increased from INR 71 crores to INR 76 crores for the quarter. We expect the net debt levels, excluding Pivya launch, to gradually reduce in FY '27, considering the successful launch of new products and growth from new facilities in our core business. The profit before tax for the quarter before exceptional items grew by 34% year-on-year to INR 225 crores. Profit after tax, but before exceptional items grew by about 30% year-on-year to INR 185 crores. Adjusted for the exceptional item pertaining to insurance claims reviewed in the previous financial year, that is in the quarter 2 of FY '25, the profit after tax growth was at 20%. Moving to the half yearly results. Revenue grew at 13% year-on-year to INR 3,621 crores, reflecting growth across businesses. EBITDA before R&D spend for the period was at INR 927 crores, resulting in an EBITDA margin of 26% and a year-on-year growth of 28%. Again, reflecting -- the EBITDA growth is a reflection of strong revenue growth and improved capacity utilization across facilities. EBITDA post R&D expenses was at INR 613 crores, which is about 17% of revenue. Profit before exceptional items for first half grew by about 22% to INR 339 crores and profit after tax adjusted for the insurance claim I just mentioned was at about 18%. With this, I have given a broad overview of the financials for the quarter and the first half, and I now request Shaunak to take you through the India branded business. Over to you, Shaunak.

Thank you, Krishnan. For the India Branded business, we delivered a revenue of INR 639 crores for the quarter with a 5% year-on-year growth. Within this performance, gynecology, ophthalmology, Animal Health have demonstrated an accelerated performance. The cough and cold segments grew in line with markets with robust operational execution. We introduced 2 new products in this quarter. And with the implementation of GST 2.0 to ensure benefits of lower GST rate get passed on to the end users, the billing was paused for a few days to facilitate this migration of the channel to the new GST regime. This led to a compression of the billing cycle, especially in the East Zone due to festive seasons, resulting in a marginal impact on growth for the quarter for India business. I will hand over the discussion to Pranav for his presentation on international business.

Thanks, Shaunak, and I'm happy to present the Q2 performance for the international business. Our Q2 performance reflects the continued momentum as we strengthen our presence across key markets and achieving growth in both formulations and API. The performance was driven by a 31% growth in the rest of the world markets, which reflects our strategic geographic expansion and focused execution. Despite continuing pricing challenges, our U.S. business grew 21%, supported by higher volumes, whereas the API business grew by 15%. We continue to maintain sharp focus on profitability and operational excellence. We filed 2 ANDAs during the quarter and cumulative ANDA files were at 269. We also received 6 approvals and 1 tentative approval. We launched 3 products in the U.S. We cumulatively have 226 ANDA approvals, including 21 tentative, and we expect to launch 4 to 5 products in Q3 and another 4 to 5 in Q4 of this year. Our R&D investment this quarter at around 10% of revenue reflects our commitment to building a strong pipeline for future growth. We continue to focus on complex and high-value areas such as injectables, peptides, oral solids and drug discovery with an emphasis on early entry opportunities like first-to-file day 1 and NC-1. Our annual R&D guidance was given at INR 600 crores to INR 650 crores at the start of the year. We continue to have the same number in mind. We will invest towards marketing and approval in the product launch of Pivya, which will mark our foray into the branded segment in the U.S. market. We expect to start this late Q4 of FY '26. Pivya would target the stable 50 million prescriptions in urinary tract infections, which has had little product introduction for more than a decade. This will have an impact on near-term profitability, but we are confident of the medium- to long-term market opportunity that the product will help us capture. With this, I throw the floor open for Q&A.

[Operator Instructions] Our first question comes from the line of Damayanti Kerai from HSBC Bank.

My first question, I just want to understand the R&D bump up better. So Pranav, if you can help us understand, although you are maintaining the full year guidance, but where the majority of spend went during the quarter that led to sharp increase in the R&D? Which segment or product categories, if you can elaborate?

Yes. So as I said, if you see on an H1 basis, I'm saying a guidance of INR 600 crores to INR 650 crores. And on an H1 basis, we're -- within the amount that we had said. So it's okay. I think we're not too far off, which is in the quarter-wise, we are 10%. But I think for the rest of the year, at the end of the year, we will be around that 8% kind of levels. In terms of where it went, I think predominantly, most of it is on the formulation development, but a lot of it being on the injectables and complex injectables also, which as we gradually increase our injectables and complex injectable filing, that is also kicking in for us.

So is semaglutide or any other peptide also part of this expense?

So we have set up a peptide lab, and we do have a bunch of products and GLP-1s under development, semaglutide being one of them. Having said that, we are not there in the first wave of launch for semaglutide in the Canadian market and even in the U.S. market, we won't be the first phase of semaglutide. However, we are working on tirzepatide, Mounjaro, and we believe we will be in the first phase of that in many of the markets.

Okay. My second question is on your branded Say in the U.S. market. So you mentioned some investment will go towards that portfolio. So very broadly, how much or what kind of investments are planned for that category?

And... I think yes. No, this is a little bit more of a mid- to long-term play because as we build out a field force, in the start, it will be like an umbrella ship in terms of the revenue that will be generated. So initially, we will have a field force which will be promoting the product. And it will take a couple of quarters for it to ramp up. So we may see a couple of quarters that we may have a little bit of a profitability hit because of this. But as we go along, as I said, it's like an umbrella curve and you will see a significant ramp-up as we start generating prescriptions in this area.

Okay. That's helpful. And my last question is, if you can comment on what has led to very strong growth in ROW market and API -- especially API, I understand demand had been muted for, I guess, not only you, but across the market for the last couple of quarters. But I think your performance is very exceptional. So if you can help us understanding that.

No, no, good question. See, okay, so 2 things. One is the ROW generics for us, that part of the business, if you see over the last 10 years or so, 7 years to 10 years, we've grown by a CAGR of almost 20%. So that has been a very good growth market for us. You have to take this -- I think this year also, we'll end up growing by about 15% to 20%. This quarter, 30% growth is a little exceptional because last year, H1 had a low base compared to H1, H2 has a much higher base last year because last year, during H1, we had some supply difficulties. So H2 will be there. We will grow in H2 as well, but it won't be as high. But at the year-end, we'll be about 15% to 20% in ROW generics. As regards API, yes, it is still not as rosy. If you see the last 8 quarters, even we've had -- we've been a little sluggish in terms of growth for API. And I think it's just at a lower base. This quarter, we ended up having some more development quantities in some areas. API is still challenging. I think for the year, we will grow at about 10%. But yes, this was a good quarter. It was an exceptional quarter.

Okay. Full year around 10% growth is something more visible, okay.

Yes, exactly.

[Operator Instructions] Our next question comes from the line of Tushar Manudhane from Motilal Oswal Financial Service.

Sir, again, on this Utility Therapeutics, if you could sort of elaborate in terms of number of field [indiscernible] or field force you want to set up? And in addition to this, what kind of portfolio you intend to build up? Is that going to restrict only to urinary tract infection? If you could throw some light in terms of these aspects.

Yes. So what we will do with utilities is we will gradually ramp up the field force. We will start with some of the high prescription areas. This is in women's health, right? So we will target the women's health area. We will start with a smaller field force to initially see how the ramp-up happens. We'll go with high-prescribing doctors, and we've already identified the territories. We will start with that field force. And as we move along, as we start generating sales, we will increase the field force to go for more doctors as well. In this same area, we will look at in-licensing in more products as well. But first, we want to stabilize these products, stabilize Pivya, get the sales going off the ground. But actively, we are scouting around for other opportunities as well. I believe this can be a good derisk from the generic business and the pricing challenges that we have in the generic business, and we can build a good franchise in women's health, and that's something that we're going to aim to do.

So at least for, let's say, over the next 12 months to 18 months or 12 months to 24 months, how much sort of an additional operational cost would be start seeing meaningful traction in the revenue?

So I think it will take a couple of quarters at least. Let's say, if we start end of -- so I think Q1 FY '27 will be the first full quarter of launch as per the schedule that we have currently, as per our plans. So I think first full year, I think it will take a couple of quarters at least to get it going, and I think then believe the revenue will ramp up. As I mentioned to Damayanti, it will be like a little bit like an umbrella curve, J-curve will go up much faster as we start generating prescriptions.

Got it. So considering this aspect and subsequently reasonably good traction in, say, non-U.S. as well as U.S. market and API. So any guidance you would like to give for [ FY '26 ] or second half FY '26 EBITDA margin?

So EBITDA margin, I think the only guidance I've given in the past, and I continue to stay by it is that if you see fundamentally, what will happen over the next couple of years, we will see an improvement in EBITDA margin moving forward. So it could be that quarter-on-quarter, you may see a variation. But next to next year, we'd like to go to the 18%, 19% kind of levels in the next couple of years, get to a 20% EBITDA level. And that will happen with growth across all the sectors. I think with India business will come back to growth. Animal health care is already doing well. Gynac, ophthalmology are doing well. And once the main business also starts getting back on growth. The other aspect is the U.S. growing. We have some facilities like the injectable and the onco facilities, which are not as fully utilized as of now. As that utilization goes up, that will help push up their margins as well. So I'm pretty confident that in the next couple of years, we will bump up towards closer to the 20% kind of levels.

Our next question comes from the line of Bharat Celly from Equirus Securities Private Limited.

Sir, just wanted to understand on the [ U.S. ] specialty side, so what sort of investments or levels we are looking to earmark towards this business? What sort of losses we can see maximum when we get into this business?

So Bharat, what will happen is these will be all in terms of upfront costs, as you know, we've acquired this for milestones. We've got a few milestones. Total milestones will be $12 million paid over a period of time. And the operational cost is just the onboarding of the field force. That's what's going to be an operational cost. So we're going to try minimizing that. As I said earlier that to Tushar, that we will gradually start the ramp-up of the field force. And as we start getting some momentum, then we will build up the field force even more. I think let's wait until Q1 to see how the ramp-up starts, and I think we'll get a much better idea as we move along.

Surely. And what gives us confidence that it can be a successful product because we have seen multiple companies getting into specialty side and then rolling it back later on and then considering the -- so what gives us the confidence over here?

Yes. So what gives us confidence is in this segment, right, in women's health and UTI infection, there haven't been too many new molecules that have come out. This is a tried and trusted product, which has been launched in Europe and it's been there and commercialized in Europe for many years. So it's tried and tested. Number two, it works well in women who are pregnant. I think it's quite a safe alternative. So that gives an additional bonus. And since there haven't been too many new introductions, we believe there's a niche that we can go to. We've done some surveys with doctors in the U.S., and we believe that there is an opportunity. In fact, once some of the medical professionals have heard about this, they have already started approaching us as to when we're launching the product. So that gives us some excitement. I believe it will be an interesting area as a first foray into branded segment in the U.S. And as we move along, we'd like to add more products to this as well.

Sure. And last one, what sort of losses we have from the new injectable plant, which we have commercialized over the last 2 years, 2.5 years?

So we don't have losses per se. I think we do have unabsorbed overheads. And I think as we go along, I think the first half of this year, we've already seen a much better utilization of these facilities, which has also led to the margins going up. And as we move along with the launches that we have in the pipeline for H2 and FY '27, this will further -- you'll see a further impact on the top line, which will continue growing in the U.S. and the rest of the world markets as well as the margin improvement.

Surely. And since we are investing into the new specialty side, there could be some margin pressure for at least FY '26, '27, right?

So I think, let's see, I think, as I said, Q1 and Q2 is where we've seen, I believe Q3, Q4 onwards, it will start getting normalized.

And any budgeted amount which you would have thought of to invest in the initial past two quarters?

No, we haven't disclosed that and we haven't gone to those numbers yet.

[Operator Instructions] Our next question comes from the line of Bino Pathiparampil from Elara Capital.

Just a follow-up question on ROW markets. Are these mostly Europe, most of the sales coming from Europe?

So Europe is a big market for us. I think for us, our ROW business is broadly centered around 4, 5 territories, which is Europe, Canada, Australia, Chile and South Africa and Brazil.

Of which Europe, Canada, Australia, I mean, the regulated markets would be roughly what, half or 70%...

85%.

85% is regulated. Okay, got it.