Alkem Laboratories Limited (ALKEM) Earnings Call Transcript & Summary

Welcome to Q2 FY '21 Earnings Call of Alkem Laboratories. From the management side, we have Mr. Sandeep Singh, Managing Director; Mr. Rajesh Dubey, Chief Financial Officer; Mr. Amit Ghare, President, International Business; Mr. Yogesh Kaushal, Senior Vice President, Chronic Division; and Mr. Gagan Borana from Investor Relations. Over to you, Gagan.

Yes. And thank you for taking out time and joining us for Alkem Laboratories' Q2 and H1 FY '21 Earnings Call. Earlier during the day, we have released our financial results and the same are also posted on our website. To discuss the business performance and outlook going forward, we have on this call the senior management team of Alkem. Before I proceed with this call, I would like to remind everybody that this call is being recorded and the call transcript will be made available on our website as well. I would also like to add that this discussion may add or may include forward-looking statements and the same must be viewed in conjunction with the risk that our business faces. After the end of this call, if any of your queries remain unanswered, please feel free to get in touch with me. With this, I would like to hand over the call to Mr. Sandeep Singh to present the key highlights of the quarter and the strategy going forward. Over to you, sir.

Good evening, everyone. Welcome to our quarter 2 of FY '21. I would briefly touch upon the key performance highlights of the quarter gone by and would then leave the floor open for questions and answers, as usual. While we continue to fight against COVID-19 pandemic, the government announced multiple rounds of unlocking. The Indian pharmaceutic industry has witnessed gradual recovery in new prescription generation as doctors and health care professionals resume their services. This has led to a sequential recovery in our India business, more specifically in our acute care portfolio. Compared to the last quarter, our India business grew by about 35% quarter-on-quarter. And most of our large brands are performing and their representatives are outperforming in their respective markets. In acute therapies like anti-infectives, gastro, vitamin and minerals, cardiac and anti-diabetics, we grew ahead of the market in the quarter as well as for 6 months ended '21. However, given that the significant portion of our India sales comes from anti-infectives segment, which witnessed a year-on-year decline during the quarter and first half of the year, a secondary sales growth as reported in IQVIA has been on the lower side compared to the broader market. Our trade generic business continues to grow well and has helped us mitigate some pressure on our branded subscription business. Coming to our international business. I'm happy to share that during the quarter, our international business registered a healthy growth of 16.4%, mainly led by our U.S. business, which grew by 18.6%. The growth in the U.S. business during the quarter in dollar terms was also strong at 12%. Further, over the last 3 years, ending September 2020, our U.S. business revenues have more than doubled. This growth has largely been driven by our new product launches, coupled with market share gains in some of our existing products. Investment in R&D and ensuring high standards of regulatory compliance has also been an important contributor towards this performance. During the quarter, we invested INR 139 crores in R&D, which is 5.9% of our operating revenue. We filed one ANDA with the U.S. FDA and received 4 approvals, which includes one tentative approval. With this, we have now been fairly strong product -- we now have a fairly strong product pipeline of 149 ANDAs already filed with the U.S. FDA, with nearly half of them waiting approval and commercialization. Timely new product approvals and the launches would be a key focus to drive growth in the U.S. market. In terms of regulatory status of our manufacturing facility, all our 6 manufacturing facilities in India and the U.S. and supplying to U.S. have received EIR as on date. We continue to invest in our people and technology to ensure our facilities comply with global regulatory standards. Talking about the financial highlights during the quarter gone by. The savings in marketing -- in savings in marketing expenses during the quarter, coupled with our ongoing efforts towards productivity improvement and process optimization, helped EBITDA margin showing significant improvement to 25.4% compared to just 20% last year. Also during the quarter, we showed improvement in our working capital cycle, which was impacted by COVID-19 in the last couple of quarters. We have also delivered significant improvement in operating cash flow during the first half of the fiscal year compared to first half of last year. We continue to maintain a healthy balance sheet with net cash position. Going forward, with the uncertainty around COVID-19 remaining, it is difficult to predict how the situation will evolve. We are taking all necessary steps to ensure that the safety of our employees and business partners are the #1 priority. Thank you, and over to you all for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.

Congrats on good numbers. Sir, first question on the India business. So if you could help me split the Rx share and the Gx.

So trade generic is about 27% of our overall India sales for this current quarter and first half. Obviously, in this year, trade generic has grown faster than the prescription business, so it is not at normal levels. On a normalized level, it was close to 20% last year.

It was 20% last year. Okay. And what would be the rough growth that we would have seen in trade generics, chronic and acute, very roughly?

I think bifurcation, we normally don't give, Prakash. So we like to refrain not start a new practice. But I can broadly tell you that acute, obviously, because of anti-infectives, reliance was muted. And it was in like very, very low single digits to almost flat in the acute side. Trade generics had a very healthy growth rate of 20% plus, but -- and chronic was like average.

Understood. And what I'm trying to understand here is that once the COVID situation normalizes, would we continue to focus on trade generics as a 20% average? Or would it go up, down going forward? How do you think about that? That's one. And secondly, on -- in the acute, I think there's a clear bifurcation that is happening. So the vitamin is showing a very good growth. Gastro is showing growth, whereas anti-infective is not showing growth. So once the anti-infective comes back, do you see the trade generics share going back? Or how do you think about it?

No. So Prakash, there are 2 things in your question. See, trade generic as a percentage has gone up, not only because they have done predominantly well, it's also because the prescription business has gone down, right? So there's no question of trade generics grew because we focus them more. We always focus, therefore, we are like #2 company in India. So we have -- that has been business as usual. But -- well, COVID-19, what it has done, it led to supply disruptions for prescription business where trade generics could capitalize on, part number one. So as a percentage of revenue next year, it would certainly come down because I see prescription business bouncing back. Coming on the acute side, I think you're right, multivitamins and things have shot up because of immunity and all that going on. So this -- that will continue. But as a -- I see antibiotics bouncing back as we open up. So as a percentage of sales, antibiotics will certainly go up next year. But I don't see multivitamins slowing down too much because it will take a lot of time to get rid of those habits they have formed over the last few months. And the fear will also not kind of completely go away. So you [ lost here ] a drastic drop in multivitamins. Thank you.

Okay. Great. And second question on the balance sheet side. So clearly, the cash flow has improved. What do you plan to do with the cash? And if you could help us understand because the balance sheet does not carry the near-term cash balance, so what is the gross debt and the net cash?

I think Mr. Dubey can answer the second part. And then strategically, I can -- I will answer on the plans with cash and all that division. So over to Mr. Dubey, please.

Prakash, as on 30 September, we have cash equivalent to INR 418 crores, positive cash. If you recollect as on 31 March, it was on negative side. So we...

It was...

It was negative. It was overrun balances. And now we have positive cash of INR 418 crores.

Yes. Okay. So Sandeep, how do you plan to use the cash? What is the, going forward, capital allocation policy?

Capital allocation policy remains unchanged at 25% of PAT. 20% to 25% will go as dividends. And Prakash, when we really accumulate significant cash at the time, we can have this conversation, Prakash.

[Operator Instructions] The next question is from the line of Nithya Balasubramanian from Bernstein Research.

My first question was on the gross margin line item. The gross margins looked -- have come in a little lower than quarter 1. If you can help us understand the reasons for that.

Yes. Mr. Dubey, I think you could take that.

Yes. So yes, you're very right, Nithya. Actually, gross margin, it has come down because of 2 reasons. In quarter 1, there was one-offs. There was a technology income, which was there in quarter 1. And in quarter 2, as like quarter 1, there was a positive side of one-off. There is a negative side of one-off in quarter 2 also. So that is on account of IGST refund, which was on lesser side. So I think -- but we -- our view is we'll be able to maintain our gross margin to the level of 60% to 61%, which is normal kind of gross margin.

Got it. Just a follow-up on that. So your -- given trade generics' contribution is higher, has that also helped as the gross margin is down because you see lesser gross margin in your trade generics portfolio?

Yes. Trade generic contribution, actually, it increases. Yes, of course, to a certain extent, it gives -- it makes impact. But in our ethical, we have better mix. Actually, vitamin is just now what our Managing Director referred on Prakash. And these products, they have very good margins. So our mix is getting positive. So it is offsetting contribution of generics to certain extent.

Got it. My second question was maybe, Sandeep, you can help me here, on the sales and marketing expenses. So I think the commentary that we've heard last quarter was that a lot of these costs -- now that the market is opening up, a lot of these costs are likely to come back. But I'm actually pleasantly surprised to see the extent of cost control on that line item. So question around, do you see this being sustained going forward? Or do you see a lot of these costs coming back now that the market is opening up even further?

Yes. So I'd say -- usually say that the truth is somewhere in between. So all of it will not come back because I think we, along with all pharma companies, have kind of learned a few things in COVID-19. So we'll -- obviously, the expense will go up from here. But I don't see it going back to pre-COVID days completely. So I think we can still save up some money even next year. So that's my answer. If there's any specific, I'm happy to answer you.

Sir, can you help us understand what kind of savings? What are some of these ways and means to which you're likely to sustain savings post COVID as well?

I think there are plenty of things, and Mr. Yogesh can come on that, President of the Chronic Business. But as you know that -- let's call the happenings. So travel is going down and a lot of CMEs and all that are moving to online. So Yogesh, maybe you want to pitch in that.

Yes. I see major marketing inputs usually during routine times are the doctors' table top reminders and those books distributions, conference participation, they contribute close to around 25% to 30% of our marketing or maybe a little more than that. So I think that this -- a few of the things have permanently changed. Even post COVID also, we don't expect doctors to go for a similar kind of table top reminders. The conference participation, we don't see even happening until third quarter of '21 also. So those will be major savings which might get sustained until second or third quarter of next year. So that's how we are seeing change. Now what our MD also said and we are also experiencing, some of the permanent changes which might happen, what we have learned in COVID, is majority of the conference now, CMEs and all have become online, and they are becoming more effective, and this is also saving doctors' time to travel and all. So I think this will become a permanent feature in pharma industry in future as well. So that will continue the savings.

Understood. Any other structural changes you see in terms of span of control or reduction? And would you be able to do more with the existing set of people or a fundamental reduction in the number of risks that we need to sustain the same revenue level?

Not really. We know that this is a temporary phase. And within 2 -- a year or 2 years, we should normalize, whether -- getting talent today in the industry is not so easy. So as of now, we are not thinking of rationalizing field force, neither we are working. I mean there are minor change may happen in associate span of control, but from overall field force side, no, no major changes.

The next question is from the line of Damayanti Kerai from HSBC.

First, clarification on balance sheet items. So we have seen a sharp reduction in payables, which declined around INR 245 crores compared to March level. So if you can explain that. Similarly, if you can explain the rise in inventories.

Mr. Dubey, you can go.

Yes, Damayanti. Our payables, it has come down because we just wanted to optimize our procurement. So some early payments we have made. Some procurement, it has happened against advances also. And mainly reason is on account of that.

Okay. So this might be a temporary phenomena, right? And it should see a reversal in second half?

To a certain extent, actually, our procurement from MSME parties, the payment it has to be made within 45 days. So actually, whatever addition has happened on that, that is going to be a permanent. And rest of the thing, it will get normalized.

Okay. And on inventories?

Inventories. In fact, inventories, if you see, it has come down from June. Actually, our inventory is on lower side. But purposely, during COVID period, we wanted to have more inventory here in India as well as in overseas market also. So immediately, we don't think in next quarter on the inventory front, any major correction we need to do. We require inventory for our business to have that.

Okay. So it is broadly in line with the increase in business, right? That's why -- okay. Okay. My second question is regarding the India growth outlook. So second quarter, obviously, used to be our heavy quarter. And with COVID disrupting anti-infective sales and other key acute therapy sales, how should we look at second half growth? And if you can provide some visibility on how should we look at operating margins in near term or near to medium term.

Yes. As you know, I'll comment on the growth outlook and kind of refrain from the operating margin comment. See, October, we [indiscernible] revival, and I think that must be broadly in line with many companies. But we certainly see a growth revival. So we're optimistic that, unlike the past, where in Q2, we kind of had the best of growth, I think our growth would be coming in the next few months. And we see double-digit kind of growth coming back.

Okay. So compared to, say, early this year when we had majority of sales coming in second quarter, it should be more distributed, as you said, after we saw good revival.

Yes. But please take my comment with a pinch of salt, you never know how it turns out. October is still just 1 month and how things and how we operate at our India level because of COVID and all. So just be cautious on that. But October was good, just to share with you.

Okay. So if you are not commenting on operating margins, maybe you can just update us, like the marketing and promotional activities, though like there is digital [ component ] now there, but are all of your reps are back in field? Or what is the situation there?

Rajesh?

So yes. So our field force is almost 100% on field now. And in terms of doctor coverage, almost 80% to 85% doctors coverage we have reached. We used to have a doctor call average of around 10% or 11%, almost 8% to 9%. So by and large, 80% of doctors' activities have begun, and we are also seeing a decent number of patients now footfalls in doctor clinic as well. So almost, I would say, 70% to 80% footfall is back.

The next question is from the line of Neha Manpuria from JPMorgan.

One question on the India market. With most of -- I'm assuming this would have benefited Alkem with that large brand in acute segment particularly benefited during COVID. And I think that's reflected in our above-market growth rate for COVID -- for acute segment. Once things normalize, will we be able to keep this market share gain that we have seen? Or do you see this as a temporary phenomenon and we probably lose out on all the incremental share that we are picking up?

So I think we will not really maintain. We might continue the momentum because, as you know, Neha, what has happened during COVID times, a lot of small regional companies found it very difficult. And they would perhaps not come back. Also what happens, like doctors will now be more selective with whom they meet and all. So the smaller companies could get squeezed out. So you will see that not only Alkem, but companies with large brands, with good brand equity, they all have gained market share. And I don't see that reversing any time soon.

Understood. My second question is on the U.S. business. So there seems to be some moderation quarter-on-quarter. Could you give us some color? Was this because of higher pricing in some product? Or what was the reason?

Yes. Mr. Ghare, can you please take that?

Yes. Thank you, Sandeep. So Neha, answer for that, obviously, is that the summer months or quarter 2 has always been a little low for us. So that's one of the reasons. And the second reason, of course, is we had more launches in quarter 1 and perhaps in the quarter 4 of previous year, which kind of carried forward in quarter 1. And unlike that in quarter 2, we had less number of new launches. So -- and this price deflation is always there to contend with in the generics business. So a combination of all these is -- resulted in small degrowth on our sequential [indiscernible].

And Amit, if I may ask, what is our expectation for launches in the second half? How many did we do in the first and what's your expectation in the second half?

Right. So first half, we have done 7 launches, 6 or 7 launches, I don't know the exact numbers. I'm sorry about that. And during the last call, if you recall, we had given an advice that this year, we will end up doing double-digit launches. So I'm expecting between 10 to 12 total launches during the fiscal year.

Understood. Okay. So a similar number of launches in the second half.

Similar number of launches, that's first half and the second half, yes.

The next question is from the line of Kunal Randeria from Edelweiss.

Maybe just going back to the [indiscernible]

Mr. Kunal Randeria, we are not able to hear you clearly. Your voice is breaking.

Sorry. I hope this is better now.

Yes.

Yes. So Sandeep, even before the COVID hit, your other expenses, excluding R&D, have been growing only in single digits in the past 2 or 3 years. So now with this COVID-related savings, would it be fair to assume that in the next year or 2, these expenses will grow in single digits in absolute term?

Sorry, I didn't understand your question. Which expenses are you talking about, sir?

Other expenses, excluding R&D.

You weren't clear.

Sorry to interrupt. Kunal, your voice is breaking again.

Sorry. So the other operating expenses excluding R&D.

Yes. What about it, sir?

So yes, so in the last 2 or 3 years, we have seen that your other expenses have increased only in single digits. Now with COVID-related savings, would it be fair to assume it will increase only in single digits in the coming years ahead?

Yes, I would think so. There's no reason for it to grow more than the historic and no relation with COVID, I think, [indiscernible]. So I think that's a fair assumption, I would say.

Right. But then, Sandeep, then would it be fair for us to assume that the guidance -- acquisition guidance that you had given of reaching 20% plus you'll over [indiscernible] this by a fair margin in the next year or 2?

What do you mean by a fair margin?

No, I mean if your revenues are growing double digits and expenses are growing in single digits, and you could probably maintain a 24%, 25% kind of a margin -- sustainable margin trend.

For the year?

Yes, in the coming year, maybe next year or in the year after that?

No, I don't think so. That would be very easy to reach a 25% margin on -- annually. That's a little too much, I think. But yes, 22%, 23% is something more realistic, I think.

Right. Right. And my second question is on the U.S. business. So we have a fair base now around $320 million. So I'm just wondering, what are your thoughts on the profitability of this business going forward?

So what do you mean, sir, like what are you wondering?

No, sir, I'm just thinking, your profitability would be maybe single digits today. How do you see yourself 2 or 3 years down the line as far as this business is concerned?

We have already said, we don't give out profits of U.S. business. But broadly, I will reiterate our aspirations. Return on capital, we kind of have our target to reach 15%. Of course, we are not there, anywhere close to that. But I think in the next 2 to 3 years, we have a very decent shot at reaching that. So I continue to believe that U.S. is a large market, and the return on capital will not be as good as India, but it will still be decent.

The next question is from the line of Abdul Puranwala from Anand Rathi.

I have 2 questions specifically on your India business. My first question is related to the API supplies, which you would normally get from a third party. Are we seeing some price increases there or the material costs going significantly up because of the outbreak of COVID? And I mean, any thoughts on that? And second would be on -- what would be your [indiscernible] derived from the India business, which would be dedicated towards hospitals? And when we say that the second half will be quite well, are you factoring the footfalls? Or patients should improve in second half, and that makes us confident about the revival in India business?

Yes. Okay. On the RM prices, we don't see a major issue. If your question is on quarter 2, the RM prices have not kind of moved up overall. We had some issues in quarter 1, some kind of tension because of India, China and KSM issue. But quarter 2 was pretty stable. Your second question of what percentage of business comes from hospitals, we don't have it, but we can pull it out. But just to answer you, the reason I said that H2 will see a revival was not just because of hospital. A large part of our business comes from OPD and GP. There, we are seeing footfalls increase and unlocking happening. Therefore, that was the reason why we're being optimistic, not so much hospitals. But yes, hospitals would also open up, operations will start happening, and we have a decent antibody injectable portfolio. So all that will also start increasing. But it's not driven mainly just by hospitals. It's -- we have a very general practice as well.

Sir, just to follow up on my first question related to the raw material prices. So I mean, can you share some outlook of how the second half or maybe FY '22 would be? So I basically relate this with the higher inventory level, I mean, you guys have on the books currently. I understand in the previous questions, you have answered this partly, but just wanted to understand from a raw materials perspective.

In FY '22, I think if I try to answer it also will be wrong because in a very dynamic world, socio-politically, so I can't comment for something that's going to happen, say, 12 months down the line. But for the next few months, I don't see any major issue. Now of course, we have -- if we continue to have certain issues with our neighbors and all that, then we could again see some issues happening. But internally, we have kind of procured more of planning to have a decent raw material inventory because in case things go bad, then we'll have certain things. So I honestly cannot give you a very good visibility. I mean my knowledge is as good as anyone. But things are not as volatile as it was, let's say, a year back.

[Operator Instructions] The next question is from the line of Shrikant Akolkar from Ashika Stock Broking.

So I would like to know about one of the products in your pipeline, Dimethyl Fumarate, where we have a tentative approval and that we have seen some of the launches by the competitors.

Yes. Mr. Amit Ghare, please.

So we received the final approval, and we've launched the product also in the market.

All right. And what would be the market share at the moment?

No. Unfortunately, we haven't garnered too much of market share on this product.

Okay. All right. The other question is on the export incentive impact. So I know that this quarter probably was less impact, but how should we look at the next quarter for the export incentive?

Yes. Mr. Dubey, please.

Yes. So yes, you are very right. Actually, next quarter, there is a capping of INR 2 crore on export incentive. So obviously, it's a material amount in our financials. So that impact will be there. But after that, actually, we are also not very clear how government is going to compensate. So as you know, roughly 3.5% or 4% kind of export incentive is always there on exports. And so that impact is there. Next quarter, I think roughly around point -- 75 basis point or 80 basis point impact it is expected.

Okay. Okay. And the last question is on the biosimilars in the Indian market. So where have we reached so far in the launches of key biosimilars?

Yes. I think key biosimilars will be start launching in quarter 4 of this financial year. If all goes well, we'll have 3 approvals in the biotech space. Two of them will be peptides, which for me are also biosimilars -- or biotech, actually. And all of them would be a mAb. We will launch these from, say, Jan to March, in between.

Next question is from the line of [ Shanti Patel ] from SP Investments.

Sir, I just wanted to know, what is the return on capital employed and return on equity today? And are you planning to stick to that in the next 2, 3 years also?

Mr. Dubey? We didn't catch your last part. What...

What is the return on capital employed...

That we got...

And return on equity today? And are you going to maintain the same or increase in the subsequent 2, 3 years? And what is your plan?

Yes. Understood. Mr. Dubey, you could answer the first part.

Yes, yes, yes. So return on capital employed, yes, of course, now it is somewhere close to 20%. And I think we'll keep on doing improvement only going forward. There is no question of why we should not maintain that. Definitely, we'll maintain that, and in fact, we'll improve.

And what about return on equity?