Alkem Laboratories Limited (ALKEM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Alkem Laboratories Q3 FY '21 Earnings Conference Call hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Tushar Manudhane from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.

Thanks, Malika. Welcome to Q3 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, President, Chronic Division; and Mr. Gagan Borana from Investor Relations. Over to you, Gagan.

Thank you, Tushar. Good evening, everybody, and thank you for taking out time and joining us for Alkem Laboratories Q3 and 9-month 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 the call is being recorded and the call transcript will be made available on our website as well. I would also like to add that today's discussion may include forward-looking statements and the same must be viewed in conjunction with the risk that our business faces. At the end of this call, if any of it query remains 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 year gone by and strategy going forward. Over to you, sir.

Thank you, Gagan. Good evening, everyone. Quarter 3 of FY '21 has been a healthy quarter for the company, with growth returning in our India business. Compared to the decline in the first half of the year, our India business registered a growth in quarter 3 with significant recovery in our acute portfolio. In chronic areas of cardiac and anti-diabetes, we continue to grow ahead of therapy growth rate and improve our standing in the representative markets. Our trade generic business, which has been a strong driver of our growth in recent quarters, continues to grow at a robust pace. In the recent calls, I had mentioned about launching biosimilars in India market from our own R&D lab and manufacturing facilities at Enzene. On this front, I'm happy to share that we have received the marketing authorization from DCGI for our first product from Enzene. And we look forward to launch this product soon in India. Moving on to international business, which grew by 7% during the quarter and 18% for the 9 months of this financial year. Our U.S. business has grown well in the financial year so far, with close to 20% year-on-year growth. During the quarter, we received10 ANDA approvals from the U.S. FDA, which takes the total tally to 16 ANDA approvals this year. This bodes well for our future growth in the U.S. market, which has largely been driven by new product launches. Apart from U.S., amongst other international markets, Australia and Chile registered healthy growth during the quarter. We continue to judicially invest in R&D, which is an important pillar for our growth. This quarter, we have invested close to INR 134 crores in R&D, which is 11% higher than what we had invested in the same quarter last year. We now have 149 products filed with the U.S. FDA, out of which we have received approval for 102 of them, out of which, 14 are tentative approvals. In terms of regulatory status of our manufacturing facilities, all our 6 manufacturing facilities applying to the U.S. market have received EIR as on date. Our new manufacturing facility in Indore is awaiting pre-approval inspection by U.S. FDA. We continue to invest in our people and technology to ensure our facilities comply with the global regulatory cGMP standards. Talking about some of financial highlights during the quarter gone by, the savings in marketing and other expense during the quarter, coupled with our ongoing effort towards productivity improvement and process optimization has helped in EBITDA margins expanding by 200 basis points to 22.8% compared to 20.8% last year. Also during the quarter and 9 months of the financial year, we have shown significant improvement in operating cash flows. This has helped us further strengthen our balance sheet with net cash position of close to INR 800 crores compared to net debt at the start of the year. Going forward, with the reduction in COVID cases and vaccination drive across the globe, I'm hopeful that on-the-ground situation will further improve, and there would be a pickup in new prescription generation, which should help the pharma industry, a comprehensive product portfolio, strong execution team and continuous investments in R&D and compliance should help us deliver value to our patients and our stakeholders. Thank you for listening.

Can we move on to Q&A?

[Operator Instructions] The first question is from the line of Damayanti from HSBC Securities.

Sir, my question is, now India broadly back to pre-COVID level in terms of operations, how do you see operating cost trending ahead? And earlier, you were very conservative in terms of our margin outlook. So do you believe there will be upside to what you had earlier anticipated in next year or so?

Yes. Thank you for your question. So I think on the India market, Yogesh can talk about on the margin front, I just like to answer your question. So your question, I think, is on the margin expansion. I would mention that this year was a kind of abnormal year. But nevertheless, I think what we guided even 1 year back to all of you all that every year we do see improvements coming in, in the operating -- operations of domestic and in international. And in the domestic and particularly, you know that chronic is firing in all cylinders, and productivity is very less compared to acute, it's 1/3. So that growth will happen, and we foresee that margins would expand in the next year as well overall basis. So this year, margins might be higher because of lower marketing cost. But that 200 bps EBITDA margin expansion, we stand by that, what we had mentioned.

Okay, sir. And in terms of pickup in India part, it's all back to a pre-COVID level, right? But cost might still see some lower level because of all the extensive measures which you had put in place?

Yes. So rightly said by you that overall business on a mystic front, the industry is almost back to pre COVID growing at around 11%, [indiscernible]% to 11%. So operating cost, which, if I understand you rightly, you're talking about marketing operating cost, then there will be some permanent changes. So that will remain relatively low compared to the previous year. So yes, so there will be a marketing cost optimization, which will sustain beyond COVID also.

Okay. That's helpful. And my second question is on the U.S. part. We have done reasonably well in last few quarters, and we are almost at INR 300 million kind of base. So how do you see this business, say, like 3 to 4 years from now? And how do you see Indore plant scaling up once FDA inspects and approve the plant?

Amit, Mr. Amit Ghare, can you take the question, please?

Sure. So the first part of your question, I think last quarter or the quarter before, we had broadly guided saying we expect our U.S. business to continue to grow strong, certainly in double digits, lower double digits, obviously, about 15%. And that is the commitment that we have sort of made to ourselves. And we are very clear about that. This is where we'll grow. So that's the kind of CAGR that you can really expect. Now as far as indoor facility is concerned, it's just one of the other facilities for us. Of course, there are some fiscal benefits associated with it. And as and when it gets approved, we'll obviously optimize our production.

Okay. Again, that's helpful. And we are good in terms of current plant catering to our growth need, right, without putting in any new CapEx?

Yes. If you're asking from capacity perspective, we are very well poised right now.

The next question is from the line of Ashish Thavkar from Motilal Oswal.

Sir, if you could comment on our anti-infective space in India, how are the Penins, Taxims, IVs, how are these -- this particular therapy segment behaving now?

Yes. So antibiotics, especially in the acute, I mean acute overall antibiotics, they still have to recover and go back to pre-COVID days. So I think we do see some growth, but we have not reached pre-COVID days yet.

Yes, the primary reason why it is taking so long to pick up, would that be because of people not following in? Or do you feel there's somehow there's still lower footfalls in terms of visits to the doctor?

I think both, ultimately, both the schools and all that are shut, going out is still curtailed -- it is still coming up and hygiene has gone up. So I think combination of these factors are kind of inhibiting that growth, which I think is good. I mean, it's good for the nation.

Yes, obviously, yes. A related question would be on -- once everything settles down the virus issues and all, even post that, do we expect trade generic business to grow as fast but not as fast as last year, but still better momentum? Or you feel that the branded business will take over?

No. So I think there's no question of branded business taking over or other business taking over. I think this year, trade generics had a good run, not only for us, for maybe the large players as well because trade generics could reach out to markets where branded business was struggling this year. So I think this was a great year. We do not think that it can repeat again next year. So branded business will be back and the growth percentage of trade generics would come down.

Yes. So one of your competitors trying to shift the trade generic part of the business to its consumer division. Do you feel that, that creates an opportunity for you in the sense that an extra space is created?

It does in a way, but they also know what they are doing. They are extremely good. They are #1. So we don't underestimate them. We don't think they are doing anything wrong. It might create some disruption in the short term, but nothing to get too excited about and think that it's going to be something great for us.

Okay. That's helpful. Just one more from my side. On the U.S. side, whatever new launches are happening. So in your assessment, would those new launches happen in the first wave now or it's too early to say?

Yes. Mr. Ghare, maybe you can answer that.

Sorry, I missed the question. What did you say? What was the first?

No, I was alluding to the fact that whether new launches would happen in the first wave, or it's too early to comment about it?

You mean first wave as in day 1 or day 181? Well, obviously, the aim is to be in the first wave in the market always. But we don't always get it right. So to that extent, whatever opportunities come our way and whatever we are able to launch in the first wave, that is always welcome.

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

My first question is with the trade generic segment. So how would this business as a whole would have performed in Q3?

It has outperformed the branded business. But exact percentage, I don't think so we disclose those details, but it has outperformed our branded business significantly.

Sure, sir. That's helpful. And second question is on Enzene Biosciences. So I believe there was 1 biosimilar approval, which they have got, I mean, an approval from DCGI.

Correct.

So what would be the commercial plans and the size of the opportunity, which we could eye for this particular product?

This product, we're going to launch any time through Alkem. And we already are selling the molecule. We were doing it from some other company because Enzene was not ready. So this is already a INR 15 crores rand for us. The market size of this brand, I cannot recollect, but I can get back to you. Overall opportunity which we are chasing for domestic market in the pipeline of Enzene is close to INR 2,000 crores. Obviously, this plays out over the next 3 to 5 years. But yes, so that is in general for India market size what we're achieving.

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

Amit, on the U.S. business, given that we've got 10 approvals this quarter, is there any specific reason why the revenue was flat quarter-on-quarter? Did we see any price adjustment, inventory adjustment, et cetera?

Yes. So the number of launches for the entire 9 months still continues to be about 7. So obviously, that is the reason revenue is obviously a direct function of launches. We are in the process of gearing up for our launches. And if you recall, we had made a commitment again that this year, we will have between 10 to 12 launches, and we are very well poised for that number in the entire fiscal year.

Understood. And my second question is on -- now that we have about 40 ANDAs approval, our filing seems to have slowed down. I mean we didn't file anything this quarter. Do we need to pick up the filing to be able -- to be able to maintain our growth momentum, the 15% growth CAGR that you're talking about?

Yes. So I'm taking that question. Yes. So I think please keep in mind that 1 quarter should not form a basis of judging anything. For example, we got 10 approvals this quarter. But does not mean we'll get that many every quarter in approval. Similarly for filing, we have always maintained, we'll file close to 12 to 15 ANDAs, and that's the run rate, we are confident we'll achieve. And that's what it's going to be. So keep in mind that growth, of course, depends on the number of ANDA filings, but it also depends on the quality of ANDA finding. And keep in mind that now we have to balance our biotech R&D also. So keeping all this into consideration, I think 12 to 15 is something we are more than happy to find in the next few years, every year.

Historically, this number used to be close to 20. We have even done 23, 24 filings in the past. You're saying that...

That depends how you do it. And some years, it would be higher, as you said. But we have always maintained, that's what we want to do, and we will be doing that. 12 to 15 is something which we have maintained all throughout.

Understood. My second question...

But the averages will be 12 to 15.

Understood. And my second question is on the India business. If I were to look at our acute portfolio, while I understand that it's probably not gone back to pre-COVID level. Would it be fair to assume that because of the disruption in the market, we have been -- probably been able to gain more share versus the smaller players given the strong brand business? If you could give some color on how probably the disruption has helped us?

Yes. So we have got market share, gained market share in most of our large bands. Whether it is Clavam, Pan and pantoprazole, most of them, we have gained market share map. So that's a fair point. And going ahead also, we are looking to restructure our acute business in the next year where we will be further going for market share. It's a good point that where I should mention that we are looking at some small expansion also for the acute segment in the coming financial year.

So, by restructure, you mean add more MRs. Or...

It's a combination of adding few people, not too much. It's a combination of shifting brands from one SBU to the other. So it's de clutter, we can focus. It's a kind of combination of all that. But to answer you, we have gained market share, and we further want to accelerate that market share. Because as you know, market is not under our control, the growth rate. But yes, gaining market share is something which we can control far better.

The next question is from the line of Rashmi Sancheti from InCred Research.

Yes, thank so just a little more clarification on trade generic segment. I think in the first half, it contributed roughly around 25% to the India sales business. So are we at the same level in this quarter also? Or it has dropped to around 20% sort of?

We are close to 20%, 25% in between that. Exact numbers, we don't give, but yes, that's a good estimate, ma'am.

Okay. And sir, on overall industry in terms of anti-infective or antibiotic therapy, is it that the hospital demand has not yet picked up? I mean, is it that it is still -- there are a lot of delay in the surgeries and everything? I mean, it is not picking up. Or it is taking a lot of time? Because earlier, we thought that in the second half of the year post unlocking, things would pick up in surgeries and everything. So how is it overall?

So, I think it has picked up, but it has not picked up the way we thought, and it's not gone to pre-COVID days. And yes, in hospitals and higher injectables, higher antibiotics, those things are pretty slow right now.

Okay. But do you think that the pickup would be fast in FY '22?

I think -- I do think, but time will tell, but I think there are good reasons that we will be going back to the normal in the next few months.

Okay. And sir, lastly, on operating margins, FY '21 being exceptional because we saved a lot of cost. So you said that there is a scope of expansion every year. So on this high margins, you are saying that FY '22, there would be still scope on a few basis point expansion?

Yes. Yes, I understood your question, ma'am. So I said that this year is not kind of a very normal year. So obviously, this year, we should not consider and think that will further go up from this year. But if you remember last year, EBITDA margins, I think, was around 17.5%, if I recollect. I maintain that we'll go up, let's say, by 200 basis point every year. So I think if you keep that into guidance, next year, we could expect that we'll be close to 19.5%, 20% margin. Just taking that guidance, which I told last year.

Okay. But you also mentioned that there would be a lot of cost savings, which will be continued in FY '22 also because of the digitization initiative and all?

Yes, yes, numbers which you hit this year. I wish I could do that, but I cannot.

The next question is from the line of Nikhil Mathur from AMBIT Capital.

So, my first question is on the input cost environment. Can you throw some color on how the input cost environment has been in FY '21 versus FY '20? And do you believe that there could be any sharp movement with upside or downside, in the coming 3, 4 quarters?

Nikhil, you are not very clear. Can you repeat the question?

Is it better now?

Yes, it is better.

Yes. Sir, my question was on the input cost environment from Alkem's perspective. Can you shed some light on how the input costs have shaped up through 9 months FY '21 versus FY '20? And what would be the outlook for the coming 3, 4 quarters?

So, Nikhil, I think you are asking for input cost.

Yes, yes.

See, I think as far as availability is concerned, we are quite comfortable. And if your question is on cost, I think we don't see any abnormal, yes, 1 or 2 API, it always moves up and down. But there is no abnormal kind of pressure on cost front also. So we are quite comfortable on API procurement as well as on cost also.

Okay. And just to question tie to this from a 2 to 3 years standpoint, are there initiatives, whether it is product launches or focusing on procurement efficiencies or a bit of backward integration or any strategic actions being undertaken to improve business mix at a sustainable level?

Yes, we -- Nikhil, we always work on optimization of our input cost. We have alternate vendors who are seeing better negotiation, optimization in yield, all this kind of exercise, it goes on. It goes on continuous basis. So yes, if you're hinting is somewhere towards backward integration, I think some small part, yes, important API. Definitely, everybody has to think, and that's what we are also doing. But leaving that apart, I think we have a complete plan and that exercises goes on. And we don't see any reason to have any issue on this front.

Okay. And just 1 final question. On the biosimilars pursued in the domestic market, what can be the challenges for Alkem to scale up in this particular business? But the reason I asked this question is that we don't really see a lot many large-sized companies who are investing in biosimilars from a relative market standpoint, being very [indiscernible] the domestic market. So what is different that Alkem is kind of doing here? And what kind of the challenges that might trouble you in terms of scale, operating losses for a comparable period of time, anything that you can share on?

So good. That's a good question. So we have started this from India market, but ultimately, we'll have to take our products to RoW. And the final destination is obviously Europe and U.S. that's a 5-year plan, but the vision with which Alkem or any other company also perhaps are doing biosimilars in India, is to take it global. So if you -- so that's point number one. Just to make that thing very clear. Second, I think what challenges Alkem might face to commercialize it. I think point number one, some of the biosimilars are into oncology space, where we are not very strong currently. So we don't have the same strength, for example, which we have in antibiotics or with the GP franchisee. We don't have that same equation there. So I think that is something we should have to build. But just keep in mind that Enzene is not -- I mean, a biotech -- we are open to even work with third parties. It's not necessarily just ourselves for our product. So that's what I want to tell you. If there's something specific, I'll take your questions.

The next question is from the line of Prakash Agarwal from Axis Capital.

Sir, I mean, I missed the opening remarks, but could you split the growth of India business in Rx and Gx?

So normally, Prakash, you know we kind of don't give those numbers specifically, but I know I mentioned in all the questions, Prakash, that trade generics business growth rate was far higher than our branded business in India. Yes.

Okay. Understood. And on the -- there's a sharp uptick in other income. So I totally understand the cash would have gone up. But is there anything else apart from interest income, anything from real estate investments, which were in the past has monetized or?

I think our CFO will take that question.

Yes, Prakash, other income is on a higher side. That's mainly on account of offtake of our -- one of our brands, that is Magma. And there was a sale of asset also in that. So that amount is there, of course, real estate is not in that. Actually, as you know, real estate investment, it is valued on fair valuation. So yes, some liquidation amount, it has come, but it's not any big component in our other income.

And asset monetization is with respect to what, sir?

Selling of our brand, we sold a brand to Abbott.

Okay. Okay. And what would be the cash position now? I mean, we turned net cash last quarter, if I'm not wrong?

So currently, we are somewhere close to INR 780 crores or INR 800 crores. That is our cash position. And you know, Prakash, as on 31st of March, we were negative of INR 335 crores. So in this 9-month period, cash generation, it was more than INR 1,000 crores.

So what I understand is you had INR 300 crores net debt. Now you have turned INR 700 crores, INR 800 crores net cash?

Yes, your understanding is correct.

Okay. And what is the CapEx, sir, in this 9 months?