Alkem Laboratories Limited (ALKEM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and a very warm welcome to the Alkem Laboratories Q1 FY '22 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. Thank you, and over to you, Tushar.

Thanks, Ali. Welcome to Q1 FY '22 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 Diseases; and Mr. Gagan Borana from the Investor Relations. Over to you, Gagan, for the opening remarks.

Thank you, Tushar. Good evening, everyone, and thank you for your joining us today for our Q1 FY '22 earnings call. Earlier during the day, we have released our financial results and investor presentation, and the same are also posted on our website. Hope you had a chance to look at it. 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 everyone 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 today's discussion may include forward-looking statements and the same must be viewed in conjunction with the risks 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 gone by and strategy going forward. Over to you, sir.

Thank you, Gagan. Good evening, everyone. So without further delay, I'll get into it. We have had a strong start to the financial year with total operating revenues growing by 37.1% year-on-year, EBITDA margin coming in at 21.7% and net profit after tax growing by about 11% to INR 468 crores. During the quarter, we also generated healthy cash flows, which has helped us further strengthen our balance sheet. And now we have a net cash position of INR 980 crores as on June 20, 2021. Talking about our India business, it registered a growth of 30 -- sorry, 65.3% year-on-year during the quarter, which was majorly driven by strong volume-led growth in acute therapy. Even adjusting for the low base of last year, the company delivered a robust growth over quarter 1 FY '20 base, which was more of a normal quarter for the company. Moving to international business. Our U.S. business reported a sequential growth of 11.2% year-on-year. Decline of -- and a decline of 9.3% in the quarter. During the quarter, we filed 2 ANDAs with the U.S. FDA and received 5 approvals. Apart from the U.S., the international markets delivered a strong year-on-year growth of 56.4%. Tracking our progress in the biosimilar segment, I'm happy to share with you that last month, we have received market authorization for 2 more products for India market. We will soon be launching these 2 products, taking the total of 3 product launches in India from Enzene platform. We have also signed a few important licensing and supply agreements in the biotech space worth INR 100 crores. They are based on milestones going forward with global pharmaceutical companies to monetize the product pipeline globally. In terms of regulatory status of our manufacturing facilities, St. Louis facility was inspected in June 2021. And post the inspection, we received 2 observations. We have already replied to the U.S. FDA with a corrective and preventive action plan to resolve these observations. Apart from St. Louis, all other 5 manufacturing facilities supplying to the U.S. markets have an EIR as on date. Our new manufacturing facility at Indore is awaiting pre-approval inspection by U.S. FDA. Also recently, we had a remote and virtual U.S. FDA inspection of a bioequivalent center at Taloja, which we successfully closed without any observation. With this, I would like to open the floor for Q&A. Thank you very much.

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

Congrats on good numbers. Just on the sales growth outlook, especially for India business, given that it's a very high growth, how do you see the rest of the year panning out for you?

So Yogesh, you can go ahead.

The first 2 months certainly were supported by COVID and all that stuff. So it was a very healthy growth. But now -- yes. So with now industry settling to around 11% to 12%, we expect that balance 9 months and by end of the year, we should be in high teens. This is what is our projection by March.

Okay. You mentioned COVID there so, I mean, apart from vitamins, which is indirect COVID use, did you have any other COVID products?

No, no. No. We don't have anything antiviral or anything to do with the COVID, except for multivitamins, A to Z, yes.

So it's all COVID portfolio, right?

It's all COVID portfolio.

Okay. And 2 quick ones for Mr. Rajesh Dubey. On the -- one is on the gross margins. It seemed a little low despite a strong growth. Are there any one offs, if you can explain that? And secondly, on the free cash flow and net cash flow for the quarter.

So Prakash, I will take your first question, that is gross margin, yes, the gross margin in this quarter. It is, I mean, one-off. And that one-off is -- we have extended our provision related to near expiry. If you recollect in Q4 of last year, we revised our policy for taking provision for near expiry from 6 months to 12 months. And that was 1 quarter where we took a sizable near-expiry provision. When we are taking provision, we conclude or we estimate we'll not be able to sell this product at normal price. And -- but possibilities are there, it will get realized also. But right now, we expect we are not going to do that. So some of the inventories, if it's all due as our policy within 12 months sales-like period, and that also is considered. So I think definitely, we see this as a one-off because going forward, then, again, it will come in our normal cycle of 12 months. So this time, actually, NRV provision and the year expiry, if we put more this together, so definitely, it is going -- it is impacting our margin by 1.5%. And -- yes. I think that is the major reason behind it.

And free cash flow and cash flow from operations?

Yes. So we have free cash flow of INR 981 crore as of 30th of June. In this quarter, we generated more than INR 450 crores free cash just on the year-end. If you want some guidelines, we'll be crossing INR 1,000 crores.

So INR 450 crores is after all the CapEx and working capital, INR 450 crores?

Yes, yes.

The next question is from the line of Nithya Balasubramanian from Bernstein Research.

So in India, I presume other than the VMS portfolio, your anti-infectives portfolio, azithromycin and doxycycline, et cetera, would also have seen a benefit because of Wave 2, is it possible to strip out the growth from those kind of products and tell us what's the true underlying growth of your base portfolio ex-COVID?

Other than -- COVID, in fact, didn't really impacted our core portfolio. So other than multivitamin and all, yes, there was, in fact, an impact on anti-infectives, but the anti-infective also grew because this time, the lockdown was not for patient and doctors. The patient flow was almost normal. So that's the reason. Because of base effect also, we got a high-growth and because of patient flow also we got a good growth. So of course, in the coming quarter, we should be coming back to, as I said, in a normal growth trajectory, we projected around the high teens in all.

Got it. In terms of your critical care portfolio, how is the recovery between like in that part of the portfolio?

We -- as far as -- if you're asking me, portfolio, which is for critical disease management, then we are mainly into hospitals, okay? And which are injectables. So our critical care portfolio is largely major antibiotics like meropenem and all. Other than that, we don't have any cardiovascular portfolio, which is used in critical care management. So as hospitals are opening up, COVID, there were very high uses of high-end antibacterials. So there were some traction we have seen in injectables. But in the coming time, as elective surgeries opens up we XXXXXXXXXXXXXXX a similar trend.

Understood. And one on U.S., I think a couple of calls earlier, you had guided for about 15% to 16% growth for the next 2, 3 years, driven largely by new launches. But we are seeing the growth kind of cooling off a little bit, though Q-o-Q still looks healthy. Anything -- do you still stick to that guidance? Any color on why the Y-o-Y growth wasn't as you would have expected?

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

Sure. Yes, I agree with you, the broad guidance still remains broadly what we had given. And year-on-year quarter growth, of course, there has been a degrowth. A couple of reasons obviously affected. One was, obviously, we had a lot of -- a strong quarter last year, mainly because of some of forward buying done by our customers, a bit of stockpiling and panic buying as well affected that. The reason -- so that's one of the reasons. The other reason has been some loss of market share and, obviously, price deflation, which has sort of depressed this particular quarter compared to 12 months ago. But our broad guidance remains similar, and we are looking to grow at those numbers.

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

Congratulations on a good set of numbers. So would it be possible for you to provide some color on how the growth in India would be within acute and chronic and the trade generic segments?

I think broadly, we kind of not give therapy breakup, but I can tell you that acute grew -- outperformed growth overall in spite of a high base. And chronic and trade generic both grew like very substantial, above 50%, both of them.

Understood, sir. And my second question is on the U.S. business. So recently, we got an approval for a dual test. So any color on that? I understand the product size is not very huge, but since you own exclusivity and you are maintaining your guidance, would you -- [indiscernible] a similar [ SBU ] of opportunity play an important role in maintaining our guidance for the U.S. business?

I think I will let Mr. Ghare come on that. So Mr. Ghare, over to you.

Thank you, sir. Yes, we have launched generic Duexis famotidine and ibuprofen. And obviously, we will look at acquiring as much market share as we can. Please remember, this launch is at risk, we are still mitigating in the upper circle. But beyond that, I would not like to comment anything further at this time.

The next question is from the line of Nimish Mehta from Research Delta Advisors.

My question is, again, related to the U.S. market. Can you tell us, we have -- we are likely to launch this product Pradaxa, which is Dabigatran at the end of this calendar. So if you can let us know as to whether we will be having 180-day exclusivity on that? Or -- and will it be a meaningful product for us?

Mr. Ghare, please.

Yes, we will launch this product. I'm not sure that it will launch in December or it has been pushed back by 6 months because of pediatric exclusivity. So I don't want to comment. But certainly, we'll be the first to launch the product in the market. We will have a 180-day exclusivity. The first launch and the 180-day exclusivity will be shared amongst all the first filers. And in terms of whether the product will be significant for us or not, I would not like to give any specific guidance on any particular product in any case launch is a few months away. But we will obviously try our best to get commensurate market share.

Understood. And given that we have had 2 high-value launches that is generics mesalamine and the [indiscernible] that we just mentioned, which I would assume that it is very high margin, given the recommendation. Would you not think that the lower gross margin guidance that we had given last quarter needs to be revised upfront? Any thoughts on at that will be helpful.

Yes so...

Sandeep, go ahead. Go ahead, sir.

I mean, the question is for you, rightly. Both products are for U.S. So go ahead, sir.

Okay. Sorry for that, Sandeep. Look, the overall guidance given by CFO, obviously, he will explain. But generally, the new product always comes with a better margin profile. And when we look at our overall product mix, we obviously factor that. So certainly, the new products will come at a higher margin. I guess that's all that I can answer on this question.

Yes. So yes, if CFO can tell me about the lower gross margin, will that be maintained or we think it will improve [indiscernible]?

Yes. I think our guidelines is not on lower side. Our guidelines, it was 60% to 61%. Of course, we are not factoring product to product, it's a basket gross margin guideline. There are so many factors, which affects margin and particularly gross margin. But we strongly believe what gross margin we have given, we are going to work towards that. In this situation, even this gross margin, we might feel a little bit pressure kind of situation because of API prices increasing. But all [ blames ] put together, we feel we'll be there what guidelines we have given of 60% to 61%. Is this okay?

Yes. This helps. And yes, obviously, if you can also comment on EBITDA margin, that will be even more helpful.

EBITDA margin, our guidelines, it was from 19% to 20% for this year because our endeavor was to improve by 100 basis points after a year. So we remain with our guideline, looking to better quarter 1, we believe 50 to 100 basis points, we'll try to improve on that.

How much, sorry? How much will you try to improve? I'm sorry.

50 to 100 basis points, we'll try to improve.

50 to 100, okay, understood.

Just to clarify, last year's guidance was 19 -- I mean, last call, we guided for 19.5% to 20%. So this 50 basis point improvement is over the guidance and not be...

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

First on the trade generic business. How has this business momentum been over the last 2 quarters? We did see some pickup during the pandemic. Has that -- has the growth rate for the business rose? And related question, we are seeing more players enter the trade generic segment. Does that make it difficult for us to continue to grow this business at double digits that we've been seeing over the last few years?

Yes. Yes, I'll take this question. So there's no -- so to answer you, trade generic continues to do at a very healthy pace, and the growth is not slowing down. And this question specifically of large presenting trade generics, I think it was expected because this is kind of growing very, very handsomely for the last few quarters. But you said, can -- will this double-digit growth continue? The answer is emphatically yes. Because keep in mind, we don't only grow in double digits, we grow in very high double digits. So achieving double digits and maintaining that over the next few years, we don't see it as a challenge at all.

And what will drive this growth, Sandeep, despite the competition in your view?

Sorry?

What will drive this double-digit growth, the strong double-digit growth that we are guiding to despite the competition that you will see?

Sure, sure. So I think a lot of people underestimate trade generics business, and that's also a franchisee and a brand business actually. It might seem like an oxymoron, but it's not. So the relationship which we enjoy with the trade generic -- trade channel is something which can't be replicated overnight. It takes many, many years. We have reached -- where we have reached in 20 years, didn't happen overnight. So all the best people will have come in, but they will also take the time, ma'am, and we got to kind of appreciate that. This is a tough business, actually.

Understood, understood. And in your opening remarks, Sandeep, you mentioned licensing -- [ you have some ] licensing deals worth INR 100 crores with global pharma. If you could give some color on that, I didn't really catch the context of that thing?

I'll tell you that, yes. So Enzene Biotech subsidiary has out-licensed this. One of them is a mAB. It's with a European company. And that in -- out-licensing value is $10 million based on milestone and up to launch. And they have also out-licensed 1 recombinant peptide to a company in South Korea. That's around worth $2.5 million. So therefore, both of them put together, I said that it's close to INR 100 crores. And that's again based on milestones. But I think we have begin out-licensing. And I personally see a bright future for biosimilars as we go forward.

The next question is from the line of Harith Ahamed from Spark Capital Advisors.

On biosimilars, will you be able to share what percentage of our R&D status today is for biosimilars? And on the licensing of the mAB products that you have done to a European partner, what stage of development is that product? And could you give some time lines around the development and launch for this product?

Sorry. So I got your first question. Second question, maybe I'll ask you to repeat, but I'll quickly answer you. So we spend close to 12% to 14% of our R&D on biotech historically. What is your second question, sir?

So this product that you've licensed to Theramex, what stage of development is that product? Is it in clinical trials already? Or [indiscernible]...

In India, we have got approval. So in India, it's going to be launched. But yes, this is for Europe and some other countries. So that -- we are going to enter clinical stage very soon for Europe. Phase I will initiate in a couple of months, so early stage.

And then the market -- and the market formulation or patent expiries for this product will be -- what timelines?

I mean, if you launch it, that's still like 4 years away, 4 to 5 years away. Yes, yes.

Okay. And my second question is on the PCPM for domestic business. How much lower is the PCPM for the chronic segment in our domestic business? And do you expect this to catch up with the acute segment PCPM for us?

Yogesh, you can take that.

So we have some very evolved business and then we have evolving business. So for the evolved business, we have a productivity range of around INR 8 lakhs to INR 10 lakhs. And from the evolving business, we have a productivity range is around INR 3.5 lakhs to INR 4 lakhs. And the new businesses, our productivity ranges between INR 1.5 lakhs to INR 2 lakhs. Have I answered you?

Okay. Yes, got it. And then the evolved business, can you talk -- you're probably referring to our neuropsychiatry segment and...

No. Anti-infective side. Yes. Anti-infective.

Okay, okay. Okay. And then within chronic segment, the chronic therapies, would the PCPM be significantly lower versus the company-level PCPM?

Yes. Since we are almost 80%, 85% antibiotics, anti-infectives, so where our PCPM is in the range of around INR 8 lakhs to INR 10 lakhs and chronic is evolving, where we are in the range of around INR 3.5 lakhs to INR 4 lakhs.

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

So my first question is on the vitamins portfolio. So it's -- this business is growing at a very fast clip, and I think actually growing double -- almost 2x the market. Now we're #2 in India. I'm just wondering what the sustainability of this business from here on?

So see, COVID certainly has an extraordinary surge on such multivitamins, and particularly those which are zinc-based preparations. So this 3-month traction, certainly, you can't see a regular time, but they are our core products. They are our focused products. So they will sustain. They will out beat the industry group, that is for sure, but certainly not the COVID surge. So these are our core focus products, and we should outperform the market growth.

Right. I mean, sir, would it be fair to assume that maybe a quarter or 2 down the line, there could be some pressure on this portfolio as the core for high base?

No. Yes, yes, you can expect. In the first quarter next year, you can expect some pressure on these portfolios.

Sure, sure. And my second question is on [indiscernible] product that you launched in this quarter. So would it be fair to assume that you're working on other mesalamine products also? And are there any sort of launch time line that you would like to share with us?

Yes. So honestly, we don't like to talk about our pipeline. So any assumptions, I think, would not be correct. And I also would like to add that these mesalamine formulations, we all know are pretty tough. So even if we are working on it, I don't think so, we'll be in any position to tell you when -- or where, if at all it happens. So nothing right there, we want to comment.

Sure, sure. And just one more question, if I can. Can you share how the API prices are behaving now, whether it's going up or it's stabilized now? And what -- how is it impacting gross margins?

Mr. Dubey, please.

Yes. API prices, it has started going up from margin. And till mid of May, actually, we witnessed a major spurt in selected API prices. But after that, it started softening, and it has not come back to normalcy. But I think the major it has come within range. And slowly, we expect it is going to be normalized. So now trend is not upward. Either it is softening or stable kind of.

So sir, is it yet to impact our numbers or has it already impacted in this quarter?

In this quarter, some little bit impact, it has come. But since -- as I said, prices started showing upward trend from April and May. So we procure material, then formulation has happened. And now once sale is going to happen, then it will lead to our financials. So June sale, to a certain extent and very normal or very minimal kind of impact it has done. But in quarter 2, we'll be having rest of the impact of API price increase. But I think, yes, it has impacted, but it is manageable, and we are comfortable on gross margin, what guidelines we have provided.

The next question is from the line of Sriraam Rathi from ICICI Securities.

So just one question from my side. The staff cost looks very high this quarter. So I mean, was there any one-off in the quarter? And are there any specific increase that has happened?

Staff cost is a little bit up. So staff cost, we have a few one-offs in this quarter. One is, in fact, it's on account of gratuity and leave encashment liability provisioning. And this has happened because we revised basic of our employees. Traditionally, it was 37% of the CTC, but new wage bill is expected. So we decided to true-up to a certain extent. So from 37%, we increased to 42%. So that one-off which has come in this quarter. And that is not going to remain going forward. Second, staff cost, it looks on a high side because we had a very good quarter on our revenue. So we paid the incentive. If you are comparing with last year's quarter, it was definitely incentive percentage-wise and achievement-wise also, it was very much compromised this quarter, since we had surplus. So incentive percentage it has increased as well as quantum also it has increased. So putting this 2 together, it gives an answer -- major answer to your question of increased employee cost.