Caplin Point Laboratories Limited (524742) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call of Caplin Point Laboratories Limited, hosted by Haitong Security. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amey Chalke, Pharma Analyst at Haitong Securities. Thank you, and over to you, sir.

Thank you. Welcome all to 3Q FY '21 Earnings Call of Caplin Point Laborites. From the management side, we have Mr. C. C. Paarthipan, Chairman; Mr. Vivek Partheeban, COO; Dr. Sridhar Ganesan, Managing Director; Mr. Muralidharan, CFO; Mr. Sathya Narayanan, Deputy CFO; and Mr. Vivek -- Vinod Kumar, Company Secretary. Over to you, Vivek.

Thank you, Amey. Hello and good evening, everyone. We're pleased to welcome you all to our earnings call for quarter 3 and our 9-month results. Please note that a copy of all our disclosures are available on the Investors section of our website and as well as the stock exchanges. And also, please do note that anything said on this call, which reflects our outlook for the future, or which could be construed as a forward-looking statement, must be reviewed in conjunction with the risks that the company faces. With that, I would like to hand over the floor to our Chairman, Mr. Paarthipan to take it off, please.

Good evening ladies and gentlemen. Welcome to our earnings call. At the outset, some of the key milestones of the past and present: Cash and cash equivalent stand at INR 426 crore as against the revenue of INR 796 crore. Here, the cash is more than 50% of our revenue. Number two, cash flow from operations for the last 9 months stand at INR 223 crore as against INR 44 crore in the last year. Consistent growth in top line, EBITDA and bottom line. Caplin, a turnaround story, reaching the status of second position as a wealth creator in the last decade by selling simple generics in semi-regulated markets of South America, that too in a smaller geography. This news appeared in Economic Times on December 31, 2020. And we also secured the position of 36 among the top formulation companies of India and 759th position among the 1,000 pharma companies of the world as from Torreya's report. The above message reflects how we perform as a mid-sized company compared to our peers. And then Caplin is a debt-free company, which you are aware, and there's no bad debts also in the market’s subsidiary. Now the benchmarks of present and future. Caplin is on the cusp of significant change in creating a tech architecture. The CNBC TV has featured that Caplin as the #1 company in India across all industries with regard to R&D spend as a percentage of the revenue in the last 5 years. Today, we have 2 API R&D and 2 formulation R&D and 1 CRO for clinical studies with close to 400 scientists working in our company. We have developed 25 to 30 unique injectable APIs for the U.S. market, which can also be sold in various other markets of the world. We are in discussion with an API company for acquiring their facility, [ failing ] which we’ll start our own API plant immediately. Our new API facility is not only for the injectables, but also for OSD and oncology. We have already bought the land. I think it's 18 acres in a place called Thervoy Industrial Estate, which is next to our injectable plant. Our API R&D team has already identified close to 600 APIs, which we are planning to manufacture from the key starting material to API, which means we will not only manufacture the API, we'll also manufacture the KSM and intermediates, which alone could prevent the dependence of external companies or countries. Our formulation injectable R&D has developed many simple and complex molecules, which are in various stages of registration. Further, our oral solid dosage R&D has developed more than 100 products, which are in various levels such as translation, filing and registration in several parts of South America. Our CRO is all set to file the document in February that will trigger inspection for U.S. FDA, and we are very positive that we'll get our approval mostly in 6 months from now. Now let us look at the various projects of future. We recently bought 4 readymade buildings measuring 1,52,000 square feet, which came from an auction. These buildings were constructed by a pharmaceutical company, which became an NPA, subsequently [indiscernible]. We already started the design drawings, and we are having to go for an oncology plant for tablets, capsule and injectables for regulated markets in this building. We're in fact sure of completing and starting the commercials -- completing and charting the commercials in 18 months from now. We also have plans to go for OSD and hormone plant for regulated markets and the entire funding for our CapEx will be from our internal accruals. Now let me highlight the changes of CapEx in Caplin Steriles. The second line for liquid injectables is already on stream on commercials started. Number two, currently we have sufficient capacities for liquid injectables, vials and ophthalmic production. And number three, we already received the machineries for bags, which will be installed in the current year itself. Number four, we will start our PFS section and the second line of expansion for lyo in 2022. And we also have plans to go for a dedicated line for emulsions in 2023. Once we complete the installation of all these segments, we'll probably be one of the -- this company of our size to have many segments of injectables area, which will be instrumental for a mega growth in North and South America. Now let me highlight the major opportunities for future. We now have 2 legs of the pharmaceutical business. One is the business model differentiation, in the different -- in various markets, in the private market, especially. The second one is the tech architecture to accentuate the positives to remain relevant and create a sustainable competitive advantage, both in private and tender business like any other big company. The key starting materials to formulation will create a leg up for Caplin in tender business in many countries. As you know, the tender business is very voluminous with more number of competitors. However, Caplin's end-to-end technology platform will create an advantage for many products in tender. Further, the cash flow will continue in future, which will create advantage for our company for R&D to projects, both in terms of CapEx and OpEx. This will also attract and retain relevant human resources using our unique ESOP scheme. Now let us look at the markets and registrations. Indian pharma exports to Latin America are increased by an impressive 23%, reaching $790 million in the first 8 months of April to November. This clearly shows the opportunity in our merger market. We are increasing our registration in the current markets, not only for generics, but also for unique products for brand marketing. We're also expanding to bigger geographies such as Mexico, Brazil, South Africa and others. Our first order from Mexico is being processed now. We appointed people from India for brand marketing, but also has country heads to the new markets of Latin America. So in a nutshell, our future business will be based on the following. A, focus on the cash flow first with the consistency of growth in bottom and top line; B, add new revenue stream every year; C, keep cost under control while keeping an eye on quality, integrity, safety and security; D, enrollment of key people for the next level; E, efficient allocation of capital for various projects right from KSM to API and complex molecules for regulated market and also fast-track registration to achieve the breakevens for the new projects. Finally, we'll also pull the plug and it's not making any sense. Thank you. Thanks to all of you.

Thank you. Should we open the floor for Q&A session now?

We'll just give a very brief update on the U.S. business, and then we can open up the floor, please.

All right. You may proceed.

Yes. So as Chairman has indicated, I'll just give a little bit more details on Caplin Steriles, which is our U.S. regulated market business. We've been having some pleasant surprises in terms of approvals. In fact, when we conservatively earmarked around 11 to 13 months per product for approval, we had 3 approvals in very quick succession: one in 9 months, one in 10 months and the other one, very surprisingly in 6 months. So we've had 3 very quick approvals recently, and we are putting together plans to launch these products as soon as possible. And so basically, in total, we have launched 7 products in the U.S. so far. And then the next 5 to 6 products will be launched in the coming 3 to 4 months. Our capacity in our vial line 1 is running at a high level. And vial line 2, even though it is new, it is starting to get freed up with -- when it comes to capacity for both the commercial products and exhibit batches. We are putting together plans to have the next 2 lines, as we have said and been explained in this note. The other 2 lines are going to be 1 vial line with high lyophilization capacity, which will probably come on stream sometime next year. And then the following year, we are going to have a completely dedicated line for injectable emulsions. We are getting into good partnerships now for all the products that have been approved. Most of these partnerships are long term. And also, they are designed in such a way that it does not restrict Caplin from launching our own label in the markets if and when we decide to do so. When it comes to market share for the products where we are present for more than 2 years, we're at about 7% to 10%. On an average, 7% for products where there are more than 8 or 9 competitors, 10% and above for products where we have about 5 or less. Of course, we would like that to be at least 10% to 12% for all the products overall and we are working towards that with our partners. Going forward, starting from this year itself, most of the products that we will be filing will have some amount of complexity involved because we have completed most of our products, which were considered as simple solutions. Now we're getting into the complex products. It could be emulsions, it could be suspensions and it could be products that are difficult to manufacture also. We are going to be filing our first 3 ophthalmic products by Q2, Q3 of this year, and we are also making good progress when it comes to non-U.S. markets. We've already signed up a partnership with JAMP Pharmaceuticals in Canada and we are in joint discussions with companies for entry into South Africa, Brazil and Australia within the next few months, partnerships that I'm talking about. When it comes to revenues, this year we have seen that there is a significant increase in terms of product revenue, which is understandable considering we've been launching products in the markets and there is a little bit of a reduction in terms of milestone revenue. But going forward, this will be the case because our most significant revenues will be coming from product launches and product supply and milestones will start to reduce, but will be replaced by what we call profit share because almost all of the partnership we are having right now, we are doing a profit share, where the net profit will be shared with us from the front end. And that's it for now. I'm sure there are people waiting with questions, so we can open up the floor for questions.

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

Just wanted to get some clarity on the tender order that we have received. So if you can clarify when does it commence and the kind of margin profile that we will have?

I request Chairman to take this question, please.

Yes. There are emergency tenders now in Central America. The emergency tenders are related to COVID-19 issues, which of course you are aware. We received actually the tenders -- like last 6 months, it has been happening, 1/2 of which we are already completed, and the rest of it, of course, will go in the last quarter of actually this year. The margins are very good. The reason being it's not easy for any company -- any and every company can explore this product as there is actually a huge shortage of raw material. Some of them have to be imported from the neighboring country. And some of them actually is in the form of shortage of containers. That also creates a lot of issues. But the advantage that we have is, we already have stocks closer to the customers, which you are aware, because ours is a Stock & Scale model. So that create us an opportunity for us to cater to the market without much hurdle.

Okay. And sir, how much of that tender would have -- would be -- already have completed so far?

5.5…

I would…

Yes, please.

Yes. So there's been continuous standards coming through. This $10 million that we have spoken about was received only in the last 1.5 months, and we are going to start supplying. It will be supplied over the current quarter or the next quarter.

Okay. Understood. And the other question is on the U.S. revenue. So I think U.S. revenue this 9-month would have been around INR 65 crore to INR 66 crore. And we have guided INR 100 crore revenue in this fiscal. So where do we think that we will end up INR 100 crore, or we can go ahead more than INR 100 crore this year?

Okay. So we have completed revenues close to INR 60 crore. We're not at INR 60 crore at this moment. We're at about, I think INR 54 crore, INR 55 crore right now. We are confident. We expect to finish the year close to INR 100 crore. I'm not sure if we will cross INR 100 crore. We'll have to take into account that there's been significant delays in the man and material movement between the months of April to October, which sort of delayed some of our qualification and launches in the market. I will not call this mixed revenues, these are shifting of revenues from current year to potentially next year. I think even if we finish it at INR 90 crore, INR 95 crore, it still represents about 50%, 55% increase over last year, which is good. And the other thing to take into consideration is there is a big shift upwards in terms of product revenue, which is what is long-lasting, which is what is more predictable in the market.

Okay. One more question, and then I will join back the queue. So now we are doing about INR 300 crores of CapEx over the next 30 months. So just wanted to understand about the free cash flow expectations over the next 3 years?

Yes. I'd like Chairman to take this answer, please.

Yes. The projects that we are planning, as I told you before, is all actually products -- the products that we are going to manufacture from the projects such as oncology and others are products which have very good demand in the market. And to be very honest with you, we will also not make the mistakes which we have done actually in Caplin Steriles. In the sense, we've commissioned the plant and we were not in a position to attract R&D talent when we went for our Caplin Steriles plant, whereas today, our company is also visible, and we also go for the ESOP to attract the talent. So on one side, we are commissioning the plant. On the other side, we have already developed some of the products and we are using actually a third-party manufacturer to file the registration. So by the time when we start our commissions, we would have completed some of the registration, and we'll only ship actually from other factory to our factory, which means we are very sure of achieving the breakeven without much difficulties. So we are sure that we'll be in the position to maintain the current ratios. We are very sure for the next 2 years. After that, starting from 2023 and 2024, we expect a mega growth actually for Caplin Point.

So we can deliver the free cash flows even after INR 300 crores CapEx over the next 3 years?

Yes. We are sure of cash flow. It's going to be a little higher or lower, that of course we'll have to wait and see. What is important, our focus will be more on cash flow. But at the same time, when we start investing more and more in the facility, it may be slightly lesser, but we'll never go for borrowing. It will be only from the internal accruals. Any project that we do hereon, it will be only from the internal accruals. So whether we're actually the same level or slightly lesser, it's not going to affect actually the company's future.

The next question is from the line of Sonia Lalwani from Pareto Capital.

So my first question -- I have few questions. First question is company -- like you have been alluding to new product launches post 2 to 3 years, focus on tender business, proportion of branded business getting increased and even injectables to Lat Am. So given that Caplin has considerable understanding of Lat Am markets, how much incremental growth we can expect from all these initiatives in the Lat Am market in next 2 to 3 years' time frame? If you can quantify some of these initiatives?

Okay. I'll take this call. There are 3 business that you have mentioned. One is the Tender business, Brand business and Injectables. All these involves time. As you know well, when we get into larger markets, the entry barriers are quite high. The registration takes its own time. And coming to Brand Marketing, Brand Marketing also -- Brand Marketing in India or overseas, it takes its own time. And then coming to Injectables, the business that we're going to do for Injectables is more of institutional selling. But of course, we'll be in a position to achieve short and medium opportunities. However, we're sure that we'll be able to maintain the current growth ratio. This CAGR will be the same or slightly higher. But to quantify in numbers, it's not that easy as we are not in a position to start the Brand Marketing as of now. At the same time, Tenders also is happening now. It's more of actually emergency tenders, and we'll continue to do well in spite of actually COVID slowly coming out -- slowly the curve is flattening. We will be able to do it because of the fact there will be a lot of traffic and there will be a lot of congestion in ports and then containers have not been in the position to get in on time also. But company like us, we always keep goods next to the customer, as I told you before. Early point of time, we'll have goods more than INR 150 crores in all these places. By the time we arrange the container, we always -- we have goods to sell. So our sales will not be affected. The ratios will be maintained. Phenomenal growth, as I told you before, will start only after 2023. And moreover, paying INR 2,000, INR 3,000 extra or even INR 5,000 extra per a container is not much important to us. To us, the cost of opportunity is much more important than the cost of a container because we are sure of selling at a higher price because of the Stock & Scale model. We -- suppose when you sell to an importer, the importer will take the goods from various manufacturers. But when we sell to the customer, we'll watch the situation and then decide when to sell and how to sell at a higher cost. These are the few things, which I think probably will convince you to understand our business model.

Yes, sir. Surely. Second question that I have is on the U.S. Injectables business. So I think Mr. Muralidharan can just give numbers on what the asset turnover could be on the new capacity that is coming up. And what is the expected time line for achieving this kind of asset turnover? And also whether regulatory approvals have been in place for this new capacity?

I will just answer the second part of the question. So as per FDA guidelines, if you're adding additional vial line -- in our case, it's a vial line, right? So when you're adding additional vial line, as long as it is under the same building, under the same quality system, they call it the FEI number, Facility Establishment number. As long as it's under the same quality system, then it is only an annually reportable change. So we'll need to just inform FDA that we have added another line. So it doesn't require a new inspection. On the asset turnover, I'll request our CFO to answer, please.

Good afternoon. This is Muralidharan. Asset turnover ratio, yes, actually, it will be -- more practically, if you see 2 to 3 years can -- because we just invested and then we currently have turnover [indiscernible], it will be about INR 100 crores, INR 90 crores, INR 93 crores, which means it will be about 1:1. Going forward, without much addition to the CapEx, we should be able to do to 2 -- 3x kind of a turnover would be capacity what we have today. And this is all going, [indiscernible] plant capacity announcement Then 3 years from now, definitely it will be -- 3x will be asset turnover.

Okay. So you are saying for the short term, it's kind of 1:1 and maybe for the longer term, it can be -- it can go up to 3x?

Yes. It's a medium term. Yes.

In the medium term, okay. And sir, when can we achieve this kind of asset turnover? Like what will be the breakeven point?

We feel that from a cash flow breakeven angle, according to our estimates, we feel that it should be anywhere around INR 120 crores to INR 130 crores. We're not far away from that, right? I mean, we expected to achieve that this year, but because of some disruptions due to COVID, we were not be able to do it, but we're not far. We feel that next year it should be very much possible.

Yes. I'd just like to supplement that -- what Vivek said, the breakeven year, actually when we take the expenses, we charge off the R&D related expenses and the filing expenses, which many companies have different viewpoints and then they give different treatment. But consolidatively, we are charging off the R&D related expenses and the product development expenses, which has been going [indiscernible]. As the Chairman put it, we are the largest -- we spent the largest in India as well as South India turnover. So the breakeven is a misnomer here because we concentrate more on building the -- more products. And then -- so that 2 years, 3 years of extent, we should be in a position to take a deep cross, yes. That's the point. So breakeven now, in fact 2, 3 years, what Mr. Vivek meant was excluding the R&D related and filing related, if you have to see as a commercial operation, it will breakeven even at the current turnover.

Okay. All right. Got it. Sir, I have a third question. Like -- you can just -- how much -- if you can just tell about how much revenue we can achieve from 4 ANDAs that will be launched in the next 2 months, like a ballpark figure as to what could be the potential revenues?

Yes. So of course, we don't want to get into numbers at this stage, right? So even though this is very short term, what we do give out is addressable market size of the product when -- as and when we have the ANDA approved. We are working with very high-level partners. In fact, some of our partners are the largest companies in the U.S., and they will do justice to the product. We are very sure of that. So we would like to look at it from an overall revenue angle rather than on a product-to-product kind of a basis because as you might already know, there is intense competition in the U.S. There's no doubt about it. Even though injectables is lesser competition compared to orals, there is still significant competitive landscape in the U.S. right now. But from an overall perspective, I think we will comfortably beat this year's revenue when it comes to next year. And as always, our target is to achieve at least 10% to 15% market share each time we launch a product. So you could sort of take that as a guidance.

I would request Ms. Lalwani to rejoin the queue for follow-up question. The next question is from the line of Sachin Kasera from Svan Investment.

This question is for Vivek on the U.S. operations. You mentioned that this year because of the COVID-related issues, we were not able to achieve the planned budget. So because of the lower base now, have you also revised the FY 2023 budget downwards? Or we remain hopeful of achieving '22 budget inventory with it also?

Yes. So when it comes to product approvals, we have not faced any delays, thankfully. When it comes to product filings, there's been probably a few months delays with a couple of projects. I would not say it's directly related. It's not linearly related, I would say. But yes, compared to what we have done this year, I will say that we will very comfortably beat the revenues next year. And that's about it. Like I said, when it comes to product approvals, as you might have seen, we already have 12 approvals now, 8 under Caplin's name and 4 with our partner’s name. So I don't expect a slowdown in revenue or anything like that.

Can we expect a significant jump in FY '22?

We'll have to wait and see. We are hopeful. We are confident that we will do well, but a significant jump, I don't know how you would quantify it as a significant jump, but we will do that.

INR 150 crores for next year.

We are still not comfortable to get into numbers, Sachin. Our breakeven point is about INR 120 crores to INR 130 crores. That is -- INR 130 crores, I would say, and that will be a milestone that we would attempt to achieve for sure.

Sure. My second question was on the CapEx that has been presented in today's results of around INR 275 crores, INR 300 crore. So can you tell us what is going to be the peak revenue? And what is the type of payback that you're looking from this project at full utilization?

Okay. One thing which is very important, as I told you before, not only completion of the facilities, it’s also completion of the registration, which really gives you the business, as you know well. So we need at least minimum of actually 3 years. In 3 years, we are very sure actually that we'll be on the fast track. That is for sure. But however, it cannot be in the form of actually all the factors that we are planning to -- all the additions, which we are planning to start -- restart the commission and production after 3 years. Some will start after 2 years also. So we are likely to do well, as I told you before, starting from 2023. So this period for Caplin will start from 2023 onwards. That's how I would put it.

That's understood. That is I think something you mentioned. But my question is a little different. With this investment of INR 275 crores to INR 300 crores, can we generate additional, say, INR 1,000 crores, INR 800 crores, what is the type of incremental revenue that can come to the company?

Yes. That's -- we are sure of reaching actually that kind of revenues. INR 1,000 crores, INR 1,500 crores of revenues is definitely possible in addition to what we are doing now. That is for sure. Part of it was, we exactly emphasized and what we focus is actually the cash flow. In 3 to 4 years’ time, we expect a phenomenal cash flow again, which means even if -- our concern is not the top line, to be very honest with you. We always focus on the cash flow because top line is vanity, bottom line is sanity, cash is the king. So if you look at other companies of our size, then we'll be able to understand that you are sure -- I'm sure that you say there are not many peers who are up our size having this type of cash flows. We will continue to have the cash flow. This will actually double and quadruple actually in 3, 4 years from now. So that's the most important point, I think, more than the top line. Am I right?

Sir, my last question was on the API. You mentioned that you're working on acquisition. So is it that we are seeing some final stages? And here it could happen soon or is it at some very preliminary stage for the API plant?

No, it's somewhere halfway through, and we will take a decision by end of this February. And we will not be waiting under wings because we already waited to be very honest with you. We'll start our construction actually starting from March. It has come to, say, 50%, 60% is covered. Still, we won't say we have come to a stage where we're in a position to understand the whole actual infrastructure and other things. More than the infrastructure and other things, we don't know how many competitors are in the field. Also to be very honest with you, this is a facility of a multinational company. So we will wait currently up to February end, that's what we have decided [ during ] which we'll go for our own API facility.

The next question is from the line of Mitesh Shah from ICICIdirect.

Congratulators on the good set of numbers. I just have one question. Your expansion on the Latin America was delayed because of the COVID travel restriction. So what is the current position and when we can see the ramp-up in the Latin American markets?

Yes, extension in the sense -- the registration is on. The only thing, there is one market, which I consider as the best market because I have traveled to this particular market several times, that is Mexico. The business already started. However, there is a market which we know now when you get into it, we can be able to create a niche in that particular area. So that's one thing I would say is delayed because I have not been in a position to travel. But the advantage that we have today, unlike other companies of our size, we have people working to the tune of 500 to 600 subsidiaries. So they have been working continuously, even during COVID time. On top of it, my son who lives in this part as well, actually, he is taking care of the marketing also along with the professionals. The delay with regard to the new geographies, yes, it has happened, not in the current market or not in the form of increasing the registration in the current market. It has happened only in the bigger geographies. And hopefully, it will be over in the next 3 to 6 months' time, maximum, maximum. The day we find effective actions, we'll be there in the market.

Which major market are you looking, Mexico and which other markets?

To me, more is Mexico. Brazil is definitely the biggest market. But at the end of the day, where we make -- where we are in a position to generate more revenue is the biggest market to us, am I right? Because Brazil, maybe like -- is one of the best markets is true is the biggest market. But for us, it's very -- it's definitely possible and definitely better than other markets in the form of -- in the sense now that we'll be able to generate more revenue, more cash flow, whereas getting into Mexico.

About the U.S. Injectables, are you planning to leverage this Latin America markets with the injectables portfolio you have in the U.S.? Or it is totally separate?