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

Ladies and gentlemen, good day, and welcome to Haitong [indiscernible] Q1 FY '22 Earnings Conference Call of Caplin Point Laboratories. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amey Chalke. Thank you, and over to you, sir.

Thanks, Ray. Welcome all to Caplin Point Lab's 1Q FY '22 Earnings Call, hosted by Haitong Securities. From the Caplin management side, we have Mr. C.C. Paarthipan, Chairman; Mr. Vivek Partheeban, Chief Operating Officer; Dr. Sridhar Ganesan, Managing Director; Mr. Muralidharan, Chief Financial Officer; Mr. Sathya Narayanan, Deputy Chief Financial Officer. Thank you, and over to you, Vivek.

Thank you, Amey, and thank you, Haitong Securities. We are pleased to welcome you all to our earnings call for Q1 FY '22. Please note that a copy of our disclosures is available on the Investors section of our website as well as the stock exchanges. And please do note that anything said on this call, which reflects our outlook to 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 for the opening statements.

Good afternoon, ladies and gentlemen. Welcome to our earnings call. With your permission, I would like to give you a quick brief about the past, present and future of our business. As you are aware, we are still in the midst of the pandemic. However, we have vaccines as a preventive care. The second best one is the COVID-appropriate behavior. There is a connect between COVID-appropriate behavior and the business appropriate behavior, which is the all-important discipline. Indiscipline not only leads to infection, but also creates integrity issues in our workplace. Hence, we need to eliminate the indiscipline from our systems. Now let us look at our business. We restructured our supply chain, manufacturing and our marketing for our business in Latin America, with a focus on products with the following classifications: 80% fast movers, 15% value creators and the 5% eliminators, which we have already eliminated from our list of products. The result is reduced inventories in our books, with increased sales, profits and cash flow. Latin America, as usual, is the favorite destination for Caplin's business. With so simple generics, smaller markets, humble employees, with more metaintelligence for metacognition, but honest and hardworking, created Caplin a progressive mission. Now the progress report is our first quarter report of good fundamentals. Now let me give you the overview of pharma exports to Lat Am. Pharmaceuticals are now the third largest export to Latin America at the vehicles and chemicals. Exports to Latin America increased by an impressive 13% to $1.1 billion in 2021. It will not be out of place to mention that Caplin is the early entrant to these toughest markers and became the sweet cucumber in a vinegar barrel. Now we're all in the business of building our tomorrow's today. Today, we have 2 APA R&Ds, 3 formulation R&Ds, 1 CRO to strengthen our future business. Our new registrations and the existing and the new markets would ensure a sustainable cash flow and profits for future. The new products that are being registered in the existing market will result in a new division to promote the newly registered products such as [indiscernible] complex injectables and oncological products. Our R&Ds are creating a technical superiority to our products. We also started selling specialty injectables in the domestic market. Most of these products are hospital supplies, such as Amphotericin, which is needed and used for black fungus in COVID-19. We are planning to add some more specialties and looks for core marketing opportunities with some established companies in the domestic market. We are also manufacturing a good amount of enoxaparin to supply for the domestic market. Even if we have to form our own teams to sell these products, we don't require a big sales force as these are injectables that are sold only through hospitals, not through prescriptions. The company needs hardly 3 to 4 representatives per state to cover all the private hospitals for this type of products. We have also identified a list of oncology and [ general royalty ] for bio studies in our CRO. Our CRO is all set to get the approval of U.S. FDA in 15 to 20 years from now. Once we start our commission production in the new facilities, we'll be ready, actually, to launch these products in the market. Further, we have plans to register our products in various geographies, such as Europe, Mexico, Brazil, South Africa in the near future. Now that we have different buckets in the form of specialty injectables, tablets, capsules and oncological range for the regulated market, which will definitely give an edge to our company and to also look at the new projects and the expansion of the existing projects. Caplin Onco will start the commissions hopefully by March 2022. The API will acquire the land. We will start the construction, both for general and onco APA. Expansion of 2 lines in our Caplin Steriles, we have already placed orders. The details of which, our COO will discuss in detail. Products, we are planning to manufacture such as not only the liquid injectables and ophthalmic, but also lyophilized products, bags and PFS. We also have a plan to go for a dedicated line for propofol in our Caplin Steriles. Now marketing. Coming to marketing, it's better to follow the trends of the big companies as far as technology market and attracting the best talented people. But coming to the market, we must create new trends in the time of a business model differentiation. That's the only way to create sustainable, actually, practices for our future. We have plans to look at the second and third layers of the market to create an executable niche, which alone will differentiate our business in the bigger markets such as U.S.A. and others. The best way forward would be to create a niche which most of the companies of our size could not do, such as U.S. FDA-approved injectable facility with our own products in the market. In addition to that, also planning to go for the front-end process and the backward integration. So that creates a business model differentiation while traveling with the big companies in bigger geographies, but focus on second and third layers of the market. C, create the culture of integrity, quality, transparency as a sustainable business practice. B, attract the best talents with attractive uses, in addition to meeting their expectations the way in which they ultimately treat that they want to be -- the way they want to be treated, we need to do that kind of actually. That's kind of the way they expect to be treated. The expectations in the form of treating them, the way they want to be treated. Finally, develop the capabilities to coach, train and monitor the pressure to retain the talent and prevent the attrition. Finally, the report of financial highlights of top 50 pharma companies in India, which appeared in chronical format this July 8, 2021. And we stand at 39th position among the top 50 companies. In 2015, we promised our shareholders that our top line of 2015 will become the bottom line of 2021, which we have achieved with a small difference of some INR 3 crores. Moreover, our goal is to strive and make it between 20 to 25 position in India in the next 6 years among the top 50 companies. Thank you. Thank you very much.

Thank you, Chairman. So from my side, I will just give a quick brief about our progress in the U.S., followed by our CFO, who will give a little brief about the numbers for the quarter. So we continue to make good progress with regards to capitalization of our approved ANDA with 4 new launches. We have 4 more launches planned before end of the year, which will complete the 16 products that we have approvals for now. The products that have already been launched and completed 12 months, we noticed that the market share has been anywhere between 7% to 12%, and we're actively working with our partners in the U.S. to try and improve on that to make sure that we have at least slightly higher double-digit figures on the market share. Taking into account our intention to have our own label in the U.S. by 2023, by way of our own front-end, we signed only nonexclusive deals in the recent past, and we will continue in the same manner. The next few filings that are between 7 to 8 products and has to be filed, which will be a mix of injectables and ophthalmics the next 3 quarters. And by January of this next year, we will have the [pre-mix ] guideline that will be ready for [ equity assessment ]. And during the same period, we are also targeting the first 4 complex products exit batches, and these complex products fall under the long-acting suspensions and emulsion category, mostly in injections and one in ophthalmic. When it comes to Phase II, as Chairman was saying, we have already completed the ordering of 2 vial lines from [indiscernible] and Bosch, which is now called Syntegon. There is also a prefilled syringe line from Italy that we were in and also high capacity lyophilizer. We are potentially dedicating one line specifically for emulsion injection filling, of which propofol is a major product. We are obviously doing propofol in multiple countries in Latin America, and we would like to extend this worldwide, including U.S. and EU. With the capacity expansion, I think we'll be growing again, once again close to [ 13 ], our current capacity, which should all go well for us for the next 5, 6 years at least. And going forward, rather than focus specifically on U.S. alone, we are going to be focusing more on a global level. So any product that we are taking up the developmental filings. We will be extending it towards a global dossier, with a specific entry to some key markets such as Brazil, Mexico, EU, Canada, et cetera. When it comes to backward integration, it looks most likely that we will be going from our own greenfield project, like our Chairman was explaining, and the target completion of this within 18 to 24 months. And in the meantime, we are working with an FDA-approved CMO plant from Hyderabad that will help us activate our DMF filings in the short run. So revenue-wise, not much has changed from our initial projection when it comes to capital strides. We'll stick to the same. And we hope to achieve that and potentially go past it if things go well. That's it from my side. I request CFO to make final comments before we open the floor for questions, please.

Thank you, Mr. Vivek. Good afternoon to everyone who has joined us on the call. This is Muralidharan, CFO of the company. Welcome, once again. The results we have received for the last 24 hours or so, the results are very gratifying. Not gratifying only because of the numbers what we have reported, but also these numbers have been reported against very challenging things. We show the [ grit ] and determination of the management team and the entire workforce of the company, starting from the Chairman to the last worker of the plant who has made this happen. So we are thankful to each and everyone and this guidance shown with the management. As you know, we have also recovered the turnover for this current quarter, [indiscernible] highlights the second quarter achievement. 2015-'16 turnover -- entire year turnover has been achieved in the Q1 of 2021-'22 results. Our chairman was mentioning about the profit of sales turnover of 2015-'16 being achieved in 2020, '21. We have also surpassed the profit of 2015-'16 in the very first quarter of 20210'22. Also, for the first time, we have reported -- the EBITDA reported is [in the tune ] of INR 100 crores in the first quarter. And gross margins have stabilized at about 55%. We expect that to be in line [indiscernible]. The one more important aspect is that last year when we were around this time, we had cooperation for the seamless integration of the market subsidiaries, with a great pressure. We want to inform the investors that the integration is more or less to invest and all the subsidiaries are in place and the [indiscernible] are addressed in this respect also. The gross margins will stabilize. The OpEx is more or less the same level as we have budgeted, and we don't expect any major pickup in the profitability as well. The other aspect is that the cash flow from operations is double the backlog in the first quarter, and free cash flow is about INR 60 crores, meaning that we have invested about INR 15 crores in the form of capital advances and then capitalization, which Mr. Vivek also mentioned, we have ordered certain equipment for our Phase II. And also we believe, [indiscernible] for a wonderful project during the quarter. Our increase in expenses, somebody was raising offline, with respect to Q1 2020, [indiscernible] that even 2020 expenses are not to be compared with even [ Q1 '21-'22 ] for a simple reason. The turnover has gone up by about INR 63 crores. Many of the expenses which are in tandem with the increase in volume are reflected in the numbers presented. For example, the foreign [ fuel cost ] of factories are working almost 3 shifts a day. We thought these numbers could not have been achieved. This foreign fuel cost has gone up, and the -- as people may know, the sales cost has increased substantially during these challenging times. Availability of vessels or the containers, we call containers [indiscernible] for our products are not available and also as and when they are made available, they have become more expensive And then R&D efforts are not all that great in the first quarter of last year, where the onset of COVID was there. Current quarter, despite the second [ dip ], our R&D efforts have been geared up. And R&D also, we have spent more money than the first quarter of last year. These are many reasons for expenses. Otherwise, numbers are there before you. I will refer to Vivek to open the floor for discussion.

Thank you, sir. Yes, Amit, I mean, I think we can open up for questions now, please.

[Operator Instructions] The first question is from the line of [indiscernible], an individual investor.

Congratulations for an excellent set of numbers. And I was just going through it. You are expanding wherever -- I know, I am able to see the passion. We understand that the human resources, I was much more keen to hear from you, in the last con call -- couple of con calls before, you told that you were giving resources, have doubled this 2 and you are attracting talent. So I just want to know, what is the talent you are attracting? And what are the human -- and development of human resources because where you're expanding, human resources are extremely important. That's my first question, sir, please.

Very true. The most important area, as you know, is R&D, researching and development for any pharmaceutical companies, that's how we create good signs. We have some of the people who are working in our R&D, whether it is formulation R&D or APA R&D or CRO, there are people who have at least 15 to 16 years experience, either in a multinational or a transnational company. So we're in a position to attract the talent. As I told, because of 2 reasons: one, it's up the [ tensions ] the prosperity, in addition to actually whatever salaries, like hike, they expect you will also give. Second, we also would like to treat the people the way they want to be treated, which means we give freedom for them to actually what calls for another [indiscernible]. The third advantage here, the hierarchy actually is flat. There is nothing in the form of some professional and some kind of policies, which can happen and disturb these abilities also. So the people who perform in this company are noticed by us. So I don't foresee an issue. We have not been actually foreseeing any issues, but we've been attracting talent. Although Tamil Nadu does not have an ecosystem, something similar to [indiscernible]. But so far, so good, we're very comfortable.

[indiscernible] Can I just one point here?

Please.

Yes. Actually, just to supplement the HR, the human resources, the quality of human resources. 4, 5 years back, if you had seen Caplin Point was not as efficient. We had hardly -- not even handful of PhDs. Today, we are proud to say that we have about 27 PhDs on our roles, who are working on various R&D.

My second question is, regarding the injectables for the U.S., [indiscernible] We just need to know that all the companies are putting up an injectable [ capacity ] or increasing their capacity, especially for the U.S. markets. So with this, I think the competition is going to increase there. How does Caplin factor this competition there?

The competition is bound to happen in every market today. As we told in [indiscernible] [ why actually in our stage ], what is important is that business model differentiation. As you know well, our business is all about differentiation. Whatever we have today is not because of the market which is in the form of viewers or, in India, our brand marketing. There's nothing that we know, just the brands. We never created a huge, actually, product brand, but our business model has become a brand. So which means what we have to do in the regulated marketplace rather than following the trends of the big buzz, We Have to look at the second, third and fourth layers of the market. I'm sure now it's possible. For example, I would like to tell you this one. I was talking to the CEO of my CRO. And he is a gold medalist from [ Madras ] Medical Company -- sorry, Madras Medical College. And he says, 72 of his colleagues are working as Director and Senior Directors in many parts of the hospitals in U.S. His name is Dr. [ Vineet] [indiscernible]. Vineet told me -- "Will you be in a position to come with us, actually when we go to the market to understand the size of the market and the kind of the purchase they make. He said, 100%, it's possible. In fact, he worked in U.S. He's the one who created the [ world news ] facilities from scratch to the finish. The only thing he was unable to achieve, doing it in a big way in terms of marketing because world news cannot be sold to the hospital. So he told me, we are very sure that we'll be in a position to sell to the hospital because -- he also told me one more thing. There are 1,100 Madras Medical College doctors working in the U.S. This clearly shows that there is a huge opportunity. We don't want to go and actually replace the importers, are actually focused on the importers. We can go one step below. I would put it this way, we have been catering to the bottom of the premier in Central America, now that we will get it to the bottom of the business from me. That will take care of our requirement.

[Operator Instructions] Next question is from [indiscernible].

Hello, am I audible now?

Yes, madam.

My first question is regarding U.S. users. I just want to know what is the profit margins, or...

Your voice is not audible, madam. We are unable to understand, please. Can you please talk a bit louder?

Hello. Hello.

Yes, madam.

Yes. Sir, I want to know what the profit margins from the U.S. business and expected growth for the next 5 years. What is the expected growth from U.S. dealer?

I will call the COO to talk about this.

If you look at the gross margins from our U.S. business, it's still quite similar to our parent company. So our gross margins were at about 50% in now. The only thing is, our overheads are high right now because we expense out all of our R&D and our filing fees [ and our specific fees ] everything is else expensed out as a form of adequate conservatism. So if you looked at the gross margins alone without taking the rest of the things into account, I think we'll be very similar to the parent company. As the revenue starts to grow, as the breakeven part comes through and then revenue starts to grow, I feel that we should augment the parent company's bottom line EBITDA, et cetera. When it comes to the growth over the next 5 years, the public statement that we've made is, we intend to target $100 million revenue from Caplin Steriles, which is a U.S.-based entity -- U.S. focused entity, rather, by 2026.

2026? Okay. And sir, what is like -- the CapEx we have announced, I just want to know the venue will start coming from which [indiscernible], after 31? Or what is the target of the revenue when the new increase in -- with the CapEx?

Okay. Okay. So when it comes to the U.S. CapEx, we are basically expanding our facilities in what we call as Phase II of this plan, and we expect to complete this within the next 15 months. Now how it works in the U.S. is, a product can be moved between lines within the same facility. They call it the FEI number. If the facility that expands within the same day, it doesn't really need to go in for another inspection or anything like that, okay? But when it comes to expectation of revenues out of that, we don't really differentiate between our existing capacity versus the new capacity and anything like that. It's all different when the capacity is available for us to put it to use. So we don't have a breakup of what this new expansion of capacity is going to bring him in terms of revenue.

Next question is from the line of Aditya Khemka from InCred AMC.

Congrats to the company for doing so well. Paarthipan, sir, can you briefly talk about your venture into the more larger markets of Latin America? I recall you have mentioned earlier in your earlier con calls that you are about to enter Brazil and Mexico. So what would be the modest operandi would be first, enter the generic market and then try to build a branded generic portfolio? Or do we do both together? Just some details on that side would be very helpful.

The larger markets of South America as you know well, Brazil and Mexico and followed by Colombia, Chile, Peru. Now that we have completed restrictions to the [ penem ] 60, 70 products in countries like Chile and Peru. Last year, Peru has grown by 80%. Chile has grown by 56%. I'm talking of exports from India to Chile and Peru. And the biggest market, they also went for actually an emergency purchase. We also exported some of the products like propofol dexmedetomidine for both the countries, Brazil and Mexico. And currently, we're in the -- in fact, we received one approval from Mexico. We are in the process of filing actually the dossier in Mexico. Brazil, there, the company's habitual audit. It has come to a stage that probably in 2Q [indiscernible] tell us a date and it'll take, all along, own 2 months actually to complete the whole thing. And coming to the business model, which you saw, how exactly we're going to market. If you look at our business in Central America, unlike other companies of our size, we went there and we replaced the input. This is not possible in the bigger [ part of ] things, because the companies which are selling actually in the bigger [ part of ] things, whether it's from India or from actually local markets, there are big companies except to a very small portion of companies that are small. So you can either replace the importer, not actually the competitors. We only have to look at actually the second, third, fourth player, which I told you before, which means any product that goes actually from the manufacturer to the importer, then the imported, it goes through various layers. It will be in the form of wholesalers, distributors, semi wholesalers, then, of course, no small retail change. So it's not that it confines only to actually one domain. You can go to various places and find out which is the best play where you can position yourself to increase the sales, profits and cash flow. So we will not get into brand marketing, which is a long haul, and we don't have that kind of a deep pocket. Although our cash flow is comfortable, we will be in a position to do generic business, but we will create a niche that's an executable niche, which we have built. We are sure of it. In fact, I worked in Mexico before COVID. Unfortunately, I have not been able to travel now, which you now know the borderless world has closed the borders, and we will have to wait for the COVID come to flatten and then we'll have to go there. Coming to Brazil. Brazil is more of end of business. So it should be like any other company. You'll have to get into standard business and private market will have to go and work and see the niche, and then we'll have to create something to differentiate. That's it, please.

Yes. So what I understand from you, sir, therefore, is the first target is going to be the generic, generic [ anti-tender ] business indeed, large markets and not really the branded generic business.

Branded generic community, branded generics, there are 2 types of branded generic. One, as you rightly said, brand marketing. You create prescription, it becomes a brand. That's how it is. Another brand of generic actually is in the form of OTC, and there is nothing in the form of [indiscernible] invest can they create subscription through doctor. We may go for branded generics in the form of some OTC and all. That will be in the form of like we will go for some associates on both will come for associates and also, that's not going to be very expensive. And the lead tend for revolving that kind of a business. The brand marketing kind of a business is always long. But branded generics in the form of OTC, there are 2 ways to do. We don't want to go to the media today. We can go through, actually, the retail chains. There are people, there are companies who are 1,000 to 1,500 retail shops in countries like Mexico and Chile. So here, if you can get some associates, that networking effect, actually, will create business for Caplin also.

Understood. That's very helpful. And sir, second question on the U.S. FDA audit of our injectable line. I -- if I recall correctly, last we were audited in 2018. So have you heard anything from U.S. FDA? Are they informing you about the potential audit now again?

The last inspection was in 2019. And ever since that, we've not had an inspection. Of course, all throughout '20 and '21, there is not been any inspections. But we believe some virtual inspections are happening and very few physical inspections are happening even in India. When it comes to our CRO, we've been informed about virtual inspection. They just started collecting all the documentation from our side.

All right. And sir, one more question. Sorry. This dedicated line of propofol, what is the time line? And how much capital expenditure would that take?

So the overall CapEx for this expansion in Phase II is going to be around INR 140 crores, and this emulsion line, which is the propofol line, if you want to call it that, is combined together with it. Now first of all, propofol is a product that we have stabilized very well. Our product is probably equivalent to most of the companies that you can find here. So we want to launch this as a global product, and we've already started doing fairly decently in parts of Latin America. We want to sort of take this to U.S., EU, global et cetera, where we see that there is a very decent potential there.

No. So my question was actually pertaining to given that you are laying an extra line for propofol, would that trigger a U.S. FDA inspection of the site? Or would that not require a separate inspection because the site is already approved and you can just -- as soon as you get the ANDA approval, you can just pass that in the product. That's what I wanted to understand.

So technically speaking, it doesn't need an inspection. But at the same time, we can't really tell when the U.S. would want to come in to inspect or what they would want to come in to inspect or anything like that. Every time we find a product that is in the U.S., that would lead to a series of checkpoints that they will have to answer themselves. Obviously, all of that is internal information for the U.S., but it is what you call, if you want me to get slightly more technical, it's a terminally stabilized product, which means you heat the product up to 120 degrees after you complete the filing. Now we've already been approved twice for that form of stabilization. So technically, it shouldn't be an audit, but if it comes, it comes. It's -- we, in the pharma world, especially in the regulated market world, you need to be ready anytime for an audit.

Next question is from the line of Anupam Agarwal from Lucky Investment.

Congratulations on a good set of numbers. Just firstly, if you could highlight, our CapEx outline is basically INR 300 crores, if I see the presentation. If I walk through the earlier presentation, the number would likely be, on one side, 3 -- INR 250. What has increased? Is there some change in the dynamics? If you could highlight on it.

Vivek, can you go ahead and answer to this question?

Yes. So if I heard your question right, there are 3 CapEx outlay that we are going after. So number one is our oncology line. Now this is going to be overall about INR 100 crores, INR 100-plus crore. We see INR 100 crores to INR 110 crores kind of an outlay, and we are going to start with the OSD to begin with. And then in Phase II, we are going to take up injectables. Number 2 is the API piece of it. Of course, we were evaluating a couple of things, but it looks most likely that it will be a greenfield project. This could be anywhere between INR 50 crores to INR 70 crores for both API and oncology API, general category and oncology API. And the third one is the Phase II of our injectable plant, which comes under Caplin Steriles, but Caplin Point is extending a line of credit to Caplin Steriles for expansion here, and that will be around INR 140. So all put together, we expect this to be about INR 300 crores.

Got it. Got it. Sir, if you could just -- I mean, just an extension, this INR 300 crores of CapEx will lead to what sort of topline over the next 2 to 3 years? I understand it's going to be commercialized in FY '24 likely. What was sort of revenue we can expect on this?

Yes. So we cannot -- yes, we are actually there. Yes. So in most...

Pardon me, sir. We have lost the line for the current participant. So maybe we can continue with the answer, and we'll move on to our next question. Maybe you can continue with the answer for now.

Okay. So in pharmaceuticals, especially in formulations, it's very difficult to put a revenue number as against a CapEx spend, right? So I mean, it's not like an API plant where you're doing only 5 types of API and then you put x amount of capacity, you'll have y amount of revenue potential from that. So here, it's much more difficult. So we would like to broad base it to our original target, which is, we expect to double our revenues in the emerging market, our current markets, in the next 5 years. And we are targeting $100 million revenue in the U.S. within the next 5 years. So we would like to sort of broad base this within these figures.

We'll move on to our next question, which is from the line of Alisha Mahawla from Envision Capital.

My first question is on the injectables business. What is the current capacity utilization?

Yes. At this point, we have 2 injectable lines, 2 vial lines and 1 ophthalmic line. So when it comes to commercial products, we are probably still at about 45%, 50%. And when -- but it looks a little bit more utilized right now because we continuously file exhibit [ basis ], which is basically the basis that we file for as a statement in the U.S. So both put together, we should be at about 70% right now. Yes.

Sure. And with the Phase II of the injectables coming on stream, say, over the next 2 years, will the capacity be sufficient for us to reach our target of $100 million revenue by FY '26? So will we then still need some incremental CapEx?

No, this INR 140 crore CapEx that we are doing is going to trickle our current capacity. So that should be more than enough for what we are targeting to file over the next 4 to 5 years. We don't see ourselves going in for another CapEx for the next 5 years after this.

Okay. Sure. And sir, this facility still hasn't broken even, right? The breakeven will be at what level?