Eris Lifesciences Limited (ERIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '20 Results Conference Call of Eris Lifesciences. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Bakshi, Chairman and Managing Director of the company. Thank you, and over to you, sir.

Thank you. Good evening, everybody, and welcome to the quarter 3 '20 earnings call. Let me take you through the presentation, and then we will open after for Q&A. The first slide in our presentation talks about a very momentous period for us. As you are aware, in the last call, I told you that we have initiated a study called India Heart Study. It got mentioned in nothing less than the official journal of ESH, which is one of -- which is a great thing to happen. And we could be possibly one of the very few company or the only company to have achieved this feat. Again, putting forward the whole thought of achieving thought leadership in hypertension. Immediately then, I come to the point, which is higher expenditure in this quarter. So we see INR 14 crore to INR 16 crore higher expenditure in this quarter, which is nonrecurring in nature. The reason of this expenditure is, number one, we have hired around 215 (sic) [ 219 ] BEs and the managers for 2 different businesses. These expenditures are for their onboarding, for the training and also for sometimes a notice payout, especially at the higher managerial level. Secondly, we have invested heavily on Zomelis and Rariset, which is our Sucrosomial Iron. These are the 2 products, which we were quite bullish on. These were launched in the month of December, so nothing much is captured in the sales. But going forward, it seems that these 2 product itself will contribute around 6% to 8% of additional growth in the coming year. So it's a good start. AICD numbers do tell us that we are somewhere averaging INR 3 crores, INR 3.5 crores at this point of time based on the strips. The other point is we are not able to sell Zomelis as much as primary because we had an arrangement with Novartis that first Abbott will sell their stock. And according to an order from the court, Abbott is allowed to sell it only until April. So we think that the entire sale will be captured from the first quarter of the new year. Rariset, again, we have invested very heavily, just to give a number on that. We have done around 400 medical education meetings only in the first month of launch, that is December itself. And we are seeing a good traction. If these trends -- if they move forward, which we are sure, then we would be -- we are looking at around INR 18 crore to INR 20 crore brand of the Sucrosomial Iron in the next financial year. The other news is that Guwahati plant is now ready for production of the newer products, which we're talking about, especially in the softgels and the nutraceuticals. And we will be hitting around 80% from the Guwahati plant coming from the first quarter of next year. We have also got some renewed focus in the business. The entire business is now defined into 5 SBUs, and we've got some people from outside to manage these SBUs. So 2 SBUs are in the Cardio Metabolic business, which remains our largest business. Because of a very sharp focus on CNS, CNS has also been put in as an SBU. And there is one business which is Acute business, wherein we already have a person in-charge, the cluster head, who has joined us recently. And one SBU is for the Newer businesses. This, not exactly restructuring, but kind of putting them into buckets, will give more focus to each of the businesses. And these will be run in a more professional manner than before. Now coming to the secondary growth, I'll talk about the quarter 3 and the 9 months ending simultaneously one after the other rather. So you see this year, up until now, the market has grew by 9.5%. Acute has actually grown by 10%. So acute has overgrown chronic, which is not very common, but this has happened this time. And especially in the third quarter, it has grown ahead of acute quite significantly looking at the past records. So that is one of the reasons that our sales for a 9-month perspective, as per the secondary, is 9.8%. And for the quarter 3, 6.4%. Where in acute, we have degrown by 8%. And in chronic, we have grown by 11% vis-à-vis 9.2%. The change in the performance for the quarter 3 is actually coming from subchronic brands and 2 brands, in particular, where we have underperformed the market. The market has grown by 8.3% in the third quarter, and we have grown just by 3.8%, which is 22% of our contribution. On a 9-month basis, we have grown at around 8.2%, almost at par with the market. This underperformance in quarter 3 is because of 2 brands, which has already been corrected in the month of January because the January sales are out. And we saw a 9.8% growth in January as per the same data we are talking about. So quarter 3, we grew by 5.3% in growth sales internally. We have an 18% dip in EBITDA, which I've explained. We have spent around 16 -- INR 18 crores extra. There is no exceptional item there. Next quarter, we will come back to around INR 55 crores, INR 60 crores. Our average has been INR 70 crore, INR 74 crore. Generally, in the fourth quarter, it is between INR 55 crores to INR 65 crores, and we have preponed certain expenses, including our meetings -- budget meetings. All that has been done in December. So there's a blip there, but this will get even out by the end of the next quarter. On the 9-month side, we've grown by 7.7%, 3% growth in EBITDA and 1.3% growth in net profit. Rest everything is as it is. We can take in questions now.

[Operator Instructions] The first question is from the line of Amey Chalke from HDFC Securities (sic) [ Haitong International Research ].

I'm from Haitong. So first question is on, obviously -- on incremental investments. So we have added around 300 MRs. So going ahead, should we expect the MR count to remain stable for at least a year or so? Or what is thought process over there? Then the second question is on -- we have announced that we are entering into the generic space. What kind of investment will go into this business? And what is the thought process in entering into the generic market at this point of time? These 2 questions.

Sure, sure. I'm sorry. I didn't mention the trade generic part. So we have -- we are entering into trade generic. I think next month, we will start the billing. So the whole thing will start coming out in the April. So I'll answer the first question first, which was -- let me start on the trade generic part, which I missed in my presentation. So the idea of getting into trade generic was 2. One is that, as you're aware, our company is largely INR 18 crore to INR 20 crore -- 20 brand company, which contributes more than 75% of the sales. Our representation into acute market has always been very less. And over the years, it has come down to 14%, 15% now. The trade generic market, as you guys are aware, is more of an Acute business than anything else. So it gives us a good -- and this business has been rising -- has been growing steadily in the country, and there have been companies who've been able to demonstrate good EBITDA margins also. Now going ahead, the plan is to launch this division. We already have the leaders in place, and we have got one of -- best of talents of the industry. We are setting our distribution system at this point of time. The idea is to be in the trade generic side, but to be more on the OTC-able kind of product. So initially, there will be a mix of OTC-able products and pure pharma, but the strategy is moving ahead with more rigor in the OTC-able part, so that is scalable and it is also profitable. So that's the thinking around trade generics. Amey, your question on the expenditure, can you please say it again?

[ Lower or stable ].

About the people? Yes. So right now, what -- the addition of people have -- still to happen in the trade generic. We will have a team of around 50 people. Right now, we already have 20 people, 25 people boarded. But as a thumb rule, we always invest in the managers and the leaders first. So the people now coming would more be at the bottom of the pyramid, the front-facing field force. As far as -- so 25 more people for trade generics. No other plans at least for the first 6 months of the launch. Depending upon how we do, we'll think about it in the later half of the next year. Talking about our current business. We just added one division in chronic. We have no plans for this year, but we see some more products coming in the next year. So a possibility of one more division in Cardio Metabolic is there maybe in the second half of next year. So until the first half of next year, we don't see any significant improvement -- addition rather. There would be some 30, 40 people, depending upon how we want to expand the current business.

Yes. Just one follow-up that do you expect this business to be margin relative? Or you -- because we are operating at 35%-plus EBITDA margin. And so typically, what I understood from the industry, the margins in the trade generic side is close to 20% or more or less over there. So what is your thoughts on that?

No. Amey, this -- I don't see this coming to the level of the present business. That is the reason we are taking this into wholly 100% owned subsidiary, so there is no mix up between the 2 businesses. We don't see this business going to 30%, 35%, even in the long term. But we are very hopeful that once we gain traction, 20% is something which is achievable.

The next question is from the line of Tausif Shaikh from Prabhudas Lilladher.

Can you give us a breakup of revenue subsidiary-wise? And can you just break up that INR 18 crore which you have spent extra on other expense? How much you have spent in Zomelis and new employees?

We -- both those things, we don't have the breakup. We have been giving the breakup for all this time. So we are no more giving the breakup because they have been completely integrated now, and they have been merged also. As far as the additional expenditure, which you are saying, so look, broadly -- I don't have the math splitting. But broadly, what happens, it is like -- from a people point of view, it is onboarding, it is training, it is notice period buyout, especially at the manager level, and then it is about internal meetings as well as external meetings. So promotional expenditure is at the top, followed by people and their settlement.

Okay. Just one more, if I can. You have moved into generics. Can you throw some more light on it, like how many products you're planning to launch in the next 6 months?

So you have to bear with me for one more quarter. What I can tell you right now that we are ready with around 65 products as of now. But is this enough? The answer is no. So the brand addition is -- generic is not as filtered as it is in the -- as in our core businesses. So as and when the need arise, but this business typically is done at a larger brand level, at a more SKU level.

The next question is from the line of Rahul Veera from Abakkus Asset Management.

Sir, I just wanted to understand in terms of our product shift to our own Guwahati facility, we've moved up to 65% in Q3 FY '20, but there's been no improvement in the gross margin, sir?

Yes. We actually dropped down to 65%. Before we took Strides, we were at 75%, 80%. We actually dropped down from there because we didn't have a couple of lines available with us. Now with the line coming back to us and 80% moving in Guwahati, we'll see -- that difference will now come up from the first quarter of next year.

Okay, okay. And the generic 65 products that we are planning will be manufactured in-house? Or...

No, no. Nothing in-house as of now. Nothing in-house.

[Operator Instructions] The next question is from the line of Anubhav Aggarwal from Crédit Suisse.

This first question is Zomelis. Did you have to cut prices after you bought this brand?

So now the price which we are selling is at INR 9 and INR 10. INR 9 for the 500 mg variant and INR 10 for the higher metformin variant.

And when they were selling, they were selling at around INR 25 for this? INR 25?

Yes, yes. In that range.

Okay. And the other question was on this 2 brands that you mentioned, which have not done well. What are these 2 brands?

So this is -- we are -- these 2 brands are Remylin D and Tayo.

Tayo, right?

Remylin D and Tayo.

Tayo, okay. But -- okay. So there's nothing new, right? For us, even these 2 brands have not been doing well for some time, right?

No. It has not. It is only in quarter 3 they got -- so if you look at the -- in quarter 2, the contribution from quarter 2 to quarter 3 has come down by around INR 3 crore.

Okay. And then I have a question that -- one question just asking on this Acute division. We've been always saying that we are not focused. So why don't we decide when we were restructuring business to let go this Acute division? I mean why don't we divest it?

Okay. Anubhav, acute and the semichronic is intertwined with each other. So what happens in every one division where there is an acute, there are a couple of product for semichronic also. So we'll give you an example. Our biggest acute basket lies in our gastro division, which also has relearned in that. So while from an AICD part of it, we say it is only 14%, but it is intertwined with other reasonably big brands also. In fact, what we have done is that we have put this under a different SBU. And we've got somebody who has a huge -- a lot of experience handling this for the last 30, 35 years. And we are looking to improving our share in acute because acute market in the last 2 years has been performing well. It is not the time 2 years back when they were consistently underperforming. So it makes sense for us that we kind of revamp this business and try and get better out of that -- better in that. Regarding Zomelis, look, the data is telling me that we are already at a INR 3.5 lakh run rate. Now INR 3.5 lakh run rate at the new NRV is around INR 3 crores, INR 3.5 crores a month. That's the AICD data, which I'm quoting.

Okay, okay. And just last question on this generic entry. So just asking that this option was always available to us, and we've chosen to enter this business when the regulator is considering this industry of putting margin caps. So what's triggered this -- our entry into -- so late into trade generics?

Yes, Anubhav. So it's a very reasonable question. Why did we enter now? We -- as a company, we are going through expansion, which I had talked about in the last call. This space in my head wasn't as big or was not becoming as big as it has actually become. The advantage with us is that we were very, very -- we are very concentrated brands, small -- less number of brand doing larger business. Now when it comes to the trade margin issue, which you are talking about, Anubhav, in my understanding, trade margin business will not completely change -- will not -- this business will not go away anyway. Now, in volume terms, it is quite large. And we -- and there is a huge population who goes to the chemist and asks for drugs for his ailment. So this business might get a little restructured in a manner, but this business getting into big problem doesn't seem slightly.

So if I can just ask a very simple question. I think what is the fixed quantum that we're attributing to the business? Like, kind of -- I know a lot will -- you buy it from outside, et cetera, so all will be variable, but what's our total fixed cost investment into the business?

Fixed cost investment.

Yes.

So fixed cost investment is only going to be on the people and on the inventory. Nothing else.

And how much would that be?

People cost would be, say, around 15 -- INR 12 crore to INR 15 crore, even less than that, maybe INR 10 crore for a full year when we are 50 people. And we think that the gross margins here would be in the range of 50%, 52%. So depending upon whatever the sales is, that part would come down.

[Operator Instructions] The next question is from the line of Riddhesh Gandhi from Discovery Capital.

Could you just expand a bit, again, on your trade generics business as in -- I mean how particularly familiar with who you'd be competing with, the current distribution approach and how it differs from a branded generics business, which you've -- which, I mean, typically, we see in the Indian market?

Yes. So that's a -- I mean that's a lot to talk actually. I'll try to put this in the shortest possible framework. So typically, branded business is something just described -- which is a prescription business and a trade generic business is something, which is over-the-counter business where a patient goes to the chemist and either they buy something for themselves or chemist gives him whatever he needs, depending upon the problem he is having. The distribution system is very different. So you have different distribution for the branded generic, which is more of fulfilling kind of a distribution, where there is a demand fulfillment, and the demand is generated by prescriptions, while this is more of a push business, where you are doing demand creation, and it is more on the shelf kind of a push, which happens. So these are the...

We don't have MRs and all of that in the generic trade business?

No. This is a distribution-driven business. So the distributor is a quasi-salesperson here. So you don't require that many feet on the ground. It is more of a distribution business.

Got it. And in terms of -- at the EBITDA level, it would -- I'm assuming these are still lower in terms of margins?

Yes, yes. Absolutely.

Got it. And the reason why you guys are actually expanding into this area is because you see this as being a trend in the acute space, which you're seeing? Or...

Yes. To an extent, yes. And this is one market which has actually grown very well in the last 5 years. Typically, we enjoy a lot of respect in the market from a brand perspective because of being at the top of the pyramid. That makes it easier for people to recommend and sell our brands, so that -- and our presence in the biggest market of generics. Trade generics from a branded perspective is very, very lower, almost missing. So there's nothing which comes into our own business, which we are doing. So they completely remain separated.

Got it. And as -- let's say -- and how much actually profit margin would the actual pharmacist make with a trade generic as opposed to the -- actually a branded generic?

So significantly more. I would not -- because it depends upon pharmacist to pharmacist. But it is significantly more than the branded business.

Got it. So effectively, you would -- effectively, you'd be running these 2 parallelly or you would do -- I mean, ultimately, look to move your queue towards being a traded generics business?

No. They are completely different. Absolutely. They will be run in different -- this would be running a different subsidiary. This has a different distribution system. So they don't cut each other at all.

Got it. And are there any other of your peers who is also looking at this market or not really?

No. So I think the larger peers -- the larger companies are already in this market, and some of them have been doing exceptionally well.

The next question is from the line of [ Subrata Sarkar from Mount Intra Finance ].

Sir, a couple of questions. First, can you share the January data of AIDC -- AICD and your position with respect to chronic and subchronic and acute?

Pardon me for a percentage here and there because I'm not carrying it. But since you've asked, I think at a company level, we are around 10% growth. And at the chronic level, we are at around 12.5% growth.

Okay, sir. And in case of acute, like, sir, any rough idea?

Acute, we are at 7% growth. How much is it, Kruti?

[ 3.4% month ].

January?

January month.

Just wait. Since you have asked, I'll just pull the data.

Yes, sir. And please share the industry data also, sir, then it will help.

Okay. So I can't spend much time here. I'll just tell you as a preview. So acute, we have grown -- there's a degrowth of minus 3%; chronic, there is a growth of 13.6%; and subchronic, there's a growth of 10%; and overall, there's a growth of 10%.

Okay. Perfect, sir. Sir, now on a broader level, one question. Like, since we have launched, just help me like if I'm wrong. Sir, if -- since we have now launched Vildagliptin, so is there any like cannibalization possibility for our Tendia in that respect?

So Tendia growth slowing off is a possibility, and that is happening in the market. So there would be some amount of cannibalization, which will happen. The cannibalization is -- will happen on the growth, not on the base business. So the Teneligliptin market, which by now was growing by around 25%, 30%, we expect this to come back -- come to around 10% to 12% -- 10% to 14% in the next year. Having said that, whenever this kind of thing happens in the market, the lead brand generally tend to take a larger share because the noise actually comes down drastically. So we are hopeful that Tendia will continue to beat the market and remain a very vibrant brand in this market.

Okay, sir. Sir, now just one question. Can you share some, like, color on the, like, Strides -- the acquired Strides portfolio right now, sir. How it is doing, sir?

So we have been doing this for 4, 5 quarters. We are not doing it anymore. I'm sorry for that.

Okay. No issue. Sir, last question. Sir, regarding this China and coronavirus issue, sir. Like is the -- on the API side, which we are as well, so are they facing anything? In the entire supply chain, is there any problem on that? And like what we are anticipating on that, sir?

So yes, it's a valid point. If this continues for a long period of time, then there will be certain challenges around the intermediate. As of now, we are -- the way we see this -- the kind of comfort which we are getting from the vendors in China, it seems that we should be okay.

Okay. So like how much time if it is continue we can face some challenge, sir? That's what like -- until what time we can sustain easily and then there will be some effect, sir?

So look, we -- like everybody, we also have [ built ] up on things which we thought are important, at least, we have bulk of the orders. So I don't find any problem until the first quarter. And by that time, everything should settle down. I don't think there's an issue there.

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

Yes. Sir, on the cost, just a reconfirmation and clarification. You mentioned it would normalize to the earlier levels, which is about INR 70 crores, INR 75 crores. Is that right understanding?

Yes, Prakash. Absolutely right understanding. This is only one time this has happened. We have been maintaining our cost at around 28%, 29%. And that's going to be the norm. Nothing is changing there. Only in this quarter, we had preponed some expenditures and also built up some campaigns and other promotion for the newer brands. That's the only moving point. We remain around 27% with 9% on other cost as it has always been the case.

Okay. And this will be from Q4 onwards, basically?

Yes, yes, yes.