Eris Lifesciences Limited (ERIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the conference call of Eris Lifesciences Limited. We have with us today on the call Mr. Amit Bakshi, Chairman and Managing Director; and Mr. V. Krishnakumar, Executive Director and Chief Operating Officer. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. V Krishnakumar, Executive Director and Chief Operating Officer. Thank you, and over to you, sir.

Thank you, Nirav. I'm Krishna Kumar, and I welcome you all to this call to discuss our latest acquisition. Before we get into the specifics of our deal, I wish to take a few minutes to recap the [indiscernible] of our inorganic strategy. As discussed several times in the past, the key thrust of our inorganic strategy is to [indiscernible] our presence in attractive therapy areas. We leveraged the stride acquisition to enter the CNS therapy. We entered the insulin segment through an equity venture with [indiscernible] Biopharm, and we entered the dermatology therapy through a series of deals, starting with Oaknet. We have employed a string-of-pearls approach in building our dermatology portfolio this year with targeted acquisitions to fill specific portfolio gaps. This approach has helped us maximize business fit and minimize redundancies. We employ a prudent screening approach to every deal that we evaluate in order to ensure evidence of early value creation opportunities, specifically in terms of number one, strategic fit with our specialty or sub therapy requirements. Number two, the presence of arbitrage opportunities by way of fundamentally good businesses, which are sub-optimally run. And last but not the least, meeting our financial criteria like gross margin, growth potential, YPM debt-to-EBITDA ratio and IRR. We approach every deal with an owner manager mindset, wherein we are happy to roll up our sleeves and do the hard work to create value. This discipline has enabled us to create value from deals like Strides, Zomelis and Oaknet. Starting with our inception in the year 2007, it took us nearly 13 years to add the first INR 1,000 crores of revenue. However, we are adding the next INR 1,000 crores of revenue in just 4 years by deploying our internal cash flows, along with external funding to drive a mix of organic and inorganic growth. We have traveled the journey from INR 200 crores to INR 2,000 crores, while largely preserving our gross margin at the 80% level, and we expect that this will continue to be a way of life at tariffs going forward. Coming to these specifics. Today, we have announced the acquisition of 9 cosmetic dermatology brands from Dr. Reddy's Laboratories for a consideration of INR 275 crores. This portfolio includes well-known brands, such as Hydroheal, Revibra, Aquaderm and Acrofy. The brands are largely in cosmetology segments like anti-acne moisturizers, cleansers, anti-aging, hair health, melasma, et cetera, and have a combined primary sales of INR 50 crores per annum. That is INR 50 crore per annum. This deal is in line with our stated intent of building a strong dermatology franchise. We keep started this process with the acquisition of Oaknet Healthcare for INR 650 crores in May 22. And we strengthened the franchise with the acquisition of my dermatology brands from Glenmark in January of this year for INR 340 crores. While the Glenmark deal helped us strengthen our medical dermatology franchise, the latest deal helps us augment our cosmetic dermatology franchise. Post the deal, Eris will rank #3 in its dermatology covered market with a market share of 7%. Inclusive of this deal, we have invested INR 1,265 crores in acquisitions in this financial year, primarily in building up our dermatology franchise. The aggregate revenue of the business and brands thus acquired is expected to exceed INR 400 crores in the coming financial year FY '24. This will translate into a YPM of INR 5 lakhs for Oaknet, which is double the YPM of INR 2.5 lakhs it had at the time of acquisition less than a year ago. Further, we know that a YPM of INR 5 lakhs can translate into an EBITDA margin that is very close to our corporate EBITDA margin, which is where we expect to open it to be next year. This is a massive uptake from the 10% EBITDA margin, which the opioid business had at the time of acquisition. The series of these done in this financial year has also resulted in a significant diversification of our therapeutic mix. Pre-Oaknet, Eris derives 80% of its revenues from the cardiometabolic and BMM segments. Notwithstanding a 13% growth in these segments, the concentration of the cardio metabolic and BMN segment is now down to 65%. The contribution of our 3 emerging therapies, namely dermatology, CNS and Women's Health has increased from 12% to 28% with dermatology having emerged as our fourth largest therapy with a 15% share in overall revenue. We expect this process of therapeutic diversification to continue as we continue to invest in our emerging therapies of insulins, dermatology, CMS and women's health, alongside our flagship cardiometabolic business. This transaction will be financed through borrowings and will achieve financial closure in the next few days. We can now open up for Q&A.

[Operator Instructions] The first question is from the line of Tarang Agrawal from Old Bridge Capital.

A couple of questions from me. One, when you say that your 7% of the covered market in Derma and then number 3 there, if you could give us a sense in terms of how big is your covered market versus the overall Derma market. What do you mean when you're giving this stratification?

Yes. So the concept of covered market is a very standard thing that is followed in our industry. So that is not a new point. It's just a term that is used to denote the particular segments of the market that we play in. So out of the total dermatology therapy, our covered market is around 45% of the total drama therapy. And so when we say we are #3 with a 7% market share. We are essentially talking of that 45% footprint, which represent the molecules and the segments that we are presenting. [indiscernible] we are maybe at 10, 11 rank...

Got it. Got it. So I mean, like, for instance, if I were to understand the diabetes market, right? I mean, INR 12,000 crores is solid, it's about INR 300 crore, INR 3,500 crores is, right? And then you have cellphone areas and you've got everything else INR 12,000 crores. So when you say your 45% of the covered market, are there any specific subcategories within Derma that you're covering? Or this is just -- I mean, some more details into this would be help for...

So okay. So I mean, on the back sheet the site is part only, we're still getting that more reverse with the market. But as far as I understand, so there is 2 parts of the market, broadly, broadly set. One is medical dermatology, which is more about the oriental infections and the other piece is a little bit tilted in the cosmetology side. So through our first 2 acquisitions, our medical dermatology piece has got very strong. And in that particular context, we were talking about #3 line, which is almost 50% of the coverage. Now large markets where we are not covered. So for example, the #1 market in cosmetology is [indiscernible] acne care -- so [indiscernible] is still very small. Say, hair care, for example. Hair care, again, is a large market, but our presence there is very small. So these are some areas we have a smaller presence, new [indiscernible] for example, one of the largest market, but we have a very small presence in the emolument market. So these brands, if you look at these brands, there is an in-hole opening for us to really build brands around that one brand which we have acquired to make sure that we are able to get a higher market share in these markets where we are not press.

Got it. Got it. That's helpful. Current GCs of the brands that you have acquired between Glenmark and Dr. Reddy's, would the GCs be similar to outlet?

Yes. These -- we are in the same [indiscernible].

Okay. And my sense is these products could be manufactured internally, whether in Sikkim or [indiscernible], right?

Yes. So we are evaluating that because as of now, most of these products are done by third parties. But given that we have put together a fairly sizable derma basket now, we are evaluating the business case to manufacture these products in our Gujarat plant. So we should have some update on that the next time we meet up.

Sure. And the last is going to be 100% debt funded -- if so, what's the cost of funding that you're looking at? Will it be fixed or variable?

It is variable in the range of 8% to 8.5%.

Next question is from the line of Prakash from Axis Bank.

Just trying to understand you. So we have been fairly aggressive, especially in the derma side and getting the fair share of the market now. So you said that there is a white space of acne within the down. So you would still be open to looking at more assets?

Yes, it does make sense. If we get something which will fill the gap. So there are 2 answers to this [indiscernible]. One is that now it's time for us to consolidate like we have got 3 acquisitions in the year. So we clearly believe that now it's the execution time, the consolidation time. So are we ready to do something within there? The answer is a clear one. But if there is something which is useful and still in that range, which gives us comfort. We are still open to that.

Okay. And maybe I missed this, but the MRs, we are just the brand, right? So is it fair to say that the MR, which came from Oaknet, but they were medical derma and other -- so these are enough MRs or you will need more specialized MR for cosmetic derma marketing?

So we are adding what we have done in this some amount of redistribution of people which we have done, we are adding one more division, which will be primarily [indiscernible]. And we are hiring 50 people from outside. Rest 50 of them have been moved from inside from the various divisions. Now between [indiscernible], what happens because it's not such a big line when you do a presentation in front of a promotion in front of a doctor? It's more about training and understanding the product. So I think the team at [indiscernible] is a very good team at the management level at the marketing level, and we have had some very good successes in the recent past also. So that I'm not worried from that point of view.

I may just add to that. So the expansion in the fuel for is to the tune of 40, 50 reps like Amit mentioned, and the existing field force that Anders Derma open it is about 650. So it's really a very incremental expansion that we are looking at. So your earlier point that these brands that have come from Glenmark as well as reads are pure brand deals with very high GC. So it gives us a very good arbitrage potential in terms of scaling up of YPM of the business and hence also the margins of [indiscernible]

Okay, understood. And so from a margin perspective, it would be fair to understand that there is a lot of headroom, but currently, it will be one below the company average, and there is a potential to move to the company average is what you are saying?

It is far better than a potential Prakash. It's pretty much a done deal because this year, we have been saying that our Oaknet EBITDA margin for the year will be around 25%. But once we put all of this together. As I mentioned earlier, our IPM will be 5 lakhs per month right from 1st April. So that means that we have the line of sight on an EBITDA margin, which is in the range of 36% to 38% for next year. It's not a potential. There is a clear line of sight.

Correct.

Okay. And this we are saying for the full basket of the Oaklnet, the Glenmark and the recent is…

Yes. We are looking at the entire basket to be north of INR 400 crores in revenue next year with an EBITDA margin in the range that I highlighted to you.

Okay. So one more last question, if I may. So we said that you are fairly open to the [indiscernible] and it makes sense to cover the entire market. Just trying to understand what [indiscernible]

Sorry, can you repeat that again.

So Amit, you mentioned that clearly you will be interested [indiscernible] do franchise. But in the cardiometabolic can be #3 segment. Are there any white spaces and would you be interested in any...

So Prakash, I can't -- number one, I can't see any where you are sitting at this point of time. And second, historically, it has always been a difficult thing to run for. So right now, in our minds, we do not -- we do not have a site of getting to something in cardio, which is significantly big.

So again, it goes back to the covered market ratio, right? Yes, sorry…

We missed you again…

Yes. No, no, that's fine. So I was just saying that our presence in cardiometabolic is pretty expansive. So hence, the probability of finding white spaces is limited to that extent.

The next question is from the line of Tarun Shetty from Haitong Securities.

I just have one question. What would be the primary sales growth for this portfolio as at 22? And what would be the same year-to-date?

So the primary sale this year was to the tune of INR 50 crores. That's the number. And the CAGR over the last 2 years has been around 8%. And this is despite the fact that these brands were -- despite being a very strong brand, they were not promoted. But in our hands, when we look at the kind of focus and go-to-market that we are bringing, creating a new division and provide focus on these brands, we believe that 15% to 20% kind of a growth in the first 3 years is a doable proposition.

Okay. So for clarification, there INR 550 crores this year, you mean year-to-date FY '23 or FY '22?

Year ending March 23.

The next question is from the line of Aarti Rao from Anand Rathi.

Sir, I just missed out on the plan means that as tests. And any talk 2 or 3 brands that crosses over INR 10 crores or INR 30 crores...

I can add hear a slide echo from the management side. [indiscernible], please stay connected, while rejoin the management line back for the call. [Technical difficulty] Ladies and gentlemen, thank you for your patience. We have line for the management reconnected.

Hello. Am I audible?

Perfect I had questions regarding the brands that you disclosed. What are those 9 brands? And any brand that probably clocks more than INR 10 crores or INR 20 crores single hundred?

Yes, there are brand names the key brands are Acrofy, Aquaderm, Avarta, Hydroheal, Revibra, [indiscernible] some of the key brands. In terms of revenues, there are at least 3 brands in this portfolio, which are north of INR 10 crores, and there are a couple in the INR 20 crore bracket. In terms of leadership position, 3 of these brands are ranked among the top 3 in their respective segments. And there are other 3 of these brands which are ranked among the top 5 in their respective segments. So 6 out of 9 brands has some kind of a leadership position.

Okay. And my next question is what kind of growth the cosmetic derma segment would be growing on an IPM basis?

So the entire derma segment has a growth of about 10%, 11%. Cosmetic term is growing slightly faster than the average.

Okay. And do we expect the drugs that we've acquired, I mean, the brand that we have acquired would grow better than the industry rate?

Yes, that is the expectation. As I mentioned earlier, once we are able to take the brand and they get settled down within our system, [indiscernible] what we can expect.

The next question is from the line of [ Bharat Dakar ] from [ Annual Wealth Management. ]

Thanks a lot of opportunity. So basically, now what has been the total net debt position?

At the end of March, we'll be at around INR 850 crores for debt.

And our EBITDA in the vicinity of about INR 600 crores?

From a net debt-to-EBITDA standpoint, we expect we should be at around 1.5x this year, which will obviously significantly reduce when we look at what numbers we are looking at for next year.

Okay. So you are -- any like upside cap, we can expect that so something else also comes up for acquisition. What kind of upside gap we have in our mind for net debt-to-EBITDA number?

So we'll be comfortable. See, the banks require you to 3x. So we'll be comfortable holding the 2x mark. That's kind of the internal benchmark that we have for our assets.

Okay. Yes, yes. From a shareholder perspective, I would also recommend that only that not to cross beyond although your scalability and the way you have turned around at and your margins have improved, that tells us about your capability to shore up the margins. But then to, I think net debt to EBITDA of about 2 CP slightly more linger. So that is our possession also. And the other thing is that in all the brands, basically, do you expect all the entire INR 400 crores to go up to our 3%, 38% margin, which you said, right?

Yes. That's right.

Yes, more 25?

24.

[indiscernible]. So you're saying INR 150 crores EBITDA, and you have a debt of INR 800 crores, which we have taken at 8.5%. So INR 70 crores will be the interest cost.

Yes.

Okay. And what growth we should expect from our organic business?

So we can come back to you on that because we'll be meeting you again in 7, 8 weeks when we talk about our results. So we will give you a completely competently picture about the next year.

Okay. Any payout [indiscernible] kind in your mind which... [indiscernible] because we will be the first [indiscernible] reduce that, right?

So as I said, all of this stuff will pick up when we come to talk to you about the year-end results. Right now, we'd like to focus more about dermatology and Oaknet.

[Operator Instructions] The next question is from the line of Prashant Nair from Ambit Capital.

Just wanted to clarify a couple of things. So firstly, the incremental spend for you on these products would be the 50 MRs and additional sales promotion activity that you would have? Is that the right way to look at it?

Yes, Prashant. That's right.

Okay. Fair enough. And typically, when you acquire such brands, which have not been core to the seller, how much do you have to step up intensity related to what you would be normally doing in the product of yours? Is it -- I mean, is there any sense you can give, which help us understand the upfront outlet?

Yes, Prashant. So generally, if you ask us, we sign a pretty convenient to say, tail brands and all those things. But when we look at the brand from a good [indiscernible] point of view and what is the kind of image it has in front of the activities. So all these brands which we are talking about and also the [indiscernible] brands, they really stand out in the owner at the handover of the world, the sort of the world are really leaders in the in the own therapies. Now what happens over a period of time, when you have a very large basket, you can't help, but it comes into some kind of a logical order. So when it comes into a fresh -- when it comes to some fresh hands, will be energy, all of a sudden increases. And because we -- there are a lot of therapy gaps available in the acquirer. In case of us, the focus on the very increases very, very rapidly. And just the fact when a brand is promoted as #4 and when it is promoted as #1 or 2 makes us very -- makes a significant difference. So what we will see -- I mean take over, let's not talk about what will happen with the brands take open it for [indiscernible]. So it is just about the energy, the positioning of the brands, and that's how the whole difference is made. So in our plan, we have a very fresh and energetic way to look into these brands in the different therapies. And I believe that energy is a [indiscernible] for growth...

Okay. Yes. And then just one more clarification. So [indiscernible], when you mentioned the revenue number for a few of these brands, so north of INR 10 crores, a couple of which are the 2 bracket, [indiscernible] level, right? Or are these primary...

Yes. So these are Rx number, and some of them are exaggerated also what -- I think off-line people can tell you exactly what are the brand sites.

[Operator Instructions] The next question is from [ Mehar Ika ] from [ Equitas Investments. ]

So considering the cost of acquisition of the [indiscernible] crores and the turnover of around INR 50 crores. So we have given it a value of around upwards of like 5.5% down. So you must have done some market results. So according to what if this high value which you have given for it and what revenue potential that this portfolio holds in next 3, 4 years based on your restarting...

Yes. So that's a nice question. So as you would have been alluding to that cost pathology is a little premium to dermatology and the growth also in the last 5 years has always had the dermatology growth. So cosmetology as a segment is a little more ever than dermatology. That's number one. Then we look at what is the category you're looking at. So say, a product like an Aquaderm which is like INR 5 crores, INR 7 crores case revenue, if I'm not wrong, but the category is [indiscernible]. And it is the perception on that category has been very nice. So we do run this perception analysis among the tin brand-wide just to see how the brand is positioned in their end. So because the one which is cosmetology, net, it is taking the right boxes as far as the therapy is concerned. And historically cosmetology has been a little more rigor and growth has also been better than dermatology. That put together makes that EUR 3 million goes along...

Okay. And any revenue potential that we must have kind of assessed in the next 4 years, 5 years of on a long-term basis that the live banks can go up to this level from INR 50 crores to some number...

Next question is from the line of [ Harshal Patil ] from [ Mirae Assets. ]

Sir, just had one question to ask you. Basically, this was with respect to the margins for Oaknet. Sir, if we see the quarterly Q3 margins as of December quarter, I just hoping it was at around 27%. And right now, we are expecting about 25% for FY '24. So sir, am I missing something out here?

Yes. So I mentioned that 25% would be the margin for this year that is FY '23 full year approximately.

Okay. Okay.

The margin for '24 will be in the range of 36% to 38%.

Okay. And sir, the leases would effectively be the ramp up in the portfolio of term that's Glenmark assortment plus Dr. Reddy's portfolio.

Yes, to leverage ramp-up will always be a leverage. But what is important here when you get brands and you make them sit on the same people. That is where the whole -- the productivity then kicks in. And at the [indiscernible] level, if you are in the vicinity of 78%, 80% gross margins and are hitting a 5 lakh close to 5 lakh kind of IPM then these kind of margins. So when and when we are giving you these numbers, we have really not incorporated a substantial growth in the whole [indiscernible] system. We are giving you a very nominal kind of growth because we have to just get things together. But it's just a function of a 5 lakh productivity and earn huge gross margin between 78% to 80%. So largely these 2 things are there, the EBITDA margins will fall in between that 30%, 60%.

Next question is from the line of Shah Labarwan from Snowball Capital. Please Shah [indiscernible], please. No response to -- next follow-up question is from the line of Tarang Agrawal from Old Bridge Capital.

Just wanted to check, you mentioned that your number in the covered market the derma. Would the top 2 players be the same players who are the leaders in overall top therapy for this covered market as well?

GSK in this particular case, for the cover, yes, they are ahead of us.

Next question is from [ Ahyu Shama ] from [ Clearview Capital. ]

I think a key part of the strategy to show up gross margin is to ultimately make these products and how the acquired brands announced. Just wanted to check, what is the maximum turnover that we can generate out of the INR 300 crore odd gross loan that we have currently? and whether there will be a mine need for creating new capacity going forward if we were to ensure these products?

So I'll answer those 2 questions one by one. So the potential for fixed asset turnover in our industry is very high, like we are seeing a fixed asset turnover of more than 10x for our second plant. So we expect you should see at least that, if not more for the new facility. In terms of bringing the derma operations in-house, that is actively being evaluated. It will require so at present, our second facility configured for oral solid dose and injectables, not for derma. So if we do bring these products in-house, there will be some incremental investment, which we can quantify as soon as we make that decision. But your point is right that there will definitely be an arbitrage in terms of improvement in gross margin if they are brought in house.

And am I wrong in saying that we do not need any land and building it because the blocks have already -- we already have blocks in place. So it will all be plant initial [indiscernible].

Yes. So you won't be below utilities?

Any timeline that we are in the [indiscernible]...

That's being evaluated right now. We haven't crystallized on anything, but the next time we have a chat, I'm sure we'll have some kind of an update.

Got it. And in what percentage of products that are manufactured to third parties, I can get that number so...

Was this question for the Derma portfolio or for company as a whole?

Company as a whole.

Third-party percentage is 15% to 20%.

Ladies and gentlemen, I will take that as the last question. On behalf of Eris Lifesciences, that concludes this conference. Thank you for joining us. You may now disconnect your lines.