Eris Lifesciences Limited (ERIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 and FY '24 Earnings 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, Chief Operating Officer and Executive Director. [Operator Instructions]. Please note that this call is being recorded. I now hand the conference over to Mr. V. Krishnakumar, Chief Operating Officer and Executive Director of the company. Thank you, and over to you, sir. Please go ahead.

Good afternoon, and welcome to our quarter 4 and FY '24 business update. So just before we get into the quarter, I think this is a good time to kind of recap the journey that we have been through over the last 24 months or so. It's been nothing short of transformative as far as our business is concerned, as far as our footprint is concerned. It began with the acquisition of Oaknet in May '22, followed by the acquisition of suite of brands from Glenmark and Dr.Reddy's later on that year. So we put together a dermatology franchise in financial year '23. Then in the financial year that went by, we picked up the Biocon, nephro and derma businesses in the month of November, followed by 2 very pivotal and strategic deals in quarter 4, which kind of go hand-in-hand with each other: firstly, the Swiss Parenterals Limited acquisition and the acquisition of the Biocon injectables business, which was announced in March and completed in April. So a total investment of more than INR 3,500 crores in the last 24 months, a big part of which has happened in the last few months and a very, very transformative journey. I'll articulate more about this as we go ahead. A quick update for all of you in terms of what we have started doing on the Q4 deals. Obviously, these are still early days. So we will come back to you with a detailed update post the completion of quarter 1. But -- and also, we have acquired Swiss Parenterals, which had an FY '23 revenue of INR 280 crores, 27% EBITDA margin. The Eris equity stake in Swiss has been augmented to 70%. We kickstarted the business integration. So the Eris corporate team now overseas core business activities at Swiss. Also, this is something that we had highlighted and we shared the deal with you that we see a lot of manufacturing synergies between the Biocon portfolio and the Swiss manufacturing capability. So happy to share with you that we have initiated the manufacture of Biocon injectable products at the Swiss units, and this will ramp up. Swiss has an active R&D pipeline of more than 90 products. We are in the process of strengthening go-to-market activities, including business development and regulatory. And the other important initiative where we have already started work is to get the Eris Ahmedabad unit inspected by international regulatory authorities later this year. Because you might recall that we had spoken about initiating the export of oral solid dose forms as an additional -- as a completely new revenue line for the company, whereby we would leverage the manufacturing footprint at our Ahmedabad unit and we would leverage the channel relationships of Swiss Parenterals. So the first step in that direction has been taken where we're preparing the groundwork to get the plant inspected later this year. As far as the Biocon injectable business is concerned, we completed our acquisition in early April. It has brought power brands like Basalog, Insugen, Biomab, Canmab, Ivnex and Biopiper into our portfolio. The revenue run rate at the time of acquisition was to the tune of INR 30 crores per month. Now this acquisition has resulted in a significant expansion of our covered market. So we see that our covered market has expanded by more than INR 15,000 crores because of this acquisition. We have added 4 divisions insulin, critical care, oncology and market access. So insulin, critical care and oncology is something that we have spoken to you before. market access is a very interesting, again, new revenue line that we've added. So market access division is basically engaged in supplying the same suite of products to various central and state government institutions. So this is, again, a new revenue line that has gotten added. We have an active sales and marketing team of around 630 personnel which includes 435 reps. So moving on. So this is something that we are very excited about, the kind of diversification that we were seeking in our therapeutic mix in the domestic formulations business, which is still the mainstay of the company. So if we look at March '22 versus April '24 on a MAT basis or roughly a 2-year period, our top 3 therapies which is oral anti-diabetes, cardiovascular and VMN accounted for 80% of our business back then. Now the concentration of these 3 therapies has been reduced to 54% after accounting for the fact that these therapies have delivered 11% CAGR over this time period. And our emerging therapies, notably derma, insulins, women's health, CNS, oncology, critical care and nephro, they now account for 40% of our business. So we kind of are happy with what the way this has come together, and we believe that this sets a very good base for secular organic growth going forward. This is a quarter 4 picture from AWACS in terms of growth versus peers. So the IPM growth for quarter 4 was 9.5% and Eris' growth was to the tune of 14.5%. So happy to share that Eris continues to outperform the IPM and also continue to stack among the top 10 players. Now moving on to the quarter 4 update in terms of primary numbers. Domestic Branded Formulations, our flagship segment, clocked a revenue of INR 480 crores in quarter 4 of this financial year. This accounted for 87% of our consolidated revenue for the quarter. In terms of quarter 4 growth, the overall growth in the Branded Formulations revenue was 23% and the organic growth in quarter 4 was 15%. We expect to see a sustained 12% to 14% organic growth in our Domestic Formulations revenue in FY '25 as well. For the full financial year, Domestic Branded Formulations clocked a revenue of slightly over INR 1,900 crores. It accounted for 95% of our consolidated revenue and then implies a growth of 18% over last year. Again, we expect to see a 12% to 14% organic growth in this business in the current financial year. And also happy to share that Eris MJ closed the year with INR 46 crores of revenue in its second year of operations and an exit run rate of INR 5 crores per month. Coming to Domestic Formulations EBITDA. The quarter 4 EBITDA of the segment was INR 130 crores. This represents a 27% margin and a growth of 8% over Q4 of last year. There was a decline of 180 bps in Q4 gross margin due to the evolving product mix. There are new items that have been added to the portfolio, including the Biocon segment that we have picked up in November. This product mix is expected to stabilize by the first half of this year. For the full year, the EBITDA of the business segment was INR 656 crores, which represents a margin of 34% and an increase of 100 basis points over last year. This increase was driven by a couple of factors. One is, as we already recapped to you in previous occasions, successful integration and significant margin improvement in our derma segment from 27% to 35% and a major reduction in the EBITDA burn from Eris MJ. So it was INR 20 crores burn in FY '23, which is at INR 8 crores burn this financial year. And we were looking to get to breakeven in quarter 4, which we are more or less there. Quarter 4 EBITDA was around minus INR 1 crore. We'd like to share some clarifications on the Domestic Branded Formulations EBITDA. So starting with our reported formulations EBITDA of INR 656 crores for the year and INR 130 crores for the quarter. There were a couple of onetime nonrecurring items which we'd like to call out. So there is a bucket of INR 21 crores which includes a few items like donations, SAP implementation costs and deal-related expenses. So this aggregated to INR 21 crores in quarter 4 and hence for the financial year. And the second factor is something that we would like to call out here, which is what we see as the excess OpEx that we've spent on the Ahmedabad plant. So basically, we have spent INR 30.5 crores as operating expenses for this plant, which represents pretty much a fully loaded cost. However, the capacity utilization was less than 20%. So on a pro rata basis, we have overspent here to the tune of INR 17 crores. And this situation will get normalized by quarter 4 of this year. But after adjusting for these two anomalies in the numbers, the adjusted Domestic Formulations EBITDA is INR 695 crores, which represents a margin of 36%. So I guess if there is one message that I would like to leave you with on this slide, it is that the fundamental characteristic, the fundamental margin profile of our Domestic Formulations segment is intact. It continues to be a 36% margin business. Moving to the consolidated picture for the quarter and the year. Consolidated operating revenue for the quarter was INR 551 crores. This represents a growth of 37%, and consolidated operating revenue for the year was INR 2,009 crores which represents a growth of 19%. Post deal closing, Swiss Parenterals clocked a revenue of INR 55 crores, which is part of Q4 consolidated numbers. Q4 EBITDA stood at INR 148 crores with a 27% margin and 25% growth year-on-year. FY '24 EBITDA stood at INR 675 crores with a 34% margin and 26% growth year-on-year. This implies a margin expansion of 174 bps. Quarter 4 PAT stood at around INR 80 crores with a 30% growth year-on-year, and FY '24 PAT stood at INR 397 crores which implies a growth of 6%. This includes the impact of all acquisitions and nonrecurring items. Adjusted EBITDA for FY '24 was INR 713 crores on a consolidated basis. This represents a 36% margin and a 33% growth year-on-year. Adjusted profit after tax for the year was INR 432 crores, which represents a 22% margin and a 16% growth year-on-year. A little bit of clarification on the adjusted profit after tax. So it really flows through some of the adjustment that we spoke about in the EBITDA a couple of slides ago. So there was an adjustment of INR 38.4 crores to the EBITDA because of nonrecurring items. So this flows through to PAT as well and the impact at the PAT level is INR 35.4 crores. So the consolidated PAT is INR 397 crores on a reported basis and the adjusted PAT is INR 432 crores. Coming to the other important metrics for the year. We report one more year of strong operating cash flow conversion. So our operating cash flow to EBITDA for the year was 72%. Earnings per share reported for the year stood at INR 29, which represents a growth of 6% year-on-year. And cash EPS, which excludes the effect of amortization, stood at INR 38, which is a growth of 14% for the year. In-house manufacturing, which is basically our Guwahati and Ahmedabad sites, accounted for around 60% of Domestic Branded Formulations revenue this year. This is primarily on account of the evolving product or business mix. Consolidated debt on our balance sheet as of March 31 stood at around INR 2,700 crores. We expect that this will reduce by INR 400 crores in this financial year from internal accruals on the back of our continued healthy operating margin and strong OCF conversion. In terms of return on capital employed, you can see that it was at 34% in FY '22. And then FY '23 and FY '24, the numbers are 20% and 11%, which is clearly driven by acquisitions, where the gross block impact has come into the base instantly. Amortization impact has also come in. But the earnings, the margin improvement, all those things, integration, they take time, which is why when you look at FY '24 return on capital employed on an adjusted basis, it's a number of 19%. So this adjusted is based on full year pro forma EBIT of FY '24 acquisitions and it excludes the impact of M&A-related amortization. Moving on to the guidance for the current financial year. So as mentioned earlier, we reiterate an organic revenue growth guidance of 12% to 14% on our Domestic Formulations base business of FY '24, and we expect to maintain a Domestic Formulations EBITDA margin of 36%. On Swiss Parenterals and the most recent Biocon injectables acquisition, we will share the FY '25 revenue and EBITDA guidance post completion of quarter 1. We are in the process of putting things together. We have good visibility of more than 20 first-in-market launches through our own R&D pipeline. And when we spoke to you last time, we spoke about the benefits that are to be gained by enforcing the manufacturing of some of the Biocon products, whether it is insulins or oncology or hormones. Now in order to achieve the in-sourcing, we are looking to set up these manufacturing blocks at our Ahmedabad facility, and we estimate that we'll have a CapEx of INR 70 crores to INR 80 crores around the same. In terms of key considerations for the financial year, again we have depreciation to the tune of INR 60 crores, amortization to the tune of INR 225 crores. Interest expense, we estimate at around INR 240 crores. As articulated on numerous occasions, we continue paying cash tax at the MAT rate of 17%. We have an accumulated MAT credit of around INR 460 crores as of March 31. So we will progressively leverage the accumulated MAT credit over the next few years, because of which operating cash flow is expected to be maintained at 70% to 75% of EBITDA. Debt reduction continues to be a very important strategic priority for us. So the pro forma EBITDA of FY '24 of all the acquired businesses is more than INR 850 crores. So on this basis and looking at an outstanding debt of around INR 3,000 crores, we are at a debt-to-EBITDA ratio of 3.5x now, and our priority is to reduce this to less than 2x in the next 18 months. So towards this, we expect INR 400 crores of repayment through internal accruals this year and INR 600 crores of repayment through internal accruals in the next financial year. So by the end of next financial year, we will be at a ratio of around 1.5x, which is something that we believe is a comfortable place to be in. So this concludes the presentation for this quarter. Now we move on to Q&A.

[Operator Instructions] The first question is from the line of Gagan Thareja from ASK Investment Managers.

I hope I'm audible.

Yes, sir. You're audible. You can go ahead.

Okay. Yes. So I think you put out a filing on the stock exchange indicating that you intend to do a fundraise. Can you give us some idea of the magnitude of the fundraise and in what form do you intend to do this and by what time? [Technical Difficulty]

Ma'am, we are unable to hear you. Can you unmute the line from your side?

Yes. Apologies. It's unmuted now. Sachin, please go ahead.

Gagan, can you hear me?

Yes, I can hear you now.

So we intend to raise NCDs of around INR 1,250 crores and repay the CPs which are due first week of June -- second week of June.

Okay, okay. And is it also possible for you to apprise us of how the acquired brands from Reddy's and Glenmark have done for you this year? And how do you -- I mean, what are your sort of strategies or thought processes to scale these businesses? And likewise, for the other acquired entities also, if you could apprise us of what are your aspirations perhaps if not on a short 1-year frame but perhaps on a 3-year frame and also give us your thoughts on the profitability metrics of these businesses going ahead.

Gagan, Amit here. So Gagan, look, Dermatology is clearly emerging as our fourth largest therapy now. So typically, we were strong in diabetes cardiovascular and VMN. These were 3 categories which we used to be very dominant. Now we are looking at dermatology, it's now become our fourth largest therapy. And if I'm not wrong, we are already featuring in the top 10 in dermatology. There is some movement or noise in the data of the AWACS data which happens when you kind of buy brands from outside. Now I am having a very good traction between dermatology and cosmetology. We are still doing better in dermatology. So Glenmark brands were largely on dermatology, and that is one area where we have seen high teen growth. The cosmetology piece hasn't done as well as the derma piece, but I think we are learning the ropes there. Dermatology is a very large business between dermatology, cosmetology, the clinical dermatology. So that is panning out good for us. We aspire to be 1 of the top 5 in dermatology. So it's a big ask -- not very big, it's a decent ask, but we think we have the wherewithal to achieved that. Because inside, if you look at the major brands, our major brands are showing much bigger growth than the overall growth of the business. So that gives me a lot of confidence. So I can tell you for sure that dermatology will be another large player.

Is it possible to give us the numbers for Oaknet, Glenmark acquired and Reddy's acquired brands for FY '24, both topline and margins if possible?

Look, margins, Oaknet margins are almost at the company level margins. I can safely tell you the margins are at around 35%. Now if you look at the AWACS data, it is all over the place. So that is reporting a triple digit kind of -- Kruti, am I right?

Yes.

In most of the brands. So it went down and then it came up. But what I can tell you, we see a healthy teen, higher teen growth in the next 2 years when it comes to our large brands.

So the primary sales -- I mean, secondary sales, right, as you say, were all over the place. But for the primary sales that you would report in your own income statement, what would be...

Gagan, Kruti here. So all these pieces are now part of the DBF business, and disclosing each brand or each therapy separately is not a part of our guidance. So you'll have to go by the secondary numbers as far as each brand or each therapy is concerned.

All right. And for the MJ biopharma piece, how is that working out in terms of monthly sales numbers? And are you at a breakeven on that business now? Or what are the margins looking like there?

Yes, Gagan. We told you in the presentation at quarter 4, we are almost breakeven. The loss was limited to INR 1 crore for a quarter. So we are quite -- we are up there now. And the run rate, we are run rating at INR 60 crores. But you'll have to wait for this business because we are having 2 businesses in insulin now. So there is one large piece which has come from Biocon and then there is an MJ piece. So I will tell you, after the first quarter, how do we manage both these brands. Right now we are managing both the brands within the company. But you need to give me 1 quarter to make it more clear. Largely, the large portion of the growth will be driven in the MJ brands -- sorry, the Biocon brands because there are very large-sized brands, Basalog being INR 100 crores and Insugen being INR 100 crores. Large availability across the country. So most brands have a lot of juice in them.

Also, could you perhaps clarify, I think Mankind also has an in-licensing arrangement with Biocon for Glargine, if I understand it correctly. And obviously, you will be up against their fairly comprehensive distribution. In addition to that, my understanding is that with dapagliflozin and gliptin all now becoming generic, price points are lower and penetration is much higher volume-wise, and they tend to sort of delay the onset of insulin usage. So between these two, do you see these two in some way sort of be the challenges that you might have to face in growing your own insulins business?

So Gagan, look there is no science which says that basically these products will replace insulin at any given point of time. Secondly, insulin initiations in India has been very, very poor when compared to any of the West. The adoption has been very, very poor. So even when we talk about develop countries like U.S. where the products have been available for a pretty long time, we really don't see a challenge in insulin. So insulin market in India is still very, very under-penetrated. And when you look at the science, it actually doesn't, at any point of time, say that these OHAs would substitute for insulin. So we don't find the insulin going down at any point of time.

Yes. And on the -- from a competitive standpoint, how do you see the market with Mankind also entering this business?

Look, Gagan, we want to believe we are good at diabetes and we are good at insulin. Insulin is a little bit more concentrated form in diabetes. So we believe we are good. And up until this point of time, our 2 years of journey have actually been quite reasonably very good. So let's see where it goes from here.

[Operator Instructions] The next question is from the line of Neelam Punjabi from Perpetuity.

Am I audible?

Yes.

Ma'am, may I request you to use your handset, please?

Yes. Sure. Is this better?

Yes, ma'am.

My first question is on the Swiss Parenterals portfolio. So have we launched anything from that portfolio in our Domestic Formulations segment?

Yes, we have already. So the idea was when we bought the critical care piece from Biocon, we wanted that to be shifted first to Swiss and then launch new products. So I think that cycle has started. And we believe by the end of this quarter, a large percentage, almost 60 percentage of that portfolio, should be manufactured with Swiss and there should be 4 to 5 new brands which should be launched manufactured by Swiss. So that plan is on track.

Got it. And secondly, my question was on the net debt figures. So INR 2,700 crores by March 31, 2024 that you all mentioned, that includes the potential payout for the Biocon acquisition, right?

Yes. So just to clarify, the Biocon acquisition of payout is completely factored into that and the INR 2,700 crores as of March 31. But for all practical purposes, we gave the debt figure at INR 3,000 crores. Because the Swiss Parenterals augmentation of Eris' stake from 51% to 70%, that resulted in the debt figure going up to INR 3,000 crores, but that happened in the month of April. So while March 31 is INR 2,700 crores, our starting point for the debt is INR 3,000 crores. And this includes everything, nothing has been left out.