Torrent Pharmaceuticals Limited (500420) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Torrent Pharmaceuticals Limited Q4 FY '20 (sic) [ Q1 FY '21 ] Earnings Conference Call. We have with us today Mr. Sanjay Gupta, Executive Director, International Business; Mr. Sudhir Menon, Chief Financial Officer; and Mr. Aman Mehta, Chief Marketing Officer, India business. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay Gupta. Thank you, and over to you, sir.

Thank you, Nirav. Good evening, everyone. Thank you for joining us. I would like to begin now with a few comments on our Q1 operating environment. Starting with demand. Pharma markets saw negative growth during Q1 2021 as compared to strong growth rates in Q4 of last fiscal year. In India, the overall market declined by 6% in Q1 as compared to a growth of 9.8% in Q4 of last year. However, inside this 6% decline, there are 2 trends that gave us reasons for optimism. Firstly, the chronic markets did much better. The Indian chronic market had a growth rate of 4%, while the subchronic segment declined by 8% and the acute market declined by 12%. Secondly, while April and May were strongly negative, June saw a turnaround as compared to April and May. Growth rates in June was 2.4%, while April had a negative growth rate of 10.9% and May was also negative at 8.8%. We can report similar trends from Brazil. IQVIA data shows that branded generic market in Brazil grew by only 1% from April to June quarter as compared to 14.7% during Jan to March. It is worth noting that year-on-year growth rate in June was a positive 8.8%. We operate only in the chronic CNS, cardio and diabetes space, and this market grew in Q1 at 6.7% as compared to the overall market growth rate of 1%. Moving on to the supply side. While our supply chain was better than we had originally anticipated, the overall environment remains unpredictable. Since the lifting of the national knockdown in India, the number of COVID cases have gone up. As a result, state and local authorities have mandated local lockdown including in towns where our facilities are located. This has a direct impact on our production. Freight and other costs continue to remain at an unusually high level. Now let's move on to the highlights of Torrent's Q1 performance. Q1 revenues were at INR 2,056 crores, up by 2% on a year-on-year basis. EBITDA stood at INR 664 crores, up by 19% on a year-on-year basis. EBITDA margins were at 32%. Margins were higher as lockdown resulted in lower expenses. I'll make some comments on our major market. India revenues were at INR 925 crores and grew by 2%. During Q1, patient footfall was significantly impacted. Around 85% of our reps are now currently working in the field. As per AIOCD Dataset, Torrent's Q1 2021 growth rate was 1% as compared to an IPM growth of minus 6%. As noted earlier, the chronic market grew at 4% and Torrent's chronic portfolio grew at 8%. Moreover, IPM subchronic growth was minus 8%, whereas Torrent subchronic was at 0%. Our focus on brand building in the chronic and subchronic space continues to yield positive outcomes. Torrent is ranked #7 as per AIOCD quarter June 20 dataset, where as a ranking on specialty Rx basis stands a 6 as per the SMSRC dataset. On brand building front, Torrent has 16 brands in the top 500 brands of IPM with 10 brands of more than INR 100 crores. During the current quarter, Nebicard has crossed INR 150 crores mark as per AIOCD MAT June '20. Our new launches in CVD continue to gain volume momentum every month, even in the current difficult environment. On the productivity front, our PCPM currently stands at INR 7.7 lakhs as against INR 7.2 lakhs for Q1 of '19-'20. Commenting on the U.S. Our U.S. sales in Q1 were $47.4 million as compared to $51.4 million in Q1 of last year. For Indrad and Dahej plants, we have completed all the CAPAs and have submitted the closure report to the FDA. We await the FDA's communications on the next steps. Recently, we have also received our first approval of a product from external collaboration, which is erythromycin IR tablet. As per IQVIA, it is the $60 million market. We expect 1 to 2 additional approvals in the current fiscal year from external collaboration projects. Our Germany Q1 sales were EUR 29.3 million as compared to EUR 33.1 million in Q1 of last year. However, we are encouraged by the positive quarter-on-quarter sales as our Q4 '19-'20 sales were EUR 26.7 million. We are well on the way to resolving issues with our quality control procedures in Germany. At June end, 85% of the product issues have been resolved, and we are on track for 97% resolution by September end. Brazil sales were BRL 96.4 million, up by 1% on a year-on-year basis. IQVIA data shows that in Q1, Torrent had a growth rate of 10.5%, much higher than the overall market rate. One of the core reasons is that we operate only in the chronic space, which has grown much faster than the overall market. There were also some supply shortages, which negatively impacted our primary sales. The weakening of the Brazilian real resulted in our Q1 growth rate in INR to be negative 20%. Despite this short-term prevalence, we continue to believe that Brazil's structural story remains intact. We are optimistic about future reforms that are intending to increase overall competitiveness and reducing red tape. IMS now expects the Brazilian pharma market to grow in 2020 at the rate of 4.1%, in line with the mid-impact scenario as compared to a pre-COVID projection of 10.4% and the projection in March of only 1.9%. Torrent expects to launch 3 new products before the end of the current fiscal year, which will provide us with additional growth momentum, and we feel confident that we will be growing at a rate higher than the market. Nirav, we can now open the call to questions.

[Operator Instructions] First question is from the line of Vishal from Aviva Insurance.

Sir, my first question is on the overhead expenses. There has been a substantial reduction that we saw for this quarter. So what proportion of this is sustainable? Because this quarter, we saw -- I mean, there was no travel, there were no -- I mean, less overheads. So once things normalize, how would this pan out?

No, I think we'll have to wait for one more quarter before we answer this question. So you are right, I mean, the expenses are lower because of the lockdown situation, which happened, right, in quarter 1. So whether this kind of a substantial saving would continue in quarter 2, I really doubt about it. So it's better to wait for one more quarter to see what levels we are reaching because I think there has been a substantial improvement in terms of the field working, the hospital working and the doctor working. So I would not like to give you any guidance, but it's better to wait for one more quarter and see what levels we are achieving.

Okay. And sir, what would have been the key driving factors for the U.S. business because clearly, $47 million has been a relatively good number at a time when new launches have not been there. So have you been able to scale up those items in the U.S.? Or is it something else that is driving? Could you elaborate a bit on this?

No, in the U.S. market, I mean, overall, the generic market was negative 6% in Q1, so this doesn't surprise any one of us because of the low patient footfall and the high number of COVID cases. And we continue -- on the negative side, we continue to face price declines. We have no new approvals from Indrad and Dahej. But on the positive side, we are fairly competitive in the products where we play and we've been able to grow volumes and shares with us, I would say, existing basket of products. So I would say that to some extent, the positive and negative factors balance each other out for the time being.

Okay. Last question on Germany where you said the 97% of the issue should be resolved by September. So once things get back to normal, what would be the kind of growth that you foresee for the European market for FY '21?

So historically, Torrent has been growing almost double-digit every year in Germany. So I wouldn't expect us to return to that trend sometime before the end of the year. So for the current year, it would be slightly lower, given that we'll only reach, I'd say, our normalized growth by the end of Q2. So high single digits to close to double digits should be, I would say, a reasonable expectation for this year. And this is, of course, subject to the caveat that we aim to reach 97% of the problem resolution by September, and we are on track to do so.

Next participant is Prakash Agarwal from Axis Capital.

I just wanted to understand the gross margin improvement, so I understand -- I mean, the mix has not changed too much, right? For India business, Y-o-Y is fairly flat, which is good in this environment. U.S. is down and so is your Brazil, which is a higher gross margin business. So what has really moved in terms of gross margins?

So Prakash, what you said is absolutely right from an overall perspective. But as Sanjay -- Sanjay did mention that the chronic businesses have done well for Torrent in the branded generic space. And that would be one cause of a product mix change within the portfolio, which has rated better gross margins this quarter.

Okay. And so I'm just trying to understand, I mean, for the continuity part of it, so would this be sustainable? Or with your activities, which you said that has picked up, the mix would change a bit?

No, I got it. So I think last year, if you remember, we had given a guidance that between 72% to 73% is something which is sustainable, is what we feel, right? And for the last 4 quarters, if you see that we've been between 72% to 73% and if the guidance, which I would continue giving that the right number is anything between 72% to 73%.

Okay. Perfect. That helps. And secondly, on U.S. FDA, I missed. So what is our expectation in terms of reviving or getting approval from Levittown, Dahej and the other one?

So Levittown is relatively straightforward because we would complete the remediation and start production in Q3. We just need to inform the FDA. And at some point, the FDA will come and inspect us and then start approving new products. But for existing portfolio of projects, we will start manufacturing sometime in Q3. For Indrad and Dahej, there is actually no precedent, right, to these COVID times. So we don't know how it will pan out. So what Torrent has done is that it has completed its closure reports, so we have completed all the CAPAs and we've submitted the closure report. And what we do is, we have asked for something which is called a record review, so -- which is basically like a desktop audit, but we are just waiting for the FDA's feedback on this topic, right? So hence, as Torrent, it's best that we -- I mean, we are in no position to give any guidance as to when this inspection or record review will happen and when we'll -- we start getting FDA approval because we don't have any information on this topic.

Okay. Understood. But this Levittown, you are saying that you are expected to see inspection in Q3 and resolve it? I mean this would also be under this warning letter route, right? So do you have visibility to resolve and start commercializing from Q3, Q4?

So Levittown is slightly different because we are not manufacturing any product, right? So you'll recall that from Indrad and Dahej, we are currently continuing to commercialize our existing approved products. So what I was telling you was that from sometime in Q3, we will begin commercializing our existing approved products from Levittown. So in other words, it will come on par with Indrad and Dahej.

[Operator Instructions] Next question is from the line of Damayanti Kerai from HSBC.

Sir, can you split India growth into volume price and new launches?

Torrent India growth as per AIOCD, volume growth was minus 8.5%, price growth 7.4%, new launches 1.7%. And the IPM breakup is minus 11.8% volume, 4.5% price and 1.4% new products.

Sorry, new product, how much you said for IPM?

1.4%.

Okay. Okay. And sir, my second question is, we have seen that price increase has been one of the key driver for our India combination growth for some quarters now, so how confident you remain about sustaining just 7%, 8% kind of growth, which we are seeing on last few quarters?

This should be able to sustain. And as our new launches keep gaining momentum, the volumes also will keep adding. So right now, we are 3% higher volume growth than the IPM.

Yes. Volume, we should see a recovery. I was asking more on the pricing sustainability part.

So the 7.4% number should be sustainable.

And what gives you confidence about that?

Sorry, I lost you there.

No, I'm asking like what gives you confidence about sustaining this 7%, 8% kind of price increase on a consistent basis?

So the same matter that we review every year, how this comparative scenario is evolving compared to the next 2 or 3 brands, especially in markets where we have leadership positions. That's where the price increase, maybe 1% or 2% higher than the competition is sustainable. So that's how.

Okay. And my last question is regarding your debt repayment plan. So can you just update us on that?

So I think this quarter, we've repaid around INR 440 crores, I would say. And for the full year, we are looking at INR 1,000 crores kind of a number.

Okay. So INR 1,000 crores what we planned earlier, that remained on track, right?

Yes, yes, absolutely.

Next question from Nimish Mehta from Research Delta Advisors.

I actually also wanted to understand the outlook on gross margin. We've been hearing that the API costs have actually risen and most of the companies in API segment that are booking good pricing for themselves. So is it likely that we might be impacted in our formulation margin, especially at a gross level? Some outlook on that will be helpful.

No, no, you're absolutely right. So I think there are few APIs where we see a substantial price increase. But if you ask me whether it's going to be a significant impact going forward, the answer is no. I would say it's not that significant, which will be there as far as the gross margin is concerned. Yes, I mean on an overall basis, we are seeing a gross margin impact of 1 -- between 1% and 1.5%, I would say. But that's taken care basically because of certain price increases, which we have taken wherever possible, right, and more in the branded generic space. So if you ask me whether that's going to impact the overall margin, the answer is, no.

Okay. So as I understand, I mean, you just commented on the gross margin sustaining between 72% and 73%. I am, therefore, assuming that the API prices will stay at whatever higher level it is, but it will get compensated by the price increase. Is that a fair assumption?

No, no, absolutely. And I think most of the prior increases which we take, one is the competition-based price increase. We also look at cost-based price increases. So I think it should be -- it should cover up to that extent.

Okay. Great. Understood. The second thing, on the overhead marketing expenses, I mean, we are -- kind of there's talk in the industry that people are -- I mean, the industry is trying to move towards on a more digital marketing platform. Are there any thoughts related to that? And if yes, what do you think? I mean on a ballpark level, it could be the cost structure and the savings that we may realize.

So from the Indian market perspective, there will be a shift towards digital in the coming quarters and possibly longer. But it's not going to be a substantial part. At least that's what it's looking right now. So more or less cost structure should be similar. Probably in the next quarter, we can provide further information on that.

So you don't envisage a significant change in the overall scheme of things that has happened there?

Nothing, major. No.

Next question is from Prateek Agarwal from ASK Investments.

My question is with regards to production linked incentives that government of India is now starting to offer. Does Torrent in any manner seek to utilize those incentives?

So I would say we're evaluating the proposal which the government has just brought in, right? So maybe next quarter or maybe after that, we'll update you on that.

Next participant is Kunal Mehta from Vallum Capital Advisors.

My question is, Sanjay sir, sir, we wanted to understand the situation on sartan at the present. Are you back in the market and, if yes, for how many products?

So we are actually not selling sartans actively in the U.S. So we are actually prioritizing our FDA clearance and as such, we've taken, I would say, a management call to go slow on sartans. So I would not expect any material numbers from Torrent on sartans in the near future, at least until our FDA issues are behind us.

Sir, just a follow-up on this one. So if -- just so, sartan is already an approved product for Torrent, and so all you have to -- all you would have to do in my -- is this -- is file a -- give us your CBE-30 filing and change the source of API source and you can relaunch your product. So I wanted -- just wanted to understand what apprehensions or points are you having in your mind while you are deciding to go slow on sartans? Any perspective would be helpful, sir.

So essentially, we've had these experiences with this nitrosamine impurities and we built a complete infrastructure to test them. And as a company, we decided that it was better for us to manufacture these products in dedicated lines. And so we just need to reconfigure a bit our production tools, so that we can organize these dedicated lines to manufacture sartans. And also, we need to make some changes in our end-to-end supply chain in terms of sourcing of APIs, et cetera. So we are in the process of making those changes. So -- by moving, we are abandoning this market. But in the very short run, I would not guide you towards a material revenues here.

Understood, sir. And you will be changing your API suppliers or the existing suppliers would be able to supply you?

So the situation varies from sartan to sartan, but we are constrained to change a few important API suppliers.

Next question is from Nitin Agarwal from IDFC Securities.

So Sanjay, 2 things. One is, on the U.S., how has the shortage situations been in the U.S. over the last quarter, a couple of quarters? Have they sort of became more sporadic? Or do you see more opportunities there to participate in?

So in our experience, there was a little bit of a panic in the March time frame. But currently, that panic seems to have subsided, and we are almost in a normal supply situation.

So we're not seeing any incremental opportunities on the participating shortages?

I think we are not seeing either a panic purchases or -- there are, I would say, 1 or 2 here and there where certain suppliers might have difficulty in supply chain connectivity. But on a broader level, the market has no supply issues.

Okay. And on the pricing front, so does that mean there are relatively fewer price increase opportunities now to sort of take that further?

Yes. I think we are back to a normal situation, where, generally in the U.S., many of you model between 5% to 10% price decreases across the portfolio of products. So I don't see why the trend would be different in the quarters ahead.

And then, sir, the last thing on sartans, since you've been a participant in the past, have you seen any meaningful price hikes in general across the portfolio? Or that's not really been the case because of the disruptions that are happening in the market?

I think there are other companies who are more competent than Torrent right now to comment on today's sartan market. So I would refrain because we are not actively participating in this market in an aggressive manner currently. So I would just refrain from commenting on this market situation.

No problem. And secondly, on the emerging markets, we had a very sharp growth this quarter. So anything to sort of how should we look at that? Is it like a sustainable base for the emerging markets? And any particular market which drove it?

Sudhir, do you want to take that?

Yes, yes. So you're right, I mean, I think rest of the world looks a little higher this quarter. If you ask me whether this kind of growth is sustainable, I think it's better to wait for one more quarter to see because it will be too early for me to make a comment whether this is less more or whatever. But you are right. I mean compared to the earlier growth levels, it's been higher.

But Sudhir, was there any particular market which drove it or it was broad-based?

No, no, it was broad-based, I would say. And I think most of this would have been there because of some additional stocking because these are African, Southeast Asia markets, right? And the supplies -- and these are mostly distributor-driven models, which are there in the ROW market, where we've seen a surge happening. So possibly, yes, I mean this kind of a growth might not continue in the subsequent quarters, but it's better to wait for one more quarter and see.

And last one, Sudhir, on the staff cost, is there an element of some sort of -- some reduction in staff cost or lower staff cost for the quarter because of -- due to this lower field -- lower promotion-related activities or there is -- that has just sort of entirely reflected only in the other expenses?

Yes. It's only reflected in the other expenses, Nitin, nothing in the staff cost.

That is more a sustainable number, a regular number has been accounted for.

I would say so, yes.

You next question is from the line of Prakash Agrawal from Axis Capital.

So just trying to understand the India business better. I mean, clearly, you mentioned June saw a big tick -- uptick. And I can see from the AIOCD data also, your major brands beat Shelcal, your Dilzem, your Losar and all have high double-digit growth. So I would say partly could be stocking again with unlocking. But in July, we hear that there's some part of locking again happening. So would you say that growth is normalizing or is it still picking up? Any color you can give for July?