Torrent Pharmaceuticals Limited (500420) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Torrent Pharmaceuticals Limited Q3 FY '21 Earnings Conference Call. We have with us today Mr. Sanjay Gupta, Executive Director, International Business; Mr. Sudhir Menon, Executive Director and 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. Sudhir Menon. Thank you, and over to you, sir.

Yes. Good evening, and welcome to quarter 3 FY '21 earnings call. On an overall basis, quarter 3 witnessed mixed trends with respect to recovery from pandemic across the market. While India continued to witness a sequential recovery of near to normal, certain other markets where we are present, such as U.S., Europe and LATAM, they witnessed extended lockdowns during the quarter. Very quick highlights of our financial performance for the quarter. Revenues were at INR 1,995 crores, up by 1% on a year-on-year basis. Operating EBITDA was at INR 607 crores, up by 12% on a Y-o-Y basis. And the margin is 30%. Net profits were INR 297 crores, up by 18% on a year-on-year basis. The Board of Directors today has approved an interim equity dividend of INR 20 per equity share. I would now hand over the call to Aman for taking us through the India business. Thank you.

Thanks, Sudhir. The India business revenues were INR 930 crores, up 7% on a year-on-year basis. The IPM witnessed a sequential recovery in Q3 with a growth of 6% versus low to negative growth in the first 2 quarters. Torrent's Q3 growth as per AIOCD was 8%. Growth was driven by overall recovery in footfalls, continued momentum in chronic brands and strong recovery in subchronic brands. Our growth was also complemented by new launches, which -- the contribution of which increased to 2.9% versus 2% of Q3 last year. While we continue to outperform many of these high potential new launches from the last year, we have further launched 2 promising brands in this quarter, including Dapagliflozin and rivaroxaban. We would further like to highlight that, in Q3, we have undertaken a phased restructuring of our field force to optimize focus on high-growth markets and therapies. As of Q3, the MR strength post this restructuring was 3,800 compared to 4,000 in the previous quarter and the PCPM was 8.1 lakhs. In the beginning of Q4, we have further executed this restructuring and the Q4 strength as of this quarter Q4 stand at 3,600. And this PCPM will be reflected at the end of Q4. Torrent continues its focus on brand building and specialty approach and has 16 brands in the top 500 of the IPM with 10 brands more than INR 100 crores sales. I'll now hand over to Mr. Sanjay Gupta to take us through the international markets.

Thanks, Aman. Let's begin with Brazil. During 2020, Brazil GDP shrank by an estimate of 5% to 6%. Despite initial concerns in the March-April time frame about the pharma market, it has demonstrated a solid performance. As per IQVIA, MAT December performance of the branded generic market in Brazil was a growth of 7.9%. And in comparison, Torrent had a performance of 10.1% growth. Q3 internal sales were at BRL 125 million, up by 16% on a year-on-year basis. Q3 sales growth was primarily due to volume increase in our large brands as well as the launch of new products. We launched 2 new products in Brazil, mirtazapine ODT as well as bisoprolol. Our generics business, which now contributes 6% to our top line, has also started growing strongly. In Germany, in Q3, the German market was flat after 2 quarters of negative growth. Torrent Q3 sales were at EUR 29.6 million, up by 10% on a year-on-year basis. Our quality issues are now being resolved, and this is reflected in our recovering market share. Our market share has reached -- it's almost reached its prior level prior to the quality issues and is currently at 7% as compared to a peak market share in September 2019 of 7.2%. We have already launched 6 products this year and expect to launch 2 further products before the end of this fiscal year. Moving on to the U.S., our Q3 sales in the U.S. were $39.3 million as compared to $51.5 million in similar period last year. U.S. growth continued to be impacted due to temporary discontinuation of our sartan products, absence of new launches and price erosion on the base portfolio. For Indrad and Dahej, we have submitted closure reports and continue to await guidance from the U.S. FDA on next steps. Currently, we have 47 ANDAs pending approval and 6 tentative approvals in hand. To conclude, Q3 revenue growth was strong in India, Germany and Brazil. Profitability improvement was backed by cost control and efficiency improvements. Our focus continues to be on deepening our presence in our core markets and on returning our U.S. business back to growth. Operator, we can open the call to questions now.

[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.

Yes. The first question is around India business. I heard Sudhir say return to normalcy of 8%. But when we see the split of volume and price and new products, I think volume is still a negative number for both the market as well as Torrent. How do we see this going forward? What is the initial pillars? And how do we see the growth for next year?

Yes. The volume still continues to be negative. And the IPM volume was minus 1.9% for the quarter and Torrent was minus 1.6%. So this has seen a gradual recovery every quarter. So we expect it to continue the same pace of recovery over the next quarters.

Okay. But I mean given the low base that we have, is it fair to assume that we could have a mid-teen kind of growth with volumes coming back?

That would be too early to say right now when mid-teen growth would be back. It all depends on the overall market recovery. And what we've seen so far is that still Q3, there has been a consistent increase in the subchronic and acute as well. So that would be -- because chronic has remained more or less stable. So as that picks up, the overall volume would also pick up.

Okay. And the comment that you made on the phased restructuring, so with 3,600 in this Q4, is it already done? And this is the number we want to achieve? Or there could be further restructurings as well?

No, this is what has already been executed.

Okay. And so this 3,800 was during the quarter 3 or it was at the fag end of the quarter? We're going to see the impact in upcoming quarters?

Yes. Q3 -- sorry, 3,800 was in Q3. And at the beginning of Q4, it was 3,600. So it's been done over a 3, 4 month period.

Okay. So we're going to see the impact from Q4 onwards in totality?

Yes, should be.

Okay. And then next question is for Sanjay on the U.S. side. So Q4, we were expected to see the liquid products which were discontinued from the U.S. plant. So are you on track to reintroduce them? And how should we expect the pickup from sales of those products?

So, we should expect commercial impact starting from the April time frame onwards. The plant renovation is complete, is going through the validation requirements at this point in time. So we should have sales coming in from Q1 of next fiscal year. And generally, our first goal is to launch currently approved products. So we have about 6 approved products which we should bring to the market. I think the first year would be a gradual ramp up. And second year, onwards, I would say it should be back to where we were before we shut down the facility, which was at the annual run rate of between $10 million to $15 million. That's what we are targeting in the initial, let's say, couple of years.

The next question is from the line of Neha Manpuria from JPMorgan.

Aman, on the India business, given our volume is declining when you mentioned that the chronic sales is pretty stable, how should I look at that versus the sales restructuring? I mean what was the reason behind the sales restructuring given the volume is already weak in the quarter -- over the last few months?

It was -- I mean, exactly that. I mean, the essential purpose of this restructuring was to defocus on some of the less or low growing brands and increase focus on the higher growth brands, including the new launches. So that's the intent.

This reduction that you've seen, were these essentially from any specific therapy areas or any particular brands, I mean the older brands, et cetera? Would you like to highlight?

I can certainly share that they were from the older brands. Those would be the kind of low growth markets.

Okay. Understood. And on the Brazil business, we have seen a good quarter-on-quarter momentum on a constant currency basis. Sanjay, what is the product launch pipeline for Brazil over the next year? And how should we look at growth in this market?

So frankly speaking, I've been surprised this year by the strength of the Brazilian pharma market. Overall, we are seeing the branded generic market in the 8% range and the generic market in the 15%, 16% range. And this is despite the negative performance on the GDP. So this market continues to -- pharma market in Brazil continues to be, I would say, an island of growth in this overall environment. And I think that is going to continue. So the projections I'm seeing for the next 3, 4, 5 years from IMS and other consultancies is in the same rain. Our objective is 2 fold. Firstly, is to grow our branded generic business. And we would be launching about 4 -- 3 to 5 products a year in terms of branded generics. And at some point in time, we would be forced to undertake an expansion of the 2 field forces we have, which are in the CNS and cardio diabetes area. So the branded generic business would grow with existing products and 3 to 5 new products a year. In terms of our generic business, which is currently small, because branded generics is 91% of our business and generics is about 6% of our business. There is an enormous scope for growth here because the market itself is growing 15%, 16%, and we have a relatively narrow portfolio. So again, we would launch -- and like there is no need to increase field force to launch more generics. So we'll be focused on launching initially maybe less than 5, but eventually adding to that portfolio. So I would say, overall, we should grow faster than the market in both our segments, branded generics and generics.

Understood. And lastly, on the operating cost, if I were to look at our other expenses ex R&D, that pretty much remains flat, even though commentary from most of the peers or even as you suggested near normalization of trends in India. Has the restructuring also meant lower SG&A cost? Is that the way you should look about it -- look at it? Or how should we look at this cost trending forward?

So Neha, the promotional expenses have started going up. So versus quarter 2, quarter 3 has seen some increase happening. So that's something which has started. The only thing which has happened in this quarter is there were some offsetting items setting up the increase in the sales and distribution expenses. So 1 is I had said the freight expenses had gone up, right, in quarter 1, and there's some normalization, which will happen. So a good amount of normalization has happened in terms of freight expenses in quarter 3. So that offset the increase which we're seeing in the promotional/selling and distribution expenses. Also, there's a certain period with supply provision, which was made, not very big ones, smaller ones, where because of the supplies normalizing, it was reversed in quarter 3. So although the sales and marketing expenses have gone up, there were some offsetting things which have happened in quarter 3.

The next question is from Anubhav Aggarwal from Crédit Suisse.

Aman, one question on this restructuring sales force. Can you just indicate almost 10% of sales force, which has gone away, what was their productivity level? When you report overall, quarter 2, it was before restructuring 8.1 lakh or 8 lakhs. What is that, around 2 or 3 lakhs? Or what would have been their productivity?

No, it wouldn't have been as low as that. I think it would have been certainly lower than the company average, but it's not about that specific factor. It's the products that were more realized. So we looked at it from a product positioning and promotional angle rather than just productivity angle.

Can you explain this a little bit more in a sense that -- so effectively, we are saying that we are not losing sales at all? Same work is now being done by 10% lesser field force. Is that what's happening? So the same brands been promoted by lesser number of guys?

Yes. I mean, 1 or 2 brands may be of -- on less focus overall. So -- and -- but those brands should be able to maintain the share. But overall, there shouldn't be any negative impact on sales because coverage has not been impacted. Coverage is, in fact, exactly the same. So net benefit should not -- I mean, net impact on sales should not be negative at all.

Okay. Okay. Second question is on the U.S. business that now the new run rate of sub $40 million, is it more to lose, let's say, suppose our facilities -- just a scenario, doesn't take clear for another 2, 3 quarters. We'll see more competition coming in. For example, Depidol LA now is not such a big product for us, but you still see more and more guys keep coming there. So is $39 million a new low that on this we cannot go down significantly here? Or is it like a number in $30 million, $35 million is still possible as your quarterly run rate?

So I mean there's forces in both directions, right? On the positive side, we would have the Levittown plant starting sales from April. And then we have some external business development projects which are coming through. So we recently launched erythromycin IR, and we've also launched another product, aprepitant. So these would be, I would say, contributors on the positive side, the liquids business and the external R&D projects. On the negative side, price erosion continues. So this was -- we have [ an angio ] portfolio. And so as new entrants come in, there would be price erosion. And the price erosion, I would say, would be in the high single digits is what we are seeing in the U.S. market right now. So overall, I would say, that maintaining would be a good result.

Okay. And just 1 more question, sir. You said here, is that this year, margins have been great. I'm not looking for a number, but definite direction. Would fiscal '22 margins can match up fiscal '21 or only fiscal '23 margins would be higher or equal to fiscal '21?

No, no. So this year, the margins have been higher, right? And I don't think it is sustainable. I mean the way I look at, Anubhav, is that if I look at FY '20 as the normalized year, right, there, I think the operating EBITDA was roughly 27%. And what we've been talking about the business is that at least there are some inherent levers because of the branded piece being 65% for the margin to improve at least by 75 to 100 basis points. So I think if this year was not impacted by COVID probably from 27%, we would have come to 28%. And therefore, next year, we should be at around 29%, I would say. That's the way to look at it. But I really don't know whether some of these cost efficiency, which has been brought in, would play out next year or not, maybe a little bit, but not significant.

The next question is from the line of [ VS Rambabu ], who is an individual investor.

I'm the retail individual investor. I'm happy to know that the company is growing very -- you've given a good financial results also for this quarter. But I'm asking 1 question, but I do not know whether I can ask or not. I do not know this question. If any, sir, wrong with -- wrong with me, please kindly pardon me. Is there any idea to issue bonuses or anything for reward of the shareholders, sir, in the near future?

So I think in the opening call, I just mentioned that today was the Board meeting, right. the Board has approved an interim dividend of INR 20.

Okay. Okay, sir. Okay.

Nothing more. Yes, nothing more.

Is there any near future proposals are there like to know that?

Yes. That's what I said, right? I mean, so today, the Board meeting is over. So there's nothing as on date.

Okay, okay. Sorry, sir, I do not know whether this question may be asked or not, I do not know. As individual investor, just I'm asking. However, I am happy to know that good results was posted by the company.

The next question is from the line of Bharat Shah from ASK Investment Managers.

In that phased restructuring where significant such large field force has been reduced, then why did we wait this long? I mean, did it need a pandemic for us to take such a decision?

No, not really. It's more dependent on the market dynamics of each portfolios or each therapy in the portfolio. And it was taken -- the call was taken looking at the future growth markets. So the idea was to really optimize the overall growth of the portfolio.

That I understand and that it's for the growth of the portfolio. But these restructuring were relatively so simple. Shouldn't we have done it earlier itself, rather than having waited during -- because this is not a minor reduction?

I don't think we would have been able to do it sooner. It's purely a call that we evaluate -- as we mentioned on the call, that every year, every few years, we do evaluate the overall portfolio and productivity. So it's part of that exercise.

So the separation cost is already reflected in this quarter results?

Sudhir?

Yes, yes, absolutely.

All the costs are reflected in this quarter results?

Yes, yes.

[Operator Instructions] The next question is from Prakash Agarwal from Axis Capital.

Can you hear me now?

Yes. Please go ahead.

Yes. On the financials, just wanted to know the debt reduction for the quarter and the FCF for the quarter?

So YTD December, the total reduction is roughly INR 830 crores.

And first half was, sir?

INR 440 crores, I think, yes.

Okay. And what is the -- we were looking at INR 1,000 crore plus number?

Yes. I think we should be there.

We should be around INR 1,200 crores now?

No, I think it's -- closer to INR 1,000 crores is definitely possible.

Okay.

Let's see what happens in quarter 4, Prakash?

Okay. And what is the free cash flow, sir?

Free cash flows as at December should be roughly INR 1,200 crores.

Okay. Okay. And just 1 on the U.S. FDA. I heard the opening remarks. So our remediation is fully done as was also the last quarter. But in terms of dialogue with the FDA, has the dialogue progressed? Or they have given any dates? Or the physical inspection started by Indian inspectors? Anything of that sort that we have requested? Any update would be useful.

Yes. No, so we haven't touch in -- our regulatory group has been communicated with the FDA. But there is nothing that we are able to share, right, as of today in terms of indication as to when they would come. So it's an ongoing conversation, and we have taken note of the fact that some local inspectors from the FDA have started testing facilities. So from our side, let's say, the pressure is on, but when we have something concrete, we will report to you.

Okay. Perfect. And last, just 1 more clarification. So from a margin -- EBITDA margin expectation perspective, what I heard right was around 29% with the phased restructuring getting reflected, but with not much impact on the revenue growth. Would that be correct understanding?

What do you mean not much impact on the revenue growth?

So when you're pulling out 400 people as Aman...

Yes, absolutely, absolutely.

Yes. Yes. So there is not much on the -- impact on the sales as you are just defocusing on a low growth brand portfolio. Is that correct?

That's right. That's right.

The next question is from Arpit Kapoor from IDFC Mutual Fund.

Just on the domestic piece, so given with the reduced sales force, we are currently running almost INR 1 crore plus per MR. So where do you see -- how far can you see this number going before, let's say, we will evaluate in -- before we would need to add sales force again?

So the existing basket of brands in the portfolio right now can certainly sustain this strength of the field force. And as and when we have further launches over the next year, 1.5 years, it leaves us in a much more comfortable position in terms of overall PCPM to expand as well. So we would take a call definitely every year on the expansion. And just to further clarify. This restructuring also did have some part of expansion as well. So it wasn't just a decrease. It was net at 3,600.

Okay. Okay. And as far as the pricing is concerned, so again volumes continue to be negative. I guess pricing growth would have been close to 6%, 7%, and that is the trend that we believe we are comfortable even for next year as well. So we'll be able to take that much kind of a pricing growth for the -- from a portfolio point of view for the domestic business?

Yes, there should be.

Okay. Okay. And in terms of new product introductions, any plans of getting into new therapies or it would be in the existing therapies that we are there?

As of now, it's more in the existing therapies. This quarter, in Q3, we had 7 new launches, and we expect maybe 4 to 5 in Q4.

The next question is from Bharat Shah from ASK Investment Managers.

I hope this is not taken wrongly. But last several quarters, 8, 9 quarters, we seem to be in a kind of -- into rate of growth of 1%, 2%, 3% type. When do we think we are likely to break out of this stranglehold?

Yes, Sudhir?

Okay. Yes, I'll take that question. Yes. So you're right. I mean so 1 of the 2 important factors which have impacted, right, I mean, for the last 5 or 6 quarters, one is the U.S. business, right? I mean so somewhere in 2019, the whole U.S. FDA warning letter and [ YI ] came in. And since most of our filings are basically from these 2 facilities, we were stuck on account of the new products not coming in. So U.S.-based business, we know that it's always a declining sales, right, because of price erosion. So that's something which has got impacted. The other is in terms of INR growth, yes, the BRL USD depreciation, which has almost been 25% over a period of 1, 1.5 years, right. So these 2 put together have impacted. The third thing, which happened, was somewhere in quarter 3 of last year, we had implemented the new quality management system in Germany because of which there's a lot of backlogs in terms of revealing batches to the market, right? And over the last 3 quarters, we have been talking about all these 3 parameters. But if you look at the intrinsic value for these 3 businesses, you will see that Germany is now come back to a double-digit growth, which is around 10% in constant currency and INR growth is around 21%. So I think the future outlook for Germany looks very good because all the remediation plan is now over, and we are back as per our normal base, right? The second thing is, as far as Brazil is concerned, last quarter, we said, right, I mean, adjusted for the utilization, which is happening in the distribution business, it's double digits. So now we've started seeing double-digit growth in Brazil in terms of constant currency, which is 16%, although in terms of INR, it is minus 8%, right? So we believe that going forward now, there's no room for further currency depreciation as far as BRL USD is concerned. And if it all, once the economy starts to revise, after the COVID disruption, which has happened, there should be some appreciation happening. So going forward, you will see Brazil also doing well both in terms of constant currency and INR. India is already understood well because the market is gradually recovering. And we've seen a 6% growth in quarter 3. So we believe that quarter 4 should be still better than quarter 3 and we should be 200 basis points -- at least 200 basis points above the market, right? I mean, so that should also be on track. So U.S. is only a surprise which is there, right? I mean so we're all waiting for the U.S. FDA inspection to happen and our new products to come in. And once those things come in, you will start seeing U.S. contributing to the overall growth of the company, right? Because today, if you see, U.S. is around 20% of the business, and -- which is degrowing at around 25%, right? So the overall growth impact because of U.S. is 5%, for the reasons known. But once the U.S. FDA issue is sorted out in the coming year, you'll find U.S. contributing to the overall growth of the company. So all the 4 important geographies, which contributes to 85% of our total revenue, will start to fuel the overall growth coming in.

So can we say the next year should be a year of watershed departure?