Torrent Pharmaceuticals Limited (500420) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Torrent Pharmaceuticals Q3 FY '23 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Sudhir Menon.

Thank you. Good evening, and welcome to quarter 3 FY '23 earnings call. Quarter 3 registered revenue growth of 18%, led by strong growth in the branded generic markets and steady performance of the generic markets. Branded generic markets constituted 70% of the total revenue base. The growth in the branded generic markets were primarily driven by new launch momentum, performance of the top brands and integration of acquired portfolio. In terms of financial performance during the quarter, the revenues were INR 2,491 crores, up by 18% on Y-o-Y basis. Operating EBITDA was INR 724 crores with operating EBITDA margins at 29.1%. There is a one-off impact on gross margins by around 0.6% for the quarter due to under absorption of manufacturing cost as there was a temporary stoppage of manufacturing in the month of October for around 15 to 20 days for carrying out cleaning validation of certain equipments as a follow-up to the USFDA audit. Today, the Board of Directors have approved an interim dividend of INR 14 per share. With this, I would request Aman to give his insights on India business.

Thanks, Sudhir. India revenues at INR 1,259 crores grew by 17% and included revenues from the integration of Curatio Healthcare. As per the AIOCD data set, the Torrent's growth in Q3 was at 12% in line with the IPM growth of 12%. Our growth was aided by new launch performance, particularly in the chronic segment, performance of our top brands and strong growth of the Curatio portfolio. At the end of the quarter, Torrent has 19 brands in the top 500 of the IPM with 13 brands now more than INR 100 crores sales as of MAT December 2022. Our field force has been further expanded and MR strength now stands at 5,300. This is inclusive of the Curatio division. Our base business MR strength stands at 4,700, which has also been expanded in the current quarter. For YTD December FY '23, revenues were INR 3,728 crores, up by 15%. We expect the India business to continue its growth momentum, backed by new launch performance, top brand performance, increase in field force productivity of the expanded field force and continued performance of the acquired portfolio of Curatio Healthcare. I'll now hand over to Mr. Sanjay Gupta for the International business.

Thanks, Aman. Let's start with our biggest branded generics business outside of India, which is Brazil. So Brazil revenue was at INR 248 crores, up by 36% on a Y-on-Y basis. Constant currency revenue was in Brazilian real, BRL159 million, was up by 17%. As for secondary data set, Torrent's growth is 19% versus the branded generic market growth of 13% for the quarter ended November '22. On a MAT December '22 basis, Torrent's growth is at 15% versus a BGx market growth of 12%. Strong contribution to growth has come from our CNS franchise and the generic business, which now contributes about 14% to our Brazilian revenues. We have launched 6 products in the last 12 months. The 2 biggest markets are for Venlafaxine and Rivaroxaban, where our market share in prescriptions in the month of December is at 8% for Venlafaxine and 9% for Rivaroxaban. Our plans to increase our coverage of CNS in cardio markets from the current 19% to 35% by 2025 are on track. This year, we have received 7 approvals. There are 10 products pending approval with ANVISA, and we would be filing an additional 10 plus products before the end of this fiscal year. IQVIA projects a retail market growth of 11% in 2023 and 2024 and we should be growing at a rate higher than this. Moving on to Germany. Our German revenues were INR 241 crores, up by 1% on a Y-on-Y basis. Constant currency revenue were at EUR29 million, up by 4%. We have started growing again, thanks to the start of business of some new tenders that where won earlier in the year as well as 4 new launches in Q3. For the coming year, we anticipate single-digit growth coming from tender wins, some of which have been realized already. In 2022- '23, we would have launched more than 10 new products in Germany. The new products help us compensate the pricing pressures due to increased competition in the market. On the U.S. side, U.S. revenues were at INR 291 crores were up by 24%. Constant currency revenue was $35 million, up by 13%. We have received OAI classification for our Indrad facility. For Dahej and the oncology facility, we continue to wait for the USFDA inspection. Future outlook of the U.S. business is linked to our ability to get new products on the market. We expect to file about 5 to 6 products in the current fiscal year. As of December 31, '22, 48 ANDAs were pending approval with the USFDA. To conclude, while the BGx markets shall continue to lead the growth, Germany shall continue to witness steady sequential recovery. For the Indrad facility, we are actively engaged with the regulator for resolution of issues at the earliest. Operator, we can now open the call for Q&A, please.

[Operator Instructions] The first question is from the line of Saion Mukherjee from Nomura Securities.

Sir, can you indicate the growth without Curatio? What is the organic growth for India in this quarter?

The base business growth is 12% and the reported growth that we have is 17%. So the remainder 5% is coming from Curatio.

And on the Indrad facility, is there any communication that you've received from the FDA? And what's your outlook there in terms of timeline? And if you can indicate what's the level of contribution from that side to the overall revenues?

So what we have received is a letter stating the status of the facility as OAI. So the agency kind of will take some official action in a time period of 45 to 90 days from the date of the letter, which was day before yesterday. And the official action ranges from a regulatory meeting or a warning letter or something of that sort. So we shall wait for them to decide before company getting further. And Indrad revenue contribution is -- we haven't disclosed the revenues by plant so far, right?

Correct, correct. Saion, maybe I can come back to you on that.

We'll take our next question from the line of Damayanti Kerai from HSBC.

First on India, can you split the base India growth into volume price and new launches contribution? And related question is, what I understand, price increase has been the significant driver for India sales this year. So from this high base of price increase, how should we see a growth scenario in the coming year?

So the AIOCD growth is 12% for Torrent in Q3. Out of that, volume is 0.2%, price is 8.1% and new products is 3.5%. So this 8.1% is against 7% of the market price growth. So it's pretty much in line with the market growth and we think this range will continue. This has been pretty much our MAT range for price increase and we think next few quarters also this should continue.

Coming quarters also 7% to 8% price increase is doable, right?

That's right. That's right.

And on the new launches, can you comment on some of the key launches which has supported the 3.5% contribution, because I think in the past we have mostly improved and took a 0.5% contribution from new products?

Yes. So the new launch contribution is calculated on a trailing 24-month basis. So in this period, we have launched relatively high number of brands in the chronic segment. Recently, the launch has been of Sitagliptin, as shared last quarter, where we continue to be the number one franchise of the newly launched brands. We should be doing roughly around INR 4.8 crores to INR 5 crores a month based on AIOCD. So this is strengthening our market share in diabetes. Similarly, in CNS, we had launches this time last year in the Pregabalin franchise, which continue to do quite well and remain the number one market share. So these are the key 3, 4 launches that are adding the incremental new product growth.

And secondly, on Curatio integration. So can you talk about the progress which you have done since integrating the portfolio to your India business? So you mentioned you have a separate team and then you have added more people, et cetera. So a few more color would be helpful.

So the business is on track. It's been 2 and a half months in the quarter that we have got the sales from Curatio. October 14th is when we had integrated. So 2 and a half months of sales in Q3. Pretty much continuing the same division, same strength in the business. We have started realizing synergies on the cost front in distribution where there were overlapping cost, let's say, distribution and CFA, warehouse set-up, which has all been merged and some back end functions which were overlapping. So this synergy has started playing out. I think about 3% to 4% margin improvement has already seen in the first quarter. Top-line delivery continues as per the exist -- the ongoing performance and we think this should sustain. So I would say better to wait another quarter, at least Q4, once we have the entire quarter under our performance, we can share further insights to the performance of Curatio.

My second question is on Germany. So you mentioned now the supplies have started for the new tender. So this tender is for like what period? And do you anticipate any more tenders coming in say next 2 or 3 quarters?

So in Germany, how it works is that tender duration is 2 months. And usually, you win some tenders and they start 6 months later. So what happens is that the Q3 increase in sales, we flagged a few months ago. And saying that you had tenders which would start in Q3. So subsequently, each quarter, we win a few tenders and which is what has led me to tell you that we expect single-digit growth next year.

Our next question is from the line of Sumit Gupta from Motilal Oswal Securities.

Just want to know on the price erosion update in the U.S. market. So what...

Mr. Gupta, sorry to interrupt. If you are on a hands free mode, can you switch to a handset and speak. Your audio is not very clear.

Just want to know on the price erosion update in the U.S. market. So what kind of trajectory that you are seeing?

So year-on-year, we are seeing high-single-digit.

And what is the capacity utilization overall?

Overall, it depends upon the plant. So Indrad is a multi-country plant, right, much more than Dahej. So Indrad capacity utilization is in the high-70s. And for Dahej, we are more in the mid-55%, 56% range.

Our next question is from the line of Shyam Srinivasan from Goldman Sachs.

Just again focusing back on the Curatio acquisition. You talked about cost synergies, but I remember in our acquisition call we talked about revenue as well. At some point of time, we look at the top 5 brands, Teddybar, Etogla, Spoo all of that and just see where they are priced with respect to market, and if necessary take price increases. So is that something that we -- it's early to comment about that or you think we have selectively started doing that as well?

So that's also started. Already one round of price increase which was already taken before the acquisition that was to offset the increased raw material cost, that has been affected and that new stock will be on the market in this quarter. So that should also start reflecting. And otherwise, I mean, revenue -- the Curatio revenue growth was about 20% for the quarter, the Curatio standalone. So the growth is pretty much on track.

Sir, but I thought we were expecting to go faster relative to the segment, right, or maybe it's too early days for the 2 and half months, do you think for this 20% growth? I was under the impression that, that segment is growing maybe 20% and Curatio is probably growing faster.

No. I think the segment that we especially are covering, which is the prescription-based pedia-derma, this is significantly faster than that. But either case, next quarter should give a better picture. I think this mid-to-high-teens growth is something that we feel is sustainable for this portfolio and rest will be the levers that we mentioned earlier, which should start playing out probably by end of the next financial year.

Just on the -- Sudhir, on the financial side. So what is the kind of debt position now after the deal? And if you could just reiterate some of the cash flow numbers that we are generating? And how we plan to kind of reduce debt over time?

Yes. So Shyam, I think by 31 March, 2023, the net debt position should be around INR 4,300 crores. And as per the repayment schedule, next year we should be repaying roughly INR 1,200 crores. And probably in FY '25, a major chunk of the cash flow will get allocated towards the repayments of all these loans.

So there is no -- so it's largely from internal accruals, right? So essentially you are going to divert -- what about CapEx? Sorry, I think that's the other question I had. INR 1,200 crores you're going to repay. And what is the rest of the operating cash flows going towards?

So roughly you can say the EBITDA should be close to around INR 3,000 crores, let's say. Of which, the conversion to operating cash flow should be 80%, which is INR 2,400 crores. And CapEx over the next 3 years on an average should not be more than INR 250 crores, max INR 300 crores, I would say, per annum.

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

Just trying to understand gross margin better. So 3Q gross margins are little down versus 2Q, while our higher gross margin business, India and Brazil, have done fairly well. Can you explain that?

Yes. So Prakash, I don't know if you've heard the opening speech where I had explained…

We were on the other call, sorry about that.

So what I said is there is a one-time impact of gross margin by 0.6% for the quarter and which is primarily because of under-absorption of the manufacturing overheads in the month of October, wherein immediately after the USFDA audit, which ended On 28th of September, there had to be some cleaning validation of certain equipments which had to be done as a follow-up to the USFDA audit. Because of that, there has been an under-absorption of overhead which has impacted the gross margin by 0.6%.

Any other reason? I mean, because Brazil also has done fairly well, which is a higher gross margin business.

No other reason, Prakash. This is only one-time impact which we have seen.

And what do you attribute is Indrad facility, the 483s have come again and now the OAI, it had gone in that status earlier. And we have seen other facilities, other companies also seeing observations coming back. So I mean, it's been 3, 4 years now, so what's really -- that as a company or as an industry we are missing here?

So you're right. I mean, as far as this recent OAI is concerned, we are still working on it, right? I mean, trying to get in touch with the USFDA to understand better. So it would take couple of weeks, I would say, for us to get a better hang of what would be the next thing which we should be looking at. So maybe, post one to 2 weeks, we'll have a better clarity to give you some feedback on that.

And one more for you on the interest cost side. So you mentioned INR 3,000 crores EBITDA with 80% conversion. So the debt repayment should be much higher than the INR 1,200 crores you talked about or how do you think it -- that's a conservative number or it's a realistic number?

No, it's a scheduled repayment which is there for the next year. And I agree, I mean, if there is additional cash which is there on the balance sheet, it will be used for repayment of the loans to the extent whatever is possible. What I was saying even if I take a scheduled repayment which is happening next year of INR 1,200 crores, that should end most of my previous acquisition funding. And therefore, FY '25 whatever cash flows are getting generated, considering the growth over the next 2 years, most of that can be allocated for repayment of Curatio loans.

And lastly for -- if you can also give some color on the market formation of Sacubitril Valsartan. I understand not many players have come in or it's too crowded as was seen in other diabetes products like, Vilda, Sita, et cetera or still market is getting formed?

Market is still getting formed. I think the matter is still subjudice. So would want to wait till this -- there is further clarity.

And you expect that in next 3, 6 months, Aman?

It should be hopefully within this next 6 months.

Our next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.

On the other ROW markets, there's been a pretty strong growth in this quarter, it's INR 290 crores number versus INR 240 crores, INR 250 crores we've been doing. Any particular driver for the growth in the quarter?

I don't think, Nitin. It's been quite a good quarter, I would say. There are one or 2 geographies where there were some incremental opportunities which was seen which we were able to take it. That's the reason for ROW the growth is little higher. But otherwise, even a country like Mexico is doing fine, I would say, growing double-digit for almost last 4 to 5 quarters, high-double-digit. So yes, I mean, to a certain extent, there was some incremental opportunity which has come in quarter 3 in, I would say, Russia, basically, which has helped in getting such a strong growth.

But this shouldn't be -- we should not take this as a base to model going forward numbers?

But Russia is a very small market for us, Nitin. So although there is -- yes, I mean, possibly 1% or 2% contribution to the overall incremental growth, but not major.

So this INR 290 crores can -- can we take it -- the point I was asking is, can we take this INR 290 crores as a base for this business or from a modeling perspective?

Nitin, it's a little difficult for me to give any guidance on that. Maybe 2 quarters or 3 quarters, if that number is sustaining, then possibly I can confirm that. But I think it's better to wait for one more quarter to see whether this number is sustaining. But nothing as of now which can indicate that this can go up or down now.

Secondly, on the Curatio costs, on SG&A and staff cost, I mean, has -- we've built in only one and a half months of these costs, right? Some more costs we should pencil in for the next quarter?

No, it's almost 2 and a half months which has been factored. So not major even if you take a full quarter, I would say.

So that's -- at least on the overhead front we largely now all the costs are basically for base?

I would think so.

And lastly on Brazil. Sanjay, you mentioned that the market growth is guided to grow 10% for the next couple of years. Was it correct?

Yes. So IMS projects generally next 5 years 8% to 12% growth. Next 2 years, it's projected at 11%.

And given the fact that we are in the process of launching multiple new products, we should be in a position to considerably outpace the market?

Correct. So we have 3 growth drivers. Essentially, last one year, we've increased the number of CNS reps. So that has given a good momentum to our CNS franchise. Our generic business is doing very well. And then thirdly, the new launches.

And what proportion of the business would be generic right now in the U.S.?

14%.

14%?

Yes.

[Operator Instructions] We'll take our next question from the line of Neha Manpuria from Bank of America.

Sanjay, on the Brazil business we saw a good set-up in this quarter. I heard the commentary that you mentioned. But it's fair to assume that there is -- this number is sustainable, and as we launch more product, we should continue to see growth from this day?

So Neha, the previous 2 quarters, local currency growth had been 8%. And essentially, that growth was on the lower side, but IMS was showing this mid-teens growth, which is the underlying growth of the business. Q1 in Brazil generally gets impacted because of Q4. There is over-stocking from the wholesalers. So Q4 of last year was showing a growth of 21%. So Q1 is a little bit impacted number. Q2, we had some shelf stock adjustments because of which primary sales were on the lower side, but the IMS sales continued in mid-teens. So I would say that double-digit north of 10% is given, given the market growth and we should be reasonably higher. So I would tell you that it looks like this is the trend.

Understood. And did I hear correctly that you are planning to file 10 more products by the end of the FY '23?

We would file a total of 10 plus products in this fiscal year.

So the 10 pending which includes part of the filings, right?

No. The 10 pending are as of today.

Understood. So by the end, we'll have probably 20 products pending for approval?

Yes. I would say, at least 16 to 17 products, maybe 20.

And by when should we start seeing commercialization of these? I mean, what's the approval timeline now like in Brazil? Has it improved?

Yes, yes, it's usually now 24 months. And what you would see is 5 -- at least -- see, it's quite heavy to launch branded generics. So I think what you would see generally is 4 to 6 products a year.

[Operator Instructions] We'll take the next question from the line of Krishnendu Saha from Quantum Mutual Fund.

Just understanding the 24% growth in the U.S. is mostly from the third-party filings, is it?

No, no, this growth is because of base impact. So if you go back to the same period last year, the sales were on the lower side, $31 million. So -- and while generally for the last, I would say, 6, 7 quarters our sales have been $35 million. So that particular dip in the same period last year is what results in the percentage growth this year.

How many products do we have in the market actually?

So we sell about 55 products.

55 products, but will there be…

Mr. Saha, I'm sorry to interrupt, but your audio is not very clear. Could you repeat your question?

Yes. How many products do you have in Brazil itself?

Brazil, we have about 22 products. Sir, did you get my answer? It's about 22.