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Alembic Pharmaceuticals Ltd
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Ladies and gentlemen, good day, and welcome to the Q1 FY '23 Financial Results Conference Call of Alembic Pharmaceuticals Limited. We have with us from the management, Mr. Pranav Amin, Managing Director; Mr. Shaunak Amin, Managing Director; Mr. R.K. Baheti, Director, Finance and CFO; Mr. Mitanshu Shah, Head of Finance; Mr. Jesal Shah, Head, Strategy; and Mr. Ajay Kumar Desai, Senior VP, Finance. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. R.K. Baheti. Thank you, and over to you, sir.
Thanks. Good evening, everyone. Thank you for joining our first quarter for 2022-'23 quarterly results conference call. I'm sure you would have received the results by now. I know the financial numbers are bit below your expectations. But during this call, we'll try to explain you the reasons. And also the rationale why we think the underlying business is robust. So, first of all financials. During the quarter, our total revenue were at INR 1,262 crores, EBITDA was INR 9 crores and net loss was INR 66 crores. Continuing review of our Aleor R&D cost, which was capitalized earlier and looking at the conditions in the U.S. generic business, Aleor has -- Aleor still is a separate company, the merger process is underway. So, Aleor has further written-off INR 115 crore out of its CWIP out of capitalized R&D to P&L. And so we did it in March 2022. Also -- and INR 115 crore we have written-off in June 2022.
The residual intangible assets in Aleor is just about INR 40 crore. Had Aleor followed the previous factors, APL's consolidated profit before tax could have been higher by INR 115 crore, about INR 50-odd crore. EBITDA on likewise basis would have been INR 107 crores. Borrowings, the gross borrowing at consolidated level is INR 515 crores versus INR 630 crores in March 2022. The company has INR 112 crores as cash on hand. As on March '22, it was INR 65 crore. Net borrowing as on 30th of June 2022 is INR 403 crores versus INR 569 crores as on March 2022. Our net debt equity is very comfortable at 0.08.
I will now hand over the discussion to Pranav for his presentation on international business.
Thank you, Mr. Baheti. It was a challenging quarter for the U.S. business, especially when seen in light of very good preceding quarter. I had mentioned in the last investor call that we had made a switch to a new third-party logistics vendor. Due to this, we had anticipated some supply disruptions. And hence, the buyers had pulled in extra inventory to ensure that the quarter was smooth. [indiscernible] during the quarter, and the revenue for the quarter was $47 million in the U.S. We continue to remain focused on the long term of the U.S. business backed by 15-plus launches every year, and hopefully, consolidated market share in our existing products. The near-term will remain challenging, but long term, we still remain optimistic about the US business. The ex U.S. formulation business as well as the API business have both come off a very high base of last year, hence the growth was as muted. We are confident on both these verticals moving forward after the next quarter onwards.
Our R&D expense is INR 261 crores. Ex of Aleor's revised charge of R&D, the expense is INR 146 crores, which is 12% of sales. We filed 7 ANDAs during the quarter and cumulative ANDA filings remain at 237. We also received 8 approvals in the quarter, including 3 tentative. We launched 5 products in the quarter and plan to launch another 5 to 7 products in the next few months as well. The FDA remediation is ongoing at our F3 injectable facility at Karakhadi. We have appointed some bunch of consultants and we are in -- remediation measures are underway, along with the FDA as well to ensure whole compliance. This will take a couple of months, hopefully, and we should have a better news for you. The US Generics was flat at INR 367 crores for the quarter. The ex U.S. Generics degrew by 8% to INR 182 crores for the quarter, whereas the API business degrew by 16% to INR 233 crores for the quarter.
I will now request Shaunak to take you through the India branded business.
Yes. So good afternoon, everyone. The India business, if I could talk about it was, I think we had an extremely good quarter though the top line numbers do have a base reflection of last year's COVID, at times made, which causes distortion, but when I look at the numbers, ex COVID adjusted, here very strong growth. Even on the veterinary growth they increased, we had extremely strong growth with about 35% growth over last year. Our overall growth put together was though the number was flat, like I said, COVID adjusted, we grew at 20%. And if I look at just external numbers, I think the industry showed a negative growth of 2%. Alembic has as is reflected a parallel growth of, negative growth of 3%. But ex of Azithromycin, which was a big contributor to last year's sales numbers, the industry degrew by negative 1%, whereas Alembic recorded a growth of plus 12%, as per IMS in the same period.
Based on this, I think we're extremely bullish on the India business. Keeping that in mind, I think Q4 onwards, looking at the traction, looking at the portfolio growth, we did start to increase investments in the business and we did see a significant ramp up in Q1 in terms of investments and we expect some of these to start playing out in terms of top line numbers going into as early as Q2 and Q3. Other than that, I think the core portfolio of the business continues to do well and with a strong onset of monsoon in June-July, in July mainly and continuing into August, we expect the acute portfolio, which is a very strong part of our business to continue with more competing growth numbers.
I would like to open up the floor for Q&A now.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have the first question from the line of D. Kerai from HSBC.
Baheti sir, you explained about Aleor charges. So in the previous quarter, you took around INR 123 crore and this quarter, INR 115 crore. And then you mentioned around INR 40 crore is residual. So say, like we have to again charge of this INR 40 crore. After that, there will be no R&D expenses related to Aleor or how should we look at that part of the cost?
So, second part of your statement is right. INR 40 crore is what is now residual. The only correction I'll make in your first part of the statement is, previous quarter, that is in March 2022, it is charge of INR 189 crores.
So, INR 189 crore in the fourth quarter, INR 115 crore this quarter and then we are just left with the INR 40 crore...
Total was about INR 350 crores spent over the last 3, 4 years on R&D.
So sir, anything else like where assessment is ongoing and then we might see similar charge-offs, which is right now not part of our operating cost or we should be just looking at the Aleor portfolio?
As far as Alembic Pharma is concerned in any case, we have been charging off all R&D expenses to P&L sales building. So, we have no accumulation in balance sheet there.
And just a question on R&D. So, even if we adjust for this Aleor charge, it still remains notable at around 12% of sales. So, how should we look at this cost going ahead? And as we see like U.S. challenges are far from getting over, are we thinking about reallocating R&D to some other businesses?
So no, you are right. But okay, I look at percentage of profit as a -- growth percentage of a turnover is a just a number because it is dependent on 2 different numbers. But in absolute term, we don't plan to increase R&D. The R&D cost, including Aleor, on a current basis is about INR 700 crore per year and we'll contain it within that. And we are also looking at rationalizing it to some extent to the extent it is possible without really affecting the growth of the reserves in the future. So, you can say that it will stay between INR 650 crore to INR 700 crore in coming years.
So, INR 650 crore to INR 700 crore kind of R&D expense will continue on an absolute basis? And majority will continue for the U.S. market, right?
Yes. Majority expense U.S. market, but now we are extensively using the same set up to do dosing [indiscernible] for EU and for rest of the world markets, regulated markets. But we are only in regulated markets.
And my last question on India business. How much is acute sales of the total India business?
Ajay, you would the number ready?
Yes, it's INR 118 crores.
INR 118 crore.
1-1-8, 1-1-8.
1-1-8, yes.
Our next question is from the line of Chirag Dagli from DSP Mutual Fund.
I understand there was some upfronting of revenue in the fourth quarter last year and now that number is low. But if I look at the last 3, 4 quarters' average, then it seems like the base business is, whatever, $55 million to $60-odd million. So, is that the base? Or is the Q1 $47-odd million that we've reported that the new base?
So Pranav had said in the previous calls that $50 million, $55 million for U.S. is the base and we still remain -- yes, remain...
And sir, can you help us just broadly understand, as we look into the next 2 years, how would the scale up of expenses both above EBITDA and below EBITDA, just broadly happens?
See, there are few expenses Chirag, which are beyond our control and there are a few expenses where we can have a significant amount of control. Now expenses which are under our control, we are doing everything under the sun to contain them, restore them, make them more productive, make them more effective. But some of the expenses and I'll give you an example, particularly in international business context, is freight costs.
So, freight cost, I'm sure you would have -- you must be talking to multiple pharma companies, has gone up almost across the board, not only India, U.S. freight cost, but even internal freight cost in U.S. has also gone up multi-time, not in terms of percentage. So, that is impacting us and that's why we don't have much of control. So, some expenses, we can't predict. Some input costs have gone up because of this crude price being very high in Q1, solvents and some of the material cost also went up. So, these are beyond our control. But operating cost, overheads, particularly, we are trying to contain as much as is possible.
Sir, my question was more about what we are capitalizing and what we've already spent. So, depreciation as well as the OpEx that we are capitalizing as some of these facilities come on stream, what sort of costs will hit the P&L is what I was trying to understand and how phasing...
As and when these facilities get into commercial production.
Correct. So, what is the quantum, sir, both depreciation and OpEx?
So, that will be, Mitanshu, INR 200 crore about.
So, yes and around INR 180 crores, INR 200 crores of cash expenses and then you will have another INR 150 crores of depreciation.
This is still left to be taken into the P&L?
Yes. That's for all these 3 plants.
Correct. So sir, is there a way to sort of think about the phasing out of this, of how this will -- over what period will this hit the P&L?
Actually, that will get capitalized as part of the respective assets. So, we are not -- okay, we'll have to carry an extra depreciation burden, but I'm not so worried about at this moment. What I'm more worried is how soon we can make the plant operational and start churning revenue out of that. So, we have like, Pranav said, we are working proactively for resolving the issues of F3, F2, part of the study is already approved by FDA and part of it, we already started filing and the inspection is already triggered, let's see when the FDA visits us.
Sir, my limited point was that we have INR 350 crores hitting the PBT to generate that kind of gross profit, we'd probably have to do INR 500 crores worth of sales in the U.S. So, is this understanding right that while the sales may take time to scale up, but the expenses will immediately hit on a fully loaded basis and will be upfronted?
No, which is true. Largely, what you say is true.
We have the next question from the line of Vaibhav B from Honest and Integrity.
Sir, I have 2 questions on the international business and then I'll come back in the queue for the domestic. So, on a U.S. oral solid part of the business, can you give me an idea of what would be the gross margins in that business? I don't want EBITDA margins or what ROC we are making, but just broad range of gross margin in U.S. oral solid business?
So, we don't give a vertical-wise margin break up. But what is for sure is that the margins have gone down because of the price erosions in the U.S.
And in terms of the price erosion that has happened in the U.S., between -- in U.S. specifically, is it like a different kind of erosion that we are seeing between chronic and acute products? Or it is across all the products? Because in some of the cases we hear that the price erosion in chronic is less than acute products. Is it true?
No. Actually, U.S. is a generic market. So, I think you're seeing erosion across the board. There's too much supply and too many people supplying the market, especially from India. So, price erosion is across the board.
[Operator Instructions] We have the next question from the line of Rashmi A from Dolat Capital.
Sir, one clarification on this INR 115 crores, how much is that sitting in the other expenses? And how much is there that is there in the depreciation part.
So, around INR 100 crores is in other expense and INR 15 crores is in depreciation.
And on your U.S. business, this quarter, we have reported $48 million, and you're saying that the base business is around $50 million to $55 million. So, what led to fall of that extra million dollar? Is it because of any things which is one-off? Or this is something which will continue in the subsequent quarters. In fact, this will become the new base?
So, in the last quarter, Q1, I had said that I anticipate that around $50 million, maybe $55 million, depending on the situation would be our base business. Having said that, the last quarter, we did about $70 million in the U.S. That was due to some one-time buys as well as we moved our 3PL. We moved our distributor, a third-party logistics provider, sorry, this quarter. So that's why the buyers had stocked up a lot more. That's why last quarter, the sales were higher, which led to a slower offtake in the start of the quarter for this quarter.
So, you mean to say that from the second quarter, we should come back to a run rate of around $50 million to $55 million?
So, it depends. I think seeing how the erosion also goes, in my opinion, we'll be closer to $50 million because I'm seeing a lot more erosion in the market than I saw at the end of Q4.
Sir, how much is the price erosion? Is it still in double digits for [indiscernible]? If you could quantify that.
Yes, I would say it's in double digits. I haven't looked at it because it's a moving figure. So, I don't keep looking at it. But I anticipate it will be in low double-digits.
And any new launches which you are guiding for FY '23?
So, we launched 5 products in Q1. We anticipate to launch 5 to 6 in Q2 as well. And for the year, I think we'll be anywhere between 15 to 18 kind of launches.
And what kind of growth we will be seeing in the specialty and acute segment in India business? I mean any guidance if you want to give? And also for this quarter, if you can split between price growth, volume growth and new launches growth?
So number, we don't give guidance that way. But what Shaunak has already said that we should -- we are very confident about our market beating growth rate both on specialty and on acute ex of [indiscernible] products.
And sir, last question on gross margins. We were doing around 73%, 74% gross margin. And I think more or less, it was expected that it would remain in that range, but I understand that due to the U.S. price erosion and due to the high input costs, the gross margins are 50% to 70%. But anything which you can like let us know that month-on-month basis, the input cost is getting -- is coming off. And from the second quarter, we are going to see any improvement from hereon? Or you feel that this could be at least for the entire year?
Very difficult to say at this moment. I mean it will be dependent on multiple things, input cost as well as on realization, which I do. So, I'm not putting a number as of now.
So, is it safe to assume that it would more or less remain in this range only 70%, 71% for the entire year?
[Technical Difficulty] giving guidance on this.
We have the next question from the line of Nikhil Mathur from HDFC Mutual Fund.
I just have one question. The last time I remember, there were some 150 approvals that were in place and the company had launched 104, 105 products in the U.S. So, the remainder of the products that are yet to be launched. Should we assume that there's any [indiscernible] left or I think given how the situation is there in the U.S., there's barely any [indiscernible] left in those products?
So generally, with the market situation, as I said, we launched about 15-odd products this year. I think some are awaiting patent expiries. So, those we launch as a on the pattern expires, those are tentative approvals. And the rest, we will take -- some are in the process of launching and some we may choose not to launch because we have technical issues or because of the market situation.
And again on the gross margin front, it's very counterintuitive. If I look at the sales percentage of India in the overall mix, it has kind of gone up. So generally, and many other peer companies, the margins in India are usually better than the export market. So, this dynamic is different in Alembic and hence, actually, India growth for India higher share needs some bit of margin dilution?
So, I don't know whether I have understood you right but previous few years, we did extremely well in U.S. than by some very good product realization and our margins in the U.S. were much better. Of course, U.S. incurs a much higher percentage of R&D. But otherwise, at the gross level margins were very good. India margins are more or less like consistent and they remain except for some bit of changes due to those COVID-related disruptions [indiscernible]. But otherwise India margins remains more or less consistent.
So sir, your U.S. margins are one of the highest in the industry. And I think there's a specific strategy because of which you generate such high U.S. margins from the gross -- at the gross level. Isn't -- it's a big risk for Alembic. I mean, at 68%, 69%, whatever, 70% gross margin, no other Indian company does this. I think it's a big risk going forward, especially when the pricing also gets so big for the U.S. market.
So -- I mean, okay, at the peak level, when some of the products are doing very well in U.S., our margins have also peaked to 75% plus. And at that time, that I said that the margins are not really sustainable long term and they will come up and they are coming off. So -- but I mean, even if you say our margins are better than industry, I'll take it as compliment.
Sir, but the past is -- I mean, all credit to the company for what you guys have been able to deliver in the past. But if I look at 2, 3 year out, is my expectation right that there can be more risk than tailwinds to your margin profile?
I think very difficult to say because it's very difficult to predict the market, particularly the U.S. market and India market realization is more consistent and more predictable but U.S. is very difficult to predict. So, won't really comment, but we believe that or not we believe, we hope that sooner than later U.S. also will stabilize at some point of time.
Also, what I think is, you have to, one thing is the U.S. is the largest market in the world and it is a market we cannot not be a part of the [indiscernible] market to be a part of. And I would say that you have to look at it a little bit more in the long term. If you see our last 10-year track record, the profit and the revenue growth has been quite exceptional. I think over 25% -- 20%, almost 30% profit, 25% in terms of top line. So yes, the U.S. does moves -- move -- is cyclical. But I think it's an interesting business and you cannot -- not play in it.
And sir, what is the currency transaction impact? Where would that be sitting in 1Q because I don't think any major gains at least in other income. So, how is the currency accounting played out?
So generally, rupee depreciation has been favorable or good for pharma companies. We are also net foreign exchange earner. So generally, we'll have a positive impact.
Can you quantify this? How much of positive impact is there from currency?
We don't because a part of it was phased, I mean, like we said 30%, 40% of it on a regular basis, the balance remains open, but I think we would have got some benefit out of it.
We have the next question from the line of Harith Ahamed from Spark Capital.
First one is on the F3 facility. You mentioned that the remediation activities there are underway. So, in your assessment, will this facility require a reinspection before it gets cleared by the FDA? And regarding the F2 and 4 facilities, we are having expectation around inspection time lines for these 2 new facilities?
Okay. So F3, I believe it would require an inspection. But let's see how it goes in terms of the FDA's -- how they accept all the results and we've been updating them on a monthly basis, but I believe it will require a reinspection. As regards F2, the oral solid part is already approved by the FDA, there's no issue there. The injectable bit, we have filed some products, so we should trigger a filing as and when the FDA increases their audits, which they already have. I think we should have them visiting us for an audit as well. F4 also we have filed. I think however in the priority list of FDA, this will be a little later. So, I don't think that will happen this year.
My second question is on margins. And I'm looking at margins adjusted for the one-off R&D at Aleor, that's around INR 100 crores, which is above EBITDA. Still, the margins are at around 10%, slightly below 10%, while we were at a closer to 20% number through most of last year. So, how should we think of the recovery in margins from this level? And maybe some color on how the recovery would play out over the next few quarters.
So margins would stay under some pressure till the realization from U.S. improve and we are doing everything possible under our control to do some cost realization. They would have smaller influence on margin. I think we will bank on U.S. doing better further improve margins.
But sir, while we are expecting a recovery in the U.S. in the coming quarters, over the next 3 to 4 quarters, we'll also see the additional costs, which are getting capitalized now. So, that would also mean further pressure on margins from the current levels, right?
So, I said once the new facilities becomes operational and an earlier participant also mentioned, initially, the revenue will be lower and expense would be higher, there will be a pressure on margin. So, you need to capitalize any growth you need to sustain a higher cost in the transitional period, and that's how you grow the business.
And last one, if I may. Your comment on the intangibles write-off at Aleor, you mentioned that the write-off was done to reflect the current market conditions. So, just thinking about the adverse market conditions pertaining to the U.S. generic market. Does this also imply that we will have a rethink on our future CapEx as well as R&D spend for the U.S. market? Because the way -- when I look at the numbers, our normal R&D spend continues to be at around INR 150 crore level on a quarterly basis. So, now that you're seeing the market conditions turn adverse, will we have a rethink on probably lowering the spend to reflect the most challenging environment there?
Yes, you are absolutely right. I think the way we're approaching the U.S. is 2 things. One, on the CapEx side. All these new plants, when you -- essentially new capability that we did. So, I don't expect -- anticipate any new CapEx, large CapEx in new facilities coming up for the U.S. moving forward. At the most, we may have some incremental CapEx or maintenance CapEx, we may increase some API capacity. But on the formulation side, we will not do any CapEx on new facilities. As regards to R&D, yes, we're constantly evaluating that as well. How do we rationalize our R&D spend as well moving forward because the returns in the U.S. are more. We'll rationalize it by either looking at other territories or in terms of other verticals. Now this R&D that you see is not just OAC, but it's part of -- it includes injectables and the other verticals as well. And this will help the new plants get up to stream faster as well.
We have the next question from the line of Bharat Celly from Equirus Securities.
Sir, I just wanted to understand on product called [ Permetrol ]. So I believe we have already launched that. So, I just wanted to know how you are seeing the traction in that product and whether we have seen any adverse rising as such. So, anything you can comment on the overall outlook of the strategy you have launched in?
Yes, it's a good product. It's -- we have launched it. We've picked up some share as well in that product. I think it's got a little lesser competition. So, let's wait and see how it goes. It is from a CMO. So, we're slowly gradually picking up more share as we get -- as we have more confidence in the supply chain.
And what sort of market share we will be reaching in this product at this point of time?
It depends but I think we must be around 15% or so. I think it's got 15% or so.
And sir, so we are referring that we will be having around $50 million base in the U.S. market. So, that guidance is including Permetrol?
Yes. So, Permetrol is the base business. It started including these new products because some old ones has gone back down. And this is there. So in that, I'm including this as well.
So, actually I'm failing to understand one thing because this drug is almost like $300 million drug, a rough part of that as per the IMS and then only it is a 2 generic player market. And yet, we -- our base numbers in that case, ex of this drug might be much, much lower. So, I don't know exactly what is happening in that front? Whether Permetrol is relatively still a sizable chunk for us or not. It's very difficult to get clarity on that.
So 2 things. One is we don't give product-wise break up. But if you realize that what reported figure is it could be gross sales versus what even looks like as net sales. So, you have to see that differentiation, which is not necessarily captured all the time in IMS. And that's why you're feeling there's a much larger product than it is.
And according to you, what will be the net sales of that drug if you could provide?
So I don't -- as I said, we couldn't give product-wise guidance on the sales of the product.
I was referring to the overall market?
Industry, I would say, net sales will be about 20% to 40% or so, 20% to 30% depending.
20% to 30% of $300 million?
Of whatever the gross sales, I'm giving a range for an industry-wide product.
We have the next question from the line of [ Akshata Rein ] from Green Portfolio. Ms. Akshata, can you hear us?
My first question is related to CWIP, as there is CWIP of INR 2,200-plus CR on 31st March '22, can you please share what it pertains to? And when are they scheduled?
Can you repeat the question? I didn't get you?
My question was the CWIP is of INR 2,200 CR as on 1st March '22. Can you please what it pertains to? And when are the projects scheduled?
We were discussing Akshata, we have 3 facilities, which we have built, F3 was for injectables, F2 is onco oral solid as well as onco injectable and F4 for new formulation facility. So, all of these [Technical Difficulty] but none of them has gone to commercial production yet.
Also, can you please share Aleor's EBITDA percent and Alembic's EBITDA percent without Aleor?
It was there in the results itself. I mean, we have about some percent also -- it has fallen and about 10% or maybe less than 10% EBITDA without Aleor impact.
So my -- so this might be naive of me but could you please share why like in the table of Q4 FY '22, it doesn't show any change in revenue. I understand that Aleor was a subsidiary with 60% stake. So, sales should have been added line by line, right?
So, that company March itself, we had acquired the balance 40% and now it's 100% subsidiary. Currently, we are in the process of merging Aleor with Alembic Pharma and the matter is in the honorable NCLT the market.
We have no further questions. I would like to hand it over to the management for closing comments.
Yes, thank you, everyone, for joining this call. It was pleasure and learning in interacting with all of you, and we look forward to interacting with you again in post Q2 results. Thank you for joining.
On behalf of Alembic Pharmaceuticals Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.