Shilpa Medicare Ltd

NSE:SHILPAMED

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Shilpa Medicare Q1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Siddharth from CDR India. Thank you, and over to you, sir.

[Siddharth Rangnekar, analyst]

Thank you. Good afternoon, everyone, and welcome to the conference call hosted by the management of Shilpa Medicare Limited to discuss the first quarter performance for the period ended June 30, 2023, and the discussion on the strategic initiatives that are underway.

The management is being represented by Mr. Omprakash Innani, Chairman of the company; Mr. Vishnukanth Bhutada, Managing Director; Mr. Alpesh Dalal, Chief Financial Officer. We shall have Mr. Vishnukanth Bhutada lead the discussion with his perspectives on the business performance and the strategic progress. He will be followed by Mr. Alpesh Dalal, who will give his views on the financial and operational highlights.

After the management comments, there will be an opportunity for getting your queries answered.

Before we commence, I would like to state that some of the statements made on today's call could be forward-looking in nature, and a detailed disclaimer in this regard has been captured in the conference call invitation, which is available on the stock exchange website.

I would now like to invite Mr. Vishnukanth to take this discussion forward. Thank you, and over to you, Mr. Vishnukanth.

[Vishnukanth Bhutada, executive]

Thank you. Thank you for joining us today on the call. I will be sharing prospective of Shilpa Medicare for 1st April '23-'24. I will commence with the operating progress and combine it with the highlights of this -- and this strategy -- on strategy. I will be followed by our CFO, Alpesh, who shall take forward the discussion on the financial aspects.

Subsequent to our speech, we will be glad to address queries and concerns from the participants.

I will commence with the key updates of the quarter. I will go by the segment-wise. First, the API, we have completed the augmentation of our facility to offer the peptide polymers CDMO services. These new subcategories within API represent a step up in the value creation for us, but conversely, are associated with the certain gestation period. We are taking Exhibit batches of the initial products of our clients in the peptide. And in response, is likely to translate into the firm commitment. This segment also makes the polymers. Again, which are also high end products within API, which we are making for the innovators.

Our CDMO business is ramping up well to a sizable order positions. We're also entering, as per the strategy, into the non-oncology API. Wherever we can make an impact, timelines has been followed for the delivery of the project, which has been boosting the CDMO business, and clients are providing new contracts.

During the quarter, [indiscernible] 2 new DMFs have been filed and to add around 231 DMFs, we have filed across the geographies. Some of these APIs are oncology products that will see the expires throughout -- around -- up to 2027, '28. Our focus is also on developing the API that can replace imports where these are presently coming from the outside of the country. By enhancing utilization and capabilities of our existing products, we are seeking to enhance the engagement with the existing clients for our core API and this will show the results.

And all these things considered, I'm confident that our API business once again will be big crown jewel of the performance.

Again, the highlights on the formulation. I will just start it. We have -- on oncology, the new drug application for the Pemetrexed injection 1,000 mg, 500 mg and 100 mg, formulation approved by the U.S. FDA. This was the first NDA approved drug in our Shilpa. The unique formulation supply as a ready-to-use product solution. And this product approval from the third-party manufacturing side. Commercialization arrangement is in place with Amneal Pharmaceutical LLC for the U.S. market. Plan to launch under J code program by Q4 '23 -- '23-24.

U.S. market size approximately is around $735 million.

We filed the -- again, Nilotinib capsule, which is also filed into the Germany, and this is a centralized DCP procedure we are filing. The product filed in Europe and expected launch of this complex product will be Q2 '24. Partnered already with the 2 customers in the European market. And European market is approximately $418 million. And for U.S., the Pivotal study is also ongoing.

We have one more product that is called SMLNUD07. This has also entered into the Phase III study. We already received the CDSCO approval for this Phase III clinical study. Most importantly, the indication of this is NAFLD, that means non-alcoholic fatty liver disease. We will be able to complete this study Q2 or Q3 '24. This is the most common liver disease which is affecting almost all parts of the world. And the huge population pool is there for this. And this is an unmet need, where there maybe a particular drug on the NAFLD. And we are happy to say that this Phase III study already started on that.

Then with our first partnership deal inked into the Transdermal Patch. So as you know that the Transdermal Patch also is a very complex development which is -- for the future, it is required. And we have invested for the 2, 3 years in this. We're happy to say that the first partnership we have done already with the European company on this, and the Pivotal studies we'll plan in Q2/Q3. [indiscernible] already we have taken it on that. And the size of this molecule is around $240 million.

Then we have launched the [indiscernible] formulation also into the U.S. market. We're partnering with the other company. Vitamin D3, Melatonin, Methyl Cobalamin, Simethicone and Green Tea. These dietary supplements have been marketed now into the U.S.

Then we have received the biosimilar update. We have received the high concentration Adalimumab into the Indian market. Hopefully, we should be able to launch in this quarter. We already partnered with the -- we are going to launch it as a Shilpa and one more with the Indian company.

Then we have done the recombinant Albumin, already Phase I study already initiated. As you know, that NBE, New Biological Entity status, we have already received it on the authority. And this Phase I study will be completed by December '23.

Then one more molecule, Aflibercept. Phase III study already, we have received the approval from the CDSCO for the starting new study. As everybody knows that Aflibercept is a very complex ophthalmic molecule, and we already completed Phase I. Now Phase III, we are starting it. Phase ||| will start by next quarter, we'll start to Phase III. And the -- this is what's on the complex formulation, we are doing it. We have -- and our crucial step is to facilitate new products under the API formulation.

As these will bring us the predictable cash flow, the new segments are at a closer to give the visible contribution from the commercialization of the product and will help us enhance our margin profile [indiscernible] As touched upon by me earlier, we are looking at rationalizing R&D expenses and monetizing our work as quickly as possible. You will see the operating cash flows from the year, which Alpesh will explain to you separately. We are doing several cost cutting measures into the R&D, including the formulation R&D without compromising on the niche segment.

With that, and on the U.S. FDA front, the update is same as we have completed our remedial measures, and we're waiting for the FDA to come and do the inspection. Other than U.S., almost all the regulatory authorities in the world have approved our facility, and we'll continue to export to the other part of the world, including U.S., some of the shortages product. And the Unit 7 analytical lab US FDA inspection recently with VAI classification in March '23.

This is the second US FDA inspection within 1 year. [indiscernible] Unit 6, which is MHRA approved has been started commercialization of the some of the [indiscernible] products in the nutraceutical and dietary supplements category in the U.S. market. And soon, we are going to launch into the ROW as well as in the European market. One product, ODF has been completed satisfactory review by the U.K. MHRA and expected to get the approval in the recent future.

Commercialization of some of the products into the [indiscernible] is ongoing, either [indiscernible] side or CDMO side.

Commercialization in the U.S. for one more [indiscernible] product will start on the CDMO side.

With that, I draw to the close my opening remarks and hand over to the CFO, Alpesh, to continue. Alpesh, over to you.

[Alpesh Dalal, executive]

Thank you, sir, and good afternoon, everybody. I'll provide the financial highlights for the quarter -- for the first quarter of the current financial year.

So from a revenue perspective, we reported a flattish quarter with revenues of INR 262 crores on a consolidated basis. However, we witnessed strong improvement in our profitability backed by our focused efforts on bringing in operational efficiency and improve monetization of our investment in R&D to [indiscernible].

Consequently, our EBITDA stood at INR 50 crores, higher by 74% year-on-year and 23% sequentially. The improvement in EBITDA has helped us turning in back at that level as well on a consolidated basis.

On the debt front, our net debt as at the end of the quarter stood at INR 745 crores compared to INR 764 crores at the end of the previous quarter, resulting in a lower net debt at about INR 19 crores.

And quick update on our CapEx that we have incurred. During the quarter, we have incurred CapEx of roughly around INR 30 crores, and of which majorly it has been in our Albumin facility where we have invested roughly about INR 24 crores for the Albumin.

And I also wanted to update all of you about another major development, which we have completed just yesterday, where we have successfully completed issuance of NCD of INR 450 crores to select marquee investors on private placement basis. Now this -- NCD issuance will help us reorganize our debt portfolio in a manner that helps us meet our [ re-payment ] obligation in line with our expected future cash inflows with an initial monitoring period of 27 months. So this should ease out the overall pressure that we had on our cash flow. So with that intent, this arrangement has been carried out. And on operational front, as Vishnukanth was mentioning earlier, that we are prioritizing the launch of products that are ready in various segments that we spoke about. And we are also ensuring that our overall cash flow gets restored, right?

So obviously, these are all being done on the back of efforts that we are doing for the last 12 months R&D without really impacting any of our developmental efforts, which are required for our business purpose, and we are also optimizing our working capital requirements, to generate sufficient operating cash flows. So as I indicated last time also that we had positive operating cash flows. During this quarter also, we have had a decent operating cash flow being generated of roughly about INR 70 crores that we have done.

So overall, I think the business is coming back on track. And with those closing remarks, I would like to open this forum for Q&A.

[Operator]

We take the first question from the line of [ Shivan Sarvayya ] an individual investor.

[Unknown Analyst]

So a few questions from my end. Sir, what is just the [ clarification ] you said NCDs that were raised were for a moratorium of 27 months. Did I hear that correctly?

[Alpesh Dalal, executive]

Can you repeat your questions, please? I did not hear it clearly.

[Unknown Analyst]

Hello? Can you hear me?

[Alpesh Dalal, executive]

Yes. We can hear you. Can you please repeat your question?

[Unknown Analyst]

Yes, sir. Just a clarification on your opening remarks. You said the NCDs that you issued yesterday at INR 450 crores The moratorium is 27 months. Is that right?

[Alpesh Dalal, executive]

Yes, moratorium is 27 months. That's right.

[Unknown Analyst]

Okay, sir. And the rate of interest here that we will be paying?

[Alpesh Dalal, executive]

The rate of interest is slightly higher than the normal rate, but it helps in covering up on the operational side where we are able to get better terms on our supply prices.

So overall, we're able to more or less take care of the impact of increased costs that didn't have that.

[Unknown Analyst]

Correct. And sir, if you could quantify that rate?

[Alpesh Dalal, executive]

I think some of these things, we may not be able to immediately quantify. But we'll be able to provide you in due course.

[Unknown Analyst]

Sure. And sir, my next question is on the API business. Sir, and this pertains to Slide #20. Sir, historically, we've been bifurcating the API business between onco, non-onco, CDMO, CRAMS and others. So at this time, the CRAMS piece does not show here. Is there a change in the way we look at the API business?

[Alpesh Dalal, executive]

So basically, CRAMS business is something -- so CRAMS business is something that if you recall in the previous calls also, we indicated that by design, we are bringing it down, and we have not stopped doing that particular CRAMS business because that was a plan A that we had. Since there is no CRAMS business that we are doing anymore, that particular block business [indiscernible]

[Unknown Analyst]

Okay. And in terms of the CDMO service, can you just explain a little bit more? A bit nuanced way, what is exactly that we do here in the API piece when we say CDMO/Service.

[Vishnukanth Bhutada, executive]

CDMO we are doing the -- especially for the new drug development. So some of these, like either it is in any special molecules, to work for them. Some of these -- we have to make the pilot that just we have to make and give them for the Phase I study or Phase II, Phase III study. These are the things particularly covered in CDMO, API business.

[Unknown Analyst]

Okay. And sir, how -- what would be your client profile [indiscernible] number of clients, the phase at which the molecules are currently? [indiscernible]

[Vishnukanth Bhutada, executive]

These are clients -- some of the clients are the U.S. -- generally, I can tell you more is from the U.S., not from any other part of the world. 75%-80% is coming from the U.S. where the development takes more. And typically, what happens in the U.S. the smaller company takes up to Phase I and/or the Phase II. And then the bigger company acquire that particular brand and they take it to the Phase III. This is what is happening. We have the mix of all.

[Unknown Analyst]

Okay. Fine. And sir in terms of others, what is there in others and why is it so volatile in the sense the quarter-on-quarter, we see a lot of volatility in new numbers?

[Alpesh Dalal, executive]

So I assume on the other side, actually there is not much volatility. What happened was that in Q1 of last year, obviously, this others also includes whatever CRAMS that we had, which is not there in this quarter. So that is one portion that [indiscernible] into difference, which is coming up.

And the other question is, last year, Q1 that we had, because we had done the [indiscernible] of our business from Shilpa Medicare to Shilpa Pharma. So good future on pricing basis, we had to do facilitation transition to ensure that we were able to import the goods correctly. So there was a still -- a sales run, because a one time small [indiscernible] sales done of about INR 16 crores, which is sitting and getting reflected here in others.

[Vishnukanth Bhutada, executive]

And to add currently, we have almost 7 active [indiscernible] projects, ongoing currently into the CDMO. [indiscernible] As I mentioned, some of them are Europe. This is what I can say.

[Unknown Analyst]

Okay. Okay. And one more question on the formulation part, license fees part of the business, could you just help understand how the license fees are on? Whatever sector [indiscernible] stable cash flow, these are based on certain milestones ? [indiscernible] INR 53 crores would be license fees and how much would be PDC?

[Alpesh Dalal, executive]

Your voice is not clear.

[Unknown Analyst]

Can you hear me now?

[Operator]

[Operator Instructions]

[Unknown Analyst]

Hello? Am I now audible?

[Alpesh Dalal, executive]

Yes, it's slightly better now.

[Unknown Analyst]

Okay. Sir, my question was on the license fees [indiscernible] in the formulation business. Could you explain the flow of the license fee, the way it occurs, on what basis, are the license fees on? And what is PDC? And if you can bifurcate between license fees and PDC?

[Vishnukanth Bhutada, executive]

As you are probably aware, any licensing fees, once it is given or agreed that means that they have due diligence already helping them of that particular product. And we get the initial milestone, on the second milestone, once we file in that country. There are several initiatives on signing after verifying and they are ascertaining that they are confident that what we have enough material to license this particular product in that particular region.

This is one initial requirement for doing an accounting or agreeing for any milestone. So this is what it has been done. And the milestone payment or the licensing fees is not a new for us. Licensing fees every quarter we are getting it. Sometimes it is a little more or sometimes if that particular milestone falls in that particular quarter, then we take into that quarter more. But this shows the strength of our R&D, and the strength of our ability and strength of our plan and the people. They are confident. Once they are confident on all aspects, it is not only on the product, it is not only on the regulatory, it is not only on the pivotal and pilot data which we have generated.

These are all being taken into the consideration, including the plan targets sometimes. These are all [indiscernible] technical all, once that is done, then they will agree for the licensing fees. This is what the major I can say about the licensing fees, and this is a regular in nature. And finishing the product development [indiscernible] I think Alpesh can explain more on but each of this licensing fees, whatever we are getting is, it's a differentiated product, which we are doing it for that. Like especially, as I mentioned, the transdermal patch what we [indiscernible] in this particular quarter licensing has been done.

Then secondly, NDA approval, what we got it, flat licensing milestone [indiscernible]. Some of the once MTG molecules which we are doing from the API on the formulation development, that also has been done in this particular quarter. And this is the beginning. This is not the end. Year-from-year, again, it starts more, not only the licensing revenue, as well as the commercial [indiscernible] there is a part of it like that.

[Alpesh Dalal, executive]

As Vishnukanth, mentioned there are different milestones which are captured. And based on -- as and when we keep achieving those milestones, we keep receiving our licensing fees. So the licensing fees that we have received this time also is a combination where we have signed up certain agreements in the past, where we have achieved a new milestone, and we have received that deal. In certain cases, we have entered into arrangement, which has given us new licensing fees and all. So it's a combination of the two. And this is a very regular feature in any formulation business in the pharma industry.

[Unknown Analyst]

Okay. Sir, do we expect this to sustain the INR 53 crores and grow from here, like is just a kind of pace and we actually keep growing on?

[Alpesh Dalal, executive]

This has been based on the R&D pipeline, and it's a churn that happens. So there are -- as and when our newer products keep getting developed, that ends up providing new opportunities. So it's a continuous process that we have.

[Operator]

[Operator Instructions] We take the next question from the line of [indiscernible]

[Unknown Analyst]

Yes. So last time, we spoke Alpesh, the message was that the company simply does not want to add more debt to its balance sheet. And then we come out with another INR 500 crores, INR 400 crores, INR 500 crores of debt shaping. So I wanted to understand why this shift of strategy? Also, what is our total debt now after this debt, NCD issuance? And also, is it fair to assume that you have chosen to go to debt through instead of the rights issue, because you all had come out with the rights issue notice and then didn't get back on that, but then [indiscernible] NCDs so then is the rights issues stand canceled?

[Alpesh Dalal, executive]

Okay. So let me answer the first part first. As we have taken this NCD of INR 450 crores, this is predominantly utilized to retire our existing term loans. So it is not adding on to the debt burden, right? This was just, as I mentioned in my opening remarks as well, that this was more of a reorganization of our debt, right? So obviously, there is slight increase that would happen because of the quantum that we have got. But it is within our overall expectable limits.

Second question on the rights issue. We basically -- there are not really -- rights issue is still very much part of our strategy. Rights issue typically requires certain regulatory timelines to be completed and all. And in the meantime, we wanted to, as I mentioned earlier, reorganize our debt. So this is only towards reorganizing, this is not towards increasing our debt. And rights issue, again, would -- is planned with a recombinant in terms of deleveraging our balance sheet. And that we will do so once we have rights issue in place.

[Operator]

[Operator Instructions] We take the next question from the line of Shaikh Mohammed Ayaz, an individual investor.

[Unknown Shareholder]

Congratulations for the excellent set of results. I just want to ask that what kind of performance do we expect in the further quarters? Whether this performance will continue or we can expect some bullishness in that?

[Alpesh Dalal, executive]

That is the reason why I said that we're making the predictable cash flow. I have given in the opening remarks itself, mentioning that the predictable cash flow is very important for our company. We were using for last 1 or 2 years because of this unpredictability not because of that -- on a regulatory front from the U.S. FDA. But now we are coming back on track. And we've fairly seen that this will, definitely, will continue. Not only continue, it will improve.

[Operator]

[Operator Instructions] We take the next question from the line of Shivan, an individual investor.

[Unknown Shareholder]

So, question on the Albumin part? So what would be the total investments we would have done in the Albumin project till date?

[Vishnukanth Bhutada, executive]

Total investment where, you are asking?

[Unknown Shareholder]

Albumin business.

[Vishnukanth Bhutada, executive]

This is a different, no? We are doing some in the CapEx into the development.

[Unknown Shareholder]

Yes, of course. What would be in the CapEx and what would be in the development part? The total investment?

[Vishnukanth Bhutada, executive]

I think we'll come back to you.

[Unknown Shareholder]

Okay. And sir, we were supposed to start selling recombinant human Albumin as an [indiscernible] this year. Sir is that on the card?

[Vishnukanth Bhutada, executive]

Yes, definitely. It is there on the card. This year probably, what will happen [indiscernible] because now we're preparing the [indiscernible]. And once we try to submit the samples, getting it there in the publish and approvals and all, I think, this time definitely

[Unknown Shareholder]

Okay. Sir, by when and what is the topline that you expect to be done [indiscernible] phase?

[Vishnukanth Bhutada, executive]

It is a very small quantity. We have currently 1,000 liters [indiscernible]. So I don't think we'll have any substantial from this [indiscernible] But yes, anyhow measure you have [indiscernible] you need to get established yourself and get it accrued vendor. That major work will be completed before our commercial facility put into the operation. Otherwise, that will take more time. Here, what we are trying to do with existing facility completely [indiscernible] the samples to the customers, getting it approved in their formulation and start the commercial supply [indiscernible]

[Unknown Shareholder]

Okay. Okay, sir. And sir, in terms of CDMO for the biological piece, where are we currently? Are we expecting the revenues to flow? If they are flowing, what would they will be?

[Vishnukanth Bhutada, executive]

Yes. Definitely, the CDMO is the biggest opportunity into the biologics. We are continuing to explore this. We have some good yields are also coming into that.

[Unknown Shareholder]

I will get back to you offline for the CapEx on the Albumin part of the business.

[Operator]

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for closing comments.

[Alpesh Dalal, executive]

Thanks a lot everybody for coming and joining the call. We hope to continue with the good performance that we have had this quarter, and we will keep in touch with you and keep updating you about the progress of the business that we have. Thanks a lot.

[Vishnukanth Bhutada, executive]

Thank you.

[Operator]

Thank you. Ladies and gentlemen, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.