Strides Pharma Science Ltd

NSE:STAR

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Strides Pharma Science Limited Q4 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand over the conference to Mr. Abhishek Singhal to introduce the management. Thank you, and over to you, sir.

[Abhishek Singhal, Former Associate Director]

Very good afternoon, and thank you for joining us today for Strides earnings call for the fourth quarter FY '19. Today, we have with us Arun, Founder and Managing Director; and Badree, Executive Director, Finance, to share the highlights of the business and financials in the quarter.I hope you have gone through our results release and the quarterly investor presentation, which have been uploaded on our website as well as the stock exchange. The transcript of this call will be available in a week's time on our company website.Please note that today's discussion will be forward-looking in nature and must be viewed in relation to the risks pertaining to our business. At the end of this call, in case you have any further questions, please feel free to reach out with the Investor Relations team.I now hand over the call to Arun to make the opening comments.

[Arun Kumar, Founder, Group CEO, MD & Director]

Good afternoon, and thank you, Abhishek. Thank you all for joining our earnings call of Q4 '19 and FY '19. First of all, I must say I'm very delighted with what we have achieved here in the last 4 quarters. But before I dwell into the numbers, let me first address the issue of the [ OAI ] action at Puducherry plant, as I'm sure a lot of the questions will be around that. Clearly, this has been a very disappointing outcome for the Strides' management, considering our stellar track record in compliance. This is a facility that we got along with the Shasun transaction, but having said that, the facility has gone through 3 audits successfully since our ownership. So this has got nothing to do with results that I'm just stating. It's a legacy facility, it had some challenges during the audit. We believe our responses to the FDA had been comprehensive, and we believe we would be able to weather through these programs quite aggressively and meet our compliance standards quickly.In the interim, we will start giving you regular updates on what is happening with this facility. I just want to reassure investors that this facility currently produces only about 6 of our commercial ANDAs. Only one of those ANDAs can be produced at alternative sites. So -- and we have significant capacities in the group to take care of any unforeseen eventualities, and this is the model of the Strides group that we always have 20% to 25% of forward-looking capacity readily available to either make up. It was already designed for opportunities of scale. But having said that, in unforeseen situations like these, this incremental capacity that we have is our focus. So the one product that we can't take out of the Puducherry site is a manufacturing start-up where we have an annualized run rate of around $3 million. Outside of that, all these products -- all the products manufactured at Puducherry are already produced at other sites because of the volumes that are involved in these products.There was also -- there would be also questions relating to our CGT. So I have -- in all my previous communications, I mentioned -- I have requested all our analyst group and investor community not to factor the CGT numbers into the math, which in this case, it's not -- it's less to do with the facility but more to do with the fact that we have to repeat a clinical study, which is a very complex study, which in our opinion met all the end points, but the FDA requested us to do some additional studies. And as a consequence, when those new studies were to be done and this product also being on Modified Release, we have taken this product in a dual-sided approach. So we will continue to file our clinical strategy around the Puducherry site, but we'll also have this product manufactured in an alternative site of the group. So from a complex nature of this product, we think it's still valid and relevant for us stay nested. But -- and that is the high-level overview that I wanted to provide on the CGT. And now I'll get into the numbers. It has been a strong quarter. Our business was reset at the beginning of the year. We believe that we are now resurgent with our strategy. It's executing -- it's executing to plan. I'm particularly pleased with the fact that the U.S. business has now delivered $53 million of revenues this quarter, which was $25 million in Q1. So the business broke even in Q2 at $32 million. And since then, it's seen a significant upward trend. What is very pleasant about this business growth has been that there's been 0 price erosion on any of our products. More importantly, we have only commercialized 34 -- sorry, 37 products out of our 68 approved products, so we are very focused on allocating resources or private capital or capacity on products that make the most economic sense for us. So we still have a long tail of products that can be launched to make up as -- to make up for growth. Importantly, 9 products today are now market leaders. We have the #1 market share on 9 products. That is up from one product the last financial year. And 10 of our products are either the #2 or #3 in terms of volume and value. And so this is an important outcome, kind of validates our strategy of staying focused on products which are difficult to manufacture, small products, niche or complex API involved, and that model continues to deliver some phenomenal results. Having said that, we've had the benefit of the winter sales of TAMIFLU where we are a fringe player as a late-approved player in the space, so we only had about $2.5-odd million of TAMIFLU sales and the consolidating effect of Vensun was very, very limited. We only had approximately $1.5-odd million of sales from Vensun. So effectively, the Q4 sale has been predominantly organic aided by about $2-odd million of seasonal products like TAMIFLU, oseltamivir. And so from that perspective, that has come from the fundamentally based portfolio and like I mentioned, that increased market share and compliance with supplies. We have had 0, almost negligible, failure to supply the whole year, with 0 failure to supply in Q4, which is also -- has started in increased working capital needs as we keep inventory as we are ramping up our U.S. business.It's been a great year from an R&D perspective. We have filed 21 filings which is more than double of what we did the previous year. We received 15 product approvals, and we continuously focus on developing products which are niche. We expect to have a similar kind of filing momentum even this year. And although the Puducherry site has about 10 ANDAs, one of them is duplicate, so it's about 9 new products. We were expecting for target action dates during this financial year. They obviously will not come true unless we complete our regulatory actions at Puducherry. But having said that, with the bank of products that are not commercialized, we are very confident to build momentum from where we left off in FY '19 in the U.S. business.Other regulated markets business is growing significantly. We had close to about INR 300 million of revenue recognition challenges in Q4 because of serialization issues. As you know, that serialization became -- came into effect in February. We had some challenges like most of the companies in India and elsewhere to meet all the serialization needs of our machine slowed down significantly as the technologies were being adopted. So adjusted for that, we had a great Q4. So I think this business now has got to a pretty good size where future ramp-up will be significant.A lot of filings. In fact, our filings from these markets have been significant, almost 30-odd new filings. And we continue to leverage our Australian portfolio, which we own IPs for other markets.As part of Australia, we had a steady growth as we have guided. We squeezed out all the growth out of this market, but we have significant margin improvements because of our supply chain integration to the Strides system. And therefore, our margins have gone -- have increased. Shareholders are now approved the exit of Arrow on 27th of March. There are 2 post-closing conditions which are still in the works. That is why supply remained -- and also for the official merger between Arrow and Apotex with Competition and Commission approval they're expecting in a couple of days, so they had to go back with a revised structure of ownership. We expect things to fall in place in the next couple of weeks, and we will keep you updated until such time. Arrow continues to be an important business for the group and operates as an independent company.Most disappointing businesses for the whole year was the emerging markets and the institutional business. I have been heavily focused on ring-fencing all the tactical businesses into converting them into strategic businesses whether it's forecasting liability, work on the business and also on how we conduct these businesses with completely clean [ mental ] hygiene in our plants business, primarily sales is just about commencing Q4, very marginal. So we've taken -- between these 2 businesses, we have taken a drop of approximately INR 500 crores in revenues. And our EBITDA is in this business is in the mid-single-digit numbers, which is very disappointing. But having said that, we believe all the hygiene and the cost correction and rightsizing the Institutional business to operate in products and portfolio which are only profitable. As this capacity went out, the U.S. is competing for capacities, we will be very rational with how we approach the emerging markets and the Institutional business. We still think that the business has continued to be at sustained size, but with an improved margin profile.So -- and on the -- we are delighted with what we've achieved in FY '19. The regulated markets now contributed almost 90% of our global revenues. Adjusted for emerging markets, post R&D, our EBITDAs are now a shade about 20%, and that is after very significant increase in R&D spend. And key challenge is we need to grow from here, we expect that to be possible considering that we will continue to grow in some of our key markets, especially the other regulated markets and in the U.S. We have kept costs under control both in terms of our manpower costs but also OpEx. And consequently, gross margins have improved with better pricing environment, which is shown through from [ cross-section as shown through ] the EBITDA, which is great this quarter. And we believe that we will have continued expansion on the existing portfolio in the U.S. and with new products. And then, of course, once the Australia cash comes in, the balance sheet gets significantly improved although our current annualized run rate and with further improvements that we'd expect from emerging markets, we can comfortably handle the covenants of our total debt as we speak. And then we believe that the rapid expansion in the U.S. and other regulated markets will more than recoup for the revenue loss in Australia, when that deal is done there.In terms of an overall focus for FY '20, we believe the U.S. growth will be driven by portfolio. Our other regulated markets is benefiting from a large pipeline of products that have been filed with the regulators. We expect several tools. We see significant pricing improvements in Germany, in the U.K., in the Netherlands, which is great. And of course, our key focus this year will be to ensure that Puducherry facility comes back in shape. And the immediate global focus for the larger part of the leadership is to bring Africa's manufacturing infrastructure back to shape. And then also our recently approved U.S. FDA facility in Singapore, which is a designated facility as for the U.S. regulations, which allows us to sell to the U.S. government. We have already won our first contracts from Singapore. So to convert these opportunities into business, should be another key focus for the company.All in all, we are very confident of -- we are satisfied with what we've achieved thus far, and we're very confident on what FY '20 will bring to company and its investors.So with that, I'm open to questions and my colleague, Badree, who will address questions related to the balance sheet or cash flows or the ratios. And I'd be more than happy to discuss and address questions related to the business and strategy. And like Abhishek said in his opening, if there are questions or calls that you would like us to set up later, we'll be more than happy to do so with our ability. With that, I request Abhishek to take over and open the floor for questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal Securities.

[Tushar Manudhane, Research Analyst]

Sir, just on this remediation of the Puducherry, any remediation cost that will be there?

[Badree Komandur]

No.

[Tushar Manudhane, Research Analyst]

Okay. And any incremental R&D spend with respect to the repeat of the complex study?

[Badree Komandur]

Yes, there will be approximately $1.5 million to $2 million of incremental R&D spend, which is anyway budgeted as soon as we got news of the clinical challenges.

[Tushar Manudhane, Research Analyst]

Understood. And I seem to recall from this, you made [ lifestyle ], did that come under our P&L, no? Or...

[Badree Komandur]

That period event, it was prior to our 50% ownership also, it is such that the recall happened now and we were obliged to announce it, but it has got no impact on us.

[Tushar Manudhane, Research Analyst]

Okay, great. And just lastly, the Australia [ downgrade ] mentioned the income [ some more times ] so with the interest cost come in for additional couple of more quarters or...

[Badree Komandur]

I don't think this is going to [ get executed ] by more than a quarter. It's just because the Competition Commission for them, they have to accept the new terms, I mean, the new deal terms. And the commission is being only refund after the Australian election which is next week. So it's just that. So we are expecting -- we don't expect this to run for several quarters in terms of a decision.

[Operator]

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

[Prakash Agarwal, Executive Director of Pharmaceuticals]

Sir, a question on the business gross margins. We have seen a very strong uptick in the U.S., which is typically good margins. So -- and you also got in products in the front-end. So I'm just struggling to understand why there is a dip in gross margins?

[Badree Komandur]

Sorry, why is there a dip in gross margins? Yes. So Prakash, your question is that why is there a dip in our gross margin? Or why is there an increase in the gross margin?

[Prakash Agarwal, Executive Director of Pharmaceuticals]

No, dip, sir, from 56% to 53.5% Y-o-Y, sir, Q4 of last year?

[Badree Komandur]

So it's 0.2%, right?

[Prakash Agarwal, Executive Director of Pharmaceuticals]

No. No, 280 basis points.

[Badree Komandur]

No. I don't think the numbers are right, Prakash. Can we go off-line and give you more clarification?

[Prakash Agarwal, Executive Director of Pharmaceuticals]

Yes, sure, I'll take that. Okay. And secondly, on -- so the time lines for the additional studies. Would it be like 6, 12 months? Or is it going to be like much faster?

[Badree Komandur]

No. It's a very complex study. It's more like a 12-month -- it's more like a 12-month reset of the [ drag ].

[Prakash Agarwal, Executive Director of Pharmaceuticals]

Okay. Okay. Got it. And some color, if you could...

[Badree Komandur]

Which is why if you recall the last transcript, I did mention that please do not consider this...

[Prakash Agarwal, Executive Director of Pharmaceuticals]

No. No, you did, yes.

[Badree Komandur]

I just want to reassure you that nothing has changed materially from our internal thinking around this.

[Prakash Agarwal, Executive Director of Pharmaceuticals]

Perfect. And on [ Sansibar ]. We do have an approval, I see a couple of guys already launching at risk. What is our take on that?

[Badree Komandur]

We'll give you an update, while early, 2 of them have launched [ their products ] and 2 of them follow different approaches in terms of how they have accessed the market. We have to follow one of them. But we are waiting for an important event in terms of the milestones from what we have been advised by the 20th of this month and then we will give you an update. We have the product available to launch if we, if the pathway is given.

[Prakash Agarwal, Executive Director of Pharmaceuticals]

Okay. And is it subject to somebody...

[Operator]

[Operator Instructions] The next question is from the line of Nitin Agarwal from IDFC Securities.

[Nitin Agarwal, Analyst]

Congratulations on a pretty solid set of number, sir. Sir, on the U.S. business, I don't know if -- you've closed about $50-odd million for the quarter on an organic basis you mentioned. Now at the current portfolio level, is there more scope to extract more value of the current set of products or a growth next year are going forward is going to be larger driven by new launches?

[Arun Kumar, Founder, Group CEO, MD & Director]

No. So we have relaunched 37 products out of 68 approved products. And if you look at it, we have been very calibrated in our approach in the sense that, for example, in immunosuppressants, mycophenolate and Tacrolimus, we had 0 sales last year. This time, it's very significant products. If you look at [ sensible ] data, you'll see that we're already picking up significant market share. So we just ensure that the timing is right when before we launch a product. So all the balance of the 30-odd products, which are not launched, have got delayed as far as the marketplace. But what is interesting is also we have seen our base 37 products also increasing in terms of market share.

[Nitin Agarwal, Analyst]

And in terms of -- when we look to FY '20 in terms of your approvals, how many tags which are there out -- ex Puducherry facility where you can get approvals?

[Arun Kumar, Founder, Group CEO, MD & Director]

We should be able to get the same number of approvals, like [ 30-odd ] products.

[Nitin Agarwal, Analyst]

Okay. And you hope to commercialize most of them next year? Or how do you see that?

[Arun Kumar, Founder, Group CEO, MD & Director]

Well, like I said, our approach is a little different. We don't launch on the day 1 on any product. So we will wait and often -- this most often, the strategy has worked very well for us. We continue to monitor the market. So I don't -- if your question is that, I think your question is that is there base expansion, the answer is yes.

[Operator]

The next question is from the line of Kunal Randeria from Antique Stockbroking.

[Kunal Randeria, Research Analyst]

Congrats on a good set of numbers. A couple of questions. So firstly, just -- I don't know if you could throw some light on what of the statements at you have made in the presentation saying that 45%-plus of the previously approved ANDAs have potential market opportunity, given the changing market dynamics. That seemed a very optimistic kind of a number. So if you could just run through some of your thoughts on this?

[Arun Kumar, Founder, Group CEO, MD & Director]

Sorry, you said this is a very optimistic number. You're talking about the U.S.?

[Kunal Randeria, Research Analyst]

Yes, about the U.S., so 45%-plus of approved and then -- so that's even too high. So I was just wondering if you can share your thoughts.

[Arun Kumar, Founder, Group CEO, MD & Director]

Yes. So like I said, if you -- what we're basically saying is that 45% of our previously approved ANDAs have potential market opportunity, which we said we are not commercializing these products, 45% of the products that are already approved. But if you take an example of the 2 products that we have launched in the last 6 months, there are many other products that have come -- that are now showing up the same kind of uptick. For example, ibuprofen soft gelatin capsules, we are not relaunching the product. It's becoming an important product starting from next quarter. It's going to be launched 2 years after the NDA got approved. So there are several products that we are seeing that the ANDA withdrawal effect is coming to play or then some of the existing players have exited the markets like focusing on other products. So that is why we believe there is value and if you look at the same slide, if you look at of the key front-end molecules that we are showing tracking for market share, last year, none of these products which we rolled out approval have this kind of market share.

[Kunal Randeria, Research Analyst]

Sure. And just one more. You also mentioned that in a few European countries, you are seeing some pricing improvement. So is it mean -- is it an existing products or the kind of launches that we are going to make which are probably low competition and [ meet ] higher realizations?

[Arun Kumar, Founder, Group CEO, MD & Director]

So I think we are seeing a mirror image of the U.S. in terms of specific products which have seen price improvements and some we see acute competition. So we think all the molecules' prices going up a lot more than some of the newer products. But in our case, it's a combination of new launches and existing products.

[Operator]

[Operator Instructions] The next question is from the line of Shashank Krishnakumar from JM Financial.

[Anmol Ganjoo, Director]

This is Anmol Ganjoo. I've got a couple of questions in the U.S. business. One is that the improvement that we seem to be seeing is a function of very sharp increase in market share in certain products. As you detailed that our positioning in a lot of these products is quite terrible. What would you attribute this primarily to?

[Arun Kumar, Founder, Group CEO, MD & Director]

I think supply security is a factor that we have for us in our customer needs. So supply security, getting our supply chain in place before we go and take businesses of larger -- of some of the larger buyers. And we typically -- the margin hasn't changed. Well, we typically become the secondary supplier and default of the primary supplier is what we then become the primary supplier to any product. We typically are not the primary supplier but any product at the start.

[Anmol Ganjoo, Director]

So are there beneficial result in certain -- some products or the supply chain disruption will cost and how should we...

[Arun Kumar, Founder, Group CEO, MD & Director]

Yes, there are beneficial results part of this, but not anymore.

[Anmol Ganjoo, Director]

Okay. And my second question again on the U.S. business. I heard you on T.V., asking your results, and that we are exiting at $200 million and set for 20% growth for the U.S. on that base, so which is incremental $40 million. But I also wanted to understand, what are -- how much of this assumption is vulnerable to things not panning out in a satisfactory manner at the Puducherry facility? As you work through scenarios, what is the vulnerability of this assumption, assuming things won't pan out as the plant at Puducherry?

[Badree Komandur]

The results and [ the related math ] on saying that we get to a 20% growth, considering that we have grown 80% over the [ world ] rate, and given on a strong Q3, we've grown almost 25% Q-on-Q. It will be -- and now that we have reached a certain critical margin, it's quite fair to assume that our growth will not be in the same mid-scale rate that we have had in the last 4 quarters. But clearly, [ 5% ] growth from here in spite of Puducherry is something that we will be able to [ do ]. Like I mentioned my opening, Puducherry doesn't have an impact on supply. It only has an impact on new products. And even if there is any transaction, which we hope this will not be the case, considering how we have proactively react to the situation. I am very confident that the U.S. business will get to a decent number and you will see panning in the next couple of quarters.

[Operator]

[Operator Instructions] The next question is from the line of Nitin Agarwal with IDFC Securities.

[Nitin Agarwal, Analyst]

Arun, just to reiterate on the point that you made on emerging market Institutional businesses earlier in the call. The revenue for these 2 segments will stay around the same level at this year?

[Arun Kumar, Founder, Group CEO, MD & Director]

Yes, it stay around the same level, but it will not operate anymore at the 5% to 6% EBITDA that we achieved. So it will -- the idea is to get that business to that group the regulated market EBITDA. So that it's an order that we get there, considering the size and stance of it.

[Nitin Agarwal, Analyst]

And secondly, just on your guidance, but again on the U.S. you made [ 20% ] growth. This is organic or just improving that Vensun and [ baby vacs ] business also?

[Arun Kumar, Founder, Group CEO, MD & Director]

The baby vacs, it will improve the Vensun business. The baby vac business also yes, and that is why we are more than comfortable in telling you that. And so like I said, I think it will be great if you guys just follow through our next few quarters as we ramp up our business in a more -- in a more robust way. Like I said, it will not the way we did last year because of [ rains and snow ]. But yes, we are very confident of getting to a reasonable number in the U.S.

[Nitin Agarwal, Analyst]

And lastly, on the underdeveloped markets, you mentioned the fact that the business now is at critical scale, which gives them the position to grow out -- the critical mass to grow strongly from thereon. I mean, are there -- from a regulatory perspective, from a market perspective, are there development especially in the serialization, which sort of has the opportunity for players like yourselves?

[Arun Kumar, Founder, Group CEO, MD & Director]

Like I mentioned in the fact that United States, they are the strong players because they have very expensive process to run. And Europe unlike the U.S. is serviced a lot by fake dealers, they are not players of small time -- small base and also small time. Everybody will say, Europe is big time. If -- they have smaller capacity that they are focusing their necessary investments does not make any sense. So have seen a lot of the French players are exiting the market or asking us to put capacity on investments and I think it's -- it's a good communication. We made the business more complex for smaller players. And we think it will be a good time for companies like us who are heavily invested with both portfolio and the ability to offer products in these countries.

[Nitin Agarwal, Analyst]

And so these markets not historically would be largely your -- the key market for us would be different European markets, Canada? Or are we looking to add any of the markets to it?

[Arun Kumar, Founder, Group CEO, MD & Director]

So we are fully covered -- we could now operate -- we mentioned that even in Canada, so we're in Canada. We are in South Africa. We are in U.K. and we are in Continental Europe. So we have now covered -- we just now in those markets, but we are in Germany, we are now in Netherlands. We are in the Scandinavian markets. So we have quite well diversed in those markets and the same goes with [ Europe ] in these markets, and we are now clear with a lot of capabilities around that.

[Operator]

Ladies and gentlemen, that is the last question. I now hand the conference over to the management for their closing comments.

[Arun Kumar, Founder, Group CEO, MD & Director]

So thank you all. I really appreciate your time, very much pleased. Like I mentioned, please feel free to contact us if you have questions at any time. Thank you, and have a great weekend. Thank you.

[Operator]

Thank you. Ladies and gentlemen, on behalf of Strides Pharma Science Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines. Thank you.