Alkem Laboratories Limited (ALKEM) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Alkem Laboratories Limited Q3 FY '20 Earnings Conference Call, hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Tushar Manudhane from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.

Thanks, Faizan. Welcome to the 2Q -- 3Q FY '20 Earnings Call of Alkem Lab. From the management participants, we have: Mr. Sandeep Singh, Managing Director; Mr. Rajesh Dubey, Chief Financial Officer; Mr. Amit Ghare, President International Business; Mr. Yogesh Kaushal, Senior Vice President, Chronic Division; and Mr. Gagan Borana, Investor Relations. Over to you, Gagan.

Thank you, Tushar. Good evening, everybody, and thank you for taking your time and joining us for Alkem Laboratories Q3 FY '20 Earnings Call. I'm Gagan from the Alkem IR team. Earlier during the day, we have released our financial results and the same are also posted on our website. Today, in this call, we have the senior management team of Alkem to discuss the business performance and outlook going forward. Before I proceed with this call, I would like to remind everybody that the call is being recorded and the call transcript will be made available on our website as well. I would also like to add that today's discussion may include forward-looking statements and the same must be viewed in conjunction with the risks that our business faces. After the end of this call, if any of your queries remain unanswered, please feel free to get in touch with me. With this, I would like to hand over the call to Mr. Sandeep Singh to present the key highlights of the quarter and strategy going forward. Over to you, sir.

Thank you, Gagan. Good evening, everyone. Thank you for taking out time and joining us for our quarter 3 and 9 months FY '20 results conference. I would briefly touch upon some of the key performance highlights, and would then leave the floor open for questions and answers. Quarter 3 FY '20 has been a strong quarter for the company with revenue growth of 13.3%; EBITDA margin of 20.8%, which is a significant 50 point -- basis points improvement towards the last year; and net profit growth of close to 89%. Similarly, for the 9 months of this financial year, we delivered a revenue growth of 14.4%; EBITDA margin of 18.6%, which is 260 basis points higher than last year; and a net profit growth of 58.2%. Touching upon the key performance highlights of the quarter, our India business, which contributed about 2/3 to overall sales, grew by 14.1%. The growth was broad-based with all our 3 segments: Acute, chronic and trade generic, registering a year -- a healthy year-on-year growth. As for IQVIA data, our secondary sales grew at more than 1.5x the IPM growth rate. This was largely driven by significant growth in our anti-infective portfolio, which registered a secondary growth of close to 21% compared to the therapy growth rate of 12%. In Gastrointestinal and Vitamins segment also, we delivered a secondary sales growth, which was higher than the market growth rate, thereby maintaining our leading position in these therapies. In our Chronic segments like neuro, CNS, cardiac, anti-diabetes and derma, we grew significantly ahead of the therapy growth rate, thereby improving our ranks and market share. We have a comprehensive product portfolio with several market-leading brands, which are well complemented by a large field force and plan in their distribution network. This, along with effective sales and marketing strategies, have been the key reason for our strong performance in India market. Coming to international business, which contributed about 1/3 to overall sales and grew by 11% during the quarter. This was mainly driven by our U.S. business, which grew at 12.6%. During the quarter, we invested about INR 121 crores in R&D, which is about 5.5% of operating revenue. We filed 4 ANDAs during the quarter and received 4 approvals, which includes one tentative approval. Thus, for the 9 months of this financial year, we have filed a total of 11 ANDAs and average 15 approvals, including 4 tentative approvals. On cumulative basis, we have -- we now have a product pipeline of 136 ANDAs, already filed with U.S. FDA, with 70 final approvals. With more than half our filings yet to be commercialized, timely product approvals and the launches would be our key focus to drive growth in the U.S. market. Talking about cGMP inspections, I'm very happy to share that during the quarter, the U.S. FDA inspected a Biocon center located at Taloja. We cleared the inspection without any Form 483. Also in November 2019, both our formulation facilities in India at Daman and Baddi received an EIR. To update, we also had a -- we just concluded a St. Louis inspection last night, which we have updated the stock exchange. We got 3 483s, and we would like to highlight that we had got 4 -- 8 483s the last time, and none of them have repeated this time. We are confident that we'll close this in the next few months. Summing up the performance for the quarter and 9 months gone, I would like to say that we have already made a lot of investments in our people and infrastructure, which we are looking to leverage going forward. Improving the productivity and utilization would be one of the important focus areas for the company. Also, cost optimization and process improvements are the other major areas, which we're continuously working on, in order to compete more effectively in the cost-conscious generic market. Thank you for listening. With this, I would like to open the floor for questions and answers. Thank you very much.

[Operator Instructions] The first question is from the line of Kunal Randeria from Antique Stock.

Sir, first question is related to gross margin. So we have seen the 9-month '20 has seen a very good improvement over FY '19. And the margin remain fairly steady in the last few quarters. So if we were to break down some of the improvements that have led to maybe the product mix or API prices or procurement efficiencies. I mean some rough estimates of what has led to the improvement?

Yes, Kunal. You rightly said, in this quarter, we witnessed 3% improvement in gross margin. It was 59 -- 58.6% in last year's quarter 3. Now it is 61.8%. And you rightly pointed out, there are more than 2, 3 factors, and API is one of them. So you can give equal weightage to API prices as well as good mix also. It's a combination of particularly distorting API -- softening of AP prices and the product having better margin, that mix has got improved.

Right. So then related to API price again, see, one of the domestic API suppliers today said that they are seeing higher prices for the finished goods. So I just would to like to get your thoughts on it?

See, if I see my quarter so definitely, we had advantage of API prices. I think API price, it is going in line with our understanding and cost, what we have in our mind. So unless recent problem, and that we are not discussing that is coronavirus related supply issue. I think we are very comfortable. We don't see any significant upside in API price unless something happens going forward.

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

Congratulations on good set of numbers. The first question on the strategy. Like a couple of years back, we took a strategy of expanding the field force and de-cluttering the bigger brands. I think that's clearly playing out well. What is -- I mean, since we have grown very well, how do we ensure this double-digit growth irrespective of the season continues for the next couple of years?

Yes. Prakash, see, you rightly said that one is that we got a good favorable year. So if you see last 3 year's trend, the acute portfolio in the industry has grown by 5% to 6%. And last 2 years, we are witnessing a growth of around 10.5% to 11%. So that has certainly supported us. Now look at the structure of company, where there is an acute and last time also I said, and there is a semi chronic set of a segment, which is now becoming stronger in the company, okay? And then we have a chronic. So if you split all these 3 then our acute acute, which is anti-infectives and all is just 1/3 of the business. The 1/3 is semi chronic, which doesn't have an impact of the season. And then our evolving chronic business, which has started contributing close to 11% to 12% business. So we have to strengthen semi chronic and chronic in future. And we hope that next year, 2 would be a good year, the way we have been witnessing for the last 2 years. So that should sustain a robust growth for company.

Yes. But if you could share some strategies or action plan that you're taking, like in terms of new launches or covering the gaps in new therapy areas or existing therapy areas? That would be great.

Yes. So see, from existing products, except for those 14 brands which are amongst top 300, we have identified certain brands which are in a range of INR 10 crores to INR 20 crores and INR 20 crores to INR 25 crores types. So we intend to at least add 2 to 3 products in this club of top 300. And all those bigger divisions which has a brand range of INR 20 crores to INR 50 crores that we would want to make them big. And in chronic and semi chronic, where we are in the range of INR 10 crores to INR 20 crores, we are identifying 1 or 2 brand per division, which can be in the range of INR 50 crores to INR 100 crores in the next 3 to 4 years' time. So these are clearly identified for each of those therapies, and each of the businesses. And the focus will be to make these brands bigger in the coming time.

Okay. And is there a revised guidance for the margins. As last time, it was 100 to 150 basis points on a base of fiscal '19. We are clearly much above that. So if you could help us with the guidance for the closing year and next year?

Prakash, as you know, and offline or on this call, you always ask about our guidelines as far as margin is concerned. So we remain with our guidelines. And last time also, we said, definitely, we are going to put 100 basis point improvement to our margin, and we stick to it. I think you should not take this quarter 3 margin absolutely for annual. But definitely, for -- in annual terms also, we are going to do better. And definitely, there will be 100, 150 basis points more.

Yes. Compared to last 2 years.

No, no. So my question was more towards next financial year. If there is any color that we can give on the margin side, given the cost initiative also we last mentioned in the last call, that we are taking. So what are the margin levers for next year?

So Prakash, first, if you remember last call or the one before that, we've maintained that every year. We'll increase it by 100 basis points EBITDA margin. Obviously, not infinity. It's not possible, but our long-term objective was that -- short-term objective to medium term was a very -- 20 percentage EBITDA margins. I think we are in sync with that, in a couple of years' time. So that's the color we can give right now, nothing more than that.

The next question is from the line of Saket Bansal from Opulent Investment Advisers.

Yes, sir. Sir, I have a few questions. You said you -- there was a good mix because of which we see a gross margin increase. So do you mean chronic growth rate was higher compared to the actual growth rate? And if you can say, 9 months, what was the chronic growth rate? And what was the actual growth rate?

Yes. When I say improvement in product mix, it is all of -- it is not any therapeutic area specific. So it's for our overall business. We're having better margin. It goes well with acute as well as chronic and even for our international business also. So it is not -- nothing specific to any particular segment.

Sir, still if you can say, what kind of a growth rate we saw in last -- this quarter in chronic?

See, Overall organization growth is 14% and our acute has grown by 13% and chronic has grown by 21%.

21%. For this quarter, right?

Yes, for this quarter. This is I'm talking about annual. This is I'm talking about for 9 months.

9 months?

Yes, yes.

Okay, okay. And sir, your tax, if you can just tell me what kind of tax rate we'll be closing this year?

We'll be somewhere close to 10%, in some case.

Okay, okay. And FY '21 and '22, if you can guide me over there.

It is going to be in this range really, 50, 60 basis points here and there.

Okay, okay. Great. And sir, one more thing. About this inventory, you say that there can be a problem because of the coronavirus. So do you have any kind of inventory of API? Just you procure it from China.

Generally, any pharma company of our size, they ensure or they take care of a month API requirement of 1.5 months.

1.5 month?

Yes. And our dependency directly on Chinese imported material is not very great. It's below 5%. But indirectly, of course, it is that. But we are comfortable at least for 1.5 or 2 months.

You don't think so there can be any impact going forward in this quarter.

That I can't say because it depends how quickly this [indiscernible]. So we have our back-up plan for 1.5 months. And let's see how things goes well ahead.

Okay. And sir, if you can throw some colors on U.S., like how is it going and what's your view there, going forward?

Well, the growth in this quarter probably was on the lower side, as you guys have seen. But certainly, we are growing and the business is healthy. We've had some introductions in the quarter. And the product mix also benefited from overall sales growth as well as from margin perspective. So last quarter, I had very clearly said that we are expecting good growth, double-digit growth, lower double digit, but double-digit growth, and we're very much on track there.

Okay. Sir, in terms of margin, if we see, you will -- chronic, let's say, if chronic -- have you moved to double-digit EBITDA margin?

We don't break our margins segment-wise, but I'll let CFO answer that question.

You rightly said, Amit. We don't talk margins on our therapeutic or any specific business segment as well.

[Operator Instructions] The next question is from the line of Charulata Gaidhani from Dalal & Broacha.

Sir, congrats on the good set of numbers. I wanted to check if you could give a split between volumes and prices in domestic as well as exports?

Yes. Our volume growth, it was somewhere close to 8%, 8.5%. Whereas our NRV, that is price growth, it was in the range of 4.5% to 5%.

Okay. And any new launches?

Yes, of course. Rest of the growth is on account of new launches. That's somewhere close to 3% kind of.

Okay. And exports?

See, as I said, we talk on growth in margins, basically on overall basis. But export, again, both these combination, volume growth as well as NRV growth, it is there. And more or less, it's in the same range really. Our NRV is -- new launches, I mean to say, not NRV. NRV, in fact, for existing products is downward, but it's basically volume growth and new launches.

Okay. Right. And why is your tax rate at 10%?

We have some fiscal benefit. And for our domestic business, particularly. And then we have R&D expenditure on which we get the benefit. That's the reason why tax rate is on [indiscernible].

The next question is from the line of [ Ranvir Singh ] from Sunidhi Securities.

The first one. Can you help me match this segment-wise breakup. So you're seeing international sales is INR 752 crore, out of which 583 -- INR 584 crore is from U.S. and INR 146 crore is from other international sales. That total is lesser than INR 725 crore. The total is only INR 730 crore. So where this INR 22 crore is coming from actually? From international business?

I think you are talking for our quarterly sales.

Q3, Q3 number, yes.

Yes. So -- so some components we have from our subsidiaries also. So that's around INR 20 crores, we have from our subsidiaries. That's basically 2 RoW market.

Okay, okay. And even adding up for this India Business and International Business, it's also not matching up with your total revenue. So is there any element of some other operating income, which is not given in a different split?

Yes, of course, other operating income is there. And that is always there. In case of mainly when we are -- any company is exporting because you have your export benefits. And then since we are having fiscal beneficial plans. So we have, as you speak, different also. And besides that, there are a few other items in other operating. So differential portion is other operating income.

So if you want other operating income number for the quarter, it's [ INR 326 million. ]

Okay, okay. Yes -- similar, in Q2 also, there is a huge difference. That's why -- in Q2, I think some INR 45 crore difference I think from segmental, yes.

So the split which we have given in the presentation is the sales split, okay? Not the total income split, okay? So difference is basically the other operating income. So the other operating income in Q3 FY '20 was [ INR 326 million ]. Q2 FY '20 was [ INR 446 million ]. So if you put that, I think the sales will match with the breakup.

Okay, okay. Understood, understood. And in U.S. business, of the total approvals we have, how many products currently we are selling in...

About 80% are commercialized.

So some 60, 65?

No, less than that. Our total approvals, 81 include tentative approvals. So that will bring us down to 70, within that 70 also, there are -- we've got final approval, but we are still waiting for launching those. And my 80% was with respect to 70. So it's about 50 products that are commercialized, and the balance are -- either some of them are not very attractive to launch and many of them are in the process of being launched. Some of the recent approvals are still under the pace of launch.

Fine. And any target for product launches in the U.S. next year? How many NDA we are the -- expecting or planning to launch?

Yes. So our filing plan is 12 to 15 every year. And earlier guidance for launches was higher single digits, which we increased last year -- last quarter and last year and since last quarter to lower double digits for new launches in a year.

The next question is from the line of Saion Mukherjee from Nomura.

Just one question on the cost front. Is this material cost or gross margin improvement? Has it completely played out? Assuming, there are no disruption because China. Do you think the benefit is already there now in the third quarter? Or there is something which is still left over?

I think it's already there, Saion, yes. I think we're doing a good job.

Okay, great. And on the overheads and employee cost. How should we think? I mean I understand there is not much addition happening there.

Correct.

So the overhead growth would be below the topline growth, right? Is that a fair assumption to make?

Yes, fair assumption to make.

And only one question on this -- your margin guidance, where you talked about 100 basis points. I'm getting to '20 over a period, let's say, couple of years. Given your business mix today, the way you see the business, do you think '20 is the kind of peakish number? Or you think, there is room to go beyond '20? Do you have anything that you can share?

There is certainly room, Saion. But honestly, to -- like, wait for certainty that will hit, let's say, 20-plus in the short time frame. That is something which I don't want to kind of commit to. So obviously, '20 is not the peak. The business would also evolve, Saion, as you know. It's hard to predict. Product mix would change. We have certain plans. So it depends on many factors. But in the possible future, I think, '20 is something, we are comfortably aiming at it. But that's not the [ speak ] to answer you, obviously. But above that, it doesn't happen automatically. We also have to undergo some changes and get into more complex products, for example. You like that. That's slightly longer term.

Okay. And anything on India Business? Anything on M&A acquisition, that you're seeing, that you're interested, or it makes sense for you at this stage?

No. So Saion, as we always maintained, we are not really looking at to acquire large companies or large brands. We have grown our business organically. It's worked well for us. That doesn't mean that it's a taboo. We will look at small brands, niche things, which help us fill our portfolio, but nothing large, Saion, nothing large, or even medium sized for that matter.

The next question is from the line of [ Anubhav Agarwal ] from Lucky Investment.

Yes, congratulations on great set of numbers, sir. I have certain questions. If you can just give a number to how many products that are not attractive for launch anymore in the U.S.?

I would say that number would be in single digits for us.

Okay. Okay, that's fine. Can you just share a field force count and the productivity, as on Q3 or 9 months?

So see, we -- overall, we have close to around -- including Alkem and Cachet, we are on 11,000 field force. So this is -- the split is between generic, acute and chronic, okay? So we have close to around -- out of that, around 7,000 works for acute and 2,000 for chronic and 500-odd for generic. Now equity, we have huge range. So those are -- those acute divisions, which are settled for quite some time, our productivity ranges from division of around -- average overall for Alkem would be INR 4.8 lacs, average. It includes the bigger divisions and the smaller divisions or the evolving divisions.

Right. And how much room do we see for this acute segment of IPM to grow from where we are today?

Since they have a large productivity, we would actually intend to grow at least 1.25%, 1.5% more than the market growth.

Okay, okay. Sir, last question. Given the fact that we had an extended monsoon this season, would have gained up to about 40, 45 days in this quarter also. So if one were to adjust this, and see the growth rate, can you just throw some light there?

See, your colleague just -- 2, 3 people before you, they ask the similar questions. So growth, we will have to adjust strategy. And I said that, what dependency now is just not on acute, which means anti-infectives. We have chronic, semi chronic and acute, all 3 mix. So we will adjust those brands accordingly, and see that we drive the growth. But yes, we will certainly want the good luck to continue, the way we had last 2 years. Difficult to now project that what kind of monsoon we'll have for future, but yes, the year will be little work out to sustain the growth.

Right. And last, sir, if I may. Can you just guide us on our R&D rate for the -- for FY '21 and '22?

Yes. So I think we have always maintained around 5.5% to 5% -- between 6%, not beyond that.

The next question is from the line of Shrikant Akolkar from Ashika Stock Broking.

I would like to know the top 5 products in the U.S. and their contribution in the revenue?

We don't give product-wise revenues. But if you look at IMS, while the revenues may not match dollar to dollar, their contribution to our overall U.S. number will probably match. So that's public information.

All right. So now that you are closing almost $300 million per year kind of U.S. based. So incrementally, are you seeing any improvement in your profitability? I mean EBITDA margin or gross margin, something like that?

On the gross margin front, I don't want to make any predictions because the business is always subject to deflation. And therefore, product mix and new launches will always contribute, and their contribution will result into overall margin improvement or going down. But when it comes to EBITDA, certainly, the operating leverage will play. And any revenue growth will certainly result into higher EBITDA for us.

But compared to last year, are we saying any significant improvement in your profitability in U.S. business?

Yes. So to answer your question, since we grew 12.5% this quarter, certainly, our EBITDA for U.S. business would go up.