Alkem Laboratories Limited (ALKEM) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Alkem Laboratories Limited Q3 FY '22 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. Thank you, and over to you, Mr. Manudhane.

Thanks, [ Neerav ]. Welcome to 3Q FY '22 Earnings Call of Alkem Laboratories. From management side, we have Mr. Rajesh Dubey, Chief Financial Officer; Mr. Amit Ghare, President International Business; Mr. Yogesh Kaushal, President, Chronic Division; and Mr. Gagan Borana from Investor Relations. Over to you, Gagan, for the opening remarks.

Thank you, Tushar. Good evening, everyone, and thank you for joining us today for Alkem Laboratories Q3 FY '22 Earnings Call. Earlier during the day, we have released our financial results and investor presentation and the same are also posted on our website. Hope you had a chance to look at it. To discuss the business performance and outlook going forward, we have on this call the senior management team of Alkem. Before I proceed with this call, I would like to remind everyone that this 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 the queries remain unanswered, please feel free to get in touch with me. With this, I would like to hand over the call to our CFO, Mr. Rajesh Dubey, to present the key highlights of the quarter gone by and strategy going forward. Over to you, sir.

Yes. Thank you, Gagan. Good evening to all of you, and thank you for joining us today for our quarter 3 FY '22 earnings call. I will briefly take you through the key operational and financial highlights of the quarter gone by and would then leave the floor open for questions and answers. Starting with the financial performance of the quarter, revenue from operation grew by 30% Y-o-Y, driven by robust performance in India business. Despite the inflammatory raw material landscape, our gross margin was almost flat Y-o-Y, which was largely on account of better revenue mix with higher contribution from India business. EBITDA margin dipped by 380 points Y-o-Y to 19%. The Y-o-Y dip-in in the EBITDA margin was partially because of saving on the marketing and other promotional spend in quarter 3 of last year, which was impacted by COVID-related drop down and has got normalized this year. Our net profit after tax grew by 16.6% Y-o-Y, helped by tax credit on account of restructuring in the U.S. During the quarter, we also generated healthy cash flow, which has helped us further to strengthen our balance sheet with net cash position of around INR 1,500 crores as on 31st December 2021. Talking about our India business, it registered a growth of about -- to 20% Y-o-Y during the quarter and about 35% for the 9 months of the financial year. This growth was majorly driven by strong volume growth, partially helped by COVID-19 tailwind in our acute therapy area of anti-infectives, vitamins, minerals, nutrients, pain management and gastro. Most of our mega brands continued to outperform in their respective markets, thereby maintaining the leading position. Our chronic portfolio also delivered a market written performance for the first 9 months of the financial year. Our trade generic business also grew well in the quarter and the 9 months of the financial year, despite the high base of last year. Our recently launched Pulmocare division catering to the respiratory segment, saw an encouraging start with growth rates higher than the therapy growth rate. Moving on to our international business. Our U.S. business with quarterly sales of $77 million was down 7% Y-o-Y. This was due to significant price pressure on our base portfolio that we try to offset by regularly product launches. During the quarter, we filed 1 ANDA with the U.S. FDA and received 6 approvals. Apart from the U.S., our other international markets delivered a robust Y-o-Y growth of 25% during the quarter with healthy performance in our focus market of Australia, Chile Philippines and Kazakhstan. Updating on our progress in the Biosimilar segment. During the quarter, we signed an agreement with Theramex to develop and commercialize tocilizumab for Europe market like U.K. and Switzerland, and also Australia. The commercialization is expected in the year 2026. In terms of regulatory inspection, all our manufacturing facilities supplying to U.S. barring the St. Louis, has as an EIR as on date. Our new manufacturing facility at Indore is awaiting pre-approval inspection by the U.S. FDA. With this, I would like to open the floor for questions and answers. Thank you for your patience listening.

[Operator Instructions] The first question is from the line of Damayanti from HSBC Securities.

My first question is on some of the cost headwinds, which industry is currently facing. So in your observation, have you seen any moderation of date in headwinds such as higher raw material price, freight cost, et cetera?

So what I understand, Damayanti, from your question, you wanted to know impact of higher API costs on our cost? Am I correct?

Yes, sir. And -- like how has been trend recently? Say, compared to last quarter, have you seen any moderation in recent weeks or so?

So as you know, price increase on API started somewhere start of the same quarter. And we covered in our second quarter amidst call also API prices, it has started rising now. And it was expected starting, given the impact in our COGS in quarter 3 and going forward. So quarter 3 also impacts to certain extent, it is there, but not significant impact is there. Definitely, since we ensure our raw material and packing material for at least 3 months. So whatever high-priced API or packing material we have procured, definitely quarter 4 is going to have major impact. So we feel somewhere between 2% to 3% of our margin, if we get impacted in quarter 4. As far as answer to your question, whether softening of prices has started happening or not, so yes, in some of the API, a little bit size softening we have witnessed. But our expectation after winter Olympics completion, I think that is the time when we have to see how China is behaving and how prices start indicating. So I think we'll come to know better once this winter Olympics gets over. But definitely, quarter 4 is going to have impact of higher API prices and -- ultimately impacting our margins also.

Okay, sir. That's helpful. Then my another question is on India part of the business. So can you broadly specify what is the current contribution from chronic therapies? And where you would like to reach in terms of chronic contribution in next 3, 4 years from this year?

Damayanti, in last quarter also, we said the same that we are currently contributing approximately 15% to the domestic turnover. And by '24, '25, our [indiscernible] is that we should reach around somewhere in the range of 21% to 22% of domestic turnover.

Okay, sir. My last question is, can you also specify the MR productivity for your acute and chronic segments, like where we are in terms of 2 segments in terms of productivity? And what is the blended right now? Blended number?

Okay. So chronic -- sorry, acute, we diligence put together, we are close to INR 700,000 in our productivity, it ranges from [ 10.5 ] to around [ 3.5 ], but broadly across chronic, acute, it is INR 692,000. Chronic, we have a productivity of INR 330,000. So these are 2 productivities. And across company if you ask me, which was -- I believe was your next question, was around INR 578,000.

Okay, sir. My last question -- quickly on the U.S. part. So obviously, you mentioned that prices are very challenging right now. So again, about recent trends, are we seeing similar, I'd say, elevated [ level of ] price erosions, the way we have seen in second quarter or so or in recent few weeks, at least, we have seen some softening on subspecific products also?

Damayanti, some softening we have seen, but that perhaps is if we're looking year-on-year obviously, the price erosion started in the first calendar quarter of 2021. So to that extent, the base is already now at a lower number. Overall, the deflation continues, which, of course, always continues for generics erosion.

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

Just wanted to check on the India business, what is the broad breakup of the Gx and the Rx?

Can you repeat your question? Broad?

Broad contribution from the generic business and the prescription business, sir?

You're talking about generic to formulation, right?

The generic and prescription business. So trade generic is around 20% of our domestic sales.

Okay. And would it be fair to say that it's grown higher than the prescription business?

Yes. Yes, Prakash, generic, it grew more compared to [indiscernible].

Okay. Perfect. And on that prescription business, sir, we had a good tailwind given the second, third round and all the 4 main therapies where we're present had this [indiscernible] that you've also mentioned in the press release. And I will assume it's really difficult to call out what would be the base business growth. But any ballpark number? I mean, would it be high single digit if these tailwinds would not be there?

You're talking about year '23, '24 -- '22, '23, sorry?

Yes, current 9 months, sir.

Current 9 months. So -- Can you repeat your question again?

So I'm just saying that we had some tailwinds of COVID Q1 obviously, but in -- especially in Q3, also, there were some [indiscernible] tailwinds, which you've mentioned correctly. Just trying to understand if COVID was not there, what would have been the base business growth? And how do you expect it next year given the high base you have?

So see, we don't have COVID-specific products, but then our empirical treatment or supported treatment, which are there [indiscernible] COVID marginal spike, like -- products like Pan, which is a GI product, then some of the multivitamins, zinc-based multivitamins [indiscernible]. So there is a marginal impact. And of course, in the first 2, 3 months, we had a good positive impact of antibiotics. So overall, there is impact of COVID on our business. But if you ask me specific to third quarter, then not really much. There is a marginal impact of COVID, not much. Yes. And your next question about how is next year we foresee, so very difficult to predict so far, but whatever some of the analysts -- they have done some working, we see around -- if we remove COVID impact business in the current year or if you include COVID impact and then throughout the next year, I think the industry should grow at around 8 to 9 percentiles. That's my [indiscernible] number, I would say. And we -- as a business, we will try to outperform the market growth.

Okay. Okay. Fair enough. And second question to Mr. Amit, on the U.S. filing. So filings are about 9 approvals -- there is about 18 with 3 tentatives. How do you see the -- numbers obviously don't matter much, it's a chunkiness of product, but how do you feel with this base next year should turnout for us in the year?

Prakash, next year in terms of filings, I know your question is on the revenue, but just on the filings, the ambition will continue to be in the [ 12 to 15 ] range. And in terms of launches, which will, of course, has helped the current year and will help the next year. We've had a good number of launches this year, and we are very optimistic in terms of growth going forward for next year. That was the real question I understood.

So with the price rising, we have come to a certain date. And now with new launches and ramping up of existing products, would it be fair to say that the chunkiness is the -- is not there anymore with most of the products, and we could grow double digit, would that be fair understanding?

Look, the objective would certainly be back to growing double digits. It now totally remains to be seen in terms of how good our launches perform, what kind of market share we get. And also remember, the price deflation for all the new launches is always higher, so if it's a day 1 launch, it's a rapid price deflation. Day 1 [indiscernible] in launches. If it's a follow-on launch, it still results into apparently rapid price deflation compared to the [indiscernible] business. So keeping all that in mind, however yes, we are optimistic for a good growth going forward.

Okay. And lastly, to Mr. Dubey, given the strong cash position now, how are we thinking about adding some -- using the cash because I mean, in the last 1 month itself, we have started to see some small, small acquisitions. I know as a company, we've not followed that path, but what is the thought process now? And how do you use the cash?

Prakash, we have replied various times. In fact, whatever cash we have, we keep for our business expansion. And of course, we are doing reasonably well with the dividend also going forward. So when I say future business expansion besides organic, inorganic opportunities also, definitely, we'll consider if we get at right price. But we want to do any inorganic after having complete details and considering rising of opportunities. So definitely, we have plans for cash available [indiscernible]. And in any case, we'll keep on giving dividends the way we're doing right now?

Any major CapEx plan?

Sorry?

Any major CapEx plan?

No, CapEx guidelines we have already given to you. This year, we are going to have somewhere close to [ 400 ] next year, between [ 400 ] to [ 450 ]. And after that, I think we'll be somewhere [ 450 ] to [ 500 ] kind of. I'm talking normal CapEx. It's something...

Yes. Yes. nothing new, no new major projects as such.

Yes. Not very specific, but we may be requiring domestic facility, say, after 2 years.

The next question is from the line of Kunal from Edelweiss.

So my first question, again on the India business growth. So I think you did mention that the market will grow at 8% to 9% next year, and you would like to grow above that. So while I understand this, I think this year you have beaten the market hands down because I believe the COVID [indiscernible] treatment in terms -- you have been more success this year. So I'm just wondering that on this space, do you see growth actually tapering down very sharply next year?

Not really, see, this year, particularly the antiviral treatment was restricted, okay? So it is mainly antibiotics and all, which were sold. So yes, there will be some tapering which will certainly happen. There is a reason the market, traditionally, which has grown by 9.5% to 10%, we are talking about around 8% to 9%. So there will be certain tapering in the market. And so is business, so our objective will remain to outperform the market.

Even on this base, sir? Yes. I think no one has reported a 20% year-on-year, I mean, growth in this quarter. From this space also to grow, maybe at 9%, 10%, you think it's doable?

Yes. So see, we are not saying that we grew at the same pace, but we are saying we'll be outperforming the market growth.

Sure, sir. Sir, my second question, again, regarding India. So WPI this year is in double digits. I understand you have maybe 25%, 26% of your portfolio under price control. So should we -- so what has happened typically, you would take the full 10% or 11% kind of price growth next year?

Yes. So we'll try to see that we take the -- almost we take the full benefit of WPI price impacts. Yes.

Sure. And WPI is over 10%, so you can take over that? Let's say, it's 15%, you can take 15% size growth?

To that point, it is in a range of around 10% or so. So that should be the impact on our old pricing benefit, not 15%.

Okay, sir. Up to 10%, fine. And just one more clarification. Sir, Mr. Dubey mentioned that you will see on 2% to 3% impact on gross margins in the next quarter. Sir, did you mean 2% to 3% on a 9-month FY '22 base or over Q4 FY '21?

No, no. I was referring our Q4, not 9 months. 9 months, it has already gone. So we have margin more than 60%. So -- but for quarter 4, our expectation -- or we have estimate having impact of higher API prices to the extent of 2% to 3% to market.

Okay. I mean, so just to put back in context, last year, you did around 57% kind of gross margin. So maybe this time could be doing around 55%. Is that a fair understanding?

No. No. No. Actually, if you see our last quarter, our gross margin, it was more than 61%. So we expect we will be somewhere closer to 59% or 60%.

Sorry, sir, I don't understand this. So last year, because the Q4 is typically a seasonally weak quarter, gross margins tend to go below 60%, right? The last 2 years it's been 57%, 56%. So if you are doing 59% this year, then how come -- I cannot see the input cost impacting.

Sorry, actually, I was not comparing this gross margin with last year's quarter 4 because in last year's quarter 4, there was a few one-off items also -- write-off. There was an element of write-off in last year. I was referring to quarter 3, our YTD and quarter 4. So YTD, we have gross margin more than 61%. And we expect there will be [ hit ] by 2% to 3% on that. Am I clear?

Sure, sir. That's helpful. And sir, just lastly, the new division that you have launched, the Pulmocare division, just want to understand a bit more in terms of what will be the recurring CapEx going forward, how many sales reps you have added and so on?

So we are currently at [ 130 ], we should be reaching close to [ 125 ] this year in Pulmocare. Yes, that's your question, right? So you are only wanting to know about people or beyond this also something else?

Beyond this, I mean, the OpEx will probably start inching up, right? So I'm just wondering what should be the new run rate?

Yes. So Pulmocare, actually, in fact, recently, we started and we cannot expect breaking over immediately. So this year, our expectation, at the business level, to have some kind of negative, but that will not be big. And as Mr. Kaushal, said we have 170 people going to be in '22, '23. Definitely, we have to wait for some period. Amount of negative this year, it's not big, but it may be in the range of INR 30 crores to INR 40 crores.

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

Sir, on the India business, the growth is strong. Do you -- I mean, is there some sort of channel fill or buying in anticipation of Omicron wave that we saw in December? Or you think December could have -- this quarter would have equal strength given the Omicron cases?

Saion, we don't see any major panic buying even in December or January also because of Omicron. Possibly some element, it will be there. But we don't think any significant impact is there.

Okay. And have you seen any impact -- significant impact this quarter? I mean, so far in the month of January, for instance, where we have seen a lot of cases?

So just as I said in the beginning, this year, the impact of Omicron is not on the core antiviral kinds, but some impact, you can say, very minor, very difficult to evaluate so far. But Pan and your zinc preparations and antiulcerants, they may have minor, but not to the extent what was in the first wave -- second wave, sorry.

And sir, can you just talk about volume growth and price increase expectations that you have for the India business? Typically, like -- of course, next year maybe slightly higher on pricing. But typically, what's the kind of price and volume combination that you're seeing for your business?

So you want to know, Saion, for this quarter or...

I don't know. I mean, maybe we can -- because there's COVID-related demand sometimes. So it sort of may skew up things. But I just want to know, like going forward, what -- I mean, on a normalized basis, what is your expectation of how much of the growth you generally expect from pricing and how much from volume?

The pricing, as you just -- a few minutes back, Mr. Kaushal, he indicated, this time we have advantage of WPI also. So -- And wherever we get opportunity, definitely, we are going to take rise in price. But straightway, we cannot apply all across because we have to see ultimate price. Our price vis-a-vis is our peers' price and all this. But generally, our price increase is in the range of 4% to 5%. Definitely, this time, it is going to be a little bit more. So you can assume around 5% to 6% we expect to take price increase. And volume we are somewhere close to double -- somewhere close to 7% to 8%. I think there we need to realign, and there, we can have 1% or 2% lesser compared to it. But new launches are also there, and they are going to add up. So definitely, we are going to outperform market.

Okay. And sir, in the U.S., there is a decline that we have seen. So what exactly happened sequentially? Because this looks to be a steep decline. Any specific product you faced price erosions? If you can give some granular details on this [indiscernible]?

Yes, Saion. So obviously, the loss of market share in the previous quarters, certainly one of the factors that was responsible. The new launches that we had again in the previous quarter have gone through, again, a major set of deflation, price deflation. So obviously, the base business itself for the previous quarters compared to the current quarter that has been overall deflation. And that was obviously not offset by enough launches during the quarter, enough launches from a value perspective. So I guess that's the reason for a quarter-on-quarter decline.

And just one last question. I think in your opening remarks regarding the tie-up on biosimilars, did you say you look at commercialization in 2023 or I got the year wrong?

'26. Yes, '26. Commercialization is going to happen in '26.

And when do you expect the filing? '25? Is it calendar '25?