Strides Pharma Science Limited has informed the Exchange about Transcript of Analysts/Institutional Investor Meet/Con. Call
June 01, 2022
BSE Limited Phiroze Jeejeebhoy Towers, Dalal Street, Mumbai – 400 001 Scrip code: 532531
The National Stock Exchange of India Limited Exchange Plaza, Bandra-Kurla Complex Bandra (E) Mumbai - 400 051 Scrip code: STAR
Dear Madam/ Sirs,
Ref: Earnings Call of the Company on May 25, 2022 pertaining to the Financial Results for the Quarter and Financial Year Ended March 31, 2022.
Sub: Transcript of Earnings call
Pursuant to the provisions of SEBI LODR Regulations, 2015, further to the Earnings Call audio shared on May 25, 2022, please find enclosed herewith transcript of the Earnings Call.
The said transcript is also available on the website of the Company at: https://www.strides.com/investor-annualreport.html
Request you to kindly take the above on record.
Thanks & Regards,
For Strides Pharma Science Limited,
Manjula R Company Secretary
Encl: a/a
“Strides Pharma Science Limited Q4 FY2022 Earnings Conference Call”
May 25, 2022
MANAGEMENT:
1. MR. ARUN KUMAR
– FOUNDER, EXECUTIVE CHAIRPERSON &
MANAGING DIRECTOR
2. MR. BADREE KOMANDUR
– EXECUTIVE DIRECTOR - FINANCE & GROUP CFO
ANALYST:
MR. ABHISHEK SINGHAL
Page 1 of 15
Strides Pharma Science Limited May 25, 2022
Moderator:
Ladies and gentlemen, good day and welcome to Strides Pharma Science Limited Q4 and
FY2022 earnings conference call. As a remainder, all participant lines will be in the listen-
only mode and there will be an opportunity for you to ask questions after the presentation
concludes. Should you need assistance during the conference call, please signal an operator
by pressing “*” then “0” on your touchtone phone. Please note this conference is being
recorded. I now hand the conference over to Mr. Abhishek Singhal. Thank you and over to
you Sir!
Abhishek Singhal:
A very good morning and thank you for joining us today for Stride’s earnings call for the
fourth quarter and full year ended financial year 2022. Today we have with us Arun
Founder Executive Chairperson and Managing Director and Badree – Executive Director
Finance & Group CFO to share the highlights of the business and financials for the quarter.
I hope you have gone through the 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 the company’s website. Please note that
today’s discussion may be forward-looking in nature and must be viewed in relation to the
risks pertaining to our business. After the end of this call, in case you have any further
questions, please feel free to reach out the investor relation team. I now handover the call to
Arun to make the opening comments.
Arun Kumar:
Thank you Abhishek. Good morning, everybody and thank day for joining in early this is
very unusual time for typical Stride’s earnings call as we had to announce the results quite
late yesterday given some of our directors were overseas. Thank you for
the
accommodation and look forward to this engagement. Before I start, let me start off saying
that while it has been an extremely challenging year for Strides, we see green shoots. As a
promoter and as the founder of the company, I take full responsibility for the events of the
last year as regard the organization's performance. It is easy to rationalize on COVID, the
business environment and other ailments, but it is critical to accept responsibility, fix it and
move forward. I’m actually very delighted to say that I am happy to come back to work
full-time at Strides and as a family we are fully committed to ensure that Strides gets back
to its previous glory or past glory if I may and we are determined to institutionalize the
organization to face challenges of the environments that we faced or any future
environments that may come our way. I also give credit to the fact that while we have had
difficult year, we had a set of extraordinary people staying fully invested with the company
and its opportunities. With my coming back on April 7th, although I started getting involved
into the business a little earlier, first of all I want to thank all the leaders who served the
company in the last two to three years and have moved on for other interest or for the
reason that the company has a revisited and recalibrated its strategy.
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Strides Pharma Science Limited May 25, 2022
Having said that, I am very happy with the team that we now have in the organization and
apart from my coming back I am also delighted to welcome Venkatesh who will now head
our US business. Venkatesh until very recently was the CEO of Alkem's US business and
Microlabs US business before he joined us. Being a seasoned professional with deep
experience in the market, he will lead our sales and marketing activities in the US and US
continues to be an important market irrespective of the business environment it currently
operates in. The transaction with Endo in my view is extremely accretive to the
organization. The integration of the Endo business, which actually technically integrates to
us only from June 2022, is an important milestone to our refit and recalibration strategy. To
have Venkat leading that business is an extremely important step that we have taken and I
also wish to thank Terry who not only got us the transaction closed, but also integrated and
is in the process of handing over the business in a seamless manner to Venkatesh and his
team. Q4 nonetheless has been a much better performance especially coming back after two
difficult quarters. We are seeing green shoots across all our businesses in spite of the doom
and gloom, we have had some outstanding outcomes for example our US business has
started to pick up. We are now confident of hitting $250 million guided. This is not going to
be telescope towards H2 or it is going to be linear, which effectively means we will see
growth pick up fairly quick and as early as in H1. We should get into a linear situation with
our numbers in the US that would give us a lot of headways to build the business from
thereon considering that we have over 150 products that come through the acquisition. We
have a strong plan for a launch of 20 odd products per year starting now. All of these
products are approved, so we are not dependent on any regulatory inspections or facility
inspections, as these are approved investments as in approved products. More importantly
in the US especially we are sitting on a significant inventory as the volumes dropped in the
last year and with the volume pickup being quite significant, we are already seeing growth
in volumes as early as this quarter, we believe this will improve our cash flows quite
dramatically. This is an important step for us to bring our balance sheet size in order apart
from the fact that we have guided that we will reduce our debt by 1000 Crores. We have
requested and our partners in Australia have been very kind to bring forward our payments.
We expect to receive these payments in H1 against December 31 as previously contracted.
This is going to help our debt book quite a bit and also the fact that we have reset the
businesses to focus on large businesses where we have complete control on cash flows. We
would exit minuscule and tiny businesses, which do not move the needle for us for revenue
or EBITDA that and free cash generation will significantly help us achieve our stretched
target of reducing debt by a 1000 Crores and bring the company back to a very solid exit
run rate of EBITDA exit run rate to be under three times EBITDA. This is the task that we
have set for ourselves. We are very confident of achieving it. This will always also be aided
by strong performance in other markets outside of the US. We reported in Q4 our highest
quarter in the other regulated markets with strong pickup coming in post-COVID in the last
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Strides Pharma Science Limited May 25, 2022
two quarters, and we believe that we will see a similar pickup in the US operations in the
coming quarters. The emerging markets continue to grow. Of course, it is subscale but it
helps us in our manufacturing under recoveries and we will continue to focus on that
business and build from where we are in terms of top-line growth. The margin flow through
is not very significant, but the absorption is very, very important for us. We have a series of
cost improvement programs that includes very significant re-look at our cost structures,
reducing the complex natures of our international businesses, reducing the number of
subsidiaries, operating companies more in matrix and sometimes in a functional leadership
manner, reducing cost consequently and we expect our cost improvement programs will
enable us to get market leadership in several products and also reduce the cost structure
quite significantly. Given our significant investments that we have and approvals that we
have, we are reducing our R&D investments into the US as we do not see the need for
significant R&D investments for the next three years, although we will keep our eyes open
and continue to file critical products that we believe are important for our domains and new
strategy, so that will continue, but we will not see 25 to 30 product filer anymore in the US
and shift the focus to develop to launch our products that are already approved. What the
transaction with Endo has done for us has clearly solved what used to be an acute only
strategy, which worked very well for us pre-COVID but COVID clearly exposed the
portfolio strategy gaps and now with the combined portfolio that we have from Endo and
Strides, we do not have any more excuses on our narrowness of our portfolio and we
strongly believe that the new domains in controlled substances, hormones, and nasal sprays
will give Strides enough ammunition for future growth and also product launches. We have
created significant working streams, clearly laid out scorecards for our leadership to execute
across globally, so we are all working in sync to create what we call the One Strides and
build a company of scale and size, which I am sure that you will see the results flowing
through in the near term. I would not dwell too much on FY2022. Some of the key issues
obviously were that a significant drop in the gross margins. For the first time we had a drop
in revenues, although Q4 has started to look differently. We had a 16% increase in
operating cost, employee, and other expenses. We obviously are sitting on significant
inventory, which we are now already seeing normalization. We expect this inventory to be
normalized to the extent that we need to have by the end of the year releasing cash, but also
then starting on the under-recovery process in our plants considering that we are sitting on
large inventories. We obviously are not filling in new stocks until the stocks are getting
over, so this year it is going to be a very important year on razor sharp focus on execution,
margin expansion and also bringing the balance sheet to size. The detailed deck has got
individual slides on the US. For example, the US sales has moved from 38 to 44 million and
if you are guiding the street for $250 million then obviously this needs to be closer to a $60
million run rate. We are very confident that we will get there very soon and that is mainly to
do with the integration of the Chestnut Ridge operations in the US. We are expanding
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Strides Pharma Science Limited May 25, 2022
significantly our other markets and in any markets that we are not present, we have
significantly secured new partners and we are working on increasing our IP led B2B proper
share model across Europe in markets that we do not want to operate ourselves in the front
end and we have exited many markets like Canada and some parts of Europe where we
cannot scale, but in the markets that we can scale we are putting all our energies to become
a leading player with opex leverage and significant margin expansion. Our emerging
markets especially our Brands Africa market was not impacted by COVID. We all know
that COVID was not as severe in Africa especially in northern Africa where we operate and
we continue to benefit from those in our margin expansions. Productivity of our sales reps,
now numbering about 160 odd sales reps in French Africa and continuing to introduce new
products will ensure that we will have an improved sales in those markets. There are a few
markets in Africa that we operate that we are now revisiting if it fits into our overall
strategy of scale that if you are not a top five player in a domain or a frontier market does
that make sense for us to be in and we are reviewing those, but none of that is going to
impact what would be an important year for sustained substantial growth in top line and
EBITDA. We have a very detailed debt slide this time on how we propose to reduce our
debt and when we open the house for questions, we will be more than happy to answer any
specifics, but we also have detailed explanations on Stelis. We believe that Stelis has done
extremely well as a pure player CDMO in its first year of operations. We have a revenue
model, which we have articulated in our deck. We have two businesses mainly the CDMO
business where bulk of our investments have been made and with the completion of our
new site, we now have amongst the top 20 global capacities in microbial and mammalian
manufacturing capability, but we are one of the few global players, which are fully
integrated from cell line development to full finish. We are delighted to have on boarded six
customers in our first year. In the first three months of our operations in this quarter, already
we have added another six new customers. Market services agreements that we sign up with
these customers are always linked to a contract for supplies and our supply book is now in
the vicinity of 100 million for the first years of master service activities that we have done.
Now just that it is understood well, market service agreement typically leads to a
commercial supply agreement in about three years. We are approximately a year and year
and a half away from breaking even that business. Outside the challenges of Sputnik and the
sanctions on RDIF, which we are finding all kinds of solutions to resolve including taking
the help of the Government of India to work with their good offices with the Russian
Government to find solutions as we are sitting on inventory of a sale value of close to about
$40 million, which is extremely critical for us to find a home and we are working for it.
Luckily for us dating of our stocks are good. We still have 12 months of inventory so we do
not see any risk for the next three to four months. The next two quarters for Stelis is
extremely important as we find a solution for Sputnik, but more importantly our own
COVID vaccine which is called AmbiVax, which is in-licensed from Akston Biosciences
Page 5 of 15
Strides Pharma Science Limited May 25, 2022
has completed the full dosing of its phase three patients in India as some of you may know.
We have a EUA status on this product issued by the Government of India and we have now
applied for a booster study across all variants and this being the first or one of the fewer
most stable vaccines which does not require cold chain. I mean it requires cold chain, but
normal under 25 degrees makes AmbiVax a very unique vaccine and therefore we still
believe that there are a lot of legs left in this program. Outside of that, the CDMO business
will do well we expect the MFA contracts for this year will help us operationally break even
and excessing investors have got an additional $65 odd million commitment of capital,
which everybody is committed to invest. Consequently, we do not see any challenges for
the funding of Stelis. Of course, this does not include the fact that there continues to be
ambiguity around Sputnik, but we want the next three months to resolve for this and to also
see how AmbiVax itself progresses because we are expecting to submit our phase three
final clinical data to the Government of India by middle of June, so there is a lot of
important milestones. Most interestingly, the facility we have three plants, two blocks were
inspected by the EU Authorities and we are expecting formal approvals but we had great
outcomes and consequently we are seeing a strong inbound of customers. Stelis’ CDMO
business is unique considering that we do not do small contracts. We do service contracts
only with supplies, which makes us a very uniquely different biological CDMO compared
to other players in the country and with the size and scale of what we have achieved, I am
extremely confident that this will be an important pivot for Strides. We have also
announced at Stelis two significant announcements with regard on the business
development. We have a stellar team in house as work class in the last two years building
out this business, but as we as we build, as we grow global, I am delighted to invite to
welcome Frank and Dr. Axel both veterans in the biotech CDMO business development
activities having more than 25 years of experience respectively both in Europe and in the
US and with deep connects to big pharma, so I am quite excited about the opportunities
around Stelis. I know that there would be questions on what are our plans for Stelis. We
have put all our plans for Stelis on hold till we find a solution for Sputnik till we hear about
AmbiVax and we continue to see value to convert some of the major customers that we are
expecting to convert in this year. We have been announced of the USFDA inspection that is
a very critical milestone, so in the next update I think we will have lot more news about two
or three elements, which are still ambiguous at Stelis but we are right on top of matters and
we are very excited about our investments in Stelis and we look forward to address any
specific questions. I must also apologize that most of you may not have had time to read
through our very detailed explanations including our slides on extraordinary items and we
know that it is a busy day for many of you, so we will be more than happy to take calls from
any individual investors or analysts who may want to ask us questions and please write to
us or to Abhishek and we will be happy to address and we now are happy to take any
questions that you may have.
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Strides Pharma Science Limited May 25, 2022
Moderator:
Thank you very much. We will now begin the question-and-answer session. The first
question is from the line of Tushar Manudhane from Motilal Oswal. Please go ahead.
Tushar Manudhane:
Thanks a lot for the opportunity and the elaborate explanation on improving the
performance going forward, so just would like to understand on the US front like the Endo
portfolio would have similar gross margins as the Strides portfolio in first place.
Arun Kumar:
Yes, that is a fair estimate.
Tushar Manudhane:
Secondly even on Strides side we had good number of products, which were already
approved, could you just explain any reasons for not able to launch in the past and then
what gives you the confidence that they would be still very profitable going forward as we
launch in the coming years.
Arun Kumar:
Tushar, out of the 200 or 150 odd ANDA that are not launched more than 100 of them came
through the several inorganic transactions, small ones we did earlier and now with Endo.
Many of them needed significant improvements in terms of cost, which means vendor
changes, some significant changes mean that the past approvals from the FDA can go up to
about six to eight months of work from our side and six months of approval time. We have
now received several approvals and we continue to receive several approvals of key
products on a regular basis and that is why we are now committing to launch at least 20
products from the current 55 to 60 odd products that are launched. We should be able to
take that more than 20 per year, but 20 is the minimum.
Tushar Manudhane:
Given that there has been good amount of price reception, I mean that is what we hear from
the peers, so on our existing portfolio and even on Endo portfolio what kind of price erosion
we would have experienced?
Arun Kumar:
In FY2022, the price drop was very significant. You already know that for the fact that our
gross margins have dropped by 10%. The drops have been in some cases as high as 30% to
35% in some cases as low as 10%, but what we are seeing is not across the platform, across
some products, especially in our portfolio especially in acute portfolio we are seeing price
higher by people who disrupted the market now no more operating after having got rid of
their inventory because it does not make sense to play at those prices, so we are seeing
rebids. We are bidding at higher prices. We are winning businesses and we are growing our
base business. Our value deflated; we had a $50 million revenue deflation. We are now very
confident of getting back the base revenue this year itself and then add it with the Endo
portfolio and that is what makes our 250 million quite feasible, so we are not seeing more
deflation on our portfolio because if we are seeing we are obviously not winning or bidding
for them because it does not make sense, but overall given that we have the luxury of so
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Strides Pharma Science Limited May 25, 2022
many un-launched products and with the fact that we started the cost improvement
programs probably two years ago, we are very close and we are getting some very nice
approvals as we speak. They are small but they are very nice and niche and we will see
some more in the next couple of months. We believe that the margin uptick will come on
the 250 million. I do not see a drop in margins from where we are, but it will not be across
the board that we will be able to improve the margins and it is going to take us some time
before we get back to our historical 60% gross margin. I mean to be fair US gross margin of
70% and now it is about 60% so getting back to 70% is a long haul and I think somewhere
between 60 and 65 we should settle in the US and then kind of recoup at least 3% or 4% of
the global gross margins that we have lost in FY2022, and I am quite confident about
getting that.
Tushar Manudhane:
Understood Sir and going little below the gross margin you have elaborated on good 300
bps improvement in the logistics cost if you could elaborate and this could happen over
what period of time?
Arun Kumar:
Last year because of the supply chain disruptions especially with input material either we
were sitting on too much of inventory which means you are paying for very expensive
warehousing costs in the front end and these are not cheap because you pay by the week by
pallet, so normalizing that when you are not shipping new goods and getting pallets out of
UPS and our warehouses that obviously will reduce our cost, but more importantly with
very stringent focus on our AOP or annual operating plan which gets constant updates, we
are now producing only to demand and not to estimates because we have a lot of inventory
we do not really have to rush anything by air so from end of September except for
extraordinary opportunities that adds to our $250 million uptick, we do not see the need to
send any goods per air, sea fares have gone up from an average of $6000 to now $25,000
per container and containers are not available for the US as you would have probably heard
from many other peer groups. The fact that we are able to take off even more expensive
freight cost from air into sea will reduce the cost and most of the cost reduction would come
from front-end warehouse reduction cost.
Tushar Manudhane:
Got it Sir so considering the improvement in the sales and the reduction in the cost and we
are currently at about 5% EBITDA margin as we ended FY2022 in fourth quarter, what
kind of EBITDA margin can we think of let us say in FY2023.
Arun Kumar:
I cannot guide you for a percentage margin. Our focus is to focus on revenue growth.
Revenue growth will get back our volumes and not necessarily only from the US from all
markets that will ensure that our capacity utilization in our plants will improve leading to
lesser under recovery, which is important. If you go to our debt book you will see that we
expect to accept at least 150 Crores of EBITDA for us to be under three times debt to
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Strides Pharma Science Limited May 25, 2022
EBITDA after reducing 1000 Crores of debt, so I think our focus this year is about solving
for inventory, improving our cash flows, reducing our balance sheet and to improve growth
and when all of these inefficiencies that have been inbuilt in the business because of
COVID or whatever we want to say will normalize to what we predict.
The idea is that by the end of the year we should be between 16% and 20% range if that
addresses your question but you would see growth Q and Q from here. We are done with
the bottoming out the business. We are seeing growth coming back and we are excited
about the opportunity Chestnut Ridge brings and some of parts we are confident to get
there, but I cannot give you an exact finite number. The focus this year is focus on growth,
improve capacity utilization, reduce inventory, improve free cash, get out of few businesses
that do not make any strategic or value sense in the near term and yet grow the business
from where we are. All of this will lead to significant improvements to the overall business
and you should be asking us percentages more closer to H2 and closer to the end of the
year.
Tushar Manudhane:
Just on this 450 Crores debt reduction that could be largely from the internal accruals
because the kind of margin trajectory, which we are kind of building from the point where
we are today so just to understand that trajectory.
Arun Kumar:
Absolutely so free cash generation, we are sitting on inventory which is being exhausted
this year and I think that when I look at exits of minor P&L. We are not talking of anything
more than about 100 or 150 Crores in that range, so it is nothing significant. It is just that
we want to focus on the bigger outcomes, but otherwise even if we do not do any of that we
are confident of free cash generation to that extent.
Tushar Manudhane:
Alright thanks.
Moderator:
The next question is from the line of Vinay Bafna from ICICI Securities. Please go ahead.
Vinay Bafna:
Thank you for the opportunity and good morning, everyone. I have a couple of questions.
My line was a bit patchy at the start so I just want to clarify. we are assuming $250 million
annual sale for the US business next year and you highlighted during your statement that it
will be linear, so we are assuming a $60 odd million quarter run rate, which is
approximately 35% sequential growth. I understand it might not be entirely in Q1, however
just want to understand how much of it will be contributed by the Endo and considering our
plant at Puducherry is still under regulatory concern, what is the dependency on the plant as
of now?
Page 9 of 15
Arun Kumar:
Well, our Puducherry dependency is zero because we have site change. I mean we have
Strides Pharma Science Limited May 25, 2022
developed almost all products from other sites and they are not material at all. To launch
any approved product, the OAI in Puducherry has got no impact. You can launch a product
from a site if the product is already approved right, so we do not have a problem with that
so Puducherry is really not a challenge. It will be hard for me to give you specifics of how
much is from Chestnut and how much is coming from India, but I can give you an
indication that Chestnut Ridge will add so remember we take charge only in June, although
we are starting to consolidate some of the businesses. We expect Chestnut Ridge to have an
exit run rate of about $25 million a quarter in this year to our top line, but I cannot give you
the quarterly outcomes on Chestnut Ridge.
Vinay Bafna:
That is very helpful Sir. If I understand correctly then at least at the initial part of the first
half is going to be driven by our internal growth.
Arun Kumar:
We do have Vinay, some Chestnut Ridge products that we took charge as soon as the deal
was announced, so there is a certain amount of value but the bigger product launches are
happening as we speak, so you should watch Q1 and Q2 for launches out of Chestnut
Ridge.
Vinay Bafna:
Okay got it. That is very helpful. Secondly, we have said that we have gotten an upfront
payment from our partners in Australia. Since it was a payout which you are expecting
several years later does it impact our agreement for those steady sales, which we do over
there and how much of the payment is left to reap from there.
Arun Kumar:
First of all, it is not several years it is only a few months. The payment was due on 31st
December 2022. We should have the funds in our bank in H1 so it is a few months in
advance, six to seven months so that is what is important, it may be five to six months if I
may and our contract was supplying to Arrotex is for 10 years, so we do not have any
challenges on that. In fact, our business will grow from where we are.
Vinay Bafna:
Do we have any more payment left on their side for this agreement or is this the last one?
Arun Kumar:
This is the last payment.
Vinay Bafna:
Okay got it. Last bit is you did highlight a bit on the logistic cost to the previous participant,
but what we understand is that it was a significant jump during the quarter and you also
highlighted how the air freights have gone high. I am sure that you have taken up several
measures and you were highlighting how you want to reduce it but considering how the
situation is and what the peers are saying no one is really talking about these costs going
down. You want to highlight anything very specific wherein we are trying to save on costs.
Page 10 of 15
Arun Kumar:
Yes, like I said a large part of our logistics costs include our front-end warehousing cost so
Strides Pharma Science Limited May 25, 2022
if you are sitting on inventory, which you sell out over six months then you are sitting on
too many pallet stations that you pay too much of rentals on a weekly basis correct, so if
you are not loading new pallet stations because you are not producing until the stock is
resolved. Your logistics cost automatically comes down in our case, so it is not a peer-to-
peer comparison. The fact that our volumes dropped last year by more than half, but our
AOP or the production was for almost all the annual operating plan and that is how this
business works because if you do not have inventory in the front end then you will not win
business. You cannot win business unless you have stock in hand so considering that we
have enough inventory for at least three to four months compared to the average two
months and that normalization itself will reduce our logistics cost. In effect to sell the same
dollars or more we will be shipping maybe 40% to 50% containers less than what we
shipped in a bad year, so it is just a normalization. It is nothing to do with we getting any
better prices than anybody else is getting with container freights.
Vinay Bafna:
Understood but then I have actually two sub questions to it also; they will be the last of
them. First part is that since we are sitting on such high inventory and we are wanting to
liquidate them as well considering obviously there will be shelf-life issue as well with that,
we are still assuming a growth on our base portfolio largely because of the volume driven,
so is not it a bit contradictory at least maybe you can help me understand that we are trying
to push more volumes but we are not expecting.
Arun Kumar:
Now I am not pushing anymore volumes. During COVID times…
Vinay Bafna:
Even if the demand is coming in. It will be at a cost of price, unless that it is…
Arun Kumar:
No, it is not coming at a cost of price. In the acute therapy, the number of players continue
to be few, in which what Strides flourished its strategy, so in the acute whoever dump the
product is no more in the market in fact that market has become more attractive for us as a
number of players have probably even reduced further. The volumes have started coming
back with prescriptions coming back, which effectively means that we have not lost market
share at all, so it is just that our market share let us say on ibuprofen was 28% or 30% for
many years. It has not changed since COVID, but if the volumes move up by 500 million
units so your 28% share also moves up by 500 million units so it is nothing to do with us
selling at a cheaper price that is not what we do.
Vinay Bafna:
Got it. So it is that our product baskets are benefiting in situations, which is improving at
the macro level, which is fair enough got it. That is all from my side. Thank you Sir.
Moderator:
The next question from the line of Gautam Bahal from Mauryan Capital. Please go ahead.
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Strides Pharma Science Limited May 25, 2022
Gautam Bahal:
Hi Arun thank you for taking my questions and for the detailed presentation as well, a
couple of them. I am just trying to make sense of slide 16 that you guys posted last night.
Would I be right in interpreting this as in Q4 you had 77 Crores of exceptionals to your
EBITDA so you would pass 46 to 77 to get to 123. Would that be right? Slide number 16 in
PPT non-operational items slide, I am trying to interpret that would that be right that in Q4
you had 77 Crores of exceptionals which will not be repeated going forward.
Badree Komandur:
That is correct. These are exceptional items
Gautam Bahal:
To interpret the Q4 number you just add the 77 Crores to the 46 Crores of reported
EBITDA, adjusted per EBITDA.
Badree Komandur:
What happens is see the company has got an accounting policy that traditionally in the last
many years they have been reporting all these line items in exceptions and whenever there
is a product recall it is treated as exceptional and it is consistent with the past practice and
this is a one-time nature predominantly.
Gautam Bahal:
Just trying to understand the 46 Crores that you have printed as your consolidated EBITDA.
Arun Kumar:
It does not have any adjustments.
Gautam Bahal:
I am just trying to get to the sense that if you add 46 to 77 that already implies a 14%
margin is that the right way to think about it or not?
Arun Kumar:
No.
Gautam Bahal:
Okay, maybe I will reach out offline on that one. The next question Arun is the 1000 Crores
debt repayment that you have outlined, does that include anything to do with Stelis
secondary sales at all?
Arun Kumar:
No.
Gautam Bahal:
Okay good to know.
Arun Kumar:
We will have no debt.
Gautam Bahal:
I guess you have implied this already, but when you say 3x debt to EBITDA that implies a
650 Crores EBITDA would that be right in FY2023.
Arun Kumar:
Run rate.
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Strides Pharma Science Limited May 25, 2022
Gautam Bahal:
Run rate in the exit quarter or something I guess?
Arun Kumar:
Yes we are pushing to be better, but that is the target.
Gautam Bahal:
Okay and that also implies around 16-17% EBITDA margin run rate.
Arun Kumar:
Which is what I was alluding to earlier question from Tushar.
Gautam Bahal:
Arun, given that we are almost two thirds through Q1 already are we sort of trending
towards these better numbers? are we trending towards 60 million quarterly run rate in the
US already or not yet?
Arun Kumar:
Our headline says guides for an encouraging FY2023 outlook, which effectively means you
are right if you are very close to June, we probably know what we are telling you and if we
are headlining our US sales to be near linear then the answer to both your questions is yes.
Gautam Bahal:
Last one from my side, I mean there is a lot of moving parts on the top line and on the cost
line right, where does the business settle out in a couple of years or three years from now
Arun.
Arun Kumar:
These lines moving for everybody in the industry. I mean all these lines keep moving what
exactly is your question?
Gautam Bahal:
My question is where does it settle out in two or three years in a normalized basis? Do we
ever see a 20% margin again on this business what is your thought?
Arun Kumar:
Absolutely. We do not see any reason why we would not be there and that is because of the
diversity of the business. All the emphasis of the people who look at us is for the US as is
the case. Please look at our other regulated markets business how quickly it is growing, how
rapidly it grows, it does not have the SGNA and costs associated to US, so while you may
run a lower gross margin the flow through margins EBITDA is stronger and you will see
lumpiness from here on because we are adding several new markets, but the base is a very
solid base and I would not hesitate to say that we are now amongst the top 10 players in
Europe in other regulated markets out of the country. We want to focus on that market. We
have got lots of opportunities and product approvals coming our way, but it does not get too
much attention, but that is where our focus is because it is a massive market, it has been
massive consolidation of massive players in Europe. The big players are hurting for
portfolio supply chain and we are partnering with them on profit shares and no contract
manufacturing activities and yes, we are seeing an uptick in our business and you will see
more and more of that in the next two to three years. Mirroring US the other big markets in
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Strides Pharma Science Limited May 25, 2022
three to four years is a goal for the company and that is what is going to make the opex
leverage very, very different and the EBITDA flow through being very different and we are
very determined to get there with that strategy.
Gautam Bahal:
Okay I appreciate the color, Arun. Just a final data point what is the sort of maintenance
capex you should build in for this year approximately.
Arun Kumar:
The good thing now is that when your capacity utilization is low as you have inventory and
you do not have to use all your plants, we have the ability to move one product from one
facility to another considering there are several FDA approved sites, so we are going to be
very low on capex. Our typical capex will be about 100 odd Crores per year for the next two
to three years. There is nothing major that will go into investments in terms of capex
because all our plants are well equipped and have got large capacities and enough capacity
for the next two to three years in terms of build out.
Gautam Bahal:
I understood. Thank you Arun and I look forward to a better year.
Moderator:
We will take the last question from the line Nitin Agarwal from DAM Capital Advisors.
Please go ahead.
Nitin Agarwal:
Hi thanks for taking my question. Arun on the US, you have talked about increased RFQ
and all being coming in the market, what it is really implying, is it implying more volumes
or are you seeing some improvement in the pricing also.
Arun Kumar:
There are two things Nitin; one is if I am sitting on too much of inventory I can go and use
an existing incumbent by giving a price and then how it works is that I get a rofr for to
accept that price and in many cases we did not accept the price so we exited the market and
once the inventory was exhausted you can serve a notice saying that I do not want to supply
after 90 days or 180 days and then typically the customer then comes back to the market for
a new vendor and that is what I mean so for about three to four months post-COVID and
when US was really picking back nobody was getting any requests for quotes, but now it is
back to normal. Of course, there is price intensity in some products but especially in our
acute products, we are gaining back the contracts. We have many contracts that we have
lost, we are winning back. They do not move the needle much in terms of revenues but they
move the needle a lot in our gross margin uptick.
Nitin Agarwal:
On the Chestnut portfolio, we have talked about how complex the presentations like
hormones, by why when do you see some of these things begin to get commercialized for
us those complex sorts of non OSD formulations?
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Arun Kumar:
You can look at our hormone launches in Q2. You can see our controlled substances
Strides Pharma Science Limited May 25, 2022
coming back which are not being currently sold coming back in Q4, but there are several
special products especially products like megestrol where we may be one of the only few
players in the market. You would see us coming back in that product as early as this
quarter. Now that we have complete control of the business starting in a couple of days
rather a couple of weeks, you will see more uh launches coming out of Chestnut Ridge, so
by H2, you would see the momentum of launches, but one of the reasons I am giving you
more a linear guidance on US is because you are also giving Chestnut Ridge the attention it
requires in terms of market share, so we are gaining market share in the products simply
because when Endo is exiting the market, they obviously for the right reasons did not pick
up new contracts, as they were not willing to take the liabilities of supply, but now that we
have started bidding and winning new businesses that also adds.
Nitin Agarwal:
Lastly on your debt, the question has been asked a few times, but on the guidance that
implies ex- investments in Stelis and CHC, our net EBITDA number of 1800 Crores there
about, net debt number of 1800 Crores by the end of year.
Arun Kumar:
Net of investments or debt to EBITDA on the pharma will be under two by this year.
Except run rate do not mistake me for that.
Nitin Agarwal:
Okay. Thank you.
Moderator:
Thank you. I now hand the conference over to the management for closing comments.
Arun Kumar:
Thank you everybody for coming in this early and appreciate your time and questions. I am
sure that many of you may have follow-up questions, please feel free to write to our
investor desk or with Sandeep or Abhishek or even to me or Badree and we will be more
than delighted to answer your questions. Have a great day ahead. Thank you.
Moderator:
Thank you very much. On behalf of Strides Pharma Science Limited that concludes this
conference. Thank you for joining us you may now disconnect your lines.
*****
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