GLANDNSEQ1FY23July 27, 2022

Gland Pharma Limited

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16analyst exchanges

3executives

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Management on call

Srinivas Sadu

MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER

Ravi Shekhar Mitra

CHIEF FINANCIAL OFFICER

Sumanta Bajpayee

VICE PRESIDENT, CORPORATE FINANCE & INVESTOR RELATIONS

Key numbers — 40 extracted

rs,

oining our earnings call for the first quarter of fiscal 2023. My best wishes to all our shareholders, analysts, and their families. I must say it is a tough start to FY'23 with few supply chain issues,

ring the quarter on account of delays in material supply. At our Dundigal facility, we lost nearly 7% to 8% of our available production capacity of lyo and liquid vials during the quarter owing to sup

he quarter on account of delays in material supply. At our Dundigal facility, we lost nearly 7% to 8% of our available production capacity of lyo and liquid vials during the quarter owing to supply ch

Rs.8,569 million

hree quarters on account of improved productivity. We closed this quarter Q1 FY'23 with revenue of Rs.8,569 million as against Rs.11,539 million in Q1 FY'22 and our PAT stood at Rs.2,292 million for the quarter aga

Rs.11,539 million

improved productivity. We closed this quarter Q1 FY'23 with revenue of Rs.8,569 million as against Rs.11,539 million in Q1 FY'22 and our PAT stood at Rs.2,292 million for the quarter against Rs.3,507 million in Q1

Rs.2,292 million

'23 with revenue of Rs.8,569 million as against Rs.11,539 million in Q1 FY'22 and our PAT stood at Rs.2,292 million for the quarter against Rs.3,507 million in Q1 FY'22. We have generated Rs.3,328 million of cash f

Rs.3,507 million

gainst Rs.11,539 million in Q1 FY'22 and our PAT stood at Rs.2,292 million for the quarter against Rs.3,507 million in Q1 FY'22. We have generated Rs.3,328 million of cash flow from operations in Q1 FY'23. We cont

Rs.3,328 million

stood at Rs.2,292 million for the quarter against Rs.3,507 million in Q1 FY'22. We have generated Rs.3,328 million of cash flow from operations in Q1 FY'23. We continue to make progress on our key focus areas to b

1 billion

e China market. The addressable market size for the next set of products in the China market is USD1 billion. We ensured timely new product launches and managed to launch 14 product SKUs during this quarter

4.1%

an market. During Q1 FY'23, upon excluding capital R&D expenditure, the R&D expenditure stands at 4.1% of revenue for the period in line with our historical trend. As on 30, June 2022, we along with ou

12%

summarize our performance across various geographies: Our rest of the world markets accounted for 12% of our Q1 FY'23 revenue for the quarter as against 19% in Q1 FY'22. The delay in material supplies

19%

Our rest of the world markets accounted for 12% of our Q1 FY'23 revenue for the quarter as against 19% in Q1 FY'22. The delay in material supplies has hit our ability to take up rest of the world order

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Guidance — 20 items

Sumanta Bajpayee

opening

“The transcript of this call will be submitted to the stock exchanges and made available on our website as well.”

Srinivas Sadu

opening

“At our Dundigal facility, we lost nearly 7% to 8% of our available production capacity of lyo and liquid vials during the quarter owing to supply chain disruption, but we should be able to go back to normal utilization levels from next quarter.”

Srinivas Sadu

opening

“Both lines became operational from July and the loss of production will be covered in the next three quarters on account of improved productivity.”

Srinivas Sadu

opening

“We anticipate another quarter for us to go back to normalize levels of inventory for this market.”

Srinivas Sadu

opening

“China remains a key geographic focus and we expect to start receiving approvals in the current year.”

Ravi Mitra

opening

“During the quarter, we have managed to maintain EBITDA margin in higher band of our earlier communicated target range.”

Ravi Mitra

opening

“The situation has normalized now, and we expect the cost of power to come down.”

Ravi Mitra

opening

“Due to supply-related issues, most of the sales during the quarter were back ended and hence you see increase in receivable days, which we expect to regularize with normalization of business.”

Ravi Mitra

opening

“We had evaluated a number of M&A targets in the recent past, current market dynamics, making the valuation of target assets more reasonable, has provided impetus to our goal of acquiring right strategic fit for a growth plan.”

Tarang Agrawal

“Will be safe to presume that a significant proportion of business loss was owing to supply bottlenecks rather than changing front end market environment?”

Risks & concerns — 11 flagged

We are making all efforts possible to minimize the impact of these disruptions by qualifying new suppliers as well as optimizing our production planning.

— Srinivas Sadu

There is visible price pressure in the US which is impacting profitability for certain products.

— Srinivas Sadu

Because in your presentation and in your opening remarks, you've also alluded to price erosion in some markets, impact of a high base in the other markets.

— Tarang Agrawal

So, still trying to understand the decline from 200 crores to 50 crores.

— Anubhav Agarwal

So that's why we're able to cater to the US market without impact, still it would cause the impact of about 20, 25 crores.

— Srinivas Sadu

That's only the risk about 40, 50 crores of heparin, which couldn't supply.

— Srinivas Sadu

As far as the capacity is concerned, I don't know whether we can recover everything what we lost in this quarter, but at least the growth what we told in our normal business that's going to be maintained, but what we lost about 250 crores or 300-odd crores this quarter could be difficult to recover 100% of that.

— Srinivas Sadu

If you can just forget one quarter then probably the growth will be stronger, but if you include this quarter because it's difficult to recover what is lost in this quarter to 100%.

— Srinivas Sadu

Should we see that the worst is behind from the margins perspective, or there is API related pressure and the syringe related disruption can lead to some more downside in the short term before it starts moving up to your desired 33%-plus levels?

— Mayur Patel

Sir, can you talk a bit about the pricing pressure in the US that you mentioned especially in the context that I thought that your partnerships in a business model is fair bit sort of insulated from the end market competition?

— Sameer Baisiwala

So the impact of price for us, I think, is about 1%, so it's not much.

— Srinivas Sadu

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Q&A — 16 exchanges

Three questions from my end. First, if I look at each of your markets, business loss seems to be material. Will be safe to presume that a significant proportion of business loss was owing to supply bottlenecks rather than changing front end market environment? Because in your presentation and in your opening remarks, you've also alluded to price erosion in some markets, impact of a high base in the other markets. So just wanted to get some sense as to whether it's really on the demand side or it's really the supply chain bottlenecks for each of your markets.

Srinivas Sadu

Primarily it's a supply chain issue, right. In the US if you look at quarter-on-quarter, we still grew by about 4% and year-on-year degrown by 4%, but then there's a timing issue of certain products, but I would say still a lot of products in the US actually has grown substantially, right. And because of the syringe shortages, we have allocated most of our supplies, what we got to the US market to cater to the contract what we got, like I mentioned last time. So we didn't have enough syringes to supply to domestic and rest of the world market. So that has impacted sales in other markets. And f

The profit share number for the quarter if you can share please?

Ravi Mitra

It is about 10% of the revenue. The CAPEX number looks low, so what is the guidance for the full year and where are you spending the capex money this year? CAPEX full year guidance remains same; Rs.300 crores what we said last time. So we are building up this microsphere combi line as Mr. Sadu was talking about a little while ago for our complex products and that ordering and spending, which should start soon. And first quarter was more of a timing thing. So we will end up at Rs.300 crores. Other than that complex injectables line in Pashamylaram we are also adding more API capacity and also b

I have a few questions. First, Mr. Sadu, is it possible for you to quantify how much of the impact on the supply shortages in the plant shutdown is there during this quarter? And how much of the sales loss is recoverable in the coming quarters?

Srinivas Sadu

So if you look at market wise, I would say, US because of syringes, we lost Rs.25 crores, RoW about Rs.100 crores we lost, and domestic, we lost about 40 crores I would say. So even if we add these numbers, the total is still lower, right, from what the growth trajectory we were hoping to be on. So is there also any impact on the demand side of the business? I would say not the demand side. If you look at the timing, right last year, if you see Micafungin is a big product, if you look at last year first quarter, almost Rs.126 crores came from that product, whereas this quarter, we didn't suppl

One clarity on this India revenue. So, this quarter we done about Rs.51 crores. If I look at the March quarter, or the December quarter, we were doing very close to Rs.200 crores. You talked about 40 crores impact on the supply disruption from that insulin facility. So, still trying to understand the decline from 200 crores to 50 crores.

Srinivas Sadu

So, if you see the last quarter, there was export restriction on Enoxaparin product. So, we were supplying a lot domestic supplies to third parties. So, most of the revenue almost Rs.100 crores revenue came from supplying to third parties, but with low margins and we could supply with the different syringes. But, if you look at the logistic costs, the import costs and also the dollar, it's not making any sense to operate at the price level which are under price control in India. So, we didn't continue to supply to those because of the restriction, in last quarter, we did that. But at least we

My question is to understand the extent of shortage. I mean, we've been hearing the shortage from the third quarter to the fourth quarter, and we're seeing a significant part in the first quarter. Now that we are into the second quarter, I mean, in terms of intensity, how do we see things easing up say from the second quarter and when we are talking about the second half to kind of normalize, what gives us kind of a confidence in that kind of commentary?

Srinivas Sadu

So, while the syringes is a major impact, which has happened, there were also issues around four or five products where we have filed alternative tubing or filters with FDA. We also lost some productivity on that, about 16 to 18 productivity days across sites and across lines. So that kind of sorted out. Syringes, we have seen some quantities coming at the end of the quarter. So that's why we're able to cater to the US market without impact, still it would cause the impact of about 20, 25 crores. And we have delivery schedules from BD for this quarter as well. So looking at that, I think we ar

Just on the China business, I think in the presentation you mentioned that our facility inspection has been waived off. So when do we expect to start seeing revenues from China come to and what's the filing that we expect from China over the next year?

Srinivas Sadu

So for two products, they are in a clearance phase. They confirmed that there is no need of inspection. So the something should come in the third or the fourth quarter, that's what we are anticipating. Five products getting filed in FY'23 and then another six to seven products in FY'24. In terms of margins for the full year, now that you have given your commentary that supply chain issues could partly get resolved in the second half, the mix should improve. How should we look at the margin in light of the higher cost and this is margins ex-other income, would it be similar to what we have done

So first question on the biologics business. We have shared that; we have got four visits. But typically what's the process, let's say from site visit to actual contracting, what are the steps? And the visits that we are getting from clients, are those new clients for us, or some of the existing clients, but they're a biosimilar division or biologics division visiting us, so how should we think about that?

Srinivas Sadu

So, three are new customers, and one is the known customer with a different division. I think it varies from all the four clients. Few are looking at transferring technology and looking at making clinical batches, the other is looking at doing more analytical development for what they've done, one client is looking at taking a line for two months, and setting up some of their people for the technology transfer. So it depends on who the customer is, but it's at various kinds of discussions happening. Secondly, just a clarity on the earlier participant's question on the margin, you said FY'23 be

On the margins side 31.5% core EBITDA margins, which you managed in this tough environment to maintain at least QoQ. Should we see that the worst is behind from the margins perspective, or there is API related pressure and the syringe related disruption can lead to some more downside in the short term before it starts moving up to your desired 33%-plus levels?

Srinivas Sadu

I would say, it is one of the toughest quarters in terms of everything, right, I mean, the costs of utilities are high, power shortages in our states are very high, so we have to use utility for that. And then, we have to airlift lot of goods because of the shortages of materials. So that has been absorbed. So I would say, the worst things have already happened. And I think, hopefully, some of these comes back to normal, the margins should only improve. You very nicely explained about all the problems across markets, mostly supply chain driven. So earlier, RoW market was growing at a significa

So, we have guided for launching seven products in the US say over the next few quarters, which has an addressable market of around $1.3 billion. So what's our take there are we still on it?

Srinivas Sadu

Yes, we have approval for three products which are planned to be launched and the rest we have a goal dates of I think next month. So we should be able to launch most of it, yes. Other participant had this question on biosimilar. So while we understand that three to four clients you're in active discussions with, but some timelines as to when can we see that first dollar revenue coming in broadly, roughly, in your expectations versus where you're engaged with your client currently, some flavor on that path would really be helpful? We are actually not meaningfully adding to near term numbers fo

Sir, just on this biologics again, so how much would be the operational costs already into the P&L?

Ravi Mitra

So Rs.15 crores, Tushar, for this quarter. Broadly Rs.15 crores per quarter will be the run rate for next one to two years and fully reflected? Sorry, your voice is not clear. Can you repeat? So Rs.15 crores is a normal quarterly run rate to consider for biologic at least for next one to two years? Yes, the team is full there, so this will be there. Because of this constraints on account of syringes, would there be any penalty on account of delay or failure to supply or that is taken care of despite shortage of ancillary materials? No, no, the priority was given to US and normally penalties ex

Sir, on the partnership typically for the products that you have launched in the recent past let's say over the last two years or so, in the US, typically how many partners sold the product in the US market and are these like exclusive contracts or more of them are non-exclusive in nature?

Srinivas Sadu

Some products are exclusive and some are semi-exclusive, I would say. So, especially the big products or wherever there is a patent litigation or some BE study need to be done. There it will be exclusive because they also pitch in with the upfront costs. But otherwise, normally we either will give semi-exclusive or even if we give exclusive, then we'll have a clause if they don't hit a percentage of market share, then it becomes semi-exclusive. So for the less complex products you would have multiple players, right, would that be like two, three players or typically like how many players you g

Because of addition of employees, cost has been higher. What about other expenses? I missed that part. So, the other expense is substantially higher despite lower revenues. So, are these operating costs and here to stay and how do we think about it or is it due to escalation of freight, etc., which is coming down now?

Ravi Mitra

Other expenses for this quarter is Rs.808 million, March was Rs.899 million. So this quarter it has come down actually. And last year June was Rs.783 million. So, it's about 3% up actually, not so much. Only power and fuel has gone up substantially. So the reference was percentage to sales. Most of the cost is fixed in injectable facilities. So it's not so much varies, especially the other expenses in relation to. That's why we have a leverage effect whenever our sales go up or down. In terms of timing for qualifying from other injectable, syringes players, so I heard saying that US is largely

Srinivas Sadu

So the impact of price for us, I think, is about 1%, so it's not much. And that's been the case over the years, either there's no impact or 1% or something. So, there's not much impact for us on that front. How does it percolate down to your P&L? Is it through profit share or how does it work? Yes, it's through profit share. I'm just wondering if the end market product pricing falls 10% or 15%, would the impact not be much bigger for you? Because overall revenue wise, it's only about 10% for us. So even that fall, won't impact much. If you are having 1% impact, what does it mean for the end ma

My question is to Sadu sir. Sir, until about few weeks back, we were guiding about a high teen kind of growth trajectory overall. What exactly has changed in a few weeks that we're looking at these kinds of numbers? That is number one. And second question is, you talked about disruption led sales loss of around Rs.250 crores, of which the COVID impact seems to be around Rs.150-odd crores. So when we build numbers, take additional Rs.400 crores off the estimates for FY'23, is it a fair way to look at it?

Sumanta Bajpayee

Rakesh, can you just repeat the question again? Both the questions can you just split and come back again? My question is until about a few weeks back, we're guiding a high teen kind of growth trajectory overall. I mean, what essentially has happened, that we are seeing such a stark contraction in the numbers overall across all the segments, what exactly is that we have missed out? See, one is what we anticipated to get delivered, got delivered late in the quarter, we were anticipating to get the syringes delivered in the beginning of June, end of May, and it got shifted to third week of June.

My first question is can you help us understand what percentage of your IP-led and tech transfer contracts have a profit share built into the agreement, and does this differ across markets?

Srinivas Sadu

So this profit share model is only for the US market, not for other markets. And our own IP-led products, the profit share might range from 40% to 50% whereas the tech transfer models is more on royalty where we have about 5% royalty on net sales, that kind of a model. So basically no profit share as far as the tech transfer models are concerned? Yes, correct. Secondly, sir, we have seen some selling by key personnel including you Mr. Sadu in the last couple of months. Can you please help us understand the reasons for now completely selling off your stake in the company? These are all stock op

Thank you, Steven and thank you all the participants for joining us today for our first quarter earnings call. If any questions still remain unanswered, please feel free to reach out to us. Thanks and looking forward to interact with you again in our second quarter earning call. Good night.

Management

Speaking time

Srinivas Sadu

Moderator

Ravi Mitra

Rakesh Naidu

Amey Chalke

Tushar Manudhane

Saion Mukherjee

S Padmanabhan

Alankar Garude

Dheeresh Pathak

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Opening remarks

Sumanta Bajpayee

Good evening, and a warm welcome to Gland Pharma's Earnings Conference Call for First Quarter of Financial Year '23. I have with me Mr. Srinivas Sadu -- Managing Director and Chief Executive Officer; Mr. Ravi Shekhar Mitra -- Chief Financial Officer to discuss the business performance and to answer queries during the call. We will begin the call with the business highlights and overview by Mr. Sadu followed by financial overview by Mr. Mitra. After the opening remarks from the management, operator will open the bridge for Q&A session. Before we proceed with the call, please note, some of the statement made in today's discussion may be forward-looking and based on management estimates. And this must be viewed in conjunction with market risks, uncertainties involved in our business. The Safe Harbor language contained in the press release also pertains to this conference call. This call is being recorded and the playback shall be made available on our website shortly after the call. The t

Srinivas Sadu

Thank you, Sumanta. Good evening, everyone. Thank you for joining our earnings call for the first quarter of fiscal 2023. My best wishes to all our shareholders, analysts, and their families. I must say it is a tough start to FY'23 with few supply chain issues, which were ongoing for the last couple of quarters, hit us hard on a quarterly dispatches. We faced delay in receipt of APIs and primary packing materials which caused delay in production. We are making all efforts possible to minimize the impact of these disruptions by qualifying new suppliers as well as optimizing our production planning. We lost productivity during the quarter on account of delays in material supply. At our Dundigal facility, we lost nearly 7% to 8% of our available production capacity of lyo and liquid vials during the quarter owing to supply chain disruption, but we should be able to go back to normal utilization levels from next quarter. In spite of the ongoing supply side disruption, we ensured the new pr

Ravi Mitra

Thank you, Mr. Sadu. Good evening, ladies, and gentlemen. Thank you very much for attending our first quarter earnings call. Our earnings presentation has been uploaded on the website. Let me begin by sharing the financial performance of first quarter of financial year 2022-23. Revenue from operations for the Q1 FY'23 stood at Rs.8,569 million, declined by 26% due to various reasons as explained by Mr. Sadu in his opening remarks. But some of these are transient in nature. And we would like to reinstate that our differentiated business model remains robust with the focus on supplying quality products to our customers. In spite of the continued challenges in non-availability and delayed supply of critical materials, our efforts were to ensure that sufficient level of inventory remains available at our customers end in our core markets. Other income for the first quarter of financial year 2023 was Rs.744 million which includes foreign exchange gains on operations of Rs.342 million and in

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