ALKEMNSEQ2 FY2023November 11, 2022

Alkem Laboratories Limited

7,738words

165turns

15analyst exchanges

5executives

Download PDF ↗ALKEM stock page →

Management on call

Sandeep Singh

- MANAGING DIRECTOR, ALKEM LABORATORIES LIMITED

Rajesh Dubey

- CHIEF FINANCIAL OFFICER, ALKEM LABORATORIES LIMITED

Amit Ghare

PRESIDENT (INTERNATIONAL

Yogesh Kaushal

PRESIDENT (CHRONIC

Amit Khandelia

- AVP (FINANCE), ALKEM LABORATORIES LIMITED

Key numbers — 40 extracted

13%

e time on Q&A. But during the quarter, quarter 2, our India business delivered a strong growth of 13% year-on-year, while our U.S. business was impacted by significant price erosion and reported a ye

0.9%

ur U.S. business was impacted by significant price erosion and reported a year-on-year decline of 0.9% in rupee terms. However, our year-on-year growth in U.S. market has impacted significant contribu

8.5%

and famotidine. But a point to note is, on a sequential basis, U.S. business reported a growth of 8.5%. Our domestic franchise outperformed the Indian pharmaceutical market by 500 basis points, ther

500 basis point

eported a growth of 8.5%. Our domestic franchise outperformed the Indian pharmaceutical market by 500 basis points, thereby increasing market share across all acute therapies. Our growth in the Antidiabetic se

eby increasing market share across all acute therapies. Our growth in the Antidiabetic segment is 4x the market growth rate on back of new launches. And I must share with you that we have had a rema

Rs. 400 crore

out in the next 6 months to 2 years. Also during the quarter, we have generated cash of Rs. 400 crore, taking a cash position to about Rs. 1,350 crore as on end of September 2022. Thank you. With thi

Rs. 1,350 crore

g the quarter, we have generated cash of Rs. 400 crore, taking a cash position to about Rs. 1,350 crore as on end of September 2022. Thank you. With this, we'd like to open the floor for Q&A. Moderator

16%

first things first Saion, I think you're right. The guidance which we gave of, I think, close to 16% for this financial year might be challenging looking at the scenarios. So, I think there are mult

4.7%

here, but that is well compensated by our favorable mix. Actual hit in our gross margin, which is 4.7% in the quarter. More or less, it has come totally from price erosion what we have in the U.S. mar

4.8%

osion what we have in the U.S. market. So, price erosion impact on gross margin is to the tune of 4.8%. And as the Managing Director, he already told you, our guidance of 16% to 16.5%, we feel if this

16.5%

is to the tune of 4.8%. And as the Managing Director, he already told you, our guidance of 16% to 16.5%, we feel if this situation is going to continue, then it will be difficult for us to be there and

100 basis point

continue, then it will be difficult for us to be there and there could be minus side to extent of 100 basis points or something like that. Saion Mukherjee: Sir, just if I can ask for some elaboration. So, you

Advertisement

Guidance — 20 items

Amit Khandelia

opening

“To discuss the business performance and outlook going forward, we have on this call the senior management team of Alkem.”

Amit Khandelia

opening

“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.”

Amit Khandelia

opening

“Sandeep Singh to present the key highlights of the quarter gone back and strategy going forward.”

Saion Mukherjee

“And in that context, the guidance that you've given for the EBITDA margin for the full year, where do we stand?”

Sandeep Singh

“The guidance which we gave of, I think, close to 16% for this financial year might be challenging looking at the scenarios.”

Rajesh Dubey

“And as the Managing Director, he already told you, our guidance of 16% to 16.5%, we feel if this situation is going to continue, then it will be difficult for us to be there and there could be minus side to extent of 100 basis points or something like that.”

Sandeep Singh

“We see that our EBITDA margins will go up next year.”

Amit Ghare

“We obviously hope that the business or the price erosion will recede and this will grow and the margin will grow in the U.S.”

Amit Ghare

“And we hope that some of those things will come through for us, which will then obviously help us going forward.”

Sandeep Singh

“Yogesh, if you can take this it will be great.”

Risks & concerns — 11 flagged

business was impacted by significant price erosion and reported a year-on-year decline of 0.9% in rupee terms.

— Sandeep Singh

And as Managing Director, he rightly said, yes, of course, impact of material cost is there, but that is well compensated by our favorable mix.

— Rajesh Dubey

And as the Managing Director, he already told you, our guidance of 16% to 16.5%, we feel if this situation is going to continue, then it will be difficult for us to be there and there could be minus side to extent of 100 basis points or something like that.

— Rajesh Dubey

Is there a pressure in the domestic business as well?

— Saion Mukherjee

Actually, in domestic business, on overall basis, if you see, there is no pressure on the margin.

— Rajesh Dubey

has been a big drag now for a business that is 25% of revenue.

— Kunal Randeria

And we did not see complete impact of our price increase in quarter 1.

— Rajesh Dubey

So, it is a clear indication, the impact of price increases definitely coming in.

— Rajesh Dubey

So, that implies around 17, 18 kind of percentage kind of margin in second half and despite second half being seasonally weak for us.

— Naushad Chaudhari

Actually, complete impact of price increase we see in quarter 3.

— Rajesh Dubey

So, in Cardiology, if you look at our product portfolio, our major challenge has been through anticoagulant.

— Yogesh Kaushal

Advertisement

Q&A — 15 exchanges

Sir, I would like you to talk about the cost pressures. I mean, you mentioned last quarter how things have moved. It looks like the cost pressures are still very high. It is a seasonally strong quarter and the EBITDA margin that was recorded is probably the lowest we have seen in the past many years for the second quarter. So, I just want to understand, is there a cyclical component here or structurally those costs are higher? How should we think about margin? And in that context, the guidance that you've given for the EBITDA margin for the full year, where do we stand?

Sandeep Singh

I'll just answer some part of it, and I'll give it to Mr. Dubey, our CFO, for some more details on it. So, I think first things first Saion, I think you're right. The guidance which we gave of, I think, close to 16% for this financial year might be challenging looking at the scenarios. So, I think there are multiple reasons for compressed gross margin and to one of them means that API price is high. One of the reasons is also the price erosions we have in U.S. So, I think the cost is not going up further. It has stabilized, but I will let Mr. Dubey throw some more light on that. Thank you, San

So, Sandeep, U.S. has been a big drag now for a business that is 25% of revenue. I mean playing a havoc on your gross margins, and it seems that new launches aren't compensating for price erosion. So, I mean what's going wrong over here? Aren't you getting approvals on time? Or is the fact the approval that you are getting highly competitive? And have you enough ammunition in your pipeline for the next 6 to 12 months to sort of at least stop this kind of erosion?

Sandeep Singh

So, I think Amit Ghare will come on the details, but I'll just quickly say that. See, I think next 6 to 12 months, we don't go by the 30% price erosion this quarter, which we had for some reasons, this is not going to happen every quarter and Mr. Amit can speak really on that. So, that's point number one. Second, honestly, next 6 to 12 months, we don't see anything dramatically changing that something can kind of turn the tables. As long it’s got to do with approvals, it's just the market condition. And it's just what is playing for most of the guys. So, Amit, do you want to comment, please? S

Just trying to understand, again, this is better. So, our India share went up. Last time, we had said that the price hike benefit will flow through from Q2 onwards. It's not flown fully in Q1. And we had some one-off expenses, which was launch expenses relating to Sitagliptin, plus there one-off ForEx, which was unlikely to recur. So, all these 4, 5 things, have they still played out? And obviously, we've seen margin improvement, but not to that extent, which was expected. So, are these launch expenses continuing and ForEx expenses continuing?

Sandeep Singh

Mr. Dubey, you can take that? Yes, Prakash, actually, yes, we discussed in our quarter 1 call. And we did not see complete impact of our price increase in quarter 1. You are very right. But if you see quarter 2, our growth, NRV component is 5.3% out of our total growth, what 10% growth we have shown. So, that is the biggest component. So, it is a clear indication, the impact of price increases definitely coming in. And I think all these 3 levers NRV, new launches and volume, it's a reasonably good number in quarter 2. So, we have a very clear indication. Impact of price increases is coming in.

I have just 1 question on other expenses, which are going at a much higher rate than the revenue. So, if you can comment on this.

Sandeep Singh

Yes, Mr. Dubey, please take it. Yes. So, I think, Sumit, you are looking for our comment on other expenses. So, other expenses, as you know, other expense, it includes everything. And if you take marketing expenses, plant expenses, corporate overhead and most of the R&D expenses, everything goes in other expenses. So, I think you would like to know why our other expenses are on the higher side. Last year's quarter 2, it was 22.3% and now it is 24.3%. So, actually, some of the marketing expenses were on a higher side. And then last year, it was very close to COVID era and traveling they were no

Can we just get a sales bifurcation for specific therapies like for Chronic and Acute, could we just get this if possible?

Rajesh Dubey

Sorry, what is it? To acute you are asking? The bifurcation for Chronic and Acute? See, we are 84/16, so our Acute is 84% and Chronic is 16%. And sir, could you just get us the gross margin for different geographies? You mean to say in domestic business or overall business. I'm talking about all geographies, like India, Australia, U.S. and yes, Australia and US. I understood, Pujan. Actually, in fact, we are not talking gross margin on geography wise. But definitely, each business is different. So, gross margin has to be different to respective geographies.

My first question is on procurement. What is the dependence on Chinese companies for raw material procurement? What is the percentage looking like today?

Sandeep Singh

Mr. Dubey, you can take that, sir? Nikhil, our direct import from China or Chinese supplier, it is not much. It is in the tune of 10% to 12%. But yes, whatever API we purchase, our API suppliers, they have intermediate dependency on Chinese suppliers. So, indirectly, if you see somewhere around 65% to 70% of our API is getting influenced because of China. So, sir, I mean, we are not fully sure how things are panning out in China when the lockdowns will open. So, are you in touch with the vendors on a derisking kind of a strategy? Are they also equally focused on trying to have multiple sources

So, can you give us a sense of what is the quarterly spend on your biosimilars initiatives? And is this likely to increase some share? Or would this be the steady state for some type?

Sandeep Singh

Mr. Dubey, you can take that? Yes, sir. Yes. So, biosimilar, I think you are more interested in biosimilar R&D or composite. No composite, if you would just give us -- Yes. So, annually, we have a total budget for biosimilar somewhere in the range of Rs. 140 crore total OpEx and revenues close to Rs. 160 crore, kind of. So, out of that R&D is somewhere close to Rs. 100 crore. And is this likely to be the range going forward as well? Or do we see some pickup. It is as per our business plan only. No, going forward, they're asking. So, going forward, no, it will be steady, not picking up. And a q

So, I mean, just trying to understand, right, like on the U.S. business, I mean, what is your longer- term outlook? I understand that you're still optimistic. But I mean, clearly, some of these cost- cutting measures that you've outlined seem to pertain to that as well. And I mean, just trying to understand what is the longer-term strategy. Is it going to be a calibrated investment based on the sort of revenue throughput? Or how are you looking at it?

Sandeep Singh

Sure. So, I'll take this. And Amit, you can add on to this, if I miss some point. So, you're right. I mean, most of the cost initiatives are, let's say, for international and when I said R&D and things like that, we are calibrating our investments to U.S. So, we are kind of controlling the capital allocation we do there. Hoping that this can become slightly better in a couple of years. And longer term outlook, see again, to be honest, no one knows, this is going through a real tough times for the entire industry. If things don't improve in some time, then, of course, we could again discuss wha

Just 2 questions. You've launched generics products with exclusivity in the US. Did it benefit in any material way in the U.S. business this quarter?

Sandeep Singh

Amit, can you take that, please? Sure. We haven't had any exclusive, exclusive launch in the U.S. this quarter. We've had a shared exclusivity launch. Any launch, which is either in the exclusivity period, of course, if you’re exclusive, it’ll only generic in market, it will definitely help. And even those where you are within the 180 days and you've launched which is a shared exclusivity with other generics, generally the margins tend to be better. And that's a very generic statement, but that's true. Any new launches generally come at a better gross margin than the existing business. But the

Just wanted to understand that given we seem to be holding back on the capital allocation towards the U.S. business, would it be fair to say that earlier we were sort of expecting 10%, 12% growth, given that price erosion is and are holding back on capital allocation there, like growth might not be that much, it could be a bit slower. Is that a fair assumption to make at this point?

Sandeep Singh

Amit, you could take that, sir? Fair assumption, obviously, if we hold back the R&D investment, it definitely will have some impact. So, now our task obviously is to see how we can do smarter investment so that we can still expect revenue growth that we expected and margin growth as well.

On the generic Pradaxa launch again, given that it's a 2 generic player market currently, our market share that I can see is in single digits, seems to be on the lower side and the innovative seems to be holding on to close to 80% market share there. So, anything that is unique about this product or anything that is challenging about this particular launch that our market share hasn't really ramped up in the way we expect in a generic player market.

Sandeep Singh

Amit? I'm sorry, I didn't get the question. Was that for a particular product there did you mean? Yes. It was about the generic version of Pradaxa, where we've been in the market for almost 3 months. Sure. We've done sort of a limited launch on products like Dabigatran. And to some extent, if not to some extent, the full extent it is because of our supply chain. We are not able to get our raw materials, and I don't want to elaborate anything further here. So, whatever we are able to manufacture and supply, we are able to sell that in the market, obviously. There are only 2 generics in the mark

First, a clarification on the margin side, sir, you indicated from the earlier guidance of 16.5% you indicated a few bps, 100 to 200 bps down for a full year, you maintained that guidance, which comes to around 14.5% to 15%. So, that implies around 17, 18 kind of percentage kind of margin in second half and despite second half being seasonally weak for us. Can you clarify that? Do we still maintain that 14.5% or 15%? Or was that for the second half?

Sandeep Singh

No. I think we mentioned for overall, Mr. Dubey, I think what do you think? On overall basis, we are going to be at somewhere close to 15%, 15.5%. And obviously, in second half, our EBITDA margin is going to be on higher side. So, if you see the first half, our EBITDA margin is 11.6%. And for the second half, we expect our EBITDA margin to be much more higher, which is ultimately going to land somewhere close to 15%, 15.5%. And that much more higher is only because of that cost initiatives we have taken? Or is there something else which would lead to? It's on overall basis. Actually, complete

Can we get the MR productivity breakup for Acute versus Chronic? And how do we see the growth in Chronic productivity as Chronic is scaling up well for us?

Sandeep Singh

Yogesh? Yes. Sure, Sandeep. So, Acute productivity is around Rs. 6.5 lakh and Chronic is around Rs. 3.8 lakh to Rs. 3.9 lakh. And so whatever growth we have taken for the year, accordingly, the productivity will increase. So, this is all. So, over like 2 to 3 years, how do we see growth for this productivity and overall productivity? Yes. So, as per our guidance, if I go by around 10% to 12% growth for next 3 years, accordingly, the productivity will grow. Yes. In Chronic, of course, we will try to drive faster growth, which is around 1.5% to 2% of market. We’ll be slightly more than Chronic i

This is Shrikant from Asian Market Securities. Can you please highlight what was the price erosion during the quarter? And where do we think this will move in the next 6 months to 1 year?

Sandeep Singh

You're talking about U.S., I assume. Yes, U.S. price erosion. Mr. Ghare you can take that. I'm sorry, can you repeat the question, please? Yes, sure. So, just wanted to know what was the U.S. price erosion during this quarter? And where do you see this moving in the next 6 months or 1 year time? Yes. So, current quarter price erosion numbers are a little bit all over the place, I'm sorry about that because of the way we’ve done some adjustment. But we certainly were higher in double digits. I mean we are somewhere between 10% to 15% and probably more than 15%. We are expecting last quarter, if

Thank you, everyone, for joining the call. If any of your queries are unanswered, please feel free to get in touch with me. Thank you. Have a great weekend.

Sandeep Singh

Thank you, guys. Have a great weekend. Bye-bye.

Speaking time

Sandeep Singh

Rajesh Dubey

Yogesh Kaushal

Moderator

Amit Ghare

Nikhil Mathur

Prakash Agarwal

Saion Mukherjee

Kunal Randeria

Pujan Shah

Advertisement

Opening remarks

Tushar Manudhane

Thank you, Mike. Welcome to 2Q FY '23 Earnings Call of Alkem Laboratories. From the management side, we have Mr. Sandeep Singh – Managing Director; Mr. Rajesh Dubey – Chief Financial Officer; Mr. Amit Ghare – President (International Business); Mr. Yogesh Kaushal – President (Chronic Division); and Amit Khandelia – AVP (Finance). Over to you, Amit, for the opening remarks.

Amit Khandelia

Thank you, Tushar. Good evening, afternoon, and thank you for joining us today for Alkem Laboratories Q2 FY '23 earnings call. Earlier during the day, we have released our financial results and investor presentation, and the same are also posted on our website. I 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 may be viewed in conjunction with the risks that our business faces. At 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 gone back and stra

Sandeep Singh

Thanks, Amit. Good evening, everyone. Since we have shared all the results, I'll keep my talk very short and spend more time on Q&A. But during the quarter, quarter 2, our India business delivered a strong growth of 13% year-on-year, while our U.S. business was impacted by significant price erosion and reported a year-on-year decline of 0.9% in rupee terms. However, our year-on-year growth in U.S. market has impacted significant contribution in base business from ibuprofen and famotidine. But a point to note is, on a sequential basis, U.S. business reported a growth of 8.5%. Our domestic franchise outperformed the Indian pharmaceutical market by 500 basis points, thereby increasing market share across all acute therapies. Our growth in the Antidiabetic segment is 4x the market growth rate on back of new launches. And I must share with you that we have had a remarkable execution on Sitagliptin launch on which Yogesh Kaushal can happily take questions later. We want to carry out this out

Advertisement

← All transcripts ALKEM stock page →

Alkem Laboratories Limited

Market Movers