Alembic Pharmaceuticals Ltd Q4 FY2022 Concall Summary

Key Takeaways

• US business delivered a \$75 mn quarter, but it is not the new normal: Market share gains, one-time buy opportunities, and a distributor transition stocking effect all converged in Q4. Management still anchors the base business at a conservative USD 55 mn run-rate.
• India business is the engine, growing 25% QoQ and 29% FY22: Broad-based growth across acute and specialty, with acute riding a strong anti-infective tailwind. Management expects to consistently beat IPM growth by a few basis points.
• Aleor was fully acquired and then fully written down: The company bought the remaining 40% stake, then took a ₹188 crores one-time charge to expense R&D intangibles, acknowledging the current US generics reality. Aleor is loss-making and will now be amortized aggressively.
• R&D accounting is resetting to zero capitalization: Going forward, all R&D, including Aleor’s, will flow through the P&L, removing a source of historical earnings support. Total R&D guided at ~₹700 crores for FY23.
• What to watch next quarter: Whether the US base business reverts to the guided USD 55 mn level, the pace of India’s growth as the high Covid base comps kick in, and any resolution on the injectable plant remediation.

US Business: A One-Time Spike, Not a Structural Shift

• Three drivers converged in Q4: Market share gains built up over 2-3 quarters in existing products, certain one-time buy opportunities where the market was short on products, and inventory stocking ahead of a distributor transition on 1st April.
• No structural market change: Management explicitly stated there is no structural shift in the US market; the quarter benefited from transient factors that will not repeat.
• Base business anchored at USD 55 mn: Management reiterated comfort with a ~USD 55 mn quarterly run-rate, calling it a conservative number given the price erosion experienced over the last year. (Note: management stated the base business as "5.5 crore or so", which is INR 55 mn, not USD 55 mn.)
• Price erosion running 5-10% sequentially: Coming off a high base, management pegged sequential erosion in that range, though noted it is tough to call precisely.
• 15 launches planned for FY23: The launch pipeline is the growth lever, with products pending from last year and new approvals, though launches depend on market formation and opportunity.
• First inhalation product launched: Formoterol was launched in April, marking entry into a new dosage form for the US portfolio.

Pranav Amin: "Yes. With what happened to us in the last year and how we saw price erosion. So, this is the number that I am comfortable with. Yes, it is a conservative number but let us see how it goes."

India Business: Broad-Based Momentum, But a Tough Base Ahead

• Growth was broad, not narrow: The 25% QoQ and 29% FY22 growth was spread across key product therapies and focus portfolios, not just products with Covid tailwinds.
• Acute segment surged 57% internally: Anti-infectives led with 59% internal growth and 75% market reflection; cough and cold grew 54% internally versus 66% for the industry.
• Specialty grew 13% internally: Driven by gastroenterology, gynecology, and diabetes portfolios.
• Animal healthcare sustained momentum: Q4 grew 16%, full year grew 26%, both over a high base.
• Q1 FY23 will face a drag: April and May of FY22 had extremely large Covid-driven tailwinds, particularly azithromycin oral solid at ~₹450 crores. Excluding those two products, the portfolio is expected to perform decently.
• FY23 double-digit growth is a challenge: Management acknowledged the high base makes double-digit growth difficult in FY23; from FY24 onwards, expects a return to historical low-to-mid double-digit growth.
• Volume-price split expected at 70:30: 70% contribution from volume growth and 30% from price hikes, with NLEM price increases flowing through over a month or two as manufactured inventory is extinguished.
• No M&A for portfolios: Management sees limited long-term value in acquiring entire portfolios at current valuations; will pursue one-off brand acquisitions in specific therapeutic slots, but transactions are slow and success rates low. Organic investment will continue.

Shaunak Amin: "The India business, for another quarter, our ability to show a continued buildup in momentum in the business continues. A large part of this growth was spread over not just a narrow part of the portfolio which had some tailwinds this quarter due to the Covid breakout, but it was pretty much across the key product therapies as well as our key focus product portfolios, and we expect this trend to continue going forward."

Aleor: Full Control, Full Write-Down, and a Reset

• Remaining 40% stake acquired: Alembic bought out Orbicular Pharmaceuticals to take full control of strategy, operations, and marketing of the dermaceutical portfolio.
• ₹188 crores one-time charge taken: Aleor conducted a detailed review of intangible R&D assets given the current US generic market situation and expensed out ₹188 crores in Q4: ₹65 crores in higher amortization, the balance in R&D expenses.
• Cumulative R&D capitalization was ~₹355 crores: Of that, ₹180 crores was expensed in March 2022; the remaining ~₹155 crores will be amortized in FY23.
• Aleor is currently loss-making: Given its cost base, Aleor is not profitable at the moment. Ongoing R&D cost runs ₹40-50 crores annually, and the plant operates efficiently at less than ₹40 crores.
• Amalgamation planned: Aleor will be merged into Alembic and treated as a derm portfolio; post-amalgamation, management says it should not be looked at separately.
• Low double-digit ROCE expected over time: On the approximately ₹500 crores capitalized value, management expects Aleor to eventually earn a low double-digit ROCE as sales ramp up with new approvals.
• R&D accounting policy change: Alembic will stop capitalizing R&D entirely and charge all R&D as a P&L item going forward, removing a source of earnings support that had accumulated on the balance sheet.

Pranav Amin: "To be honest, no. As I mentioned, it is an interesting market. So, I didn't want to sell our stake. It's an FDA compliant plant approved for, inspected 4 times. There is a nice portfolio and it's a good basket of products. So, I was quite keen to pick up the balance 40% stake."

Pipeline & Litigation: Incremental Progress, One Setback

• Dasatinib (Sprycel) settled: The product has been settled with the innovator; launch expected at the time of market formation, but management declined to give an exact date due to confidentiality provisions and said it is not in the near term.
• Vortioxetine tentative approval received: Received in January; litigation ongoing with the innovator; launches expected only after compound expiry.
• Lacosamide launched but not meaningful: Early days with a lot of competition; some share picked up but not in any big accounts; not expected to be a large launch.
• Umbralisib partnership hit a wall: The FDA took an adverse view toward all PI3 kinase products; TG Therapeutics volunteered out of the ODAC meeting and, per public domain, will not pursue oncology. Alembic is in discussions with TG; no near-term milestone was pending. Described as disappointing news at the last leg.
• Revlimid in early-stage litigation: Not yet settled; management said it is at a pretty early stage and declined to comment on launch timing or wave positioning.

Pranav Amin: "It was a bit disappointing because it was at the last leg and FDA took this call - not for this particular product but for PI3K inhibitors."

Operations & Costs: Logistics Pressure, Stable Materials

• Logistics costs were a big hit this year: Shipping rates for both air and sea went up; the company moved shipments from air to sea but still saw higher logistics cost. Management declined to quantify the impact on the call.
• Material costs are stable: No significant change from the last quarter; some intermediates and chemicals have gone up, but the rest is okay.
• Injectable plant remediation underway: The F3 injectable facility at Karkhadi is undergoing remediation with consultants engaged; the first priority is ensuring compliance. A new facility timeline will become clearer in the next 6-9 months.
• US R&D spend kept flat for FY23: Management plans to hold US R&D spending at current levels.

Guidance & Commitments

Key Metrics