Alembic Pharmaceuticals Ltd Q2 FY2023 Concall Summary

Key Takeaways

• US generics in a deep price war: Management called this the most competitive market in at least 10 years, with blended erosion in the high teens and specific products seeing 30%+ drops, even quarter-on-quarter.
• API delivers an outlier quarter: The API business grew 23%, well above the 10% full-year guide, as the world chases compliant suppliers, but this pace is not expected to repeat.
• Injectable facilities near clearance: FDA inspections at F3 and F2 yielded 2 and 4 observations respectively, and the first ANDA approvals have already started flowing, with launches expected in Q4.
• India holds its ground: The branded business grew 8% (11% ex-COVID tail), with specialty up 10% and animal health up 15%, even as new launches briefly diverted focus from traditional brands.
• What to watch next quarter: Whether the 10+ planned US launches materialize, the pace of injectable approvals from the newly inspected sites, and any sign that US price erosion is cooling rather than persisting quarter-on-quarter.

US Generics: A Market Under Siege

• Pricing at a decade-low: Management described the US market as the most competitive in at least 10 years, driven by oversupply, with blended price erosion assumed to be in the high teens and specific products eroding upwards of 30%.
• Erosion is not cooling: Price declines are still being observed on a quarter-on-quarter basis, not just year-on-year, and management sees no respite from the supply glut.
• Base business run rate: The sustainable US run rate is currently seen at \$45 million to \$50 million per quarter, stable for at least a couple of quarters, with a move to a \$55 million base dependent on new products, injectables coming in, or a market disruption that eases supply.
• Revlimid is a distant hope: Alembic was late to the game and is not in the first or second wave of launches, so any contribution is far off.

Pranav Amin: "The US business is the most competitive I have seen it at least in the last 10 years or so. There is a lot of oversupply in the market."

Injectable & Complex Generics Pipeline

• FDA inspections completed: The injectable facility F3 received 2 observations and the oncology facility F2 received 4 observations. Product approvals have started flowing even while site approvals remain pending.
• First approvals in hand: Ketorolac, Paclitaxel, and Glycopyrrolate ANDAs have been approved, with launches expected in Q4 of this fiscal year. Ketorolac remains in intermittent shortage, and Paclitaxel has shortages in a few SKUs.
• Complex injectables on the horizon: Management expects some interesting complex injectable approvals in another 6 to 12 months.
• Facility cost burden incoming: Once commercial use starts, yearly costs including depreciation for F2 and F3 will be around ₹300 crores, with the onco-injectable facility OPEX expected to hit the P&L by Q4.
• Ophthalmic build-out: About 10 to 15 ophthalmic products are already approved from a CMO, while filings from Alembic's own facility (F3 line) await approvals expected in the next 2 quarters.
• Derma portfolio live: About 15 products from the Derma facility (Aleor) have been approved and commercialized.

API Business: Quality Premium Pays Off

• Exceptional quarter, not a new normal: API grew 23% in Q2, driven by the world seeking better suppliers with compliant facilities and Alembic's focus on quality and timelines, but full-year growth is still expected at about 10%.
• No cost relief in sight: Raw material costs have not eased, and logistics costs, dominated by sea shipments, have remained at very high levels for five quarters with only a very mild recent reduction.

India Branded Business: Steady Amid Shifts

• Growth cleans up well: Reported 8% growth was in line with the industry; excluding the prior year's large Amphotericin-B sale for COVID-related fungal infections, underlying growth was 11%.
• Specialty vs. acute mix: Specialty grew 10%, led by gynecology, anti-diabetic, and ophthalmology, while acute grew 11%. Animal healthcare grew 15%.
• New launches create friction: Some new launches in gynecology and diabetology diverted focus from traditional brands, causing a small impact on specialty momentum, but management expects specialty to clock very strong double-digit growth going forward barring a very low-growth market.
• Seasonality fading: Historically Q2 is the highest quarter, but delayed monsoons are blending Q2 and Q3, and as the specialty revenue share rises, seasonal impact on Alembic will gradually decline.
• Key launches in play: Dydrogesterone has already reached the number four rank and is gaining traction. Sitagliptin launched post-patent-expiry but is too early to assess. Sacubitril/Valsartan is ready to launch all SKUs immediately on patent expiry, backed by a specialized task force for the heart failure market.

Shaunak Amin: "Immediately on expiry, we are ready to launch all the SKUs."

R&D and Cost Discipline

• R&D trending down: Q2 R&D was ₹168 crores, or ₹151 crores (10% of sales) excluding a one-time ₹16 crore Aleor charge-off. Management guided that this lower trend will continue and it will try to reduce R&D a little further.
• Cost containment is a process: The effort to contain expenses continues, with R&D as the particular focus, but evaluating projects and deciding what to drop or downsize takes time and will not happen overnight.
• Aleor cleanup nearly done: Residual intangible assets from the Aleor merger stand at just ₹24 crores and are expected to be cleaned up in the next couple of quarters.
• ANDA filing pace to pick up: Filings were delayed over the last 12 months due to FDA remediation, but the pace is expected to accelerate soon.

R. K. Baheti: "Effort to contain expenses continues. The particular area of focus at this moment is of course R&D, but it takes time because when you evaluate projects, you decide what to continue, what to drop. Even when you decide to downsize, it takes time, so it is a process that will not happen overnight, but we are constantly at it."

Ex-US Generics and Facility Expansion

• Ex-US generics grew 9% in the quarter, coming off a high base from the prior year.
• F4 facility progressing: Two site transfers and one filing have been completed from the F4 oral solid dosage facility.
• Global filing ambitions: With the US priority now addressed, the goal is to extend F2 and F3 filings to other territories including the EU.
• Mesalamine launch planned for Q4: Volume-wise not a very large product with 5 to 7 players already in the market, but management sees it as an interesting opportunity.

Guidance & Commitments

Key Metrics