Alembic Pharmaceuticals Ltd Q3 FY2023 Concall Summary

Key Takeaways

• India business outperformed, US price erosion persists: India formulations grew 12% YoY to ₹545 crores, beating the 10% industry growth rate, while US generics grew 10% in rupee terms but only ~1% in dollars as price erosion continued to offset volume gains.
• API segment delivered a lumpy 65% surge: API revenue hit ₹326 crores, boosted by a large one-off CMO order for a multinational; excluding that, underlying growth was still a strong 30-40% YoY.
• R&D spend is being deliberately cut: R&D expense dropped to 10% of sales from ~14% last year, with absolute spend reduced despite inflation, as high-risk projects are shelved and the portfolio is pruned for efficiency.
• Two new US facilities are about to start costing money: Onco-injectables and general injectables facilities will begin commercial production this quarter and next, triggering an annual expense run-rate of ~₹200 crores in cash costs plus depreciation, which will pressure profits in FY24.
• What to watch next quarter: Whether the Diclofenac and Arformoterol launches materialize on schedule, the pace of expense ramp-up from new facilities, and any sign that US price erosion is actually slowing rather than just persisting.

India Formulations: Acute-Led Outperformance

• Broad-based market share gains: Alembic's India business grew 12% versus IQVIA industry growth of 10%, with the company's own secondary sales reflected at 15% growth, indicating strong prescription uptake.
• Acute therapies drove the beat: The acute portfolio grew 21% against an industry growth of 11%, powered by anti-infectives at 24% (versus industry 12%) and cough and cold at 16% (versus industry 10%).
• Specialty held its own: The specialty segment grew 14% versus industry 10%, led by gynecology, anti-diabetics and ophthalmology.
• Animal health delivered: The animal healthcare business posted 19% growth over the same quarter last year.
• Gastrology is the one sore spot: Gastrology was the only large division that underperformed both the market and internal expectations, due to leadership issues and legacy inventory problems. Corrections have been made and management expects much better results in FY24.

US Generics: Volume Growth, Price Headwinds, and a Reset Target

• Flu season and new launches helped the top line: US revenue grew 10% in rupee terms to ₹432 crores, driven by a strong flu season that boosted anti-infectives and Oseltamivir (Tamiflu), plus new product launches picking up share. Volume growth was much higher but was offset by price erosion.
• Price erosion has not gone away: Management confirmed price erosion is still present and may have slowed but remains a factor, with customers bidding on products more frequently, which continues to compress realizations.
• The \$500 million target is gone: The earlier aspiration of reaching \$500 million in US sales has been dropped. The \$300 million to \$400 million range is still seen as a potential over a three-to-four-year period, but the entire timeline has been pushed back by two to three years due to delays in executing new plants and the reduced outlook from pricing erosion.
• New launches have underwhelmed: Many recent launches, except a handful, have not been great successes because of price erosion, making it difficult to generate adequate returns on the R&D investment behind them.

Pranav Amin: "The \$300 million to \$400 million I still stand, \$500 no. I still think there could be an opportunity to go to \$300 million plus. But as you see, everything's has got push back by about two, three years, so because of the delay in the execution of the new plants and the pricing erosion has increased -- has reduced some of the outlook."

New Facilities: The Approvals Are Coming, the Costs Are Next

• FDA is clearing facilities despite pending EIRs: The onco facility (F2) received 4 observations and the new oral solid dosage facility (F4) received 5 observations in December; responses have been submitted. Critically, the FDA has already granted product approvals from F2 and F3 even though formal Establishment Inspection Reports have not been received, which management interprets as a signal that the agency sees no risk.
• Commercialization is starting now: Onco-injectables commercialization is expected to begin this quarter, with general injectables following next quarter. The new oral solid block (Jarod) is further out, with commercialization in FY24 or beyond.
• The cost clock starts ticking: No expenses from the new facilities were charged to the P&L up to 31 December 2022. The annual run-rate across all facilities together is about ₹200 crores in cash expenses plus depreciation, and these will start flowing through the P&L in tranches as commercial production begins, eventually reaching a ₹50 crores per quarter run-rate.
• FY24 will be tougher on profit: Management explicitly flagged that FY24 will see pressure on profit because two new facilities are coming on stream and their expenses will begin hitting the P&L. The midterm view is that all additional costs will eventually be offset, and FY25 will be a lot more comfortable.
• Approval bunching ahead: Over the next 12 months, management expects some bunching of approvals, with a much faster approval rate over the next 24 months.

Pranav Amin: "My reading or sense is that, listen, FDA came to approve facilities. As far as they see it, they feel that all responses are in place, they feel there's no risk to anything, hence they've given it. The EIR, they're waiting for a formal EIR. But I think we've seen this not just the first time. We're seeing it because they want us to launch products in the market and they want new facilities."

API Business: A Lumpy Quarter with Solid Underpinnings

• One large order distorted the quarter: API revenue grew 65% to ₹326 crores, but this included a large CMO order for a major multinational. Excluding that one-off, underlying growth was approximately 30-40% year-on-year.
• The Q4 run-rate will normalize: Management cautioned that the Q4 API run-rate will not be as high as Q3 because the lumpy CMO order will not repeat, though year-on-year growth is still possible.
• FY24 growth expectation is at least 10%: Management expects at least 10% growth in the API business next year.

R&D Rationalization: Cutting Spend, Pruning Risk

• Absolute R&D spend is down despite inflation: R&D expense fell to 10% of sales from approximately 14% last year, and the absolute rupee spend was reduced even as costs and inflation rose.
• High-risk projects are being shelved: The reduction was achieved by putting high-risk projects on the back burner while increasing projects for Rest of World markets, which have been growing consistently at about 10% for the last few years.
• Further cuts are coming in FY24: Management is targeting an additional 15-20% reduction from the current R&D cost base in FY24, based on regular recurring expenses and excluding Aleor amortized costs. The effect of further project and fixed-cost pruning will land in FY24.
• The Aleor hangover is nearly done: Residual intangible assets related to Aleor/Derma R&D are now down to just ₹11 crores, expected to be completed in the next quarter or so, after which nothing will remain. A ₹13-odd crores Aleor-related charge was recorded this quarter in amortization and depreciation.

R.K. Baheti: "In absolute number, in spite of all these cost increases, inflation, we have reduced the expense. And we will further prune the projects and prune the fixed costs so that effect or that impact would come in '23 -'24."

Margin Outlook: Costs Are Coming from Multiple Directions

• Management declined to guide on EBITDA: When asked whether R&D rationalization and API cost moderation could offset new facility costs and what EBITDA margins might look like over the next two years, management explicitly declined to comment, calling it "very difficult to make a comment on this -- on the EBITDA side."
• Raw material dynamics differ by market: In the domestic market, raw material costs were stable this quarter, still not back to pre-COVID levels but stable or slightly down. In international markets, raw material costs as a percentage of sales realization have risen, largely because of price erosion rather than absolute input cost increases.
• New facility expenses are the known headwind: With the annual ₹200 crores cash expense run-rate from new facilities about to start flowing through the P&L, and price erosion still present in the US, the near-term margin trajectory faces visible pressure that management has acknowledged but not quantified.

R.K. Baheti: "It's very difficult to do that ROE analysis of R&D because a couple of products can take care of the entire R&D expense. But you are right, I mean, many of these new launches, which we have done in recent past, except a handful of them, have not been great success because of the price erosion."

Guidance & Commitments

Key Metrics