Shilpa Medicare Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Margins collapsed on pricing and mix: Gross margin fell to 56% from 66% YoY, driven by pricing pressure in key API and formulation products plus a shift toward lower-margin non-Onco molecules.
• The balance sheet is strained: Net debt exceeds ₹750 crore and the company has hired an investment banker to explore monetizing the API business, with a stated goal of becoming zero-debt.
• A pipeline of launches is the recovery thesis: First-to-market products (Pemetrexed RTU, Tranexamic acid spray), non-Onco API additions, and the upcoming Adalimumab launch underpin management's confidence that margins will improve from H2 onward.
• Biologics and Albumin are the long-dated bets: The Adalimumab launch is imminent in India, but the high-stakes Albumin facility won't be commissioned before December 2023, with commercial launch only in 2024.
• What to watch next quarter: Whether the US FDA schedules a re-inspection of Jadcherla, the pace of Pemetrexed RTU tender wins in Europe, and any concrete progress on the API monetization process.

Margin Compression: The Immediate Problem

• Gross margin fell 10 percentage points YoY to 56%, a drop management attributed to pricing pressure on selling prices in both API and formulation segments, cost increases in certain major products, and a product mix shift toward non-Onco molecules that carry structurally lower margins than Onco products.
• Formulation margins hinge on one product that has faced pricing challenges; management expects the growing product basket to stabilize formulation margins over time, with some improvement possible in H2 itself as the second half is typically stronger.
• EBITDA margin was just 6% for the quarter, and PAT turned negative at ₹19 crore, weighed down by higher finance costs and depreciation. The company has taken cost rationalization initiatives and reduced remedial costs at the Jadcherla site to counter the pressure.
• Operational losses from underutilized assets (biologics, transdermal, ODF) are dragging overall performance, though management declined to quantify the drag on the call, asking the analyst to follow up offline.
• The COVID vaccine contract manufacturing opportunity that was expected to bring significant business will not materialize, impacting the margin trajectory that had factored it in.

Dalal: "It is difficult to specify the timeline because a lot of these things when we are trying to get a business generated out of some of these investments that we have made, it would be dependent on the opportunities that come across our way."

The Pipeline: Launches That Must Deliver

• Pemetrexed RTU injection was launched in Europe as the first ready-to-use formulation of its kind globally, differentiating against the existing lyophilized presentation; a US filing is pending with clearance hoped for this quarter or next, though the European ramp-up will be slow as it moves through tender processes with good traction expected only from Q4.
• Tranexamic acid spray received CDSA approval as a first-of-its-kind tropical hemostatic spray; the India launch will come first, followed by ROW markets, with Europe and the US as second-wave markets.
• Three non-Onco API products were commercially launched in India this quarter after capacity was created last year; DMFs are ready and filings are underway in various markets, with at least three more products expected to complete exhibit batches before December.
• Prucalopride, a niche non-Onco product, was launched in the European market last quarter after dossier approval, manufactured at a third-party facility.
• Tenofovir Alafenamide tablet received tentative approval as a first-to-file NCE-1 submission, though the launch date is much later.
• Transdermal patch and film received UK MHRA approval, and four nutraceutical products are commercializing for the US market this quarter after three years of investment in the division.
• Non-Onco API strategy is built on differentiation: management evaluates each molecule on yield, quality, regulatory positioning, Chinese raw-material replacement potential, and whether the company can withstand competitive intensity rather than simply adding volume that erodes when competition arrives.

Vishnukant: "...product selections in the non Onco is not just to create the competition among the existing players, how we're going to differentiate ourselves because the strategy in our API was very clear. Let's have a differentiated product."

Biologics & Albumin: The Long-Dated Bets

• Adalimumab has completed Phase 3 human clinical trials of a high-concentration formulation and is ready for launch; two partner companies have been signed for the India market alongside the company's own launch, which is expected in Q4 post regulatory approval, with ROW market launch next year.
• Aflibercept received RCGM approval and will enter Phase 3 studies next quarter, with trials expected to take another year.
• Biologics revenue is currently practically negligible despite the major asset block being ready; management expects revenue to start flowing in the next 9 to 12 months from the Adalimumab launch and CDMO agreements at the Dharwad facility, where there is reportedly great interest.
• Albumin facility construction is mid-way with expected completion by September-December 2023 and commissioning before December 2023; the balance CapEx of ₹175 crore will be invested over the next year.
• Albumin clinical trials are manufacturing batches at the Hubli facility, with management hopeful trials start before next quarter but unable to confirm until clinical batch data is available; once trials are completed and submitted, fast-track approval is expected, with India and ROW commercial launch targeted for calendar year 2024.
• Albumin is positioned as a shortage product globally where availability matters more than price; the company has been granted patents from the US and Europe for its recombinant process, which management claims is superior to existing products.
• The investment is being paced slowly to mitigate risk; management expects more clarity on its risk hedging strategy in one or two quarters.

Vishnukant: "Albumin is such a product, where no marketing is required. It's all over world, including India, 365 days. This is a shortage product."

Regulatory: Waiting on the US FDA

• Jadcherla facility was inspected by Canadian and Australian authorities during the quarter with no critical observations, only minor addressable ones; all remediation measures for the US FDA import alert have been completed and submitted, including third-party reports, and the company is now waiting to hear from the FDA on a re-inspection.
• Nacharam Analytical Services Division received an Establishment Inspection Report from the US FDA, a positive signal on the compliance front.
• Formulation sites have received Australian and Canadian clearance, and products are being transferred to alternate sites to serve the US market even if Jadcherla resolution is delayed; almost six products will complete transfer before March 2023, with launches expected next financial year.
• No ANDA withdrawals have been recommended by any consultant, auditor, or third party after thorough data verification; management emphasized that no micro relations or data integrity issues were found.

Vishnukant: "I'm happy to share that none of the consultants, or none of the any auditor, or none of the third parties have suggested us to withdraw any ANDA, which has been filed recently."

Balance Sheet & API Monetization

• Net debt exceeds ₹750 crore, and the company has appointed O3 Capital as investment banker to explore monetization options for the API business, including an IPO, strategic investors, or private investors, with all options open.
• The stated ambition is to become a zero-debt company; if gradual, the target is to bring the debt-to-equity ratio down to at least 0.25x from the current 0.5x.
• API business grew 30% in FY22 despite the CRAMS business declining by roughly ₹30 crore, and the company replaced ₹350 crore of ISBCA revenue that moved away over two years while still achieving growth in Onco and non-Onco molecules.
• API margins are under pressure from pricing and costs, with typical EBITDA margins historically in the 23-25% range; competitive intensity in Onco API remains manageable, with management seeing no serious new entrants.
• R&D spending is being consolidated toward immediate, shorter-cycle projects that can be completed in six months to one year, with a focus on licensing activity and partnering for various markets, reflecting the shift from a cash-rich to a leveraged balance sheet.

Vishnukant: "I fully understand that the company was earlier cash free. The debt free company was there. Now we are came into the situation where the debt is there."

CDMO & Other Early-Stage Drivers

• Three new CDMO projects were secured during the quarter with MNCs for complex APIs; management declined to disclose the development stage citing confidentiality, stating only that they are NCE molecules at various stages.
• DRDO high-energy polymer supply has begun with a second order being delivered; the process is slow but management sees potential for substantial business in the next one to two years, though order size was not disclosed.
• ICE/ISBCA revenue is expected at ₹25-30 crore this year and ₹40 crore next year, with the company starting its own Ursodeoxycholic acid production.
• ODF facility was inspected and approved by UK MHRA, and nutraceutical products are registered in the US with launches beginning this quarter.

Guidance & Commitments

Key Metrics