Shilpa Medicare Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Muted quarter, margin rebound: Revenue was flat QoQ at ₹265 crore, but EBITDA nearly doubled to ₹34 crore (12.8% margin) as gross margins jumped to 60% on better mix and cost rationalization.
• Biologics is the acknowledged pain point: Management called Biologics the company's only pain point, with the first product (Adalimumab) now targeted for launch by April due to procedural issues.
• The pipeline is deep but distant: Peptides, Recombinant Albumin, Film Formulations, and a portfolio of Biologics products all sit in validation, trial, or registration stages, with material revenue contributions pushed to FY24/25 and beyond.
• USFDA overhang persists: Remediation is complete and third-party audits found no data integrity or sterility issues, but the company is still waiting for the FDA to schedule a reinspection.
• What to watch next quarter: Whether Adalimumab actually launches in April, whether the Oncology tender cycle delivers the Q4 uptick, and any update on the API business asset monetization process.

Biologics: The Pain Point and the Promise

• First launch delayed by procedures: CAPEX at the Dharwad unit is complete and Government of India approval is in hand, but procedural work has pushed the Adalimumab launch to April, with management declining to provide revenue guidance given uncertain launch timelines.
• Pipeline waiting on regulatory gates: SEC clearance received for Aflibercept Phase 3; Abatacept is still in R&D and will soon transfer to the plant; Tenecteplase, Bevacizumab, and Darbepoetin are in the portfolio but years from commercialization.
• CDMO discussions underway: The company is exploring CMO/CDMO partnerships to utilize the Biologics plant efficiently while its own products move through approvals, though no deals have been announced.
• Long gestation acknowledged: Management noted that authorities take time to approve Biologics products, but expects subsequent processes to become easier once the first product is launched.

Bhutada: "Biologics is the only pain point in our company currently, rest all is there, I personally feel that we will definitely grow."

Margin Recovery and Cost Rationalization

• Gross margin jump driven by mix and efficiency: Gross margins improved to 60% from 56% QoQ, attributed to a better business mix and operational efficiency initiatives, lifting EBITDA margin from 6.2% to 12.8%.
• Pricing pressure remains the headwind: Margins have fallen by almost 10% in Q3 and nine-month consolidated results versus the prior year, driven by pricing pressures across the global pharmaceutical industry and specifically in India.
• Complex products as the margin defense: Management is introducing complex products in CDMO, Polymer, and Peptides where competition is lower and margins can be sustained, while also pursuing plant-level efficiencies and cost containment.
• No specific margin threshold disclosed: When asked whether a gross margin cutoff (e.g., above 60%) guides product selection, management spoke generally about possibilities rather than confirming a specific threshold.

Oncology and API: Tender Cycles and New Molecules

• Oncology is flat but not declining: The Oncology API segment is tender-driven in international markets, with tenders typically arriving in late December or early January, creating a historical pattern of Q4 traction that management expects to repeat.
• Non-Oncology API building on quality consistency: Molecules like Acetylcholine, Phenylephrine, and Ursodeoxycholic acid are gaining acceptance in India, while global registrations (EU, USDMA) are awaited to unlock further growth.
• CDMO inquiries converting to repeat orders: The company is receiving a number of CDMO inquiries, some of which have crystallized into repeated orders from customers.
• Site transfers for risk mitigation: Three Oncology products are being transferred from one site to another, with commercialization expected next year.

Pipeline Assets: Validation Stage, Revenue Distant

• Peptides: Two-product plant validation is complete; another three to four product validations are expected next year, but the business is not expected to contribute revenue until FY24/25 because selling peptides requires DMF submission and few buyers exist.
• Recombinant Albumin: Phase 1 government clearance received and exhibit batches are under manufacturing, but the timeline has slipped one to two months; Phase 1 trials are expected to start and complete in FY24, with commissioning targeted for 2024/2025.
• Film Formulations and Transdermal: Five nutraceutical products have been shipped to the U.S. for commercialization; UK MHRA approval received for the ODF and Transdermal plant; management expects good revenue from this segment in FY24.
• Dr. Clot launch imminent: The haemostatic spray (Tranexamic acid, worldwide patent) is slated for India launch by April 2023, described as a first-in-the-world product.

Bhutada: "This product is again a unique product, the first time in the world somebody has developed and we have worldwide patent for this Tranexamic acid spray which the name has been given as a Dr. Clot."

Regulatory and Compliance Status

• USFDA reinspection awaited: Remediation initiatives are complete and the required submission has been made; the company is waiting for the FDA to schedule an inspection of the Jadcherla facility.
• Third-party audits clean: Over two years, USFDA ex-inspectors and consultants have verified all CAPA, data integrity, ANDA retrospective reviews, and sterility and micro issues, with no inspector raising concerns about data integrity, ANDA recalls, or sterility compromise.
• Other regulatory wins: Health Canada GMP Approval received for the Jadcherla finished dosage facility; successful inspections by Canadian and TGA authorities completed.

Bhutada: "I am proud to say that none of these inspectors or none of this consultant or none of so-called experts has even given one line about our plant on data integrity issue or recalling of the ANDA or on a sterility compromise or on a micro compromise."

Subsidiary Losses and Asset Monetization

• 11 subsidiaries in losses by design: These entities are formed for product registration in Spain, Australia, Austria, Dubai, and Canada, incurring registration fees and employee costs before products are filed, registered, and launched in those markets.
• API business monetization exploratory: O3 Capital has been appointed to evaluate funding opportunities for the API business; discussions are ongoing with a few parties, but management said it is premature to provide further details.

Guidance & Commitments

Key Metrics