Shilpa Medicare Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Strong quarter, FDA overhang: Revenue grew 20% QoQ to INR315 crore and EBITDA nearly quadrupled YoY, but the 'For Cause' FDA inspection at Jadcherla with 10 observations is now the single most important event for the portfolio.
• Profitability inflection arrived: EBITDA of INR62 crore and a return to PAT (INR1.6 crore vs a loss last year) show the operating leverage from revenue growth and cost initiatives is now materializing.
• Licensing revenue is the near-term visibility anchor: Management sees at least two quarters of licensing revenue ahead, though it refused to quantify the contribution as a percentage of revenue.
• The pipeline is deep but distant: Aflibercept Phase 3 starts before March, TOP09 Phase 3 is India/ROW-first, and the Albumin facility completes by June 2024, but none of these convert to revenue in the immediate term.
• What to watch next quarter: Whether the FDA observations are resolved without escalation, the pace of Adalimumab's India ramp, and any licensing deal announcements that convert the stated visibility into cash.

The Jadcherla FDA Inspection

• 'For Cause' trigger: The inspection stemmed from a 2020 import alert on the facility, making this a compliance checkpoint rather than a routine audit.
• Observation profile: 10 observations on the Form 483, with management emphasizing that none relate to data integrity and none are repeat observations, signaling that remediation commitments made to the FDA have been followed.
• Resolution timeline unknown: The company must submit its response within 15 working days, but management declined to estimate how long clearance will take, stating the FDA's timeline is outside its control.
• Portfolio impact: This facility clearance is described as the most crucial event for revenue from the portfolio, making the outcome binary for the near-term US business.

Vishnukant Bhutada: "None of this 483 has a repeat observation. And the second one is no data integrity in this."

Licensing & Out-Licensing Strategy

• Revenue visibility: Management stated it has visibility of at least two quarters of licensing revenue, with Bortezomib RTU already disclosed as one contributor.
• Deal staging: Out-licensing happens at various milestones: after NDA filing (e.g., Pemetrexed), after completing pivotal studies and being ready for filing (e.g., Nilotinib in Europe), or after proof of concept. In 95% of cases, proof of concept is achieved before licensing.
• Revenue structure: Licensing deals are structured to deliver substantial, continuous revenue over the product lifecycle, with management targeting a minimum of three to seven years per deal.
• Percentage guidance refused: When asked what percentage of revenue licensing income would represent across FY24 or FY25, management declined to answer, calling it impossible to quantify.

Vishnukant Bhutada: "It should be a complex not generic product so that the licensing revenue can be a substantial licensing revenue and continuous licensing revenue not only up to the filing, approval after launch, the life cycle of all these products wherever the licensing we're going to do it, will be not less than three to seven years minimum."

Biologics Pipeline & CDMO

• Adalimumab launch: The high-concentration formulation launched in India under the brand ORIADALI for Rheumatoid Arthritis. Management cautioned it is early days, as RA patients do not switch therapy easily, requiring new patient additions or slow shifts.
• Aflibercept progress: Phase 3 study approval received from the SEC; CT batch ongoing; Phase 1 completed. Phase 3 will start before March and will take at least one year.
• Pipeline depth: Two additional biologic products are at an advanced development stage, with Phase 1 and Phase 3 expected in the next six months to one year.
• CDMO ramp: At least two CDMO projects per quarter are targeted for the biologics facility. One project with a Korean customer has already been signed and work has started.
• Sustainable revenue thesis: Management expects the combination of Adalimumab-like commercial revenue, Aflibercept Phase 3 progress, two pipeline products, and CDMO projects to create sustainable biologics revenue.

Complex Products & NCE Pipeline

• TOP09 (Androgenic Alopecia): Phase 1 and Phase 2 completed; Phase 3 CT batches ongoing. Granted patents in India, USA, China, Japan, Korea up to June 2038, with Europe pending. Phase 3 will initially target India and ROW markets; EU scientific advice is expected in Q4, after which Phase 3 will incorporate EU and US arms together.
• TOP09 monetization optionality: All options remain open; the product is not yet partnered. Phase 3 data from India will support monetization for EU and US markets.
• NUD07 (NFLD indication): Study expected to complete soon in Q4 FY24-25. Licensing strategy will be determined as development progresses, with cost-benefit balance monitored at the management level.
• Another NDA under USFDA review: Approval expected by September-December 2024.
• ODF business: Five products launched in the US online (nutraceutical and OTC) with a partner; traction is building and the business is growing, though still early-stage.

Vishnukant Bhutada: "I mentioned up to June '2038 we have this granted patent on this, and of course Europe it is still, the US is ongoing."

Albumin & Manufacturing Capex

• Facility timeline: Construction and erection of the Albumin manufacturing facility (Biocare unit) is on track to complete by June 2024.
• Phase 1 study: The therapeutic-grade Albumin Phase 1 study is ongoing and running smoothly, expected to complete around the time the facility is finished.
• Excipient grade first: Once the facility is ready, excipient-grade Albumin can start immediately via technology transfer, providing an earlier revenue stream before therapeutic-grade approval.
• Capex allocation: The majority of H1 capex (INR52 crore out of INR64 crore) was invested in this facility, signaling it is the company's largest near-term capital commitment.

Financial Health & Cost Structure

• Margin expansion: EBITDA margin improved significantly, with the INR62 crore figure representing a 148% YoY jump for H1, driven by revenue growth and cost reduction initiatives.
• Cost initiatives active: Management is actively lowering R&D costs and operational costs to create a tighter cost profile that retains better margins as growth scales, without compromising product research quality.
• Finance cost burden: NCDs were raised with no repayment burden for a little over two years and an option to start pre-paying after one year. Management is evaluating strategic options that could bring cash or equity to lower the cost, but until then, finance costs are likely to remain on the higher side.
• Rights issue under evaluation: The company is evaluating an overall rights issue, though no specifics were provided.

Alpesh Dalal: "But till the time, we take any such step, the finance cost is likely to remain bit on a higher side."

Guidance & Commitments

Key Metrics