Ladies, and gentlemen, good day and welcome to the Q1 FY 2023 Financial Results Conference Call of Alembic Pharmaceuticals Limited. We have with us from the management, Mr. Pranav Amin, Managing Director, Mr. Shaunak Amin, Managing Director, Mr. R.K. Baheti, Director of Finance and CFO, Mr. Mitanshu Shah, Head of Finance, Mr. Jesal Shah, Head Strategy, and Mr. Ajay Kumar Desai, Senior VP Finance. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. R.K. Baheti. Thank you and over to you, sir. Thanks. Good evening, everyone. Thanks for joining our First Quarter for 2022-2023 Quarterly Results Conference Call. I'm sure you would have received the results by now. I know the financial numbers are bit below your expectations, but during this call we'll try to explain you the reasons and also the rationale why we think the underlying business is robust. First of all, financials. During the quarter, our total revenue were at INR 1,260 crore. EBITDA was INR 9 crore, and net loss was INR 66 crore. Continuing review of our annual R&D costs, which was capitalized earlier, and looking at the conditions in the U.S. generic business. Alembic has Aleor still is a separate company. So merger process is underway. Aleor has further written off INR 115 crore out of its CWIP, out of capitalized R&D, to P&L. We did it in March 2022 also, and INR 115 crore we have written off in June 2022. The residual intangible assets in Aleor now is just about INR 40 crore. Had Aleor followed the previous practice, APL's consolidated profit before tax would have been higher by INR 115 crore, or INR 50-odd crore rupees. EBITDA on a likewise basis would have been INR 107 crore. Borrowings. The gross borrowing at consolidated level is INR 513 crore versus INR 630 crore in March 2022. The company has INR 112 crore as cash on hand. As on March 2022 it was INR 61 crore. Net borrowing as on 30th of June 2022 is INR 403 crores versus INR 569 crores as on March 2022. Our net debt equity is very comfortable at 0.08. I will now hand over the discussion to Pranav for his presentation on international business. Thank you, Mr. R.K. Baheti. It was a challenging quarter for the U.S. business, especially when seen in light of a very good preceding quarter. I had mentioned in the last investor call that we had made a switch to a new third-party logistics vendor. Due to this, we had anticipated some supply disruptions and hence the buyers had pulled in extra inventory to ensure that the quarter was smooth. This led to a slow start to discharges during the quarter and the revenue for the quarter was $47 million in the U.S. We continue to remain focused on the long term of the U.S. business backed by the 10+ launches every year, and hopefully consolidate the market share in our existing products. The near term will remain challenging, but long term we still remain optimistic about the U.S. business. The ex-U.S. formulation business as well as the APL business both come off a very high base of last year, hence the growth was muted. We are confident on both these verticals moving forward and for the next quarter onwards. Our R&D expense is INR 261 crores. Excluding Aleor's revised charge of R&D, the expense is INR 146 crores, which is 12% of sales. We filed seven ANDAs during the quarter, and cumulative ANDA filings remain at 237. We also received eight approvals in the quarter, including three tentative. We launched 5 products in the quarter and plan to launch another five to seven products in the next few months as well. The FDA remediation is ongoing at our F3 injectable facility at Karakhadi. We have appointed a bunch of consultants and remediation measures are underway along with the FDA as well to ensure full compliance. This will take a couple of months hopefully, and we should have better news for you. The U.S. generics was flat at INR 367 crores for the quarter. The ex-U.S. generics we grew by 8% to INR 182 crores for the quarter. Whereas the APL business, we grew by 16% to INR 433 crores for the quarter. I will now request Shaunak to take you through the India branded business. Yes. Yes. Good afternoon, everyone. The India business, if I could talk about it, was, I think we had an extremely good quarter. The top line numbers do have a base effect of last year's COVID benefit gain. Which causes discussion, but when I look at the numbers, like COVID has just made everybody stronger. Even on the wet material, 13% extremely strong growth with about 35% growth over last year. Our overall growth put together was COVID number was flat. Like I said, COVID adjusted, we grew at 20%. If I look at just external numbers, I think the industry showed a negative growth of 2%. Alembic has, as is reflected, a parallel growth of negative growth of 3%. Except azithromycin, which was a big contributor to last year's sales numbers, the industry grew by negative 1%, whereas Alembic recorded a growth of +12% as per IMS in this time period. Based on this, I think we're extremely bullish on the India business. Keeping that in mind, I think to go onwards, looking at the question, looking at the portfolio growth, we did start to increase investments in the business, and we did see a significant ramp in Q1 in terms of investments. We expect some of these to start playing out in terms of top-line numbers looking into as early as Q2 and Q3. Other than that, I think the core portfolio of the business continues to do well and with a strong onset of monsoon in June, July mainly, and continuing into August, we expect the acute portfolio, which is a very strong part of our business, to continue with market-leading growth numbers. I would like to open up the floor for Q&A now. Thank you. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies, and gentlemen, we'll wait for a moment while the question queue assembles. We have the first question from the line of Damayanti Kerai from HSBC. Please go ahead. Hi, thank you for the opportunity. R.K. Baheti, you explained about Aleor charges. In the previous quarter, you took around INR 123 crore and this quarter INR 115 crore. You mentioned around INR 40 crore is residual. Say like we have to again charge off this INR 40 crore, after that there will be no R&D expenses related to Aleor or how should we look at that part of the cost? Second part of your statement is right. INR 40 crore is what is now residual. The only correction I make in your first part of the statement, previous quarter, that is in March 2022, we charged off INR 189 crores. Okay. INR 189 in the fourth quarter, INR 115 crore this quarter, and then we are just left with INR 40 crore residual. Total of about INR 350 crore spent over last three to four years on R&D. Anything else like where investment is ongoing and then we might see similar charge-offs, which is right now not part of our operating cost or we should be just looking at Aleor cost only? No, as far as R&D program is concerned, in any case, we have been charging off all R&D expenses to P&L since beginning. We have no accumulation in balance sheet there. Okay. Just a question on R&D. Even if we adjust for the Aleor charge, it still remains notable at around 12% of sales. How should we look at this cost going ahead? As we see, like U.S. challenges are far from fading. Are we thinking about reallocating R&D to some other businesses? No, you are right. Okay, I look at percentage of profit as a profit percentage of a turnover is just a number because it is dependent on two different numbers. I mean, absolute term, we don't plan to increase R&D. The R&D cost, including the Aleor, on a current basis is about INR 700 crore per year. We'll maintain it within that. We are also looking at rationalizing it to some extent it is possible without really affecting the growth of the business in future. You can say that it will stay between INR 650 crore-INR 700 crore in coming years. INR 650 crore-INR 700 crore kind of R&D spend will continue on absolute basis, and majority will continue to the U.S. market, right? Yeah. Majority is to the U.S. market, but now we are extensively using the same setup to do regional extensive filings for EU and for rest of the world markets, regulated markets. We are only in regulated markets. Okay. My last question on India business. How much is acute sales as a total India business? Ajay, you have that number ready? Yeah, it's INR 118 crore. INR 118 crore. Okay, sir. 118. One one eight. 118. Yeah. Thanks, R.K Baheti. Sure. Thanks. Thank you. Our next question from the line of Chirag Dagli from DSP Mutual Fund. Please go ahead. Yeah, sir. Thank you for the opportunity. Sir, I understand there was some upfronting of the revenue in the fourth quarter last year, and now that number is low. If I look at the last three, four quarters average, then it seems like the base business is whatever $55 billion-$60-odd billion. Is that the base or is the Q1 $47 million odd that we reported at the new base? Pranav said in the previous call that $55 billion for U.S. is the base. This will remain. I understand. Okay, okay. Fair point. Sir, can you help us just broadly understand as we look into the next two years how would the scale-up of expenses go both above EBITDA and below EBITDA just broadly happen? See, there are few expenses, Chirag, which are beyond our control, and there are few expenses where we can have a significant amount of control. Now, expenses which are under our control, we are doing everything under the sun to contain them, rationalize them, make them more productive, make them more effective. Some of the expenses, and I'll give you an example, particularly in international business context, like freight costs. Now, freight costs, I'm sure you would have, you must be talking to multiple pharma companies, have gone up, almost, across the board. Not only India to U.S. freight costs, but even internal freight costs in U.S. has also gone up multiple times, not in terms of percentage. That is impacting us, and that's where we don't have much of control. Some expenses we can't predict. Some input costs have gone up because of this crude price being very high in Q1. Solvents and some of the material costs also went up. These are beyond our control. Operating costs, overheads particularly, we are trying to contain as much as is possible. Sir, my question was more about what we're capitalizing, and what you already spent on depreciation as well as the OpEx which we're capitalizing as these, some of these facilities come on stream, what sort of costs will hit the P&L is what I was trying to. How that's phasing out. When these facilities get into commercial production. Correct. What is the consensus about depreciation and OpEx? That will be in the range of INR 100 crore-INR 200 crore approx. Yeah, I mean around INR 180 crore-INR 200 crore of cash expenses, and then you will have another INR 150 crore of depreciation. This is still left to be taken into the P&L? Yeah. As for all the three plants. Sir, is there a way to, you know, sort of think about the phasing out of this? Over what period will this hit the P&L? Actually that will get capitalized as part of the respective assets. Okay, we'll have to carry an extra depreciation burden, but I'm not so worried about it at this moment. What I'm more worried is how soon we can bring the plant to operation and start generating revenue out of that. We are, like Pranav said, working proactively with FDA for resolving the issues of F3. F2, part of the asset is already approved by FDA, and part of it, we already started filing and inspection is already triggered. Let's see when the FDA visits us. Understood. My limited point was that, you know, we have INR 350 crores hitting the PBT. To generate that kind of, you know, gross profit, we probably have to do INR 500 crores worth of sales in the U.S. Is this understanding right that, you know, while the sales may, you know, take time to scale up, but the expenses will immediately hit, on a fully loaded basis, and will be upfronted? No, which is true. Largely what you say is true. Understood. Okay, sir. Thank you so much. Thank you. We have the next question from the line of Vaibhav Badjatya from Honesty and Integrity. Please go ahead. Yeah. Hi, sir. Thanks for starting the call today. I have two questions on the international business, and then I would like to ask you for the domestic business. On a U.S. oral solid part of the business, can you give me an idea of the possible gross margins in that business? I don't want to see the margins or, you know, what announcements you're making, but just broadly, range of gross margin in U.S. oral solid business. We don't give vertical wise margin break up. Yeah. What is for sure is that the margins have gone down because of the price erosions in the U.S. In terms of the price erosion that has happened in the U.S., b etween, in U.S. specifically, is it a different kind of erosion that we are seeing between chronic and acute products or some of the people we hear that the price erosion in chronic is less than acute products? Is it true? No. Actually, U.S. is a generic market, so I think you're seeing erosion across the board. There's too much supply and too many people supplying in the market, especially from India. Mm-hmm. Price erosion is across the board. Okay. Got it. Understand. I will come back Thank you. Participants who wish to ask a question may press star and one on your touchtone telephone. We have the next question from the line of Rashmi Agarwal from Dolat Capital. Please go ahead. Yeah. Thank you for the opportunity. One clarification on this INR 115 crores. How much is that sitting in the other expenses and how much is there, that is there in the depreciation part? Around INR 100 crores is in other expense and INR 15 crores is in depreciation. Okay. On your U.S. business, you know, this quarter we have reported $48 million and you are saying that the base business is around $50 million-$55 million. What led to fall of this extra $1 million? Is it because of anything, which is one-off or, you know, this is something which will continue in the subsequent quarters and this will become the new base? in the last quarter, Q1, I had said that I anticipate that around $50 million, maybe $55 million, depending on the situation, would be our base business. Having said that, the last quarter we did about $70 million in the U.S. That was due to some one-time buyers as well as we moved our 3PL, our distributor, a third party logistics provider, sorry, this quarter. That's why the buyers had stocked up a lot more. That's why last quarter the sales were higher, which led to a slower off-take in the start of the quarter for this quarter. Okay. You mean to say that from the second quarter we should come back to our bandwidth of around $50 million-$55 million? It depends. I think, seeing how the erosion also goes, in my opinion we'll be closer to $50 million because I'm seeing a lot more erosion in the market than I saw at the end of Q4. How much is the price erosion? Is it still in double digits for the LMG? Yeah. Could you just quantify that? Yeah. I would say it's in double digits. I haven't looked at it because it's a moving figure, so I don't keep looking at it. But I anticipate it'll be in low double digits. Okay. Any new launches which you are guiding for FY 2023? We launched five products in Q1. We anticipate to launch five to six in Q2 as well. For the year I think we'll be anywhere between 15-18 kind of launches. Okay. What kind of growth we will be seeing in the specialty and exclude segment in India business? Any guidance if you want to give? Also for this between price growth, volume growth and new launches growth. We don't give guidance that way, but what Shaunak has already said that we should. We are pretty confident about the market beating, you know, both on specialty and on acute, except for COVID-related products. Okay. The last question on gross margins. We were doing around 73%-74% gross margin. Lately, more or less, it was expected that it would remain in that range. I understand that due to the U.S. price erosion and due to the high costs, you know, which gross margins are 60%-70%. Anything which you can, like, let us know that, you know, month-on-month basis, the input costs are getting, you know, it's coming off and from the second quarter we are going to see any improvement from your end? Or you feel that, you know, this could be, you know, at least for the entire year? Very difficult to say at this moment. I mean, it will be dependent on multiple things, input costs as well as, the realization which I do. So I'm not putting a number as of now. Okay. Is it safe to assume that it would more or less remain in this range, only 70%-71% for the entire year? I'm making your own assumption. I'm I'm not giving guidance on this. Okay. All right. Thank you. That's it from my side. Thank you. We have the next question from the line of Nikhil Mathew from HDFC Mutual Fund. Please go ahead. Yeah, sure, sir. I just have one question. The last time I remember, there were some 150 approvals that had been placed and the company had launched 102, 105 products in the U.S. The remaining of the products that are yet to be launched, should we assume there's any commercial left or I think given how the situation is there in the U.S,. Is there any commercial left in those products? Generally with the market situation, as I said, we'll launch about 15 odd products this year. I think, some are awaiting patent expiry, so those we'll launch as and when the patent expires. Those are tentative approvals. The rest we will take, some are in the process of launching and some we chose not to launch because either technical issues or because of market situation. Again, on the gross margin front, it's very counterintuitive. If you look at the geographic mix of India in the overall mix, it has kind of gone up. Generally in many other peer companies, the margins in India are usually better than export markets. Can you kind of explain LMC and hence actually India growth or India higher share leads to the margin dilution? I don't know whether I have understood you right, but previous few years we did extremely well in U.S., backed by some very good products, realization. Our margins in U.S. Were much better. Of course, U.S. and India have a much higher percentage of R&D. Otherwise at the gross level, our margins, U.S. are very good. India margins are more or less like consistent and they remain except for some bit of maybe due to those COVID related disruptions in the year and are back. Otherwise, India margins remains more or less consistent. Okay. Your U.S. margins are one of the highest in the industry. I think there's a specific category because of which you generate such high U.S. margins at the gross level. Isn't it a big risk for Alembic? I mean, at 68%, 69%, you know, whatever 70% gross margin, no other leading company does this. I think it's a big risk going forward, especially when the economy is so bleak in the U.S. market. I mean, at the peak level when some of the products were doing very well in U.S., our margins have also peaked to 75%+. At that time I had said that the margins are not really sustainable long term and they will come up, and they are coming up. I mean, even if you say our margins are better than industry, I'll take it as compliment. Right. The past is, I mean, all credit to the company for what you guys have been able to deliver in the past. If I look at simply, is my expectation right that there can be more risk than tailwinds to your margin profile? It's very difficult to say because it's very difficult to predict the market, particularly the U.S. market. I mean, India market, as I said, is more consistent and more predictable, but U.S. is very difficult to predict, so won't really comment. We hope that sooner than later, U.S. also will stabilize at some point of time. Also, what I think is you have to. One thing is the U.S. is the largest market in the world, and it is a market that we cannot not be a part of. It's a great market to be a part of. I would say that you have to look at it a little bit more in the long term. If you see our last 10-year track record, the profit and the revenue growth has been quite exceptional. I think over 25%, almost 30% profit, 25% in terms of top line. Yes, the U.S. does move, and the move is a little cyclical. I think it's an interesting business. You cannot not be in it. Okay, sir. Sir, what is the currency transaction impact? Where would that be sitting in OCI? Because I don't see any major gains at least in other income. How is the currency accounting played out? Generally rupee depreciation has been favorable or good for pharma companies. We are also net foreign exchange earner. Generally it has a positive impact. Can you quantify this, like how much of contribution is there from currency? We don't because a part of it was hedged. I mean, like we said, 34% of it, we hedge on a regular basis. The balance remains open. I think we would have got some benefit out of it. Okay. Thanks a lot, sir. You're welcome. Thank you. We have the next question from the line of Harith Ahamed from Spark Capital. Please go ahead. Good evening. Thanks for taking my question. First one is on the F3 facility. You mentioned that validation activities are underway. In your assessment, will this facility require a re-inspection before it gets cleared by the FDA? Regarding F2 and F4 facilities, do you have any expectations around inspection timelines for these new facilities? F3, I believe it would require an inspection, but let's see how it goes in terms of the FDA's how they assess all the results and we've been updating them on a monthly basis. I believe it will require a re-inspection. As regards F2, the oral solid part is already approved by the FDA, so there's no issue there. The injectable bit, we file some products, so we should consider a filing as and when the FDA increases their audits, which they already have. I think we should have them visiting us for an audit as well. F4 also we have filed. I think wherever in the priority list of FDA, this will be a little later, so I don't think that'll happen this year. Okay. That's helpful. My second question is on margins. I'm looking at margins adjusted for the one-off R&D failure, that's around INR 100 crore, which is above EBITDA. Margins are at around 10%, slightly below 10%, while we were at a closer to 20% number through most of last year. How should we think of the recovery in margins from this level? And maybe some color on how the recovery would play out over the next few quarters. Margins could stay under some pressure if the realization from U.S. improve. While we are doing everything possible under our control to do some cost rationalization, they will have only a smaller influence on margin. I think we will bank on U.S. doing better for the improved margins. Sir, while we are expecting a recovery in the U.S. in the coming quarters, over the next three to six quarters, we'll also see these additional costs, which are getting capitalized now. So that could also mean further pressure on margins from the current level, right? I said, once the new facilities becomes operational and, as an earlier participant also mentioned, initially the revenue will be lower and expense will be higher, there'll be a pressure on margin. It's like any growth, you need to sustain a higher cost in the transition period. That is how you grow the business. Okay. Last one, if I may. You've commented on the intangibles write-off earlier. You mentioned that the write-off returns to reflect the current market conditions. Just thinking about the adverse market conditions pertaining to the U.S. generic market, does this also imply that we will have a rethink on our future CapEx as well as R&D spends to the U.S. market? Because the way I when I look at the numbers, our normal R&D spend continues to be around that INR 150 crore level on a quarterly basis. Now that you're seeing the market conditions turn adverse, will we have a rethink on probably lowering the spend to reflect the more challenging environment there? Yes, you're absolutely right. I think the way we're approaching the U.S. is two things. One, on the CapEx side, all these new plants we did were new, essentially new capability that we did. So I don't expect, anticipate any new CapEx, large CapEx, really new facilities coming up for the U.S., moving forward. At the most, we may have some incremental CapEx or maintenance CapEx. We may increase some APL capacity. On the formulation side, we will not do any CapEx for the new facilities. As regards the R&D, yes, we're constantly evaluating that as well. How do we rationalize the R&D spend as well moving forward? Because the returns in the U.S. are more, we'll rationalize it by either looking at other territories or in terms of other verticals. Now, this R&D that you see is not just OSD, but it's part of it includes injectables and the other verticals as well. This will help the new plants ramp up upstream faster as well. Okay. That's all from my side. Thanks again for the opportunity. Thank you. Thank you. We have the next question from the line of Bharat Celly from Equirus Securities. Please go ahead. Yeah, hi, sir. Thanks for the opportunity. Sir, I just wanted to understand on product called formoterol. I believe you have already launched that. I just wanted to know how you are seeing the traction in that product and whether we have seen any adverse finding in that drug. Anything you can comment on the overall outcome of this drug since launching? Yeah, it's a good product. It's we have launched it. We've got some share as well in that product. I think it's got a little lesser competition, so let's wait and see how it goes. It is from a CMO, so we're slowly, gradually picking up more share as we get as we have more footprint in the supply chain. What sort of market share we will be reaching in this product at this point? It depends, right. I think we must be around 15% or so. I think it's 14%-15% or so. Sir, we are referring that we'll be having around $50 million in the U.S. market. That guidance will increase this year? Yeah. What's happening is base business, it started including these new products because some old one has gone back down and, this is there. In that, I'm including this as well. Actually, I'm trying to understand one thing, because this drug is almost like $300 million drug for IMS. Then only these are two generic therapy, and yet the IR base number in that case ex of this drug might be much lower. I don't know if this is what exactly is happening in that and whether formoterol is relatively still a sizable chunk for us or not. It is very difficult to get clarity on that. Two things. One is we don't give product wise breakup. You have to realize that what the reported figure is, it could be gross sales versus what everyone looks at as net sales. You have to see that differentiation, which is not necessarily captured all the time in IMS. That's why you're feeling that it's a much larger project, product than it is. According to you, what will be the net sales of that drug, if you can provide? I don't, as I said, we don't give product wise guidance on the sales of a product. I was referring to the overall market. Okay. As an industry, I would say, net sales will be about 20%-40% or so, 20%-30% depending. 20%-30% of $300 million. Of whatever the gross sales are. I'm giving a range for an industry-wide product. Okay. Sure. Thank you, sir. Thank you. We have the next question from the line of Akshata Rane from Green Portfolio. Please go ahead. Ms. Akshata, can you hear us? Hello? Yes. Thanks for the opportunity. My first question is related to CWIP. As there is CWIP of INR 200+ crore as on 31st of March 2022. Can you please share that potential and when are they scheduled? Can you repeat the question? We didn't get you. Yeah. My question was the CWIP is of INR 2,200 crore as of March 1, 2022. Yeah. Can you please explain what it pertains to and any other projects from you? We were discussing, Akshata. We have these three facilities which we have built. F3 was for injectables. F2 is oncology oral solid as well as oncology injectable, and F4 for new formulation facility. All of these are CWIP because none of them has gone to commercial production yet. Okay. Also, can you please share Aleor EBITDA% and Alembic's EBITDA% without Aleor? Well, it's there in the results itself. I mean, we have doubts on some. It has fallen at about 10% or even less than 10% EBITDA without Aleor impact. This might be naive of me, but could you please share why the acquisition payable of INR 2 crore as on 2022 doesn't show any change in the revenue? I understand that Aleor was a company with 60,000 stake. Sales should have been added to bottom line, right? That company merged itself. We had acquired the balance 40% and now it's a 100% subsidiary. Currently, we are in process of merging Aleor with Alembic Pharma and the matter is with the honorable NCLT and other ones. Okay. We have no further questions. I would like to hand it over to the management for closing comments. Yeah. Thank you everyone for joining this call. It's a pleasure and learning to be interacting with all of you and we look forward to interacting with you again in post Q2 results.