Ladies and gentlemen, good day and welcome to Alkem Laboratories Limited Q4 FY23 earnings conference call hosted by Motilal Oswal Financial Services Limited. 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 then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sumit Gupta from Motilal Oswal Financial Services Limited. Thank you, and over to you.
Thank you. Welcome to the Q4 FY 2023 earnings call of Alkem Laboratories. From the management side, we have Mr. Sandeep Singh, Managing Director, Mr. Rajesh Dubey, CFO, Mr. Amit Ghare, President International Business, Mr. Yogesh Kaushal, President Chronic Region, and Mr. Amit Khandelia from the finance team. Over to you, Amit, for your opening remarks.
Thank you, Sumit. Good afternoon, everyone, and thank you for joining us today for Alkem Laboratories' Q4 FY 2023 and full year FY 2023 earnings call. Earlier during the day, we have released our financial results and investor presentation and the same are also posted on our website. Hope you have had a chance to look at it. To discuss the business performance and outlook going forward, we have on this call the senior management team of Alkem. Before I proceed with this call, I'd like to remind everyone that this call is being recorded and the call transcript will be made available on our website as well. I would also like to add that today's discussion may include forward-looking statements and same must be viewed in conjunction with the risk that our business faces.
After the end of this call, if any of your queries remain unanswered, please feel free to get in touch with me. With this, I would like to hand over the call to Sandeep Singh to present the key highlights of the quarter gone by and strategy going forward. Over to you, Sandeep.
Thank you, Amit. Good afternoon, everyone. I will talk about key operations and strategic highlights and then leave the floor open for Q&A. On the domestic front, during the year we have done exceptionally well on launch of new products. Contribution of new introductions to our growth was 3.1%, significantly surpassing the industry, which is at 2.3%. We had some very encouraging new launches during the year. We launched Dapanorm Trio in antidiabetic therapy and are ranked number one in this molecule. We had one of the most successful launches of sitagliptin in this year in an extremely crowded market where there are more than 50 players. We rank among the top five in this molecule. We also launched Sacuval in January of this year which came after Vymada went off patent.
We are among the top players in this molecule as well. When you consider this fact against the background of we not being among the top 25 in cardiac, this is a good achievement. We look forward to carry this momentum of market-beating performance of domestic in the domestic franchisee in the following year as well. During the quarter, there was an exceptional item on account of impairment of assets, which has impacted profit before tax to the tune of INR 103 crores. We have taken a call to discontinue a Saint Louis plant which was meant for controlled substances due to the structural changes happening in the U.S. market. We understand that our EBITDA margin for the quarter and year is subdued and we are working towards that. With this, I would like to open the floor for questions and answers. Thank you.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star 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. The first question comes from the line of Mitesh Shah from Nirmal Bang. Please go ahead.
Thanks for taking my question. My first question is regarding the discontinue of this plant. What would be the operational benefit because of this the impairment which we have done and the discontinued the plant?
I think there are some financial benefits. I will let our CFO answer that, but Mr. Dubey.
Yeah. We expect to save our operating expenses to the tune of INR 100-INR 110. Just have in your mind this year, entire INR 100 crore or INR 110 crore is not going to come because we may continue this plant for another month or two.
Okay. It would be like a 10 months of benefit we'll see there, this particular year.
Eight, nine months you can say.
Got it. W ith this restructuring, how do we see the margins going forward? Because this was one of the tough year for margin definitely.
Mr. Dubey, you can.
Yeah. Margin, actually in fact in our last call, our MD, he has already given guidance on margin front. We'll stick to our commitment and we'll definitely add 200 basis points over what we have right now. I think we have to be somewhere close to 16% kind of situation.
Got it. The our other international markets growth are remain strong. What would be the reason this quarter and how would we look at going forward other international market growth?
Mr. Amit Ghare, if you can take that, please.
Sure. Thank you. We've been focusing on a few key geographies over the last few years, and that's now kind of paying dividends. Actually has been paying dividends for last several quarters. We'll continue on that pathway. As our business reaches a certain size and scale, the percentage growth may come down. You know, overall as a company, in any case, we are focusing on quality business and margin business rather than chasing revenue. You'll notice the business continuing to grow, the rate of growth may come down, though, going forward.
Got it. Sandip, about the U.S., what about the pricing scenario over there? It would be reduced to a single digit or still it would be a double digit price erosion for us?
Amit, you could answer that, Amit.
Sandeep, do you want me to answer?
Yes. Yes. Yes.
Okay. Thank you. During the entire fiscal year, the deflation was in double digits for us. I understand your question is whether it will come down to single digits. In Q4, we saw a bit of a ease on the pricing side. We continue to have a pricing deflation. Going forward, will we end up with single digits? I think we are definitely hopeful that it will be in single digits for FY 2024.
Got it. Sandeep, just last few quick questions. What will be the tax rate for 2024, 2025?
We'll be somewhere around 14% kind of effective tax.
This particular year we closed with the high tax rate. What is, what will be the reason for that? I think effective tax rate itself is 21%.
In fact, we talked about one exceptional item. There is another exceptional item in that, and that is in tax. Deferred tax assets to the tune of INR 100 crores, we reversed in this quarter four and YTD March 2023. That is the reason why you see our effective tax rate on higher side. For next year, we will be 14% for or 14.5% kind of.
Got it. Thanks. That is from my end.
Thank you. Before we take the next question, a reminder to all the participants, please restrict yourself to two questions. Next question comes from the line of Rashmi Shetty from Dolat Capital. Please go ahead.
Yeah, thank you for the opportunity. One question on other expenses. You know, if you exclude R&D expenses, your SG&A expenses is pretty high, quarter-on-quarter, as well as year-on-year. Any specific reason for it? And how do you see ahead in FY 2024?
Rashmi, you are very right. Your observation is very correct. Especially Q4, it was on higher side because just immediately previous year to this year, our marketing expense, it was muted to certain extent. We kept on engaging around 1,000 sales guys every year in last five years. Our sales and marketing expense, definitely it was on a higher side. Particularly conference expense, actually first time we got opportunity to have conference in a bigger way. That was the reason. Going forward, on other expense front, we expect somewhere around 23.5%-24% kind of situation. That is really a normal situation in our case. Obviously, this time it is on the higher side.
You mean to say that other expenses, including your R&D, would be in the range of 23%-24%?
You are right.
Okay, for FY 2024. When you are saying that, you know, there would be a 400 basis improvement in the EBITDA margin, I understand that, you know, we might be seeing some softening in the input cost and the freight has also come down. What are the other factors that would lead to this kind of expansion in FY 2024? I mean, if you can just give us like, you know, 200 basis point where all we can achieve.
Yes. Dubey, you can go.
When we talk 200 basis points, we talk consolidated. Of course, it's not any single lever of addition to ultimate EBITDA margin. Definitely softening of API price is one of it. In last call also, managing director, he detailed we are working on so many cost optimization drives. We believe we'll be able to achieve our expectation. Operating leverage is another thing. Manpower, what we have added, that is going to pay us going forward. Our internal working, it shows us we will be able to achieve 200 basis points.
Okay. That includes by saving the expenses to nearly INR 80-INR 90 crores, you know, from this plant, right?
Yes. Yes. Yes.
Okay. My second question is on India business. What was our trade generics contribution as on FY 2023? What was the growth for the entire year? How do we see ahead in FY 2024 and 2025?
The trade generics contribution to the business is, 21% now, for the entire year.
Okay. What is the growth in FY 2023 only in Trade Generic?
Is around 5%.
5%.
Around 5%.
How do we see ahead in FY 2024, 2025?
You are talking only trade generic or talking about?
Only trade generic.
Almost similarly.
Similarly. Okay, sir, I have more questions. I'll get back in the queue.
Excuse me. Let me correct myself. Trade generic will be close to double digit.
Close to double digit. Okay, low double digit you mean?
Yeah, yeah, low double digit.
Okay, that would continue to grow in that range only.
We are hoping so that that will continue to grow in that range.
Okay, sir. I have more question. I'll get back in the queue.
Sure.
Rashmi Shetty, just to clarify, you said 400 basis point improvement on EBITDA margin. It's not 400 basis point, it's 200 basis point improvement over FY 2023.
Yeah. 200 basis point only I asked.
Yeah.
From 40%-16%.
We understand. Wonderful.
Yeah. Got it, sir.
Thank you. Next question comes from the line of Kunal Dhamesha from Macquarie. Please go ahead.
Hi. Thank you for the opportunity. The first one on the plant saving that we have done, would you be able to provide some color as to which line item this INR 80-90 crores will flow in? Secondly, is there any severance related costs, etcetera, which is there in this quarter or expected in quarter one?
Yeah. When we say OpEx, actually it will go line by line. Something will go in personal cost, something will go in other expenses. It has to be all across because we, as per, as per our reporting norms, whatever hits we have, it is going to go all across. Let me, let me just correct our understanding. This INR 100 crore kind of saving is annualized. This year, we expect we'll be able to save at least for seven, eight months. Accordingly it will come down. Whether it is INR 60 crore or INR 70 crore, time will say. Our estimate is for seven to eight months.
Correct. Will there be any, you know, cost, one-time cost associated with it, like severance, etcetera? I think in U.S., you know, we have to pay.
We are considering without factoring that. We're telling you net.
Okay.
Yes.
Okay. INR 100-INR 110 is net on an annual basis. We are expecting INR 70-INR 80.
Yes. Yeah.
Perfect. I think our employee expense on a quarter-on-quarter basis, I think has come down little bit. Is it more, you know, because of the accounting where you would have provided more bonus, etcetera, incentives earlier or something? Or is it something that the base is and we, you know... This is a new base of INR 500 crore. Earlier we were around INR 525 crore, and before that INR 570 crore. Is it?
There was some rationalization in manpower in R&D and manufacturing because of certain pressures we have.
Basically INR 20 crores is the quarterly saving and which should continue going forward in your view?
No, no, it's not that much at all.
Oh.
You know, like lopsided this quarter because there was a severance pay in the last quarter, so therefore you're seeing a lumpiness over here. You could say a INR 10 crore saving because of this every quarter or more.
Mm-hmm. Okay. Perfect.
Yes.
Lastly on the trade generics, I think, you know, sir said that trade generics is around 21%. I think as far as I remember last year it was around 22%. We have, you know, trade generics has grown at double digit and versus our India business has grown at around 7.8%.
No, no. We didn't say trade generics grew by double digits. We said for next year. For this year, that is. The question the lady asked Mr. Agarwal was on last year.
Okay.
We grew by single digits over there in trade generics.
Okay. Single digit.
Yes.
Perfect. Now we would be more or less in the Rx like whatever, prescription business, India business growth more or less in line with that.
Yeah. Maybe. Maybe a bit more.
Is that a fair assumption?
Yeah, round about that.
Okay, perfect. I have more question. I'll get back in the queue.
Yes. Thank you.
Thank you.
Thank you. Next question comes from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah. Good evening. Thanks for the opportunity. First question on gross margin. Last few quarters you've talked about U.S. pricing pressure, etcetera. This quarter the U.S. contribution is also lower, but still the gross margin is still muted. Is it got to do with the high raw material prices which has still not come down or there is more to read into it?
No, you're right, Prakash. Actually, material which we procured earlier ultimately we consumed in this quarter. In short, I want to say whatever we sold in this quarter, it was manufactured against material which we procured in earlier quarter when prices were on higher side. Second, let's have in our mind this NLEM, it came in quarter four. NLEM is also having impact on this gross margin if you are referring quarter only.
Mm-hmm.
When you see annual for the year, yes, pricing pressure in U.S. market and depletion in prices there, that is a major contributor. When you see quarter closely, DPCO and then higher, material cost which we procured in earlier quarter, we consumed in this quarter.
Are we done with using old, high cost inventory and from first quarter we will be with the low cost inventory or how do we think about it?
Even today also we don't see material prices coming in line with pre-COVID level. Pen G kind of material, they have started showing positive trend. I think it takes normally three to four months because you procure and then you manufacture and then you sell. Impact is going to come.
Maybe second quarter onwards we will see the raw material price benefit.
Yes. I believe so. The second quarter onwards, it will be getting softening a little bit.
The second piece you said the NLEM impact. We must have taken price hike in April, so that offset should be seen in Q1 or that also we will see from Q2?
No, no, Prakash, in, uh, uh, when you have material, normally, uh, even finished goods also we keep for one and a half or two months. So, uh, even though you implement NLEM or you take, uh, fresh batches in the month of April or May, it takes, it takes little bit time to get consumed your ear-earlier manufacture and then your new product is going to go in market. So, uh, approximately around three months it takes, uh, in this entire process. So I think, uh, by June we'll be starting, uh, of taking advantage of, uh, price increase. But again, it will be second quarter when everything is going to come.
Okay. Perfect. Understood. One clarification on, you know, the comment made. Earlier we were looking at 15% EBITDA margin. We came at around 14%, and we had talked about 200 basis points. We are talking about 17% EBITDA margin for 2024 or 16% EBITDA margin?
16%, Prakash. 16%.
Okay. Okay. Understood. Lastly, on the U.S. sales, so how should we think about it? Do we see the impact due to closure or the products which we are manufactured already outsourced to CROs, or how should we think about U.S. going forward from here?
Sorry, Prakash, I didn't get your question. On what parameter, like do you mean, Prakash?
In terms of sales, you had the exit run rate of say $70 million. With the plant shutting down, do we see some impact of some business-?
No, no, Prakash, because... I'll let Mr. Amit Ghare elaborate. This plant was not contributing more than 2%-3% to U.S. anyways.
Okay.
Going forward also it should not impact. Yeah. Amit, you have comments, please go ahead, Amit.
No, you're right. In fact the contribution was less than 2% on the revenue side.
Mm-hmm.
The revenue loss is very marginal. Overall we are expecting a small growth in the U.S. business in dollar terms and up.
Growth on the base of fiscal 2023.
That's correct. Overall.
What's the MR count as on fiscal 2023, sir?
Team force?
Okay, Yogesh, MR count. MR count as on date.
As a company, we are around 12,000 overall as a organization.
12,000 MRs. This is with the managers or just the-
This is without managers. This is only representatives.
With the managers, sir?
Around 45% odd is the managers to the representative. All managers put together, right from area manager to the sales heads.
You have to load 45% on 12,000.
On managers, yeah.
Okay. That would be a big number.
Sorry?
It is, it is a big number.
It is a big number. Yeah.
5,000 people. About 17,000 people we have on the field plus managers.
Absolutely, yeah.
Okay.
At a group level.
Yeah.
At a group level. For sure. For sure. Okay, I have more question. I'll join later. Thank you.
Thank you. Before we take the next question, a reminder to all the participants, please restrict yourself to two questions. Next question comes from the line of Damayanti Kerai from HSBC. Please go ahead.
Hi, good afternoon. Thanks for the opportunity. My question is on specialty business, specialty portfolio in India. Obviously you have done very well in anti-diabetic space. Cardiac is something I believe where you are lagging versus the market growth. If I remember correctly, you mentioned, you are planning for some change in strategy, et cetera.
Correct.
Can you update on cardiac part because that again is a big market. How do you see specialty portfolio growing as part of your India business in say next three to five years?
You have two questions. One is about the cardiac and second is overall specialty. Am I right?
Yes. Yes, yes.
Yeah. See, let me answer first cardiac. I mentioned about slight change in our strategic approach towards cardiology. We initially were focusing on niche product, I repeat again, because we were focusing too much on anticoagulants and antiplatelets, which are little difficult and niche market. What we have done in the last quarter is we are focusing more on mass-based cardiologic products, which are your antihypertensives and lipid regulators.
We will be focusing more and we are seeing results there. Last quarter the cardiac growth was close to 1.8, and this quarter it has reached almost 5.5, while the market is growing at 8.5%. We are almost touching the market growth in cardiology, and this will take little time, but the strategic approach has started yielding results. This is how the cardiology will be placed.
That doesn't mean that we'll not focus on niche, but the larger focus will remain on mass products, mass usage molecule. Overall specialty, yes, diabetol, almost all newer molecules which are being off patent we are targeting. We have launched Dapa, Vilda, Sita. All these are launched. Various combinations of will be launched. We are currently leading almost we are amongst the top five in all these categories. Diabetology we are strengthening and we are going strong. We are currently 15. And we hope that in another two, three years, we should be amongst the top 10. In CNS, we are already ranked 7th, and for the month we have now, we are among the top five. My expectation is, you know, we should consolidate and CNS in a year or two, we should be on a...
annual basis also we should be amongst the top five. Dermatology and urology we are consolidating. We are growing 2x to 2.5x faster than the market. Fifth is our cardiology, where we are almost touching the market growth. I assume maybe two quarter more, we should be able to surpass the market.
Compared to your anti-infective growth, which is major part of your India business right now, once you sort out some of these issues in cardio part, we should assume that specialty will be growing much faster than the acute portfolio?
Yeah. That is you know, currently also is happening.
Yeah.
Chronic is currently growing at around 21%-22%, while acute is growing at around 7%-8%. Chronic is sustaining a growth level of around 21% versus market of around 10%.
Okay, sir. I misunderstood. Related question to in the overall, this year, obviously, Sandeep mentioned in his opening remarks that contribution from new launches were much better versus your own historical performance and against the market. Say for 2024, how much we, or how should we look at growth drivers, say volume, price and new launches for the India part, overall India business?
See our, while the industry still shows a muted growth of unit, we are still very bullish that as a company we should be able to drive a double-digit unit growth. We will have major growth driver this year will be unit and a marginal, you know, contribution will come from NRE and from the new products. Larger will be volume-driven growth.
Okay. My last question is on your R&D. R&D obviously, we continue to see uptrend in recent quarters, because of your progressing pipeline products, et cetera. How should we look at this number in, say, 2024 and beyond as a percentage of sales?
5% to 5.5% . We have always maintained that. That should be what it would be.
Okay. It will stay within that data range.
It will stay within that range, yeah.
Okay. Thank you. I'll get back in the queue.
Thank you. Next question comes from the line of Kunal Randeria from Nuvama. Please go ahead.
Hi. Good evening. I think you mentioned double-digit growth for India in FY 2024. I'm just wondering, you know, which therapies do you expect? Because it's unlikely that gastro or, you know, pain could repeat the kind of, you know, high teens growth that you reported this year. Just wondering where the growth will be coming from.
Yes. See our acute, we said as a company will grow at a double digit, right? Early double digit, which means around 11 times, 10%-11%. We still expect acute to continue to grow at around 8%-9% growth. Chronic will sustain a growth level of 22% types. As a company we will continue to grow at around 10%-11%.
Okay. Fair enough. Secondly, I still don't completely understand your, you know, margin guidance. I understand it's 200 basis points and we expect 16% margin. Last time around we had guided to 17%. See, in the last three months, I guess you have had some tailwinds from lower input costs, you know, that will benefit you in the coming year. I think freight costs also would have come down plus the St. Louis plant where you're expecting some 50-60 cross savings coming this year. There have been more tailwinds than headwinds. Still, you know, your absolute margin is coming from 17%-16%. Is the cost of business actually going up? You know, maybe a normal cost, you know, the savings are really not there.
I think, see, first thing, you know, these things don't happen overnight. Obviously we had anticipated St. Louis closure even when we spoke to you all last time. We were not sure when we will do it, we obviously knew. All that was factored in when we said it will be a 200 basis point increase. RM going down, the stuff you said, obviously Mr. Dubey answered that previously. For it to kick in takes time. Those benefits will only come going forward. We were a little aggressive on the marketing side this quarter on sales and marketing. Our G&A expense was like up, still up by what we thought we would be by INR 30-INR 40 crore. Yeah, I mean, what specifically do you think is kind of not very clear to you?
My, my question, Sandeep, is just that, see, I mean, prior to COVID, you were doing somewhere around, let's say 18% kind of margin, right? 17%, 18% kind of steady state margins, right? The fact is that maybe next year it will be 16%, year after that maybe 17%, 17.5%. It seems that, you know, to generate every INR 100 of sale, the OpEx has actually gone up significantly.
No.
Is my understanding correct?
No, I'm not sure. See, I think the gross margins have come down if you compare to pre-COVID. Look at the cost of ciprofloxacin like Tianjin, China, we all keep hearing. You have to look at us differently. We are one of the few companies who have a very high acute portfolio. When you compare to others and all, it might not be apple to apple. It's basically because our iron cost has gone up. I think we have lost 100 basis points there, but Mr. Dubey can, you know, guide me better there. It's mainly because of that. Cost of business has gone up. In a way, it's right, but only because of gross margins, not that we have any operation challenges and things like that. Yes.
Got it. Just 1 more if I can squeeze in. I think the St. Louis plant closing down seems like a welcome step. In terms of, I think, to improve the U.S. margins, I think the product launch quality also plays a very important role. Would you like to maybe point out the kind of launches that we should expect in the next couple of years that can really improve the U.S. gross margins?
I'll let Mr. Amit Ghare answer that.
Kunal, we've always focused on quality than quantity. We've never launched, you know, more than 15 products in a year. Our, you know, focus going forward will remain launching better products, filing better products, and obviously launching better products and launching on time. That is also very important. That's where we're focusing on that.
Okay. Fair enough. Okay. Thank you very much.
Thank you. Next question comes from the line of Madhav Marda from Fidelity International. Please go ahead.
Hi. Good evening. Thank you so much for your time. I have two questions. First, this is just ask for the early participant. I think, this year, especially towards the end of the year, there was very good benefit for anti-infectives and respiratory from very strong flu season, I think, in large parts of the country. Do you think, given we have a decently large anti-infective, does that create a tough base for us as we go into 2024?
Your voice is not clear, but whatever I understood, you are saying that last quarter the anti-infective growth was very good and do we expect similar trend for the next year? Is this your question?
No, I'm saying does that create a tougher base for us next year given, you know, I'm not sure if such a strong flu season will repeat again?
This year was a bad year, I think, for anti-infectives.
No, I'm just looking at the Q4 growth. Seems to be 20% last time.
Yeah. No, the quarter four is unlikely to continue because particularly respiratory pain, these benefited because of flu. That certainly will not continue in the next year. Unlikely, because those kind of predictions is very, very difficult to make. Flu benefits will surely not be there next year. That's what we foresee.
Got it. Got it. Just, secondly, our tax rate is quite low at 14%-15%. When do we expect that to normalize, the tax benefits that we have, maybe at some facilities, when does that normalize for us? What does it normalize to and by when?
Madhav, that is good thing. Our effective tax rate is on lower side. actually.
Organize that.
Yeah. We have this tax advantage for our SEZ facility till March 2026. After that, definitely, effective tax is going to be in normal. We'll see whether to go with old regime or new regime. That is our point of discussion, but it will become normal. Yes, of course, we do have a lot of MAT available with us, which we'll be using going forward. On cash front, we still will be having advantage after that also. Am I able to clarify you?
If it's so, for the P&L tax rate would move to the normal 25% most likely, FY 2027 on those P&L.
Yeah. I said we will evaluate whether to remain with old regime or new. It will depend. Yes, till March 2026, we'll be having this tax advantage for SEZ facility. Till that time, our effective tax rate is going to be lower. It may be lower than MAT, 20% also. Definitely it will be lower than normal tax.
Okay. Okay. Yeah. Thank you.
Thank you. Next question comes from the line of Saion Mukherjee from Nomura Securities. Please go ahead.
Yeah. Hi, good evening. Thanks for taking my question. Sir, can you know, mention about, you know, margin expansion, you talked about, you know, three, four levers, softening of API prices, cost optimization and operating leverage. The discussion that we had after that appears that a lot depends on the way the API prices move. Is that a right assessment? What is the kind of, you know, gross margin expansion that, you know, we are factoring in for next year?
We have in our mind our margin closer to 59.5%. That's that kind of expectation we have. Going forward we have considered this gross margin in normal scenario. If something happens and our raw material prices, API prices or any excipient or packing material prices is increasing abnormally, then we need to see what impact is coming on account of that. That much we need to see. In normal situation, we expect we'll be somewhere 59.5% for coming year.
Okay. Because there are a lot of moving parts, due to the U.S. business, the price erosion that we have seen, I'm just wondering if you can, you know, state what kind of profitability is there for your domestic business. Let's say for FY 2023, and how does that compare to, say, FY 2020, which was a pre-COVID year.
Saion, actually we never segregate and give different margins for our different segments. You also know domestic is enjoying better gross margin and better profitability. I think as far as comparison is concerned, that we may take offline also.
Okay. You know, like next year you're guiding for 200 basis points, you know, which would take it closer to 16%. I mean, as things normalize going forward, you sort of, you know, focus less on U.S., India grows, you push higher volumes, maybe marketing expenses are higher. Overall, if you put all that together, where should this EBITDA margin stabilize with your business model, let's say three, four years down the line?
In four years down the line?
Yeah.
Yeah. Four years down the line, maybe close to 18, 19, around that time frame. There's a lot of moving parts, so let's take it year by year, honestly. Yeah.
Okay.
Yeah.
Well, that's helpful. Thank you.
Thanks.
Thank you. Next question comes from the line of Abdulkader Puranwala from ICICI Securities. Please go ahead.
Yes, sir. Just couple of clarities. I mean, did you mention that in Q1, you'll be taking some hit on account of the severance payment, for the St. Louis plant closure?
No, no, we did not say that. We said that whatever is taken care in the past because some people have already been kind of laid off. Yeah. We did not allude to that in Q1 there would be some severance.
Okay, got it. Secondly, if I refer to your cash flow statement, it refers to an issuance of preference share, which is net of an inflow of close to INR 161 crores. Where does this reflect on the balance sheet?
Abdul, you're talking about this PE investment in Enzene, and you want to know where it is appearing in balance sheet.
Okay, okay.
No, I have not replied. I was just asking whether I'm understanding your question properly or not.
Yes.
It is classified as equity instrument, and it is just below equity.
Under the non-controlling interest
Appearing under debt, considering other obligation, aligned with it. When you see our balance sheet, it will get reflected as, under other financial liability.
Okay. Okay, sir. Got it. Thank you.
You must not be having our detailed grouping-wise balance sheet. When you refer our consolidated balance sheet, it will appear under other financial liability.
Sure, sir. Understood. Thank you.
Thank you. Next question comes from the line of Punit Pujara from Helios Capital. Please go ahead.
Yeah, hi. Thanks for taking my question. My question was on Enzene Bio. What was the revenue and EBITDA we generated for the full year?
Sorry. Okay. For Enzene, okay. Yeah. For the year 2022, 2023, on biosimilars, total revenue we have somewhere around INR 160 crore, kind of.
sir, absolute EBITDA?
EBITDA we are, still because R&D.
Mm-hmm.
-is sizable. When we see on business level, it is breakeven. right now, after taking R&D spending, there will be still losses in that. We are not talking on EBITDA right now. We'll be talking from 2024 onwards.
Sure, sir. In past we have said that we'll be incurring close to INR 100 crore investment in Enzene. Is that run rate likely to continue going forward?
Yeah.
Sure. Can you update on denosumab and tocilizumab clinical trials? I think you have guided for denosumab filing by calendar 2024 end. Are we on track for that?
Yeah, we are on track for that, for on denosumab.
Sure, sir. What would be the current stake in Enzene after this fundraising on fully diluted basis and what's the use of the funds that you have raised?
We have given option to them to get converted to 8%. Remaining 92% a small portion, it may be under reserve or. Rest of shareholding is with Alkem underway.
Sure, sir. The use of the funds?
Sorry, use of funds. Funds use.
Use of the funds.
Enzene is going to use this fund for U.S. equipment because we for biosimilar, we have aggressive U.S. plan as well. CapEx is going to start from this year. It will be used for business and more particularly for U.S. business.
Sure, sir. That answers my question. I'll join back the queue. Thanks for taking my questions.
Thank you. Next question comes from the line of Saad Sheikh from BOB Capital Markets Limited. Please go ahead.
Thank you for the opportunity. My first question is, do we have any direct sales to hospitals, and if yes, what would be the percentage? The related question is, with the recent federal government order of curtailing MR activities at the hospital, do we envisage any impact because we are acute heavy, so would that have any impact? Also, with our recent MR edition, will we be re-looking at after this? Thanks.
There's a lot of echo in your voice, the question was not clear. What I understood was you are asking about our hospital business and what is the percentage. Normally, our hospital business are more of a corporate in nature, so we don't participate much in public hospitals. Corporate hospitals, yes, we have. You know, this is around, in a range of around 6%-7% to 8%. Yeah, just the corporate hospitals. We don't really participate much in government tenders.
Okay. That answers. Thanks.
Thank you. Next question comes from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Actually, thank you very much. Sir, on the raw material cost, is the pressure during the year largely on account of the higher benzyl prices? If there is any sense you can give us in terms of what the portion of our raw material is around the benzyl and really derivatives.
So the-
Benzyl. Asking how much your raw material is benzyl impacted.
Benzyl is used in so many anti-infective APIs. Our anti-infective, as you know, we are the leader in that. Around 40% of our portfolio is for anti-infective. You can understand benzyl is a major contributor to overall API cost in that. As far as movement is concerned, yes, we saw prices getting a little bit softened. I think nowadays, it's going somewhere close to $30-$34 kind of situation. Earlier it was quite high, and that was pinpoint.
What has been the normalized pricing you've seen on benzyl versus $30-$34, which you think right now versus maybe a couple of years back in a, in a more sort of, when things were more normal on the benzyl pricing front?
Uh.
That is the question. He's asking what is the normal pricing.
Normal. It was like $8 even two, three years back. Difficult to say now what, whether it'll go back then, when will it go back. We don't know.
Actually when you're looking at this, as benzyl as a product, for us going forward, I mean, given what you're picking up from the market, what is the realistic level you see this thing probably settles at a more normalized manner?
We don't know honestly. That's what we just said. We cannot predict. Very difficult to say that.
I mean, typically, how does Alkem go about handling this? Because a large component of our raw material. I mean, just as curious, I mean, if you can give any sense on how do you, how are we looking to handle this volatility on the benzyl side?
Obviously benzyl is, from benzyl we make up, you know, we buy the API, we don't buy benzyl, point number 1. Benzyl is an input for a lot of our API suppliers. Now, obviously we have some norms where we think the price will either go up or go down. We kind of, we stock up when we're thinking our prices are going up. Right now, our stock operations or inventory positions maintain more of a neutrality. We're not predicting stocks, I mean, price going up or going down. We are following the norm right now. We're not anticipating any up or down movement.
Even in the last number, with the planned expire commercialization of domestic benzyl capacity, do you see some of these three situations can ease for us maybe in a few quarters down the line on this account?
Your question is what if domestic guys make it? That's what you're saying?
Yes, because a large domestic capacity is scheduled to come through on benzyl over the next six months.
Yes, we don't know what price they'll supply to us. We really don't know how China will react. There's a lot of moving parts, so we hope it does. Do we know it will? The answer is no. We don't know right now.
Okay. Thank you.
Thank you. Next question comes from the line of Rahul Vira from Abacus. Please go ahead.
Hi, sir. Just wanted to understand the capital allocation policy going forward.
Can you speak a little bit louder, please?
Hi, sir. Can you hear me now?
Yeah.
Yeah. Wanted to understand the capital allocation policy going forward, like what is the CapEx and what is the investment that you are looking for the biosimilar assets from here on?
I think you are asking for our CapEx for 2024. Our estimate is somewhere close to INR 300 crore-INR 350 crore.
Okay.
What was your next question?
What would be the proportion of the CapEx going towards the biosimilar assets?
Out of this INR 350 crore, substantially it's going to be biosimilars only.
Okay. That's fine, sir. What are you thinking about the capital allocation in terms of dividends or anything beyond? The kind of, balance sheet that we have as of now, plus the generation over the next two years, what are the plans for that?
Actually, declaring dividend is not in our authority, sir. It has to be board and ultimately shareholders. Yes, our dividend policy is there.
High on the cost.
Yeah. Our dividend guidelines is around 25% of profit.
Sure, sure. Perfect.
Thank you. Next question comes from the line of Gagan Thareja from ASK. Please go ahead.
Hello. Am I audible?
Yeah. Gagan, go ahead. Yeah.
Yeah. I said, first question is on the R&D cost pertaining to Enzene. Could you enumerate the number?
Yeah. R&D of Enzene biosimilars for 2024 is going to be somewhere close to INR 150 crores. Yeah.
This does not include the CT cost of denosumab. I mean, it includes it also.
Okay. Okay. second one, does the quarter, you know, show the full impact of the revised NLEM pricing on whatever bits of your portfolio is being impacted by it? Or it'll come through in the next quarter fully?
Actually, it will different period NLEM notification it came. When we talk a substantial amount, say INR 40 crore impacting our quarter four. We talk entire our NLEM covered products having impact in quarter four. However, as we discussed from April onwards, even though we have opportunity to increase price, prices, based on wholesale price impact. Then major portion is going to be neutralized once we implement this increase of price of DPCO of covered products. Still, yeah, a small portion is going to remain in next year also.
Right. If I refer back to, you know, the third quarter call, transcript, you had talked about a INR 250 crore cost saving program. You had also indicated that, you know, a large part of that would be realized in FY 2024 itself. just wanted, you know, your thoughts on that. You've talked about the INR 70-80 crore of savings from the St. Louis plant, but, can you bridge from there to the INR 250 crore, both in terms of when that will happen and through what will that happen?
Dubey, you want me take that?
Yeah. Yeah. The St. Louis is one of the lever of our overall cost saving initiative which we launched. Yes. You are very right. Our objective is to have cost saving to the tune of INR 200 crore-INR 250 crore going forward. In 2024, I think we'll be able to launch most of the exercises. We are very optimistic. Sizable amount is going to come in different phases it is going to come. Ultimately, when we're on annualized basis, it is going to be around INR 250 crore. We need to see our timing and all this. Still our expectation for 2024, out of this INR 250 crore, a sizable amount is going to flow.
The final question is that, you know, if a sizable amount of this is going to flow through, I mean, what sort of change in the last three months that, you know, you're now saying that your operating margin, you know, which you sort of inferred or surmised could reach 17% in 2024. Now you indicate will probably be closer to 16%. I understand Q4 had its, you know, ups and downs, but that doesn't have any bearing on the cost programs that you had in this. Just your thoughts on why you know that guidance has been shifted from 17%?
I think guidance was also 200 basis point more than where we land. There with that we are sticking to chief.
Yeah. I mean, I'm just trying to work the math there because the cost programs remain what they are. You have a softening of the APIs as well. You know, how does that? The absolute amount of savings is what it is going to be. It's got nothing to do with percentages, right?
Yeah.
In that sense, it should therefore actually lead to a 17% margin, irrespective of what is generated in FY 2023.
No, not really. See our RM prices, as I said, you know, we have an acute portfolio. It's not fallen as rapidly as we think to. We also want to be cautious on the RM prices. We were just discussing about Pen G, et cetera. I would really say that, yes, I mean, 16% would be great, but 16 is something which we think is more realistically which we could achieve. Because there are a lot of non-moving parts.
Okay. Thanks. I'll get back in the queue. Thank you.
Thank you. Next question comes from the line of Harit Kapoor from Emkay. Please go ahead.
Hi. Thanks for the opportunity. On Enzene, you shared the revenue number of INR 160 crores for FY 2023. Could you give some color on the traction that you're seeing on the CDMO side of the business? Is it a meaningful contributor in this INR 160 crore number?
It's not a meaningful co-one, but it's kind of growing. Close to maybe close to 40% of it could be. 30% of it could be that. 30%-40% is CDMO.
These are for innovator customers or?
These are innovators. Not all of them are innovators, but these are small bio, biopharma. These are not big innovators.
Okay. The fundraise that you've done at Enzene, can you help us understand the thought process, especially given that we have a net cash position of around INR 2,000 crores and we continue to see strong cash generation. What's the rationale here?
The rationale is, one, we wanted to kind of set a benchmark for the valuations to some extent. Second, it validates our strategy because, you know, anybody who comes in does a thorough DD. That's number two. Third, these guys, you know, they are facilities, so they have a huge network of other biopharmaceuticals that they've invested in. We get to learn from them. We could do business with a lot of them. It helps us kind of, you know, making the company truly independent, but it's run by its own board, and the investors sitting on the board ask us the right questions. Eventually, kind of in five to six years, you know, we could list it. We see Enzene as a full-fledged, substantial independent company driving a lot of value in the next five to six years.
Okay. That's helpful. Last one. On, on the margin decline that we've seen in FY 2023 versus FY 2022, around 500 basis points, is it correct to assume that almost this entire decline has come from the domestic business and the, you know, RM cost pressures in the FQ portfolio in the domestic business? I'm trying to understand if, you know, we are profitable at the EBITDA level in the U.S. business. Some color on that will also be helpful.
I think, I mean, this, Mr. Dubey gave details. I would first say, see, last year was a COVID year. We had a lot of tailwinds, therefore your EBITDA all look substantially great. The comparison itself is, I think, not the best. 500%, that basis point is driven EBITDA, led by gross margin. Mr. Dubey could throw some light there.
Yeah. Out of this 500, definitely, at gross level, and expenditure, it's equally divided. In this year, spending, yeah, it was on the higher side. Even, we had pressure on gross margin also, mainly API cost and price depletion in U.S. market. Here I'm talking for entire year. In that case, these are the two contributors to pressure on gross margin level. Putting both this together, around 500 basis points, compromise has happened at EBITDA level.
Okay. Will you be able to share the, you know, margin range for the U.S. business, at least whether it's profitable, you know, post-R&D at the EBITDA level?
No. The individual business-wise, margin discussion we are not doing.
All right. Thank you, sir, for taking my questions.
Thank you. Next question comes from the line of Tushar Manudhane. Please go ahead. Mr. Tushar, please go ahead with the question.
Am I audible?
Yes, you are.
Okay. Just on other expenses excluding R&D, even if I leave aside INR 30 crore-INR 40 crore of higher marketing expenses, still the quarter-over-quarter other expenses is higher. How do we think about it for full year and particularly for fourth quarter FY 2023?
Tushar, your question is, after taking out INR 30 crores-INR 40 crores from marketing spend, still, we are not in normal kind of situation and additional spending is there. I think, if I see quarter, and compare with last year's quarter four, I think INR 30 crore-INR 40 crore is not that amount. That is higher amount.
Quarter-over-quarter, not the last year quarter. It's Q3 FY 2023.
Yeah. On quarter on quarter basis, it was INR 670 crore vis-a-vis INR 790 crore. Actually, just give me a minute, and I have.
Sure.
Uh, uh-
You're saying, Yeah, on the similar line, INR 670-INR 790. Even if I remove INR 30 crores, INR 40 crores, still the increase is good another INR 70, INR 80 crores.
Yeah.
That's-
Total INR 123 crore. If I take out INR 40-50 crore from marketing, another contributor is Forex. Actually in quarter three, there was Forex gain of higher amount, which has, still we have gain only in quarter four, but that amount is not that big, so in quarter three it was a bigger amount. Then, on the rates and taxes front also a reasonably sizable amount debit it has come in quarter four. These two three factors are there in that. Marketing spend around INR 40 crores-INR 50 crore. Second, Forex gain in quarter three, which are in quarter four, and then rates and taxes.
Understood, sir.
Forex gain, the Forex gain and Forex loss, it is getting utilized. When you have more gain, then your debit is, means your other expense is on the lower side.
Okay. INR 700, INR 720 per quarter or roughly INR 2,800 can be the assumption for next year, right? In terms of other expenses, including R&D.
Yeah. Around 24% kind of situation we expect.
Okay, sir. Thanks.
Thank you. The last question comes from the line of Kunal Dhamesha from Macquarie. Please go ahead.
Yeah, thank you for the opportunity again. Just two questions. We have seen sales and marketing expense going up in this quarter. Let's say on a full year basis, would you say that now the sales and marketing expense as a percentage of revenue has normalized, you know, for FY 2023, which will be more in line with pre-COVID level or, you know, we had some earlier quarters where it was low, and that could again, you know, normalize in FY 2024, some normalization?
Kunal, exactly, I was talking same thing. Our normal other expenses where marketing expenses is reported, that has to be in the range of 23.5%, 24% or 23.5%-24.5%. If you see the... For this year, it is more than 25%. In quarter if you see it is more than 27%. We believe going forward, it has to be somewhere in the range of 23.5%-24%.
That assumes that our sales and marketing expense has now normalized and we'll not see any, you know, significant growth in a way, you know, with the way we have seen.
That's our expectation.
Okay. Perfect. You know, before, let's say our field force expansion, and right now it's around INR 17,500, what would have that been in FY 2022?
Sorry. Yeah. You go ahead.
We are adding roughly around 1,000 every year. You know, retrospectively you can count for 2024 . Yeah.
Okay. INR 1,000 annual and then roughly 40% additional annual.
Yeah.
49%.
Yeah. Yeah.
Okay. Perfect. Incrementally, you know, where these people are being deployed, you know, maybe, in particular geographies we are focusing or particular therapies, divisions that we are creating. Any color would be helpful.
It's largely focused on therapies. Two years before it was kind of acute and subchronic, and last year we expanded more in chronic. It depends on our therapy requirements. We by and large covers all the potential geographies.
Sure. I would say then when would you know, expect, you know, whatever I think currently you have INR 4 lakh productivity per month per member? You know, where would be the five-year goal, you know, and how fast you can improve that, you know?
Generally this is not a fixed number, but if you go by the history of pharmaceuticals, generally a productive increase from a new person on a yearly basis, depending on what kind of product you are promoting, it ranges somewhere around INR 70,000-INR 80,000 on an annualized basis. If you have to, let's say reach INR 4 lakhs-INR 4.5 lakhs, you keep on adding INR 70,000 every year, it will take around four to five years to reach that level.
Okay. Sure. That's helpful. Thanks and all the best. Thank you.
Sure.
Thank you. Ladies and gentlemen, we have reached the end of question and answer session. I would now like to hand the conference over to the management for closing comments.
Thank you everyone for joining the call. If any of your queries are unanswered, please feel free to get in touch with me. Thank you and have a great weekend.
Thank you. On behalf of Motilal Oswal Financial Services Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.