Ladies and gentlemen, good day and welcome to the conference call of Eris Lifesciences Limited. We have with us today on the call Mr. Amit Bakshi, Chairman and Managing Director, and Mr. V Krishna Kumar, Executive Director and Chief Operating Officer. 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 this conference call, please signal an operator by pressing * then 0 on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. V Krishna Kumar, Executive Director and Chief Operating Officer. Thank you and over to you, sir.
Thank you, Nirup. I'm Krishna Kumar, and I welcome you all to this call to discuss our latest acquisition. Before we get into the specifics of our latest deal, I wish to take a few minutes to recap the ethos of our inorganic strategy. As discussed several times in the past, the key thrust of our inorganic strategy is to leapfrog our presence in attractive therapy areas. We leveraged the Strides acquisition to enter the CNS therapy. We entered the insulin segment through an equity venture with M.J. Biopharm. We entered the dermatology therapy through a series of deals starting with Oaknet. We have employed a string-of-pearls approach in building our dermatology portfolio this year with targeted acquisitions to fill specific portfolio gaps. This approach has helped us maximize business fit and minimize redundancies.
We employ a prudent screening approach to every deal that we evaluate in order to ensure evidence of early value creation opportunities, specifically in terms of, number one, strategic fit with our specialty or sub-therapy requirements. Number two, the presence of arbitrage opportunities by way of fundamentally good businesses which are suboptimally run. Last but not the least, meeting our financial criteria like gross margin, growth potential, YPM, debt-to-EBITDA ratio, and IRR. We approach every deal with an owner-manager mindset, wherein we are happy to roll up our sleeves and do the hard work to create value. This discipline has enabled us create value from deals like Strides, Zomelis, and Oaknet. Starting with our inception in the year 2007, it took us nearly 13 years to add the first INR 1,000 crore of revenue.
However, we are adding the next INR 1,000 crore of revenue in just 4 years by deploying our internal cash flows along with external funding to drive a mix of organic and inorganic growth. We have traversed the journey from INR 200 crore to INR 2,000 crore while largely preserving our gross margin at the 80% level. We expect that this will continue to be a way of life at Eris going forward. Coming to the deal specifics. Today, we have announced the acquisition of 9 cosmetic dermatology brands from Dr. Reddy's Laboratories for a consideration of INR 275 crore. This portfolio includes well-known brands such as Hydroheal, Revibra, Aquaderm, Avarta, and Acrofy. The brands are largely in cosmetology segments like anti-acne, moisturizers, cleansers, anti-aging, hair health, melasma, et cetera, and have a combined primary sales of INR 50 crore per annum.
That is INR 50 crore per annum. This deal is in line with our stated intent of building a strong dermatology franchise. We kick-started this process with the acquisition of Oaknet Healthcare for INR 650 crore in May 2022. We strengthened this franchise with the acquisition of nine dermatology brands from Glenmark in January of this year for INR 340 crore. While the Glenmark deal helped us strengthen our medical dermatology franchise, the latest deal helps us augment our cosmetic dermatology franchise. Post this deal, Eris will rank number 3 in its dermatology-covered market with a market share of 7%. Inclusive of this deal, we have invested INR 1,265 crore in acquisitions in this financial year, primarily in building up our dermatology franchise.
The aggregate revenue of the business and brands thus acquired is expected to exceed INR 400 crore in the coming financial year FY 2024. This would translate into a YPM of INR 5 lakh for Oaknet, which is double the YPM of INR two and a half lakhs it had at the time of acquisition less than a year ago. Further, we know that a YPM of INR 5 lakh can translate into an EBITDA margin that is very close to our corporate EBITDA margin, which is where we expect Oaknet to be next year. This is a massive uptick from the 10% EBITDA margin which the Oaknet business had at the time of acquisition. The series of deals done in this financial year has also resulted in a significant diversification of our therapeutic mix.
Pre-Oaknet, Eris derived 80% of its revenues from the cardiometabolic and VMN segments. Notwithstanding a 13% growth in these segments, the concentration of the cardiometabolic and VMN segments is now down to 65%. The contribution of our 3 emerging therapies, namely dermatology, CNS and women's health, has increased from 12% to 28%, with dermatology having emerged as our 4th largest therapy with a 15% share in overall revenue. We expect this process of therapeutic diversification to continue as we continue to invest in our emerging therapies of insulins, dermatology, CNS and women's health alongside our flagship cardiometabolic business. This transaction will be financed through borrowings and will achieve financial closure in the next few days. We can now open up for Q&A.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press * and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press * and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press * and one to ask a question. Anyone who wishes to ask a question may press * and one. The first question is from the line of Saran Adgwal from Old Bridge Capital. Please go ahead.
Hi, good evening, thank you for the opportunity. A couple of questions from me. One, you know, when you say that you are 7% of the covered market in derma and you're number 3 therein, if you could give us a sense in terms of how big is your covered market versus the overall derma market? What do you mean when you're giving this stratification?
Yeah. The concept of covered market is a very standard thing that is followed in our industry, so that is not a new point. It's just a term that is used to denote the particular segments of the market that we play in. Out of the total dermatology therapy, our covered market is around 45% of the total derma therapy. When we say we are number 3 with a 7% market share, we are essentially talking of that 45% footprint, which represents the molecules and the segments we are present in.
At an overall level, we are maybe at 10-11%.
Got it. Got it. I mean, like for instance, if I were to understand the therapy's market, right, I mean INR 12,000 crores is solid toward, INR 3,500 crores is in skin, right? Then you have sulfonylureas and you've got everything is within the INR 12,000 crores. When you say you're 45% of the covered market, are there any specific subcategories within derma that you're covering or this is just... I mean, some more details into this would be helpful.
Okay. I mean, please, I'm Amit Bakshi. Slightly pardon me. We, you know, we're still getting more well-versed in the market. As far as I understand, there is 2 part of the market, broadly speaking. One is medical dermatology, which is more about the psoriasis, fungal infections, and the other piece is a little bit tilted on the dermatology side. Through our first 2 acquisitions, our medical dermatology piece has got very strong. In that particular context, we were talking about number 3 rank, which is almost 50% of the coverage. Large markets where we are not covered. For example, the number 1 market in dermatology is acne and acne care. Our presence in acne and acne care is still very small. Say haircare, for example.
Haircare again is a large market, but our presence there is, it's very small. These are some areas we have a smaller presence. You know, emollients, for example. One of the largest markets. We have a very small presence in that emollient market. These brands, if you look at these brands, there are still. It's a pinhole opening for us to really build brands around that one brand which we have acquired to make sure that we are able to, you know, get a higher market share in these markets where we are not present.
Got it. Got it. That's helpful. Thanks.
Thank you.
Current GCs of the brands that you have acquired between Glenmark and Dr. Reddy's, would the GCs be similar to Acnet?
Yeah. They are similar to Acnet. We are in the same vicinity of 78%-80%.
Okay. My sense is, these products could be manufactured internally, whether in Sikkim or Gujarat, right?
Yeah. We are evaluating that because as of now, most of these products are done by third parties. Given that we have put together a fairly sizable derma basket now, we are evaluating the business case to manufacture these products in our Gujarat plant. I should have some update on that the next time we meet up.
Sure. The last is going to be 100% debt funded. If so, what's the cost of funding that you're looking at? Will it be fixed or variable?
It is variable in the range of 8%-8.5%.
Okay. Thanks. All the best.
Thank you.
Thank you. Next question is from the line of Prakash from Axis Bank. Please go ahead.
Yeah. Hi, good evening. Just trying to understand, you know, we have been fairly aggressive, especially in the derm side and getting, you know, getting a fair share of the market now. You said that there's a wide space of acne within the derm. We would still be open to looking at more assets?
Prakash, makes sense, no? If we get something which will fill the gap. There are 2 answers to this, Prakash. One is that, you know, now it's time for us to consolidate, right? We have got 3, you know, acquisitions in a year. We clearly believe that now is the execution time, the consolidation time. Are we ready to do something big in derma? The answer is a clear no. If there is something which is, you know, useful and still in that range, which gives us comfort, we are still open to that.
Okay. I maybe I missed this, the MRs, we have just the brand, right? Is it fair to say that, you know, the MR which came from Oaknet, but they were medical derma and, you know, other? These are enough, the MR, or you would need more, specialized, MR for cosmetic derma mostly?
What we have done is there's some amount of redistribution of people which we have done. We are adding one more division, which will be primarily dermatology, and we are hiring 50 people from outside. Rest 50 of them have been moved from inside, from the various divisions. Between derma and cosmeceuticals, you know what happens, Prakash, you know, it's not such a, such a thin, such a thick line when you do a promotion in front of a doctor. It's more about training and understanding the product. I think the team at Oaknet is a very good team, at the management level and the marketing level. You know, they've had some very good successes in the recent past also. That I'm not worried from that point of view.
Okay.
If I may just add to that, the expansion in the field force is to the tune of 40, 50 reps, like Amit mentioned. The existing field force that handles derm at Oaknet is about 60. It's really a very incremental expansion that we are looking at. Your earlier point that these brands that have come from Glenmark as well as Reddy's are pure brand deals with very high GCS. It gives us a very good arbitrage potential in terms of, you know, scaling of the YPM of the business and hence also the margins of Oaknet.
Okay. Understood. From a margin perspective, would be fair to understand that there is a lot of headroom, but currently it would be much lower than the company average. There's a potential to move to the company average, is what you're saying?
It is far better than a potential, Prakash. It's pretty much a done deal because this year we have been saying that our Oaknet EBITDA margin for the year will be around 25%. Once we put all of this together, as I mentioned earlier, our YPM will be INR 5 lakhs per, you know, month, right from 1st April. That means that we have clear line of sight on a EBITDA margin, which is in the range of 36%-38% for next year. It's not a potential. There is clear line of sight.
Yeah, yeah. Correct.
Okay. This we are saying for the full basket of Oaknet with Glenmark and the recent one from Reddy's.
Yeah. We are looking at the entire basket to be north of INR 400 crores in revenue next year with an EBITDA margin in the range that I highlighted to you.
Okay. One more last question, if I may. We said that we are fairly open to the acne and it makes sense to cover the entire derm market. Just trying to understand, you know, white spaces in cardiometabolic, are you seeing that as well?
Sorry, Prakash, say that again.
Acne you mentioned that clearly you'll be interested, to complete the, you know, derm franchise. In the cardiometabolic, which has been our key, you know, key segments, are there any white spaces and would you be interested, in any?
Prakash, number one, I can't see many where we are sitting at this point of time. Second, historically, it has always been, you know, a difficult thing to hunt for. Right now, in our minds, we do not have a sight of, you know, getting into something in cardio-diabetic, which is significantly, you know, big.
Again, it goes back to the covered market ratio, right?
Yeah, sorry.
We missed you, Vikesh.
Yeah.
No, no, that's fine. I was just saying that our presence in cardiometabolic is pretty expansive, so hence the probability of finding white spaces is limited to wide extent.
Okay, fair enough. Thank you.
Thank you. The next question is from line of Tarun Sheth from Haitong Securities. Please go ahead.
Hi. Thank you for your opportunity. I just have one question. What would be the primary sales growth for this book as of FY 22? What would be the same year to date?
The primary sale this year was to the tune of INR 50 crores. That's the number. The CAGR over the last 2 years has been around 8%. This is despite the fact that these brands were, you know, despite being very strong brands, they were not promoted. In our hands, you know, when we look at the kind of focus and go-to-market that we are bringing, creating a new division and, you know, provide focus on these brands, we believe that, you know, a 15%-20% kind of a growth in the first 3 years is a doable proposition.
Okay. Just for clarification there, by 15 growth this year, you mean, year to date as by 23 or by 22?
Year ending March 2023.
Okay. Yes, that's it from my side.
Thank you. The next question is from the line of Aarti Rao from Anand Rathi. Please go ahead.
sir, I just missed out on the brand names, that was disclosed. And any, top two or top three brands that crosses, four-
I'm sorry to interrupt you. I can hear a slight echo from the management's line. Participant, please check your network while we rejoin the management line back to the call. Ladies and gentlemen, thank you for your patience. We have the line for the management reconnecting.
Hello, am I audible?
Yes, perfect. Perfect. I had questions regarding the brands that you disclosed. What are those nine brands and any brand that probably clocks more than INR 10 crore or INR 15 crore standalone?
Yes, there are brand names. The key brands are Acrofy, Aquaderm, Avarta, Hydroheal, Revibra. These are some of the key brands. In terms of revenues, there are at least three brands in this portfolio which are, you know, north of 10 crore, and there are a couple in the 20 crore bracket. In terms of leadership positions, three of these brands are ranked among the top three in their respective segments. There are another three of these brands which are ranked among the top five in their respective segments. Six out of nine brands have some kind of a leadership position.
Okay. My next question is, what kind of growth the cosmetic derma segment would be growing on an IPM basis?
The entire derma segment has a growth of about 10%, 11%. Cosmetic derm is growing slightly faster than the average.
Okay. Should we expect that the drugs that we've acquired and the brands that we've acquired would grow better than the industry rate?
Yes, that is the expectation. As I mentioned earlier, you know, once we are able to, you know, take the brands in and they get settled down within our system, a 15%-20% per annum kind of a growth rate is what we can expect.
Okay, thanks. That's it from my side.
Thank you. The next question is from the line of Parag Thacker from Angel Wealth Management. Please go ahead.
Yeah. Thank you a lot for the opportunity. basically, now, what will be the total net debt position after this-
At the end of March, we'll be at around INR 850 crores of debt.
Mm-hmm. Mm-hmm. Mm-hmm. Our EBITA will be in the vicinity of what, INR 600 crore?
From a net debt to EBITDA standpoint, we expect we should be at around 1-1.5 times this year, which will obviously significantly reduce when we look at what numbers, you know, we are looking at for next year.
Okay. Any upside cap we can expect that, if something else also comes up for acquisition. What kind of upside cap we have in our mind for a net debt to EBITDA number?
We'll be comfortable. See, the banks require you to, you know, stick to 3 times. We'll be comfortable holding the 2x mark. That's, you know, kind of the internal benchmark that we have for ourselves.
Mm-hmm. Mm-hmm. Mm-hmm. From shareholder perspective, I would also recommend that only, that not to cross beyond 2. Although your scalability and your, you know, the, you know, the way you have turned around Oaknet and your margins have improved, that tells us about your stability to shore up the margins. While 2, I think net debt to EBITDA of about 2x will be slightly more dangerous. That is our suggestion also. The other thing is that in all these brands, basically, you expect all the entire INR 400 crore to go up to your 36%-38% margin which you said, right? This is.
That is right.
Is this 4 or 25?
Twenty-four.
Wow. Okay. You are saying INR 150 crore EBITDA and your debt of INR 800 crores which you have taken at 8.5%. INR 70 crore will be the interest cost.
Yeah.
Okay. What growth we should expect from our organic business?
We can come back to you on that, because we'll be meeting you again in, you know, 7, 8 weeks when we talk about our results. We'll give you a completely, you know, comprehensive picture about the next year.
Okay. Any payout, dividend payout kind of thing in your mind, which after all this... Because you will be the first priority is to reduce debt, right?
As I said, all of this stuff we'll pick up, you know, when we come to talk to you about the year-end results. Right now, you know, we'd like to focus more about the dermatology and Oaknet.
Thank you. Thank you, Parag. I'll request we join the queue for a follow-up question. The next question is from the line of Prashant Nair from Ambit Capital. Please go ahead.
Yeah. Hi, good evening. Just wanted to clarify a couple of things. Firstly, the incremental spend for you on these products is 3-50 MRs and additional, say, promotion activity that you would have. Is that the right way to interpret it?
Yes, Prashant. That's right.
Fair enough. Typically when you acquire such brands, so where which have not been core to the sellers, how do you see how much do you have to step up intensity, you know, relative to what you would be normally doing in a product of yours? Is it, I mean, is there any sense you can give which helps us understand, you know, the up and outlay?
Prashant. Generally, if you ask us, you know, we find it little convenient to say tail brands and, you know, all those things. When you, when we look at the brand from a hospitality point of view and what is the kind of, you know, image it has in front of the HCPs. All these brands which we are talking about and also, the trademark brands, they really stand out. You know, the Onabet, the Halobet of the world, the Solbet of the world are really leaders in their own, you know, in their own therapies. What happens over a period of time when you, when you have a very large basket, you can't help but, you know, it comes into some kind of a chronological order.
When it comes into a fresh, you know, when it comes to some fresh hands, you know, the energy all of a sudden increases. Because, you know, we, there is a lot, there are a lot therapy gaps available in the acquirer in case of us. The focus and the energy increases very, very rapidly. Just the fact then when a brand is promoted as number four and when it is promoted as number one or two, makes a very significant difference. What we will see, I mean, take Oaknet, let's not talk about what will happen to these brands. Take Oaknet for an example. It is just about the energy, the, you know, you know, the positioning of the brands, and that's how the whole difference is made.
In our plan, we have a very fresh and energetic way to look into these brands in the different therapies. I believe that energy gives it a fillip for growth.
Okay. Yeah. Thanks for that. Just one more clarification. Earlier when you mentioned the revenue numbers for these brands, north of 10 crores, up to 220 crores. These are at EBITDA levels, right? Are we finding...
Yeah. These are EVAC's, these are EVAC's number. Some of them are a little exaggerated also. What I think offline Hrithi can tell you exactly what are the brands' size.
Okay. Thanks. That's it for me.
Thank you. Participants, you may press * and one to ask a question. The next question is from the line of Neha Gupta from Equirus Securities. Please go ahead.
Hi. Considering the cost of acquisition of INR 275 crores and the turnover of around INR 50 crores, we have given the future value of around upwards of INR 3.5 crores. You must have done some market research. According to you, what justifies this high value which you have given for it? What are the revenue potential that this portfolio holds, say, in next 3-4 years based on your research and testing?
That's a nice question. You know, as we've been alluding to, dermatology is a little premium to dermatology, and the growth also in the last 5 years has always ebbed pre-dermatology growth. Dermatology as a segment is a little more revered than dermatology. That's number one. You look at what is the category you're looking at. Say a product like an Aquaderm, which is like INR 5 crore-INR 7 crore revenue, if I'm not wrong. The category is emollients, and it is the perception on that category has been very nice. We do run this perception analysis among the HCP, brand wise, just to see how the brand is positioned in their head.
Because number one, it is dermatology, number two, it is ticking the right boxes as far as the therapy is concerned. Historically, co-dermatology has been a little more revered and growth has also been better than dermatology. That put together makes that premium which, you know, goes along.
Okay. Any revenue potential which you must have, kind of assessed in, say, next four years, five years or on a long-term basis that these nine brands can go up to this level from INR 50 crore to some number?
Because, you know, 15%-20% growth in these products just because they are early, you know, they are early brands, the average size is between, you know, INR 8.5-9 crore. Therefore, we find the headroom is quite good. We assume a 15%-20% growth over the next 4 years.
Okay. That was helpful. Thank you.
Thank you.
Thank you. Next question is from the line of Harshal Patel from Mirae Asset. Please go ahead.
Good evening, sir. Thanks for the opportunity. Just had one question to ask you. Basically this was with respect to the margins for Oaknet. If you see the quarterly Q3 margins as of December quarter, this Oaknet was at around 27%. Right now we are expecting about 25% for FY 2024. Sir, am I missing something out here?
Yeah. I mentioned that 25% would be the margin for this year. That is FY23, full year, approximately.
Okay. Okay. That's all.
The margin for 2024 will be in the range of 36%-38%.
Okay. Thank you for that. sir, the levers will effectively be the rampaging the yield portfolio term at Landmark plus Oaknet plus upgrades this year.
Yeah. Leverage ramp up will always be a leverage. What is important here, when you get brands and you make them sit on the same people, that is where the whole, you know, the productivity thing kicks in. At a thumb rule level, if you are in the vicinity of 78%-80% gross margins and are hitting a INR 5 lakh, close to INR 5 lakh kind of a IPM, then these kind of margins. You know, when we are giving you these numbers, we have really not incorporated a, you know, substantial growth, you know, in the whole Oaknet system. We are giving you a very, you know, nominal kind of a growth because, you know, we have to just get things together.
It's just a function of a INR 5 lakh productivity and a huge gross margin between 70% and 80%. Largely, if these two things are there, you know, the EBITDA margins will fall in between that 36%-40%.
Sure, sir. Sure. Thank you, sir. Thank you. Thank you for the explanation.
Thank you. Next question is from the line of Shalabh Agarwal from Snowball Capital. Please go ahead. Shalabh, may I request to unmute your line from your side and go ahead with the question, please. Shalabh, if you can hear us, may I request you to unmute your line from your side and go ahead with the question, please. Due to no response, we move to the next participant. Next follow-up question is from the line of Tarang Betala from Vortex Capital. Please go ahead.
Hi. Just wanted to check, you know, you mentioned that you're number three in the covered market for derma. Could the top two players be the same players who are the leaders in overall dermatotherapy for this covered market as well?
GSK in this particular case, in the covered market. They, yeah, they are ahead of us.
Okay. Thanks.
Thank you. Next question is from the line of Piyush Sharma from Clearview Capital. Please go ahead.
Thanks for taking my question. Is the key part of the strategy to show the gross margins to ultimately, make these products in-house, the prescribed brands in-house? Just wanted to check what is the maximum turnover that we can generate out of the INR 300 crore odd gross block that we have currently, and whether there will be an imminent need for, you know, creating new capacity in cover if you were to ensure these products.
I'll answer those two questions one by one. The potential for fixed asset turnover in our industry is very high. Like we are seeing a fixed asset turnover of more than 10 times for our second plant. We expect you should see at least that, if not more, for the new facility. In terms of bringing the derma operations in-house, that is actively being evaluated. It will require. At present our second facility is configured for Oral Solid Dosage and injectables, not for derma. If we do bring these products in-house, there will be some incremental investment, you know, which we can quantify, as soon as we make that decision. Your point is right, that there will definitely be an arbitrage in terms of improvement in gross margin if they're brought in-house.
If, am I wrong in saying that we will not need any land and building it because we already have blocks in place, so it will all be plant and machinery?
Yes. It won't be civil nor utilities.
Nothing. It's all covered.
Got it. Any timeline that we have in mind of when we plant all that?
That's being evaluated right now. We haven't crystallized on anything, but the next time we have a chat I'm sure we'll have some kind of an update.
Got it. What % of products that are manufactured numbers?
Was this question for the derma portfolio or for company as a whole?
Company as a whole.
Third-party percentage is 15%-20%.
Got it. Thank you. That's all.
Thank you very much. Ladies and gentlemen, we will take that as the last question. On behalf of Eris Lifesciences, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.