Ajanta Pharma Management Q&A: Aug, 2013

Management Q&A

1. READY FOR THE FUTURE

“While we have been posting sound performances year after year, we have also been working on laying the foundation for delivering consistent growth in future as well. And this year was no exception. We are working on every aspect to be ready ‘For Future’.”

This years annual report is singing a diffrent tune – Purposeful, much more Confident! What’s going on? Kindly comment.

As mentioned in the Annual report, the strategies for growth have been – identifying right products, development of products, regulatory approvals, expanding markets, launching of new products in the existing markets, augmenting manufacturing facilities, supplementing team strength, tightening our belts on finances, etc.

The foundation for this current journey as you know, was laid 10 years back when we consciously moved away from primarily dependence on OTC (over the counter) brands to a prescription-led niche branding/growth strategy for specialty segments. We tried to find our own slots and build on our own strengths, rather than play the volume driven game where everybody was in.

What you are seeing today is the result of a deliberate strategy on above lines – we were content to grow slowly, methodically, step by step. If we can ensure we grow at 20% on a consistent basis we are happy with that. We would rather walk solidly than try and run fast and end-up falling flat.

As a philosophy that sounds good. But on the ground you are not walking – you are running, and running fast. You have continued to grow at 40% plus.

Well the results you see today is because of the foundation laid in the last several years is very solid. We are growing stronger by the day in our markets and in our respective niches. You can say we are enjoying the fruits of the hard work and investments of the last few years now – but we continue to walk solidly; we are not running.

Top 45 Pharma Company in India. You are making making rapid progress in climbing the ranks – from 60 to 50 to now 45. Where do we go from here?

Yes our brands are growing in strength. Our rankings have improved. But beyond a point it is difficult for our kind of niche market/products. Below 40 ranking is almost impossible to achieve.

One last broad question here, before we move to specifics. While other pharma companies of similar size and similar market presence have been struggling/or faltering, you seem to be some way ahead. What are the reasons?

Two reasons:

a) We have always stayed away from Temptations. We have never been in a hurry. As mentioned before we are happy with a 20% consistent run rate. Growing just for growth sake brings its own pressures.

b) Decisions have been based on home-grown strategy/judgement. Not from any Compulsions from – Industry Peers, Bankers, or Investors/Investment Community

2. NEW PRODUCT LAUNCHES/EXISTING PRODUCTS STRATGEY/UPDATE

19 new /4 first to market products. This is where Ajanta used to excel was the key source of growth in domestic markets. The pace seems to have slowed down. Kindly comment

Yes, new product introduction process is more difficult and takes more time now with new set of DGCI instructions. Earlier it used to take 8-12 months, now it takes up to 24 months.

So when you say you you are working on every aspect (now that new product introduction takes 24 months), this would imply you are working on making product pipelines much bigger, than before?

Right, we are ready with much bigger pipelines now.

Existing WHO Malaria program winding down. At 130 odd Cr current run-rate, the impact will be significant?

We derive about 135 Cr annually from Ant-Malarial drugs. Of this 100-105 Cr is the WHO funded component and balance is from the private market. Now its not correct to say that the program is being winding down – will get reduced maybe – its more a re-allocation of funding from available donations at WHO. It really is a function of how much donation is attracted for this program. last 2-3 years there have been noises about this getting scaled down – but funds have been allocated. Even last year they announced funds at the fag end as last minute donations poured in. This year they have cleared funds for upto Dec ’13.

So what is the proposed re-allocation for?

Earlier this was for ‘Adult” malaria control. Now the focus is shifting towards controlling child- malaria. We have already got approvals for ARTEFAN dispersable tablets for this. IPCA Labs is the other one.

So what kind of impact are we factoring in?

We are working at growing the private market in a significant way, we will otgrow this soon. Our next 2-3 years projections do not factor this in.

New PfSPZ Malaria vaccine under development – from Sanaria?

That’s under development, and in no way connected to our existing products

Allergen patent challenge success. Any impact on relationship with Allergan, globally?

No, not at all. This is not significant for them at all – as you know they are not challenging the revocation in our market. Infact we like to maintain good relationships with Allergan – they are one of the largest players in Opthalmalogy. In 2005-6, Allergen had bought the license for a Opthalmalogy combination product innovation from us for a small sum, in order to gain faster access to market.

Assume there was enough legal/commercial due-diligence before the patent challenge? You were pretty sure that the odds were on your side?

Yes, due diligence was done.

Viagra Sales Emerging/Europe/Total Market. New approval for 11 countries. This was Ajanta’s claim to fame in the earlier days. How significant a share is it of current revenues?

This is one of our oldest products/brands. Normal 4 pack tablet used to be sold for Rs 30 versus the Rs 600 Viagra. We also came out with several innovations – Jelly mode we were the first to introduce, effervescent mode, thin strip, etc.

It is already being sold in 14-15 countries. The UK-MHRA approval allows sales in 11 new countries. At one point of time Kamagra used to be 25% of sales, today it’s no more than 3-4% of Sales.

What’s your reaction to the counterfeiting allegations?

We have been selling locally from many years back. Deemed exports have been taking place ever-since by other parties buying from us in India. Now what they do after buying from us is not our concern, really. Charges/allegations have been there for years unfortunately – but never proven.

Shs24 billion court suit ($9.6Mn)

TBD

3.  EMERGING MARKETS STRATGEY/UPDATE

What are the main markets?

Asia, Africa, Latin America, ROW

Kindly educate us a bit on Exports Sales/distribution/segments/products strategy for these markets.

We follow the same Branded Generics strategy for all our markets. Branding is country-specific, and we have invested in building up these brands slowly from scratch in each country.

Today we have a significant presence in these countries as well. As per IMS data we are the the 3rd largest in Philippines after Torrent Pharma. We are the 8th largest in West Africa.

380+ specialized field force. So this is entirely field force driven prescription-led model again? Or there is some distributor presence as well?

No distributors. Entirely our field-force. Earlier we used to have 3-4 guys per country, this is now upto 20-25 guys per country. In India the process is more intense – market reps have to visit the doctor every 15 days, whereas in these markets meeting once in 3 months works. Reps have grown from 250 to ~400 in last 3-4 years.

What about the product/segment strategy/ Are we following the India model in most markets?

Its geared towards what works/is needed/competitive gaps in each market. For example, East Africa is almost entirely anti-malaria market – 95% of which is WHO funded. West Africa has a private anti-malaria market besides anti-infectives, anti-biotics as well. Middle East we have presence in premium antibiotics and premium anti-infectives.  Latin America is more a Gastro and Cardiac market for us besides some OTC products. South East Asia has developed Opthalmalogy and Cardiac markets as well. West Asia, CIS are important markets.

So it’s very country specific, and brands built over last many years of hard leg work in these markets. With 380+ professionals and 1500+ product registrations in hand, we are in a good position to strengthen our presence in these markets.

How will further growth be accomplished?

Building on this strong foundation is key. We have over 1200 product dossiers awaiting approval. more than 300 product dossiers will be filed in coming financial year.

Mauritius & Phillipines subsidiaries. Special mention has been made in this years AR. Please tell us more.

Together the subsidiaries have contributed ~ 91 Cr and some 11 Cr in PAT. of this Mauritius contributes the bulk ~70 Cr and Philippines about 20-21 Cr. Philippines subsidiary has grown very fast – doubled in last 2-3 years. From here on these subsidiaries will grow steadily and will be key going forward.

4.  US – ANDA FILINGS/STRATEGY UPDATE

Total ANDA Filed – 14 | Approved – 2 | Undergoing Approval – 12. Kindly tell us more on strategies for this important market.

This is an important market for us. We hope to have 8-10 products commercially launched by FY16. Apart from the 12 ANDAs awaiting approval (including 5 filed in FY2013) we will be looking to file 6-8 ANDAs every year building a differentiated product pipeline encompassing niche opportunities.

Risperidone – the first product launched commercially is a psychiatric drug. Are we going to see more from the psychiatric drug family?

No. 8-10 products from different segments. All niche opportunity products.

So the strategy remains as before – go for differentiated niche market products. Which also means volumes/sales are unlikely to be very big here. Is that right?

That’s right.

So what kind of revenue contribution are we expecting in the long term from here?

10-12% of revenues over the long term

If we remember correctly this was more from a geographical risk diversification strategy. But the recent hikes in USFDA filing fees and other costs may be needing much higher investments now?

We have already filed for 14 products. For new filings we evaluate from all angles. Filing fees are actually the smaller of the costs. Its the raw material/Innovator samples that sometimes found very costly – from a few thousands to a few lakhs just for the sample.

Increased USFDA Scrutiny. What’s the impact?

We are watching, learning day by day.

How confident are you of facing any further, say un-announced scrutiny?

In 2009 we got our first facility USFDA approved. Since then we have been re-approved twice – each time without any single query raised. The last one was in Oct 2012. Even our ANDA filings were approved within record time of 16 months.

5. R&D SPEND/PIPELINE UPDATE

What kind of R&D budgets do you have. Any allocations as %of Sales say?

Our R&D allocations are influenced by our requirements – on as needed basis. Allocation spends are driven by requirements – such as for filing 12 ANDAs in the year, additional R&D capex requirements, new building needed to house more people or extra storage/lab space required, etc. We aren’t influenced by or follow any fixed percentage allocation process.

What kind of R&D Team do you have in place? What kind of skill sets?

R&D Strength of 300+. We have adequate skill sets/people for our kind of requirements. 10 PHDs, 30-40% are post graduates and rest are graduates.

Who is heading this function? what are his credentials?

R&D head is based in US. He is a highly experienced professional from a big-pharma company He is an Indian with us from the last 6-7 years heading this function.

How are product/market strategic decisions taken?

We have our Directors Yogesh Agarwal and Rajesh Agarwal looking after US and RoW markets. They are constantly in touch with the market meeting distributors, meeting doctors assessing requirements on the ground and have been nurturing these markets for a long time and ensure full sync with Technical functions. Today we have a great R&D Team fully in sync with Business Heads delivering and executing as per laid out strategies/plans.

6. CAPACITY UTILISATION/NEW CAPACITY/OUTSOURCING UPDATE

You had announced the Rs 400 Cr Capex plans quite some time back. The $65 Mn ECB approval has been with you since more than a year, yet you haven’t drawn on these funds. Looks to us plans are delayed/deferred?

Not at all. All our plans are exactly on schedule. We will have the Dahej SEZ facility for Regulated+WHO markets in 18-20 months from now, by April 2015. Civil works are currently on and will be completed by October this year. Machinery is being ordered.

2015 June will see first phase of commercial operations. Initially it will cater to RoW+Domestic operations while we go for necessary approvals. We have the Paithan facility approval experience to back our efforts.

So is it correct to say you haven’t drawn on the ECB funds because internal accruals have grown faster and sufficed?

That’s correct.

What’s your current outsourcing levels?

35-38% outsourced to 40+ vendors/manufacturers

Since your new facilities are still some time away, we are looking at much higher outsourcing levels?

In the next 2 years, we will be probably at 50% outsourcing levels

But this is going against your avowed policy of reducing outsourcing for achieving better control over quality and deliveries?

Today we are #5 in Ophthalmology and #14 in Dermatology and all that is completely outsourced. The aim is to achieve 70-80% reduction in outsourcing once the new expanded facilities are in place.

7. DEBT POSITION/ECB WITDHRAWL/FUNDING UPDATE

Since machinery, equipment will need to be ordered soon, it looks like in 2HFY13 you would need to draw on the ECB funds?

Could be.

How much would you be drawing in the first tranche?

Not more than $20 Mn

8. FOREX/HEDGING

Please educate us on your hedging policy/strategies.

We do not take a call on the direction of the Rupee – that would be pure speculation and open to its pitfalls. We protect a portion of our net exposure by taking simple forward contracts.

9. WORKING CAPITAL

With the kind of growth being registered by Ajanta, we were expecting some slippages on Inventory and Debtor levels. We find on both counts there is huge consistent improvement over last 5 years – down 40-50% levels. Kindly comment.

Debtor levels we will certainly maintain. Inventory levels may go up somewhat. You are seeing these improvements as a result of our brands gaining strength and volumes picking up over the years. In many markets we need to maintain the same levels of inventory as before while the volumes have grown significantly.

10. TAXATION

The higher taxation issue – consequent to Tax department disallowing some R&D expenses and the retrospective liability is not understood by the larger Investment community. kindly throw more light?

Well it’s really a matter of interpretation. They have chosen to interpret the laws now in a different way, as simple as that. and they have the powers vested in them. Rather than litigate, we have chosen to comply and move on.

So is this behind us now? This is a closed chapter and no further liability is accruable?

Yes of course. This was a 6 year assessment. Some other big-pharma companies were served with similar claims and they too have complied.

Can you explain a bit on the difference in interpretations now and in earlier years?

TBC

So the whole industry has chosen to comply. There is no one who has a different take?

Correct. No one has gone for challenging the new rulings/interpretation.

So now on Tax liability will be at the full rate for Ajanta?

That’s correct.

But shouldn’t the 200% R&D depreciation benefit amount to lower rates?

TBC

What about when the Dahej SEZ facility starts operations? That should result in some tax concessions?

TBC

11. DPCO IMPACT

Ajanta has maintained the impact isn’t significant for Ajanta. Kindly elaborate.

Two things. First our volumes form the domestic market are very low. This becomes significant for large players with revenue volumes of 3000 Cr or more at stake. For Ajanta domestic market stake is low at ~300 Cr or so. Secondly the niche specialty segments are much less on the control radar than the mass volume segments like anti-infectives or anti-biotics.

12. GROWTH/PROFITABILITY

Recent growth has been at 40% levels. Recent EBITDA levels have seen expansion to over 26%. Kindly throw some colour on sustainable levels for the company for next 2-3 years.

We maintain we will be happy to grow at 20% rates consistently. EBITDA levels are currently sustainable at 22-23% probably. In 2 years time when new Capex is operational that would perhaps lower to 20-21% levels. We would never operate below 20% EBITDA levels perhaps.

13. LONG TERM PROGRESS/NEXT MILESTONES

Well next 3 years – we will look to maintain our steady progress.

5 years down the line ?

TBC

14. CONSISTENT PROMOTER BUYING/PLEDGING

As explained in our last interaction as well, the promoters are enhancing stakes in the natural scheme of things. Pledging is only by way of financing additional share purchases.

But this seems to have accelerated?

As on Mar 31st pledged shares was at 11 lakhs. Today this is at 7 lakhs.


Disclosure(s)

Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 6 months;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years;
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