Alembic Pharma Management Q&A: Jan 2014

Management Q&A

Alembic Pharma Management Q&A

1.1 INTERNATIONAL GENERICS

AR 2013 – “We climbed the filing value-chain – Para III to Para IV, Para IV FTFs and 505(b)(2) filings in the US”. Kindly demystify the jargons for us.

Para I,II, II, and IV pertain to what is called ANDA filings – Abbreviated New Drug Applications

Para III – Actually Para I, II and III filings all pertain to patent-expired drugs. Non-Litigation category

Para IV = These are allowed to be filed – post 5 years of a NCE patent grant by USFDA for a generic version of the Innovator drug

Para IV FTF = 180 day exclusivity = Para IV First to File is another category where even before the first five years are over a company can challenge. If approved that company gets an 180 days exclusive approval to market its generic version of the Innovator drug. This can prove very lucrative for the challenger if granted. On the other hand there are Litigation Risks where the Innovator tries to prove that the challenger has infringed on its patent/process while developing the generic version.

Then there are what are called NDA filings – under which 505 (b) (2) falls.

505(b)(2) = larger period exclusivity = These are meant for a bio-similar, but completely new product. It’s made from a different salt and/or a totally different process. The FDA in its discretion (depending on the benefits/costs of development) awards a higher exclusivity period. For example for our NDA Desvenlafaxine Base Extended Release (bioequivalent version of the innovator drug Pristiq by Pfizer) was approved with a 21-month exclusivity.

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1.2 INTERNATIONAL GENERICS PIPELINE/UPDATE

FILINGS APPROVALS COMMERCIALISED LITIGATION RISK
CUMULATIVE ANDA 59 25 17-18
CUMULATIVE DMF 62
PARA IV
PARA IV FTF
505 (B) (2) 1 1 1 NIL
PARA III
PARA II

What we understand is that Para IV, Para IV FTF and %05 (b) 2 filings are the most lucrative. They also carry Litigation Risk. Can you give us a sense of the proportion of Para IV and above filings among your cumulative ANDA filings?

Initially there were Para II & III also but increasingly this mix is in favour of more complex Para IV filings.

Any of the Para IV FTF are Solo?

None, at the moment.

Why have you chosen/not able to commercialise some 30% of your approvals?

Most of them due to API issues (not available/changed) or another DMF is now used. In one case product was found to be unviable.

How are you able to comment that future mix of filings is skewed towards Para IV and above ?

Well things like Sample Seeding for the products, preparing batch stability files, etc have to start ~3 years before filing. We are already working on the pipeline for FY 16-17-18-19

NDA Desvenlafaxine Base Extended Release – 21-month exclusivity, approval received in record 10 months. Congratulations for this super-achievement. What is the progress on this launch through Ranbaxy partnership?

What is key here is doctor conversion. Doctors are currently used to prescribing Pfizer’s Prisitiq – they have to be educated about the availability of our generic version. It happens faster when our product starts appearing in the approved product lists of some of the large insurance companies. It will take 4-5 months before an on-the-ground assessment can be made.

What kind of price erosions are expected? is it true that you will see a 40-50% price erosion immediately?

For the Succi Desvenlafaxine product there were 11 FTFs approved. However for Desvenlafaxine Base Extended Release product we are the only one with 21 month exclusivity. We should not see more than a 20% price erosion in 1st year.

And in next year?

May be 30% price erosion.

Can you share the revenue share arrangement with Ranbaxy for Desvenlafaxine?

No comments.

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What’s the update now on Desvenlafaxine {Jan 2014}?

It is ramping up. But not upto expectations.

What are the issues?

Well we found out that patients using the innovator drug Pristiq on a regular basis – which is indicated for the treatment of major depressive disorders – are very reluctant to change the drug (generic version, even if cheaper). Someone (suffering depression before) who is now able to lead a normal life with regular Prisitiq medication isn’t going to risk lapsing back.

So what are the learnings from this whole episode? You had such a blockbuster technical breakthrough, but seems like not too much will come out of it.

We have taken it in our stride. These things happen. We have moved on. 

On the other hand we have seen a 100%+ growth in this segment in 9mFY14 with Sales doubling to ~329 Cr. What is this attributable to?

This is a result of a 2 pronged strategy. Building up on Contracts/Order Book and scaling up on manufacturing. We had a bulging orderbook, but were seriously short on manufacturing. Augmented capacity started becoming available only post July last year. The swift ramp up is on account of that.

1.3 INTERNATIONAL GENERICS – TEAM/MARKETING/STRATEGY

You had decided to set up your own Marketing Network in the US? How difficult is it going about this?

This is now the biggest challenge before the company. We are galvanised behind making this a success. This whole effort will take us the next 2-3 years. The first results are atleast 1 year away. 

This is a major effort. What will be the costs? Will it be around 10-15% of Sales or higher?

What are the costs? Mostly salaries and the sales+distribution costs. You should see it like this. Most of the Profits were being given away to the ANDA guys. Compared to that we will be incurring a fraction of the cost.

Kindly give us a sense of the leadership behind this strategic PUSH into US Market and the success in the International Generics business that we are seeing.

The whole International Buisness initiative is driven by Mr Pranav Amin our Director and President International Business. He is very dynamic and is pushing everyone forward with aggressive plans. He has not hesitated to bring in the right people with high salaries.

We have an US CEO who has been with us for last 5 years and assembled together a top Team in International Generics business. Success has come because of Product Identification ability. Year-wise market-wise plans are drawn up till 2024. We have to create very detailed Product Identification Files or PIFs. 8-9 people get to sign off – IP guys, Marketing guys and Strategy guys. And we believe next 10 years success will also because of this.

What about Litigation? How confident are you in handling the attendant Litigation Risks that come with an aggressive ANDA filing strategy?

We have built a strong IP Culture/Team over last 5 years or so. This Team comes up with identified products. Multiple Legal opinion is taken from 4 specialised Large US Attorney firms. Only if it is considered safe, we proceed.

Despite this caution if Litigation comes up?

There are always other options. If we subsequently find risks are high we need not go for a confrontation route. We can offer our product with royalty/other options.

Alembic has always been known as a pedigree company. But this aggression is new-found? While this culture may now be top-driven, what about the Team? How will the old Teams adapt?

Technical Team is 100% new – All IP/Research Team are new imports form other large organisations with relevant experience. On the strategy/marketing side there are a few top people who are new and a mix of folks like us.

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2.  INTERNATIONAL BRANDED

Kindly take us through the International Branded business. Does it cater to the ROW Markets?

Products are the same as our domestic branded formulations. Yes this segment caters to the ROW Markets like Russia & Africa.

Is there a country specific branding/sales strategy or it’s the same brands across geographies?

It’s the same brands being marketed in every country.

Competition must be intense in these countries as most Pharma companies from India have a significant presence in these markets?

Yes there is lot of competition. But we have formed a new team focusing on this segment.

We have seen a ~48%+ growth in this segment in 9mFY14 with Sales reaching ~46 Cr. Is there any focus to make this segment a significant contributor to topline and bottomline?

This is a 50-60 Cr Annual market. There is more focus. More filings – which also means more investment. Earlier filings cost $5000 , now these cost as much as $25000-30000.

What is a sustainable growth rate for the next 2-3 years?

We should see 25-30% kind of growth or 100 Cr in next 2-3 years.

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3.  API

As we understood from you last, this is a segment that is completely fragmented, intensely competitive, and if weI remember correctly you planned to get out of this segment. However this is the segment showing highest growth by 20% over FY12. And thus increased contribution to Sales from 7 to 8%. Kindly comment

The API segment (Acute therapy) that we were present in is very competitive – it is in turmoil. Chinese products have flooded markets world-over and India is no exception.

We have done 2 things a) Shift Focus on our own products – increase Captive use b) Shift focus to cater to large pharma company ANDA API requirements – become their first or second source. We have seen successes on both these fronts.

So move has also been away from domestic market API requirements to developed Markets?

The focus is 95% geared to servicing our ANDAs (captive use). At the same time we are able to utilise this to service large pharma company requirements for EU and emerging markets also.

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4. INDIA BRANDED /INDIA GENERICS

India Branded formulations 1HFY14 Sales
Contrib
1HFY14 Sales Alembic Market
Share
Alembic Annual
Market
Alembic Growth Therapy Growth Alembic FY16E
Sales
FY16E Contribution
 Anti-Infective  36%  157.2  3.99%  314  3%  2%  334  28%
 Gastrology  18%  78.6  2.50%  157  16%  9%  212  18%
 Cold & Cough  12%  52.4  5.08%  105  11%  11%  129  11%
 Cardiology  11%  48.0  1.43%  96  38%  13%  183  15%
 Gynaecology  9%  39.3  2.08%  79  29%  7%  131  11%
 Orthopaedic  5%  21.8  1.14%  44  8%  7%  51  4%
 Anti Diabetic  5%  21.8  1.32%  44  31%  24%  75  6%
 Opthalmology  2%  8.7  1.67%  17  51%  8%  40  3%
 Nephro / Uro  2%  8.7  1.84%  17  37%  14%  33  3%

It looks like fast growing Specialty segments like Cardiology and Gynaecology are set to overtake the earlier dominant segments in a few years. Kindly comment

Ealier Anti-Infective and Cold & Cough segments used to account for 80% of domestic sales. Now this is down to 50%. Yes Cardiology and Gyneacology are growing fast and will contribute bigger share in coming years and will overtake some segments like Cold & Cough pretty soon. But the Investments needed are high.

What kind of investments? Is it correct to say this is a Marketing driven game and not so much on the technology side?

Absolutely, all investments are in Marketing. We need to ensure Quality and availability/mind share with Doctors. Form a very low base we have started growing the specialty segments. Fortunately Alembic enjoys a very very good brand equity with Doctors.  Brand recall is very high, so we are trying to cater to higher margin lifestyle disease segments. This strategy is paying off, as doctors are ready to accept new drugs quickly due to brand name and trust.

India Generics- some 86 Cr in 9mFY14? Why do we need domestic generic Sales? Is this profitable?

Well this is a ~100 Cr annual market for us. Some of the products here are negative margin to upto 10% kind of margins. Instead of the brand name drug, it is sold in the generic name. There is a big enough market for this in smaller towns. In a way it takes care of some of our fixed costs by generating additional sales. If we don’t sell it, somebody else will and take this.

5.  SOURCES OF PROFITABILITY

Operating Margins have seen a consistent uptick? What are the main sources of profitability?

The uptick in profitability is due to a few things.

1. Improving Product Mix – As mentioned before, we decided to shift focus and get out of Domestic API which was acute therapy focused and volatile. Anything less than 15-18% EBITDA we decided to get out of.

2. Shifting focus on Formulations – Both Domestic branded and International Generics

3. Process/Efficiency improvements

The depreciating Rupee also helps to an extent

How sustainable is this going forward?

This is set to continue for the next few years. Product mix improvements are already significant. We are able to leverage economies of scale with new plant. We are at ~20% EBITDA levels. There will be 1 to 1.5% margin improvements every year for a couple of years. In a few more years we could be in a different orbit.

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6.  RISKS

What in your opinion are the major risks?

Regulatory Compliance. We are taking this very very seriously. When we were small it was easy to manage. But as we scale up we need to ensure systems and processes that take care of ensuring quality.

Kindly give us a sense of how seriously this is taken by Top Management?

The normal practice in the industry is to employ 1:2 Quality:Product personnel. At Alembic we are maintaining a 1:1 Quality: Product personnel ratio. We ensure everything is on the SAP ERP system. We have built a strong Quality Team.

When the Board meets, the first item on the Agenda is USFDA Compliance. And usually it takes 3-5 hours.

USFDA Inspections? Is this like a sword now hanging over Indian Pharma companies having/attempting a presence in US markets?

Not really. Some reactions/rumours spread that this time USFDA folks are coming to shut down 20 plants – that’s all nonsense. US has to rely on Indian manufacturing plants – we have the largest base outside of the US. Yes, they have very objective, very detailed worksheets. If there are some observations that come out, well they are not going to suppress them.

When did you have your last inspection? Were any queries raised?

1.5 years back. No queries were raised.

7. R&D SPEND

Likely to stay around 6-7% of Sales 

8.  WORKING CAPITAL MANAGEMENT

27% sales to 20% of Sales, to 17% of Sales? Debtors 62 to 47 to 56 days?

This is mostly on account of the API shift.

While Inventory levels haven’t changed much – implies that Payables also has improved significantly. What are the reasons?

Driven by Operations team focus. Some KRAs (Key Result Areas) demanded are to increase 30 days payables to 45 days and 45 days to 60 days.

9.  CAPEX/CAPACITY UTILISATION

Till when will current capacity suffice – FY15? When Next? Quantum

Actually we should be able to see through FY16 on current capacity. We are introducing a lot of automation at an initial cost of ~40 Cr.

What kind of Outsourcing do you resort to? What is the quantum?

India branded – Roughly 40% 

10.  FOREX/HEDGING

Simple 3/6 month forward contracts.

11.  TAXATION/TAX RATES

20-21%

12.  DIVIDEND POLICY

30-35% Payout.

13.   MAJOR CHALLENGES

 Next 2-3 years it is the US Marketing Challenge that will consume us.  


Disclosure(s)

Ayush Mittal: Less than 5% of Portfolio in the Company; Holding for more than 6 months;
Vinod MS: No Holdings in the Company; ;
Hitesh Patel: 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 6 months;

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