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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Ajanta Pharma

Background

Ajanta Pharma ranks among the Top 50 Pharmaceutical companies in India (IMS ORG MAT March 2012) with sales growing at 27% CAGR over FY06-12.  More than 2000 Medical Representatives strength.

The company has one of the highest R&D spends among pharma companies of similar size, spending ~ 6.5% of Sales on R&D and has invested in over 200 skilled personnel with a 35000 sq feet dedicated R&D facility for working on API synthesis and finished formulations.
The Company operates 4 manufacturing facilities in India, 3 for formulations and 1 for APIs (for captive consumption). Another formulation manufacturing facility is located in Mauritius through its 100% subsidiary. The manufacturing facility at Paithan, Maharashtra is approved by USFDA, UKMHRA, WHO Geneva (pre qualification).

Main Products/Segments

Main Generic Brands:

  • Ophthalmology (Olopat, Diflucor, Zaha, Unibrom, Nepaflam)
  • Dermatology (Melacare, Pacroma, Salicia KT, Sunstop)
  • Cardiology (Atorfit CV, Met XL, Rosufit)
  • Anti-Malarials (Artefan – Artemether & Lumefentrine)
  • Gastroenterology (Lafutax – Lafutidine)
  • Male Erectile Dysfunction (Kamagra – Sildenafil Citrate)
In the Dermatology segment, the company ranks 18th and has 34 generic brands – with 4 leading brands and more than 10 first-time products. In the Opthalmalogy segment, the company is ranked 7th and has 30 generic brands – with 9 leading brands and more than 16 first-time products in India.  In the Cardiology segment, the company ranks 31st and has 51 generic brands – with 3 leading brands and more than 6 first-time products in India.

Main Markets/Customers

  • Mainly three segments – Dermatology (32% FY07-11 sales CAGR), Cardiology (24% FY07-11 sales CAGR) and Ophthalmology (23% FY07-11 sales CAGR).
  • 75% of Domestic Revenues come from top 3 segments of Ophthalmology, Dermatology and Cardiac. Balance 25% come from new segments like Orthopedics, Gastro Intestinal and the Institutional segment.
  • Sales are mostly from a prescription-based model as the company moved decisively in reducing its exposure to tender based sales (0% from last 3 years). Institutional Sales comprise some 20% of Sales (governed by rate contracts for Ajanta’s brands). Direct Sales force has gone up from 600 to 2000+ in last 3 years. Country-wide C&F Agents network caters to the domestic market.
  • ~60% of Sales from Exports : of which ~50% from Asia, ~30% from Africa, and rest from Latin America; No sales from US and EU currently. Present in around 25 countries in Africa, South East Asia, Middle East, Central Asia and Latin America. Each country is treated as a different market. 1 distributor for each country. With around 1300+ brand registrations across countries filed, the company also has another 1300 or so brands under approval to ensure future growth.

Bullish Viewpoints

  • Consistent Growth – Ajanta Pharma has had a great run over the last 10 Years. Sales have grown at 21% CAGR growing from 100 Cr in 2003 to 605 Cr in 2012 and Net Profits have ramped up much faster at a CAGR of 46% to 66Cr in 2012. Consolidated record is even better.
  • Margin Expansions – Operating margins touched ~21% and Net Margins crossed 11% for the first time in FY2012. The company has been consistently recording higher margins over the last many years moving up from 14% Operating margin and 5% Net margin levels in FYO6. This may be attributed to increasing “brand” value, gradual shift in business model(s), and operating scale efficiencies.
  • Strong Product Pipeline – Ajanta Pharma invests ~6.5% of Sales in R&D. It has over 1300 product registrations in different countries and a pending registration (filed) pipeline of over 1300 products. For the last few years, the company has been introducing more than 20 new products every year in the domestic market, many of them first-of-its kind in India.
  • Prescription-Sales shift – Ajanta Pharma has successfully transitioned to a prescription-sales model, from the earlier dependence on sales to government and institutions – which were lower-margin tender based business. The company has heavily invested in increasing its field force to over 2000 Medical representatives. Expansion of doctor base, coupled with increased prescription rate has led to significant gain in market share and improved ranking during the year (FY12 within Top 50, compared to 63 in FY11).
  • Direct-Sales led model – Interestingly, Ajanta Pharma has been relying on a direct-sales led model rather than a distributor led model, even in overseas markets. More than 90% of export sales reportedly are through the direct marketing network, with only 10% coming from distributors.
  • Focused therapeutic markets – The company follows a very country-specific and product-specific model. For example, it sells its Anti-malarial and specialty range of products in African markets, while in South East Asian markets cardiology, ophthalmology and dermatology products are sold. Similarly for Latin American market, the company sells cough syrup dosages predominantly. Thus rather than dumping all products to marketing team, selective penetration is attempted depending upon the demand for that particular market.
  • Backward Integration for API facilities -Ajanta Pharma invested in a state-of-the-art API (Active Pharmaceutical Ingredient) facility in Waluj, Aurangabad in FY10. While the company mainly depends on Chinese supplies for its API needs, this facility is critical in its objective of launching new first-time products in the country. In-house capabilities on this front enables it to maintain product confidentiality in the innovation and trial phases where API supplies may be unavailable/scarce. The facility is being used primarily for captive consumption.
  • Heavy investments in Capex – In the last 4 years Ajanta Pharma has spent upwards of 200 Cr in Capital expenditure, which has paid off handsomely, so far – upgrading the USFDA approved Paithan facility, setting up an API facility in Waluj, a newfully equipped R&D center in Mumbai and Warehousing infrastructure. It also acquired a formulations facility in Aurangabad to cater to semi-regulated markets. With the current and foreseen growth levels, the company envisages capacity peaking in next 2 years. The company has planned two separate manufacturing facilities – one for regulated markets & another for domestic & emerging export markets to be completed in 24 months with an investment of ~400 Cr. Funding through new debt, apart from internal accruals.
  • Improved Subsidiary Performance – Subsidiaries have started adding to the fizz – contributing 72 Cr (~12%) to the topline and 11 Cr (~17%) to the bottomline. Performance of its subsidiary in Mauritius has been excellent and the step down subsidiary in Philippines has also been able to improve its performance substantially making profit for the first time. US and UK subsidiaries continue to assist in regulatory work for product registrations in those countries.
  • Entry into developed markets – The company has made excellent progress on this front since FY10, when it first started filing ANDAs (Abbreviated New Drug Application) in the US Market. It has received approvals for the first 2 products and filed another 7 in FY12. The first 2 products are expected to be launched in 1QFY13. Management has guided for a ~$2.5-5 million annual sales from these mid-size product segments.
  • Strong Balance Sheet – With long term borrowings at 75 Cr and short-term borrowings of 87 Cr, the total debt-to equity stands at 0.6x. Long term debt-to-equity is at 0.28x which leaves plenty of room for further leveraging. The company is in a position to fund its growth plans comfortably.
  • Consistently increasing Dividends – Dividend Payout is low at ~13% of Earnings in FY12. But to its credit the company has been consistently increasing dividends over the last 5 years. Dividends went up from 2.93 Cr in FY08 to 8.78 Cr in FY12, at an impressive 31% CAGR.

Bearish Viewpoints

  • Likelihood of Abbreviated New Drug Application (ANDA) filing fees going up – Establishment of Generic Drug User Fee Rates for Fiscal Year 2012 has revised the rates of ANDA filings. This is likely to see a significant escalation in expenses and may cause the company to pursue a more moderate ANDA filing strategy.
  • Higher Working Capital requirements – Working Capital/Sales has seen a significant jump in FY12 over FY11 – reversing the earlier trend. Working Capital by Sales is over 25% of Sales as compared to ~20% of Sales in FY11. This is attributable to the big jump in Inventory and Sundry Debtors – both going up by over 25% from FY11 levels. This might exert downward pressure on margins going forward.
  • Aggressive Expansion Plans – The company has indicated expansion plans entailing 400 Cr over next 2 years. This is a huge jump over the average spend of ~50 Cr per year over the last 4 years. This will mean stretching the balance sheet from the current comfortable levels, entail higher interest costs, and exert further pressure on margins.
  • High Exports contribution – With over 60% of Sales, coming from ROW exports any changes in the regulatory/political environments of these countries may impact revenue prospects
  • Forex fluctuations -Forex volatility remains a significant risk to be managed in light of over 60% of Sales coming from Exports.

Barriers to entry

  • Strong Brands –  Company’s leading brands listed in top 5 sub-therapeutic segments of
    • Ophthalmology (IMS Rank 7, Industry  ~800 Cr)- Olopat, Unibrom, Diflucor, Zaha and Nepaflam
    • Dermatology (IMS Rank 18, Industry ~2600 Cr) – Melacare, Pacroma, Salicia KT
    • Cardiology (IMS Rank 31, Industry ~5300 Cr ) – Atorfit CV, Met XL
  • Strong Direct Sales model – Over 2000 direct sales people to increase doctor reach and prescription sales. Going by the gain in market share and improved rankings, this model (invested in over the years), is working to the company’s advantage.
  • Lower Tax rates – The company’s locations continue to operate under MAT. Besides it also avails of R&D tax deductions (150%). Overall the tax rate is around 15-16%.

Interesting Viewpoints

  • Ajanta Pharma has received 2 Abbreviated New Drug Application (ANDA) approvals for Risperidone & Levetiracetam from the USFDA in FY12. It has also filed for another 7 ANDAs during FY12, taking the total ANDA Portfolio to 9. The company received its first product approval by USFDA in a record 16 months of filing the ANDAs.
  • Keppra® (Levetiracetam) 2011 net sales: € 966 millions by UCB Pharma Inc – the original patent holder.
  • Ajanta Pharma is expecting $2 -$2.5 million of annual revenue from both these products and is likely to launch both products that received approval in the first half of FY’13.
  • The company has guided to file 5-6 ANDAs every year with the USFDA, and to build up a portfolio of 20-25 products in the next 3-4 years in the U.S. market for potential contribution to its top line.
  • The company continues to launch new products in the market in different therapeutic segments. During FY12 the company launched 25 new products out of which 13 were first time in the country. (FY11 23 new products launched).

Disclosure(s)

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


Ajanta Pharma Management Q&A: July, 2012

Management Q&A

1. AJANTA PHARMA HAS HAD A GREAT RUN OVER THE LAST FEW YEARS. SALES HAVE DOUBLED IN LAST 5 YEARS TO OVER 600 CR WHILE NET PROFITS HAVE GONE UP MORE THAN 3 TIMES TO OVER 66 CR

Kindly take us through the journey and key success factors. Kindly explain Ajanta Pharma’s business model segments. Kindly explain how the company decided to concentrate on “Prescription-Sales” led business model.

Although we started operations way back in 1973, what you are seeing today – the seeds for this was really sown in the conscious choice we started exercising almost a decade back in 2002-03 – when we decided to concentrate on the Generics Formulations business with a 3 pronged focus – 1. Branded 2. Specialty 3. Innovative

We decided we will play in the branded generics space. We will not go for everything – we will have different basket for different markets -specialty segments. We will focus on country specific disease profiles. And we will bring innovative first-time products to the market.

The Innovative plank focuses on 2 aspects of delivery for the patient 1. Convenience 2. Compliance. For e.g we were the first to introduce  Met-XL  – a single dose BP drug. Similarly we have introduced several opthalmology products for the first time as eye-drops (which hitherto could only be taken orally with attendant acidity and gastric side effects). The convenience aspect encourages both doctors and patients to ensure better “compliance” to prescribed medicines.

How long did this process take? What were the main challenges on the way and how did the company manage these?

As mentioned before, this has taken us almost 10 years to reach where we are today. It has been a slow, careful and calibrated approach. In 2002-3 we were slightly negative on P&L or just break even. We could write-off accumulated losses only in 2005 (we were in a position to do it earlier also) since RBI permissions for the same were received only in that year.

We made a conscious decision to move away from low-margin tender-based sales. We invested in R&D and gradually built up the direct sales force.  In the last 3 years Direct Sales force has climbed up from 600-1300-2000.

Is it true that currently Tender based Sales constitute less than 20% of Sales?

For the last 3 years Tender-based sales contribution has been zero. We do have some institutional sales but those are based on rate contracts and for our Branded Generics products.

What is the current direct sales force size? And the distribution network?

We rely on a country-wide C&F Agents network, with our 2000+ direct sales force.

2. PRODUCT SEGMENTS

Kindly explain major product segments and their contribution to Revenues.

Cardiology, Dermatology  and Ophthalmology are our existing specialty segments. Orthopedics, ENT and Gastro Intestinal (GI) are the new Specialty segments that we have entered. As per IMS 2011, we are ranked No. 7 in Indian Opthalmology Industry valued at ~800 Cr. In Dermatology we are ranked 18th (Industry ~2600 Cr), and in Cardiology segment we are ranked 31st (Industry ~5300 Cr).

75% of Domestic Revenues come from our top 3 segments of Ophthalmology, Dermatology and Cardiac. Balance 25% come from new segments like Orthopedics, Gastro Intestinal and the Institutional segment

How has the company managed to produce Top 5 Generic brands in the Derma, Opthalmalogy and Cardiac segments?

Ajanta Pharma has leadership in many sub-therapeutic segments across specialties. We have been able to consistently move up the IMS rankings. This year we have been ranked 50th overall in terms of Sales in Indian market. This is because of our strategic focus, innovative product portfolio and leadership in many sub-therapeutic segments. We introduced many first to market products providing patient convenience & compliance.

In Opthalmology the company has totally 30 brands. 9 are leading brands with top 5 IMS ranking. Of these more than 16 products were first-time launch in India. Similarly in Dermatology we have some 34 brands. Leading brands are 4, with more than 10 First-time launch products in India. In Cardiology total brands are 51. leading brands are 3 with more than 6 first-time launch products in India.

Apart from the R&D skills, what does it take on the Marketing PUSH side?

New specialty segments, new product launches, brand building exercises and consistent investment in expanding quality direct sales force. In the last 3 years the sales force has gone up form 600 to 1300 to 2000. That is the main investment on the Marketing side.

Kindly take us through how your R&D spends and Marketing Overheads spend have looked over the years – as you made the transition majorly to the Prescription-Sales model?

We have one of the highest R&D spends among pharma companies of similar size. we spend 6.5% of Sales on R&D. We have invested in over 200 skilled personell with a 35000 sq feet dedicated facility.
Marketing spends will also be in a similar range.

How do you go about maintaining/augmenting market share of the top generic brands in domestic markets?

We have dedicated divisions responsible for each segment. They are responsible for chalking out individual programs in a very dynamic environment.

3. ROW EXPORT SALES. EXPORT SALES CONTRIBUTE MORE THAN 60% OF SALES.

Kindly explain the business model adopted in your ROW markets.

We are present in around 25 countries in Africa, South East Asia, Middle East, Central Asia and Latin America. Each country is treated as a different market. We have 1 distributor we go with for each country. With around 1300+ brand registrations across countries filed, we also have another 1300 or so brands under approval to ensure future growth.

The company has a policy of targeting select geographies for export of select products? How do you go about identifying such target markets? What are the criteria used?

We study the country specific disease profile, dissect what’s missing – again from the convenience & compliance angles. As explained above, this is a result of a detailed formalised market study.

What’s the revenue mix there between prescription-sales and tender-based sales there?

No Tender based sales.

How many employees in ROW markets? And in your experience is this better than the distributor-led model? Why?

We have a distributor in each country. We have some 300 direct sales force in RoW markets.

What’s the company’s hedging policy? How does it plan to manage the volatility ion Forex?

We do not hedge except for the natural hedging available by way of Foreign Currency loans.

4. USFDA AND ANDA APPROVALS. THIS IS A BIG SHIFT IN STRATEGY FOR THE COMPANY. TILL NOW THE COMPANY’S SUCCESS WAS ATTRIBUTABLE MAJORLY TO SUCCESS IN DOMESTIC AND ROW EXPORTS.

2 ANDA Approvals in 16 months. And 7 more filed in 2012. Kindly explain the segments these 2 products are launched for. What is the annual market size? How many companies with the same approvals?

Please understand the US market foray for what it is. We have deliberately not gone after blockbuster drugs. The market sizes for these products are small. You should see this as another means for us to diversify our geographical reach and open up additional revenue streams from new markets . We have had good success in RoW markets, and we do have some product advantages, but competition is not far behind!

While this is no doubt a very big achievement for the company, how long will this segment take before significant contributions come in? What kind of revenues can be expected from this segment in FY13?

Revenue contributions will not be significant, any time soon. You see today RoW markets contribute ~US$ 70 Mn. Even if we take a product basket of 10 approved ANDAs with a $4 Mn annual average business, it will add upto some $40 Mn. That itself will take some doing.

Kindly explain the Distribution/Sales model adopted by the company in US. What kind of partnerships have you struck? How does the company plan to ramp up sales in US market? What will it take for significant business to be derived – and by when?

The US is just another market for us. We have appointed 1 local distributor who will take care of Sales & Marketing efforts. We will not looking to have our own set up there.

What are the costs involved per ANDA filing? There are reports that additionally GDUFA fess are going to be levied which will make it very costly ($30,000 -$150,000) ? Kindly explain the impact of these and at what levels are these fees envisaged for FY13?

Yes, there are significant costs and may have a big impact on future plans. You see whatever has already been filed has been processed under existing fee structures. For any future filings, we will need to take account the new fee structures and its impact. We will have to assess fresh if it makes sense!

Why is the company focusing on developed markets? Isn’t the Indian and ROW markets large and lucrative enough? Why not push new products through well-established distribution channels in India/RoW, rather than push new products through new sales channels in US/Europe?

As explained before, RoW and Domestic markets will continue to be focus areas. Alongside we will always be looking to open up new markets and additional revenue streams for the company.

5. R&D SPEND. R&D SPENDS HAVE BEEN RAMPED UP OVER THE LAST FEW YEARS. FY13 SPEND AT 37 CR IS ~56% OF NET PROFITS.

Kindly explain your company’s R&D Philosophy and the sustainability of spends at such levels.

R%D spends at some 6-7% of Sales is something that we will continue to invest in. Regulations are becoming more and more stringent. The Approval/Registration process is getting extended. Our Focus is to remain ahead – in our specialty segments.

Many of your products are first-time launch in India. Kindly explain to us the philosophy of the company behind this strategy? What percentage is first-time products vs overall product launches in a year? Do all your first time products enjoy a 6-month or more kind of window before other competitors catch up?

The ‘Convenience” & “Compliance” focus as explained before is the mainstay of our specialty or innovative products business. The many first-to-market innovative products are based on a mix of Release profile, convenient dosages, combinations and/or new off-patented molecules.

Yes our first-time products do enjoy atleast a 6month first-mover window of opportunity to consolidate our branding. In many cases this goes upto almost a year.

Would you say this first-time product focus is an USP for Ajanta Pharma that differentiates it from other similar size branded generics manufacturers?

Yes Specialty Products is our USP and our strength. We will continue to build on our strengths. In keeping with the philosophy, the next 2 years Product Pipeline is ready, today. This rich new product pipeline should propel future growth.

6. PRODUCTION CAPACITY. CAPEX. THE COMPANY RECENTLY ANNOUNCED 400 CR CAPEX FUNDING REQUIREMENT IN NEXT 2 YEARS.THIS IS A BIG 4X KIND OF JUMP IN ANNUAL CAPEX FIGURES.

Isn’t this a very aggressive move? What are the current capacity utilisation levels? What are the underlying business/market assumptions that would require such a jump in Capex? Is there any link with the US market Foray?

We have 5 manufacturing facilities. 3 are formulation facilities in Aurangabad and 1 formulation facility in Mauritius for African countries. And 1 API facility in Aurangabad. Our Paithan formulation facility is one of the best in the country and approved by USFDA, MHRA, WHO Geneva and MOH of many other countries.

Yes, you are right about the jump from our normal Capex levels. There are good reasons for the move now. You see currently some 30% of our production is outsourced. At the rate we are growing, within 2 years it would have meant 50% of our production being outsourced.

We thought about it and decided we cannot take that risk – for the kind of specialty/innovative products we are in. We need a certain degree of control over Timing, Launch readiness, Quality. Besides that 50% of outsourced manufacturing when brought in-house will allow us greater operational efficiencies.

Also it will help us streamline product segmentation. Today we have only 1 plant that is USFDA/MHRA/WHO approved, and that already is working at 75% capacity utilisation levels as it caters to other markets as well. We are looking to dedicate this 1 plant exclusively for developed markets. Approvals for a separate new plant usually takes 24 months.

This will mean is we can switch other production in this plant, plus the outsourced portion, to the new plant/or other plants.

Does this mean you will stop outsourcing altogether?

Well, some 20% to 30% outsourcing may continue.

Is funding secured with the $55 Mn ECB and Internal accruals? What will be the order of Maintenance Capex needed over FY13 and FY14?

Yes, this ECB Loan comes with a 2 year moratorium and 4 year repayment period terms. Maintenance Capex will vary from 20-30 Cr and can go-upto 50 Cr depending on the specifics/de-bottlenecking, etc.

Post ECB, the company will have US$ receivables and payables in US$ as well, how much of a natural hedge will this bring in? Will there be major changes to existing hedging policy?

Yes, we probably have to re-look at our Hedging Policy.

7. WORKING CAPITAL. WORKING CAPITAL HAS GONE UP SIGNIFICANTLY TO OVER 25% OF SALES COMPARED TO EARLIER 20%. DEBTORS AND INVENTORY HAVE BOTH GONE UP BY OVER 25%.

What is the outlook for the next 2-3 years? As the company operates at a larger scale, will this keep going up? What are the company’s targets on this front?

Inventory levels went up this year due to some specific Raw Material situation. We should be able to revert to our normal 20% levels as Inventory Days. Debtor Days will probably remain at 25% levels.

8. MARGINS & PROFITABILITY. MARGINS AND PROFITABILITY HAVE MADE BIG UPWARD STRIDES IN THE LAST FEW YEARS. FROM ABOUT 6% LEVELS IN FY08, NET MARGINS HAVE CROSSED 11% IN FY12. OPERATING MARGINS HAVE TOUCHED ~21%

What are the key success factors? Where do you see margins stabilising? What is a sustainable level for the next 2-3 years? Why?

Yes in terms of EBITDA improvements that we have seen over the last few years, we have probably peaked. That pace will slow down, we may register small 100 bps kind of improvements. We certainly hope to be able to sustain at these levels.

9. WHERE DO WE GO FROM HERE? WHAT IS THE NEXT LEVEL FOR THE COMPANY?

Post completion of planned Capex (400 Cr) what is target revenue mix and target margins from different geographies (FY14-FY17)?  Where do you see the company in the next 5 years? What are the major milestones on that road and what are the major challenges?

We have our internal targets, for sure. We are here today because of what we started doing say 3 years back. We will be in a different (better) position 3 years into the future. The idea is to focus on our strengths, keep persevering in our goals, ensure that we make progress and not slip back or fall down from where we are – in spite of all the dynamic changes in the environment.

We want to be CONSISTENT, keep growing at a steady pace. We want to keep growing above industry average with improved profitability.

In 5 years time, what % of revenue will come from the US and ROW Exports, and what % from domestic?

Domestic will continue to be ~37-40% contribution levels. US contribution will be bigger.

10. LONG TERM VISION

Kindly elaborate on the long term vision and the strategic directions the company will be setting goals for itself.

You see 4 years back we were ranked 163 among Pharma companies in India as per the IMS MAT Survey. In 2012, we have made it to the 50th.

We will continue to focus on our main Segments. In Optha we are number 7 currently, our aim is to reach No. 2 position there. Similarly in Derma we are at No 14, we can considerably improve on that.

Which among dermatology, cardiology, ophthamology or other segment are the thrust/focus areas for the company? Where does the company see maximum potential for growth?

In India, the Basket approach works better. Doctors give priority or preference to a company with a larger basket of products in their segment. A cardiologist for example, will prefer an MNC company with say 5-10 products than say an Ajanta Pharma with say only 2 products.

Dermatology, Ophthalmology and Cardiac are focus areas for the company. In Ophthalmology the Industry has grown at a 5yr CAGR of 17%, and we have managed to grow at 23% CAGR over last 5 years. Similarly Cardiology Industry segment has grown at a 5yr CAGR of 17% and we have grown at a 24% CAGR. Dermatology Industry has grown at a 5 yr CAGR of 18%, while we have managed to grow at a much healthier 32% CAGR.

There is enough growth potential in all the 3 segments and we are constantly working to increase our product basket in these segments. The new sub segments like Orthopedics, Gastro, etc also have good potential.

Is the company thinking of partnering any bigger MNC company to scale up?

The segments that we operate in are niche segments. Small market size. Some of the new segments are even smaller. Bigger MNCs are not really interested in segments of these sizes, because even a 10% share of that market is pretty small for them.

Is the company looking for collaboration/partnerships for US market? How do you plan to cater to competition from larger Indian peers in US (5-10 years span, strategy)

This is still too far away to comment anything at this stage. we will see as things develop and our penetration increases.

Given the increased generic penetration levels in next 5 years, where do you see margins stabilising in 5 years time from now?

Fortunately we are not in the mass market volume segments like the Anti-Infectives/antibiotics (we were a late entrant) where it has become ultra-competitive fragmented – just too many players.

Can’t really say what will happen 5 years from now. If Rupee goes to 80 or 30 to the US$! Or other dynamic shifts in the environment. Having said that, in the face of normal competitive activity we should be able to hold our own and sustain at these levels – given that we operate in Specialty niche segments.

11. RISKS. GOING FORWARD, WHAT ARE THE MAJOR CHALLENGES & RISKS FOR THE COMPANY?

There are many sectors coming under the Competition Commission lenses. Any chances of Pharma sector coming under its purview?

Regulatory RISK is the possibly the biggest risk the industry/company faces. Regulation and compliance norms are getting stricter and tougher. There are many forces at work. The industry on its part has been trying to engage and work with the Government – to come out with a comprehensive National Drug Policy, now for a number of years.

What are the other challenges before the company?

Forex Management is another one. Volatility in either direction is a concern and is a dynamic challenge that we have to gear up to face.

Changing consumer patterns is also a bigger challenge for companies like us. There is much more awareness and access to information on the part of consumers. We need to be able to understand and harness these shifts in consumer patterns.

12. CONSISTENT PROMOTER BUYING. THERE HAS BEEN CONSISTENT BUYING BY PROMOTERS FROM OPEN MARKET FROM OCT 2011. PROMOTER STAKE HAS CONSEQUENTLY GONE UP TO ~70% IN Q4FY12 FORM ~66% IN Q2FY12. THE BUYING HAS BEEN SUSTAINED IN Q1FY13 TOO!

Would you like to make any comment on this? There seems to be a hurry to race to 75% stake by Promoters. Do you find the company undervalued at current levels? Are there any major events unfolding in near future??

There are no external factors at play. This is part of a natural scheme of things.The Promoters believe in the prospects of the company. And yes, they find it undervalued. They have been enhancing stake in the company from time to time.

Also pledged shares have again gone up. From 200,000 shares pledged in Q2FY12 to 550,000 in Q3FY12. Please comment.

That is only by way of financing the additional share purchases.

Disclosure(s)

Atul Sethi: No Holdings in the Company; ;
Ayush Mittal: No Holdings in the Company; ;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 6 months;
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