Orchid Pharma Ltd (ORCHPHARMA) Q1 FY23 Earnings Concall Transcript

Orchid Pharma Ltd (NSE:ORCHPHARMA) Q1 FY23 Earnings Concall dated Aug. 10, 2022

Corporate Participants:

Mridul Dhanuka — Executive Director

Sunil Kumar Gupta — Chief Financial Officer

Manish Dhanuka — Managing Director

Analysts:

Nishant Sabnis — Sabnis Financial — Analyst

Nikhil Upadhyay — SIMPL — Analyst

Unidentified Participant — — Analyst

Viraj Parekh — Carnelian Asset Advisors — Analyst

Presentation:

Operator

Ladies and gentlemen. Good day, and welcome to the Orchid Pharma Limited Q1 FY ’23 Earnings Conference Call. As a reminder, all participant lines will be in a listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mridul Dhanuka, Executive Director at Orchid Pharma Limited. Thank you, and over to you, sir.

Mridul Dhanuka — Executive Director

Good afternoon, everyone, I hope that all of you and your families are safe and healthy. On behalf of Orchid Pharma, I extend a very warm welcome to all participants on the Q1 FY ’23 financial results discussion call for Orchid Pharma. Today on this call I have with me Mr. Manish Dhanuka, Managing Director; Mr. Sunil Gupta, the CFO; and Orient Capital, our Investor Relation partner. I hope everyone had an opportunity to see our results that we have uploaded on the exchanges and on the company website. Before discussing the quarterly performance, it gives me immense pleasure to update all of you that the company’s wholly-owned subsidiary in India, Orchid BioPharma Limited, had made an application under the production-linked incentive, PLI scheme of the government for promotion of domestic manufacturing in India. The approval has been awarded to Orchid BioPharma Limited for the manufacture of the product, 7ACA for 1,000 metric tons per annum. This approval will help the company in backward integration, reducing dependency on sourcing from China, and aid in improving overall margins for the business. With this PLI approval scheme, we expect to start the plant in FY ’24,’25. The current import price of this product is USD65, we expect to generate an EBITDA of about 10% in this business. The government PLI benefit shall be 20% of the sales price for the first four years of the business, then 15% for one year, and the last six years It would be 5% over and above the EBITDA of 10% that I have estimated.

Besides this, new product development and innovation are an important aspect of our business. Our R&D is continuously working to strengthen our product portfolio. We have multiple products at various stages of life cycle of development and I would like to update you on the status of some of those things. Ceftaroline development is on track. The commercial launch for this will be in December ’22 and then subsequently, we will be filing the DMF for the U.S. market. Enmetazobactam, the new chemical entity developed by Orchid Pharma, the development of this for the Indian market is on track. The CRO for the clinical trial has been finalized and the CDMO [Phonetics] site for the formulation of this product manufacturing is also closed. Cefovecin, the third product we talked about launching commercially will be commercialized before March of ’23, and Ceftazidime/Avibactam will be launched in India in January 2023. So these four launches, we are expecting in this financial year, and hopefully, these will augur [Phonetics] well for the prospects of the company going forward.

Other opportunities under development, which we have not talked about earlier are ceftolozane/tazobactam and Cefiderocol. Patent for these — both these products expire in the next three to five years. The company is also working on several initiatives to support growth of future and our focus on capacity is utilization, addition, and backward integration. So, two updates on this, the capacity addition in sterile block is on track, this should come online by Q1 FY ’24, and the capacity addition in oral block is at detailed engineering stage, should come online by Q3 of FY ’24.

Now I will request Mr. Sunil Gupta, CFO to share the financial highlights of the quarter.

Sunil Kumar Gupta — Chief Financial Officer

Yes, good afternoon, everyone. I’ll present the results of Q1 FY ’23. I would like to say that turnaround is progressing well and during the quarter, Orchid Pharma maintained its growth momentum on year-to-year basis. Our consolidated revenue for Q1 of FY ’23 stood that INR133 [Phonetics] crore versus INR92.3 crores in Q1 FY ’22, thus registering a growth of 42% on a year-to-year basis. Gross profit for the quarter one FY ’23 stood at INR61 crores compared to INR45 crores in the same quarter last year. Then EBITDA stood at INR12 crores in Q1 FY ’23 versus loss of — minus EBITDA — minus 0.40 EBITDA — INR4 crores EBITDA in Q1 FY ’22. Our EBITDA margin for Q1 FY ’23 was 9.5% as compared to minus 0.5% same quarter last year. The company successfully managed to reduce its losses. Our PAT stood at minus INR14 crore as compared to — compared with minus INR28 crore in Q1 FY ’22, that was the broad financial figures. Yes, now over to Chorous [Phonetics].

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question comes from the line of Nishant Sabnis with Sabnis Financial [Phonetics]. Please go ahead. Mr. Sabnis your line has been unmuted you can proceed with your question. As there is no response…

Nishant Sabnis — Sabnis Financial — Analyst

Hello, hello.

Operator

Mr. Sabnis, you can proceed with your question.

Nishant Sabnis — Sabnis Financial — Analyst

Yeah, Hi, sir, the first question I had was, in the previous quarter you had reported a lower loss and this quarter our losses have increased substantially, so even though our inventories have dropped, could you please highlight on what would be the reason for the same?

Mridul Dhanuka — Executive Director

You are talking about March ending quarter?

Nishant Sabnis — Sabnis Financial — Analyst

Yes, quarter ending March.

Mridul Dhanuka — Executive Director

So I think some misunderstanding, the inventories have increased from March, they have not dropped. And, yes, you are correct, the profit has dropped because the sale is significantly lower. So Orchid needs to be looked at as a slightly seasonal business. Our H1 is significantly lighter than H2. So H1 numbers would always be more subdued than H2 numbers. So the right comparison would be looking at the last quarter of the last financial year.

Nishant Sabnis — Sabnis Financial — Analyst

Okay, Sir, so going forward like, do you think in the second quarter, you can expect the same revenue to come in and at the same level of margin or would be a little better?

Mridul Dhanuka — Executive Director

Yeah, so obviously, we are a global business, selling to more than 60 countries, so it is subject to the vagaries of the export market, but our long-term guidance remains at 20%, 25% CAGR, and the margins should definitely improve.

Nishant Sabnis — Sabnis Financial — Analyst

Okay. Sir, the 7ACA, which you have announced for 1,000 metric tons, just wanted to understand what is the timeline which we are looking at to deliver this entire 1,000 metric tons, would it be in FY ’24 or when would you — when we can achieve full capacity for this?

Mridul Dhanuka — Executive Director

Right. So we expect to start in FY ’24, ’25, and in the first year of operation, we are expecting roughly half the capacity levels, and within two years time of starting, we would be at 100% capacity.

Nishant Sabnis — Sabnis Financial — Analyst

Okay. And this would get us how much — approximately, what would be the revenue or the turnover we are expecting from this?

Mridul Dhanuka — Executive Director

Yeah, so I shared a price of roughly $65, if you calculate based on that price only because it’s again a world market and competitive, so we are expecting roughly INR400 crores to INR500 crores per annum kind of revenue with EBITDA of 10% plus 20% PLI benefit.

Nishant Sabnis — Sabnis Financial — Analyst

Okay, sir. Thank you. That was it. I’ll get back in the queue.

Mridul Dhanuka — Executive Director

Thanks.

Operator

Thank you. Our next question comes from the line of Nikhil with SIMPL. Please go ahead.

Nikhil Upadhyay — SIMPL — Analyst

Yes, hi, good afternoon. am I audible?

Mridul Dhanuka — Executive Director

Yeah, Nikhil.

Nikhil Upadhyay — SIMPL — Analyst

Yeah. Hi, first of all, congratulations on the improving trajectory, which the company is seeing over the last four, five quarters. Two, three questions. One is on this 7ACA product, because — how much of it would be our internal consumption, and would the PLI benefits come for the internal consumption as well or only for external sales?

Mridul Dhanuka — Executive Director

Yeah, roughly 30% of that should be our internal consumption and — because it is — the PLI is housed in a wholly-owned subsidiary and the transaction has to be at arm’s length, our understanding is that it would come on the entire quantity.

Nikhil Upadhyay — SIMPL — Analyst

Okay. And secondly, on the price of $65, is this like — what was the price like pre-COVID because we’ve seen the prices of APIs and intermediary moving up post-COVID, so — like this 10% when you are building, is it current prices or has the prices remained same over the last four, five years?

Mridul Dhanuka — Executive Director

No, I would say the prices have increased significantly during the COVID, almost more than 30%. So we expect the prices to moderate, but it depends on the competition, which is, currently the exclusive supplier for this product is China, and now we would also start manufacturing, so it would depend on the market competitive pricing, but I expect that because the raw materials would have also increased for China also, the costs are rising only after the COVID, they have not moderated, but they are not increasing anymore, that’s for sure.

Nikhil Upadhyay — SIMPL — Analyst

Okay. Two more questions. One is like, Cephalosporin, whole of the market was down because of COVID-induced lockdowns and everything, are you seeing a demand improving for the market as a whole, if you can just help us understand how is the global demand and company-specific demand improving, anything which you can share?

Mridul Dhanuka — Executive Director

Okay. I’ll answer this question. I’m Manish Dhanuka.

Nikhil Upadhyay — SIMPL — Analyst

Hi, sir.

Manish Dhanuka — Managing Director

What we’ve seen during the last financial year, definitely there was an improvement over 2021. However, during this financial — financial year, I would say that, first, it’s slightly difficult to predict because what we have seen in last three years, the first quarter is probably the weakest and the first half is weaker than the second half, so obviously, we’ve done much better than the first quarter of last two years. So we are seeing positive trend and if the same trend continues, then we could say that the demand is growing in antibiotics.

Nikhil Upadhyay — SIMPL — Analyst

Okay. And last question, in the previous two calls and meetings, we had mentioned about customer addition in Europe and one of the customer addition in U.S., who was applying for site transfer, and also where are we, how are we progressing with customer addition, any more — any more incremental news or information that you can share?

Manish Dhanuka — Managing Director

Yeah. The customers, we are adding, lot of samples have been submitted. I think in one of the calls, we announced that not only to Europe, we’ve actually [Technical Issues] so one very significant customer in China got approval for one of our products [Indecipherable] and we have made around INR10 crores worth of — almost INR10 crores worth of export to them. At the same time, the U.S. market, which had virtually closed for us due to the shutdown of one of our old customer that we are expecting to open very soon. The filing of ANDA is based on our raw materials, and we are hoping to get orders for U.S. market as well.

Nikhil Upadhyay — SIMPL — Analyst

And lastly, sir, our last plant inspection was in 2018 or 2019, anything you are hearing in terms of inspection?

Manish Dhanuka — Managing Director

Last inspection was in 2019. Generally, they come after two to three years, so we are preparing ourselves for inspection during this financial year. But as we all know due to COVID, there is a very big backlog with most of the agencies, however, we are inviting European agencies on our own to get our inspection done. But USFDA, generally, does it based on their own priorities, so it’s difficult to share when USFDA will come.

Nikhil Upadhyay — SIMPL — Analyst

Okay, fine. Thanks a lot, sir. I’ll come back in the queue.

Operator

Thank you. Our next question comes from the line of Amit Gala [Phonetics] with GD [Phonetics] Capital. Please go ahead.

Unidentified Participant — — Analyst

Hello, can you hear me?

Mridul Dhanuka — Executive Director

Hi, Amit.

Unidentified Participant — — Analyst

Hi, thanks for the opportunity. So my first question is based on the capacity utilization in the quarter for sterile and oral overall?

Manish Dhanuka — Managing Director

Yeah, Amit, what I would like to say is that, as I said in the answer to earlier question also, we have seen the trend in first quarter, the sales are rather less, the demand is less, but as the quarter goes, I mean as we move to the second and third quarters, the demand improves. So based on our experience — this experience, we are now running the plants at about 80% capacity, the sterile plant, because it is a long manufacturing cycle and we are trying to build stock so that we can increase the scale when the demand comes up in third and fourth quarter. And the oral would be running around 60 to 70 capacity demanding — depending on the current [Indecipherable]. So you could say — I mean, current capacity overall utilization would be around 70 to 80.

Unidentified Participant — — Analyst

Okay, thanks. And the next question would be like, could you give us explanation of — about how you will plan the CapEx to be utilized, under the PLI?

Manish Dhanuka — Managing Director

So, PLI, as Mridul said, the government has made provision for two years to set up the plant and we expect to set up our plant in that two-year period. And then we would like to run it at full capacity. As per our estimate, this current demand in the country is around 2,000 tons, and selling this 1,000 tons within India should not be a challenge. And the CapEx is expected to be between INR300 crores to INR500 crores.

Unidentified Participant — — Analyst

Okay, okay. And, so lastly, if you could provide me some revenue breakup on basis of geography like which are your most contributing geographies, and also break up on the basis of like regulated oral and emerging oral and emerging sterile?

Mridul Dhanuka — Executive Director

Yeah, so, Amit, actually the geography-wise breakup, we don’t provide, but our long-term guidance remains similar, two-third of the business comes from that split between oral and sterile, so two-third is oral, one-third is sterile. And between regulated and emerging markets, the split is roughly, now it is 60% emerging markets and 40% regulated markets.

Unidentified Participant — — Analyst

Okay, thanks, that’s it from my side. I’ll step back in the queue.

Mridul Dhanuka — Executive Director

Thanks.

Operator

Thank you. Our next question comes from the line of Vijay [Phonetics] Parekh with Carnelian Asset Advisors. Please go ahead.

Viraj Parekh — Carnelian Asset Advisors — Analyst

Congratulations, Mridul. Good evening. I just have a couple of questions. So, this — since you are going to be captively consuming 7ACA for Orchid, you said close to 30%, have you worked out what kind of improvement in margin it would give for the holding company?

Mridul Dhanuka — Executive Director

Actually, Vijay, because of the transfer pricing rules it has to be done in arm’s length basis, so whatever will be the market price for Orchid, let’s say, I benchmark it against the Chinese price, it has to be the same price to Orchid as to any of the customer. So Orchid may not have a direct benefit, but any of that margin will up flow from the — on the consolidated basis.

Manish Dhanuka — Managing Director

But the supplier — I would just like to add that the supply uncertainty and the inventory management will definitely become easier.

Viraj Parekh — Carnelian Asset Advisors — Analyst

Okay. So the two other questions, probably one which you have been answering for the last financial year. One was about the Enmetazobactum. Do we see any royalty in the quarter one results or do we see any royalty coming in FY ’23 for Enmetazobactum? And secondly, how is our debt reduction plan looking, I mean, where are we on the timeline basis on that?

Mridul Dhanuka — Executive Director

With respect to Enmetazobactum, first news should come from China by end of this year, that was what we had said earlier, that’s still our expectation, and also hopefully within this financial year, we should see the U.S. deal. This is only — I would say my estimate based on the activities which are going on, but no certainty I have around that information. And the second question you asked was…

Viraj Parekh — Carnelian Asset Advisors — Analyst

The debt reduction.

Mridul Dhanuka — Executive Director

Yeah. The debt reduction plan, our term debt was down to INR140 crores. So by end of this year it should be down by other INR50 crores to INR80 crores.

Viraj Parekh — Carnelian Asset Advisors — Analyst

All right, all right. I’ll just squeeze in the last question before I get in line. So how is the demand scenario in Europe and U.S., you were facing some kind of short-term headwinds in Europe, so how is the demand scenario there? And in your opening remarks, you mentioned a few commercial launches in India, Ceftazidime/Avibactam and one other drug, which probably I’m not getting a name right now, but apart from that do you have any commercial launches in U.S. and Europe as well in the current financial year?

Mridul Dhanuka — Executive Director

Yeah. What will happen, Vijay, with these launches, Ceftaroline was the product I talked about first. So when we launch in India, basically that is the product produced for validation for U.S. and Europe markets, wherein based on both batches we will be filing the DMS. So these were earlier products under development in my last presentation, so now we have visibility on when we — we have arranged the raw materials and we are planning the commercial launches. So launches will start from the rest of the world or emerging markets and for regulated markets based on that manufacturing will be filing validation batches and DMF, which should take six months from roughly commercial.

Viraj Parekh — Carnelian Asset Advisors — Analyst

All right, all right. And in terms of the demand scenario in Europe and U.S.

Manish Dhanuka — Managing Director

Yeah, so like I said, the first quarter has gone better than the first quarter of last year, so we are expecting that overall demand for exports should be higher only. However, I think all of you are aware, the first quarter in India was quite bad, I mean all pharma companies suffered the antibiotic demand, was relatively less in India. We expect from this quarter onwards that will also improve. But in exports, we face reasonable demand and that’s the reason of these results in first quarter.

Viraj Parekh — Carnelian Asset Advisors — Analyst

All right. Thank you so much. I’ll get back in line.

Operator

Thank you. Our next question comes from the line of Nishant Sabnis with Sabnis Financial. Please go ahead.

Nishant Sabnis — Sabnis Financial — Analyst

Hi, sir, one more question, so, how have we seen over the last two, three quarters, the raw material pricing, has it softened or how much — by how much has it dropped or increased in the last few quarters?

Mridul Dhanuka — Executive Director

Yeah, roughly, if you compare the gross margin, so I would say it’s roughly about 5% we have lost when compared to last year June. But if you see from last quarter, the gross margins have improved slightly, that’s largely due to the fact that being a B2B supplier, there is a slight lag in terms of when the actual price rise we are able to pass on to the customers. So I would say, overall, impact on our margins is about 5%, out of which roughly 2% we have been able to pass on to the customers or clawback from, let’s say the customer.

Nishant Sabnis — Sabnis Financial — Analyst

So, it’s safe to say that we’re not holding any inventory at higher prices from any previous quarters.

Manish Dhanuka — Managing Director

We — I would say that we produce about 60% of the production is done on actual order basis and only 40% of inventory we maintain, but some of the contracts are long-term, so I don’t expect to have any loss on account of inventory. The only possibility of loss that happens is in the ROW market and there we do not maintain margin rates, so we don’t expect that.

Nishant Sabnis — Sabnis Financial — Analyst

Okay. So this 40% inventory that we’re holding is — what is the timeframe that we look at like in terms of the time, like is it like one month?

Mridul Dhanuka — Executive Director

Nishant, that depends on product to product. Orchid is, for example, I have already shared in the past, we have the widest range, some of the products we produce only one campaign a year. Some of the specialized products, maybe two campaigns a year, so it depends on the fast-moving products, I don’t have any stock, so it depends on product to product.

Manish Dhanuka — Managing Director

So, generally, like we explained last time also, we have a campaign of two tons. We manufactured two tons, if we get an order of say 600 kg, 700 kg and our forecast is two tonnes for the year, so we manufacture two tonnes and 600 kg, 700 kg gets liquidated immediately and then the balance will probably sell over the year — over the whole year. So because of that campaign strategy, we have to keep that inventory, but last two years experience is, it gets liquidated within the financial year mostly.

Nishant Sabnis — Sabnis Financial — Analyst

Okay, sir. And coming to our ForEx and volatility in the prices which are happening, what is our strategy for that?

Manish Dhanuka — Managing Director

We are naturally hedged there because our exports are more — much more than our imports, so we don’t see much of a risk in that aspect.

Nishant Sabnis — Sabnis Financial — Analyst

Okay, okay. Thank you, sir. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Amit Gala with GD Capital. Please go ahead.

Unidentified Participant — — Analyst

Hello. Thanks for the opportunity again. So, what I wanted to ask was that as a company, what is our ambition to reach the EBITDA target for the next three years?

Mridul Dhanuka — Executive Director

Amit, our stated guidance is 20%, 25% CAGR, and high teens EBITDA, and — but when I said that earlier since the last call we didn’t have the PLI, so I have shared some broad guidance on the PLI numbers, as progress and investments start happening maybe we’ll have more details on that.

Unidentified Participant — — Analyst

Okay. Lastly, [Technical Issues] so what is the target of debt reduction for this fiscal?

Mridul Dhanuka — Executive Director

Yeah. So our term debt from INR140 odd crores would go down to less than INR100 crores.

Unidentified Participant — — Analyst

Okay. And do we foresee any requirement for capital, like for CapEx or anything else in the coming fiscal year?

Mridul Dhanuka — Executive Director

Yes. Though, there is an announced CapEx of INR50 odd crores for the expansion of one of the steroid blocks, which we have announced earlier, so that work is going on, and the other one, for the — again for the PLI scheme, we have already given you a very broad number right now of INR300 plus crores, so as things progress we will come back on how that is going to be funded and things like that.

Unidentified Participant — — Analyst

Okay, okay. Thank you. That’s all from my side.

Mridul Dhanuka — Executive Director

Thanks.

Operator

Thank you very much. [Operator Instructions] As there are no further questions in the queue, I would now like to hand the conference back over to Mr. Mirdul Dhanuka for closing remarks

Mridul Dhanuka — Executive Director

I would like to thank everyone for joining us and the insightful questions. I hope I’ve been able to answer all your queries. In case you have any further questions or require any further details you may please contact us or Orient Capital, our Investor Relation partner. Thank you so much for joining this call.

Manish Dhanuka — Managing Director

Thank you.

Operator

[Operator Closing Remarks]