Poly Medicure Limited analyst Q&A

We will now begin the question and answer session anyone. The first question is from the line of Karan Khanna from Ambit Capital. Please go ahead.

Thanks for the opportunity and thanks for the very detailed intro ductory comments and congratulations on a great quarter as well. I have three questions Sir first on your us business as for your us FDA filings you have received additional site 510k approval for a range of IV catheter during the quarter so what kind of potential does that open up for you and as a followup given you have demonstrated substantial equiva lence of your devices with pedicure device devices of global MNC such as B Braun, Baxter are you looking to replace these manufacturers as well in the US market.

So you are right absolutely we have received 510k approvals for IV catheters and we have also received some new approvals recently and of course if you recall in my previous calls I said we are going with a bouquet of products not only one product. There will be almost a bouquet of 8 to 10 products over next about 8 to 12 months and we expect that revenue coming from 8 to 10 products over next 3 to 4 years which will between $15 to $20 million so th at is the guidance we have given and this is the initial set of products and of course as time progresses we will be adding more products in the portfolio because the market is progressive and that is how we will develop it and of course we have proved our substantial so what we are trying to prove that the quality of Poly Med products is equal to products and the performance and quality of products equal to products made by very large multinational companies and we are able to prove the excellence of our devices with that so that will open up the US market and especially the customers or the hospitals using our products will see that equivalence of these products are products with large multinational company product so definitely the idea is to replace them and bring in Polymed. Of course, it is going to take a long time. Those companies have been in the US market for many, many decades but again that is a journey we will have to take.

Sure that is helpful. My second question is on your growth guidance. When you upgraded your guidance for FY2024 how should one think about the growth guidance for the next 2 to 3 years as a followup with your cardiology division and your critical care division also coming on stream by end of FY2024 how should one think about revenue contribution from these businesses in the next 2 to 3 years.

So first I will talk about the new divisions, so these are new divisions which are starting. If you recall our renal business which we started four years ago so it has almost taken let us say the market is around 1200 to 1500 Crores so it has just taken us around 4 years to reach the revenue of around 100 Crores in this business so we will end close to let us say 100 Crores maybe 90 Crores in that range so it takes time to build up a new business, critical care product again it needs a lot of clinical te aching, lot of clinical CME sessions so we are engaging there in this but we see a great potentia l in both the divisions in critical care and cardiology is completely dominated by multinational companies especially intervention cardiology and critical care products so our idea is to bring in higher technology products and I cannot give you a number because we are still in the very initial phase. We have still not launched many of the products. Cardiology will be launched only early next year and probably during the next year and critical care has just been launched few weeks ago so we are actually in the initial phase but maybe I will have more clarity maybe in next 4 to 6 months where I will give you some more better understanding on this business. We have not shared the guidance beyond FY2024 but maybe in subsequent calls I will be able to give you guidance for FY2025 and 2026. Of course, with new plants being operational I think we should be ab le to maintain a steady growth rate of over 20% in the next couple of years. This is what I can tell you right now.

Sure and a last question at the end of your 500 Crores capex cycle which ends in FY2024. Now you are already sitting on 150 Crores of net cash on your balance sheet and generating fairly healthy operating cash flows as well yeah so where would you look to deploy the extra cash beyond your capex needs say from FY2025 onwards that would be last question, thank you.

So I think this is a very capex heavy industry and needs constant investment so we have to up our anti on R&D as we get into cardiology and critical care we have to increase our spending’s on R&D and bring in some new capital equipment for R&D so we have to work in that direction and this medical device industry if you look at the global industry it grows through acquisitions and MNAs and we have done one acquisition in 2019 and I have talked about a few minutes ago that how important it is for us in terms of oncology products and it is growing very steadily so if we find any new opportunity we will definitely deploy our surplus crash into this new opportunities.

That would be my last question. Thank you and best wishes for the festive season to the entire team.

Thank you. The next question is from the line of Rashmi S from Dolat Capital. Please go ahead.

Yes, thanks for the opportunity. Just on the sales guidance front basically you have mentioned that there is a change in the overall medical regulation and ahead say in next 3, 4 years I know that we will be growing gradually but in next 3, 4 years the mix would remain similar, or we feel that the contribution from the domestic business is likely to go up in a big way.

We think that the mix will remain the same because Polymed has a very strong global presence and our business model as it looks like for next 2, 3 years we see it 2/3 exports and 1/3 local market. Because if you look at five years history it is also in the similar range so we probably in next 2, 3 years also will remain like that be cause both the business are growing at the same percentage level so I think we are very happy and confident that we will stay in that range only.

Okay and when you mentioned the US business that you are trying to take up the MNC market share and those companies are already in the industry for decades so is it like we are going to play on pricing that we are going to give a discount compared to the MNC products or it will be more or less similar so if you can just give more colour on how we will be able to achieve that kind of market share from them.

I think the most important thing is I think you have already said that and because you already mentioned asking the question so if you produce an Indian and maybe an equivalent quality product so there definitely will be a price area because once you have to prove your performance and quality equivalence first so that we have proven that our product is equivalent in quality and performance so based on that and if we are able to let us say break the price barrier then probably we will have a better way of addressing that market. Of course, we will continue to bring in Innovation, some incremental changes in the product as time progresses but of course you are right because being in manufacturing in India definitely we will have the price advantage.

Okay and Sir in the domestic business how much was the renal care contri bution for this quarter and first half and how much it has grown.

So renal business contribution was close to 40 Crores and probably by the end of the year we should be close to 90 Crores or so that is what I mentioned earlier and second half looks to be more stronger for us and also Y-o-Y has grown around close to 30%.

So, this is the growth which you ar e talking about is for the Q2 FY2024.

H1.

H1 so 40 Crores you have done in first half right.

Yes, that is correct.

Okay and what about your infusion segment that contribution if you can give it.

Madam we do not give the contribution. This is a confidential number.

Okay as a total sales also earlier you used to give it.

We have because the numbers are not in front of me right now but specifically you can send an e- mail then we will be share with you.

Okay Sir so on your gross margin front I understand that you mentioned in your comments that due to the sales mix we have lost some gross margin in this quarter on quarter-on-quarter basis but you have not seen any sort of inflationary pressure on your raw materials is that correct to understand.

Yes, that is correct because there has been a very slight correction in raw material prices if you see between Q1 and Q2 because of higher crude oil pricing but we do not see a major impact and that is the reason we are still maintaining a guidance of 25% even for the next half of the year.

Understood Sir and my last question is related to the other expenses. This quarter you mentioned that the cost associated to new products have gone up and that is the reason our other expenses have gone up but in the coming quarters also you mentioned that there will be new launches, the company is going to catch the launch momentum so is this number fair to ta ke it for rest of the quarters to model how you feel that this number is likely to go up.

Critical care and the cardiac, both products are basically will be catering for the export market or for the domestic.

Of course, it will be domestic b ecause we need almost 2 to 3 years to get regulatory approvals for global markets so any new product launched today from India and if you have to go to developed markets in Europe or US it takes 2 to 3 for any company not even us, for any company.

Understood Sir. Thank you so much.

Thank you. The next question is from the line of Vishal Manchanda from Systematix. Please go ahead.

Thanks for the opportunity. Sir with respect to th e new medical device regulation you shared that class A, class B devices would be regulated by the state regulators and the class C and D would be so could you share has this in anyway impacted existing competition so basically have competitors exited the market.

Because Poly Med was already a fully regulated company. Because we are already exporting our products as I said earlier 50% export is coming from European market for Polymed so we are already in the highly regulated markets of the wo rld so we were anyways regulated, the impact was coming from unregulated companies and also affecting the quality of the product but we will see the impact of regulation over next 2, 3 years not happening because lot of companies have to upgrade the facilities, some have upgraded, some have not and some have to upgrade the product also because there are now 1400 standards for medical devices so this is all going to change and we are going to see an impact so for us I will say India market offers a very exciting promise because with everything else getting regulated now we have a good traction for products and also we are seeing a lot of increase of revenue in corporate hospitals so all that will impact because earlier corporate hospitals were worried to buy local products because they were not regulated and they could not distinguish between a good or a bad company but with now regulation in place now everything is at par so the companies which will be regulated there is a good future and especially companies who have prior history and who have been in the market for a long time will have a better market going forward.

Just a follow up on this so should I understand Poly Medicure already has approval from the regulator.

Yes, we do have for all the products we manufacture we do have.

Just so this can become a differentiation value.

Of course, that is what I am trying to say absolutely.

I do not know the data, that data will be w ith DCGIs office. I do not have access to that information.

Just one more what percentage of your sales would be from class C and class D devices which are regulated by the center.

Majority of our products fall in class B and C.

Okay just on the gamma radiatio n facility that you are setting up so just wanted to understand how much you would save basically on account of this.

It is not about saving for exam ple today most of the gamma radiat ion facilities in India work for multiple products they work for food grains, they work for let us say sea product like fisheries lot of stuff is being today gamma radiated for export and typically we have a challenge that some of the facilities do not comply with global standards for sterilizing medical devices and to mitigate that risk we are trying to set up our own plant. Of course, once we have in-house facility, we will save some cost. The facility has not started so I cannot give you a number probably once we establish this facility by let us say Q3 of next financial year then probably we will be in a better position to answer this questio n, but it is again to improve the regulatory compliances and ensuring that we follow the best standards in the world.

That is all from my side.

Thank you. The next question is from the line of Girish I Jain from KJMC Financial Services. Please go ahead.

Sir! Thank you for the opportunity and congratulations on the good set of numbers. Just wanted to get a sense of the US business you mentioned that the first shipment is gone and by the end of this financial year we expect to get approval for 8 to 10 products.

Next calendar year.

Okay next calendar year so earlier in the previous calls the management had guided $15 to $20 million as the potential revenue fro m the US business by next three years is there any change in that.

No there is no change in that because we are still in the initial phase Girish ji so we cannot give you anymore clarification right now. Once we have more products which are FDA approved then we will be able to maybe change our guidance after maybe 6 to 9 months maybe that is where we will see more visibility coming in but the current pipeline of product, I think we are still good with $15 to $20 million.

Okay and Q3 and Q4 were expected to see the two new plants getting operationalized any update on that.

Yes, they are on track so of course in Delhi we have still a very bad situation I am sure you are reading in the newspapers regarding pollution and stopping of all construction activities so we are delayed by one or two months I think that i's the only thing but more or less these plants are almost getting ready and hopefully by Q4 all the four plants should be fully operational.

Excellent okay that is all from me thank you and all the best.

Thank you. We have the follow-up question from the line of Vishal Manchanda from Systematix. Please go ahead.

Just a quick follow up on the US about 8 to 10 approvals we are targeting there. Would you be able to kind of share some colour on the market size of those.

Sorry Vishal these are all confidential questions I cannot share right now. I cannot disclose which product we are talking about. This is very sensitive to the company’s business.

Okay so not even market opportunity.

No, I cannot share that now.

And is the market fragmented in the US.

No, it is not fragmented. Market is very cons olidated with 5 or 6 large GPOs managing that business.

Would the US approvals in any way improve your prospects in the domestic market.

I do not think so, that does not matter here.

Okay thank you Sir.

Thank you. The next question is from the line of Hemal as an individual inve stor. Please go ahead.

Sir thank you for the opportunity. I am new to this company I just have one quick question in terms of your raw materials what are the key raw materials how do we think about them and how are their pricing is it volatile or very stationary or do we have contracts that make it very stable for 3 months, 6 months if you can shed some light I would really appreciate it and apology if this has been answered in prior calls.

Absolutely Sir, no problem at all. I will be happy to answer this so mostly raw metals are medical grade plastics which are coming from outside India most of our 70% of our raw metal is imported but as you know plastics is more or less governed by crude oil pricing globally, so it fluctuates because of crude oil pricing. Of course last year maybe very high cycle, the cycle went down in the initial part of this year but because we have a very mixed variety of products and of course we use steel because we use big needles we use different also materials which are used in manufacturing from silicone to lot of other materials and our raw material let us say contribution is only 35% to the final product co st so that makes us quite resilie nt to these changes and if there is a fluctuation also we are able to manage it very well but of course we do not have long-term contracts because none of the companies are on long-term contract to sell plastics, globally this does not happen.

Okay thank you for that , so mainly plastic is the main ingredient.

It is Sir.

And absolutely final you were talking about the renal machine you said 400 per year is there you want to take this right.

Market is 4,000 a year, the new machine market and current placement of machines is 40,000 so plan to take 10% market share in next couple of years, move to 400 machines so that is what we want to do and then gradually move up the ladder.

And each machine would be Sir how much approximately.

Each machine is roughly around 6 lakhs to 7 depending on the model 6 to 7 lakhs.

6 to 7 lakhs. Okay this is it. The rest all have been answered. Thank you, Sir, appreciate it.

Thank you. Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference back to the management for the closing remarks. Thank you and over to you.

Yes, thank you very much and thank you everyone for your questions and thank you again for participating in the company in various ways and we look forward to receiving your support and guidance in coming years and if you have any individual questions feel please feel to ask our CFO or company secretary. You can send an e-mail and we will be happy to answer them and if some of you want to visit our factories, please inform our company secretary or CFO and they will be able to arrange a visit for you and take you around our facility. Thank you again and look forward to speaking to you soon.

Thank you very much. Ladies and gentlemen, on behalf of ICICI Securities that concludes this conference. Thank you for joining us and you may now disconnect your lines.