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Laurus Labs Ltd
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Ladies and gentlemen, good day, and welcome to Laurus Labs Limited Q1 FY '23 Earnings Conference Call hosted by Antique Stockbroking Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Monish Shah from Antique Stockbroking. Thank you, and over to you, Mr. Shah.
Thank you, Neeraj. Good morning, and welcome to Laurus' Q1 FY '23 results conference call. We thank the management for giving us the opportunity to host the call. Today, we have with us Dr. Satyanarayana Chava, Founder and CEO; Mr. V V Ravi Kumar, Executive Director and CFO; and Mr. Vivek Kumar from the Investor Relations team.
I would like to hand the call over to Dr. Satya for his opening comments. Thank you, and over to you, sir.
Thank you, Monish, for this introduction. Thank you for joining us for our Q1 FY '23 results conference call. Since COVID-19 continued to post challenges with increased infections with new sub-variants, we hope every one of you and your family members, colleagues and friends are keeping safe and healthy during these challenging times. We are pleased to have this opportunity to update you on the progress and answer your questions.
Our Q1 results reflects a very healthy start for our FY '23. As we continue to improve on product mix and EBITDA was maintained at 30%. This was achieved despite ongoing disruption in the business environment due to COVID-19 and geopolitical scenario. Our CDMO division delivered exceptionally good performance, offsetting pressure on our ARV business. And growth in the API division was modest, but future business prospects appear very encouraging.
Imported RM prices have largely remained elevated in the light of supply chain conditions. But we do anticipate some of these challenges to abate with gradual China coming -- lifting sanctions during COVID and also easing our geopolitical situations across the globe. We are progressively expanding our portfolio and new initiatives. This along with our significant investment program should enable us to capture exciting and new business opportunities and reduce any concentration risk from a single product or a single therapy and deliver a broad-based sustainable growth in the long run. As a result, we remain affirmative on our aspirational target of $1 billion sales and which will be partially supported by several approvals anticipated.
Moving on to our financial results for the quarter, we achieved INR 1,539 crores in revenues, focusing a very healthy growth of 20% year-on-year. Sequentially, we have substantially improved on our non-ARV revenue numbers. Formulation reported a revenue of INR 349 crores for the quarter, a decline of 33% year-on-year. Coming to LMIC business, while broader demand [Technical Difficulty] after, the pricing has largely remained depressed in Q1, which is at already record low level. We are taking a calibrated bidding approach to ensure better outcomes in the tenders for this business. Having said that, we are very confident of sustaining our leadership position in ARV first-line treatment, both APIs and formations. During quarter 1, we launched lopi-rito combination in U.S. Additionally, we are awaiting a few more approvals in the U.S., which will drive our growth in the coming quarters and years.
As you are aware Laurus is a fully integrated player in ARV formulations and we believe we have the fair ability to weather pricing challenges and we are able to maintain our margins in the current quarter, supported by performance in other divisions. Coming to the developed market, our performance was stable as the increase in the generic volumes more than offset by pricing pressure. We continued to deliver the front-end operations in the U.S. market for new product launches.
During the quarter, we filed 1 additional ANDA and received 2 approvals, both tentative. We expect U.S. filing pace to pick up during this financial year. Cumulatively, we have filed 32 ANDAs to date, of which we have a total 11 final approvals and 13, actually 14 tentative approval so far. In Canada, we continued to have 11 product approvals, of which we have launched 5 products and planning to launch more products in the next couple of quarters. For EU markets, we have validated 2 products as part of the CMO opportunity. We expect a significant upside in this financial year from these products and we have a basket of 9 approved products, of which we have launched 3 on our own label and we will be launching 2 more products shortly.
Based on our healthy product pipeline progress, we continue to invest in non-ARV FDF infrastructure. As indicated in our last conference call, we have commissioned our brownfield expansion at Unit 2, taking the total FDF capacity to 10 billion units now. We expect a more gradual ramp-up of capacity utilization in the new block. On the R&D front, we continued to allocate critical resources to our research initiatives and investment portfolio with product-specific approach based on complexity and scale economies.
Additionally, we are implementing steps to bring more robustness in our overall product development processes, including focus on bringing digital transformation within [indiscernible]. We were happy to share that we have commissioned our sterile R&D labs, which we have started working on a few priority projects. Overall, R&D spending to sales for the quarter was at 3%. We have a total 55 products in the R&D pipeline, either under review or under development, having an addressable market size of over $40 billion.
When it comes to generic KPIs, our antiviral business during the quarter continued to witness sequential improvement and sales grew to INR 383 crores. While overall demand environment stays faster, we expect volume and prices are going to stabilize around these levels. We continue to maintain a leading market share in current product line and also expect to increase marginally in the developed market supplies of APIs. Onco APIs reported INR 62 crore sale during this quarter, reflecting a marginal growth of 5% year-on-year. As we are mentioning, we have the largest high-potent capabilities in the country and we are adding new capacity and we continue to have -- see good uptake in onco APIs. Our aim is to strengthen global leadership in offering onco APIs, not for generic customers, but also for the innovative clinical based molecule also.
APIs other than oncology and ARV sales, including diabetes, cardiovascular and asthma, showed very good numbers for the quarter at INR 138 crores, growing significantly at almost 80% year-on-year. This was supported by new contract supplies and we believe this segment should return to healthy growth trajectory in FY '23. We filed 1 DMF in non-ARV during the quarter, taking the total up to 74 DMFs filed so far. We have also completed validations of 2 APIs and we expect to file the additional DMFs in the current financial year. Interestingly, we also have a very high order book visibility in this segment. And accordingly, adding additional manufacturing capacities to capture the opportunities in non-ARV non-onco API space.
Synthesis business delivered exceptionally good quarter, delivering a robust growth of over 190% year-on-year and 6% quarter-on-quarter to INR 577 crores. The growth was supported by solid demand from new and existing customers, existing products and new opportunities in this division. We remain quite excited about this division as we focused on both commercial execution as well as pipeline expansion and activation. We continued to work with several and diversified customer base, including several big pharma. Our greenfield investment to set up a dedicated R&D center for Synthesis division at Genome Valley, Hyderabad and 3 manufacturing units at Vizag under Laurus Synthesis Private Limited is progressing as per our expectations, as we communicated to all our stakeholders earlier.
New sites for Synthesis division will have capabilities to handle steroids, hormones, high-potent molecules, apart from other large volume products in animal health. Laurus Bio revenues were largely stable at INR 30 crores and quarter-on-quarter, but we do anticipate pickup with the ramp-up of new capacities, debottlenecking of R2 and with our large-scale CDMO partners. We do believe alternate food industry is likely to grow meaningfully over the coming decades. And scale, cost and functionality will remain the core drivers for differentiation for the players. Scheduled expansion at R1, including a new R&D block and installing downstream balancing equipment to enhance capacity at R2 is on track. This expansion will be completed before the Q2. We have zeroed in land parcels for another greenfield site for our large-scale fermentation capabilities. And we are in the drawing board stage right now. We will invest to create the capacities around maybe 600,000 liters to 1 million liters capacity in new site.
With that, I would like to hand it over to Ravi to share some financial highlights.
Thank you, doctor, and very warm welcome to everyone on our first quarter FY '23 earning call. Total income from operations for the quarter is INR 1,539 crores against INR 1,279 crores with a healthy growth of 20%. Gross margin for the quarter is at 57.6%, almost like 90 bps on a better product mix. Our EBITDA for the quarter 1 is at INR 454 crores with margin of 29.5%, which is close to the full year guidance what we have provided. Our diluted EPS for the quarter is at INR 4.6, not annualized, which grew over 4% over the corresponding quarter. Our ROCE improved to 29.4% on an annualized basis based on the better product mix. On the CapEx front, we invested close to INR 209 crores for the quarter. And as we guided, we are expected to invest around INR 2,000 crores in the 2 years' time between FY '23 and FY '24. For any further details, you may refer to IR presentation in this regard.
We remain on course to strengthen our position as a cost-effective integrated pharma player. We are investing in backward integration process, creating more capacities in the non-ARV infrastructure. On the tax rate, our effective tax rate was around 29%. Based on this year onwards, we are losing our exemption to 50% on the SEZ side. That's the reason it is at a higher side. But however, we are going to evaluate further in the -- at the end of the third quarter or beginning of the fourth quarter, whether to shift to the new tax regime or not.
With this, I would request the moderator to open the lines for Q&A.
[Operator Instructions] The first question is from the Sudarshan Padmanabhan from JM Financial.
Yes. Sir, can you hear me?
We can hear you.
Yes. My question is on the synthesis business. I mean, if I look at the run rate, honestly, you have done a phenomenal job from where we were 2 years ago to a run rate of almost INR 600 crores. In the annual report, you talked about 2 contracts. One is a multiyear CDMO contracts with niche APIs and the other is global major life sciences. I would like to understand, I mean, whether this run rate is sustainable, I mean, going forward? I'm not necessarily looking at quarter-to-quarter, but directionally. And is there any kind of one-off suppliers where we have ceded to any of the contracts, which might not [indiscernible] probably going forward?
I will answer this question in 2 parts. You are mentioning on 2 contracts, 2 pieces of information. One is multiyear, multiproduct contracts signed with global life science company. We are building a dedicated capacity to cater to the products and demands as per the contract. Right now, we are developing products, which will go into the manufacturing site. And 1 MC validation is going on at our current site. So the revenue coming from that contract is not that significant right now. But it will become significant once we qualify the plant, which will happen maybe second half of next financial year. That's question about part 1 of your question. In the part 2, which we indicated, we got a major contract from another life science company and the supplies are ongoing. So with that, there is no one-off in Q1.
And this will continue probably for the next year? I mean, it's a longer-term contract. It's not necessarily a top line contract?
These clinical programs, commercial see, it's difficult to predict. I think only, as I mentioned in our last call, numbers only will tell you how we are doing.
And the run rate should continue? I mean more or less directionally, we should continue to do well on the CDMO part. Is that right assumption, sir?
We will do very well in the CDMO part, that's for sure. So a lot of opportunities ahead of us. We are -- as Mr. Ravi mentioned, we are creating a 3 new greenfield sites for CDMO division, that indicates how much of opportunities are in front of us.
And sir, one question, last question from my side is on the formulation side. I mean we have the new capacity coming up. But on a quarter-on-quarter, we have seen a dip, I mean, from a run rate that we usually do. I mean, do we see the run rate kind of moving ahead? And when do we start to optimally utilize the capacity, sir? I mean, some color on how we look at it directionally.
You are asking formulation. Formulation capacity is fully qualified right now, but it will be fully utilized by end of this calendar year.
Next question is from the line of Krish Mehta from Enam Holdings.
Congratulations on a good set of numbers. The only question I had was on the total breakup of ARV versus non-ARV sales for this quarter?
The ARV APIs is at 25% of our sales. If you recall ARV APIs, once upon a time in 4, 5 years, used to constitute 80% of our sales. Now it is 25% of our sale and 17% of sales came from ARV formulations. If you sum it up, about 42% of our sales came from ARV, from APIs or formulations put together.
Next question is from the line of Amey Chalke from Haitong Securities.
And congratulations to the management for the good set of numbers. Sir, I have one question on the margin side. So despite this sizable increase in the synthesis business, our margin improvement sequentially has been minimal. So is it fair to assume that the synthesis margins are not very far from the company level margins? And if it is so don't you think it is on the lower side, if you can clarify on that? Along with that, also, if you can explain the higher other expenses for this quarter compared to the 4Q of last year?
There was price pressure on ARVs, both APIs and formulations. That reduction in the margins in ARVs was offset by higher margin CDMO business. The CDMO business, the numbers are on par with any other CDMO focused player. That is one. Second, when it comes to the other businesses, we are talking about EBITDA. EBITDA numbers for the entire company, we are not disclosing the division-wise. So other operating expenses, I will ask Ravi to clarify.
Yes, the expenses side, there is a power shortage in our manufacturing area in Andhra Pradesh in the last quarter. We have sourced a lot of power from the private sources and also we used diesel. We spent about INR 33 crores additional expenditure towards power. And some part of the foreign exchange loss also there. You are aware the foreign exchange loss on account of the, not incurred loss, it is in restated loss. So that's also reflected in the other expenses.
So going ahead, you expect these other expense to normalize at least in the near term?
We expect so. The power and fuel get normalized already.
And if the GM remain at a similar level because of good business mix, don't you think the EBITDA margin has scope to improve going ahead?
Our overall for the year, we gave an EBITDA margin guidance of around 30% and then we are still reiterating that.
And just last question I have on the formulation sales drop. On the [ TLV ] side, how do you see the tenders going ahead? And is the demand have gone down or the pricing has gone down substantially. That's why the market size has shrunk? If you can elaborate on this part.
The volume front, there is no de-growth. Volume uptake remains robust for all players put together. In the last quarter, the most of the tenders except South Africa, winner takes all tenders. So business drifted to few players rather than spread across several players. That's the case with the Global Fund and PEPFAR where the volume split is evenly across all the players. So we do expect to the supplies to Global Fund and PEPFAR will start from Q2. So we do hope the formulation sales in the ARV segment will pick up from the next quarter.
Next question is from the line of Nikhil Mathur from HDFC Mutual Fund.
2 or 3 questions I had. The first question is on the CapEx for FY '23 and '24. You have guided to a normal course of CapEx. Can you help me with the CapEx which were elevated for the custom synthesis business with INR 2,000 crores?
The CapEx number guided by Ravi a little while ago is INR 2,000 crore for FY '23 and '24. I would say, 40% to 50% of the CapEx is in the CDMO space, either R&D or manufacturing, put together, is about that number. And very little is going into -- actually, not little, nothing is going into the ARV APIs or formulations. So most of the remaining CapEx, say, which is around another INR 1,000 crores is going into non-ARV APIs and non-ARV formulations or backward integrations.
So basically, what is the gross for today for the custom synthesis business and if we add another INR 1,000 crores, so what is the gross book we're looking at for custom synthesis 2 years down the line?
Currently, except 1 small facility, we don't have a dedicated manufacturing facilities for custom synthesis. So today, our facilities are common for both generic and custom synthesis. To remove that complexity and fight for capacity, we are creating dedicated capacities for our CDMO space. So we can't segregate right now. How much is used for CDMO, how much is used for generic, we know. But there is no dedicated capacity for CDMO or generic, both utilize the same capacity.
Sir, second question. I mean, one of the participants has already asked this question. I might just want to ask this question in a different way. In FY '21, when the sales rebound happened for the company in a big way, the company wasn't fully sure whether that particular sales momentum or the growth momentum will continue in FY '22 or not. And then in FY '22, we saw destocking at various levels and multiple business areas.
Now whatever the sales that is happening in FY '23, our $1 billion guidance that you are reaffirming on multiple forums, what can be the external threat or sudden shock to that number, let's say, in FY '24 and '25? I think it's very well understood, I mean, given that you are sounding so confident on this $1 billion guidance, it should get realized in FY '23. But as investors, we are not fully sure what kind of shocks can happen in the system, whether in the company or outside. So if you can give some more comfort, whether this $1 billion number can sustain in FY '24 and '25 or not, that would be very helpful?
See, what are the CapEx we have announced FY '23 and '24. So these capacity should give additional revenues in '24 and '25. So by your question is, while achieving our target of $1 billion, will be a growth in FY '24 and how much will be growth in FY '25. So we can say our history also reveals. So we grow significantly in 1 year, grow marginally in 1 year. So it is not that we can grow as it put a straightline is not possible. So we have very exciting opportunities in front of us. That is the reason we are doing CapEx. And now CapEx is not being done in anticipation of something. So at least we have moved away from creating capacities ahead of our requirement is gone. We are creating capacities to capture what opportunities we have in front of us. So FY '25 is going to be a very good year. We have -- in our previous call also we had mentioned. And FY '24, we are not giving guidance, but we'll give you guidance at appropriate stage what will be the growth opportunity in FY '24.
And sir, one final question again on the personal synthesis side. I mean we are broadly aware of the capabilities that Laurus brings in this particular segment, especially in the high-volume manufacturing front. But over the last 3, 4 quarters, the run rate -- the quarterly run rate of sales from this segment continues to move up. So do you mind highlighting some 2 or 3 incremental capabilities that is now helping Laurus to continue to grow in this particular business? I mean, maybe 1 or 2 case studies that you might want to share from your broad portfolio of products in this business?
It's a very interesting question. We have added significant capabilities apart from significant reactor volume. So the company is in a position to do hydrogenations at very scale, low cryogenic reactions at scale, bio-catalysis at scale, continuous flow reactions at scale. So company added significant capabilities. That is the reason we're able to attract, retain new customers and in-source several products at late-stage clinical phase or commercial because of our new enhanced capabilities in the company.
And then just if I may just squeeze in 1 final one. For Laurus Bio, can you share some outlook from a 2-to-3-year perspective? What kind of revenue we should expect from this business?
Laurus Bio, we did INR 30 crore sale in this quarter. And Q2 will be similar. Q3, Q4, we expect debottlenecking of downstream processing. So some increase in business will come. But FY '24 is going to be a flat year for Bio because our capacities are fully utilized by end of this year. That is the reason we are investing significantly or we are planning to invest significantly in the division. And those capacities will come for commercial use in FY '25. So FY '25 is a big leap for Bio, but not FY '24.
Next question is from the line of [ Binu ] from Incred Capital.
And congrats for a great set of numbers. Dr. Chava, your guidance of $1 billion for the year implies 50% to 60% plus kind of growth for the year. And in the first quarter, you have done 20%. So which means for the next 3 quarters, you are looking at maybe 70-odd percent kind of growth in revenues, Y-o-Y. So is that self confidence? Or is it more aspirational? How confident are you about meeting your sales...
When we announced our goal aspiration to become $1 billion, the dollar was at INR 73, yes INR 72 to INR 73. So we are very confident to achieve that number now. So at that number, I think we have every arms and ammunition available to reach there.
Just to understand, is there any 1 risk that you don't need to see what it is, but is there that 1 risk in your mind, which could impact achieving this maybe some product developing some problem or 1 client moving away from you? Is there 1 or 2 such key risks which can impact this or is it a well distributed business target?
See, we have capacities, we have customers, we have visibility of orders and except 1 product approval in formulations, all are in place. If we are scouting for a customer, we are scouting for the capacity or facility approval and all, it is a long goal. So we are not that. We are very close to our goal. We have all the actions required or abilities required to reach that number.
Next question is from the line of Tushar Manudhane from Motilal Oswal.
First on this brownfield capacity, which has now come up in July. So what could be the incremental operational cost associated with this, which will come in the subsequent quarters?
See, our formulations expansion capacity is fully manned. So those expenditures are already built in Q1 itself. So we are going to recruit marginally more people in new block. But those costs are already built in in Q1. If there is a slight increase, it will be built in Q2. See, you are aware all these preoperative expenditures are expensed, not capitalized in the company. So all those are built in in our numbers.
And just on other API segment, where we have seen good traction over the past 2 quarters. So how do you see this in terms of the new products? And or we -- market share gaining the existing project, the perspective here is that there has been a good amount of inventory-led disruption in API in industry per se on account -- maybe on account of COVID and/or maybe the China-related lockdown. So how do you see the prospect for non-ARV APIs?
Non-ARV APIs will continue to grow. And our increase in our inventory is a conscious decision we took to weather the challenges of supply chain challenges. So in one way, our increase in inventory helped us to sustain our growth. So if we are very prudent in our inventory, we might have challenges also. So higher inventory helped us to sustain the supplies to our partners during challenging times.
Next question is from an Ritesh Rathod from Nippon India Mutual Fund.
Can you quantify in terms of ARV pricing pressure, which you mentioned significantly, how much it would be down on a year-on-year basis?
It is both ARV APIs and formulation, if you take together, as I mentioned, it is about INR 550 crores. The margin impact was almost 15%, I would say. Average 15% both put together.
And in case of custom synthesis, you spoke about 2 contracts and the second one where you are ramping up. So you have -- I presume you would have ramped up in Q1 as well as in Q4 to some extent. How sustainable that business would be after a year or so once it reached to a steady state? Do you see risk or any sort of risk over there after a year or so?
These products are in the late-stage or just launched. So they have a very long patent life. So these are not like generic molecules today, company A will get market share, tomorrow, company B, get market share, then we are not with the A and B, then we have no orders. But with MCEs, these unilaterals will have long rope. So I don't think this will vanish in any year. So these are pretty long-term in nature.
This you're talking about the commercialized product, right?
Yes.
And any kind of pricing pressure comes in this product on an annual basis or productivity benefits, which needs to be passed on.
We haven't seen significant price pressure in this division unless we agree. See, these contracts are long term, so we do agree what kind of improvements we make and pass it on to the partner. But other than that, this segment is -- pricing is predictable and stable.
And excluding the 2 contracts which you spoke about, excluding that, custom synthesis business, the base, you will grow on that base if you exclude that -- those 2 contracts? Even over there, you are confident of saying the same thing.
We do expect to grow. Yes.
And one final question on CapEx. You will have maintained your CapEx guidance or even that has gone up? Or like what's the number as of now? Because you mentioned about the rupee side fluctuating on your revenue guidance. Just to reconfirm your CapEx guidance?
See we indicated around INR 2,000 crore CapEx for FY '23 and '24. And in the Q1, we did spend around INR 208 crores CapEx.
Next question is from Nitin Agarwal from DAM Capital.
Sir, on the CDMO business, how many commercial products are we supplying right now?
We have 6 commercial products; 4 -- actually, 7, 4 and 3 APIs.
And sir, and how many late-stage products would we have that can get commercialized over say next 2 to 3 years?
We're not going to give you a number, but there are a very good number of candidates in the late-stage.
And sir, on the current revenue -- sorry.
Because of those only we are expanding our capacities and capabilities in the division.
Absolutely, sir. I was just curious, rest of the 7 that we have, do we see this number going 2x, 3x over the next 3 to 5 years, 3 years, rather?
We don't want to comment on that.
And sir, is there a -- I mean, can you help us also with a split which is there between the business between, say, contract research and contract manufacturing in the CDMO business, the early-stage contract research that you do?
So we don't do any preclinical work. So we don't do any med-chem work. So all or most I would say, the most of our revenue coming from manufacturing only. So nothing is coming from research. We don't have any FTE programs.
But in terms of -- is there a work that you're doing with innovators during the clinical trial phase, maybe doing pilot quantities and all in Phase II, Phase III?
Yes. Okay. Going back to your question, we do have a lot of programs coming from Phase I, Phase II. But Phase I revenues are not that big to mention.
And sir, secondly, on the formulation business, so how do we see the ex ARV business in the formulations over the next couple of years? What would be the drivers for this business?
Excluding the lot of filings done, a lot of approvals anticipated. And the growth in formulations will come from non-ARV now onwards.
Sir, you mentioned a specific product around in Europe, that will be a big driver. By when will that product start to kick in for this?
Partly, this quarter, but majority will come from next quarter onwards.
And then lastly, on the CapEx, you talked about INR 1,000-odd crores on the non-CDMO part of the business roughly. Can you just help us understand what were the areas where you're investing these primary areas investment for -- on the ex ARV side for the CDMO for the CapEx?
In the non-ARV -- non-CDMO CapEx, maybe 2/3 is going into the APIs, and 1/3 may go into formulations further.
And the formulation we're adding more capacity beyond the brownfield that you've done -- we've commissioned this quarter?
Not this financial year, but next financial year, maybe yes.
The next question is from line of [ Siddhartha ] from The Investment Trust Of India.
So sir, I had a couple of questions. One on the ARV tender side. Sir 3 years ago, we received a large multiyear contract for the LMIC market. Just wanted to understand when this was due for renewal? Is this done the new round of tender for this?
The South African tender results were announced. We don't have any formulation say there. So API sales will go to South African contract. And Global Fund and other tenders will be announced soon for 2023 onwards. So for 2023 allocations were already made and supplies will come from next quarter.
Sir, my second question is on the large CDMO product. Is it fair to say that if you exclude this from this quarter, then the synthesis business is flat to single-digit growth on a Y-o-Y basis?
Large multiyear multiple contracts hasn't given any significant revenues in Q1.
I'm talking about the commercialized large contract that we have been supplying since March.
No, still there is growth. So -- and this is not a 1-month contract. So the contract, we still need to execute fully.
Sir, basically, the follow-up to this is that is this contract a multi-year contract or it's a renegotiable, renewable single-year sort of a contract?
I think too early to comment on that.
And are these margins for this product will be similar to overall synthesis business?
Yes.
The next question is from the line of Dhruv Bhatia from Bank of India.
Sir, my question is on the CDMO piece. So this quarter, you have done about INR 577 crores of revenue. Is it fair to say that for the full year, I mean, this is at peak capacity utilization you're running at. So on a full year, you could probably do INR 2,000-plus crores revenue from the segment?
We want reserve answering this question right now.
But do you have the capacity to do further than this with current capacity available?
We have capacity available, yes.
And the INR 1,000 crores of incremental CapEx that you have planned for CDMO, what type of asset turns can we build in going forward?
You could take our current average, close to 1.5, at 1.4, 1.5 between 1 and 1.5, depending on how we effectively utilize that CapEx. Yes.
And the capacity that you've put up is obviously for, as you mentioned, the multiyear, multiproduct contracts, but over and...
Hello?
Sir, the line for the participant dropped. We move on to the next participant. The next question is from the line of Kunal from Carnelian Asset Management. Kunal, you're not audible.
Hello? Am I audible?
Yes, now you are.
This is Manoj from Carnelian. First of all, congratulations for a good set of numbers. I have a couple of questions. First one is on CDMO side. So just wanted to understand a little bit more on CDMO. Since you mentioned that you have built some new capabilities to build this business. So just wanted to understand 2 things, sir. A, is like what is our right to win here? And secondly, how do you pin down the opportunity side in the segments where you are working?
Right to win these opportunities is based on reputation, regulatory track record, flexibility in offering volumes. That is the right to win. And the second question, I couldn't get very clearly.
Sir, if you can pin down the opportunity size in terms of the segments or therapies or like in terms of the molecules where we are working, where we are putting the CapEx. So if you can let us know the opportunity size overall for these segments where you are putting CapEx?
In the CDMO, we have little or no scope to choose what we should get. So all depends on what partners want us to make. See, we are not making steroids -- we are not making Cephalosporins Penicillin. Other than that, we are offering a wide spectrum of things, starting from steroids, hormones, high-potent, prostaglandins, so large volumes, small volume. So our offering is very extensive except Cephalosporins with Penicillin.
And sir, whether these capacities which you are building are fungible, let's say, if you are building a particular capacity like you also mentioned in your PPT that you are putting a CapEx on a multiyear contract. And let's say that molecule, end molecule doesn't get the anticipated growth. So whatever CapEx you are putting either it has to be protected by way of take-or-pay? Or is it fungible? So if you can elaborate on this bit, sir?
One of the facility we are building is for a specific therapy area, animal health. So it is fungible within the animal health, but not through human health can put there. So that is -- that kind of fungibility is there. And other than that, other products are either advanced intermediates or APIs, those are -- there are some equipment technology specific, which is not fungible, but majority of the reactors are fungible, yes. See, in the CDMO space, except few occasions, our partners don't use those vessels 365 days a year. So there's some kind of flexibility has to be there.
And sir, one last question I have, mainly on Laurus Bio. You mentioned that you are evaluating a plan to create close to 1 million liters fermentation capacity in Phase 1. If that goes through, what kind of CapEx we can think for building this kind of capacity? And any color on time line for this in terms of CapEx as well as ramp up?
See, we will get back to you on how much CapEx we are going to spend maybe in the next quarter or so. So we are finalizing our numbers. But we do expect this facility will up and running sometime during FY '25.
FY '25. When you see enough opportunity size for this -- in this space, right?
There are opportunities. See, the challenge right now is we don't have capacity to offer. So that is the reason we want to do this on a fast track mode and we'll get back to you with the exact time lines and also how much we're going to spend on that.
Sir, on fermentation, I think world is overdependent on China. And still, I think India is not there. So means building this kind of capacity, so if you can give us some color in terms of the kind of capability or the kind of the kind of -- I would say that means whether we will require some kind of pre-existing contracts or whether we will first build the capacity, and then we will have to wait for the contract. So some color on that, maybe this quarter or next quarter, I think that will be helpful for us.
Sure. So this capacity is being built for synthetic biology, alternate foods, recombinant food proteins. So we were not competing with the conventional fermentation of steroids or vitamins or any other large molecules. So this is specifically for synthetic biology, yes, precision synthetic biology. Yes.
Next question is from line of [ Bharat from Quest for Value Capital ].
My question is to Dr. Chava. Sir, you say that you want to see CDMO to be 25% of the sales in FY '25. And if you see our numbers now, already in last quarter, CDMO is 25% of the revenue. And this quarter, it's already 37% of the revenue. So I would like to know like where do you see CDMO in percentage of sales in FY '25?
Very good observation. Maybe we had to revise our target to 1/3 by FY '25. Yes. From 25% to 1/3 by FY '25, maybe.
Yes, yes. Because currently, I can see in the PPT that it's 25% by FY '25, but already you are 37%. So I think 33% is good number you see.
Yes.
And my next question is that total capacity of Unit 2 is 15 billion a tablet. And now -- right now, 10 billion is commissioned, but the total capacity, it can be estimated to 15 billion, right? If you can also do a brownfield extension of 5 billion more, right?
Yes, you are right. The physical infrastructure was created to expand capacity by 10 billion, but 5 billion capacity was installed and qualified. There is a room to expand by another 5 billion. That may happen next year FY '24 depending on the -- how we are doing in Europe and U.S.
So you mean to say that once this 10 billion is completely utilized, then you will do a brownfield capacity of 5 billion?
Yes.
And one more question is that in PPT, you mentioned that you are taking calibrated tendering approach to ensure better profitability for this ARV formulations. So don't you think that you would lose market share because of this calibrated tendering approach?
See, what we meant by calibrated approach is, we don't want to participate aggressively in tenders where winner takes all. So there, people are very aggressive on pricing. So we don't want to participate in those tenders but still participate in tenders where the award is split amongst several people.
But generally...
I mean calibrated.
But generally, I may be wrong, but I think this ARV with tenders, it's not like winner takes all, right. It will be like 30% to the first guy and 30% to second guy and 30% third guy? It will be distributed, right? It's not like winner takes all, I guess, or I'm wrong?
There were some tenders. Maybe I would put up to 10% of the market is winner takes all kind of situation.
And my last question is like, in last con call, you said -- I mean not last con call, I think 2 quarters back, you said that you are planning to use this Unit 4 capacity as interim to service this multiyear contract with animal health company till the dedicated plant is ready. May I know like by when you would be able to do commercial supply from this interim capacity for this animal health company?
Commercial supplies will start end of FY '24.
That's on the new capacity, new plant, right?
Yes. So I think once the new capacity comes up, I think we don't want to utilize the capacity Unit 4 for those products.
So you're not planning to commercialize Unit 4, you're planning to commercialize only in the new plant?
You are right.
Next question is from the line of Pratik Kothari from Unique AMC.
Kind of couple of questions regarding ARV. So in the last con call, we did mention that our API formulation prices were down 10%. And you said this quarter, it's down about 15% from high. So there's been further deterioration of 5-odd percent, correct?
Yes. And we do believe that's a new base. We don't expect further significant price drops. Yes.
And we also did say that going forward in the coming few quarters, we used to do INR 550 crores, INR 600 crores of ARV APIs a quarter. We are at about INR 350-odd crores now or rather INR 400-odd crores now. They should go back, but not at the same margins that we used to see maybe 2 years ago?
ARVs, both the APIs and formulation put together, I think top line will grow, but at a lesser gross margin, what we enjoyed in the previous years.
And sir, when you should do -- I mean 2 years back, when we used to do INR 550 crores, INR 600 crores of ARV APIs, they started a second line...
We never did INR 600 crores. So the peak, we did was INR 1,900 crore per year ARV API. But broadly, you can say INR 1,500 crore, INR 1,600 crore APIs and other say, same number in the formulation. So our new yearly base for ARVs will hover around INR 3,000 crores, take at leave a couple of hundreds on the positive side. So that will be the new norm. So we don't expect that -- see, the situation is evolving and we are accustom trying to accommodate to the changes in the environment. We are growing in volumes, but the price drops are pushing us downwards in our growth. So around INR 3,000 crore is the new base for ARVs put together. I think we are very confident to retain that number. And that number will also help us to retain our leadership position in both especially in APIs.
Sir, in your opinion, what is causing this price war because at one time, we also saw that our solvent prices or input prices were going up and we were intending to pass that same. Has new players come in? Or has that market share changed in certain way, if you can grow some light?
It's a difficult one to answer. No new player came onto the market yet. And it's not a growing market for 10 people to jump in. It is a declining market. And it is incumbents are very strong. If the incumbents are weak, then there is a scope for a new player, but incumbents are very strong, and the market is stabilized, is not growing. So it is a natural phenomenon in the business. So the era margins in this business has gone and it has become a cash cow. So maybe it's a very important segment for us at INR 3,000 crores and is an important business for us. And we are committed to that business and we do whatever course correction is needed to maintain our leadership position.
Next question is from the line of Jeevan from Sahasrar Capital.
Congratulations, sir. Just 2 questions. First is, last year, when we talked, we were basically having world leadership in 8 molecules, and we are aspiring to go for 15 molecules. So where do we stand now?
In a couple of oncology, we increased our market share. So that target is non driven on that. So we will -- we are continuing to add portfolio where we have leadership version or ability to get to leadership position. That goal is on track. And in the next 2 years, maybe that number what you said, will definitely more than 10. Yes.
And on the CDMO side, basically, we were into human health. Now we're getting to animal, I think we will also get into plant. So I think looking at your CDMO, it looks like more of a chemical company than a pharma company. So -- and we have capacities, we have capabilities, we have credibility, and we have clients. So we have all 4C. So how do you see the traction coming in CDMO, the kind of inquiries you are getting from the clients? So are we looking to sign something similar multiyear multiproduct contract deal even in the future? So...
We are not a chemical company. We're a chemistry company. There is a lot of difference between that. So we intend to use our chemistry capabilities and scale to offer value to our partners. So I think we are adding more capabilities there, as I mentioned previously to 1 question. What is the right to win here? We offer large-scale chromatography, bio-catalysis, fermentation, hybridization, continuous flow chemistry, very low temperature chemistry. So I think our capabilities are also very enhanced. We can also do spray drying. So because of those enhanced capabilities coupled with our commitment to invest for a project, I think this division looks interesting for us.
So are you seeing a similar kind of inquiries for a multiyear multiproduct deal? So large deal I'm saying basically.
We are working on some. At an appropriate time, we'll let you know. Yes, we are working on some.
And last question is on the bio side actually. So we -- last time when we spoke, you said that we have enough plant acquired for 3 million to 4 million liter capacity. So right now...
We didn't acquire, we have chosen land parcels. And now we have zeroed in where to build. So we will close that land in this quarter and then start putting bricks as quickly as possible.
And one more, sir, on the multiyear contract that we have for the CDMO. So is it for interim widgets or also for API and formulation?
We can't answer that, yes.
Next question is from the line of [ Naushad ] from Aditya Birla AMC.
A few clarifications, sir, firstly, on the CapEx pipeline of INR 2,000 crore, INR 2,500 crore, you mentioned 50% would go to CDMO business. And you have shared an asset turnover of 1.5x. Can you give us the asset turnover of the CDMO business, what one should expect?
I think when I mentioned around 1, 1.5, our CFO also corrected that. So you could take between 1 and 1.5, yes, as our turnover ratio when it is fully utilized. See, the gestation between our cost to investment starts to get into the peak commercial sale, we'll take between 3 to 4 years. So we invest and then we go to the peak, it doesn't happen. So the day we complete our CapEx, we need maybe another 2 years to fully utilize that capacity.
Yes. That I understand, sir. So in both the businesses, we should expect on a full utilization, it should give 1.5x?
Between 1 and 1.5, you are free to choose either 1 or 1.5.
And how are we planning to fund this CapEx, sir? Would it be largely through internal accrual or any portion of debt we are planning for this?
I'll ask our CFO to answer this.
Hopefully, internal accruals.
And by any chance, do you share your CDMO margin, if don't quantify it qualitatively, if you indicate, would it -- is it significantly higher than our API and formulation business or marginally higher?
We have been disclosing that. The -- on a gross margin side, CDMO is the highest followed by formulation followed by API. That is what disclosure we gave and then we -- it is still valid.
And at the EBITDA level, the difference remains same or it becomes narrow?
We don't calculate EBITDA level. So it's not possible to calculate it.
And lastly, in our CDMO business, typically, when we go for new client acquisition, what is our value proposition to the client? Is it cost? Is it the capability? What exactly we do or we pitch differentiation to get the client?
See, I think it's 2, speed and flexibility.
Thank you. I now hand the conference over to Dr. Satya for closing comments.
Thank you, participants for your very interesting questions, and we'll continue to update you any further information in the next call. Thanks, Monish for organizing this. Thank you, everyone.
Thank you, everyone.
Thank you very much. On behalf of Antique Stockbroking Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.