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Laurus Labs Ltd
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Ladies and gentlemen, good day, and welcome to the Laurus Labs Limited Q2 FY '23 Earnings Conference Call, hosted by Antique Stock Broking. [Operator Instructions]
I now hand the conference over to Mr. Monish Shah from Antique Stock Broking.
Thank you. Good evening, and welcome to Laurus' Q2 FY '23 results conference call. We thank the management for giving us the opportunity to host this call. Today, we have with us Dr. Satyanarayana Chava, Founder and CEO; Mr. V.V. Ravi Kumar, Executive Director and CFO; and Vivek Kumar from the Investor Relations team. On behalf of Antique Stock Broking, I would like to wish the management and all the participants a very Happy Diwali.
I will hand the call over to Dr. Satya for his opening comments.
Thank you, Monish. Thank you for joining us for our quarter 2 FY '23 and H1 FY '23 results conference call. We wish everyone participating in the call and their families very happy and safe Diwali.
We are pleased to have this opportunity to update you on our progress and answer your questions. Our strong start to FY '23 continued in the second quarter. Our H1 financial results demonstrate favorable change in our business mix and sustained profitability. This was despite ongoing disruption in the business environment due to continued pandemic situation and also emerging geopolitical issues. Q2 results were driven by continued strong growth in our CDMO business. The traditional support from Non-ARV API segments. Overall, FDF ARV division performance was subdued and was impacted negatively by lower formulation molecules and adverse pricing dynamics in both API and Formulation.
Supply chain logistics scenario has slightly eased, driving moderation in imported RM prices. However, the ground situation remain extremely dynamic with the multiple factors in play, like restricted internal mobility in China, geopolitical issues. We are trying to minimize any disruption to customer shipments by expanding our critical supplier base and also having enough inventory to cope up these challenges.
As we enter into second half, we remain confident in strength of our businesses, which is expected to deliver a strong revenue growth and a stable EBITDA margins of around 30% for the entire financial year. However, in near-term, we'd like to provide you an update on our earlier goal of $1 billion revenue by FY '23 sales target, which could potentially get delayed due to changed competitive landscape and adverse pricing impact in ARV APIs and offtake in ARV formulations.
We remain firmly guided by our strategic priorities to build long-term growth. And our excellent execution skills will enable us to deliver value to all stakeholders. We are executing on the opportunities in front of us today, while simultaneously making the necessary derisking investments to sustain the company's success into the future.
Moving on to our financial results. We achieved a healthy top and bottom line growth for the quarter and the first half of FY '23, which was led by an exceptional growth in non-ARV numbers. We achieved INR 1,576 crores in revenues for the quarter, showcasing a 30% growth year-on-year. In the Generic FDF, for the quarter, our revenues were down by 70% year-on-year. For H1, our revenues were down by 51%. And our revenue degrowth was about INR 520 crores when compared to H1 FY '22 versus H1 FY '20.
However, our antiviral APIs have shown a healthy growth, INR 477 crores in quarter 2 versus INR 339 crores in quarter 2 FY '20. For the first 6 months, we did the INR 790 crores ARV API sale versus INR 750 crores in last financial year 6 months. Oncology degrowth was visible in our Q2 numbers, but this is momentary and we expect overall Oncology will have a growth by end of the financial year. Noteworthy to have to observe, our other APIs has grown significantly in the current quarter from INR 115 crores to INR 222 crores. And in Generic APIs, overall, we did INR 618 crores versus INR 527 crores in Q2 FY '20.
Our Synthesis was a very remarkable achievement here. We did INR 722 crores -- INR 720 crores versus INR 155 crores in Q2 FY '20. Our Bio results were almost flat, INR 27 crores versus INR 26 crores in FY '20. Overall, we did INR 1,576 crores sales from the quarter 2 versus INR 1,203 crores in quarter 2 FY '20, which was almost 30% more than the previous -- corresponding quarter last year.
I want to give you a brief on our Generic Formulations. This division reported revenues of INR 498 crores that we capped off of this financial year with almost 50% decline year-on-year. And from the quarter, it was exceptional degrowth of 70%. When it comes to LMIC business in ARVs, the broader demand environment in ARV continue to stay affluent. And the pricing has remained very depressed in Q2, which is already at record low levels.
We continue to remain calibrated in our bidding approach to ensure better profitability for this business. Having said that, we are optimistic about having a better H2 uptake with situation getting stabilized. We are very confident of sustaining our leadership position in first-line HIV treatment, both APIs as well as formulations. During first half, we launched lopinavir-ritonavir combination in the U.S. and also received U.S. FDA approval tenofovir-lamivudine combination in the second quarter, which we expect to launch shortly. Additionally, we are awaiting few more products approval which should drive our growth in coming years. Laurus is fully integrated player in ARV formulations and believe we have the ability to weather any pricing challenges in the coming quarters as well as we're able to maintain our margins in the future quarters.
Coming to the developed markets, our performance was stable and we continue to get good market share on some of the products. Increase in the generic volumes have been able to offset the pricing pressure. We continue to leverage our front-end operations in U.S. for new product launches. During the quarter, we filed 2 ANDAs and received 4 approvals, 2 final and one tentative. We expect U.S. filing pace to pick up during the second half of this year. Cumulatively, we have a total 34 ANDAs filed to-date, of which we have a total of 14 final approvals and 12 tentative approvals so far.
In Canada, we continue to have good approval pace with 11 approvals on hand, of which we have launched 7 products. In the Q2, we launched one product. And we intend to launch 2 more products in the rest of the financial year.
For EU markets, we have validated 3 products as part of our CMO partnership. We did one product in Q2. We got approval. We expect a significant upside from these products in the coming quarters. We have a basket of 10 approved products versus 9 in the previous quarter, of which we already launched 5 products. We launched one new product in Q2. And we will be launching few more products in the rest of the financial year.
Based on our healthy product pipeline progress, we continue to invest in Non-ARV formulation development and infrastructure. We currently have commissioned the total capacity of 10 billion units during the quarter 2. We also wanted to make a note, there is a room to expand the formulation capacity by another 5 billion, but this may happen during the next financial year depending on how we are doing in Europe and U.S. and how best we are utilizing our current infrastructure.
On R&D front, we continue to allocate critical resources to our initiatives and invest in portfolio with product-specific approach based on complexity and scale economies. We initially started with immediate release solid orals now we moved into modified release. We're also slowly moving up in the value chain by investing in complex generics.
We have developed a unique novel drug delivery for pediatric HIV and filed patents around each. We intend to file NDA for this novel pediatric product during the current quarter. We believe this drug product for pediatric HIV treatment could significantly enhance our position as a innovative cost effective solution provider in HIV treatment in LMIC and also provide opportunity for us to explore our therapeutic areas using this drug delivery system. We're also happy to share that we have commissioned our sterile R&D. And currently, we have 30 scientists working there. Overall, our R&D spend to sales for the quarter was around 3%.
Going to Generic API, our anti-viral business during the quarter continued to witness healthy improvement with the sales growing by 20% year-on-year to INR 407 crores, while for the first 6 months, the growth was 5% year-on-year. Overall, demand stays softer and we expect volume and prices are going to stabilize around the current level.
Onco APIs reported about INR 51 crores sales during this quarter, a decline of 30% year-on-year. However, for the past 6 months, the segment had a degrowth of 14% year-on-year. This is a temporary phenomenon, in fact, we are very confident to increase our oncology sales significantly in the next 6 months. We are also increasing our capacity of 5% manufacturing in our Unit 4 located in Atchutapuram to meet our continued demand for high potent APIs.
Other API segment sales, which includes cardiovascular, diabetes and asthma products have shown very good offtake, both for the quarter 2 as well as the first half of the financial year. For quarter 2, we reported the sales of INR 222 crores, growing 90% year-on-year. For the past 6 months, [indiscernible] the growth is robust at almost 90% year-on-year, supported by new contract supplies. During the first half, we have filed one DMF for a non-ARV product. With that, the total DMF filed is 74 to-date. We are also initiating validation for several APIs and expect to see a good filing in FY '24. We continue to have high attributes [indiscernible] for non-ARV non-Onco APIs and additional manufacturing capacities also will support to capture the opportunity in this segment.
Synthesis again has delivered strong quarter, delivering a growth of over 300% year-on-year and 25% quarter-on-quarter and recorded a sales of INR 720 crores. During the first half of the financial year, our CDMO business have grown over INR 2.5 lakhs compared to the previous years. This growth was supported by solid demand from new and existing clients. We are very excited about this division. And we are investing more in augmenting our capacity and R&D as well as manufacturing.
Over 50 active projects at different stages and ongoing commercial supplies out for APIs and sovereign intermediates. Our greenfield investment to setup a dedicated R&D center for Synthesis division at Genome Valley, Hyderabad and 3 manufacturing units in Vizag under Laurus Synthesis Private Limited is progressing as per our previous timelines. New sites for this division will have the capabilities to handle steroids, hormones and high potent molecules apart from medium and large volume products.
Our Laurus Bio revenues were largely stable at INR 27 crores versus INR 26 crores quarter-on-quarter last year. But we do anticipate pick-up of new capacities with our large scale CDMO partners in the second half of this financial year. However, for H1, the sales grew 41% year-on-year. We believe alternate food industry is likely to grow meaningfully over the coming years. Scale, cost and functionality will remain core drivers for differentiation for the players. And we want to capture this opportunity and would like to expand our capacity, both at R1 to have more R&D projects and also complete the investment in balancing equipment at R2 to do scale up of these projects from R1. We are also in the final planning stage to further expand our manufacturing capacity on a greenfield site in Karnataka itself.
With that, I would like to hand it over to Ravi to share financial highlights.
Thank you, Doctor. A very warm welcome to everyone for our quarter 2 and H1 FY '23 earnings call. Before starting anything, I want to wish a very happy Diwali and the safe Diwali.
Total income from operations for H1 is INR 3,115 crores against INR 2,482 crores, a growth of 26%. During the quarter, we have 31% growth with INR 1,576 crores against INR 103 crores. Gross margin slightly decreased to 55.1%. This is because of the product mix and some of the lower prices in the ARV segment. Our EBITDA is for quarter 2, INR 449 crores with 28.5%, whereas for first half is INR 903 crores with around 29%. This has happened for a better division mix, the CDMO mix is being helping for this. Our diluted EPS for the quarter is INR 4.30, a 16% growth and INR 9 not an annualized basis for H1, the growth of 10%. Our ROCE is stable at 28% on annualized basis. This is on the back of product mix -- better product mix. On the CapEx front, we invested INR 416 crores in the first half. And we are broadly in line with our guidance for the 2 years around INR 2,000 crores across all the subsidiaries and divisions.
And we remain on course to strengthen our position as a cost effective integrated pharma player. We are investing in the backward integration program and creating more capacity. And the additional investments in the capacities we are expecting to be in the non-ARV sites. And we are -- on the quality to side, we are still bullish on the overall business of the company. We are -- and the FDF ARVs are only and one-off kind of a thing in the second quarter and we expect it to restore from the quarter 3 onwards.
So with this, I would request the moderator to open lines for the Q&A.
[Operator Instructions] We have our first question from the line of Jeevan Patwa from Sahasrar Capital.
I have 3 questions. Firstly, so earlier we have 5 billion tablet capacity. And at the peak utilization, we'll be around INR 500 crores revenue from that formulation. Now we have increased it to 10 billion tablet capacity. So the potential for formulation actually is INR 1,000 crores per quarter now, but this quarter, it's been almost only INR 149 crores. So I just want to understand by when you think we'll be able to utilize the increased capacity? We are also even thinking of going to 15 billion tablet capacity. So obviously, we must be having the visibility of utilizing this formulation capacity. So just wanted to understand what is the timeline when we can actually fully utilize this 10 billion tablet capacity?
Jeevan, the 10 billion capacity, you can't have just multiply some factors to arrive at the revenue, each tablet can be sold at different prices.
No, I understand that, sir. I just want to understand the utilization. When can we...
By end of this financial year, we expect to -- about 75% utilization of 10 billion units. Still we have some state capacity. And for us to enhance capacity from 10 billion to 15 billion, we also need 12 months to buy equipment, install, qualify it and validate the product. We need 12 months. So in anticipation of business, after 12 months, we need to start the investment. So we are not investing an additional 5 billion capacity in this financial year. But the building is ready for us to expand capacity from 10 billion to 15 billion will take notice of 12 months if there is an opportunity for us. Otherwise, if you want to make greenfield, you need 24 months' time. So we have shortened that window by 12 months by building civil infrastructure, but not installing the line.
Secondly, we say that we have almost 47 approved filing in the developed markets with market size of $21 billion. So out of that, how much we have actually launched?
We have launched 14 molecules as of now with an addressable market sales of $2.5 billion.
Next is, I want to understand there has been 50% contribution from CDMO in this particular quarter, but still we are -- our margins have actually dropped. So why that has happened? So is it because ARV API has got very low margins or is it something else? Secondly, other expense for this quarter also looks very high. So last quarter, our other expenses was high because of fuel and power cost and also because of the ForEx loss. So this quarter, what has happened on the margin front?
There was a decline in ARV API prices and there is a deleverage in ARV formulations. So our partnership capacity was not well utilized in Q2. So there was a deleverage in our formulations. These 2 led to the overall decline in EBITDA margins. Otherwise, we could have done better. That is the reason what we have guided. For the rest of the financial year, we expect better margin profile because the visibility for ARV formulation is looking bright for Q3 and Q4.
But our gross margin also declined, sir. So 50% contribution from CDMO, still our gross margin has declined.
That's the negative, impacted by ARV API as well as formulation price decline.
You see, our formulation is an integrated play. So if you recollect our guidance on the gross margin side is half gross margin is in the sales followed by formulation. So when we lose formulation revenue, we not only lose gross margin and the formulation, but also on the API together.
So in the second half, when you say that we have calibrated and digested our ARV strategy and we also got the orders from the global funds and PEPFAR that is supposed to happen next week. So do you think we'll be able to get to the better margins from here?
Better sales will result in better leverage for us, Jeevan. So the Q3 -- we expect -- Q3, Q4, we expect to be better.
And next is the tax rate. Is it going to change in the second half for us or will it remain the same at this particular way?
See, conservatively, we are projecting with the old regime. We are evaluating it. There are 2, 3 driving factors. Probably at the end of third quarter or end of fourth quarter, we will have fair idea whether it will be lower side or the same, it will not go beyond.
And the last question, sir. So CapEx in the...
Mr. Patwa, I request you to come back in the queue.
Just one question I think, if Chairman allow.
Please go ahead.
So CapEx in the first half was INR 416 crores, can you just tell us the CapEx in the second half and FY '24?
Similar number what we are expecting.
Thank you. We have our next question from the line of Sudarshan Padmanabhan from JM PMS.
Sir, just to get a little bit more sense on the commentary that you've made and also on the press release, the 70% drop in the combination in FDA year-on-year and Q-on-Q. I mean, specifically, is it primarily led because of higher inventory in the channel or what has been -- what are the reasons for, number one, the prices being sold not different in the first quarter? And also some color on in terms of if there is inventory, how much is the inventory in the channel? How do we see the margin trend is coming back probably in the second half?
We don't expect to -- a lot of inventory in the channel. It's quite visible that our API sales and ARV increase to a normal level. The reason for lower sales of ARV formulations in Q2 -- actually, we saw that impact coming from Q1 itself and significantly lower number in Q2. We didn't adjust the pricing in our tenders. So we lost lot of tenders. But we have calibrated and we are on par with other competitive pricing environment. So that's the reason we expect Q3, Q4 to be better.
So we would now participate in the forthcoming tender? I mean, at the recalibrated price?
Yes, yes, you are right.
And what was the kind of extent of pricing drop for the exchange between first quarter and the second quarter?
Broadly, in the formulation, the price drop was 20% actually.
20% price drop and 50% volume drop in the first quarter or in the second quarter of this year.
I said from the Q2 FY '22 versus Q2 FY '23, the pricing difference is INR 30 crores which is 15%, around 15% price drop.
And sir, on the CDMO side, we've seen a very strong growth in the last 3 quarters consistently, I mean, can you give some color with respect to the kind of profile of the kind of incremental growth whether it is driven by -- or is there a revenue concentration in the incremental growth or is it broad-based? How sustainable is the kind of growth that you are seeing on CDMO?
We expect to have a good backlog, good products. We have good visibility in this segment. We are investing more in capacity expansion in the segment because of the visibility what we have. We are very excited and bullish on this division, not these quarters, in the coming quarters, but in the future also, we wanted to invest and stay ahead of the curve in offering a sustainable sourcing subsidy on the backlogs.
And sir, the revenue growth is broad-based or is it kind of concentrated? I mean, if you can give some color with respect to your...
It's broad. It's not concentrated.
And finally, on the cost side, I mean, as the previous participant pointed out, I mean, we seem to have not exactly captured the benefit of higher CDMO, plus also, we are seeing that the transportation costs coming down. If you can give some color with respect to the second quarter run rate. Costs such as the transportation costs and certain other costs, how they are trending right now? And would we see some kind of a recede in the second half as we go ahead apart from the operating business?
The biggest negative contributor to our margin -- not significantly decline, some decline was there despite we have done very good in CDMO is because of the pricing pressure in ARV. Otherwise, we could have done exceedingly well. So there is no challenge in the margins of CDMO business. It continues to do very well. But in ARV, where there is a decline in margin, that contributed to drag the overall margins for the company.
We have our next question from the line of Madhav Marda from Fidelity.
I have 2 questions. First one was, during the initial remarks you've mentioned about some delays on to our revenue target due to change in competitive landscape. Could you please elaborate what exactly is that on? Is that just on the ARV side or was that for something else?
Competitive landscape changed significantly in the last 12 to 18 months in ARVs. In the rest of the businesses, we are seeing good traction, positive traction. So our Oncology business grew, our non-Oncology -- non-ARV business grew significantly, our non-ARV formulations also we have good progress with approvals, our CDMO is doing exceedingly well. So except to the landscape change downwards in ARV, APIs and formulations, rest of the segments are looking very positive.
And this level of pricing for the ARVs -- the way at least I understand is Laurus is amongst the lowest cost producers for ARVs in the market. So if the pricing is under so much pressure, wouldn't the other competitors be facing a lot of pressure on their profitability as well? So pricing should come back eventually? Is that the way we should think?
We hope pricing should bounce back to some extent positively. But I do believe we're at the lowest pricing right now. We don't expect the prices to go down farther. So I think any improvement is on the pricing side is from positive side only.
And my second question was, in your initial remarks, you also mentioned about investing in complex generic products. Could you like elaborate a little bit more in terms of what kind of products such as injectables and vinyls, what exactly are we doing here? And also, is it with our own front-end or are we doing contract manufacturing for other pharma companies?
I think because of the nature of products what we are working, we don't want to elaborate further on what complex products we are working. But the competition in those products is limited, although they are genericized, the competition is limited. So maybe when we file a product, ANDA, then we will be able to talk more about our strategy.
And is there any timeline by when we expect to file the ANDA? Like would it be -- like should we say, FY '23 or would it be FY '24? Any draw timeline will be helpful.
Maybe FY '25.
We have our next question from the line of Krish Mehta from Enam Holdings.
My first question was on the FDF business. If you could just clarify how much of the FDF sales in the first quarter and the second quarter of this financial year was from ARV?
ARV is INR 55 crores this quarter against INR 275 crores in the previous quarter.
So out of INR 150 crores in formulations, only INR 50 crores came from ARVs, the rest came from non-ARVs.
And as a percentage of the total revenue, what percentage was ARV versus non-ARV for this quarter?
There's about 29% is total ARVs.
So that's 70-30 now?
29%, yes.
Less than 30% contribution came ARV, both APIs and formulations put together.
We have our next question from the line of Bino Pathiparampil from InCred Capital.
A couple of questions. One, Dr. Chava, could you please make us understand a little bit about the mechanics of this ARV formulation tenders? Are these like tenders which happen every other day or every other a week for a fixed amount of supply or are these like a longer term supply contract which tranche through months or years?
In the Q1 and Q2, the contribution from long-term allocation was less and we didn't have success in getting non-long-term tender quantities, which there was a lot of pricing pressure wouldn't success. But now, the other agencies are about to announce their long-term allocations in this quarter. So we expect some stability will come in our forecast for the coming quarters. So we -- our lower sales because we didn't win tenders in the non-long-term focused agencies.
So it's basically a mix of both. Broadly put together -- I know it's difficult to calculate, but broadly put together, how much of the market would be long-term contracts and how much would be short-term? Is it like roughly 50-50 or?
Typically, in the last several quarters, our long-term contract base sales is 3/4 and 1/4 is short-term tender-based. In the last 3 quarters, the long-term-based tenders awards were less because of the stocking -- channel stocking. But now that is done, they are back to ordering stage right now. So that is the reason we expect lot of visibility will come from this quarter onwards.
And my second question is regarding FY '24. So when you had this original guidance of INR 7,200 crores, generally, we were expecting FY '24 to be a soft or a flat year after a very big growth this year. So now that you have lowered your guidance by 10%, FY '24 still looks like a soft year or are you seeing this last 10% of this year can be caught up next year?
We will come back with more updated forecast as we go into Q3, Q4.
We have our next question from the line of Nitin Agarwal from DAM Capital.
Sir, on the ARV business, you had earlier indicated that you would probably be around a run rate of INR 3,000 crores per year. Whatever is changing, happening in the landscape, do you think that number needs to be toned down a bit in your assessment?
It will be down, but not significantly. If you look at our ARV API is almost INR 790 crores in the past 6 months. So it's easy, you can expect it to be between INR 600 crores and INR 700 crores for the entire year for our API. So our formulation sales is lower in the Q1, Q2, especially very lower in the Q2, but we expect bounce back in Q3, Q4. So it will be somewhere between INR 2,500 crores and INR 2,000 crores total ARV, API and formulation sales.
And sir, this is a rate we should assume even on a going forward sustained basis?
We expect so. We don't expect growth in this segment probably in that range.
And sir, secondly on the formulation capacity, you mentioned we have a capacity of 10 billion tablets now. So when you are planning, what was your assessment in terms of how much of this capacity was to be utilized by ARV formulations?
Capacity in terms of ARV formulations is less than 30%. See, if you look at tablet-wise, 3 APIs go into one tablet. So you can't just compare one tablet of ARV into one tablet of Metformin. It is not one-to-one, apple-to-apple comparison. But last year, we produced little over 1 billion tablets in ARV.
And sir, so you're saying that for the total formulation capacity, ARV will take up only about 20% of your capacity on a going forward basis.
Yes, yes. ARV sales, not for us, for anyone, formulation capacity will never go into the bottom line. Formulation is [indiscernible]. The challenge is how to make cost effective API is one challenge and winning the tenders is another challenge. Making formulation is never going to be a challenge for anyone, including us.
And sir, just a link point is, you mentioned that by the end of the year, you will be at 75% capacity utilization for the formulation business on 10 billion capacity. So do we see a very significant ramp-up in the non-ARV formulations in the coming quarters?
Production wise, yes. We are producing non-ARV APIs at a significant volume right now and we expect one more approval by end of this year. With that, we expect to utilize even more capacity in Q4 of this financial year.
And sir, last question. On the CDMO business, you mentioned in the press release that the purchase order which you've got is sort of getting executed also steadily in the current quarters, but how should we look at the purchase order business, sir? Is it only for only for this year or it has continuity beyond current year also?
We have visibility for this financial year, but we don't have visibility for next financial year for the purchase order. But we have a lot of large projects under the evaluation and recognition under negotiation. So this division, rest assured, we are focusing and investing significantly into this.
And sir, just last question on this. Given the very high base that we will create in CDMO this year, is it fair to expect a flat to a growth number next year on this date or given the very high base this year, that would be difficult?
We'll come back with more specific details. It's too early for us to comment on the FY '24 CDMO numbers right now.
We have our next question from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Sir, given the kind of distraction that has already happened on the pricing on the ARV front, even if you win the contracts, what gives us confidence that we'll be able to do 30% margin because the ask rate for second half FY '23 would be 32% plus of the margin to achieve 30% margin for FY '23?
For the first half of the financial year, we are already at 29% EBITDA margin. So when we are saying we will maintain about 30% EBITDA margins, doesn't mean we are saying 35%. We have to improve -- we are 29% to go closer to 30%, which we are very confident. As we mentioned to some of the investors in this call earlier, because of the deleverage happened in formulations, that was compensated by higher margin Synthesis deal, otherwise, we could have done better.
And in fact, even in the sales standard of the non-ARV formulation has been relatively lesser for the quarter. Any particular reason to highlight?
Actually, it was very good. Non-ARV doing INR 100 crores per quarter was good. And our non-ARV quantum-wise will grow in Q3, Q4. As we mentioned, our sales to European partner will happen in Q3 -- in the second half of this financial year and we are shipping in this year for this quarter and next quarter. We have a very good visibility there.
We have our next question from the line of Kunal Dhamesha from Macquarie Capital.
One basic question on the CDMO business. So right now, when there is a new RFP that has been floated, have you seen any change in the trend of new RFPs being floated, given the biotech has been under lot of pressure on the U.S. side?
We haven't seen any decline in the number of RFPs being voted by our partners from Q1, Q2 to current quarters. Actually, maybe trend is positive rather than negative in the number of RFPs.
And a number of people bidding for particular RFP, have you seen any change in trend over the last couple of...
We don't have visibility on that. We can't comment on how many [indiscernible] receiving same RFP. We have no visibility on that.
And one question on the ARV business. When we say that short-term contracts, the pricing has gone down, but the long-term contract, allocation is about to happen. But does the short-term contract pricing are like a bellwether for the long-term contract pricing or the pricing could be different for the long-term contracts?
Long-term contracts are generally better than the winner-takes-all tenders. But eventually, one could expect that lower pricing will also have an impact on the long-term pricing again.
And is it possible with short-term contract winner-takes-it-all kind of situation versus long-term contract would be like a much more stable allocation we're doing the major players?
In long-term contracts, there are allocations to do and nobody gets more than 1/3.
And in short-term, it's not the case?
This is not the case. We have some cases picking at 50%, some cases picking at 100%.
We have our next question from the line of Palak Shah from Infina Finance.
Sir, firstly, I just wanted to understand, so our FY '23 growth has 2 big components to it. First is your CDMO business doing phenomenally better because of the large purchase order and now we're looking at a price erosion in ARV, API and formulation business both. So on that base, FY '24 growth seems to be a bit difficult or do we have more levers which can actually aid us to grow next year?
We are creating a lot of capacity. We have the levers to grow, but we will give you more color and updates as we come closer to the financial year.
So secondly, you have revisited our guidance of $1 billion target at INR 7, 200 crores, but now given that currency depreciated and we have rationalized our guidance by 10%, but effectively a 20%, 25% cut in the rupee term that you would have expected. So is the understanding right?
You are absolutely right. See, as we gave numbers in our presentation, our decline in formulations in the past 6 months is almost INR 500 crores. So that means we are not going to recoup in the next 6 months. So that led to revising our guidance lower to our aspiration number of INR 7,200 crores.
So just lastly if you could permit me for this. Given the price increase, price decrease have happened across ARV formulation and API and we still intend to maintain our margins. Can you explain the bridge, which will help us maintain the margin, because my understanding would be price erosion would lead to some dilution of margin as well?
So if you look at our contribution coming from ARV APIs and formulations will remain flattish. Whereas, rest of the businesses are growing significantly. So even though there is a price pressure on ARV because of flattish base for that and the rest of the businesses are growing, which are more favorable in margins, that is the reason we expect the margin profile will remain same or better.
We have our next question from the line of Bharat from Quest for Value Capital.
Last quarter, there was an increase of other expense by INR 70 crores and the reason mentioned that time was -- like it was due to a one-time cost of power, fuel and ForEx loss and this is one-time. And even in this quarter, we see that the increase of INR 70 crores in other expenses. May I know the reason for this?
I think ForEx loss even in the second quarter is also there, though it is unrealized. And of course, power and fuel, it got restored. The additional expenditure in the power and fuel what we have spent in quarter one is not figured in quarter 2.
Yes, but then it should reduce, right? The other expense will reduce, but it's still at the elevated level?
There are some other expenditure also there. We are adding new blocks and new capacity added for formulation. For that, we have to recruit more people, et cetera and more operating expenses also to be incurred for those.
And in the goodwill today you approved for incorporation of new specialty chemical business. May I know what is this business?
This is an adjacency to what we are doing. This -- we intend to make some chemicals to start with what we consume, which we are buying from third-parties. So we will make some very large volume, medium volume and small volume products. So these specialty chemical prices vary from $1 to $100 per kg.
And in last con call, you said that generally for these tenders, 10% of the tenders are like winner-takes-all and rest 90% is something like evenly spread. It's like 30% to the first guy, and 20% to the second guy and 30% to the trade gain, something like that. So -- and now -- and you said that now we lost most of the tenders, does it mean that we have not even won any of those tenders where it is evenly spread during the bidder?
We haven't won significant numbers of winner-takes-all, we didn't win much. That was quite visible for our lower sales in Q1 and significantly lower sales in Q2 was because of that.
So you mean to tell us in Q2 also most of the tenders were like winner-takes-all, am I right?
Yes, yes.
So this 10% of the tenders are mostly in Q1 and Q2?
Yes.
And my other question is like, till recently, we had this 5 billion capacity for tablet and I understand that out of which 2 billion is utilized for ARV and 3 billion is for non-ARV. And I assume that this complete 3 billion is fully utilized, am I right? The current 5 billion -- out of the 5 million, complete 3 billion is used for non-ARV?
Our old formulation block is optimum utilized. And even in the new formulation block, about 1 billion units we are producing on average basis right now out of 5 billion new capacity, which we expect to utilize another 1 billion units on an annualized basis by end of this financial year. That's what I said. The end of this financial year, about 50% of our new 5 million capacity will be utilized.
And the old 5 billion, out of which...
Optimum, it's maxed already.
So does it mean that out of this old 5 billion capacity, so 3 billion is for non-ARV, right, 3 billion?
Broadly, yes.
Broadly. And this quarter we have done INR 100 crores of revenue from these non-ARV. So does it mean that out of this 3 billion, we were able to generate a revenue of INR 100 crores for non-ARV. Is my understanding right?
You can't slice that way and then multiply. But broadly, you're right. We have been about 1.3 billion, 1.4 billion units contract manufacture into one partner. And we are doing another 1 billion for our own formulations for Canada, U.S. and other markets. You are right broadly, yes.
And my last question is like this 2 billion tablet capacity which we have on ARV, is that fungible or -- why I'm asking like if you want to shift it to non-ARV, is it possible or is only...
It's very fungible. And as I mentioned, making ARV, for this if there is opportunity for 3 billion ARV, we can do 3 billion. So like ARV formulations are fungible, non-ARV capacity is also fungible to ARV.
We have our next question from the line of Gaurav Singhal from Aspex Management HK Limited.
I just wanted to follow-up on some of the questions that have already been asked. You mentioned that by the time we exit this financial year, our formulation capacity, we would be able to exit at like 75% kind of utilization for the 10 billion capacity. Can you share what our utilization was in 1Q and 2Q?
It was less in Q2, very visible of our lower sales.
But if you want to share a number, if that's possible for 2Q or 1Q?
We can't share more granular than this. We're sharing a very detailed number. But if you want, maybe you can reach out to Vivek and he will be able to have a discussion offline.
I think it's been very fungible capacity. It is very difficult to explain like that.
And then for the ARV long-term tenders, pardon me, this has been discussed in earlier calls. But how long are these long-term tenders can we expect?
Long-term awards typically for 3 years. We allocate certain percentage of their purchases, that's for 3 years.
And then when global fund, which is expected to announce the long-term award, they are expected to announce allocations next week. So this is something that, if I understand correctly, we already have won these orders and it's just like a public announcement would be made next quarter or does the company also not know right now and they will also find it next week? I'm not sure if I understood that correctly.
We don't know the results yet. So they haven't announced.
So global fund will know the results next week and PEPFAR will know some time into December?
Sure.
We'll take our last question from the line of Neha Agarwal from SageOne Invest.
Sir, my question is largely on the non-ARV formulations side. If you could give more guidance on the growth visibility there pertaining to launches that we have made so far? And also, I think end of FY '22, you mentioned opportunities in the gliptins and patent segment because of the kind of superior purity of the product that we have, shows better quality that we have and we'll be able to garner better market share? What is the progress there?
So when you compare our formulation sales in Q4 last financial year, we did about INR 500 crores. Formulations, about INR 500 crores, INR 490 crores, so we have still grown to INR 150 crores. So there is a room for us to go back to INR 500 crores. The growth will happen from ARV and non-ARV both. But maybe by end of FY '24, more -- most of the growth in the formulations will come from non-ARV. Like our API growth is coming from non-ARV APIs, by end of '24, most of the growth in formulations also will come from non-ARV. In ARVs, there is a limit for us to grow in both APIs and formulations. We believe by end of next year will reach the plateau. And then growth will come from non-ARV in formulations too.
Totally, I think that's particular to non-ARV only. My question was, how is the product launch -- I mean, the product that we have launched so far, how is the growth coming along in those? In terms of market share, I mean.
We are launching 2 products in Europe this quarter onwards. And we expect one product will be launched in U.S. Q4 this financial year. So those products -- Europe products already we started shipping. And U.S., depending on the approval we expect -- the approval was delayed by a quarter. So that launch will happen early next year, calendar year. All these new products what we are talking is non-ARVs.
And any overall revenue guidance on the non-ARV formulation front for the full year?
We can't give you more granular than this. I'm sorry for that.
And if you could just help me with last year's non-ARV formulations number, please?
It's around INR 250 crores or so.
Around INR 250 crores was non-ARV?
Yes, correct.
And definitely on that base of non-ARV and just leaving aside the ARV formulation piece, at least we can expect a good strong double-digit growth on that?
You're right.
But overall with the -- just one last question. With the kind of pace that we are seeing in terms of formulations launches in the -- on the generic formulation side, do you think we could see a kind of forward similar to what we have in CDMO in terms of growth for non-ARV formulations also, a similar growth aspect?
Formulations, we expect a lot of growth will come in FY '25 not in '24.
And just one last question on the multi-year contract that you had and which you signed earlier this year. So revenue have started coming from there already?
No. The new site for that will be qualified with us next year.
So I think second half of FY '24 and then more meaningfully in FY '25, would that be correct?
Yes, yes.
I would now like to hand the conference over to Dr. Satyanarayana Chava for closing comments.
Thank you, Monish for organizing this call. Thank you participants for asking very interesting questions. And we wish you happy and safe Diwali. Thank you.
Thank you.
Thank you, sir. On behalf of Antique Stock Broking, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.