Neuland Laboratories Ltd

NSE:NEULANDLAB

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to Neuland Laboratories Limited Q1 FY '24 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only more than there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ravi Udeshi from EY. Thank you, and over to you, sir.

[Ravi Udeshi]

Thank you, Carol. Good evening, friends. We welcome you to the Q1 FY '24 Earnings Conference Call of Neuland Laboratories Limited. To take us through the results and to answer questions, we have with us today the top management of Neuland Laboratories Limited, represented by Mr. Sucheth Davuluri, Vice Chairman and CEO; Mr. Saharsh Davuluri, Vice Chairman and Managing Director; Mr. Abhijit Majumdar, CFO; and Mr. Sajeev Emmanuel Medikonda, Head, Corporate Planning and Strategy. We will start the call with a brief overview of the financials by Mr. Abhijit Majumdar, and then Saharsh will give you broad highlights of the business trends and what he is observing in the market. And post this, we'll open the call for the Q&A session. As usual, the standard CF harbor laws apply as we start the call. With that said, I now hand over the floor to Abhijit. Over to you, Abhijit.

[Abhijit Majumdar, executive]

Thank you very much, Ravi, and a very good evening and warm welcome to each of you joining our Q1 FY '24 call. My apologies for the delay. There were some challenges with technology, I think so. That's been sorted out. I'll briefly talk about the financials now. The total income for this quarter was INR 365 crores as against INR 21.7% in the previous Q1 FY '23, an increase of 64.7%. This was largely driven by growth in the specialties and the CMS segment. In comparison, our revenues for Q4 FY '23 was INR 151 crores. Our EBITDA for the quarter stands at INR 99.3 crores with an EBITDA margin of 27.2%, an increase of 14 1,410 bps over Q1 FY '22. The increase in EBITDA margin has been due to a better business mix, combined with an operating leverage as well as some easing input prices. This is in comparison to an EBITDA of INR 127.8 crores and an EBITDA margin of 30.8% in Q4 FY '23. I'd like to state that the overall operating environment continues to be uncertain. However, we have seen some favorable movement in terms of input costs over the last -- sequentially for the past 3 quarters. Our focus on execution excellence and managing costs has enabled us to manage our profitability. And as we have contentedly said in our previous earnings calls, we would request you to measure our performance over a longer time rises as our revenues and EBITDA margin will fluctuate on a quarter-to-quarter basis based on mix and which is obviously dependent on order flow and project execution. According to specifics, our gross margin was 55.2% in Q1 FY '24 compared to 53.6% in Q1 FY '23 and 54.1% in Q4 '22. This gross margin, as always, includes the manufacturing and other costs directly attributable to the products. The profit after tax was INR 62.2 crores as compared to INR 9.8 crores since Q1 FY '23. This quarter, the EPS is at INR 48.5 per share. We generated a free cash flow for Q1 FY '20 of INR 40.7 crores. We utilize part of this cash surplus to bring our working capital debt to 0 and repay INR 8.6 crores of our term loans. Consequently, our net debt position stands at INR 24.4 crores. We also reduced our working capital cycles to 118 days in FY '24 as compared to 141 days in Q4 FY '23. We continue to invest in upgrading our facilities and have invested INR 11.7 crores in CapEx during this period. I'd like to add that we continue to be mindful of balancing growth with profitability by having a continuous focus on cost optimization and efficient operation. At the same time, our focus on cash will position us to make capital investments should such opportunities rise over the short and medium term. With that, I would like to hand over the call to Saharsh for his remarks. Once again, thank you very much.

[Saharsh Davuluri, executive]

Thank you, Abhijit. Hi, good evening, everyone, and again, my sincere apologies for the delay in starting the call. I will add a few comments on top of what Abhijit has said, and then we can open up for Q&A. We have stated in the past that Neuland is transitioning from a model that was predominantly composed of prime APIs into a model which has a greater emphasis on specialty GDS business and CMS business. This quarter also represents the gradual shift that we have been envisioning for quite some time. Also, the growth and the evolving business mix has started to see a significant improvement in operating leverage. And while there would be variability on a quarter-to-quarter basis, I would like to say that the progress we see is sustainable. The momentum of the CNS business continues to be strong as new molecules transitioning into commercialization have contributed well. As we have mentioned in the past, we have a healthy pipeline of new chemical entity APIs, which are showing from us. 2 APIs have become commercial in the recent past, and we expect 2 more to commercialize in the next 12 to 18 months. Each molecule has a different business characteristic to it, and therefore, we must continue to expect lumpiness on how the business evolves. Also, we are seeing a significant number of requests from companies who would like to onboard Neuland as a partner in the drug development process. This is an indication of Neuland's reputation as an established CDMO. At the same time, I would like you to note that at a macroeconomic level, there has been an impact on the funding of molecules early in the clinical pipeline as well as programs where the data has been weak. While this doesn't impact our immediate business outlook, it could have a bearing on our plans of creating a steady flow of new molecules to our CMS pipeline. On the GBS side, the specialty business segment saw good growth, led by palpitation and side, which has again pointed to an improvement in the business mix. Prime also saw some growth arising from Mirtazapine and Labetalol. Again, the environment is uncertain from a generics perspective, and certain prime products like Levetiracetam continue to face competition from multiple suppliers and low prices. At the same time, the value of working with the pure-play API company with our track record, we're being recognized by players across the industry, including Indian formulators with a focus on regulated markets. In other updates, I would like to recall that during Q1 FY '24, we had a successful U.S. FDA audit of Unit 3 as well as an audit of Unit 1 by EDQM. We are observing a shift towards a high-margin business, which has been our stated objective. However, we continue to be mindful of any future negative effects that the business mix, product mix, raw material prices, or ForEx could have on these margins. And we would like all of you to be cognizant of this. In terms of overall business, we have a healthy pipeline in the medium to long term, and we are optimistic about our prospects. As always, I would like to reiterate that the business will remain uneven on a quarterly basis, and therefore, it's better to look at our business over a longer frame of time. At Neuland, we always keep our customers at the forefront of what we do. In line with the same, we will continue to invest in our operations in terms of establishing new capacities as well as adding new capabilities. This will be done to achieve our stated objective of furthering our leadership position in key molecules as well as being the partner of choice for new molecules for both existing as well as potential customers. With that said, I would now request Ravi to open up the floor for Q&A.

[Operator]

Thank you very much.[Operator Instructions] The first question is from the line of Sajal Kapoor, an Individual Investor.

[Sajal Kapoor, analyst]

Yes. To begin with, I must acknowledge the brilliant scale-up and execution in the NTE CDMO segment as well as the even better balance sheet and free cash generation. So overall, a great achievement. The first question I have is one of the 3 since noted about Neuland is that you have embraced many failures along the way. And that's normal in any business that's rapidly transforming. And we know that innovators can pull the plug on their projects at any time and still scale up and always can throw unexpected negative surprises. So all those risks are very well documented. What I'm interested to know today is about your learning from those cost failures. So that's my first question. And my second question is from our latest annual report, Page 41, it says, and I quote, "The nation's API capacity or nations API supplier rather is expected to travel over the next 3 years." So how does the need capacity expansion plan fits into this bigger national picture, given the lean balance sheet that we have and the solid cash flow that we have now?

[Abhijit Majumdar, executive]

Thanks for that, Sajil. I think in terms of the lessons learned and the experience of the years, I think from time to time, we've shared that on these calls as well as our annual reports from our Chairman, from myself in the Q&A. So I think everything that we've talked about comprehensively captures all that. But notwithstanding that, I think there are a couple of things which are important from our investors' point of view. I think from an overall CapEx point of view, we have some internal metrics and policies that really guide what kind of CapEx we approve, what should be the payback period? What's the minimum IRR for our cash expenditure, how we source our material, from where do we source them, and the minimum safety stocks that we need to maintain? I think connected to your second point in terms of our CapEx and troubling our capacity. As you know, the core of our strategy has always been over the years, and I think Saharsh alluded to this in his opening comments, is that our goal is to continue to focus on higher-margin, higher-profit specialty APIs without losing focus on our prime APIs as well as our CDMO business, so that using the same asset, while improving the quality of the infrastructure, we are able to constantly improve our margins without taking a significant amount of debt or risk. So therefore, going forward, we will stick to that core strategy and focus on building our business. Obviously, the lessons learned are many, but we don't have as much time to elaborate on all of them, but I appreciate your question. [Technical Difficulty].

[Unknown Analyst]

Congratulations, team, for the good set of numbers. My first question is, I've asked this question in the AGM also, but I need some more insight on that. So my question is that we have mentioned in our annual report about commercializing of 2 new molecules in the coming years. So if you cannot provide the market see and it would be helpful if you throw some light on its therapeutic segment, how much amount of contact we are supplying right now, and when we can expect to get it commercialized.

[Abhijit Majumdar, executive]

Yes. Thanks for the question. I think the molecules that have been commercialized, the market size for these molecules, I think it's difficult for us to give a specific number. However, I think just to help you understand it better, I think what you could look at is the growth that we have seen in our business, I think we were INR 150 crores, INR 200 crores kind of a CMS business. I think if you see the last couple of quarters, I think the trajectory has improved significantly. And a big part of that growth is coming from these molecules. So I think it's safe to conclude that these 2 molecules have a much higher market potential than the molecules we've had traditionally in our CMS pipeline.But how big they could be is something that we would -- we would not be able to quantify because these molecules are still in the early stage of launch. Maybe we may be able to answer this question, say, 2, 3 years from now. But having said that, I think with regards to the indications, we -- again, I think we continue to have these conversations with our CMS customers, and we've been advised to keep the information very, very confidential. And therefore, we're not really even comfortable disclosing therapeutic areas because, again, it could potentially lead to more follow-up questions about these molecules. So what is important is that these molecules are early in their phases of launch. They have an exciting 5-, 7-, 10-year kind of runway in front of them under patent exclusivity. And we are still seeing very early stages of the growth and that's reflected in our numbers. So this is probably what I would limit the response to. And perhaps you will be able to understand it more as you know the future quarters come by.

[Unknown Analyst]

Okay. The next question is Q1 was quite surprising on the margin side Y-o-Y because there is a high share of seamless business, right? So we'll be able to see this kind of revenue sharing upcoming 3 quarters?

[Abhijit Majumdar, executive]

I think you should probably look at the business over a longer term of time. And I think what -- as I had mentioned in the opening remarks, I think the performance of the recent quarters is a sustainable performance. But at the same time, it's difficult to quantify whether it will be replicated in specific quarters or not. So I think if you look at, say, the last 6 quarters, you will clearly see how the CMS business is trending, how the GDS business is trending. I think that's the visibility that we can give you, and we can tell you that that business or whatever trend we are seeing is a sustainable trend. But we would not be able to elaborate on how the specific quarters would pan out. I think that's something that, again, because of the uncertainty of the business, we would restrict our response.

[Unknown Analyst]

Okay, sir. And the last question is also, sir, we have mentioned that Indian API is in annual, but the Tainan API companies are facing tough competition from the Europe company. So we may also face the time. My question is, we have competitive capabilities in terms of gas prices, low labor costs, and more economic stability. So how these European companies are able to give us of commutations?

[Sajeev Emmanuel Medikonda, executive]

No, I think it's a good question. Net, the only response we would give is that a lot of the business that we get from our customers is based on the technical capabilities that we bring to the table, our understanding of the customer need, and the experience that we've developed over the years, both in the generic API business, which includes prime specialty as well as the CDMO business and what those needs of those customers are We, as an organization, don't typically compete on cost or because of the physical geographical location of Neuland as well as its facilities. Therefore, I think today, most of the business that they're getting is repeat business from our existing customers as well as new customers who've heard about us from the market as well as our existing customer base, and that will be the business model going forward.

[Operator]

Next question is from the line of Kunal Shah from Kalenianpital.

[Kunal Shah, analyst]

Congratulations for a good set of numbers. One was you mentioned that we are receiving a significant number of requests from companies across the partner with [indiscernible]. So if you can help understand what is obviously the capability that we as a company has been building up. But other than that is because of the scale that we have achieved or what exactly has led to -- or they want to diversify from other countries and therefore, if you could help understand the nature of how meaningful it could be in the next 2, 3 years on Neuland as a company when it comes to scaling up. That was your first question. The second question was more from the kind of capacity utilization level that we have now, considering the business visibility we have if you could help [indiscernible] that we have for this particular financial year.

[Saharsh Davuluri, executive]

Okay. I think with regards to the first question, I think when we work with innovator companies for the CMS business, one of the things that we recognize is that we are able to help them take their drug through an NDA approval and help them launch a new drug. It's our ability to partner with them, starting from, say, an IND stage, take them through Phase I, Phase II, Phase III, and then help them launch the molecule and then save them as a commercial supplier. Crudely speaking, this is the capability that we bring in. Now how are we different from our competitors? Or what is the factor that drives customers to us? I think it's slowly emerging as our track record of how many NDAs we have filed over the last several years? How many situations are there where we have come in as a second source and embraced an existing process? How many situations were we started at an IND level and helped craft a scalable process of a complex NCE? I think it's largely this track record of having worked with customers that has really created that indication that I had referred to in the opening remarks. I think it's the number of projects that we have completed. And also of the innovator community, the CMC community is a finite community, whether they are mostly in the biotech space in the U.S. or big pharma or even in Europe. Good word spreads very quickly. So when you end up doing a project for a particular company, then either the word spreads around, and therefore, that has also been very helpful. I would say that the China plus 1 seems like it will help us because there is a clear message from innovators that they want, they don't want China, and they want an Indian CDMO. So maybe compared to earlier, we are getting more requests because of the China plus 1. But that is not still reflected in our current performance because I think that may reflect more in the future performance. But I think I go back to the point which I had mentioned earlier to the gentleman. I think we are not necessarily competing with local players or specific companies in the CMS business. I think it's a very large space. I'm told it's a $100 billion-plus space. Even the largest players may not be more than $1 billion or $2 billion in revenue when it comes to complex small molecules. So the space is really big, and we are essentially just trying to find the best fit for our capabilities, which is small- to mid-volume kind of complex APIs. And I think one thing that we are very proud of in Neuland is our focus. We are not going after any other spaces. We want to stay focused on complex APIs, both for generics as well as CMS. We are not going after, let's say, animal health or crop sciences or other spaces, which, in our view, could become a distraction and not necessarily a good fit for the kind of infrastructure and capabilities that we have. So I think that's how I would look at it. I think with regards to the second question, the CapEx, Abhijit, do you want to answer that?

[Abhijit Majumdar, executive]

Yes. So on CapEx, see, as we said today, we have 3 units, 2 units at around 90 plus capacity utilization. The third, which is the new one, is at around 60%. We need to be mindful of the fact that our facilities are multifunctional. So that we've taken different APIs should some volumes drop off for a particular molecule. The second is that we also have the ability to expand in our third unit, should we have underlying contracts coming up. That's the second point. The third point is, as far as our CapEx is concerned, as we had alluded to in our previous calls, we are spending close to INR 100 crores every year, we are budgeting for it, and that's what we are going to keep on upgrading our facility, making the necessary tweaks so that we are able to beat the customer expectations. So currently, our visibility is that as and when we see opportunities, we would look at a fourth plan, but currently, we are expanding our current facility L3. But that's not on the annual until we have something. We'll certainly come back to you. But right now, we are optimized, and we are able to meet the customer requirements, at least as we see it for this year and for next year. Thank you.

[Operator]

[Operator Instructions] The next question is from the line of Maulik from Anandrathi.

[Unknown Analyst]

I just wanted one understanding. So in terms of our segmental revenue breakup for Q1 FY '23, the revenue from CMS was approximately 31%. And for Q1 FY '24, it is 44%. So our CMS revenues have increased, but the gross margin has not increased, which is flat on a year-on-year comparison. So just wanted to understand one thing. If the margins are similar to other segments? Or how is it? Can you throw some light on it?

[Abhijit Majumdar, executive]

So I'll try to explain that. You are right in saying that the CMS revenue growth is significantly higher than the GDS. We need to be mindful of one point that as we commercialize, right? Our margins, price is depleted, right, because that's the reason of the game. After the validation stage, the prices could be $100, and after that, it would drop. And so we would have a drop in margins. So they won't kind of get reflected in your -- as you have alluded to in Q1 FY '24 numbers. But overall, at an overall mix level, we have a margin which is blended margin, which is around 54%, 55%.

[Saharsh Davuluri, executive]

And I think maybe if I can just add to what Abhijit said. I think one is because these molecules and the business itself is lumpy. Comparing quarter-to-quarter like a quarter 1 year ago, the mix may be completely different. I think that's also something to take into consideration other than the fact that as the business scales up, it's also natural to expect that because of economies of scale, et cetera, there will be some reduction in prices, which could have an impact.

[Unknown Analyst]

Okay. Understood. So just to clarify, in the previous year Q1, so maybe this product mix would have been different as compared to the Q1 FY '24 quarter. And that is the reason why there would have been margin differentiation. Is my understanding correct?

[Abhijit Majumdar, executive]

Yes, the mix would have been different. I don't have the exact numbers here with me, but the mix would have been different. And also the scale of the business as it's ramping up. I think logically, at a broad level, it will be -- the margin will have an impact because of that. Lower prices.

[Operator]

The next question is from the line of Anirudh Shetty from Solidarity Investment.

[Anirudh Shetty, analyst]

I have 2 questions. So you had mentioned that our capacities are multifunction. So just wanted to understand if -- are they fungible across our PPI and CDMO products?

[Abhijit Majumdar, executive]

Yes. I think all our capacities that we are creating are multiproduct. So they would be fungible not just within segments but across segments.

[Anirudh Shetty, analyst]

Got it. And we have a lot of opportunities in our CSM business, and it tends to be non-media. So if we were to expand our Unit 3, how long would it take to get that expansion down?

[Abhijit Majumdar, executive]

I think expansion, we have to look at it in 2 scales. I think within the existing facilities, particularly Unit 3, we can create capacity, which will be maybe relatively shorter 12 to 15 months, you can create significant capacity, but that would be finite, right? And then there's the higher level of capacity creation would be to creating Unit 4, which would be our fourth manufacturing side. That would obviously have larger headroom, but that would obviously take a longer period. And again, depending on the way we would go about it, greenfield, brownfield, et cetera, again, the timelines would depend on that. I think for us, it's a constantly renewed process because what we're trying to balance is the needs of our customers, both existing and new, over the next 2, 3 years, how we can service them from our existing facilities. -- balancing that with the needs of the customers beyond the 3-year, 4-year time frame and then trying to figure out what kind of capacity we have to create and then trying to optimize the decision-making based on what kind of investments it would require. So it's kind of an ongoing process. And I think right now, we feel comfortable that we have sufficient capacities for the next couple of years.

[Anirudh Shetty, analyst]

Got it. And you mentioned that the intention is to stay focused, and you don't do agro and animal health for that reason. But just one pushback there is assuming that we'll have a certain chemist skill set that can be used to for into these categories. And why wouldn't you want to consider the opportunities that come our way? How do you see this as a distraction or different from our existing pharma CDMO business?

[Abhijit Majumdar, executive]

See, I think one is, I think Neuland, if you look at our operations and the scale at which we operate, I think we make a lot of molecules which are in the 5 metric tonnes, 10 metric tons per year kind of capacity. So if you look at our plans, we don't have a lot of 20,000-liter 15,000-liter reactors. We end up having a lot of 5,000-liter reactors with a lot of complex instrumentation to control reactions and things like that. So one, I think our setup is more suitable for human health, where the volume of the products is in the 10 to 50 metric ton range, we will have outliers as well. Second of all, I think we definitely keep an open mind in terms of when it comes to chemistry, you're absolutely right. We are a chemistry-based organization at the end of it. But while we are open to it, we don't see a lot of great fits in that area, and pursuing opportunities in that area would most likely require us to significantly tweak our infrastructure. And I think this is something that we have observed. We have looked at the market. We have tried to understand certain chemistry areas that we are strong in, whether they're applications or agro chem. We talk to companies in the past, Japanese companies who have shown interest in these areas. But it all comes down to not having a ready split of infrastructure. And then there are elements which -- the dynamics of which we are not very clear about me. So for example, the kind of stickiness that those businesses would have, the strengths that we bring, which is GMT, a lot of precision in our controls and in process chemistry. We are not seeing clear evidence of these attributes actually mattering to those kind of customers, and that's translating into the stickiness of business. Because at the end of the day, we don't want to get into businesses where we could be very easily pitted against competitors, getting into price situations. And that's what creates a little bit of this thing. Sujay, do you want to add something?

[Sajeev Emmanuel Medikonda, executive]

No, I think just to add to that, I think for our customers as we provide a lot more than just chemistry. As he was saying, we bring project management, our GMP track record, being able to scale up technology because all the pharmaceutical goes for human consumption and, therefore, requires an extremely focused and consistent mindset when it comes to quality as well as regulatory affairs. And that is something that we've developed over decades of experience. And therefore, coming back to your question, we see enough opportunities. I pinhead a comment that our market is expected to be in the vicinity of $100 billion. So for us, it's a very simple equation when the market is big enough, and we spend close to 4 decades building expertise, why would we look elsewhere if we become so big that the market is not sufficient for us anymore? That's the bottom line.

[Operator]

Thank you. The next question is from the line of Viral Shah from Ashika Group.

[Viral Shah, analyst]

Yes, congratulations on the set of numbers. So my first question is actually that, as earlier, you were talking about repeat businesses. So now that in a [indiscernible], we are currently molecule-specific and even getting repeat businesses from existing companies. So my question is that going ahead in the future, do we intend on setting up a dedicated CapEx customer, more FCC kind of business model? Or anything else that would actually reduce the lumpiness of the business?

[Abhijit Majumdar, executive]

I think 2 things. One is the need of the customer determines whether we will -- what kind of dedication we will have on the infrastructure side. I think typically, our strategy has been to build multiproduct facilities, and we would produce anywhere from 3 to 5 APIs in 1 facility. And I think that gives us the flexibility to manage different molecules growing at unknown growth rates. But having said that, when a specific molecule tends to do well and there is an increase in demand, and it's very evident in terms of the supply agreement and visibility from rolling plan forecasts and things like that. Then what would naturally happen, and we are seeing that also happen is that certain production areas get more and more dedicated towards one product and that's not a challenge for us. And I think we are opportunistic that way. When we see a customer with a clear surge in demand, we are happy to allocate certain infrastructure to them. I think other than that, for us, the -- I'm sorry, I planned on the second question that you asked. Yes, I think that's something that, again, we are open to, right? Because as Sucheth and I explained our strategy is very clear. We want to grow the complex APIs both for GDS and CMS. And as we are engaging with more and more customers, both on the generic and innovator side, and we are seeing a critical mass of the business, there are varied levels of engagement requests coming from customers. There are some customers who might want a dedicated production block. And they are willing to enter into certain agreements that might give us that kind of assurance, especially if we have to make those investments. But I think for us, the broader point is we want to create capacity ahead of time, but we want to create capacity when it is -- when the customer is actually willing to partner with us and show that demand. What we would not likely do is create capacity and then look for customers. We might create small-scale capacity like pilot plants or R&D infrastructure. But I think our business is evolving to a level where we won't be creating huge production capacities and then look for customers for it. I think we will create capacity on the back of customer demand. So I think that's something that will be the way forward.

[Sajeev Emmanuel Medikonda, executive]

Yes. I think so nicely said, just adding. We have to -- and that's what I kind of said, we need to be mindful of balancing growth with profitability, right? Because it doesn't make sense making capital investments and then kind of figuring out how to fill it up as some of the Indian companies have chosen to do. We need to balance it. And that's why we are mindful of -- on cash as well as return on capital employed, growth, and profitability.

[Operator]

The next question is from the line of Sanjaya from Amerson.

[Sanjaya Satapathy, analyst]

Sir, the question that I want to ask. One is that is there any kind of benefit that can come to you from this discussion of drug shortage in the U.S.A.

[Abhijit Majumdar, executive]

No. What I was going to say is that the drug shortage in the U.S. is specific to products. That means it happens EBIT because of a quality issue or regulatory action or someone's kind of stock manufacturing of that product. We have not seen that happen to that sort of other product. But for our products that we already manufacture, we've seen the benefit where if one AND has been exited from the market, then we're able to quickly fill in that gap, gain that market share and maintain that market share. But currently, on the list of drug shortages, I think we have a pretty good market share, and the business is growing. So we don't see any specific opportunities as of now.

[Sanjaya Satapathy, analyst]

Understood. And sir, second question is that I see your part of the CMS business. The development part of the revenue has come down sharply on a quarter-on-quarter basis from some INR 90 crores to INR 55 crores. Is there any kind of read-through there? And at the same time, the commercial part of it is steadily growing. And is that where you talked about this pricing pressure that comes because it is getting commercialized?

[Sajeev Emmanuel Medikonda, executive]

I think if you take the development revenues, Sanjay, and the commercial revenues, I think maybe it's better to chart it back, say, 6, 8 quarters and see how the fluctuation is because the quarter-to-quarter may not really give us any kind of a tangible trend. But if you look at how the development revenue has tracked over the last 6 to 8 quarters and how the commercial revenue has tracked over the 6 to 8 quarters, then you'll get a better understanding. Broadly, what we can tell you is that development revenues will be very lumpy. It will be like some validation campaign or a scale-up campaign, and then the campaign is over, it may contribute to some revenue. Commercial revenue tends to be a little relatively less lumpy. But again, we -- every quarter will be different. So I think, in general, I think you might have certain quarters where development revenues maybe even close to 0 or maybe INR 5 crores, INR 10 crores. And then the next quarter, it might just spike up. But yes, there's no concern per se. I think we still have a pipeline of healthy molecules, which will go through development, so there's no concern.

[Sanjaya Satapathy, analyst]

Understood. If I can just ask there that, let's say, there was a massive sir, in your development revenue in quarter 4 as well as compared to the standard average run rate this quarter has been pretty strong. So is there some kind of a time lag one can think in terms of it is so kind of translating to it in the commercial part of it kind of going up?

[Sajeev Emmanuel Medikonda, executive]

Yes, that's a very important question. And I think one of the comments I made in the opening remarks of the call is that every molecule has a very different characteristic. There are certain molecules which will take maybe 2 or 3 years pause between development and commercialization. We have also seen molecules which have translated from development to commercial within 1 quarter. It really depends on the characteristics of the molecule. It depends on things like whether are we the first source, are the second source is the drug already commercial by the time Newland is getting into the project, or is the drug still in Phase II. So I think it's really difficult to put some sort of a guiding principle over here. And I think that's why it's difficult for us to be able to analyze it for you.

[Operator]

[Operator Instructions] The next question is from the line of K. Reddy from MR Investment.

[Unknown Analyst]

My question is regarding the business models that we have participated from patient Phase II commercial steel manufacturing. When I compare with our competitors said they don't participate in taking selfies. So my question is regarding the attractiveness of participating in preclinical paces in the view of a few regions. First one is it contains a lot of working capital. The second point is there is a lot of contingencies, whether the talent molecules will translate into clinical sales or mates -- what is attracting it attractiveness of for new land in participating with tandem.

[Sajeev Emmanuel Medikonda, executive]

[indiscernible] But to rephrase it is that the business model when it comes to participating on and looking at the preclinical products. And if we were to look at our model, overall, we are -- most of our structures and most of the projects that we have been focusing on from a business development point of me historically, has been projects in Phase II and Phase III and later. And even -- but we also have been with -- on the Chemist work with companies where we have been part of the IND filing too. So even though we have certain preclinical molecules showing as part of that, most of the work there is not medicinal cheesy, but rather it has worked towards the IND filing. So I think that is more in line with our capabilities. So therefore, Avas is not a very FTE-based model, but rather it is more around being able to take the product sale from their IND filing all the way to commercialization. And that is the reason why our customers come to us, and that's the way that our business is. I hope that answers your question.

[Operator]

[Operator Instructions] The next question is from the line of Disha from Roxane Investors.

[Unknown Analyst]

Sir, when peptides, such as SMA and Lira, started flowing into our GDS portfolio, where the water molecule is RD&A based, which is further chemically modified. And in comparison, we have a completely synthetic approach. So from a cost point of view, are we fairly confident we'll be competitive at scale?

[Abhijit Majumdar, executive]

Yes, Ketan, I think it's -- the fact is that the recombinant process of the innovator is difficult to replicate. And I think most of the generics are looking at a significant process, which is what we are looking at as well. I think our process is fairly competitive. I think we use hybrid technology. I believe we also may have some IP around it. I think it's still a little difficult and early to talk about the economics, and the commercials of it because I think when you start off the development of a complex generic like this, your costs will be high, and it will be very difficult to figure out how -- why will it be? If it's a simpler small molecule, and I think those discussions will be there. I think right now, I think for us, the focus is not so much on liraglutide. I think we are working on [indiscernible], but we are also working on a couple of other peptides. [indiscernible] is another one and [indiscernible], which is also the Lilly metabolic drug. So all these are complex peptides, and I think the approach would be to first develop a robust, scalable process. I think the economics don't tend to be mining space early on in the development. But I think we will have to cross that point. And at this moment, we still don't know. So we'll have to wait and watch. But there's a lot of active discussions with generic companies for these products as well. But it's still a little too early to comment on the economics.

[Operator]

The next question is from the line of Rohit Ahuja, an Individual Investor.

[Rohit Ahuja, analyst]

So my question is on the GDS segment. So in our annual report, we have mentioned that we are going to file around 6-year DMF in the GTA segment for the next few years. So can you brief us about that, like what proportionate percentage of that is going into the specialty segment? Because we now projet itself from a commodity to complex API and intermediate play. So can you touch upon that? And my second question, you have already mentioned, I want to know about the sites like when you are filing for a DMF like [indiscernible], we are building this molecule from last 90 years. So bring us about the types, what on the development? Are we getting any traction on this? So these are my 2 questions.

[Sajeev Emmanuel Medikonda, executive]

So thanks for your questions, Robert. I think when it comes to the portfolio that we have for our GBS business as we have been seeing in the past. It is focused on is totally on specialty. And we also are looking not just at specialty, but also looking to differentiate our pipeline on the basis of technology. So even if there is a molecule that probably would not be perceived as, say, a speciality molecule, but if there is value that the customer would be getting in terms of technology or in terms of supply reliability by Neuland having that molecule impact in our portfolio. Those are the kind of molecules that we would choose for our portfolio. And those are the kind of products that are there in the pipeline, which our customers can look at which is there both at Safford it's also available on our website. Now coming to the question of peptides I think we answered, we are working closely that customers who are interested in filing ADS for decades and also looking at other markets, too. But I think this is not just an investment from Asset but also from the perspective of the customer, too. So those are conversations that are ongoing, and we'll probably be able to comment only at a later date. I hope that answers your question.

[Operator]

The next question is from the line of Pranav Gupta from San LLP.

[Pranav Gupta, analyst]

So I can see that there is a drop of 2 commercial molecules that are compared to the data which was shared in the quarter 4 results. So could you please elaborate on that?

[Sajeev Emmanuel Medikonda, executive]

Yes. So basically, what we do as hygiene processes, we keep looking at the molecules that we have in our pipeline and the molecules that have not been contributing, then we also kind of reduce them. So there's been a reduction of 2 because there's one API and endometrial we were supplying up until a couple of years ago to a European innovator. This was one of our first CNS molecules. I had contributed significantly for the first several years but hasn't been in the last 2 years. So we've actually dropped that molecule and its corresponding intermediate from the pipeline. So therefore, there has been a reduction of it.

[Operator]

The next question is from the line of Abhishek from Trains.

[Unknown Analyst]

So this is a hypothetical scenario, say suppose your capacities are mapped out and given your capacities are fungible, right, and say that you have orders about above what you can serve basically. So how would you tackle such a scenario? I just wanted to know, would it be the basis of sheer margins of margin opportunity? Or would you also see a planned relationship with Anton Europe, given that, say, it's a critical client, but it's a low-margin product? So just wanted to know how would you tackle such a situation.

[Sajeev Emmanuel Medikonda, executive]

No. So thanks for the question, Abhishek. So typically, the way we do our planning, Vishay, is that we'll project all our products into the future, both on the GDS side and the CDMO side. We also have allocated capacity for products that will get scaled up from R&D. So when we project our volumes, we already have our costs, we have our input costs. We have our operating costs. And that gives us a pretty good idea of what the margins will look like, what the costs look like. And we see that there are any yellow flags then we do have programs internally to continue to work on the life cycle management of some of these products or to take steps to reduce the cost to make sure that the product is profitable. So this is a continuous process. And coming back specifically to your question, our strategy is to make sure that we never actually run out of capacity. So when we are able to project capacity into the future, we also make sure that we initiate adding this capacity well in time so that when the volumes grow, we have adequate capacity at the same reason that we bought Unit 3 and integrated it into the organization to make sure we have capacity on time.

[Operator]

The next question is from the line of Sara Kumar, an individual investor.

[Unknown Analyst]

Thanks for the opportunity. Actually, looking at last 3 quarters' numbers, it seems that one of 2 molecules of Colin has started contributing to [indiscernible]. Is that interpretation right?

[Sajeev Emmanuel Medikonda, executive]

Can you repeat your question? Your voice doesn't come out clearly.

[Unknown Analyst]

Looking ahead in the last 3 quarters of November, it seems like 1 or 2 of our 3 MS molecules have started contributing significantly. Is that interpretation, right?

[Sajeev Emmanuel Medikonda, executive]

Yes.

[Unknown Analyst]

Okay. Then what about the lumpiness of technologies provided that some of [indiscernible].

[Sajeev Emmanuel Medikonda, executive]

So I think I'm not able to understand the second part of the question there. You are asking us what about lumpiness going forward. Is that your question?

[Abhijit Majumdar, executive]

I think if you understand it correctly. Are lumpiness about that molecule. Yes. One, which obviously, as Hans said earlier, we cannot reveal the names of those specific CMS molecules unless they're already in the public domain. From your observation that they've contributed significantly to our current performance, and therefore, how will the performance be in the future? I think we expect a consistent performance. However, exactly what will happen, we are not in a position to comment. But given where we are today, we expect that performance to continue.

[Operator]

The next question is from the line of Nayan, an Individual Investor.

[Unknown Analyst]

But my question has been already answered about the reduction in commercial molecules.

[Operator]

The next question is from the line of Nirali Shah from Ashika Group.

[Nirali Shah, analyst]

So the emerging biopharma funding landscape. I think all be recovered yet. So even though there has been decent numbers of FDA approvals, what are your experiences like on the ground and to mitigate this or be able to bring it down into any big pharma yet?

[Sajeev Emmanuel Medikonda, executive]

I think the big -- the funding itself has been slow for the past several months. I think even starting from that JP Morgan Healthcare consent, there's been a certain dark cloud over biotech funding. And that's something that we have seen typically in the past also happens where there'll be a period of maybe 9 months to a year where biotechs will struggle to barons, so this will not necessarily be a long-term concern. But while the concern -- why there is this kind of a drought period, what typically happens is that projects which we expect to start do not start. And the management of these biotech companies kind of go into a little bit of a short hibernation. We don't see it as a long-term issue. I think it's something that could possibly change in the next 6 to 9 months, but we'll have to wait and see. And that's the caution that was added in the remarks. I think with regards to the big pharma business, I think for us, we definitely would like to increase our portfolio of projects with big pharma. Right now, we do work for big pharma, but it's more in specialized chemistry areas like peptides, et cetera, where they don't have other preferred suppliers who bring in that capability. But what we also see is that there is a towards building the big pharma business as well because we work with a lot of biotech companies, and we are seeing a lot of either licensing deals, or acquisition deals happening between big pharma and as a result, now, we are quite familiar working with big pharma, and that's also helped us build relationships with big pharma, which perhaps we were not able to do 5 or 10 years ago. So yes, I think we will continue to focus on that. And while we continue to build business with Biotech, I think we will also actively pursue relationships with Big Pharma.

[Operator]

The next question is from the line of Rikin Shah from Omkar Capita.

[Rikin Shah, analyst]

So it would really help if you could help explain the opportunity in apixaban given the demand for anticoagulants post cover and this molecule has been going -- becoming genericized in many geographies. So how do we look at this?

[Sajeev Emmanuel Medikonda, executive]

So I think, when it comes to Apixaban, I think it is a molecule that is continuing to grow and is getting generisize in certain markets in Europe and also in other of the world markets, but the timeline for it becoming generic in North America in the U.S. as well as in Japan is still, say, a few years after. So I think what we are seeing currently is customers who are looking to find in Europe of non-Singaporean certain cases have already started doing business in Europe. And if you look at the product, it's already a product, which is the multiple of which is likely to be multiples of tens of funds kind of thing. But considering the dosage and all those parameters, it is still not a very -- going to be a very large volume product. And once the product goes generic, we may see even the value of it going down. But currently, we are very -- the product is contributing significantly. And we have got the right set of customers for it to contribute to our specialty business for some time now.

[Operator]

Thank you. The next question is from the line of K. Reddy from MR Investment.

[Unknown Analyst]

On retiring this working tech intensity. So for FY '23 [indiscernible] lot of advances also. If I adjust the advance of fee profit, 27%, I just want to know just a comment on the advances because it was a give on -- for FY '20, we have advances around 1, and for FY [indiscernible] year, which is around INR 600 crores. [indiscernible].

[Abhijit Majumdar, executive]

So on working capital, I think so we have placed -- we are at around 110 days of revenue. I believe that moving forward, we will try to kind of keep to those levels, that's point number one.

[Saharsh Davuluri, executive]

I think in addition to what Abhijit is saying, I think the advances and all that we received from our customers is part of our business. Therefore, we expect that to continue. So I mean, we do expect the working capital to grow as the business grows, but we don't expect any major shifts.

[Operator]

Thank you. The next question is from the line of Keshav from Rakon Investors.

[Keshav Kumar, analyst]

Sir, the employee benefit expenses have seen now 20% quarter-on-quarter uptick. So could you help rationalize the reason for that?

[Abhijit Majumdar, executive]

Yes. Thank you. So if you look at -- you're right that it's gone up on a quarter FY '24 ersus FY '23, the increase is 24%. That's because of 2 reasons. One is we had the increment cycle. And our headcount also moved up. We had a headcount of $1,600, that's gone up closer to 1,700 and so that's kind of driven the increase in expenses.

[Operator]

Thank you very much. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments. Thank you, and over to you all.

[Sucheth Davuluri, executive]

Thank you. I want to thank you all once again for joining the call. Thanks for your interest. I once again apologize for the delay due to the technical pickups at the beginning. We had some very good questions, which help us think. And I hope our answers have given significant insight into our business. Even as we would have liked to have answered the question on time, our time on the call is limited. We welcome your questions offline, please reach out to [indiscernible]. Once again, we thank you for your time and look forward to our next interaction.

[Operator]

Thank you very much. On behalf of Neuland Laboratories, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.