Piramal Pharma Ltd
NSE:PPLPHARMA
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Earnings Call Analysis
Q3-2024 Analysis
Piramal Pharma Ltd
Antibody-drug conjugates (ADCs) have garnered strong market demand, with innovative pursuits enhancing this segment's attractiveness. The company has responded to these promising signs with a significant capacity expansion at their Grangemouth facility, a move reflecting confidence in the growth trajectory anticipated for ADCs. The introduction of two new suites has considerably strengthened their operational capabilities.
Being an early entrant into the conjugation market through the Grangemouth facility has given the company a competitive edge. With a reputable history and track record, the company is poised to secure a fair share of the expanding opportunities in this space.
The company's project pipeline remains robust with 35 molecules reaching Phase III. The pipeline metrics are set to be updated in the next quarterly call, providing further insights into the developmental progress and future potential.
Through strategic cost optimization initiatives started at the beginning of the fiscal year, the company has successfully expanded its margins. This is expected to continue into the next year, reflecting a disciplined approach to cost management.
Despite facing industry-wide constraints, the company's supply chain and logistics teams are proactively managing inventories and advancing shipments to ensure timely delivery to customers, thus mitigating potential disruptions.
The company's gross margins are projected to remain stable, within the range of 64% to 65%, indicating a steady profitability framework for operations in the foreseeable future.
Recent growth has been particularly fueled by a surge in commercially innovative molecules that the company supports. This segment contributes meaningfully to the company's expansion and is expected to play an essential role in driving future revenue growth.
As the company anticipates greater revenue growth, it forecasts an improvement in EBITDA margins. This is predicated on achieving more operating leverage and underscores the company's trajectory towards better profitability.
The company's diligence in debt management has resulted in reducing its debt from 5.6 at the beginning of the year to 3.4. The immediate term target is to lower this figure to below 3, reflecting aggressive efforts in strengthening the balance sheet.
While specific revenue guidance for FY '25 remains forthcoming, the company intends to provide more clarity in subsequent quarters as they gauge order inflow trends. This cautious approach to forward-looking statements aligns with the company's emphasis on data-driven strategic planning.
Sustained inflows from large pharma clients have contributed significantly to stability, even as emerging biopharma firms face funding challenges. The company anticipates improved inflows as these firms gain traction in the market, although the timing remains uncertain.
The current business demographics underline an approximately equal split between large pharma and biotech, each contributing about 33% to the business, This balanced distribution is expected to be reflected in the forthcoming annual numbers, indicating diversity and stability across its customer base.
With $16 million in capital expenditures already committed this year and an additional $20 million to $25 million projected for Q4, the company is not yet providing guidance for FY '25 CapEx. This approach underscores a completed phase of significant growth expenditures and a pivot towards enhancing profitability within single-digit margin segments.
The company has initiated formal insolvency proceedings against a supplier responsible for quality issues within its Complex Hospital Generics business. This action is indicative of the company's commitment to maintaining strict quality standards and ensuring accountability from its partners.
The attractiveness of the ADC sector has surged, driving interest from emerging biopharma entities. This early-stage interest is matched by the company's integrated offerings, crucial for smaller firms that prioritize speed and simplicity in development.
The company's diverse capabilities span from containment-oriented fill/finish offerings in the U.S. to distinctive peptide capabilities in India. Its ability to provide fully integrated services in the ADC sector is expected to generate strong order inflow, reflecting the company's comprehensive service offerings across various pharmaceutical domains.
The company aims to achieve a mix that exceeds 50% on the innovative side, which is viewed as a significant turning point. While a specific timeframe has not been provided, the company is working towards a mix shift that strengthens its position in the innovative pharmaceutical sector with all attendant benefits.
As per historical trends and previous guidance, Q4 is expected to be the company's strongest quarter. The seasonal distribution within H2 skews towards Q4, foreshadowing a significant leap in revenue and financial performance during this period.
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Ladies and gentlemen, good day, and welcome to Piramal Pharma Limited Q3 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Gagan Borana from Piramal Pharma Limited. Thank you, and over to you, sir.
Thank you, Seema. Good evening, everyone. I welcome you all to our post results earnings conference call to discuss our Q3 and 9 months FY '24 results. Our results material have been uploaded on our website, and you may like to download them and refer them during our discussion. A discussion today may include some forward-looking statements, and these must be viewed in conjunction with the risks that our business faces.
On the call today, we have with us Ms. Nandini Piramal, Chairperson, Piramal Pharma Limited; Mr. Peter DeYoung, CEO, Global Pharma; and Mr. Vivek Valsaraj, CFO of our company.
With that, I would like to hand over to Ms. Nandini Piramal to share her thoughts.
Good day, everyone, and thank you for joining us on our post results earnings call. We had started FY '24 on a positive note with healthy order inflows, specifically in commercial manufacturing of on-patent molecules in our CDMO vertical and steady growth in our complex Hospital Generics and India Consumer Healthcare business.
We are pleased to share that we have continued the momentum in quarter 3 as well, with 14% year-on-year revenue growth, EBITDA growth of 94% and about 700 basis points year-on-year improvement in EBITDA margin. Further adjusting for an exceptional item of INR 32 crores related to a product recall initiated by our third-party supplier, we have delivered a PAT of INR 35 crores during the quarter compared to a net loss of INR 90 crores in quarter 3 FY '23.
It is also satisfying to note that this performance has been broad-based with our CDMO business growing at about mid-teens rate during the year and the CHG business and India Consumer business delivering steady double-digit growth. All the businesses have seen year-on-year improvement in their profitability driven by operating leverage, normalization of raw material and energy costs, better product and market mix and efforts of our cost optimization and operational excellence.
And given that a large part of our expenses in the CDMO business are fixed, the resumption of a mid-teen growth in this business has helped us deliver an improvement in EBITDA margin during the year. In terms of our debt position, we have seen an improvement in our net debt-to-EBITDA ratio.
Currently, it stands at about 3.4x compared to 5.6x at the start of the financial year. We have used the major part of our proceeds from the rights issue to pay down our debt and are looking forward to further improve our leverage position. On the sustainability front, we have taken a target to reduce our Scope 1 and Scope 2 greenhouse gas emissions by 42% by FY '30 compared to FY '23, which is in accordance with a 1.5 degree trajectory suggested by SBTi. Further, we've also taken the target to reduce Scope 3 emissions by 25% by FY '30.
We're working diligently to minimize our resource consumption conserved by our provide a safe workplace for all our employees, deliver quality products and services, promote diversity and inclusion in our workforce and enhance the quality of life of the communities around that.
Moving on to business-specific highlights, starting with the CDMO business. In our CDMO business, we continue to see good momentum in order inflows during quarter 3 FY '24. The new development and commercial audit, excluding the existing multiyear manufacturing relationships grew by 60% in the 9 months FY '24 compared to the 9 months FY '23. These recent order inflows have high patent -- of innovation related to work, especially for commercial orders on-patent molecule. During the quarter, we received monoclonal antibodies to contribute -- order involving monoclonal antibodies. This order involves 3 sites, Yapan for ads, Grangemouth for conjugation and Lexington for fill/finish.
Given the pickup in the CDMO business, we are seeing an improvement in profitability, driven by operating leverage, favorable revenue mix, normalization of raw material cost and cost optimization initiatives. In terms of regulatory compliance, all our recently audited facilities by the U.S. FDA have an EIR.
We have also successfully closed over 140 customer audits in the 9 months of FY '24. We are also scheduled to have the UH MHRA inspection at our newly commissioned multipurpose state-of-the-art ADC manufacturing facility at Grangemouth in February 2024.
In terms of key challenges for the CDMO business in complete recovery in the biotech funding environment impacting the base of order inflows especially in the early stages of discovery and development is a key thing to watch out for. Also clinical and regulatory attrition of our customers products is a material challenge in the CDMO business.
Moving on to the Complex Hospital business. We continue to deliver steady double-digit growth during the quarter and 9 months of FY '24, mainly driven by our inhalation anesthesia portfolio. We are seeing good volume growth in our inhalation anesthesia portfolio in the U.S. market, which is partially being offset by lower market prices due to increased competition.
We continue to maintain our leading position in the U.S., single flow array market with significant market share gains in the last 3 years. In the non-U.S. markets, such as the U.K., France, Vietnam, Thailand, et cetera, we are seeing increased traction for inhalation anesthesia products. Given the healthy demand for our inhalation anesthesia products, our 3 inhalation anesthesia facilities in India and the U.S. are operating at capacity with a focus on operational efficiency and timely execution of the planned capacity expansion.
In the intrathecal segment, we continue to come our leading market share in the U.S., our brand Gablofen continues to be the #1 ranking baclofen pre-filled syringe and Power Brand in the U.S. In the other injectable segment, we launched 3 new products in the U.S. and European markets during the quarter.
We're also building a pipeline of 25 injectable products, which have different stages of development. The current addressable market size of these products is about $2 billion. In terms of key challenges for this business, geopolitical risk and associated supply chain challenges is a key issue to watch out for apart from adverse cross-currency movements as we sell products in over 100 countries.
Moving to our India Consumer Healthcare business. During the quarter, 9 months, our ICH business delivered a steady double-digit Y-o-Y revenue growth driven by new product launches and growth in our Power Brands. We have also seen an improvement in our profitability as planned on account of operating leverage as we get closer to INR 1,000 crores of annualized revenue.
We continue to invest in media and trade spend to drive growth in our Power Brands promotional spend during 9 months FY '24 was 13% of our ICH revenues. Our Power Brands grew at 12% during the 9 months and contributed 41% to our total consumer healthcare sales.
Our key brands such as Little's and Lacto Calamines grew at about 18% in the 9 months. However, growth in Tetmosol was impacted due to unseasonal rains and erratic weather patterns in the summer. Over the last 3 years, we have launched 100 new products in the market with a reasonable success rate.
During quarter 3 FY '24, we launched 6 new products and 3 new SKUs. New products launched in the last 24 months contributed to 13% of our consumer business sales. Our sales on e-commerce platforms are growing well and complement our presence in general trade. E-commerce sales are about 16% of ICH revenue, and we have a presence across more than 20 e-commerce platforms and also have our own direct to customer website, wellify.in.
To summarize, I'd like to say we've so far delivered a healthy performance in the first 9 months of the financial year. Our CDMO business is growing at about a mid-teen rate, while our CHG business and India Consumers Health business delivering steady double-digit growth.
All of our businesses are showing year-on-year improvement in their profitability. We continued to maintain our best-in-class quality record and are taking multiple initiatives to integrate sustainability into our operations. Q4 is historically the strongest quarter for us in the financial year, and we expect to continue this momentum, subject to a stable macro environment and access to logistics and distributions given the current geopolitical situation. We'd also like to reiterate the earlier guidance of high teens year-on-year revenue growth in H2 FY '24 company with a meaningful margin expansion.
With this, I would like to open the floor to Q&A.
[Operator Instructions] We take the first question from the line of Niharika Agarwal from InCred Research.
Sir, my question was that could you provide some revenue guidance for the ADC unit?
ADC.
So I don't think we provided that level of guidance at such a level, because I think it's only one of our sites.
However, qualitatively, we would like to state that we see that the overall market demand for ADCs as an offering remains strong. And if you look at the current deal activity going on, on the innovator side and suggests that a lot of innovation, I think is going into the segment, and that's part of what led us to go forward with the expansion of the Grangemouth facility, which we believe should be able to demonstrate increased order flow win rates and subsequently revenue growth in the coming quarters and years.
What capacity utilization are you expecting for the new Grangemouth facility?
We've just done the expansion, Niharika. And what we've added is 2 new suites to the facility. We had 3 initially. So it's a meaningful expansion in capacity and to see how the capacity expansion picks up.
Okay. And could you share what market share do you have for this area right now? And are you expecting the market share to pick up as well?
I don't think we disclose technology level market shares. However, I would like to note that we were one of the earlier entrants into the conjugation space through the Grangemouth facility, and therefore, we have a long track record, and we think that we are well-positioned versus our competition to continue to win our fair share, but we don't publish specific individual technology market shares.
The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
This is Akash here. My first question is, any timeline for commencement of ADC contract? Can you please share that?
I think we have multiple -- for the ADC contract with -- we have multiple ADC contracts. The work with the one that we've mentioned, I think, has already started.
Correct. It has already begun for the one that we mentioned.
It's already started.
Okay. How many molecules are under Phase III clinical trials, which can support the growth prospects for the company?
So there are about 35 as we updated as on FY '23. We updated this number annually. So in the next quarterly call, we'll be updating the pipeline. So the last updated one is 35 molecules in Phase III.
Okay. So the next question would be how much cost optimization can be expected over the next 12 to 24 months? Is it possible to quantify by the reduction in OpEx from current run rate?
So we're not specifically calling out a number of absolute value of cost optimization, Tushar. But what we can assure you is that the cost optimization programs, which we began at the beginning of the financial year, are all holding in good stead as you can see from the margin expansion that has happened, and it will continue through the next year as well.
Okay. And any impact on logistic costs due to rates issues?
Currently, there are constraints. At the same time, our supply chain and logistics teams are working to ensure that we are carrying adequate inventory of shipping in advance to ensure that the shipments leads the customers on time. The situation is a little fluid right now and we are evaluating it. And of course, our attempt will be to try and push out the consignment as required on time.
Okay. And the last question is how much tax rate do you expect in FY '25?
While we are not making our forward guidance right now for FY '25, the tax rates for the peak are 25% effective tax rate for India and U.S., which are the largest in terms of our profit share.
We take the next question from the line of Bharat Gupta from India Insight.
I have a couple of questions. So first is in regard [Technical Difficulty]...
Yes, Bharat, go ahead. Hello.
Sir, the line for Mr. Bharat is disconnected. The next question is from the line of Pravin Rathi from Pravin Rathi & Associates.
I have 2 questions. Are we actually participating in the bidding process of HLL Lifecare? If yes, then how the debt will be managed? And the second one, are we commercially manufacturing SDLT2 bexagliflozin? That's all.
So one is, I think our focus right now, we have said is on organic revenue growth, operational excellence and cost management and reduction of debt. So I think that's the focus of the company right now. In terms of bexagliflozin, yes, we are manufacturing it.
We are not bidding for HLL Lifecare. Is it -- within this respect by the government.
I think right now, our focus is on, as I said, organic growth.
The next question is from the line of Abdulkader Puranwala from ICICI Securities.
Just a couple of questions from my end. To start with on the gross margin front, so for this quarter, if you see your gross margins were slightly lower as compared to what you have done in Q2. So though the top line was largely identical, what explains this the gross margins on a sequential basis?
So Mr. Abdul, basically, we have called this out last time that we had a significant increase in inventory, and that led to an overhead credit in the COGS, which we had said would unwind in H2. So this is basically the timing thing. Our standard gross margins are between 64% to 65%, and that's what it will remain at.
Okay. So this number should largely sustain in Q4 and for next year FY '25?
We're not making a guidance for FY '25, but by FY '24, that's right.
Sure. Understood. Understood. And secondly, on the breakup what you provide on the revenue side, is it possible to provide a split of your CDMO business between what is led to innovation for the quarter and what is for the generics, including the API business?
I think our plan is to give that on an annual basis because we see that there can be within quarter abnormalities, and we find it probably more salient to give once a year along with our pipeline update that I think I've been mentioned earlier in the call.
Okay. Okay. So sir, just to better understand your CDMO growth of 11% or the 13.5% to what you have recorded in the first half and this was some ballpark color as to where the growth is coming from? Is it coming from the new molecules which are getting added in the clinical trials? Or it's more led by the 18 commercial molecules on the innovation side? Or is it the generic piece which is pulling that?
Yes. So it's a fair question. And we're actually quite excited that a lot of the growth is happening in the recently launched commercial innovative molecules that we're supporting. And I think this is consistent with the messages we shared with our year-end numbers where we saw an increased order flow in that category, and we're seeing that now flowing through into the revenues because we would expect that to be a relevant contributor to our growth.
All right. And sir, lastly, in the previous con call also, you have highlighted the business or the potential of achieving EBITDA margins at least by in a range of, say, 16% to 18%. So how soon you think this kind of an EBITDA margin is achievable? Is it a long-term aspiration or something which you can achieve in the next 2, 3 years?
So as we mentioned, we are not making a forward guidance at this point, and we don't really give a segment level margin split, and we'll cover that later when we make a specific guidance for the future.
No, sir. I was not looking for any specific segment link, but on an overall basis, your consol EBITDA margins. I mean how should we take in terms of the way to look at it? Is it 13%, 14% of what you reported in the last 2 quarters quite sustainable or you see a meaningful increase to happen in the next coming years?
See as we have guided that we will see a meaningful increase in the EBITDA margins over the previous year, and we stand by that guidance. And you will see an improvement overall at the end of the financial year as well.
I think also going forward, we should see improvements in EBITDA margins as we get more operating leverage through revenue growth. So I think in the future, we should see higher EBITDA margins.
All right. And just a final one, if I may. So on the leverage part, I mean, so in terms of our aspirations, so where do we see that leverage landing up in, say, another 2 to 3 years? Would it be close to, say, like 2x or 3x the EBITDA, what you do in the next couple of years? Or any ballpark color on that would be again little helpful?
So as you would have seen this consistently improved the overall leverage. We were at 5.6 when we began the year. We are now down to 3.4. As a first step, we are targeting to bring it down to less than 3 in the immediate term. So let's start from there, and that's the target that we have to bring it down to less that 3.
Yes. Just for benefit of all, last quarter, we gave a guidance for H2 for the guidance on FY '25, we'll have to wait till the next quarter, till we get some clarity on the order inflows. So we are not making any forward-looking guidance for FY '25 in this call. But maybe in Q4, we will be giving more clarity on FY '25 outlook or the guidance.
We'll take the next question from the line of Ankit Shah from Canara Robeco AMC.
To start, I would wanted a bit more granularity on the demand front. I understand that right now, biotech funding environment is weak, but are you seeing any kind of traction in the RFQs or inquiries? And secondly, so you said you are seeing good traction on the commercial molecules. So does that give a more longer-term visibility now with more commercial molecules in under execution, if you give some color on that.
I will answer the second part first, which is that a large part of our strategy is pivoting to innovative work on the development side, integrated projects on the development side and differentiated offerings in those integrated projects on the development side is all a mix shift towards what we believe to be a more attractive, stickier business.
And as these clinical programs mature, become commercial, the predictability of the once launched commercial programs is higher than the development programs, which are subject to binary risk. So overall, this is, we think, seeing some of the lagging indicators of our strategy. And so we think it's a good thing.
If you look at our order intake and the RFP inflow that we're seeing, we've seen through this difficult period, strong continued inflows from the large pharma client base, which have more stable balance sheets for the emerging biopharma, which would be in the area that would happen to tap the funding markets. It has been a difficult period for them over the last, let's say, 24 months.
And while some with good data and more advanced programs have been able to get funding over the period and the funding has occurred, it has not rebounded to date to a higher level than what it has been, let's say, over the last 2 years. And so we look forward to it improving in the future, but we can't predict exactly when that would be. And so for the near term, we're expecting more of the same in terms of the funding environment and any improvement over that in our mind would be an improvement in our outlook.
Got it. Got it. So related to that, I understand it's early days yet, but recently, there was a proposed biosecure act which looks to be linked with China. So what are your thoughts on that? Would it stand to benefit Piramal's business? Any initial thoughts that would be helpful.
We see the geopolitical and geographic preferences of our customers being complex and varied. We see some clients who would like more onshore production and for them, their shores may vary, but it would largely be in the U.S. or Europe. We see other clients for whom they have larger volumes and cost of goods is important. And they want to derisk from China. And then we see increased inflows for customers with that profile. And we see other customers who continue to be comfortable with China as a place to source from. And so we see the entire mix and our go-to-market strategy is not to try and convince the clients to go to a particular place because what we found is they typically know where they want to go.
And then we provide an offer from the location that they want at a price that is competitive and a technology level that's competitive and the service level is competitive for that geography. And so we see demand in actually both our overseas and our Indian offerings at the moment.
Fine. That's helpful. Secondly, can you tell me what was the net working capital, where it stands at the end of December? And has there been any inventory buildup ahead of Q4 dispatches?
So yes, as we mentioned, there is a significant increase in inventories because we have a high quarter 4. Net working capital is roughly about INR 2,400 crores at the end of December. It's almost similar to what it was in the earlier quarter in September.
Got it. Lastly, on the cost side, so I see that your costs have come down significantly, the other expenses, you mentioned some of the reasons, but should we expect this run rate to continue going forward? Or any cost that can increase due to new facilities ramping up or anything should -- can the current run rate and other expenses continue going forward?
To the extent of costs which are variable and linked to production, they will obviously vary depending upon the quantum of production and operations that happens right in the quarter. Otherwise, we are trying to do our best to keep costs at the optimum levels.
And therefore, all the operational excellence initiatives and cost optimization initiatives are running in parallel and we will continue. If you are referring to a decrease in the other expenses for the quarter, and we just want to highlight that last year, in quarter 3, we did have a provision for a receivable, which was one-off. So that may not be a correct comparison. But otherwise, the current expense that you see is more or less in line with what we want to operate at.
[Operator Instructions] We take our next question from the line of Ranvir Singh from Nuvama Wealth.
Hello?
Hello, Mr. Singh, we're unable to hear you, sir. Hello, Mr. Singh, can you hear me?
Is it fine now?
No, sir. Sir, if you are in a headset, I would request you to switch to your handset, please. Mr. Singh.
Is it better?
Yes, sir, please go ahead with your questions.
Yes. So my question was that in segment reporting last year, last sort of previous year's number seems to be restated. So you see the CDMO business, it was INR 1,021 crores last corresponding quarter. But this time, it is in INR 1,010 crores. Similarly, I see the difference in other segment revenue also. There has been some restatement today?
Sorry, Ranvir your question, I was not very clear on the question. If you could please repeat or if you're not in a place where you can speak, maybe you can e-mail and we'll separately respond to you. I was not very clear on your question.
Okay. I'll come back in the queue.
The next question is from the line of Vinod Jain from WF Advisors.
Even in a benign environment and even with the -- all the operational excellence achieved overall, the profitability of the company is constrained. I mean, if you take the onetime charge into account, the profitability is almost nil. That leaves nothing for the shareholders. So my indication is whether it is the cost reduction, which is the answer to the question, wherein IT could be a key driver and the administrative costs and the overhead in the other expenses could be curtailed further. I would like to have some thoughts of the management on this.
So firstly, in terms of the subdued profitably, as you would see that we are making good progress quarter-on-quarter in terms of improving the revenues improving the capacity utilization and optimizing the cost, which is leading to that improvement in margin. Obviously, this can't happen overnight and has to go through the process. As the revenues increase year after, we will see further improvement in margin and therefore, improvement in overall profitability. The points that you refer to with respect to admin and other expenses, all of them, of course, are being looked at and those are continuous programs that we are running to optimize cost across the organization, and those will cut in now.
Yes, whether IT could be a key driver?
Of course, we are working on digitization wherever possible, and that's a continuously running program across all our businesses.
The next question is from the line of Gaurav Arora from Equirus.
I have couple of questions. First is with respect to the CDMO business. So how much of your CDMO business would be from the small biotech firms and how much would you have shifted from small biotech to, let's say, larger firms or generic pharma over the last few quarters.
So roughly about 33% of our business comes from biotech. It's almost like an equal split, large pharma is 33%, biotech is 33% and the other balance is the midsized pharma.
So I think we give those demographics annually. That's right. And within the year, I think we probably had a bit higher growth in the large pharma this year than the emerging biopharma for the reasons we mentioned in the demand discussion earlier. And that will probably reflect when we give the updated annual numbers for the categories.
So in the next quarter, we would be putting out all the pipeline details and the FY '24 customer breakup, so you'll get the answer there. But yes, directionally, it's 1/3, 1/3, 1/3.
Sure. The next question is related to the CapEx. So we just completed a large CapEx of $157-odd million over the last couple of years. So how much would you need to invest up further for the consumer business? And have the CapEx plans for FY '25 be fixed?
So we're not making a forward guidance on FY '25 CapEx yet. For the current year, we have spent about $16 million, and we expect maybe another $20 million, $25 million to happen in quarter 4. So that's what we see as the guidance set up investment.
But should we expect the CapEx intensity to reduce a bit in FY '24? Or should it be earnings...
The large part of the growth CapEx, which we wanted to do, we have done. So there'll be some reduction, but we'll give you a more specific guidance on that later.
And last question on the ICH. And so with the annualized run rate now surpasses INR 1,000 crores, would it be fair to assume that ICH business would have low to mid-single-digit margins now? Or would it be fair to assume that it will keep improving here from? Or would you keep investing in ad spend on new product launches and prior growth over margins there?
It has single-digit margins right now. And as we gain scale, I think we like to focus on improving profitability as well as growth, but profitability first.
Next question is from the line of Bharat Gupta from India Insight.
I think I'm audible now. So a couple of questions. One, on the order book space. So can you quantify like what kind of order book we are maintaining in the CDMO space? And if possible, can you bifurcate it across the EPA and the innovation, please?
So we don't give a quantitative number in terms of API and formulation split, it is more in favor of API, maybe 60%, 40%, 60% API, 40% formulation. And in terms of split between innovation and generic at the last reported one, 45% of our CDMO revenue comes from innovation-related services and 55% is on generic. So when I say 45%, it includes discovery, development and commercial manufacturing of on-patent molecules.
And our overall multiyear trend, as I think we've communicated in our prior materials has been that the innovation mix has been increasing. And we would anticipate with the current performance that when we next update that should show movement in that direction again. So we would see that we're growing faster in that category.
I believe there has been some sort of a supply constraint with one of our peers closing down to the couple of their sites. So do you believe that the supply constraints are benefiting us in terms of gaining market share?
I think overall in CDMO, there is actually quite a lot of capacity. So -- and the market share doesn't move that easily.
I think customers obviously have choices, and we need to win our business, and we feel that we do win more than our fair share business that comes up, but they do have choices. And on any given project, there will be a long list or shortlisted, and finally, they'll choose between 3 to 5 players and everything goes out to bid and we win more than our fair share we think. But I don't think that there's a shortage of capacity and choices.
Like my question was particularly with respect to the capability which we have, particularly if we try to compare it with the peers. So are we at par or we might have to incur and bring out new platforms, so as should be at par with them in order to take the market share from them?
We continue to look at where we need to make investments in our CapEx. I think the first priority remains on maintenance and compliance CapEx. And then the next thing would be on capacity and capabilities. As mentioned earlier on the CapEx discussion, we just completed some major expansions across our network.
And at this stage, we're looking to try and maximize the benefit utilization of those. And that's why you see a more muted CapEx number for the year overall. We obviously look site to site and we can look for gaps to address. But we do feel, and I'll reiterate that our win rates as we see them when we're on the shortlist are reasonably good versus our competition, and we think that we're winning more than our fair share, which is showing up in our order book and in our revenue growth.
Great. My last question pertains to the Indian Healthcare space. So I can see in the presentation that there has been a reduction in respect to the advertisement spend and that particularly with respect to last 9 months, it has been close to 13%. So are we expecting an increase over Q4 FY '24? Or this is a sustainable level and we can focus more on the profitability side currently?
I think Q4, we'll see a little more higher advertisement spend, especially it's a seasonal time for some of our products. So yes, it will be a little higher.
Next question is from the line of Chintan Shah from JM Financial.
I just have one question. So if I look at the interest cost in financials, so Q-o-Q that is still around at similar levels of INR 105-odd crores, but our net debt especially at the end of this quarter that reduced to INR 3,800 crores. So can you just explain what has happened there?
Chintan, it is largely rate-driven. As you're aware, almost 78% of our debt resides outside of India. And our debt is actually benchmarked against all the benchmark reference rates, so whether it's the LIBOR, the SOFR, the Fed rate, and all of these, if you look at between March and December, have increased in the range of anywhere between 9% to 17%.
Also in India, if you see, whether it's the treasury bill or the bank refence rates and NCLR have also increased between 3% to 7%. So for the interest cost to go down, these benchmark reference rates need to come down first, and that will help reduce the overall interest cost.
Got it. Understood. Sir, if you can just also highlight what's the gross debt number as of December? What proportion would be overseas? I mean how are we planning to -- are we like targeting to return cash flows will be reducing that first? What's your strategy?
So as I mentioned, nearly 78% of our debt resides outside and those are dollar-denominated debt, which is serviced locally. And the gross debt is roughly about INR 4,500 crores. And the idea, as I mentioned, is through internal accruals, given the fact that the EBITDA is improving, the overall CapEx spend is also now reducing, we will see internal accruals for being able to retire debt. Our target would be to bring down the debt-to-EBITDA ratio from the current levels of 3.4 to about 3 to begin with and then reduce thereafter.
The next question is from the line of Shubham Shukla from Capital.
I hope I'm audible.
Yes, Shubham.
Yes. Okay. So most of my questions have been answered already. Just to make this on a funding scenario in U.S. biotech pumps. Is it like bottoming out? Is it better than last quarter? Can we expect a bounce in next 1 to 2 quarters? In an overall scenario?
So we track this monthly. There are different reports, you could look at from other -- from analysts that track this category. But I would say that the funding has continued at a subdued rate over much of last year. And while there's always discussion about whether next month will be the month that it ticks up, I wouldn't say that there's been any material improvement in the overall funding. And when we look at funding, we look at across the private funding, the IPOs, the follow-ons and the pipes.
And I'd say across that aggregate funding for our customer base, it has continued at a meaningful level, but significantly below the peak and it has it really rebounded. Obviously, everyone is checking January and there's been some notable IPOs in the U.S., but 2 good IPOs do not a trend make. And at this stage, we're assuming no more of the same until we get enough data points to say there's a signal.
Okay. Fair enough. Just 1 small -- another question. This exceptional items we adjusted that like INR 32 crores this quarter. It's like there's some more colors like in detail what was impacting?
Yes, Shubham. So during the quarter, one of our suppliers for our Complex Hospital Generics business had reported that there is a certain quality and severity issues with respect to that product, and the supplier has triggered a recall of those products. As per our agreement, we were entitled to indemnity for the cost with respect to the recall and the unsold products and other associated costs.
Our subsidiary had given ample opportunities to the suppliers to pay for those. And since the supply was not able to pay for those, we instituted a formal insolvency proceeding against them. And accordingly, the claim which we had made against them, we have made a provision for that in the books, which has been classified as an exceptional item.
Next question is from the line of Alok Dalal from Jefferies India Private Limited.
Peter, on this new integrated order for ADC, so can you tell us which stage is this order? Is it Stage III or NDA filing or commercial?
So this is an early stage filing. What we've seen generally is that as the ADC sector has become much more attractive as a destination for innovation work, we've seen a meaningful uptick in emerging biopharma or smaller companies targeting these assets.
And for those companies, the integrated offering and the speed and the simplicity we can offer them is very important. But these would be on the earlier stage in terms of the development cycle, they would not be late stage. This would be on the earlier side. And we expect, as the market when particular technology area becomes hot, you get a little bit more private funding into that category more single asset startups or single-digit number of asset startups targeting these and that category, we think we're well suited to meet those needs because they want the virtual, simpler, faster offering, which we can provide.
Okay. And Peter, the company has over the years built multiple capabilities. ADC is one, there is hypo-APIs, peptides, control substances. So which are the areas that excite you there is Piramal differentiated has an edge over others and that can be a significant growth driver for CDMO, say, over the next 3, 5 years?
So I'd say there's several that we're excited about. I think the onshore Hypo-API offering remains a strong offering for us, and we think it will be a meaningful growth driver in the medium term, as you said. I'd say that our -- if you look at our containment oriented fill/finish offering in the U.S., that's also an area where we think we have some distinctive capabilities, and we continue to get strong order inflow. You mentioned ADCs, both on a stand-alone conjugation basis where we have a long history.
And then for a more median period of time, we were doing that combined with fill/finish. And as I mentioned earlier, more recently, with the map. So now we can offer all 3. And even in other cases, we're offering linker. So we can now offer the fully integrated offering there in the ADC category.
As we shift to India, I think we're quite excited with our peptide capability. This used to have more of a generic orientation, but we've been repositioning that and we expect in the future to have a services innovation angle, and we think the peptide not a lot of CDMOs would be offering. Obviously, there's incredible much larger competitors, but we think that we have some capabilities that put us at the table.
And I wouldn't also underplay that there are not a lot of innovative oriented CDMOs in the Indian delivery market with a combination of science, track record and efficiency profile that we can offer, and that's actually driving a lot of our growth this year. And so the innovation offering in the India market with the science and quality and track record also. So I gave you a bit of a long answer, but we're actually -- part of what excites us is, it's not just one thing. We have several engines to grow with. And we think that they collectively will allow us to serve more innovators more integrated projects and with these differentiated offerings.
Yes, sure. Also, I think -- so if we take 3 to 5 years, then the current mix of CDMO is 55 generic, 45 innovation driven. Is there a target in mind that the company has about a change in CDMO mix, which can then provide investors with more sustainable revenue and a much better margin profile?
So I mean, the obvious next milestone that we would like to achieve would be being more than 50%. We can't give you a specific time frame as to when that would happen, but that would be one meaningful. It's just a mathematical number, but it's a meaningful tipping point we'd like to be able to demonstrate to the market. We're not at the point where we can say that we've achieved it, but obviously, we'd want to do that.
But I'd say that overall, we'd expect our mix shift to continue to move upwards on the innovation side. And as you mentioned, we think that while we obviously still benefit from selling in the off-patent area, and that will always be a meaningful part of our offering because of certain other benefits, which we discussed before, we would anticipate continuing to aim to have a sequential improvement in the innovative mix with all the benefits you described.
The next question is from the line of Aagam from Flute Aura.
My question is regarding the seasonality bias in our business. We're expecting better numbers and the absolute numbers on the top line and the EBITDA this quarter. Just wondering if there's some spillover residual billing that's going to happen in quarter 4, given the numbers are quite flat in quarter 2 and quarter 3. Could you throw some light on that, please?
So historically, for our quarter 4 is the biggest quarter. And even when we gave out our guidance in quarter 2, we have specifically called out that it is -- within H2, it is Q4, which is specifically the biggest quarter. So for us, the seasonality within H2 is also more skewed towards quarter. So yes, you will see a bigger number in quarter 4 in terms of revenue.
The next question is from the line of Pawan Bhatia from Nuvama.
Am I audible?
Yes.
I have 2 questions actually. One is, is there -- has there been any restatement in the segmental breakup? Because if I see the CDMO revenues right now show about INR 1,010 crores versus in the Q3 result of FY '23, it showed INR 1,021 crores. So has there been any restatement?
No specific restatement. At the most, that might be an FX-related movement. We will separately provide you the detail on this, if you can send us a query, Pawan.
Okay. Okay. And our second question is, is there going to be any price trend -- are they going to change in the subsequent quarters?
And you mean to say innovation anesthesia?
Yes.
I mean it is a generic market where there is price pressure. So -- and there is competition in the market. So yes, I mean pricing is...
So generally, if you look over a multiyear trend pricing in this particular market as a modest annual degrowth or reduction. One of the benefits we have in this business segment that you just asked about is that we're vertically integrated, and we have a multiyear cost program that has allowed us to maintain over a long time horizon, despite price decreases of reasonably attractive gross margin or contribution margin. And so the countervailing component allows us to maintain the necessary profitability and we anticipate working with these levers to continue that in the future.
The next question is from the line of Omkar Kamtekar from Bonanza Portfolio.
So firstly, what I wanted to ask was with respect to your consumer business, the Consumer Healthcare business. So Power Brands approximately contribute 41% of our revenues for the 9 months FY '24, at least steady. How do you see this number moving? And is this number going to meaningfully move ahead and higher? What is the outlook there?
I think overall, yes, I think that is the idea. I mean just this year for one of our brands, we had some unseasonal rains, which kind of impacted it during the season. But I think in general, the trend is for us to put media and advertising and investment behind the Power Brands, and we should see higher growth.
So any of the other brands that could migrate into the Power Brands and that might -- so is there something like that could happen over the medium term, near term? Could that be also case?
Right now, the focus is on our 5 current Power Brands. I think we want to get some to significant sizes and so there's some way to go yet.
Okay. And the consumer business itself is also now closing in on INR 1,000 crores worth of revenue. Would that be something sustainable over a period of time, say, ahead?
Yes.
Or would that -- would this also maybe be volatile because the competition in the OTC market with -- this year how are we sharing that? And do we see any challenges in that segment -- in this segment as such?
I agree there is competition in the market, but it is a sustainable business. We've been investing with kind of our distribution and feet on street in chemists stores and modern trade across India. And so overall, I think we see it as a sustainable business.
Okay. And could you just share the market share number for the Hospital Generics business? How much -- is that a distributable number that we had?
So I think we disclosed it last quarter. So in sevoflurane, we have about 44% market share in the U.S. And in intrathecal baclofen, we have 78% market share in the U.S. So these are 2 significant products we have, and we have disclosed this.
Okay. Okay. And how is the pricing environment in the U.S. with respect to our products? Are we seeing any headwinds there or maybe or resolutions of the headwinds that -- so that the outlook becomes better over a period of time? Is there any color on that? Can you please share.
I think overall, as we said, in a generic market, there is year-on-year price declines and we're trying to manage overall margin improvement by -- through vertical integration.
Okay. Okay. And lastly, so our gross block as of the last reported number of the financial -- FY '23 number is INR 3,500 crores odd. And this facility that would be coming on how much of that would be capitalized in the books? So the gross block, what would be the number now?
So while we have not published a balance sheet for December, and the next one, you will see in March. A significant part of the increase in the gross block has come in on account of the CapEx that we have incurred at Grangemouth, CapEx, which we closed at Riverview, the CapEx which we did at Turbhe and in-vitro capability that we did at discovery services. Looks are the 4 big ones, which we have done over the last year, which has led to an increase in the gross block.
CapEx number?
As I mentioned, the CapEx, we expect is anywhere between $80 million to $85 million for the year.
$80 million to $85 million. So what would be the asset turns that we can see for current FY '24 years, but on a continued basis, what will be the fixed gross block asset terms that we can expect -- so it's currently in the range 1%, 1.1%. but will it be sustained at these levels ahead also? Or would it improve?
So it obviously has to improve, and our target will be to take it to 2%, 2.5%. Of course, that will vary by site, but the asset terms will improve.
If 2% -- so we are targeting 2% to 2.5%, but that would be so we are not putting any timeline towards, but 2% to 2.5% is our target.
Yes. Over the next couple of years, the target will be to move in that direction.
Over the next couple of years. And could you just finally the...
Sorry to interrupt to you sir. May we request you to join the question queue. We have multiple participants waiting for their turn. The next question is from the line of Kunal [ Dokhlin ] from Fair Value.
Hello, can you hear me?
Yes, please go ahead.
Most of my questions have been answered. I just had one left. You mentioned that in the ICH vertical, the contribution of the products launched in the last 2 years is 13% to the top line. So do you expect this ratio to improve or stay the same going forward?
I think we expect it to be around the same because as we -- as the products scale and grow older intersect may move into our existing products basket.
The next question from the line of Rucheeta from Iwealth.
Congratulations on a great set of numbers. So my question was mainly on the side of margins. So when we are saying that obviously, there is a part of operating leverage that would play out as my sales increase. But is there a chance that my gross profit margins would improve further from your because of a better product mix? Or do we say that this 64%, 65% of margin should only be sustainable?
So while there are different factors that impact the gross margin, as you rightly mentioned, product mix can play an impact the -- at the same time, yield improvement, the backward integration, cost optimization initiatives can also help improve the overall gross margin and sometimes just the depreciation of the rupee can also play an impact on the gross margin.
So there are multiple factors that can play out. And obviously, our attempt will be to move in the direction of improving gross margins. We will work towards it. But as we mentioned, there are certain businesses where there could be pricing challenges, there could be impacts, it might even balance out. So that's possible, Rucheeta.
Okay. It's fair. But is there any target that you would like to reach to like in terms of your EBITDA margins or gross margins, if you could -- just give a little sense on that?
No specific target. I mean, obviously, we will try to improve it as much as we can, but we can't put a number to it because it completely depends upon the kind of product mix, the kind of orders we get. It depends upon the customer mix. So all of that, there are variables that will be beyond our control as well.
Okay. And sir, when you talk about this high-teen sales growth, do we also include the other income in it while we -- I mean equal fact or is it just.
Just the revenue number, including other income.
Right. Because right now, we have been growing at around -- at the lower end of it, like low teens, basically. So how do you see this improving? Because there's just 1 quarter left. So where do you see the growth coming from?
Rucheeta, as we said, quarter 4 for us is the biggest quarter. So a large part of sales does happen in quarter 4. And there, the growth rate will be higher, which should take us to -- closer to where we have said we will be.
High teens.
Yes.
And this high teens growth, do we see this in the next 3, 4 years as well, like not the next year immediately I'm talking about, but on a longer-term trajectory, if I want to see the company?
We're not making a forward guidance at this point in time, Rucheeta. We will come back on.
Ladies and gentlemen, we take that as the last question for the day. I would now like to hand the conference over to Mr. Gagan for closing comments.
Well, thank you, everyone. We hope that we were able to answer most of your questions. In case you have any follow-up questions or any clarifications, please feel free to reach out to me, and I'll be happy to respond. Thank you, and have a good day.
Thank you. On behalf of Piramal Pharma Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.