Piramal Pharma Ltd
NSE:PPLPHARMA
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Ladies and gentlemen, good day, and welcome to Piramal Pharma Limited Q4 FY '23 Earnings Conference Call. [Operator Instructions] Now this conference call is being recorded. I now hand the conference over to Mr. Gagan Borana, General Manager, Investor Relations and Sustainability from Piramal Pharma Limited. Thank you, and over to you, sir.
Thank you, Vikram. Good evening, everyone. I welcome you all to our post results earnings conference call to discuss our Q4 and FY '23 results. Our results material have been uploaded on our website, and you may like to download and refer them during our discussion. On the call today with us, we have Mr. Nandini Piramal, our Chairperson, Piramal Pharma; Mr. Peter DeYoung, CEO of Global Pharma; and Mr. Vivek Valsaraj, CFO of our company.
Before I proceed with the call, I would like to update that the company has filed a DLOF for a rights issue with SEBI for it's approval. Given this event, you would have to abide by the statutory guidelines as issued by the regulator in regards to our disclosure and external communications. Hence, we would not be able to share any forward statements not disclose any further details on the proposed fund raised during the deal window period. Therefore, I would request everyone on this call to restrict your today's discussion to FY '23 and Q4 FY '23 performance.
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 for our post results Q4 and FY '23 earnings call. I'm going to start with the quarter's performance. Starting with -- over the past few years, Q4 has always been the best quarter for the company in terms of revenue contribution and EBITDA margin. This year as well, in quarter 4, we registered a sequential revenue growth of 26% over last quarter with an EBITDA margin of 17% compared to 10% reported in Q3. In terms of Y-o-Y growth, for quarter 4, we registered a revenue of INR 2,164 crores, implying a growth of 2%. For the full year, we reported a Y-o-Y revenue growth of 8% with revenues of INR 7,082 crores. Our CDMO business grew by 7% Y-o-Y in FY '23. The muted growth was due to an external perspective, slowdown in biotech funding, delayed decision-making and low muted demand in P&S vitamins and generic API.
From an internal perspective, the resolution of execution issues at some of our sites with an ongoing exercise throughout the year. Margin in the CDMO business was impacted due to the muted growth in the larger fixed cost base. However, the growth in our differentiated capabilities such as peptides, ADCs, HPAPI, Potent sterile Injectables, hormonals products and On-patent API Development and Manufacturing Was strong with a 19% growth between FY '21 to '23. Our CapEx in FY '23 was aligned to those areas. We closed FY '23 with a healthy order booking versus prior quarters. Our complex hospital generics grew by 28% and 14%, respectively, during the quarter in FY '23.
Our inhalation anesthesia sales, particularly sevoflurane where we are a market leader with a 39% market share in the U.S. market continued its healthy growth momentum in the U.S. and ROW markets with robust volume growth. Our India Consumer Healthcare on a like-to-like basis registered a growth of 5% and 16% during the quarter and full year, mainly driven by Power Brands and strong sales traction in the D2C and e-commerce channel. Our reported EBITDA margin for the year was 12%. However, adjusting for nonrecurring items such as inventory margin on account of demerger of INR 68 crores near expiry inventory position, a provision of INR 92 crores on account of lower demand during COVID-19 pandemic and provision for receivables of INR 32 crores on a biotech customer. Adjusted like-for-like EBITDA margin at FY '23 was higher at 15%.
Our EBITDA margins during the year were impacted by higher operating expenses, including raw material costs, energy prices, weighted inflation and marketing costs. We also saw some increase in OpEx as we expanded capacities at site seeing high demand. We've already started taking initiatives towards cost optimization and improvement in operational efficiency to offset inflation pressures and improve our profit margins. As mentioned earlier, in terms of CapEx investments during the year, we invested INR 965 crores mainly towards the expansion of facilities which are witnessing high demand, such as Riverview range about Turbhe and Ahmedabad. We believe long term and our growth in our CDMO business would be driven by differentiated capabilities and integrated service offerings and have accordingly aligned our CapEx investment, also for driving growth in our inhalation and anesthesia business, which has seen significant demand we are expanding our capacities, including [indiscernible] raw materials made in-house.
Moving on to business-specific highlights. We for the CDMO. We witnessed a muted revenue growth in our CDMO business, but are starting to see signs of recovery. Firstly, we're seeing continued client RFP flow with visible demand for integrated multisite campaigns. We're also seeing healthy POs for recently approved on-patent commercial products. This has translated into a significant pickup in order bookings in Q4 compared to the previous 3 quarters. Secondly, our relationship with innovative pharma companies have strengthened. For FY '23, our new contribution from innovation-related work was 45% of CDMO revenue. Some of our collaborations with innovative companies already in the public domain, which highlights our capabilities in the CDMO business. Third, we continue to see good demand for CDMO services in the niche areas of high potent API, peptide and antibody drug conjugates. Our recently expanded capacity of Riverview facility catering to High Potent API has been seeing strong order inflows. We expect to go live with our expansion of our Grangemouth facility in the second half of this financial year, which should help us in strengthening our position in the antibody drug conjugate set.
Revenue contribution from our differentiated offerings has increased from 27% in FY '21 to 37% today. In terms of development pipeline, we aim to continue discovering and developing new molecules for our customers and have a development pipeline of molecules across various stages of the development. We expect some of these Phase III molecules to provide us with commercial manufacturing opportunities in the near to medium term. And finally, we have maintained a quality tack record. We have yet another successful year having cleared 36 regulatory inspections, including 4 U.S. FDA audits at Riverview, Lexington, Sellersville and Digwal. At Riverview and Digwal we received 0 observations while at Lexington and Sellersville, we received EIR for the VAI observations.
Further, in the previous week, of the Pithampur facility also went -- underwent FDA inspection with 0 observations, and now at any I seeks that The 5 sites, which have passed the audit and contribute more than half of the CDMO sales in FY '23. Further, with an increased number of customer audits in the year over the previous year, which is also a leading indicator of improving customer engagement. We have taken specific actions to improve our business performance. We have added more people to our business development team to improve share of wallet at key customers and drive demand at strategic sites.
Our COO, Herve Berdou, who joined us last year is continuing to drive execution improvement at various sites. We've also made some site level and functional leadership changes to address execution issues where they're needed. At OpEx, where we reassessed our cost structure more prudently given the new demand environment and hope to grow the business with better profitability on the back of increasing demand, visibility and our differentiated CDMO businesses. Moving to our complex hospital generics business. Our inhaled Anesthesia portfolio, particularly Sevoflurane is witnessing high demand in the global market. and we're expanding our capacities to meet the growing demand for our products in the U.S. market. As per IQVIA MIDAS MAT -- moving annual total, September '22 data, we are the leading player in Sevoflurane in the U.S. with a value market share of approximately 39%.
For inhalation anesthesia, we're vertically integrated and are expanding our capacities to address the growing demand of our inhalation anesthesia products. Our intrathecal portfolio continues to command a leading market share in the U.S. As far IQVIA MIDAS and MAT September '22, we ranked #1 in the U.S. market with Baclofen’s pre-filled syringe and vial with our brand
Gablofen having Approximately 78% market share. In the injectable pain management segment, our growth during the year was impacted by supply constraints at our CMO. We're working to improving these products with our CMO partners and have seen improved traction in production in quarter 4 FY '23. Profitability of our CHG business for the full year was also impacted by near expiry provisions on account of lower demand. During the COVID-19 pandemic, which we expect to normalize in FY '24. We continue our focus to build a pipeline of injectable products and have 25-plus SKUs currently in the pipeline. During the year, we launched a few new products with multiple SKUs in U.S. and European markets.
Moving on to a given to health care business. Our India Consumer Healthcare business had a good year in terms of revenue growth despite a higher base of FY '22. This growth was primarily driven by our power brands with witness growth of 37% in FY '23. Our power brands contribute to 42% to total health care sales during FY '23. Littles our top brand grew by 50% in FY '23 and Lacto Calamine grew by over 40% in FY '23, powered by new launches and traction on e-commerce. In line with our strategic strategy, we are reinvesting our profits in the consumer business to support the growth of our power brands.
During the year, we continued to spend on media and trade promotion, which has yielded good results as reflected in the performance of our power brands. Further, we launched 26 new products and 37 SKUs during FY '23. New products launched over the last 2 years now contribute 18% of consumers. We have a strong presence in the general trade or strengthening our presence in alternate channels of distribution, including e-commerce, modern trade and our own website [indiscernible] Currently, e-commerce contributes about 16% of our total consumer business sales and has been growing well.
To summarize, I'd like to say, while our CDMO business has had net-growth in FY '23, where we're witnessing green shoots of recovery in Q4, including a pickup in our order book, increased mix of innovative business, increasing demand for differentiated capabilities and continued standards of quality and compliance with successful U.S. FDA audits in the last 6 months. We have taken efforts to reallocate resources in OpEx and CapEx towards the higher demand side. Our innovation and seizure portfolio continues to see a healthy demand in the U.S., where we're the leading player in Sevoflurane.
In review of increased demand, we're expanding our capacities in our Indian and U.S. facilities. Further, our India Consumer Healthcare business is delivering high growth by Power brands. Our multicultural and multinational team of over 6,200 employees, 17 manufacturing facilities worldwide and the global distribution network in over 100 countries gives us a robust platform to build scale. We take pride in our quality track record and focus on patient, customer and consumer centricity. We're also conscious of our responsibility towards our planet, society and all stakeholders and are making steady progress in the areas of greenhouse gas emissions, water stewardship and waste management. We believe in the potential of our business and our main focus over the next few months will be on capturing demand, driving productivity through operational excellence and executing critical maintenance and growth CapEx.
With this, I'd like to hand over the call to Vivek, our CFO, who will respond to queries we have received since the last evening, post that, we will open the floor for any questions that you might have.
Thank you, Nandini. Good day to all, and thank you to those who shared your questions in advance. We'll try and answer them now and then take up any other additional questions that you may have. The first question was what is the status of the rights issue? We have filed the DLOS with SEBI on the 20th of March this year. Post that, we have received and replied to the queries from the regulator. Currently, it is under review with SEBI, and we are awaiting an approval. Next question was at what price will the rights issue be priced. The pricing will be decided closer to the launch of the issue. What are the reasons for the muted growth in the CDMO revenues for the quarter and the year? For a full year basis, we saw 1% growth year-on-year in a tough macro environment. Current quarter revenue growth was affected primarily due to the effect of those factors that had impacted the business in the prior quarters. like softer demand for our generic API and vitamins portfolio, relatively low order book during the first 9 months of the year due to a delay in decision-making by customers on account of macroeconomic environment and pipeline prioritization.
Some execution issues at the start of the year at a few of our facilities, which have been addressed during the course of the year through operational excellence initiatives and appropriate interventions across sites and business leadership team. We have seen a good pickup of order booking in the month of March, which will reflect in H2 FY '24. Also, our recent operationalized expansion at sites offering differentiated capabilities like high potent APIs and peptides, which went live in H2 of FY '23 has witnessed a good customer demand. The next question was, what was the significant year-on-year and quarter-on-quarter growth in the CHG business during the quarter, what has driven this growth?
The main reasons have been healthy demand for our Inhalation Anesthesia product Sevoflurane where we continue to be market leaders in the key U.S. market with a 39% market share and improvement in supply from our CMO from our injectable pain management product.
There was also a question on reasons for a muted performance in our Consumer Products business during quarter 4. On a full year basis, our consumer products grew by 16%. Quarterly revenue year-on-year growth appears to be lower as the prior quarter 4 included sales of COVID detection kit, which was discontinued this year. Excluding this, the quarter 4 growth was 15% and the full year growth was 19%.
We also received a question to explain the differences between the reported and the like-to-like EBITDA seen on Slide 24 of the Investor Relations presentation. Just to clarify, the scheme of demerger of the Pharma business, which is Piramal Pharma from PEL an amalgamation of PPL's wholly owned subsidiaries, namely Hemmo Pharmaceuticals and Convergence Chemicals, into PPL was effective from the appointed date of first of April 2022. To the extent of noncommon control transactions, the financial results are not comparable with corresponding previous year periods. That is the like-to-like financials eliminate the impact of intercompany transactions between PEL and PPL during the prior period. Accordingly, all the closing inventory as on 31st March 22 at PEL, in respect of such transactions included a margin element, which was charged by PPL to PEL on an ounce length basis. Since the demerger is effective first of April, the opening inventory transferred to PPL at fair value as per Ind AS included the margin element and the same has been charged to the P&L during the first quarter of PPL's financial statements on sale of such products. The onetime nonrecurring impact of EBITDA of this inventory margin in quarter 1 was INR 68 crores.
There has also been a question on expenses on the reasons for increase in OpEx, employee cost up by 19% and other operating expenses being up by 18% and how many employees were added during the course of the year. As explained, the financials are not strictly comparable due to the demerger-related accounting. On a comparable basis, employee expenses for the full year increased by 17%, and net of ForEx, the impact is 14%. During the year, we added about net 650 people to fill up the open positions and operate new capacities recently opened or planning to commercialize in the coming few months, which are witnessing high demand. The commensurate revenue from this expansion in headcount is yet to come through. The year-on-year increase in employee costs also includes impact of increments and annualization of cost positions recruited midway to previous year where attrition was higher.
In terms of other expenses, the comparable basis, the operating expenses have grown 13% and net of ForEx is 11%. Primarily coming from marketing spend in the Consumer Products business. This is a strategic choice, which was made to increase market share in the fast-growing segment. Increase in OpEx related to additional capacities which came in online, we are seeing good demand traction and expect a good efficiency of the cost base. and provision for receivables in quarter 3 due to funding uncertainty of a certain biotech customer. Having said that, the company has been taking measures to contain costs through operational excellence, better procurement, energy efficiency initiatives, lowering discretionary expense through a company-wide initiative.
There was also a question on reasons for lower operating income and higher tax in quarter 4. With respect to other income, it was basically low in this quarter as compared to the prior quarter due to a decline in ForEx gains. In terms of tax, the tax liability was higher in quarter 4 as that included tax paid on dividends received during the quarter from our joint venture company against which Section 80M of the income tax benefits were not available as Piramal Pharma has not declared any dividend. Likewise, on a full year basis, all dividends received from the joint venture company and returned by PEL as a part of the demerger process have been offered for tax. This has caused a onetime increase in the tax liability by about INR 43 crores during the full year. As an information, the consolidated accounts dividend is not shown as an income, but it is knocked off against investments, whereas tax components reside in the tax line causing this anomaly.
The next question was how much of the net debt resides overseas. So of the INR 4,800 crores of net debt, about 69% reside overseas. There was also a question on the rate of borrowing for the company and when do we expect to bring the debt down using the proceeds of the rights issue. The rate of borrowing ranges between 6.5% to 8.5% between overseas and India, and subject to regulatory approvals, we are expecting the proceeds of the rights issue to flow in by end of quarter 2 FY '24. There was a question on the quantum of CapEx expenses in FY '23 and a plan for the future of FY '24 and '25. The CapEx spend during FY '23 was about INR 965 crores, which was largely spent on differentiated sites, which witnessed high growth during the course of the year. For example, we expanded our capacities at Riverview and Turbhe during the year. With respect to CapEx in FY '24 and '25, at this point, we cannot make any forward-looking statements during the deal window. There was a question on -- other than the receivables provision, which was made in quarter 3, Where there any other A typical provisions in FY '23. The EBITDA for the full year included near expiry inventory provision of about INR 92 crores in the CHG segment on account of lower demand of non-COVID products during the pandemic. And besides that was the one-off provision on receivables that I mentioned, Adjusting for these and the onetime inventory margin on the stocks taken back of PEL of INR 68 crores, the like-to-like EBITDA for FY '23 was INR 1,047 crores and EBITDA margin of 15%
So those are the few questions that came up upfront, but we'll be happy to take up any additional questions.
[Operator Instructions] We take our first question from the line of Kunal Khudania from DSP Asset Managers.
Yes, I have a couple of questions. So first one was on the order book like you mentioned, there is a good amount of order book built up. And you also talked about the cost optimization measures that are being undertaken. So if you look at the global macro environment, the uncertainty still continues. So is company taking any further efforts to rationalize the cost. And more so, if you look at the sequential employee expenses as well as the other expenses that have marginally declined on a sequential basis. So what are the exact cost optimization measures that the company is undertaking.
And second one was, like you mentioned, most of the proceeds for right issue will go towards debt repayment. So is the company confident of meeting its CapEx requirements through internal accruals? Or how can we see the debt level spending out in the near term. Yes those 2 are the questions.
Okay. So thank you, Kunal. Overall, in terms of the debt, as you rightly mentioned, the intent is to pay down the debt to the proceeds of the rights issue significantly. Also, we are looking at the overall business performance in FY '24 and are aligning our CapEx requirements accordingly with respect to what we are going to spend. So the CapEx is getting prioritized. And as of now, we believe that we'll be able to meet the immediate requirements, both through a mix of what comes in through the rights issue and the CapEx requirements to internal accruals as well.
In terms of employee expenses, I think we have, as we said, hired new employees to actually fulfill the -- and operate the new capacities that we are -- that some of which have gone live and some of which will come in later on. So we actually think that, overall, the rise and actually sales will actually compensate for the employee expenses. In terms of cost cutting, we're doing -- we're looking across the board. We are doing procurement costs, we're doing operational excellence. We're actually looking at efficiency. And where if we are hiring, we look very, very carefully at saying that only revenue-generating hires are being hired currently.
We take our next question from the line of Hitesh Agarwal from Fair Value Capital.
Yes. My first question is on the Indian consumer health care segment. So we have grown the revenues to around [ INR 860 ] crores at present. What will be our road map for the next 3 to 4 years? When can we expect the segment to start contributing to the bottom line?
So I think we've said this in public that once we cross over INR 1,000 crores we'll start doing a gradual increase in profitability.
Okay. And what has been the revenue and profitability contribution from Allergan in FY '23?
So -- as you're aware that Allergan has a joint venture is picked up as a one-line item of associate income, and that is not adding to the top line. But from a share of profit, it's about INR 54 crores for the full year.
Okay. My second question is on the intangibles for the overall business. If you look at the -- in the presentation, it is mentioned, we have total intangibles of around INR 4,400 crores, which includes goodwill of INR 1,100 crores. So could you throw more light on these intangibles quarter? What do this consist of?
So primarily, the major component of this intangible includes the brands that we acquired. As you may recall that we had acquired brands for our consumer products business and also for our complex hospital generics business, which includes the intrathecal brands and the pain management brands. So those are the components of the intangibles. It also includes certain component of the pipeline of DMS, which we have developed for our generics business.
Okay. Are we anticipating any impairment on these intangibles in the coming years as such?
No, nothing of that sort. We don't see any indicators for impairment.
My last question would be on how many new products have been commercialized in FY '23? And what will be your target for FY '24 in the CDMO space?
Would these be on-patent products? Or would these be for Phase III going to commercialization. Is that the question in the CDMO.
Yes.
Right.
I don't think we're in a position -- I think that's limited in our filing requirements about sharing that information. I would just point you to, I think we may have on our press release with one of our customers that allowed us to share -- that would be one example you could go to and look on our website. But beyond that, we're limited in what we can say on that.
We take the next question from the line of NiteenDharmawat from Aurum Capital.
Am I audible?
Yes.
Okay. So you mentioned about 600 people that we added. So how many of them are in India and how many outside India?
I don't have a breakup at the moment. I think we can.
Yes, I'll get back to you on this. If you can just drop me a mail, I'll respond to it.
I'll do that.
but the more we're outside of -- so more were inside India and fewer work outside of India because a significant amount of edition was in our Ahmedabad Discover Services group which is an FTE-based model, but we can give you the breakup.
We take the next question from the line of Chintan Shah from JM Financial.
A few questions. So first one is, can you help us understand the margins of the CDMO business in better. So what I'm trying to understand is we have an innovative part and we have a generic part. So can you just help us understand what would be the differential probably on a normalized basis, that's not [ process ] for FY '23?
We don't actually provide segment level profitability, but what we could guide is that the reason why we share and discuss the percentage of revenue from differentiated offerings and also our share from what we call innovative offerings is because it's more lucrative materially than the alternate offerings. And so the reason why we try and share those revenue transitions in the different ways we communicate probably because they are financially materially more beneficial.
Okay. Got it. Understood. And secondly, the guidance that we have held in of innovative portfolio in the bookings. So I just wanted to understand, when you say healthy, what would that be ideally more than the mix that we have in FY '22? Or how should we understand that?
I don't think we can actually give the breakup actually for next year.
Not at this point, Chintan. I can't make forward-looking statements, so please bear with us for some time.
Okay, sure. No problem. And another thing in your RHP, you've mentioned few of the products on the generic side. So just want to get an understanding for strategy here. So is there still in terms of market size, et cetera, if you can give some guidance basically over this place.
Which products do you...
You mentioned 4 products basically Diltiazem hydrochloride Ketoconazole. I would target on hydrochloride and those 3 of products that you mentioned, so I'm assuming this would be the major product of to be in sense in terms of what's the position in the market, the market size and probably how much would they be contributing to our revenue.
I don't think we -- so one is Chintan a generics products, there are 2 types. One is where we make generics for our customers also. So that's a kind of make to order. So some of our big customers would be using our main generics. We also have our own DMF, which is the API generics business, which makes those 5 kind of products. So it's a mix. It's how I will put it.
Okay. But on trade I am excited, if you can throw some light...
On the API generic, What's the , I don't think we can give outlook at the moment.
What basically is Market size et cetera .
Yes, the market size is whatever we provide in the DLS is what we can provide because of the nature of the data sharing.
Okay. Sure. No problem's.
I am sorry.
Sorry about that.
No problem And lastly, on the India consumer side, if I see the growth, what you mentioned is the power brands in Q4 have grown by 31% and what you mentioned in your opening remarks, as you exclude that COVID kit, the group would have been hire as around 15%. So what I want to understand, since power brand contributed around 42% to 43%, so the balanced portfolio What is happening with that is certainly growing? Or what can put some more light.
See, I think one is not just we had a whole COVID, like COVID with hand sanitizers and things like that as well as the COVID testing kits, which have obviously now become much smaller. So I think that has degrown. Overall, the rest of the non-power brand portfolio is growing slightly, but not as fast this year.
Okay. But would there degrowth this quarter?
There is no degrowth.
Not there is no degrowth, but it's just mostly they are growing slowly because we're not putting promotion money behind it.
It's more trade like .
Okay, sure. And in terms of margins, I know right now, we are making losses. But just to get a sense of power brands, day be our high-margin products versus other brands? Or how should we understand that?
So the -- we're not making losses, we are breaking even. So first is we are very much said to the business that anything that they spend on gross margin, they can Respend on promotion. The power brands are actually has the potential of scale, and that's what we're looking at. So from a product perspective, there are a mix in terms of gross margin. But we don't -- but we think they're in bigger markets and have the potential to be much bigger. So on an absolute level, they would be profitable once you get to a certain scale.
[Operator Instructions] We take our next question from the line of Prakash Agarwal from Axis Capital.
Just trying to understand the Q-on-Q recovery in the fourth quarter. So is it also a function of new capacity starting to play out already or it is yet to play out? And if capacity is not the reason that what laid out because you've been saying that the order book for the start of the year has been soft. Customers are delaying this year and et cetera. So what really led to that growth recovery.
So Prakash, quarter 4 is always the biggest quarter. So there's the way it kind of -- what that DeYoung was saying because the way a lot of our customers do is they want to run down inventories at the end of the calendar year and then beginning the order in the fourth quarter of our financial year, so first quarter. That's actually one. Two is there has been some capacities so a Riverview and a Turbhe which opened during the quarter, and we were able to get revenues out. So I think those would be the 2.
Okay, which would build up, right? So the Riverview as well as would they would have a full quarter impact going forward and it should pick up, right?
Yes.
Okay. And from the margin levers perspective, what are the key margin levers you have for what you have played out already in, say, are you already taken action in fiscal '23, especially in second half of fiscal '23 would cutting some promotion costs that the consumer business would be one of them? Or what are the other levers that you are playing?
No, we've actually continued to spend on the Consumer Products business because for us, we believe that continued promotion will get us more higher growth than it has, they're not doing it. So that's not it. But we've actually restrained costs we cut down on CapEx and deferred CapEx, which was not a growth or maintenance led CapEx. And we've seen also the benefit of higher revenues, which in a fixed cost business, give you a lot more, I guess, operating leverage.
No, no. I meant what are the initiatives you've already taken in the last 3, 6 months, given that you were foreseeing slowish in growth, what are the steps you have already taken in the last 6 months...
So, I am not suppose to break in to the segments but...
But I heard you in the last call that you have done some replacement hiring in the CDMO business globally. So that would have added to cost, then the power, fuel, freight, et cetera, you have talked about, but seeing the cost increase, and this quarter, the cost has not gone up. So I'm just trying to understand, are there any measures as a company we have taken, which has started to play out and which will play out also in the future?
Yes. So first, I'm going to tackle the demand portion and we'll cover CDMO first in steps. And if that's sufficient, we can stop there or you can guide if you want to hear about CHG. But the first thing on demand is we took a number of actions to increase the number of shots on goal, speed to decision making, make decision-making faster, make it easier for clients to decide faster on smaller projects on smaller slices and also improve our win rates. And so we saw a pickup in our win rates as the year progressed and we saw a significant increase in overall decisions in the Q4.
And so that's one thing that we see the benefits of -- in the later period. Now the second thing you're going to ask about is on personnel changes. We made some important changes. We have a new COO, who's leading the business, and we also went through the next 2 levels of the organization and made a number of changes in leading functions and also sites where we thought change was needed. And so we do actually have injection of leadership in many of the places where we thought change was appropriate or necessary and a few that were -- that are still pending, but they're in the works. And so overall, that's been an important second component.
The third one is we actually tried to explain how the -- in the prior quarter when we did the call that we felt that the quarter-on-quarter OpEx may look disproportionately high versus reality. And we gave certain explanations to try and guide that it wasn't a recurring increase. And actually, there were one-offs in that scenario. And we think that, that is showing up in this context. Notwithstanding, we've also taken certain cost moves. We've been very careful about our headcount choices. We're only adding headcount where there's robust demand and necessary needed of operator level positions and in other places, we're actually seeing headcount reductions and decisions relating to that to align to the demand scenarios at sites that are not in that position. I think the next thing is we've done -- we've actually bolstered our OE team earlier in the year, which has been deployed to sites to drive productivity improvements that would allow us to get better revenue to EBITDA conversion. And so we're seeing some of the benefit, and we expect to see more benefits from the OE project.
In addition, we did a lot of work on productivity side of the procurement, and we brought in additional capacity to be more aggressive in how we approach procurement and we've seen from unfavorable to favorable PPV variances because of those efforts by our team over the period. And then I would probably finally mentioned, we mentioned energy efficiency. And obviously, we all noticed the impacts of energy increases. And so we deputed a company-wide task force at each of our sites to think about things that could reduce our energy spending either through rate or volume changes. And so we've actually started to see the benefits of the actions that may be not be CapEx driven and could be more lighter in terms of investment in time. And so I think we're seeing some of the benefits of those efforts already in the quarter.
But as Nandini mentioned, this is a fixed cost business and top line revenue has very beneficial impacts on bottom line, but we haven't been waiting for the top line. We've been taking a number of other methods and actions that I just described briefly here.
Just a follow-up here. So you talked about a strong order book, which is visible now. So as the business environment changed because last time you spoke about this year making. So is the business environment improving and hence, you are seeing order book? Or it's a function of more capacity being added, more capabilities being added? Or is it the function of both.
Sure, Actually, I'd say it's a [ 1/3 ]. The clients that we were in discussions with for a long period of time did have the money throughout the year, but they were not making decisions before they had to. They've now made decisions. The second thing I would say is that we actually have a certain number of clients that have had recent approvals commercially, and now they are preparing and engaging in their launch or the early commercial activities. And so they need to have the supply to support those activities. And then I would say. Third, we've seen some of the benefits of our efforts trying -- I mentioned our strategy of more shots on goal, faster decision-making and improved win rate. We actually have seen some of those efforts starting to bear some fruit.
But I want to caution that we're not counting on or depending on a macro uptick in the environment for our plans. If that were to happen, we would view that as an upside. We're just counting on the clients that have good science, good data and clarity about their plans to continue to place their work with us and for us to get -- we use the term more than our fair share through the 3 strategies I mentioned, but we're not counting on or banking on a macro uptick. I don't know if we have anything.
We take the next question from the line of Yasser Lakdawala from M3 Investment.
Nandani, Peter and team, and congrats on having a strong compliance track record as we walk of this had over the years. When you look at sort of long-term game plan, like how do we sort of people are CRO, CDMO footprint in India in terms of number of scientists more small-scale pilot labs? And how hard is it to sort of build and scale this part of the business because we've seen that we've grown the discovery development bid from a 30% , 35% of our sales, CDMOs sales, how hard is it to sort of grow this business to a much larger meaningful piece. Could you share some light that.
You mean the Discovery business or do you mean the development and innovator side of the business?
Yes. So the innovator sort of discovery and development business, right? Because that would be sort of the top of the funnel piece which would allow maybe a lot of those projects to flow through eventually, hopefully, into commercial.
So let me the Discovery business, I would say, is actually quite early on in the kind of scientific process. And it would take actually quite a long time for those projects to flow through, right? But it's a very profitable business. And it's kind of based on the number of scientists and few modes, and we've been expanding capacity over then in our PDS business in Ahmedabad. However, I think we don't necessarily want to make it the kind of the driving force of the business is how I would put it. I think it's -- we like the business. Our time is actually very good, and we're going to continue to manage the back well. In terms of discovery and development, I do think, overall, it is a question of having the right compliance and quality record, having the right scientists and but I will see some of our customers also want nearshoring to happen.
So some of our customers are saying that they want our business to be done for the patents products, innovative products in the U.S. or even in Scotland. So that's why we've been seeing pretty good demand in our Riverview Aurora and our Grangemouth sites because that's where the customers want to do it. The benefit for us is we've been seeing with our integrated projects is that we can talk to a customer and do something at Riverview and then they'll give us something in India for example. So that -- and that's something you wouldn't have seen if you didn't have the U.S. facility. So I we are going to -- the way we're going to look at it is we're going to provide whatever the customer wants in whichever geography they need, whether it's the U.S., U.K. or India. And that helps us to meet the customer with that.
Secondly, we've had like some sort of execution challenges at, Morpeth the hormonal OSP and contraceptive plant and the one is Lexington. I think there were 2 older facilities, which we are trying to sort of modernize and convert them to sort of commercial scale facilities. So how far are we in terms of them become, say, profitable contributors to our CDMO business.
I can't tell you forward-looking guidance at the moment Yasser. I can talk about the past. I can't talk about the future, Sorry.
But I would give some operational indicators as an example of why we have confidence in these 2 sites and what they can bring to the network. If I were to look at, let's say, the Morpeth facility at this moment, we look at in-stock ratio for some of our key customers and we're at or above the expected percentage and have been for some time. So we're meeting our customer commitments to that site, and we're actually seeing probably higher demand at that site than we have in the recent past, such that we're actually having to add operators at the moment to meet that demand, which we think is a beneficial trend for profitability for all the obvious reasons.
And so we actually do think that a lot of our efforts to address the operational issues have borne fruit at that site, and it's now at the point where we can discuss revenue growth instead of operational issue containment. And that's a great transition to have made and now we need to continue that transition.
The second one, I'd say is that Lexington, we did obviously have challenges before. But if you look at our recent trends or even our 4-year trend in, let's say, Net Promoter Scores of customer experience, which we find to be a lagging indicator of operational experience by our customers. It's been a sequential improvement each year over the last 4 years. And now we actually are in a positive position for customer experience. The second indicator I could give you would be around regulator experience. And so we obviously had a -- it's one of the sites Nandini mentioned for having a favorable U.S. FDA outcome, which we think is the regulator saying this is good.
The customers are saying this is good. And the third one, if I would look at our set of open RFPs that are being discussed with customers actually Lexington would have the highest percentage of open not yet decided RFPs of any of the sites in our network demonstrating the overall market need for the offering. And so while we have not yet addressed it, and I can't give forward looking comments, what I'm trying to give you more backward-looking information aspects that could give you reason why we think we have confidence in those 2 sites.
Peter. My last question would be, I mean, in terms, we still have about [ 650 ] , say, more than half of our business, this generics and some nutritional products. So what are we doing at from a, say, a process efficiency or technical competency and to improve maybe our yields, maybe our manufacturing processes, maybe so that as you said, like you want to improve margins, you can also maybe hopefully improve profitability, improve gross margin and do that and not worry about the macro growth, but from an existing business standpoint, what are we doing to sort of enhance our technical progress, if I may ask that.
So on the nutrition side, last year, we went through a soup-to-nuts change effort involving changes at how we lead the business, how we organize the business. We looked at go-to-market, we looked at offerings. We looked at cost to serve, way to serve and we're now in the process of implementing some of those plans. It will never be the top performer, but we do believe that these plans as implemented should continue to show a positive trajectory and improvement in reduced the drag that it's had in the recent past. And it's never going to be the hero, but it's going to be a meaningful contributor again. It's going to take some time. It's going to take some work. But we did go through the effort to figure out what we think the job needed to be done and now we're doing it.
In the case of the generics business, that process, we started more towards the end of last year, and so it's lagging a bit. But once again, the similar effort that's going on where we're doing, once again, a soup-to-nuts activity. Some of the yield efforts actually progressed in parallel because it didn't require the overall holistic look. But we are looking at the overall generic business end-to-end. But I would mention that, well, you could frame all of generics the way you just did Generics also includes what we offer in Turbhe. And I would say the addition of the peptide generic component to our business is a highly growth-oriented, high-margin, less competitive environment that has really been up great addition to our portfolio and it allows us to kind of include even in that business from a mix perspective, technologies and capabilities and offerings that not all of our competition can offer that we actually think is going to change the overall mix in addition to the plan I described for our more legacy generic portfolio.
We take our next question from the line of Ishita Jain from Ashika Group.
Congrats on a stronger quarter 4. In the Hospital Generics segment, could you comment on the pricing pressure in Q4. And we were also expanding Digwal and Dahej facilities. Are these expansions drive now? I'm not sure if I missed it. Perhaps you could also talk about capacity utilization for these facilities, please?
The expansions for our lead products are not yet live in India, and they will take some time to complete. They're underway. We do have some more some expansions for reliability that allow higher capacity out of our Bethlehem U.S. facility that are going to go on in a series of actions that will be more near-term realizable over the period. And so we expect those to be more short-term visible and capping forward-looking comments per se, but from a general strategy, you should view the Bethlehem capacity enhancements or reliability enhancements to be more proximate and you should lead to hedge and dig well to be a bit more medium to longer term. And so our utilization at the moment is that demand is greater than supply. So everything we make, we're selling at the moment.
And so the next question around pricing pressures. So as you would know, we are in the generics market, and that's the market where prices typically go down, not up. And so we are in that scenario and that we expect that to continue but we do expect with our overall approach to vertical integration and also the limited number of competition that can compete against us given the model we've picked and what we're actually selling that we should be able to maintain what we would call healthy gross margins and overall profitability as we have over the last 10-plus years with this offering.
Got it. And you mentioned that demand is stronger than the supply in the market it's the same comments you have given last time. So I just wanted to ask that, a, that remains the same and , b, that remains the same in our existing geographies, correct?
It does. And so you may wonder, well, why is this the case? I would give just 2 elements. The first is that we've been succeeding with our commercial execution and we're presenting ourselves as a compelling option against the alternatives in the marketplace, and that is being allowed us to gain our percentage market share and improve our position. That is the first point. The second point is that there has been a general increase in [ placebo flooring ] utilization versus some alternatives due to some changes in preferences that we think that trend is going to continue. Notably, there's been a decline in the use of [indiscernible] and a conversion of that prior usage to Sevoflurane. And so we are well positioned to capture that overall macro change.
Okay. That's great. And just as a second question, on the CDMO front, you mentioned 25% of CDMO revenue is from the innovator. What percentage was commercial manufacturing versus development in Discovery Services? And how has that changed year-on-year?
I think it's 45% Ishita, but maybe we can get back to you with the exact if you e-mail Gagan, please, and we'll get back to you the exact how is the change over year-on-year.
Ok, got it, we will do.
But for the general audience without giving specifics, we would say that the percentage change in innovator business is going up as in, it's growing faster than the overall. And we would also say that the percentage differentiated offerings is going up and growing faster than overall. So we think those are nice leading indicators of the efforts we've been doing for the last several years.
We take the next question from the line of Vinod Jain from WF Advisors.
My question is to Nandini Madam. The financials to reflect sustained lowering of profitability. Net profit recovered for quarter 4, but it's a near 2.5% of revenue. Priority wise, what are the steps taken to counter this situation? Do you see the situation reversing in the near future.
I think we've talked about -- a little bit about how we are looking at cost, whether it's procurement, whether it's operational efficiency and as well as energy efficiency. We've also been, as we said, looking at headcount in terms of we're only -- if we are adding people, we're adding people that are directly revenue-generating and reducing headcount where to be in line with where the revenue is. But as we think about the next year, we expect some of our -- we've got a good order book, so that should translate into higher revenues in the second half of the year. And we should see profitability improve from there.
We'll take your next question from the line of Tushar Manudhane from Motilal Oswal .
Just on your explanation of preference towards Sevoflurane . So if you could elaborate on this? So is this a regulatory factor which is driving this change in preference? Or is there a doctor factor?
So I'd say there's generally the cost of the Desflurane is a bit higher for a patient in the cost of Sevoflurane that's been present for sometime, So generally, as budgets are economized, people have been switching and reducing from one gas to the other to that the cost to the ultimate buyer. The second one is that in some of our geographies, we have noticed that there is a argument for greenhouse gas optimization and the contribution of Desflurane to those gases is several fold higher than Sevoflurane. And so if a hospital wants to make a move towards Net Zero, they say I'm going to reduce Desflurane increase Sevoflurane and then they can check the box and address their sustainability objectives for the period.
So interestingly, because sort of help in -- particularly in Q4, as I see the previous quarter reason with stable on the complex hospital generics segment.
The overall trend is a multiyear secular trends that I described. The quarterly performance is a combination of demand and supply and the overall contracts we've won, that would be more commercial execution.
Understood. And sir, in the complex hospital generics segment, how much of the overall requirement would we be taking from CMOs.
So we only make in Sevoflurane, we make inhalation anaesthetics. The rest of our business is taken from CMO.
So our 56% is in house and the balance is from CMOs.
Tushar, does it answer your question?
Yes. And just lastly, on this -- since we've acquired Hemmo almost in November 2021. So if you could just help understand how much of the capacity expansion we have done in peptides. And now that capacity expansion is done. So in terms of what could be the future course of work? Or when could we see the commercialization benefit coming through?
So we were supply constrained up until when that capacity went online late last fall. The capacity increase was as 50% approximately plus or minus, and it took a little bit of time to stabilize. And now we think we're benefiting from that capacity expansion. And it's now allowing us to execute on the orders that we have and the demand that we have -- and now we're going to have to tilt back towards demand generation and -- but for the period, we've now achieved what we needed with the expansion and now we have to execute on the pipeline and the commercial execution.
So would these incremental capacity requires these exhibit batches, validation and then subsequently the business? Or is it the same product so the commercialization can start from day 1.
Those were some of the issues I mentioned in terms of the teething issues with the expansion. We've done a lot of the validations needed to utilize the greater column, and we're now utilizing it. And that's why we now are no longer supply constrained at that site, which we were up until probably even March of this year.
Got it. And just lastly, on these aspects. So how much would you have spent on expanding the capacity? And what kind of asset turn can be expected?
I don't know if we've disclosed this, but this would be one of our higher ROI expansions investment was very modest. The incremental headcount was very modest and the incremental revenue was significant. So this is kind of from a financial perspective, between CapEx.
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We take the last question from the line of Aditya Jawal, an investor.
I wanted to understand on the innovative business growth. The last -- from the last year to the current year, there is a slight degrowth. So could you talk about that?
So I think we would say that there was an increase in what we call innovative business, which covers discovery, development and on patent commercial
Yes, Over the commercial, there is a decrease.
You're describing specifically the commercial, and there were some customer-specific issues that resulted in them not placing follow-on orders last period that resulted in what we think is a one-off situation. And we have other new customers that are expecting to place and have placed POs for the upcoming period. which gives us confidence that, that was simply a one-off of one large customer that didn't place appeal over the period because of corporate action that happened on their end.
Okay. Okay. Can you explain on the integrated order book that you're talking about. So it is a generic kind of business in that it is for the customers. We do what kind of nature is integrated quarter but when you speak of $62 million.
So what we mean by an integrated project is that typically a customer would historically have a team that would go often procure individual services from different providers on a one-by-one basis. And then they would have an internal team that would project manage and move the product from the different providers along the chain into it eventually ends up in their warehouse for them to use. With an integrated offering, we combine multiple steps into a single quarter or a single relationship so that we handle the handoffs for them for that portion that we do for them instead of they do and it provides speed and simplicity.
So an example would be where we could -- we recently signed an order for a large pharmaceutical customer where they would start the early chemistry in Digwal in Telangana. And then we would do the final chemistry in Riverview Michigan, and then we would do the drug product fill-finish in Lexington.
In our traditional model, those 3 steps will be done with 3 separate contracts and 3 separate CMOs or CDMOs, in our model, we tell them, we'll do you as one relationship and leave it to us. That's one example. Another example would be which we gave a press release on, we can -- you can look at it on our website. But it's where we did the drug substance in Digwal and the drug product in Morpeth U.K. and that these are both integrator examples. This is typically a more value-oriented partnership as opposed to a cost-oriented vendor relationship.
Okay. That helps. So when you talk about the integrated one, it is totally innovative business or it can be of generic business, but a little high-margin business?
It's more likely to be innovator, I'd say the 80-20 rule or the 90-10 rule.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference back over to Mr. Gagan Borana for closing comments. Over to you, sir.
We hope that we were able to answer most of your questions. In case you have any follow-up questions or any clarifications that you may need. Please feel free to reach out to me, and I will be happy to respond. Thank you, and have a good day.
Thank you very much, sir. Ladies and gentlemen, on behalf of Piramal Pharma Limited, that concludes this conference. Thanks for joining with us. You may now disconnect your lines.