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Solara Active Pharma Sciences Ltd
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Ladies and gentlemen, good day, and welcome to the Q1 FY '23 Earnings Conference Call of Solara Active Pharma Sciences Limited. [Operator Instructions]
Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you, sir.
Yes, a very good afternoon to all of you, and thank you for joining us today for Solara Active Pharma Sciences Earnings Conference Call for the first quarter ended financial year 2023. Today, we have with us Jithesh, Solara's M.D.; and Hari ED and CFO, to share the highlights of the business and financials for the quarter. I hope you've gone through our results release and the quarterly investor presentation, which have been uploaded on our website.
The transcript for this call will be available in a week's time on the company's website. Please note that today's discussion will be forward-looking in nature and must be viewed in relation to the risks pertaining to our business. After the end of this call, in case if you have any further questions, please feel free to reach out with the Investor Relations team.
I now hand over the call to the management to make the opening remarks.
Surely. Thank you. Good afternoon, everyone. Thank you for joining the call today. While the fiscal year 2022 was challenging, we have a steady start to the year with Q1 revenues at INR 337 crores, which is approximately 80% of our historical peak run rate. We continue to see offtake for our main products improving each month, which is evident from our increased sales in regulated markets, which have increased to 66% in Q1 compared to 58% for FY '22.
In terms of the new business, we continue to follow the pivots of our course correction strategy we embarked on. We have been selective in the business this quarter and have focused mainly on the products that are more relevant for the longer play out of our plan. Our first 100 days of the year we have primarily been focused on the 3 key levers. First, revising the base business growth and profits by bringing back the momentum we had on customer centricity by better networking and continuing focus on operating cost reduction and much efficient inventory management.
Second, rekindling the R&D focus by adding 15-plus new programs for the year. We are on track to file 6 new DMFs in FY '23 and added more high-volume products under the cost improvement basket. The third one is on the enhanced capacity usage at Vizag by initiating validation supplies to customers from our Vizag site to trigger regulatory inspection.
Although our greater focus will be on regulated markets, we are tapping opportunities in markets with no regulatory binding, and we are planning certain product supplies from Vizag to less regulated markets from quarter 3 of this financial year. This will help us to reduce the under recoveries at Vizag. Our Vizag strategy is playing to plan, and our focus is to get the site approved by the authorities and the others.
While the prices have stabilized, we continue to see short-term challenges on 2 of our key products due to softened demand and increase in raw materials cost due to the current international situation. We expect the same to normalize in the second half of this financial year. While our cost improvement programs have started demonstrating better gross margins compared to quarter 4 of FY '22, the focus remains on further improvement of gross margins by continually focusing on cost improvement programs and adding new customers in newer markets.
Coming to the Cuddalore facility status, where we have an OAI status, we are hopeful of a reclassification post U.S. FDA inspection, which we expect to happen in the near term. We eagerly await this reclassification. But in panel, we have taken steps to qualify the alternate site within our manufacturing network for some of the key products manufactured in Cuddalore, where we have seen significant traction from new customers. As of now, there are 10 new approvals pending reclassification of our Cuddalore OAI status.
Coming to our CRAMS business. This accounts for 5% of our total revenues. This business has the potential to be our fastest-growing segment with higher gross margins. In the medium term, our target for this business is to be at least 10% based on our current business and a high probability of winning pending RFPs.
Our new target markets for our API business growth are Latin America, the Middle East and CIS. We have a dedicated sales force operating for these regions, and initiatives are underway to extend current products that will yield high sales momentum as we advance. Our intense focus for the next 100 days will be to continue building on the actions we have initiated in Q1 to get back to growth, improve our cash flows and strengthen our balance sheet. With the focus on all of the actions above, we are confident about the future prospects of the company.
I now hand over to Hari to take us through the financials for quarter 1 FY '23. Thank you.
Thank you, Jithesh. We are pleased to announce that our quarter 1 FY '23 financial results and key highlights: revenue, INR 337 crores, which is approximately 80% of our historical peak quarterly run rate. Gross margin at 41.6%. As reported, EBITDA at INR 18.1 crores with a 5.4%. The gain is the fact that we have some work to do to improve our gross margin and EBITDA due to the RM price increase and consider under discovery from Vizag facility.
As Jithesh pointed out, we have identified key focus areas, which will certainly improved from performance from second of this financial year. Our immediate priority is to get Vizag in line to achieve breakeven and drive profitability growth in the near term, including getting the facility results of our inspection, which was delayed due to COVID in the last year.
While our debt book increased for 50% in FY '22. In Q1, we have reduced our debt by INR 117 million, with no fresh loans being applied during quarter 1. This is a positive side of business recovery. Based on the actions for this financial year, we plan to improve our net debt-to-EBITDA ratio under 3.5 based on the annualized Q4 EBITDA. Our net cost net assets have reduced by INR 550 crores in Q1, primarily due to the reduction of the inventory, which is a positive thing we have since been doing this quarter.
Our final focus is improving our cash flows by the prudent application of capital. With a clear focus on the actions to improve profitability, we remain confident about growth prospects of Solara. We now hand over the call back to the moderator to open the call for questions and answers.
[Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
So while there has been improvement in the gross margin on a quarter-over-quarter basis and further alluding to the comments you gave in the opening remarks related to certain softening of demand for some products and raw material cost increase. So do we see the gross margin improving further now or it will be kind of taking a brief pause here and then subsequently second half on FY '24, we'll see the improvement in the gross margin?
This is Jithesh here. So we don't see the gross margin declining. We only see the gross margin improving. And in the second half of this financial year, it will be better than where we have currently reported our results.
Any number you would like to highlight, my question is for gross margins?
Historically, we were at a minimum 50% of gross margin. And in the second half of this financial year, especially in Q4, we -- our plan is to get closer to that 50% or probably has been achieved at 50%.
Secondly, sir, with respect to Vizag, your sales would be subject to U.S. FDA inspection or without that also, we will be able to get the operating levers in place?
So Vizag, we are targeting to commence sales for the less regulated markets or markets where there's no regulatory binding from Q3 of this financial year.
Understood. So until that time it is under recovery so probably it will continue to go quarter, and then subsequently, we'll see the margins increase?
The way we have mapped our business plan for Vizag, the goal is by Q4 of this financial year, the Vizag under recovery will not be a burden on our P&L.
And secondly, at this point there is no schedule per se, right, as of now in terms of inspection?
No, sorry, I didn't get your question.
Any scheduled planned inspection by U.S. FDA for [indiscernible]
So what we are targeting right now for the Vizag site is that for our current products, which we have done the validation that we will amend our DMF to include Vizag site, and this activity will happen in October of this year. And this way, this will help to supply this to our customers who will trigger the inspection. So the plan for the inspection is, for Vizag, we are targeting second half of next financial year from the U.S. FDA. From the Europe, it could be earlier as well.
And just lastly, for this Lat Am, Middle East and CIS, what could be their contribution currently? It will be like minimal or we do have some exposure now?
So right now, in these 3 markets, what we have seen is because we are selling ibuprofen there and the opportunities for our current products as well as new products are high. So that business we are seeding in now. For Latin America, specifically, Brazil is one of the regulated markets. The commercial sales from Brazil will start kicking in, in FY '25. So for these 3 markets, it is going to be contributing to higher growth in the coming financial years.
[Operator Instructions] Next question is from the line of Vinay Bafna from ICICI Securities.
Just looking at the breakup of revenues on regulatory market, if we see then sequentially also, we are seeing either flattish or a marginal decline kind of performance. Is it just because of demand slipping? Or do you believe that the pricing is also an issue?
The regulated market is the major reason for lower sales in the previous quarter has been more to do with the demand rather than the price.
Do you believe sequentially, the prices have been stable in the regulated market for [indiscernible]
In rate market, the prices are stabilized.
And ibuprofen per se, do you believe that it has the ability, looking at the demand, that it can go back to their historical levels in terms of prices?
From the demand perspective, yes, we are seeing the demands are increasing. But to get back to its historical levels. it will take us another about 6 months time frame. From a pricing point of view, we don't see any decline further than what it is today.
Okay. Okay. All right. If I look at the other markets, revenue from the other markets except the regulated markets, we said that Y-o-Y, obviously, there has been a sharp decline. But even sequentially, it has dropped significantly. So what is the -- I mean, what is the reason here that we are not really able to ramp up in this particular region?
Your question is more related to why our sales have declined in the less regulated markets?
Why are we not able to ramp it up? That's particularly the question. I mean we have seen consistent decline for the past few quarters. I was expecting that in this particular quarter, there might be certain benefit or certain ramp-up considering stabilization of the environment.
So for us, we are really focusing on pricing as well, right? For the less regulated market, sometimes the price does not meet the criteria what we would like to sell at. Then we'll have to forgo those opportunities. But on certain products, where we clearly have a cost improvement program in place, we feel we will be competitive even in the less regulated markets.
So what I understand is that you're looking at opportunities in the less regulated market as well? Why is that that you're expecting to last for another quarter before you start improving on it.
Do you believe that the run rate for that is remaining the same, roughly about INR 10 crores, 11 crores? Or would it be higher than this quarter?
It will be more or less the same.
Okay. And you're expecting that Q3 you will start selling -- will be starting to sell revenues, I mean from Vizag? When do you believe that we'll be able to achieve some breakeven at Vizag? Any tentative deadline that you have internally, which you can share?
Yes. So I mentioned this earlier in the question, which was said, our target right now where we have built the business plan is that the Vizag would be net from Q4 of this financial year.
Okay. So 2 quarters worth of revenue we'll be able to carry to offset the cost which you had.
[Operator Instructions] The next question is from the line of Harsh Shah from Dimensional Securities.
CRAMS business. So in Q4, you had mentioned that it was 7% of your revenue. And in current presentation, it's around 5%. So sales have come off by maybe 40-odd percent on a sequential basis. So is this just seasonality or there is more to it?
No. So the CRAMS business consists of revenues, which comes from contract research as well as from manufacturing. So while the manufacturing is on track, there's been no decline. The contract research is based on project-to-project basis. So where we complete the project and then we wait for the next steps from the customer.
Okay. So on an annual basis, you are saying that we will be on the growth path?
Yes.
Okay. And -- so another thing is the new products, which you mentioned, which are around 5% to 6% of your sales. So what exactly is the definition of new product? Are these products sold for the short term during the quarter or how old these are?
Now, these new products, when we consist of it is of 2 things. One is the validation batches what we sell to the customer. That's one piece of it. And second is once the new product becomes commercial, that is when it is the customers get the approval. So for the first 3 years, we categorize that as new product sales. And then it becomes a base product.
Okay. Okay. And last on the Vizag, when you say that you will be producing in Vizag for your less regulated market, so is this incremental change or this is a shift of sales from your existing facilities to Vizag?
This would be incremental sales.
Completely incremental sales?
Correct.
[Operator Instructions] The next question is from the line of Monish Shah from Antique Stockbroking.
I just wanted to check with you what do you think will be the revenue contribution from CRAMS in FY '24?
In FY '24, it's the next financial year. So the way we have seen the CRAMS build out, that would be on our total revenues. It will be about -- close to about 8% to 10%.
And can you highlight some of the key filings that you have made from Vizag plant? This would build the confidence for a rebound in revenue growth.
Yes, sure. So currently from Vizag, what we are doing is we have our current product that is on the ibuprofen and the gabapentin. And we are going to be filing one new product out of Vizag in this quarter. So these are the immediate plans. And in Q3, there is another product, new product, which has been slated for filing from Vizag. And these 2 new products will have validation sales also to the customer.
Okay. So as of now by year-end, 4 products from Vizag?
Correct.
Okay. And how many products can you go up to? Is it -- is there a restriction in number?
No. It again depends on the quantity of the product. But just on an average basis, the Vizag has multiple blocks. So we can do, in a year, we can do at least 4 product filings from Vizag.
Okay. Okay. So the plan is to do that. Is that correct, like at least 3 to 4 filings a year from Vizag?
Correct. As I said, we -- this year, while we'll do 6 DMF filings. Out of the 6 new products, 2 will be from Vizag. But we have other products in our pipeline, which are under development, which the filings will happen only in the next financial year.
Okay. Just a last question on this. So as of now, how much your capacity utilization is for ibuprofen from Vizag?
No. Right now, Vizag is more for triggering the FDA inspection. And we'll only start looking at -- as I said, we are looking at incremental sales of not taking from our current site to Vizag. We are looking at those incremental sales so we will have a better picture in Q4.
Okay. So no non-reg sales as well [indiscernible]
No, right now, no, but we are looking at non-reg sales.
[Operator Instructions] The next question is from the line of Nitin Agarwal from DAM Capital.
On our business gain as it stands today is largely a case of underleveraged assets, right? So I guess, the revenue pickup remains pretty much due to recovery from an EBITDA perspective. Two questions on that. One is from a, from a fixed cost perspective, how much I mean the fixed was that we're running a well about INR 120 crores thereabouts. Is there any scope for optimizing it? Or this is a fixed cost, it's going to stay in the system?
Any scope for rational action further?
So this is -- see fixed cost compare -- I know that the compressors of the flat operating costs and manpower. And there's not much cost optimization in that other than the energy and waste disposal cost, which we are working on for the reduction. And most of our activities on the yield improvement and the process improvement and process optimization, that's the major contribution than the general cost OpEx reduction.
Okay. And on the revenue front, with the business that we have -- the facilities that we have, assuming once the regulatory approvals come through, -- and with the product portfolio that we have, what is the potential? I mean, what do you see -- do we see this business going back to INR 455 crore quarterly run rate at some point in time? And if you have to hazard a guess, at what point in time will you probably get to start to that sort of revenue run rate on a quarterly basis?
Our historical run rate has been at about INR 400 crores every quarter. And as you see from our Q1, we are at about close to about 80% of it. So the goal is, in terms of, first, getting back to the historical run rate of INR 400 crores per quarter in the short term. And then from a medium-term perspective, we are looking at one of those new revenues, which we are going to get from the new product filings as well as from the new markets.
So it's a short term -- should we understand if by you are -- can you give more color on what would be -- what short-term pillar we're looking at here for getting the INR 400 crores numbers?
So when I say short term, when we look at the Q4 of this financial year on an annualized basis is what we are targeting from a revenue perspective to be at about INR 400 crores every quarter.
And I guess your earlier comment you mentioned looking at EBITDA margin close to 50% by that time.
On the gross margin.
So gross margin.
[Operator Instructions] The next question is from the line of Gora Midar, an individual investor.
Am I audible?
Yes.
Yes. Actually, my question pertains to the CRAMS side of our business. It is an established fact that the opportunity size in this space is quite big. So as a company, what are we going to do differently from the other players to shore up the business on this side? And what are our aspirations or the strategy to grow in the longer term? So -- can you please elaborate on that?
So to answer your question, yes, the opportunity is vast in this area, and the CRAMS business is not new to Solara. We have been doing CRAMS, but we should have been at a much better position in terms of the revenue piece. From what are we doing good, I can say, I think other than this OAI classification of our Cuddalore site, but that was more to do with -- or product related, but nothing to do with data integrity. I think where we stand out is in terms of our quality policy as well as the EHS, which is -- these are the 2 important factors. And of course, the reliability and the supply, which is pretty much a standard, which everyone would ask for. But we are -- sorry, -- we are investing also in newer technologies, which we are planning for the next financial year once we set -- or course correct our current business. We have some long-standing relationships with a few big pharma as well as emerging biotech companies. So we are tapping on with them, and we are seeing newer opportunities coming from our existing clients as well as the new clients. We just recently hired a BD position in the U.S., and she comes with a lot of CRAMS experience. So we are adding the business development team. So we have one dedicated for Europe and now we have one for the U.S. So this is where we see our CRAMS business going to grow in the next 2 years.
All right. And one more thing. As in the merger with Aurore hasn't gone through. So are there any plans of an acquisition in this space or what are you thinking around -- or are we thinking around these lines? What is the thought process?
On the client piece of this, it would be an ideal to always have an asset in the West as well. But right now, as I said, the focus is in terms of resetting our business. We want to get back to the momentum that we had prior to the issues that we have faced. So right now, the focus is in terms of the current business, what we have on hand and the current assets. We want to utilize them well before we even think of any other -- or we think of any acquisitions.
[Operator Instructions] The next question is from the line of Shubru, an individual investor.
So my question pertains mostly to the overall news, which has been coming out of Solara for the last 6 months, which has not been very positive, including one which has just come out. So what can kind of confidence can you give us that in terms of the management, things are stable? And moving forward, we can only have better days?
So I really will not be able to comment on the past, but going forward from here, Hari and I, we are pretty confident about the future prospects what Solara has, given that we have been with this company right from its inception. And the financial results are out there where it shows the track record in terms of how the company has just not grown from a revenue perspective, but we have also increased the shareholder value from the businesses what we have generated. Our EBITDA margins have improved from 11% to 23%. So this business is something which is very close to us. We know this business, and we were very happy when the Board had reached out to us to come back, and we happily came back to reset the business for Solara. So the management team is well set, other than Hari and I, from an R&D chief perspective, our CTO, our Head of Operations. So no one has left us in spite of what's happened in the last 6 months. So the team is set. We have the customer base. It's more about the focus in terms of the execution -- how do we get Vizag right? We have a clear strategy for that, and we will be executing on these strategies. And so we are confident in laying out what's the future plan for Vizag, how we are going to ensure that Vizag is not going to be a burden on our P&L. So now it's all about execution. So the strategy document is in place.
[Operator Instructions] The next question is from the line of Harsh Shah from Dimensional Securities.
Just wanted to understand on the pricing side, we said that a couple of our key products are still facing certain pricing pressure. So are these still at the lowest close, which we saw in the last 2 quarters, there is some sort of firming up happening there? And where do you see the pricing going from here? Because we are also seeing some increases on the input side. So are we -- will we be passing it on or we will have to take that hit and wait till the raw material pressure eases?
So for at least our mature products, we think that the prices have stabilized. They're not going to go lower. From a raw material price increase, what we have faced, we expect that also to normalize in this current quarter. The focus is then on terms of the cost improvement programs for these mature products. So even if there is any raw material price increase, we are still able to protect the gross margin on these products. And this is what we are working on right now.
And a couple of quarters back, we had mentioned about changing our strategy into the less regulated markets that we will be directly selling to our customers and removing the interceder. So how is that going? And how is it helping us? Has it started to reflect in our numbers? Or do you expect maybe a couple of quarters down the line, how will it help us from the pre reset numbers?
So first is we're not changing our strategy for less regulated markets. I mean less regulated market is an additional opportunity for us. Our business of Solara has primarily been -- a majority of it has been for the regulated markets. Where the question comes about in terms of the channel partners are selling direct, the goal is, of course, to sell directly to the customers. In some markets, it is preferred that we have to go through the channel partners. But the majority of our business, if you look at it, is all in direct businesses.
[Operator Instructions] The next question is from the line of Aman Desai, an individual investor.
I believe INR 400 crores and the approximate margin will be 50%, it will mean we are looking at INR 200 crores gross margin vis-a-vis quarter 1 margin of INR 140 crores. So in terms of quarter 4 run rate, have we created almost INR 50 crores additional gross margin incremental values. Am I correct in assuming that?
Yes.
All right. And other question would be, when is the U.S. FDA inspection planned? Which quarter of the year, any idea?
Is your question specifically for Vizag site?
Yes.
So [indiscernible] mentioned earlier, we are -- our customers would because our -- the unofficial hoping it will happen in Q3 of this financial year. About the U.S. FDA inspection, based on our past experiences, it could happen in the second half of the next financial year.
Second half of the next financial year. Okay. All right. Okay. Thank you so much for the stipulation of that. You've seen that 2 quarters earlier. So that was perhaps has been not in the number. It should come up in the coming quarters. All the best
Thank you, sir. As there are no further questions, I now hand the conference over to the management for their closing comments.
Thank you all for participating in the Q1 FY '23 investor call. We really appreciate your time. Thank you. Thank you.
Thank you. Ladies and gentlemen, on behalf of Solara Active Pharma Bank Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.