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Suven Life Sciences Ltd
Earnings Call Analysis
Summary
Q1-2024
The company acknowledged the current challenging environment, particularly in the agrochemical sector, attributing difficulties to transient destocking issues. Despite a soft current quarter, management expressed confidence in a robust recovery for the '24-'25 period, bolstered by strong protection for the CDMO business and an increasing number of client inquiries.
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Ladies and gentlemen, good day, and welcome to Suven Pharmaceuticals Q1 FY '24 Earnings Conference Call.
[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rishab Barar from CDR India. Thank you, and over to you, sir.
Good day, everyone, and thank you for joining us on this call to discuss the Q1 FY '24 earnings for Suven Pharmaceuticals. We have with us Mr. Venkat Jasti, the Managing Director; Mr. Venkatraman Sunder, Vice President, Corporate Affairs; and Mr. Subba Rao, CFO of the company.
Before we begin, I would like to mention that some statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. Documents relating to the company's performance have been e-mailed to you earlier.
I would now like to request Mr. Jasti to share his perspectives on the performance and outlook. Over to you, sir.
Thank you. Thank you, everyone, for tuning in this afternoon for the conference call on the results of the quarter 1 of FY '24.
As you will see, [indiscernible] was notified and the results came out better, is driven by mainly strong growth in the CDMO Pharma and also with a better profitability. The [indiscernible] pharma innovative and development of projects are doing very good with [indiscernible] growth. But as you know, the specialty chemicals has a muted performance this quarter. And I expect this to continue this soft performance for this current quarter also. Globally, with specialty chemicals and agrochemicals having a destocking of their inventories and especially in our case, in terms of the drought situation in some other areas [indiscernible] I mean requirement is deferred for a while. Hence, you will be seeing a soft quarter for the current quarter.
Otherwise [indiscernible] based on the forecast and all that stuff, both for the pharma and the specialty chemical looking good, and we see a multiple levers of growth that is going to happen because we are discussing with customers on many aspects. And likely success happens sooner than later. And [indiscernible] last year's [indiscernible], there was COVID-related activities dying down and that discovery activity in the new molecules are coming up. And this quarter, we see the largest number of inquiries sorted in our history.
But to become a project [indiscernible] it will take time, but things are going very well. So I think it's better for me to answer your questions. In general, looking good, but there will be some kind of a gap because of the specialty chemicals not being up to the mark, again [ muted ] performance and the various reasons [indiscernible]. So otherwise, it's looking good in the long term for the year and the next year.
Now I'll open for discussion.
[Operator Instructions] The first question is from the line of Abdulkader Puranwala from ICICI Securities.
Sir, just to understand your comments on the CDMO Pharma side [indiscernible]. You said the inquiries are better. So current quarter, would it be fair to assume that the traction which has been seen is more from the molecules under development while the commercial side is also a little better?
No, it is mainly [indiscernible] new developmental molecules. That means very early-stage molecule. So to take time for us to get [indiscernible] into our inquiry is becoming an [indiscernible] project and as you know, takes time. Now on the commercial side, commercial side is as usual like last year. And nothing in this case -- see, I don't see anything indication as of today that this is moving -- commercial yet.
All right, sir. Understood. And sir, on the spectrum side. So we had one molecule, which could go commercial in the next calendar year. Is that any timeline change in that or it's moving as per schedule?
[indiscernible] next calendar year new product, no change in the time as of today.
All right, sir. And sir, lastly, on a the stake sale. So the earlier guidelines, which was communicated, it was supposed to, I think, get completed in somewhere in August. So any revision in that aspect? Or have we got all the necessary approvals for that to happen?
If the necessary approvals are in place, it would have been done because the timeline is up to August 26. But we expect the course of this monsoon session in the parliament, I think, hopefully, we'll be getting all the approvals. It's in the final stages of the regulatory approvals.
Next question is from the line of [indiscernible] from B&K Securities.
Hello? Am I audible?
Yes, you are.
Yes, please. Yes, yes.
Yes. So sir, I just wanted to understand specialty chemical side. You said that there is [indiscernible] situation. So can you just elaborate like is it a deferment for this 1 or 2 quarters? Or do you see the entire year being noted on the specialty chemicals side?
It's not entire year, but it's a quarter-on-quarter basis. So something is less this quarter, and current quarter also is in the same mode [indiscernible]. But after the September timeframe -- I mean, in September, we'll be knowing about the next quarters. So that usually after summer in Europe and USA, they'll come back with the next year's requirements and all that stuff, which we need to supply in the third quarter, starting from the third quarter itself. As of now, the -- as per the projections, looks similar to last year, but these 2 quarters are getting affected, 1 quarter already -- first quarter is affected a little bit and the second quarter also getting affected a little bit. So the softness in the specialty chemicals [indiscernible] quarters.
Okay. And sir, I just wanted to ask like on the commercial molecules are we still on 3 or has that increased for specialty chemicals?
Three. One, as I was telling earlier, is the launching sometime in the calendar '24. And as of now, that remains to be seen -- same, no changes in that.
Okay. And sir, my second question is, we are seeing that margins -- EBITDA margin has increased mostly because of other expense rationalization and gross margin has declined Y-o-Y. So from this cost rationalization, we also stay -- I mean should we take manufacturing and other expenses at the same run rate that we have in Q1 or do we see it's normalizing?
See, cost of -- I mean, manufacturing expenses, are you talking?
Yes. Manufacturing and other expenses.
It will remain the same.
For the entire year, FY '24...
For the entire year -- it is difficult, it depends on the mix also no, because we'll not be knowing 8 months ahead of time. It's only 4 to 5 months ahead of time I can tell you, but other than that I cannot tell you because it keeps changing our mix that makes the profitability.
Next question is from the line of Hussain from AMBIT.
My first question was with regards to spec chem now. You mentioned that there's a lot of inventory destocking, which is happening. So my sense was that usually generic molecules would be much more vulnerable to this type of a scenario compared to innovator molecules. So I just wanted to understand that because our innovative molecules shouldn't be that impacted, right?
Specialty Chemicals last year itself, I told you how the molecule became generic, in the sense -- in the 2 of the territories. And naturally, that's what it is. But in our case, that's -- see in general, that is what's happening. And in our case, that's also there is a drought situation in one of the territories. Hence, there is a deferment into the shipments based on the forecast.
Okay. Okay. Understood. And sir, one thing was with regards to the acquisition. So here, like you mentioned that the approval, of course, it's not in your hands, but should things delay from August onwards, have you planned anything from there on? Because I think our long stop date is towards August end, right? So just wanted to get some clarity on that.
I mean, as of now, we are expecting things to happen before the long stop date itself because as you know, [ CCI ] has approved a long time ago and other things is going through. And I think because of the monsoon, I mean this parliament session, I think meetings are not happening. And as the meeting starts taking place, which should take place any time soon, this should get resolved.
Next question is from the line of Pratik Kothari from Unique PMS.
So my first question is on Casper. If you can update us in terms of how many products did we launch? What is in the pipeline next year, recorded any sales, just on the Casper part, please?
Yes. Casper -- I mean, as I said, there is only 2 products that are launched. And 3, 4 are expected to be launched within the next 6 months and about another 8 are there in the pipeline to be approved -- I mean, to be filed. So -- and as for the Casper is concerned, we said it takes 12 to 18 months to get breakeven time, I think we are in the same range.
Right. But in terms of these 2 products, which we have launched, I mean, the commercialization of that has started? I mean we have started supplying...
Yes. It's a small volume product -- small value products as of now.
Correct. Fair enough. And once all of these products are launched, let's say, 2 then 3 in near future and 8 after that, what can be the potential if you have to look at, say, next year, what can this be?
I think we were very dynamic in the generic business, unlike the CDMO business, which I could tell kind of certainty. But in this -- if I say something, it may not work out the way [indiscernible] because how many of [indiscernible] be coming up by the time we get the approvals, we don't know. And the [indiscernible] and all that stuff. I mean, as I said, I will be positive only after the 12 months late -- that means -- it's not that -- it's not a big amount that we are talking about it. It may be about INR 150 crores or something like that.
Okay. Right. Sure. And sir, my second question is on the CapEx figure. I think our Suryapet facility is coming up, we were doing something at...
Yes. Other than those things we have not done any new activity because there is no change in the location for the what you we call the I mean R&D center because the regulation has not come into picture. And we've not put up any new facility, which, if needed, we want to [indiscernible] Pashamylaram that is also not started yet. And as and when the success of the molecule happens, then we can start working on that. So other than the Suryapet facility, which will be up and running in the third quarter -- in the second quarter, third quarter, nothing else is pending other than the replacement CapEx, which is [indiscernible].
Correct. Because we had earlier said that it might take us about 2 years to even set up this Pashamylaram facility. And that work still has not started, I mean...
No. Everything -- we have everything ready, but what I'm saying is, unless you see the success in the molecule, there is no need now because we can manage with the existing capacities here. Moreover, what happened is some of these activities are also being parallelly done at the Vizag where we can also do the same products back up kind of things and 3 of the customers have already approved the site for the intermediate. So there is no rush to do this, unless it's purely regulatory purposes, we need to have it. Right now, that's not the case. That means some of the products, which we are now making in the Pashamylaram if there is a regulatory requirement comes, that can be moved to Vizag and the regulatory product can be done at Pashamylaram. So there is no immediate requirement. But we have some other couple of products, which are [indiscernible] and then we need to have a capacity, then that is the time we need to put the capacity.
Next question is from the line of Saurabh Kapadia from Sundaram Mutual Fund.
Sir, if you can talk about the margins in this quarter, you've seen [indiscernible] margins and now going higher if our mix remains [indiscernible] follow, should we continue to see higher margins?
Sir, this question I have been answering for the last 4 years. It all depends on the mix in products. So 1 quarter, it may be high-value products and 1 quarter it may be volume growth only, but not the high value. So we keep changing it and that's why we never say that it's going to go up. When it comes positive, it's good, because we always say it is plus 40% margin -- 40% EBITDA. But it's always above that. So we don't know because we don't have a regular product day in, day out. And so I can tell you, yes, there is a possibility to increase because of the other reduction in the cost and all the stuff. This is a product mix. And every quarter, it keeps changing it. So I cannot tell.
Okay. And second is on the correction in new [ RFQ ]. In March quarter, you mentioned that it's slower. So how has been the correction in this quarter? And is it picking up in terms of new [ RFQ ]?
Yes. I was telling you, I mean, this is the first quarter we are seeing a lot of new inquiries for the new products, which are under development. This is a very early stage product. So we're all working on reporting all those things and see how many of those things will mature. I mean see what happens is that after the COVID, everybody is now focusing on the regular. There was a lull before. That is not there now. More [ RFQs ] are coming and sometimes, they will be going 2 or 3 products for the same indication, and then they will finalize one of them, but the request will [indiscernible] for all of them. So we'll keep quoting and see what it plans to. But it's a very early stage product. It's not a volume driven, but eventually it will give you good growth potential when it matures.
Okay. And sir, lastly, in terms of the filings. So how many filings we have right now and how many [indiscernible] we expect to get business?
No, no. See, the project has no meaning and we have [indiscernible] because sometimes the project stays here is active, but it will be 2 to 3 years before you see a repeat business. So we have [indiscernible] how many projects are there because it doesn't give you any...
Okay. And sir, how many molecules are there in [indiscernible] last when you mentioned about 5 molecules...
5. 5.
Okay, sir.
And I tell that there is no indication as of now how -- when is the [indiscernible] are coming and should we prepare for a large quantity or anything like that, nothing is evident as of today, and that is [indiscernible] part.
Okay. Sir, just last one on the [indiscernible] level?
I think [ CCEA ].
Next question is from the line of Rushabh Shah from [indiscernible] Securities.
Hello? Am I audible?
Sir, your voice is coming very muffled. Can you please speak through the handset?
Am I audible now?
[indiscernible] better.
Yes. Sir, I have a question on business -- the CDMO business. It's a bit lumpy, the business [indiscernible] very lumpiness. How do you manage the lumpiness about not getting future bidding orders like for 2 years or so?
We don't manage lumpiness because this is the way the business is structured and by one quarter, it may be less, 1 quarter it may be more, 1 quarter it is less value products that means they are more early-stage products, 1 quarter it may be more long-term projects. And sometimes, we can double anything when there's something is launched. I mean -- it is the -- not only us, anybody who is in this business, so they expect a normal growth of 10% to 15% on average, unless there is success of the molecule moving from one stage to the other stage. So really, there is not a management. We cannot manage anything like changing it to some generic or anything like that. It has to be the [indiscernible] that is available and wherein we supply the products.
As you said, it's very difficult to predict like until Phase 4. So how do you have the visibility like for the next 24 months or so?
I think you have heard us, we don't have a visibility of more than 6 months. Not only me, neither my customer has more than 6 months visibility, unless the results of the clinical trial comes in, they cannot tell us. So this is part of the business problem we have, and we are managing that way as a mindset management rather than any digital management.
Okay. Sir, if you could give me the opportunity size in this business and well how ahead of -- are you ahead of your competitors, sir?
I don't have a competitor because I'm purely a CDMO for the innovator product. The product that I am supplying to a customer is not supplied by any other in this country. So that we are not a competitor. So we don't look in that way. This is a different sense and you have to see our track record and how it is going. And it can be up and down, but at the same time by the year-end, it is averaging it out. Sometimes, it will be maybe 1% or 2% less, sometimes maybe 1% or 2% more only. Sometimes, it will go [indiscernible] if you see last 4 or 5 years, it's about 20% CAGR.
You said going ahead, the opportunity size for the business is tremendous, like we can see a 20% growth over the coming years or so?
Right now, I cannot say, not having the visibility, but the track record say so.
Next question is from the line of Gokul Maheshwari from Awriga Capital.
My question is that the CapEx plan of INR 600 crores, which we had planned, I'm aware that we have not done the shifting of the R&D facility. So how much of that INR 600 crores we've already executed?
It's about -- see, out of 3 buckets in the INR 600 crores was INR 200 crores for the replacement at the Suryapet site, a new block, one. Second one is INR 200 crores for the, what you call, shifting the R&D center is needed from inside the ring road to outside ring road. And INR 150 for Pashamylaram additional block, if needed. So we have not started anything else. We have only started the Suryapet thing and which we have concluded about INR 170 crores.
Okay. And is that already done or it's under execution?
It's INR 170 crores already spent and is under execution. And in the third quarter, the production will start.
Okay. Secondly is on the Casper facility. When we made the acquisition, it was -- I understand it was primarily for ANDAs. But is there any other plan to use this facility for your customers in terms of offering them formulations also?
Yes, yes, if required, we can offer them. But right now, it is [indiscernible] facility. We can use -- using only for the ANDA, but we have not started any formulations to any or regular customers, innovative products, that is [indiscernible] integration in the future when we go to the APIs [indiscernible] what you call the -- when they require because most of the innovative products, they don't take the formulations.
Okay. So right now, we are not either speaking to our clients or not executing any such project, it's primarily ANDA facility right now?
Yes, it is ANDAs facility. Yes.
Okay. Lastly, just on the CRAMS. You mentioned about the inquiries have been fairly strong, and it's still early stages, but just purely based on your experience I understand that it is -- you might have still quite a few balls in the air, but how much time does it take to really eventually this to be converted into meaningful business. I'm not talking from a quarter sense, but more like a more normal term perspective.
Yes. Because see, in the early stage, revenues are very miniscule, like INR 5 crores to INR 10 crores or INR 15 crores, whatever it is. So if it matures and it goes into the Phase II level itself, it takes 24 to 35 -- 36 months before you see any tangible results.
Next question is from the line of [ Simran Agarwal ] from JM Financial.
Am I audible, sir?
We can hear you, but your voice is slightly breaking.
Is this any better?
Yes, go ahead.
Yes. So just to ask on the margin side, the logistical cost benefit and the raw materials side benefit should stay with us going ahead, right, given that there has been a comforting ease on both of these cost accounts?
Yes.
Irrespective of the product mix? I'm just trying to understand that.
Yes, that will be more or less stable.
Right. And if we look at our positioning from a China Plus One perspective, do you see anything changing here right now? And any commentary on the earlier discussion that we had on the some funding winter that industry was experiencing in the northern part of the world. So what is the sense over there? If you can highlight any of your thoughts on the [indiscernible].
I mean China Plus One mainly [indiscernible] generics and special what you call the chemical businesses and all that stuff and some APIs, but we are not in the sector. We are in the CDMO intermediate sector. So the lull that happened after 1.5, 2 years is because the COVID. The focus was more on COVID rather than [indiscernible] development. As I was telling you since the last [indiscernible] some changes in the mindset, people wants to [indiscernible] to China. Of course, China is not much in the CDMO side of the [indiscernible] players, but still, based on the number of inquiries we got this quarter, we feel still also some change -- slight change in the thinking even for the innovator products also. So that's what we are seeing here. Other than that, it is not applicable for us, sir, as far as the China Plus One is concerned, only that is for the chemicals and regularly APIs and all that stuff.
And the funding winter thing also you see it settling now?
What is that again?
The funding winter that also you see is behind us now or you see some improvement coming?
We are not able to hear you properly.
I couldn't hear your question.
So sorry, sir. I'll join back the queue. I'll join back the queue.
Next question is from the line of [ Viswesh Krishna ], individual investor.
Hello? Am I audible?
Yes, sir.
Yes. I just wanted to know on the [ Casper ] facility. We had bought it only for formulation and innovation and R&D, correct?
It's for formulations only.
Only. Okay. Can you shed some light on that? Do we have any [indiscernible].
What?
Can you shed some light on what's happening with respect to the Casper facility? I joined the call a little late.
Yes, Casper facility for the ANDAs, and we have a couple of them already being applied very small volumes and 3 are under approvals from the FDA and 8 more are under filings, and we expect the breakeven point in 12 to 18 months.
[Operator Instructions] Next question is from the line of Rushabh Shah from [indiscernible] Capital.
Sir, my question was on the -- on the call, you had said there are some shipment delays and due to day in, day out supply such thing -- such that everything happens and come into a single quarter, and the rest of the quarters are all [indiscernible]. So is there any way to tackle those things? Or we have to deal with it because the nature of the project?
It's not the shipment delays. What we're [indiscernible] globally, the major destocking and that means they are deferring the requirements, even though projections are there. And the other part I said is it's because the drought situation, we require -- continuous deferred. It's not a delay. Deferred [indiscernible]. And as of now, for the next year, the projections are given and they're all good. And we'll be knowing, as I said last quarter and this quarter has affected because we did not supply those quantities. And we will know for the third and fourth quarter, who will be going in the September timeframe how is the -- it is going through. So the softness will be there for a temporary period, but in long run, it will -- because once the destocking takes place, the requirement is there, their projections are still similar, so there is a [indiscernible] specialty chemicals that is what's happening. But that's a short-lived we feel.
[indiscernible] there is no competition for [indiscernible] business...
Rushabh, sorry, your voice is coming very muffled. Can you please speak through the handset?
Yes. So now it is -- now am I audible now?
Yes, sir. Thank you so much.
Yes. So you said the -- you don't have any competition in that business as you told me. So [indiscernible] new player comes into your segment. So what challenges he might face to like to come up to your level? What challenges are you facing currently, sir, in your business?
I cannot tell what challenges the new players are going to face. My challenges are when we take up a project, whether it is going to go through the next level or not, it is going to be successful -- I mean, clinical trial setting or not, we don't know. This is an uncertainty, not only from my point of view, from the innovator point of view also. And when I said there is no competitor means, [indiscernible] competitors. We are not worried about them. Once you get a product, the same product is not given to second person in this country. That's what I mean to say.
Okay. And so what are your top 3 priorities going for the next 2 to 3 years?
What is that again?
What are your top 3 priorities going in next 2 to 3 years?
There's nothing like top 2, 3 priorities. There's only 1 priority, get new business and hopefully, the business will be successful in the clinical trial, which the client will give us. So this is only one way. There's nothing other -- because we are not into generic, we are not into stock and sell items. We are all [indiscernible] depending on the customer's success. That is the only way we look at it.
Next question is from the line of Darshit Shah from Nirvana Capital.
Sir, when you are saying that we have received the kind of inquiries that we haven't seen in our history of operation. So I would really like to understand, is it due to the kind of pent-up demand where most of the innovators were occupied with the COVID molecule and that has kind of come up after that or what is your sense on that?
I'll say that the discovery and development of new molecules used -- I mean deferred during the COVID situation because they are all focusing on developing various alternatives for the COVID. So now all those things are coming, that's why the requirements of those early-stage requirements are being asked for because we are one of long-term players with the customers, which we are working with. And these are all the new activities they have started with the gap. As you know, it's a cycle, something like that happens sometimes now they start the activity and which happened because of the COVID. Now the activity started full scale. And now they are looking at -- this is a very, very early stage requirements we are talking about it.
And sir, in terms of CapEx, where we kind of report the R&D and the Pashamylaram facility, is there anything to do with the deal with [indiscernible], where they have also few of the facilities, which can be used when you kind of merge all this together. Has that seem to play a role in this?
Nothing. Nothing. It has nothing to do with it because if the government says you have to move out of this thing [indiscernible]. And this thing you have done 2.5 years ago, not 6 months ago. So I could have started earlier whenever there is a requirement, we take it. It is not money, we don't have to borrow also. It is existing. Only we have taken a permission from the Board at that time. It's not just because of the deal. It has nothing to do with the deal.
And on the migration from intermediates to KPI, what's the status there if you could throw some light?
Yes. As I was telling you because the COVID, it was got delayed, the audits and all the stuff. Now it started. We are already discussing with 2 customers, and they are planning to send their department -- I mean those audit people sometime in the third quarter or something like that. I think it's going in the right direction.
Sure. And then lastly, if I may squeeze in. On this long stop date, that's [indiscernible] in the worst case, if we don't get the [ CCA ] approval, would this deal get extended as per the agreement?
This is -- 26 August is the long stop date. And after that, we have the -- I mean, it is a mutual content we give each other [indiscernible] regulatory things are not tough by that time. But the only thing on pending is CCA, which we expect [indiscernible] should get organized the meetings and hopefully, it should be over.
Next question is from the line of Saurabh Kapadia from Sundaram Mutual Fund.
Sir, your manufacturing cost has gone down in this quarter. So is it because of mix the overall cost has come down?
I didn't understand the question.
Yes. I'm saying -- I'm referring to manufacturing cost that has come down as you compare to last 4, 5 quarters. So is there any...
As you know, some specialty chemicals were not manufactured, right? These are variable costs, all those things. Actually, it will come down. Fixed costs are there, but the variable costs will come down no, naturally, when the production is not there.
[Operator Instructions] Next question is from the line of Satish Bhat from [indiscernible] Shares and Stocks.
Congratulations on good results. Sir, I just wanted to know whether you would give some update on your 2 molecules, which are planning to take to Phase II trials? So how we are you projecting, which molecules -- hello?
Yes.
So I just wanted to even look at what type of expenditure would we incur for those trials also?
What are you talking, sir, you're talking to Life Sciences here, we're not talking...
I just want to know whether I can ask on those topics.
I think people will get confused. I think we can have a separate call on that, sir.
I now hand the conference over to the management for closing comments.
Thank you, everyone, for tuning in for this conference call. As discussed earlier, we were -- the environment is very tough, especially in the agrochemical sector, but it's, as I said, is a destocking that is taking [indiscernible] situation somewhere else. We feel that it's a transient and we can [indiscernible], but it will come back in a big way in the '24, '25 time frame. We expect with this softness for this quarter, which we have told you, but based on the number of inquiries that is coming, we see a lot very great protection for the CDMO business also.
All in all, it looks good for '24, '25. And this we'll know as the time goes by, how this -- as I said, on the long term, I can tell you how it is going on. But for now, it is this quarter will be soft and hope everything will resolve by the time we speak next time. Thank you. Thanks for tuning in.
Thank you very much. On behalf of Suven Pharmaceuticals Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.