COHANCE — earnings call
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Prepared remarks
Moderator · Conference Operator
Ladies and gentlemen, good day and welcome to the Suven Pharmaceuticals’ Q4 &
Questions and answers
Moderator · Conference Operator
Thank you very much.
We will now begin the question-and-answer session.
The first question is from the line of Rushabh Shah from O3 Securities.
Rushabh Shah
I have a couple of questions.
My first question is in the formulation business, is it possible to focus less on that business and focus more on the business where our revenue share is 60% which is CDMO, since the formulation business from past two financial years it has been flattish?
Venkat Jasti
Yes, formulation business, it's not a big item for us, but it's in a leverage exercise as we told you earlier and we are expecting something to grow, but it also depends on the approvals that are now to be in place.
So, we have filed around 27 ANDAs.
So far we have only 12 approved and not all of them as you know it is very specific molecules, not a blockbuster volume-based molecules.
We expect more 7 or 8 approvals during this year and that will add to revenue eventually.
But in general, it is a flattish growth, not much to talk about on the formulations.
Rushabh Shah
If you could give me the repeat percentage of orders of the business, what percentage of clients do come back with the repeat orders for the business and if it's on the larger side?
Venkat Jasti
This is not a generic business as you know.
When once our molecule is supplied and if there is a success in the clinical trial, you will automatically get the repeat order.
And similarly, on the commercial scale, you will have a repeat order once a year or whatever it is on a continuous basis depending on how the product is growing.
If it's growing, you will get a little bit more orders.
If it's less, you still get the repeat order but it will be a little bit less.
So, this is the way it works.
Unlike a generics where you would go and sell it.
Here it is automatically because we are one of the suppliers for this particular molecule so it will be coming that way.
So, repeat orders are based on the success of the molecule in the clinical trials at the early stage.
And if it is commercial, it is success of the molecule in the market.
This is the way you get repeat business.
Rushabh Shah
And my last question is in the previous con-call you said that the duration of a project three to four months or even it would take five to six months, which is very lumpy in nature.
So, how do you take the guidance for it and how do you project the revenues going ahead?
Venkat Jasti
That's why we don't give you guidance and the revenue projections.
They come as and when its time, this cannot go quarter-on-quarter basis, you have to go more or less on year-on-year basis only.
Again it is based on the success of the molecules both in clinical trials and when it's launched on the success in the market.
So, it's not straightforward but at the same time, if you see the last four years, we have 21% CAGR growth.
So, it tells you something about the regularity with which we are getting it and but it cannot be on a quarter-to-quarter basis.
Rushabh Shah
So, do you expect the same going ahead in the next three to four years?
Venkat Jasti
We hope to, and maybe better that we cannot tell because as I said, we have only the visibility of five to six months, more than that we don't have.
But based on the past record, if we go by a decade and especially last for five years, it's going well.
And with the increase in the infrastructure and hopefully the new technologies which we are going to base on the request of the customers and especially on the success of the molecules.
Certainly in one year it can go much higher than what the average was, but that you cannot tell at this time.
Moderator · Conference Operator
The next question is from the line of Rashmi Shetty from Dolat Capital.
Rashmi Shetty
Sir.
One question related to this offer, we are seeing that this time in this quarter there is a higher share of CDMO Pharma and lower share of CDMO Specialty Chemical business.
Despite this our gross margin on a YoY basis and on a quarter- on-quarter basis contracted and our EBITDA margin is high because there is a lower cost in terms of manufacturing and other expenses.
So, what is happening on the cost side and why are the gross margins contracted if you could give us the specific reason for this?
Venkat Jasti
I think you know very well the type of business we are in and it is not the same molecule so you cannot compare it on a quarter-to-quarter basis.
The product mix is the one that gives you the margins, right.
So, in a quarter it may be high value product and maybe that will you get a high gross margin, whereas, sometimes some of these small early-stage products are there where the gross margins will be less.
This is the way it works.
So, it cannot be catered to one or the other, it all depends on the product mix that determines the gross margins, EBITDAs, and the net profits.
Rashmi Shetty
And on the cost side are you taking some cost control initiatives because I'm just seeing that quarter-on-quarter our expenses are actually come down, which has actually led to improvement in the EBITDA margins so if you can throw some color on it.
Venkatraman Sunder
No, there is no major changes that has happened.
The only thing is that quarter-on- quarter sometimes what happens is like other manufacturing expenses and other costs, there is a slight reduction, if you really see, compared to the previous year same quarter it was Rs.
18 crore for other expenses to this year it is about Rs.
15 crore.
It changes as Mr. Jasti was explaining, with the variable cost related to the product changes.
There is cost changes in effluent treatment, power cost all those things are variable in relation to the production and that's the reason it has happened.
There is no major cost reduction as such.
Overall, it is the same kind of thing.
In fact, there is no cost increase as such, that efficiency has been maintained.
Rashmi Shetty
My second question is on the acquisition and merger process, where are we currently in this process related to the tender and related to the acquisition process and the merger process?
Venkatraman Sunder
We are still waiting for the regulatory approval for the acquirer to get all the approvals from the DOP.
They are still waiting for that.
Once that is completed, probably they will announce it to the public and at that point of the time the transaction will be completed.
At this point we have not got the approval as such.
We are waiting for approval.
Rashmi Shetty
Once the regulatory approval comes in at that time Advent will first acquire the promoter stake and post that only the tender would start right, is that understanding correct?
Venkatraman Sunder
That is correct.
Once after the acquisition of the promoter stake then they can go for the open offer process.
Moderator · Conference Operator
The next question is from the line of Abdulkader Puranwala from ICICI Securities.
A. Puranwala
On the CDMO Pharma side, just wanted to understand the spike what we have seen in this quarter and is this more related to some new product getting commercialized or just some movement happening between the clinical trials?
Venkat Jasti
So, it’s a combination of both.
You cannot pinpoint to one thing that has come, there is nothing new that has come.
Sometimes what happens is that some of the material is almost ready but not shipped in the last few days so it goes into the next quarter.
Those things also can happen.
Not much change, only the values are based on some of the product mix, but as you're asking what is better this quarter there is no new launches or anything that has taken place.
A. Puranwala
On the new molecule inflow front, how is the traction with our key customers, are we seeing some renewed interest there and if you could also highlight the number of molecules which are under Phase-2 now and Phase-3 as well?
Venkat Jasti
What I'm saying is the traction of getting the new RFQs and all that stuff is still a little bit slower.
We thought it would happen post-COVID and it's coming but renewed interest is there but the pace is a little bit slower.
And none of the molecules in various phases has not moved from one stage to another to have a substantial impact on the results as of now.
A. Puranwala
And just a final one on the Vizag plant, any updates from the customer audit part as we were earlier expecting it to happen in this fiscal?
Venkat Jasti
The update is that as customers are coming and auditing and once the validation orders will be given eventually, but it is a long-run process because it will take 1 to 1.5 years before you see full-fledged approvals.
Moderator · Conference Operator
The next question is from the line of Cyndrella Carvalho from JM Financials.
Cyndrella Carvalho
Congratulations on delivering the guidance and maintaining the EBITDA margins.
Sir, I want to understand if there are any expected new approvals from Pharma side in the coming two years FY24 & FY25, any indication on that?
Venkat Jasti
No, even the customer will not know until the clinical trial data comes out and then it moves to the next stage.
So far we don't have any indication as of now any of the Phase-3 molecules will be moving into the commercial or any Phase-2 coming into the Phase-3.
So, no indication as of now it can happen any time as I said right now.
They don't have an indication.
Unless they have an indication they can't tell us.
So, we will not be able to give you any guidance at this time.
Cyndrella Carvalho
And on the Spec-Chem side, apart from the earlier three products, is anything moving there?
Venkat Jasti
Last year itself, I told you it will be in 2024 timeframe it will be moving to another commercial products not until that time.
Cyndrella Carvalho
Sir, if we look at the global environment, you highlighted that it is slightly slower, but we hear a lot around the China Plus One movement.
Is there any update on the overall R&D outlook of our partners and how do we expect this to pan out?
Any thoughts from an industry perspective and our business perspective, it will be helpful.
Venkat Jasti
Industry perspective, the China Plus One, yes, it may be possible in the non- regulated regime like maybe generics or some intermediates and something else.
But on the innovator side, it takes time for any changes or any new things to come and have a tangible results.
As you know, when we came back from the DCAT, the feedback from there is, yes, we are thinking of moving away from China and all that stuff, but there is a thinking, then they have to implement it.
If it's a regular product buying in a regular intermediate or chemical then it is much easier for them, but when you are going for an innovative product and aligning it takes time.
But that is a positive sign, and time will tell when those things come.
I think that is a good omen.
In the long run, yes, it will be good but right now, what I was telling you is on the mindset of the COVID-related activity moving into the regular activity we thought by this time we will have a little bit more traction on the new projects, but it is a little bit slow, but it will come.
As you know the CPHI itself, they were saying about moving towards India.
Similarly, DCAT also they were saying the same thing.
So, I think it will come, but for a general purpose for the industry sake, yes it will come.
It will take time, especially this space where we are in, it will have a long-drawn effect.
And when once it starts, yes, it will be good and in the years to come it will be very good.
Cyndrella Carvalho
Did we share the number that if we remove the COVID portion from the base, what will be our growth for FY23, did we share that number?
Venkatraman Sunder
No.
Cyndrella Carvalho
Can we share that number if it is available?
Venkatraman Sunder
We said earlier, it was about Rs.
120 crores what was there in FY22 and whether or not it may be muted in FY23. It is lower this year.
Venkat Jasti
And I already told you 10% is less because of that already.
It can be CDMO revenue in the pharma, that's the only thing I can tell you.
Venkatraman Sunder
We might not be able to specifically profile the customer and tell in the conference call and then and it's very difficult for us to maintain that because of the confidentiality what we have with our customers.
Cyndrella Carvalho
Sir just one question on the raw material and logistics side how do we see the scenario now as we hear a lot of peers saying that there is improvement in both the sides, has it happened for us and do you see the trend improving going ahead and given that we have delivered annual level almost of + 42% EBITDA margins, do you see this improving further with the help of softening of logistical and raw material cost?
Venkat Jasti
Naturally, what happens is the shortages is going to be a problem not the cost structure.
Our cost is more or less vis-vis being compensated because of the nature of the business we are in except one or two places where we may not be able to get the compensation.
So, when it goes down naturally the price to the customer when the repeat business comes, it will go down.
So, we hope to maintain the same margins, but based on that we do not think you will have any improvement in the margins.
The only reason is not able to have the things and get the raw material somewhere else and high prices and suddenly sometimes it may affect it, but in general the trend is good now, the availability is good and the prices of the raw materials are also stable.
Moderator · Conference Operator
The next question is from the line of Chirag Dagli from DSP BlackRock.
Chirag Dagli
Sir our commercial supplies in pharma excluding the COVID supplies has there been a dramatic change in that number for the full year of FY23?
Venkat Jasti
There is no dramatic change.
As I said, if it is a dramatic change there should have been an improvement in the sales revenue of the CDMO Pharma as I said year-on- year it is 10% less than the last years.
So, there is no improvement and whatever the decrease is mainly because of the some of the molecules which they use for the COVID are not repeated during this year that is why that was there.
Chirag Dagli
The 10% is lower because of that COVID not coming is what you are saying?
Venkat Jasti
Yes.
Chirag Dagli
Secondly, sir we are seeing some players talk about funding winter and this impacting the funnel for CDMO business from a lot of emerging biotech companies, are you seeing similar trends if you can just talk a little bit about the overall environment as far as your mix and match business as you traditionally call, what are the trends that you are seeing over there?
Venkat Jasti
Actually, as you know we are dealing with only the medium size and big pharma only and that part of the problem will not be there.
We are not working with any bio techs for that matter.
So I am not aware of that and I did not see that trend as far as big Pharma is concerned, but the only thing is the changing of the COVID related activities to the regular activities.
So, we thought it would be fast track, but it is coming slowly, but I think we see with the way people are talking and all that stuff in a couple of quarters from now it should come back to normalcy and maybe fast tracked also for the regular items.
Moderator · Conference Operator
The next question is from the line of Pranshu Jain from Neo Markets.
Pranshu Jain
I just needed some guidance on the open offer which has been there, so when you are expecting the process to get completed?
Venkat Jasti
That is not in our hands.
It is based on the regulatory approvals that has to take place when the regulatory approvals take place I think they will announce the date.
I think it will be within the fortnight they will launch the open offer after regulatory approval comes in.
I think we are still waiting for that and that will be guided to you through the notifications as and when happens right now we do not have an idea, but our thought process is it should be happening before July 1st that is a long stop date.
Moderator · Conference Operator
The next question is from the line of Varun Bang from Bryanston Investments.
Varun Bang
Congratulations on the steady progress during the year.
Sir, increasingly what we are seeing is molecules are becoming smaller and high potent so 500 mg becoming 50 mg and 50 mg becoming 5 mg, so the quantum of supply could be structurally declining, how is it evolving and how could it impact our business especially the commercial terms that we have with innovators?
Venkat Jasti
Commercial terms is based on molecule to molecule not based on milligrams to milligrams.
It is the molecule that brings the value.
If you see good olden days you have 1,000 metric tons, 2,000 metric tons, but in this innovative last 10 years if you see very rarely you see any volume-based molecule everything is on a 20, 30, 40 or 50 tonnes for the whole year something like that other than one or two.
So, I do not see any difference on that it will not affect anything because what we are saying is what we are giving is the number of steps we do, the difficulty of the steps that involve all of Specialty of the chemistry which involves all those things will get you the pricing not the volumes.
Varun Bang
I understand when we are working with innovators things do not move too fast, but just to get a sense of the progress on our plans to extend offerings to innovators through the initiatives that we have spoken about so becoming part of life cycle management, manufacturing casings and also forward integration into API, so how has been the progress in the last one year and what milestones do you think we have achieved and what are our plans for next one to two years?
Venkat Jasti
We have not achieved any milestones as you know because of the COVID it was delayed.
Now only they started coming into India for a visit of the customers after three years of gap I think it will take time and even when they start it will take a minimum three to four years for any new opportunity to come in other than the regular products that are going into the next step.
So that is the different departments in the same company if it is the life cycle management they have to do due-diligence and do the all the validations and all that stuff.
So, it will not be overnight thing scenario, but now it is starting back again because there was a pause for a couple of years actually supposed to be done in 2019 then this because of the COVID and last year I thought they will start coming in, but still they have not showed up, but this year we see three or four people even for the regular visit itself they have just started coming in and we hope that things will start accelerating so that we will have an opportunity to sell ourselves on various aspects what we are talking about.
Moderator · Conference Operator
The next question is from the line of Saurabh Kapadia from Sundaram Mutual Fund.
Saurabh Kapadia
Sir, how is this inventory situation in the CDMO specialty chemical given some climatic condition of the inventory overhang at the inventors side?
Venkat Jasti
The second quarter will be little bit soft that is what they claim to be because they may be deferring the orders and all that stuff, but sowing the crop and all that stuff, but post that it should come back to the normal that is why it said little bit soft at this time.
So quarter-on-quarter basis is not clear but year-on-year basis it will match that is our hope.
Saurabh Kapadia
So, is it the case for all the molecules in spectrum?
Venkat Jasti
Not all the molecules, some of the molecules for us only one molecule.
Saurabh Kapadia
And the second question on the CDMO Pharma, so if you can give your pipeline for Phase-3 and Phase-2 molecules?
Venkatraman Sunder
We have 5 in Phase-3 right now for three molecules we are supplying right now.
But it is still they are in Phase-3 we do not have the visibility as of now from the customer when it is going to be moving to the commercial as and when it happens probably we will be able to inform you.
Moderator · Conference Operator
The next question is from the line of Pratik Kothari from Unique PMS.
Pratik Kothari
Sir my first question is on Cohance if we can share some update some numbers if you can the last we had updated was what they did in FY22, so if you can share something about that?
Venkat Jasti
This is regarding Suven Pharmaceuticals nothing has been done.
We have signed the definitive agreement, but I cannot tell you anything about somebody else’s numbers here please excuse us.
Pratik Kothari
I understand that so when we made this announcement we were also thinking that we will get someone from Advent sometimes on the call because for an existing shareholders ultimately that you could do.
Venkat Jasti
Let me tell you something.
This is an ongoing process; nothing has been changed.
Suven is run by the existing management nobody will be coming from the other side until the transaction takes place.
Pratik Kothari So my second question is on the pharma usually we always say we have a 6-month outlook or 6-month demand that we can see, so you did talk about what the challenges that we are seeing in chemical, but can you talk about what is happening in pharma?
Pharma is going in the same way there is nothing.
As I said, this is the very beginning of the year, we have visibility over four to five months and everything is as usual as last year, nothing different.
While on the Specialty Chemicals because we see some softening in the second quarter we just mentioned that is soft otherwise everything going on in the same manner as last year for the Pharma side.
Pratik Kothari
Last question on Casper I mean have you started any commercialization there or not yet?
Venkat Jasti
Casper only one product has been launched and we are expecting other approvals sometime in July, August and September time frame.
Pratik Kothari
So, how many molecules should be launched this year?
Venkat Jasti
In Casper it is 5, we have approved and waiting for the gold dates for these in the next four to six months.
Moderator · Conference Operator
The next question is a follow up from the line of Rushabh Shah from O3 Securities.
Rushabh Shah
Sir, in the formulation business it is a business that provides services to other pharma companies which is also a bit lumpy business?
So, for Suven we make the intermediates or the molecules post receiving the project or directly start with phase 1 then come to phase 2 and then look out for projects, so I wanted some clarity on that and the same question regarding the R&D?
Venkat Jasti
No, I do not think you understand right.
In the innovative molecules, when you get into the phase one and the molecule we supply in the phase one supply and if it is successful in the phase one if it goes to Phase-2 you get to the repeat business and when the Phase-2 is successful in the clinical trial then you get the Phase-3 supplies and if the Phase-3 is successful then you get the commercial launch supplies and that is the way it works.
There is nothing like that, but there is no guarantee that the molecule that we entered everything will go into the next stage which is a mix and match of these things and then if you see we have done more than 980 projects over the years and we have only 11 commercialized one.
This is a mix and match that gives you the business opportunity.
There is nothing like you do not go in Phase-3 directly to the customer they do not because it has to start at atleast minimum Phase- 2 not after that they will not change any customer.
I mean the same customer will be supplying same product they will have two or three sources for each intermediate to their sourcing that is the way it works in innovation.
Rushabh Shah
And my last question is sir how are we different from our competition let us say a big player like Divi’s, how do we compete with the player who is operating at such a big scale?
Venkat Jasti
It is not a big scale or thing.
We are not into generics.
We are not in a big way into the API's and all.
We are into innovation.
You have to understand is innovator does not go and serves the Phase-1 molecules in two different companies if they come to Divi’s they go Divi’s only, if they come to Suven they come to Suven only.
And after that it is success of the molecules and based on the repeat business comes there is nothing like a competition that way.
It is not the volume of the business that comes in.
It is only at the commercial level that may come in and the generics place that comes in the picture.
Otherwise, it is the process that takes the clinical trials and the success in the clinical trial will give you the business opportunity for us.
Moderator · Conference Operator
The next question is from the line of Gokul Maheshwari from Awriga Capital Advisors.
Gokul Maheshwari
My question was that we spent Rs.
285 crore on capex in FY23, can you please elaborate in terms of what was the areas where we spent this capex on?
Venkat Jasti
It is mainly the replacement block in Suryapet bulk of the money goes there.
The remaining are already balancing equipments and all that stuff.
Gokul Maheshwari
And the capex was the R&D move that is still underway?
Venkat Jasti
That is not yet happened because this is only proactively we have taken the permission from the board as and when the government asked us to move we need to be prepared that is why we have taken and as of now there is no GO issued, but it can be in the minute it will happen sometimes soon.
I think it all depends on the pharma city being ready for the operation.
I think that time they will issue a GO that you need to move from that time we have two years’ time at least.
Gokul Maheshwari
But the replacement of these equipments of the capex would it be adding to the sales or improving productivity for us?
Venkat Jasti
See, when you are talking about a 35-year-old company and the old blocks are rare which is regulatorily may not meet and also the structurally may be a problem safety aspect is a problem so we need to have a replacement block.
So, in the new process you may have a little bit of additional capacity that comes into the picture and more than that it will be having a regulatory, automation and productivity related benefits also will accrue to us, but not substantially mind you it is a replacement, but with the benefits accruing to it so that you can take more projects.
Gokul Maheshwari
And just on Casper, when we acquired this facility the intention was to do certain molecules on the formulation space, but is there a possibility for us to offer formulations for our existing innovator clients as well where we are providing them intermediate chemicals and then we do formulations for them as well?
Venkat Jasti
Yes, the Casper facility is only a formulation facility.
It is not a bulk facility.
So, we can offer R&D services to anybody and if they are interested in getting it and that is their forward integration and also life cycle management is getting space that is what we are looking for and not only in Casper, but also in the Suven Pashamylaram site we have the same facility so we can do that too.
So, it is not just and it takes time and for the customers to come and do that, but in Casper you cannot do the APIs or intermediates only the formulation and R&D.
Gokul Maheshwari
And lastly just on the Phase-3 molecules you mentioned that there is no visibility of them moving?
Venkat Jasti
Yes, as of now, there is no indication that are within striking distance because unless the results are out we will not be able to know.
Right now, we do not have any guidance on that.
Moderator · Conference Operator
Thank you.
I now hand the conference over to the management for closing comments.
Over to you, sir.
Venkat Jasti
Thank you everyone for tuning in for the update on the results year ending March 31st, 2023, as I said, it is too early to give any guidance for us other than that pharma plans are going good at this time and the traction is a little bit slower in the new project acquisition.
But we hope that based on the conversations we had at CPHI and DCAT we are likely to get that in the third, fourth quarter timeframe.
In specialty chemical side, there will be some small deferment tone shipments and because of the climate conditions elsewhere and that will come back to third or fourth quarter into the full swing.
We hope to continue the business as usual with the same margins we will be keeping and hope to tune into the results update by next time in August.
Thank you.
Please note
We have edited the language, made minor corrections, without changing much of the content, wherever appropriate, to bring better clarity.