LAURUSLABS — earnings call
The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.
Prepared remarks
Moderator · Conference Operator
MR. PRASHANT NAIR – AMBIT CAPITAL Laurus Labs Limited October 29, 2021
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 Sudarshan Padmanabhan from JM Financial.
Please go ahead.
S Padmanabhan
My question is to understand the situation more as far as the raw material availability is concerned.
I think across the industry people are talking about it.
And from what I understand is Laurus Labs Limited October 29, 2021 that there have been a substantial increase in the base materials in the second quarter and further increase say in the month of October.
So, in this backdrop and given that we have also been backward integrating quite aggressively, how much do you think that incrementally in the third quarter you see issues both in terms of price escalation and availability for us?
Dr. S. Chava
The raw material price increase is especially visible in the solvents and utility costs also gone up significantly.
The increase in these prices will be visible only three, four months from the day we start buying the solvents because of the inventory in the pipeline.
As you are also aware, the grass margins for the quarter were very healthy when compared to previous quarters.
That was primarily because of higher revenue contribution coming from Synthesis and FDF.
And in the case of ARV, most of the ARVs are under a long-term contract to other formulators as well as in the FDF space.
We will maintain similar prices to our partners… I am not saying same prices, we will maintain similar prices, and we have built significant inventory, you might have seen our inventory also gone up by close to Rs.300 crores, that is primarily because we are having a lot of ARV inventory, actually big for us, because the ARV business will continue to boom because of moving from 30s to 90s, we do believe a lot of destocking is happening in the country.
Once that issue is over, the ARV business will continue to be back on track and our inventory will certainly help us to service the demand with our customers.
S Padmanabhan
On China, how much will be the dependence?
And with other business, apart from ARV, is it possible for us to pass it on?
Dr. S. Chava
Right now, close to 50% of raw materials we buy from China and we don't buy any intermediates.
All intermediates are made in-house.
So, that way we are insulated from the fluctuations to a great extent.
That's why our challenge is only to monitor the prices of solvent, which is a global phenomenon, not limited to the country, other than that because of our initiatives and also capacity creation for the backward integration, we are in a better question than people who import from intermediates and buy APIs from other countries.
S Padmanabhan
My second question is basically two parts; one is we were previously adding a lot of capacities and we have signed a long-term contract on the CDMO space which lends a very good comfort as far as future growth is concerned.
The second is if I break the cost, below the gross margin, because of lower-than-expected ARV sales, we have seen some kind of a negative operating effect and also I would assume that the transportation cost as you said would be higher.
So, as we move to the second half, number one, do we see say an FDF or you CRAMS business picking up and offsetting some kind of ARV loss?
Second is cost control.
Is there a possibility of absolutely controlling certain costs given that we are facing some of these issues?
Dr. S. Chava
Your voice was not very good but if I grasp what you are asking, see, the second half the ARVs will pick up especially the Q4 we don't see any challenges to go back to the Q4 of FY'21.
So, we are also confident because of enough capacity we have created enough inventory in the Laurus Labs Limited October 29, 2021 pipeline for us, we are very confident to service the ARV growth in Q4. Coming back to your question of gross margins, our gross margins are very healthy, 30 basis points reduction when compared to the QoQ, 100 basis points variance to the YoY.
So, we are not having any concern to maintain that gross margin despite of these challenges because of shift in regular contribution coming from FDF as well as Synthesis business.
S Padmanabhan
I am talking about margin below the gross margins, that is the operating leverage.
So, again should the volumes more than offset the kind of drop in ARV in the second half?
Specifically talking about the other expenses.
So, is there a way where we can control that cost?
Dr. S. Chava
In the Q2, we had a negative leverage actually.
We have less ARV sales, we produced more APIs.
So, despite of having higher same gross margin we had a lower EBITDA that is because of deleverage in operations because without selling we produced more.
Moderator · Conference Operator
The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Please go ahead.
Tushar Manudhane
Sir, on the FDF front, while we had capacity expansion and even new launches happened during the quarter but quarter-on-quarter in fact FDF sales have declined a bit.
Can you explain that?
Dr. S. Chava
The decline in FDF sales is not significant, Q1 we did 521 and Q2 495, if you look at year-on- year we did from 450 to 495 and we don't see any challenge to utilize our external capacity in the next financial year.
As we mentioned, we are creating capacity to service our demand in FY'23.
Tushar Manudhane
So, you mean to say that FY'22 would be more or less at the similar run rate as the capacity or rather commercialization will start having fruits in FY'23?
Dr. S. Chava
New revenue coming from the Brownfield expansion in the site will come from FY'23.
The debottlenecking capacity will come handy partly came in H1 and fully in H2.
Actually, coming from Q3, Q4, our formulations lines are running at very-very optimum capacity.
Tushar Manudhane
And just extending to that like so with this your lines operationally fully, so other expenses and the employee cost will also then increase in line in the upcoming quarters?
V V Ravi Kumar
Slightly maybe higher side, Tushar.
Dr. S. Chava
We started recruiting people for the Brownfield expansion at all levels.
H2 will be better than H1.
We believe in formulations, we have more people, we are going to start reducing in Q3 as well as Q4. Laurus Labs Limited October 29, 2021
Tushar Manudhane
Secondly, while you have alluded that 50% of raw materials are procured from China but how has been the price changes for these raw materials which you have procured from China, let's say over the past six to nine months, what percentage approx.. increase would have happened.
Dr. S. Chava
As I mentioned, we are more concerned on the volatility in the solvent prices rather than on the intermediate starting materials prices from China right now.
Tushar Manudhane
And this solvent should be contributing to what percentage of your total raw material cost?
Dr. S. Chava
About single digit.
Tushar Manudhane
Lastly on CAPEX while we have almost about Rs.580 crores in first half and given that it's 1,500 to 1,600 over FY'22, '23, so just trying to understand how much CAPEX would you be doing in the second half FY'22?
V V Ravi Kumar
Actually, what we are saying is whatever guidance we gave 1,700 crores, majority will be there in the current year itself.
In the first half whatever 518 is there, that includes the large portion of land what we have acquired for both subsidiaries as well as for the parent.
Moderator · Conference Operator
Thank you.
The next question is from the line of Ankush Agarwal from Search Capital [ph].
Please go ahead.
Ankush Agarwal
Firstly, in Q2 of last year and also in Q3 of last year you had stated that the rise in our ARV business is not because of channel stocking at our customers end, but now you're seeing channel destocking at a customers end, which you expect going forward as well.
So, what explains this contrast?
Dr. S. Chava
Two reasons.
One is most regulators in the country health authorities moved from multi-month dispensing from 30s to they moved to 90s.
So, suddenly there was an uptick in the number of units they procure to give multi-month dispensing, number one.
And partly shift from Efavirenz- based regimen as we also left some inventory of Efavirenz-based regimen, it took some time for that regimen, inventory to be dispensed.
So, these two happened in the last six months.
Ankush Agarwal
So, do you think our business can scale back to those kind of numbers going ahead?
Dr. S. Chava
From Q4 onwards we do believe we will go back to the Q4 of FY'21, we're very confident on that.
Ankush Agarwal
Secondly, just a clarification.
You mentioned that on the ARV business side you are not expecting to pass on the prices like the cost, right and you will be maintaining similar prices to our customers.
Was that…?
Laurus Labs Limited October 29, 2021
Dr. S. Chava
We do have the ability to pass on part of the cost increases to the customer, we are already talking to them but for the new orders what customers will place, for the existing orders what they have placed, we are honoring at the same prices, that is the kind of distribution we built in the industry.
We never went back to customers for a new initiative but the new orders we are already negotiating and we will certainly pass on the price increases partly if not fully.
Ankush Agarwal
And this is for both ARV, API and FDF, right?
Dr. S. Chava
Yeah, that will be in ARV API, not FDF.
Moderator · Conference Operator
The next question is from the line of Krish Mehta from Enam Holdings.
Please go ahead.
Krish Mehta
I had two questions.
The first is could you share the number for the share of non-ARV revenue for the quarter?
Dr. S. Chava
Out of Rs.527 crores, 36% of API revenue came from non-ARVs.
Krish Mehta
For the entire business including FDF?
Dr. S. Chava
I don't have the number right now.
Krish Mehta
I just wanted to clarify on the CAPEX for Q2. Could you please just restate that number?
V V Ravi Kumar
What we are saying is the majority of Rs.1,700 crores what we have guided for the for two years will be spent in this year, maybe in full year we may spend around Rs.1,000 crores.
Moderator · Conference Operator
The next question is from the line of Harit Ahamed from Spark Capital.
Please go ahead.
Harit Ahamed
On the formulations side we are expecting to complete the Brownfield expansion of 4 billion tablets by the end of this year.
So, can we expect revenues from these expanded capacities from early FY'23 or should we wait for a period of filings or site transfers and inspections before we start commercial supplies from this expanded capacity?
Dr. S. Chava
It will start giving revenues from FY'23 itself.
We don't need any new site approval.
We are planning to have inspections required in Q4 FY'22 itself.
Already scheduled by the authority.
So, we don't see any challenges of product approval or regulatory approval to utilize our Brownfield expansion in the formulations.
Harit Ahamed
Again, on the formulations side, can you talk a bit about our filing strategy in terms of what are our priority areas, will we go beyond oral solids or will we stick to products where we have strong API capabilities and then how should we think of R&D spends in this context, so currently Laurus Labs Limited October 29, 2021 we are filing almost entirely in oral solids.
So, will we think of going beyond oral solids into let's say injectables and other dosage forms?
Dr. S. Chava
As of now, most of our commercial products are immediate release.
Only one is modified release.
We are going into the modified release dosage form-V and we are also developing more complex generics which we will file one by end of FY'23 and other one in FY'24.
Apart from the oral solids, we also clear on going into sterile manufacturing and our R&D will be ready by end of Q4. For that, we started recruiting talent and we are building a portfolio and some partnerships too.
We decided to go into other delivery forms into injectables.
Harit Ahamed
On Molnupiravir, we mentioned we will look at getting a license from MPP like you've done in the past for other products.
So, what are the next steps and what's the kind of timelines that we should think of in terms of licensing?
Dr. S. Chava
It's only expectations.
FDA has to approve in their 30th November meeting and then the local regulatory DCGI has to approve.
Our files are pending with DGCI.
We do hope they will take a decision after FDA approvals by end of November.
If approval comes, we are ready to take the opportunity.
Harit Ahamed
Will be supplied in India as well along with the MPP designated regions?
Dr. S. Chava
Many people will approach MPP for licenses.
As I mentioned we have a very long successful partnership with MPP.
Probably very challenging to say whether launch will happen in this quarter but definitely we do hope the products will be launched across the low, middle income countries by January for sure.
Moderator · Conference Operator
The next question is from the line of Nitin Agarwal from DAM Capital.
Please go ahead.
Nitin Agarwal
Dr. Chava, you mentioned in your opening comments about the billion-dollar aspirational target for FY'23.
You're saying that you don't see any issues in achieving that subject to the timely ANDA approvals.
So, is this a target for us contingent on some few specific approvals, largely contingent on that which makes it sub-sensitive to these?
Dr. S. Chava
Majority of the capacity what we are getting in the formulations will be utilized to our partner in Europe where actually they have done site transfers already, include our site in the dossier.
Sites are under review.
Regulators have already scheduled a visit to our site in the first quarter of the calendar year next year.
We don't see that will be an obstacle in commercializing our products.
Nitin Agarwal
On the USFDA that you mentioned, are there any large approvals which are pending approval from the FDA that may impact our target?
Laurus Labs Limited October 29, 2021
Dr. S. Chava
There were three, four approvals pending but not because of facility inspection.
There were queries on the DMF and ANDA but in a normal course only.
So, we do expect significant approvals coming in next eight to nine months.
Nitin Agarwal
On the Synthesis business, two questions; one is on the contract that you signed up, so by when does the full impact of this contract start to get visible and how meaningful can it get, what's the current size?
Dr. S. Chava
We can't give you specific but we are investing already with existing investments; we are investing close to Rs.450 crores to service the contract and we do hope full productivity will be realized in FY'25.
Nitin Agarwal
Apart from this particular contract that we've signed up, how is the traction on the other potential partnerships or pipeline of products?
Dr. S. Chava
Now, we are very bullish on our CDMO division than we were bullish previously.
That is the reason we are investing more into this division.
We have a very interesting project from the bag line and we are adding more resources and R&D also for the division.
So, this division will do very well this year as well as in the years to come.
Nitin Agarwal
These would be again as you mentioned in the category of steroids and the high potency molecules largely, these business that we're getting?
Dr. S. Chava
It's a combination.
See, we have largest capacity to handle high potent.
That became our unique offering and large volume.
So, it is a combination of potent molecules as well as large volume molecules, it is a combination of those.
Moderator · Conference Operator
The next question is from the line of Cyndrella Carvalho from Centrum Broking.
Please go ahead.
Cyndrella Carvalho
Just a take on the site, earlier you had mentioned that we have two molecules in Phase-3.
Could you help us with some more details and any update on those and the outlook ahead?
Dr. S. Chava
From last quarter to this quarter there is no further update from those two molecules, they are still in the Phase-3, no further update available.
Cyndrella Carvalho
Sir, if we understand the raw material inflation which is ongoing, what is our sense as of now and do we have any mitigation strategy or these being the basic solvent kind of variety we have to wait until this storm settle down, so how should we look at these raw material inflation scenario as of now and what is your sense on it if you could help us with that?
Laurus Labs Limited October 29, 2021
Dr. S. Chava
The mitigation strategy is to backward integrate to that we already achieved and other mitigation strategy is we have very good inventory so that we will not be vulnerable to the disruptions in operations, that also we have done.
The other one is we can't make solvents and reagents.
So, that's where a lot of volatility we have seen.
We are closely monitoring and if there is a significant volatility, partly we will pass it on to a customer for the future orders as well.
Cyndrella Carvalho
But sir on the backward integration side, would we need any additional CAPEX or is it something that you are planning or is it already done?
Dr. S. Chava
Already done.
We are not investing additional CAPEX to do this because this is part of our strategy which we have executed or executing.
Cyndrella Carvalho
To carry forward this, if we look at any ARV tenders which would be upcoming with these inflationary costs also would be part of the standard pricing, any thoughts on that?
Dr. S. Chava
These standards are multi-year standards, so you have to wait and watch on how the pricing will move.
Cyndrella Carvalho
If we have to take the ARV business, how is the volume traction, any demand scenario change that you are seeing given the slight weakness that we have observed?
Dr. S. Chava
Demand has been less during the Q1, Q2 and we do expect by end of Q3 the demand will pick up and Q4 we do believe it will be quite normal.
Cyndrella Carvalho
Sir, one clarification on Molnupiravir with MPP.
This would be for the LMIC market, right, and on the formulations side if I understand it correct?
Dr. S. Chava
Yes, it's for the LMIC market for the formulations.
Cyndrella Carvalho
And the API for Molnupiravir would be sourced from Merck's entity or you will be also working on the API side for the formulations?
Dr. S. Chava
As part of the agreement, API manufacturing can also be done in-house and it will be in-house.
Moderator · Conference Operator
The next question is from the line of Aditya from Carlisle.
Please go ahead.
Aditya
I just wanted to clarify on a couple of things.
What percent of the raw material costs would the solvents be?
Dr. S. Chava
Purchase of solvents overall is between 5% and 10% depending on the products.
Aditya
Over the last six to nine months what is the kind of inflation that you have seen in those prices?
Laurus Labs Limited October 29, 2021
Dr. S. Chava
The significant increase in price happened in the last week only.
Some solvents went up by 10%, some solvents went up by 50%, some solvents went up by 200%, this varies, some solvents prices are normal, for example, ethanol prices were quite stable rather a little lower than what we anticipated, some solvents went up significantly
Aditya
GM impact of this price increase according to you will be visible with a lag in a month or two given that will get built into the inventory, right?
Dr. S. Chava
As we are saying, some solvents constitute 6%, 7% and I think this will not disrupt the overall gross margin level.
This may influence but this will not disrupt.
Aditya
On the formulations side are you seeing any cost pressures as well?
Dr. S. Chava
Majority of our revenue coming from LMIC, ARV and contract manufacturing to European partner and sales in Canada and yes, we fortunately haven't seen much pressure on the pricing as yet.
Moderator · Conference Operator
The next question is from the line of Gagan Thareja from ASK Investment Managers.
Please go ahead.
Gagan Thareja
My first question is around the API contracts that you have talked off in your presentation.
Are these off patent or are they on patent and you're going to supply for them?
Dr. S. Chava
It's a combination.
Gagan Thareja
Seems a lot of your foreseeable future opportunity for growth comes from one, this contract and the other is the EU supply contract which I presume will be an off-patent formulation contract.
Are the margin profile for these supplies comparable to what you have currently or are they different or markedly different from that?
Dr. S. Chava
We don't see any margin contraction by entering into the CMO partnership whether in formulations, API, we don't have that challenge.
Moderator · Conference Operator
The next question is from the line of Nimish Mehta from Research Delta Advisors.
Please go ahead.
Nimish Mehta
Just wanted one clarification on the formulations sales.
You mentioned that our sales will come back to Q4 FY'21 level which is actually much lower than what we have reported today, so Q4 FY'21 was Rs.495 crores you reported.
Dr. S. Chava
I said we will come back to Q4 FY'21 number, but that's on API, not for the formulations.
Laurus Labs Limited October 29, 2021
Nimish Mehta
Any broad guidance on the formulations sales on the same front?
Dr. S. Chava
Formulations sales, we have done much more than our Q4 FY'21 of Rs.430 crores, in Q2, we have done Rs.490 crores.
We are not comparing our formulations number with the Q4. As I mentioned the Q3, Q4 we do hope to do one in the formulations side.
Nimish Mehta
The second question is again some clarification on the raw material pricing.
You mentioned that we are not really exposed to pricing related to intermediates, but we are exposed to solvent pricing.
So, does this mean that we are kind of fully backward integrated on the intermediate manufacturing?
Dr. S. Chava
Yes, you can be clear, we don't buy any intermediates, everything is made in-house.
Moderator · Conference Operator
The next question is from the line of Harit Ahamed from Spark Capital Advisors.
Please go ahead.
Harit Ahamed
So, on Laurus Bio, we've seen a good ramp up on a quarter-on-quarter basis.
So, can you comment a bit on the margin profile of the business versus FY'21, have we seen an improvement now that the revenue run rate has picked up?
And if you could also give some sense of the revenue potential once we have all the four new reactors up and running?
Dr. S. Chava
If you look at the first half of current financial year, we have partly closed and in the second half we will do more than the first half, that is clear, and margin is good.
We can't give you specific numbers because we are not publishing margins for the division-wise, this is a very good margin business for us.
Harit Ahamed
LSPL unit-I facility which we commercialized last quarter, how has the ramp up been so far and then should we expect FDA and other regulators to audit the facility in the near term and then is the ramp up really linked to these inspections?
Dr. S. Chava
We had one virtual audit by FDA for pilot plant which was concluded two months back and they have sent a satisfactory letter because they have visited, so they don't give an EIR.
So, there are no approvals pending from the pipe and we don't have any pending inspections from FDA, last inspections we had in 2019, we don't have any pending instructions, none of our approvals are our partners approvals were held because sites were not inspected by regulators.
Harit Ahamed
So, the subsidiary, LSPL that we have, we've talked about this subsidiary getting into a stage of independent existence on its own.
So, will we be consolidating our CDMO-related manufacturing facilities under this subsidiary in the near to medium term, is that something that they're looking at?
Laurus Labs Limited October 29, 2021
Dr. S. Chava
We are not consolidating.
Whatever the new manufacturing infrastructure required for the CDMO business, we are creating a dedicated site.
CDMO already utilizes capacities which are already available with the parent, they will continue.
So, it is not easy to move manufacturing from one site to another site for these molecules.
So, existing business they will continue to use these parent capacity, the new capacities are created exclusively from the division.
I hope this answers.
Moderator · Conference Operator
The next question is from the line of Charulata Gaidhani from Dalal & Broacha.
Please go ahead.
Charulata Gaidhani
In terms of CDMO what is the contribution to revenue that you expect going forward?
Dr. S. Chava
In the past six months we have done 350 crores revenue in the CDMO business.
For FY'23, we expect it will be 15% and it is going up, so we used to have 10% till 2019, we do hope this business will contribute more from FY'24 onwards, when we commercialize the new sites, this division will start contributing more.
Charulata Gaidhani
How many customers do you have as of now?
Dr. S. Chava
We have good number of customers from virtual to small biotech to big pharma and we are adding a few new clients as well.
Charulata Gaidhani
My second question pertains to FDF.
How many launches are you planning in FY'22 and '23?
Dr. S. Chava
FY'22 we will launch only one more in US, two in Canada but FY'23 we expect to launch five in US and two in Europe.
Charulata Gaidhani
Are you witnessing any price erosion especially in the diabetes segment and cardiovascular?
Dr. S. Chava
Formulations in cardiovascular is contract manufacturing.
So, we are insulated from the pricing.
We also make API there.
So, in the diabetes for Europe also, it's mostly contract manufacturing.
So, we know at what price we produce API and we know what price we produce formulations.
So, that's where we have greatly insulated from the price drops during the launch.
Moderator · Conference Operator
Ladies and gentlemen, due to time constraint, we take one last question from the line of J Modi from Emkay Global.
Please go ahead.
Jay Modi
Sir, I had a question pertaining to debt.
So, from current level of 1,800 crores will we be looking to pay down debt or maintain at current levels?
V V Ravi Kumar
It may increase slightly more by end of this year but from next year onwards it will come down.
Jay Modi
What would be our current cost of debt?
Laurus Labs Limited October 29, 2021
V V Ravi Kumar
Around 5%.
Moderator · Conference Operator
I now hand the conference over to the management for their closing comments.
Over to you sir.
Dr. S. Chava
Thank you, everyone for your insightful questions and we wish all of you a very healthy and safe festive season and happy Diwali.
Moderator · Conference Operator
Ladies and gentlemen, on behalf of Ambit Capital that concludes this conference.
Thank you all for joining us and you may now disconnect your lines.