Concord Biotech Limited analyst Q&A

The first question is from the line of Alankar Garude from Kotak Institutional Equities.

So, no specific lumpiness. I think usually, formulation business is driven by most of our products are mostly in tenders and supplies to government institutions. As I've mentioned, sales whether it is in API and formulations is usually lumpy in nature. So - there were certain products that we supplied in this specific quarter. But going forward also, we have a very strong quarter for formulation as well. So, as I say, there is bound to be lumpiness in both API and formulation , which is something that we did see in this quarter for formulations as well.

And when you say, Ankur, domestic emerging markets as well as regulated markets are driving the performance in formulations, qualitatively, would it be possible to break the strong growth between these 3? So, I mean, is domestic growing at a faster pace compared to the export markets? Or any colour on this front would be helpful.

So, we are seeing the export market growing faster than the domestic market, while the domestic market itself is growing, but the rate of growth in exports is relatively more than that of the domestic.

Understood. The second one is, what was the capacity utilization as of the second quarter across all the 3 sites?

Across all the 3 sites, the capacity utilization is 79% as far as the Unit 1 is concerned and 50% as far as Unit 2 is concerned and 38% in Unit 3.

So then, sir, I mean, the question is when you talk about higher captive consumption in this quarter, now given that our capacity utilization at Limbasi was only 38%, capacity was clearly not a constraint for us. So, I appreciate the point on a high base this time around in the second quarter. But if you look at the overall growth, not just in the second quarter, but even in the first half, as far as API segment is concerned, it's still quite low. I mean, first half, API growth is only 3%. So, can you please help explain the reasons behind lower external API sales growth in the first half?

See, maybe talking first about the interunit sales. So, as I mentioned, that the intercompany sales from API to formulations at the end gets recorded in formulations only. And hence, API had shown that muted growth. And whereas formulation showed the accelerated growth. So if we consider if we include this API sales made to formulation and our API, the API growth would be around 9% to 10%. Going forward, in spite of the interunit sales to the formulation, we see that the API is growing by mid- to high teens. And with this, we do not see any significant change even to our ratio of API to formulation. So as I had mentioned earlier also in Q1. Q1 typically is on the lower side because we had a heavy quarter 4. But as things are progressing, we are seeing that increase. But in certain markets, rather than catering through the API, we are catering now through the finished formulation. But still, in spite of this, we see double-digit growth in our API also going forward.

Sir, I think the question there was if you look at external API sales, our understanding was, given that Limbasi was cleared by the regulators sometime back, more than 2 years now. There would be a faster pickup in external API sales as well from Limbasi. I understand the point on maybe a higher preference on formulations via captive consumption in this quarter or maybe the first half. But directionally speaking, can you comment on the traction we are getting from our external API clients from Limbasi?

Yes. So, most of the anti-infectives and antifungal products are going to be launched from Unit 3 only , which is the Limbasi facility. And there, as I mentioned , that we are seeing a lot of traction from our customers in terms of qualifying us for those products, to certain customers, we have also given qualification samples and for some customers, we are close to providing them validation quantities as well. So, expect those commercializations to happen soon. Also, for our other products such as in the immunosuppressants, we are also seeing positive feedback from certain customers in LATAM. And those opportunities also, we see materializing in the next couple of months' time as well. So, there is growth both in the immunosuppressants and more particularly in the anti-infectives, antifungal segment. With that, as I've mentioned that in spite of the interunit sales, the growth in the API, we expect it to be in the double-digit growth in spite of the sales happening interunit sales happening. So, there are orders that we have from customers, which would be executed in the subsequent quarters. So, I do not see any reasons or any concerns about our API business per se.

Fair enough, Ankur, just one clarification. When you talk about low double-digit growth, this is for the fiscal year or for the second half?

This would be for the fiscal.

For the fiscal FY '25.

Only for the API business. But for the overall business, as I had mentioned , we remain in line with our long -term CAGR guidance of the 25% CAGR growth and grow higher than the historical growth that we have done.

Understood. And one final one, generally, before FY '24, at least, we had a heavy skew towards the second half in terms of our sales as well as EBITDA. Broadly, it used to be 40-60, 40% being the first half, 60% the second half. Should we expect something similar this time around as well? Or do you expect the mix to be slightly different?

See, if you see that on our second quarter since last year, it has been relatively on the higher side compared to the historical way that we have grown in quarter 2. But that being said, the second half, as I said, is always going to be heavier than the first half. To what extent, I won't be able to comment now. But definitely, it is higher and it would make us in line with our guidance that we have even for this year.

The next question is from the line of Vivek Agrawal from Citigroup.

Ankur, is it possible for you to give some color on how you grow how the API segment has grown when it comes of volumes, right, and how the prices are faring in this quarter? Because what you are hearing from across the board, the API segment has seen a significant correction in terms of prices. So how are you seeing the pricing and all these things?

So, for our business, as I had mentioned that most of the competition that we have on our commercial products is mainly from Europe and Southeast Asia. We do not see significant competition from China. And as there are very few most of the products that we do, t here are there is very limited competition. So given that, we have not seen any significant impact on the API prices. But when we talk about how our API segment has grown, much of the growth has come from the formulations business, whic h is primarily targeting the emerging markets. And if I have to be more specific, it would be Southeast Asia, LATAM and the US market. So much of the growth in the formulation has been through these markets. And since we are fully integrated, that impact we are also seeing in the API through our interunit sales. But coming to the other segments, as I've mentioned earlier, we are seeing good traction in the anti-infectives and antifungal, oncology segments, where for many of those, we are trying to qualify ourselves as a secondary supplier because these are already generic products. But given our competitiveness and our global approvals, w e are seeing good traction on these molecules. So we expect commercialization on these molecules in the coming quarters.

Just a related question in the anti-infectives and oncology. So, is it possible for you to highlight which are the products or molecules that you expect to see some significant traction, let's say, over the next 1 to 2 years?

So, if you see our portfolio, most of the products that you have most of the products that we are manufacturing there is very, very limited competition. So, you may see maybe 1 or 2 players on those products. So given that the opportunity is very large on these molecules, maybe the market size may vary between one molecule and the other. But if I have to name a few products, products like Teicoplanin, Nystatin, these are certain anti -infectives products where we are seeing very good traction.

The next question is from the line of Sumit Gupta from Centrum.

So just one clarification: the double-digit growth in API for FY '25 you said is on a normalized basis with the formulations not in this thing, right?

Sorry, could you repeat that again?

Just wanted to understand on the double-digit growth in API for this quarter that you highlighted. What was the major reason for that?

No. So, the double-digit growth in the API is to third party sales and does not include interunit sales.

Understood. So, in that case, what is the growth for the formulation segment?

So, the formulation segment continues to do well. And going forward for the full year, it should be relatively in line with the 80-20 split that we have, give or take, 2%, 3% here or there.

See, margin profiling between the 2 is relatively is quite varied because, as you would see in the API, there are very limited players and hence the competition is very low, and we are competing with players only based out of Europe and Southeast whereas in formulation, since we're supplying to global markets, there are a number of players who we would be competing with , given that the profitability is very different between the 2 segments.

Okay. And sir, lastly, on the status of the unit. So, I just want to understand on so is there any inspection left on like Unit 1?

Sorry, special…?

US FDA inspection on for Unit 1 or the Dholka plant.

No. So currently, there is no inspection right now scheduled for Unit 1. However, as I've mentioned earlier, we’ve had a very good track record with the US FDA and also in the last few quarters, we have been inspected by other global regulatory agencies like Brazil, Europe and Japan. So given that we are still awaiting any news from the FDA for the Unit 1 inspection.

The next question is from the line of Chintan Sheth from Girik Capital.

On the API front, when you mentioned at gross level, 9% to 10% Y-o-Y growth. This is this for the quarter or for the first half?

So, the 9% to 10% growth is for the first half , considering the sales to interunit because , as I mentioned that in certain markets, we instead of going through the API, we have gone through the formulation route. And if we would have considered the API sales to interunit this would have the API growth would come to around 9% to 10%. However, a s I said, for the full year base, we expect to grow in double digits without considering the interunit sales.

Got it. And if the gross margin compression, as you are mentioning, the formulation is a high competitive, relatively high competition versus API, the mix between the current quarter where the formulation got to 26% share has the bearing on the gross margi n, that understanding looks correct, right?

Yes. So, on account of the formulations, yes, that understanding is correct. In fact, in this half year, the percentage of API versus formulation has been 26% and 74% against 15% and 85%, respectively, in the same period last year. So, since there is a significant shift in the significant shift in the split of these 2 segments. So that's why it's been reflected over there in the gross margin.

Correct. So, nothing sort of any pricing, as you mentioned, no pricing pressure either in the API or the raw material side...?

Right. Got it. And if you can speak about the new pipeline, we were planning to launch working 8 to 10 products and planning to launch at least 1 or 2 products every year on the API side. If you can talk about where are we in terms of new launches as well as what kind of market will open up in terms of the global market will open up the opportunity for us? That will be last, and I will join back in queue.

See, if one would have to look at the market size for these 8 to 10 products, I would say it would be close to around $1 billion at the API level. And in addition to these 8 -10 molecules, we also have other API products that we are working on. So, it is not just limited to these 8-10 molecules. So, the market potential is quite huge for these newer products that we tend to commercialize in the next 3 to 5 years. And all these molecules are again where we see limited competition and these are complex product s. So ample growth opportunities on these products. But every year, we expect maybe around 2 to 3 products to launch every year.

Right. Okay. And any product you want to call out that can be differentiated in high -value products among the...?

So, I won't specify any particular product. But as I mentioned earlier, all these products, maybe the market size may vary, but if there is limited competition, I think it gives us ample opportunity to gain a significant market share over the next 3 to 5 years once we commercialize those products.

The next question is from the line of Rushabh Shah from Buglerock PMS.

Yes, I just wanted to ask what is the USP of the Concord Biotech for immunosuppressants APIs, and we are one of the few Indian manufacturers. So, what is different we are doing that other players are not able to do?

So, I think what differentiates us is our expertise and our focus on growing on our strength, which is fermentation. And based on our expertise, we have set up the infrastructure accordingly. So, we have the economies of scale. Concord has a 1,250-meter cube of fermentation capacity spread across 2 unit , which I would say is one of the largest globally. So, with our expertise, with economies of scale, with global regulatory approvals, as our sites are inspected by the U.S., Europe, Japan, Korea, Brazil, and many other authorities. So, we become a one -stop shop for people who are looking customers who are looking to source these fermentation API products. And based on our expertise, over the years, we've been able to capture a significant market share globally from some of our competitors who are based out of Europe and other parts of the world. So given that the way that we have grown in the immunosuppressants and also in other segments, like in anti -infectives and oncology, there are certain products where we currently hold more than 20% of the market share like we have in the immunosuppressants. So, it is not only about immunosuppressants, but it is also about other products where we have significantly grown our market share over the years for these products. So, it is mostly about our focus on what we do best and then keep working on building that portfolio.

Okay. So, sir, as you said , we don't see many companies having that kind of fully integrated approach in some of the niche anti -infectives also so which are for the fermentation so what would be the reason why other companies are not able to do it? Is it because you are in this business for 2 decades? Or what is it, sir?

So, as I said, that it is all about the expertise. I think companies in India have not focused on the fermentation while other segments, whether it is synthesis -based or formulations have grown. But fermentation is a very challenging process and it requires expertise to kind of run that. And in addition to that, you need the economies of scale also because you typically need very large fermenters to kind of run that process. So, to set up that infrastructure also has high entry barriers, which kind of limits newer players to enter into segments such as this.

Sorry sir, I might be repeating, but you said there are not many players in the industry who have done the fermentation process, correct?

That's correct.

In any of the areas. So, sir, why is it that no one has done it? Like I wanted to understand the basic crux of it. Why hasn't anyone been able to crack this fermentation process in any of the areas from...?

So, I think there are higher entry barriers, as I mentioned. So, when I talk about because in fermentation, what happens is that if you do not have a control on the process, an A+B can give you C, C1, C2, C3, you can get very different compounds if you do not control the process. Whereas in chemistry, if you see, you will always get the same product every time you do because it is a chemical reaction. So, to have that control requires that expertise. And that, as I mentioned, that's not there are not many companies who have that kind of expertise in the area of fermentation. And hence, that limits players. And in addition to that, there are a lot of entry barriers, which I spoke about, whether it is the infrastructure cost as well, which also plays a role in limiting competition in this segment.

Any more entry barriers would you like to suggest other than the cost of the infrastructure?

So, expertise, I think having that expertise itself is one of the biggest barriers if you think about in the area of fermentation.

Got it. Okay. Sir, then my last question is, so what is the reason for the increase in the demand for immunosuppressants APIs and why will it keep on increasing further?

Sorry, your voice is not clear.

Sir, what is the reason for increasing demand for immunosuppressants APIs? And why will it keep on increasing further?

In fact, immunosuppressants, we have been there in immunosuppressants since the beginning from 2000. And now we have the full basket of products in the immunosuppressants category. So, if you look at the market of even use of immunosuppressants, it is growing at a CAGR of around 10% annually. And in addition, there is a possibility of getting a market share from the existing customers as well. So that's why we expect that the market for immunosuppressants, going forward, may also be lucrative for us.

The next question is from the line of Harshal Patil from Mirae Asset Capital Markets.

Sir, I just need 2 clarifications ; I've missed it in your comments earlier. One was for gross margins compression. So, sir, here, we are saying that almost 450 bps of Y -o-Y gross margin compression has come on the back of a change in mix, wherein we've got a higher share of formulations. So, sir, are we trying to say here that the formulations would have lower margins? Or if you could just help me understand that.

That is correct, yes. The margin in formulation is lower than that of the API.

Okay. And probably the trend would continue going ahead as well, right?

So, as I mentioned that for us to have a double -digit growth in API, the second half should be more heavy on the API given that we would see a similar ratio of 80 -20 between formulations and API. So, give or take, we expect to maintain that ratio of 80 -20 at the end of the year. And with that, most of the ratios then should fall in line with that.

Got that, sir, got that. Sir, so just a follow -up to this point would be like as we're expecting the overall mix to be around 80-20 for full year FY '25 and going on ahead also. So, are we therefore saying that in the second half, the formulations would slow down? And if that's the case, then what exactly which exactly where the products which drove the performance for Q2?

See, as I mentioned that 80-20 is our long-term guidance given the capacities, the portfolio and R&D products that we have. So, this is our long-term guidance of 80-20. However, you may see some variability on that on a year-on-year basis. But for this year, we do not see any significant variability on the 80 -20 split. But the 80 -20 is more of our long -term guidance given the capacities and the portfolio that we have, which are commercial or under development.

Okay. And sir, so just one last question, if I can squeeze in. So, the traction into the formulation segment, which is there in Q2 to a certain extent, would be maintained around in the second half as well? I mean I wouldn't say that so much of a big growth, but maybe in absolute numbers, the traction should be maintained?

So, if I understand, we do see growth in the formulation segment in the second half of the year as well.

The next question is from the line of Husain Bharuchwala from Carnelian Capital.

Sir, just wondering, this will be 2 things. Like one is on the basically on the injectables, we have been delaying the launch of the injectable facility for some time now. So, what is the primary reason that we have been delaying the launch of the injectable facility, if you can explain?

So initially, the injectable facility was expected to be commercial by September or October. However, we have now taken it to February. So, the facility is as I say, is ready. We are just undertaking the media fill studies and there was some delay in getting the approval from the Indian regulatory authority for the site. So given that we are going with our media fill studies, we expect that we would initiate the commercialization of products by February. So these 3 to 4 months of delay have been primarily due to the team is taking a little bit more caution in terms of doing these studies and qualifying the water systems and other equipments.

Got it. And second thing, sir, just wanted to understand in the formulation, what is the percentage of the hospital business? Because what we understand is in the hospital business, probably the working capitals is a little elongated so and there are very less margins in the hospital business. So how much percentage of our overall formulation business is towards the hospitals?

So, we supply our formulations to in the Indian market to the large corporate hospitals, mid - corporate hospitals, nursing homes. So, we do not see any challenge in pricing from these hospitals. But yes, when you talk about the institutional sales, which is to government institutions, there the margin profiling is slightly different from that you would see in the corporate hospitals. Bu t in that case, you do not have the spend on the marketing team. So, it kind of then offsets the cost and the margins.

Got it. And anything on the working capital that is higher than you do in terms of the government orders or on the hospital side, if you can highlight?

Working capital with respect to the government orders, yes, that's definitely slightly different because the receivables time is slightly more as compared to the corporate hospitals and the trade business.

The next question is from the line of Sumit Gupta from Centrum.

Sir, just want to understand pre-empting the global scenario on the fermentation -based API market. So how like overall, how big is the market and how many players do you directly compete with?

So, the overall fermentation market would be close to around $11 billion to $12 billion, but the kind of products that we are currently having, I would say that our target markets, our TAM would be around $7 billion to $8 billion. And this includes the pipeline products as well. Talking about the competition, I would say that there is no company globally with whom we compete on the entire basket of products. There are competitors globally where we compete with them on maybe 1 to 2 or maximum 3 t o 4 products. But we have a basket of almost 30 -plus products. And most of this competition comes from Europe and Southeast Asia. So, when we talk about Europe, you have players like Teva or like AMRI with whom we are competing and in Southeast Asia, names like CCSB would be the one with whom we are competing. But globally, I would say a handful of companies with whom we are competing. And some of these new products where we are working names like Exilia are there, which is again based out of Denmark. So, with whom we they have maybe 1 or 2 products with whom on which we compete with them. So limited competition and limited players who are in this space of fermentation. But no company has a basket with whom we compete in entirety.

Understood. So, sir, a follow-up on this was so basically the let's say, 2 or 3 large products of you which are the major products for you. So, in that case, what market share would you be having and the other player the second player would be having? Sir, what is the differential market share between the 2?

So, it varies from product to product, but our market share goes from anywhere between 20% of the world market share in terms of API volumes to anywhere around 40% to 45%. And still, as I say, that even on 45%, there is ample opportunity, and we are already t argeting customers to kind of capture the balance market share, given our strength in the pricing as well as on the regulatory approvals and the economies of scale that we bring in.

Okay. Okay. Sir, second is on the like just want to ask on the growth aspect. So, it is majorly volume-led, right? You have not taken price hike over the last 3 to 4 years and you expect the trend to follow over the next 4 to 5 years?

That's correct.

Okay. Okay. And regarding the capex, is it maintenance only or you plan to add more?

So, it is going to be maintenance capex. However, as we have significant cash reserves, if we see that there are fewer opportunities on the inorganic growth, then we may explore organic growth strategies as well.

Okay. And what will be the criteria to do inorganic?

Again, adjacencies to fermentation.

The next question is from the line of Chintan Sheth from Girik Capital.

On the utilization part, you mentioned the Unit 2 at 50% and Unit 3 at 38%, right?

Yes.

This is for first half.

Yes.

Okay. And the injectables if you can speak a bit more given the time line being taken up. Is it fair to assume that the ramp -up in the injectables will be a little faster given the approvals and everything you are kind of pre-empting before the commercial launch?

Yes, it should be faster because much of the development work has already been done on the first phase of molecules. So, our timelines to filing would be faster, but the timeine that the regulators take to approve, I do not see any change there. So but yes, time lines to file would be relatively faster. And as I say that in February or so, we would be initiating the validation batches for some of our products, which are already being concluded by our R&D development team.

Right. And any initial orders, or some confirmation from our clients visiting that site or it will happen after the commercialization happens?

Yes. So, after the commercialization, this is primarily going to be , first, for the India n market while we'll submit our dosages in the emerging markets. And once we get the approvals in the emerging markets as well, the supply would start there. But till then, it will be primarily catering to the domestic market, where we already have a significant sales force to cater to that market.

Correct. And when the injectables come through, do you see the mix between API and formulation to change materially from 80-20 over the next 3 to 4 years because it will take some time to reach optimum level revenue?

So, I think, as I said, that our long-term guidance still stands at 80-20, given the capacities and the asset turnover that we expect from all the 3 sites or all the 4 sites once they are optimally getting utilized. But intermittently, you would see certain years where that mix could change, but not that significantly.

That was the last question. I would now like to hand the conference over to the management for the closing remarks. Thank you, and over to you.

So, thank you, everyone, for joining our Q2FY25 earnings call. We hope we have been able to address all your queries. For any further information, please get in touch with us or SGA, our Investor Relations advisor. Thank you once again and have a good evening. Thank you.

On behalf of Ambit Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.