Laurus Labs Limited analyst Q&A

We will now begin the question -and-answer session. We'll take the first question from the line of Jeevan Patwa from Sahasrar Capital. Please go ahead.

Firstly, congratulations for market authorization for CAR -T technology. Just wanted to understand, now we have the authorization for India, what is our plan for other markets or other geography, is there any other geographies where we are conducting the clinical trials?

Currently, our associate company ImmunoACT has partnered with Mexican Minister of Health and trials will be done in Mexico and We are in the process of finalizing some licensing deal with a European company. So, next year we expect clinical trials will start in Mexico for this product, and in year 2025, clinical trials will also start in Europe . In Europe since the licensing deal is under negotiation, I can't give you more details, but there are some licensing deals being pursued by the company. Going back to your question, since the approval is obtained, we expect to launch in the next few months in India, we are gea ring up to do commercial manufacturing while getting all the necessary licenses needed for India launch.

Is there any other type of cancer that you are working on… any solid tumor cancer?

There is one Clinical candidate is in pipeline which is in preclinical , will go to Phase-II in the next six months, that is BCMA. There is another asset which is in the early stage of research for the solid tumors.

Just wanted to understand on this API and FDF side. So, we are talking about new CMO orders. Last quarter we said we have tied up with few clients. This quarter, we are saying we have CMO order, a healthy pipeline. So, can you elaborate more on this when will they are going to start… so is it going to be in the second-half and how big they are? Because our API revenue has been constant since last many quarters now despite having expanded our capacities by more than 50%. So, when can we actually see this number ramping up on the API side actually, and then on the FDF side as well? So, on this CMO order basically can you elaborate more?

The CMO order we got from our partners for integrated manufacturing of API and formulations. If you recollect, we were talking about billion tablets CMO. That will increase to 1.5, 1.6 billion. We are qualifying the packaging lines also. Earlier, we used to do bulk packaging, now we are doing the secondary packaging as well. And then your question of our 50% capacity addition, majority addition, we have done for CDMO. So, as you're aware, in CDMO business, we have to have patience because we have to deliver Phase-II, Phase-III and wait for the commercial launch. So, I can assure you your company is in a good position to offer CDMO differentiation when compared to other CDMO companies in India.

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

So just on the gross margin firstly on sequential basis, when the synth esis business has in fact there has been slight decline and formulation s business has also been quite stable. So , if you could just explain the reason for better gross margin this quarter compared to previous quarter?

The better gr oss margin in this quarter is primarily because of improvements we have done earlier were commercialized and also, we are operating our ARV facilities at full scale , that is also helping us to leverage.

Considering the FY24 sales outlook and presumably significant chunk of the business coming from CMO, CDMO side, as you have indicated in just the earlier commentary that the ARV-led API and formula tions could be stable, so does it mean that there should be a significant improvement further in the gross margin in the coming quarters?

The gross margin improvement, if you look at our second quarter FY23 was at 55% where our revenue was primarily driven by large CDMO orders. Yes, if the CDMO revenues pick up, the margins will slightly improve better.

Means we can go back to 55%?

I'm not commenting, but with the revenue growth primarily driven by CDMO business, the chances of increasing beyond the 52% what we have reported will certainly go up.

The next question is from the line of Bharat from Quest Value Capitals. Please go ahead.

Recently, Andhra Pradesh Chief Minister has said groundbreaking for unit-7 in Vizag. May I know what is this unit-7?

New groundbreaking ceremony was done last week is primarily to add more capacity for CDMO. We are making that common infrastructure for new CDMO sites.

There are two sites. We are creating common infrastructure and building one block in each of those to get the necessary regulatory approval so that that site also can be audited by big pharma and we can able to service from that site as well.

May I know what is the CAPEX for FY25?

We will give you more details in the next quarter conference call about the new CAPEX in those new sites.

If you see in the presentation you said like this year would be a year of consolidation and the two quarters back you said that a year of consolidation means you don't expect any degrowth. May I know what do you mean now with this a year o f consolidation , do you expect any degrowth now?

When we are saying this year will be a year of consolidation, that means we are adding a lot of capacity. If you look at in the last three years, we have added 3 million liters capacity and 5 billion tablets capacity. So, all those will be utilized in the next financial year onwards. There, a lot of leverage will come. Currently, negative leverage is happening. We have capacities , we have people and we are only doing trial quantities. So, we are spending more than what we are earning from those sites. So , once we do commercial manufacturing from those sites, you will see very healthy EBITDA margins and then return ratios.

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

In API segment actually, we have seen a decent rebound and it is largely led by oncology. So , can you please call out what has driven this rebound and is it a broad -based or any product - specific contribution, any milestone income in oncology, etc., that would be helpful?

Thanks, Vivek. The growth in oncology business is also a pleasant surprise for us as well. Maybe the regulatory setbacks for some of the companies is helping us to gain market share, and as I mentioned, we have the largest capacity in oncology , so we're able to capture that opportunity. And if you look at our oncology API sale in H1, we have done Rs.171 crores and we have very, very good order book for H2. So, looks like we'll do very well in our oncology segment.

So, do you expect the current run rate can sustain in the coming quarters or in the next year as well?

We certainly believe so because we have order books well beyond Q4 this year.

One question on F DF. How much of the business coming from US now, if you can help us understand?

Just last question on synthesis business, right. So next few projects that we have in the segments are largely in the animal health region or agchem, right. So, can you also talk a bit on human health project, that's a bigger market, so is there any progress out there, has the company received any mid or large-scale project of late

In the synthesis, there are several projects in the clinical phase right now. We believe we are well positioned for several reasons. The one reason is we have capacity and our regulatory track record is very good and we have scale and we have technical capabilities. See, nowadays we have capabilities from biocatalysis to continuous flow chemistry to very large-scale hydrogenation, very low temperature reactions, very high temperature reactions. We are capable of delivering wide variety of chemistries , that is also well appreciated by our partners. So , we believe we are well positioned to get that opportunity.

The next question is from the line of Madhav from Fidelity. Please go ahead.

I just wanted to understand on the approval for the CAR-T therapy which we have received for India. How big is the addressable market, like do we know how many patients there are in India which can be addressed by this drug? And I was just reading some article online. They said that treatment cost is about 30 lakhs per patient per year. Is that like broadly a right number that we should understand?

We cannot give you the exact cost to the patient. We can only give you what is the product cost we are going to supply to the hospitals. It is between 30 to 40 lakhs. So, we don't have any control or estimation on how much it will cost to the patient. Our associate companies plan to sell between 30 to 40 lakhs per treatment.

What's the patient population in India, do we have any broad estimation for that?

I don't have the right number with us, but currently, ImmunoACT geared up to deliver about 500 treatments per year from the current facility and also creating facility which will be ready by March 2025 where we can deliver additional 2,500 treatments per year.

Then just on the CDMO business, I think you have mentioned we have 62 active projects in the pipeline. Could you please help us understand like how many of these are Phase-II, Phase-III and commercialized molecules, if you could share some split it will be very helpful.

As I mentioned in our presentation, we have about 10 commercial products, four APIs and other advanced intermediates and we have an additional 60 projects in various clinical stages.

We have built capacity for commercial products already. The addi tional capacity, for example, in animal health, we just started commercial validation from this month. Our crop science facility is still under construction . While other human health projects where we are creating capacity , we are doing either Phase-II or Phase-III quantities. So, once we do those, we have to wait for certain time until we get the commercial orders. So, what we are envisaging , what we're also telling all our stakeholders , the company is well positioned because of the Greenfield infrastructure, our quality and our chemistry capabilities, the company is well positioned to take those opportunities.

The next question is from the line of Krish Mehta from Enam Holdings. Please go ahead.

My first question is if you could provide the split between your ARV and non-ARV revenue for this quarter on a consolidated basis?

ARV is 49%.

Could you provide the split between your ARV FDF and non-ARV FDF for this quarter?

We have done about Rs.110 crores of non-ARV formulations. If you look at our split there, it is slightly moving towards non -ARV products, that's what we are mentioning. The growth in formulations also in the future quarters will only come from non-ARV.

The next question is from the line of Ranvir Singh from Nuvama. Please go ahead.

My question is related to ImmunoACT. When we are expecting it to roll out in India?

We expect the rollout will happen in the next two months.

Do we have a plan to increase your stake there from 34%?

It's too early to say anything because they have enough capital to deploy and if they get approval and that will also give some additional cash flow for them, we don't expect.

In last quarter, we indicated that EBITDA margin may come back to around 25%-plus kind of a number going forward. Because in first half that doesn't that seems a distant rol l. So, any comment over here?

Based on the current trend of growth in all segments, we expect the margins will be better when compared to the first half and we are very optimistic about second half of this financial year.

So overall for a full year, the margin can we expect in the range of 20% at least?

Third on bio side, have you added any more products other than Trypsin in this division?

In bio, the majority revenue is driven by our CDMO partners. So , our revenue coming from Trypsin and animal origin free ingredients is also growing, but major growth is coming from our CDMO offerings there.

So, on a full year basis, what kind of potential we can see from this division?

The H1 bio is Rs.89 crores and the second half will also will be very similar to that, ye s. We expect some more decrease in Q 3 because of we are shutting down some of the facility for debottlenecking and where Q4 will rebound . So, that that division is doing very good as you have seen from our previous quarters. That is the reason we increase our stake in th e company. We have lot of confidence on that business segment.

The next question is from the line of Sajal Kapoor, an individual investor. Please go ahead.

My first question is, there is a quote from Henry Ford and I quote him, he said , “The only real mistake is the one from which we learn nothing. ” Do you believe D r. Satya that failures can sometimes lead to new opportunities or landing strips and provided the lessons are learned and internalized, and if yes, what examples from your own experience over the past year or so might you be able to share?

We have several examples. Our conviction put us into a very leadership position . For some products where we failed to validate , some products we failed to get the right costing, but we continue to invest on those products and we enjoyed the success, there are several examples for that. We cannot fail every time. So , we fail once, twice, but we eliminate the opportunities for failure significantly at every failure.

My second question, D r. Satya is, at a recent innovation conference in Cambridge , I heard a quote from a member of pharmaceutical life sciences company that kind of keeps coming back to me. The person asserted that possibility always produces uncertainty and fear of uncertainty is a competitive advantage or mode that keeps their business safe from rivals or competition. And they claim that if something is too simple to discover or develop, then anybody and everybody will eventually get involved in the field of del ivering or developing new drugs. So , the uncertainty is kind of a mode that protects their business , that was their hypothesis. I mean, what's your sense on this, if you can please?

We can give you on our recent success . Our investment in cell therapy is a lot of uncertainties around that discovery and development. So many people don't go into that. That's one way we had enjoyed success. The second is not many people are investing in gene therapy because of lack of talent, lack of u nderstanding of that segment , we invested there . But it will take some time for us to enjoy success in gene therapy . When it comes to the CDMO, what you said is absolutely right. How many companies in India have created three million liters of new capacity in the last three years? Not many. How many companies have scale at which we are operating? How many companies are having fully integrated development, that means from enzyme design, enzyme manufacturing to biocatalysis to large scale hydrogenations, flow chemistry and all. So, we are creating competitive advantage by investing ahead of the time, that is our success mantra, that's we are saying many a time and you pointed out very well. So , the fear of failure will prevent many people to invest, yes.

Dr. Satya, one question on regulatory uncertainty . What else could potentially harm or disappoint shareholders in the medium term, let's say next two to three years when it comes to the uncertainty that we have on the regulatory front, it could be USFDA audit, it could be some unexpected development, anything on your horizon that we have to be guarded against?

We have derisked significantly, but we can't say 100%. We have multiple facilities now. We are operating in multiple regions. So, we have our bio division in Bangalore, Tumkur and Mysore. We have our R&D in Hyderabad, Telangana. We have API facilities in Vizag, Andhra Pradesh. We have our associate company in Mumbai . And we have our cell and gene therapy facility being created at Kanpur. So , we have diversified significantly regional wise also . And second when it comes to regulatory inspections , you have seen our impeccable track record there and we expect to maintain that.

We will take the next question from the line of Saurabh Kapadia from Sundaram Mutual Fund. Please go ahead.

The outlook for second-half and '25 looks positive. So, will it be driven by more of the animal health project or the current commercialized molecule has the scope to drive it further, is there any large molecule or the molecule where there's a large opportunity in the current commercialized molecule as well?

Our optimism in second-half is primarily driven by increased sales in API, ARV, increased sales in oncology, increased sales in formulations, and also increased sales in CDMO, it is driven by all segments.

On synthesis side, will it be the animal health project only or the current commercial molecules also should the ARV growth as well?

We are not expecting any new commercial sales during the second-half. We're only anticipating a supply of Phase-II, Phase-III quantities in the second-half.

The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.

That will be in the second-half of FY25.

Sir, beyond these two contracts, are there any major milestones for the segment that we can we can sort of look forward to?

We are working on som e R&D projects with partner, but we don't expect commercial sales in the next 12 to 18 months, yes. As you are aware, we are working with one of the top leading crop science companies. So , we have lot of potential to grow , but we are also cautious not to overcommit and underdeliver. We are taking projects what we can deliver. So , our current challenge is also lot of CAPEX projects going on. So, we are also cautious on where to invest, how much to invest.

So, sir, is the understanding right that animal health will contribute this second-half of this year, agrochemicals product will contribute in second-half of next year, and I guess there is not much of incremental large contract is likely to contribute in the human health over the next at least 18 months?

I said next six months.

So, do you expect some commercialization of human health business also in FY25?

I can't give more specific, but there are products w hich will go from Phase-II to Phase-III next year.

Sir, this $100 million ongoing CAPEX in synthesis, by when do you see it is reasonably utilized?

Mid of next financial year onwards.

Sir, lastly on th e FDF business this quarter, what was the component of non -ARV business in that?

Rs.105 crores are non-ARV business from formulations.

And sir, lastly, on the other APIs, how should we think about this business growth from a 12 to 18 months perspective?

Non-ARV formulations potential is very high . In ARV, API as well as formulations, we will have a threshold, we will not go beyond that because the number of patients is also plateauing in the African region. We anticipate both ARVs APIs and formulations will also attain its peak revenues soon maybe. So, the growth in both APIs growth, in formulations will come from non- API, non-ARV formulations.

What will be the drivers for this growth, any specific molecules or therapies or it could be broad- based growth over here?

Our new approvals in US, our new contract manufacturing deals in APIs and formulations, our onco sales are growing, our non-ARV, non-onco API sales are growing. So, there are a lot of avenues for us to grow there.

On this ImmunoACT business, apart from the financial sta ke that we have, what other role do we have in this partnership?

We have two board membership there and we help them in thinking at about scale, some strategic inputs. Beyond that we are not involved in the. day-to-day operations there.

Any role in the manufacturing?

No. But in IIT, Kanpur we are operating our own facilit y there. So , just on the contrary to ImmunoACT, In gene therapy, we are going to operate our own facilities.

The next question is from the line of Rohit Jain from Tara Capital Partners. Please go ahead.

So, on the last call, you said that you expect improvement in the synthesis business from the next quarter onwards and this quarter that we have seen that that particular division has degrown by 10% sequentially. So, can you help us understand what changed within three months and what is the outlook for this particular division going forward?

See, CDMO, supplies, timelines all depends on what our partner is requesting. Sometimes if the partner asks deliveries in the next quarter, we have to deliver when he needs. So those kinds of uncertainties will be at CDMO. But, our customer list is increasing, our project list is increasing. That is the reason we are also very confident on this segment.

No, I understand. The reason I ask that is on the last call you said that there was some deferment and that's why the first quarter number was lower and you expect improvement sequentially. So, should we understand that there was some further deferral?

Yes, that's the reason we didn't have any sequential growth.

This was asked earlier on the call. Just wanted to confirm that. So, you said that this is the year of consolidation which earlier sort of indicated that you expected flat EPS YoY given the performance in 1H that seems like a difficult task. So , how should we think of that qualitative guidance of this year of consolidation in terms of financial?

We're not giving guidance, but as we mentioned, this is exciting times for us in the company , that means we have many prospects, many exciting projects and things are in a good shape. So, that is the reason we are investing into the future. That's my answer for this, yes. We can't give you guidance right now.

For the CDMO CAPEX and for the size that you're preparing, what sort of asset turns should we think of, the broad range like the high and the low?

I will give you a very broad number. It varies between one and two asset turn, all depends on the project, yes.

The next question is from the line of Abhijeet K from PCL. Please go ahead.

First, I'd like to ask a question with regards to the revenue base. I'm looking at the presentation, I see that there is a sequential increase in the revenue removing the r CDMO base of the previous contract which is Paxlovid . How do you see the revenues growing over the next two quarters and also in the next one year?

In the synthesis , i f you look at the overall year , l ast year was lot of commercial supplies happened. This year , we don't have any commercial supplies, but we hope next year will be again a good year for a CDMO, some of the projects are moving into the late clinical phase or commercial. So, things will be in a good shape next year.

Next part is with regards to the CDMO . You've mentioned that one is going to be the animal API business that is going to come into place and the other is the agrochemical. Do you see that this is going to be a structural change in the company where you're going to be diversifying not only from a pharma -based thing and diversify into other revenue streams like agri and also alternative sectors?

The animal health is a contract signed with one customer for good chunk of products. And in crop sciences, we have signed one development agreement and we'll also sign a second commercial agreement soon. So , our CDMO comprises of human health, animal health, some cosmetic ingredients we are doing. So that way, our CDMO division is well diversifie d when compared to many other CDMOs, yes.

We'll take the next question from the line of Aditya Sen from RoboCapital. Please go ahead.

Once we start utilizing our new facilities, let's say by late F Y25 or even FY26, then will we be able to get back to the previous high range that is plus 25% range of EBITDA?

Ladies and gentlemen, we'll take that as the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you.

Thank you, Monish for organizing this call and thank you our stakeholders who have a lot of confidence on us and I'm sure we will meet your expectations as we continue to commit ourselves to bring cutting edge technologies and servicing customers with our wide range of chemistry offerings.

Thank you, m embers of the management . Ladies and gentlemen, on behalf of Antique Stock Broking, that concludes th is conference. We thank you for joining us and you may now disconnect your lines.