Onesource Specialty Pharma Limited analyst Q&A

Thank you very much. The first question is from the line of Abdulkader Puranwala from ICICI Securities. Please go ahead.

Yes. Hi, good morning team and thanks for the detailed explanation and offer for the business. My first question is with regards to this plant shutdown. First, was there any impact on this quarter as well? Is it the same DDC plant where you're planning to expand your capacities for injectables?

Abdul, hi. This is Neeraj here. This is not the flagship DDC site. The expansion plan there goes absolutely on track. The plant Arun was referring to was the general injectable site, which is in Bangalore. And that's a site which is one of the oldest sites in the group where we supply general injectables. And that's the site where we are adding capacities in lyophilization. We are adding some new capabilities. And that's the site where we would need to take a shutdown. Our flagship site, obviously, there is absolutely no shutdown there in the flagship DDC site. The expansion which I mentioned, we continue to -- in fact, we already committed almost $75 million in that expansion.

Got it, sir. And second is on the quarterly numbers. Just trying to understand the quarter performance, so the INR290 crores of revenue posted in Q3. Is it a fair reflection of your soft gel and injectable business?

Yes. The gap, as we said, the decline or the shortfall, let’s say, for -- in the revenue is primarily from the DDC business. And that’s what -- because as we know that, the DDC business has a very, very significant margin -- EBITDA margin. The delta there flows down to the bottom line. That's what is coming to the bottom line. To answer your question, yes, it is a fair reflection.

Okay. And last one on my end. So, I mean, when we talk about the working capital being higher because of the inventory pileup of semaglutide, what is the color we have from our customers? Because we are sitting on some advances as well as on the inventory. So, you know, if you could highlight what happens if the launch gets delayed beyond whatever timeline we are currently thinking about?

Abdul, as we are a CDMO, as you imagine, whatever inventory comes to us from our customers, it belongs to the customers. Obviously, we have all the procurement has been done in conjunction, in agreement with the customers, and the delays are actually on their side. As a CDMO, all inventory risk, if that's your question, actually belongs to the customers.

Understood, sir. I have more questions, but I will get back in the queue. Thank you.

Thank you, Abdul.

Thank you. We have the next question from the line of Rupesh Tatiya from Long Equity Partners. Please go ahead.

Yes. Hello, sir. Thank you. Thank you for the opportunity. My first question, sir, is to understand the peak capacity utilization. So, I think in the last call, you said that, let's say, on the 40 million base DDC capacity, peak production can only be 20 million to 25 million devices. So that seems a little low to me. So any technical explanation you can give for this? And then maybe you can also tie this with the batch size increases that we are looking at. I mean, batch sizes, I always thought was an API. It was used in API parlance, but pardon my ignorance. So how -- what are we trying to do there also with this increase in batch sizes? What will happen to the capacity and the capacity utilization?

Rupesh, how I can explain to you is in the following way. Yes, you're right that the 40 million cartridge, that's the headline capacity. So one way to look at it is the headline capacity of the line. The second way to look at it also is the number of days which are available in a site to produce that, right? So, how it works in any manufacturing, especially in sterile injectable manufacturing, we always work on number of days. And when -- it's also that the days taken between MSAs and CSAs are different. When we run commercial campaigns, we can do, for example, as many as six batches in 7 days. However, when we end up doing MSAs, we end up doing only two batches in seven days. So purely from number of cartridges, it would be you can imagine less than a third of the commercial. So we don't always look at the number of cartridges coming out while it is in the MSA phase. As I said earlier in my call, because the MSA to CSA progression has been prolonged, that's why it's not the right time to see actual number of output. It is number of days which get utilized. That's number one. And to your second point on the batch size increase, how it again works, batch size is not just of the API. Batch size is also of the finished product. That's how for you to understand that in one day, we make one batch. So if we make a batch of, let's say, 200 liter and a certain quantity comes out per day, in the same day if we are able to increase the batch size to 500 liter, the output becomes two and a half times that within the same time taken. You can imagine the actual output from the site goes up by that scale and that is the point which Arun mentioned, that requires regulatory approval and in conjunction with our customers, we are working towards that.

Okay. Just one follow-up, sir. When we go, let's say, 100% CSA at some point in H2 FY27, on this 40 million capacity the peak production can be 70%, 80%. That's a fair assumption?

So, yes. So that in a sterile injectable, that's what typically works 70%, 75% capacity utilization is what we work with.

Okay. My second question, sir, is, let's say, whatever these 20 million, 25 million devices we sell, whenever we sell, first 25 million, let's say, what would be the rough split between different geographies based on your vantage point? I know your customers obviously will have more information, but based on whatever you have seen in the market, looked at the market between, let's say, Canada, India, Brazil, Turkey, Saudi Arabia, ROW, any rough split you can give just to understand which markets have high volumes?

Yes. I mean, Rupesh, that data is the same which is available to us is available to you. The fact is that Canada is by far the largest, obviously, the second largest semaglutide market in the world after US. So that will remain the biggest consumer, but at the same time as the approval come in, as the product becomes available, the market will expand in all the major markets, whether it's Brazil, Turkey, Saudi Arabia, India, so on. So all these will ramp up, but I would only say that as a CDMO, we will go by our customers location to us. And for us, as I mentioned previously also, we are agnostic, whether in terms of pricing or anything else. For us, geography doesn't matter. We supply the product at our factory gate.

So just this last comment, we are geography agnostic. But now, I think in the opening comment also Arun said that India will become severely competitive. And also regulatory barriers are different across the different markets. I mean, Middle East, India will be a little bit lower. Canada will be higher. Brazil is probably also higher. So do you not see fill-finish pricing diverging between the countries based on the regulatory barriers?

Sorry, I didn't get your last point. So again, I think the pricing is for our customers to work at, Rupesh. But again, I have always maintained. A we have the right capacity, B we have the right capabilities to support our customers both in terms of their demand and for them to remain competitive. And that's the reason which Arun mentioned and I just explained for us to expand batch sizes, it helps both additional capacities and remaining competitive throughout.

Thank you. We have the next question from the line of Nitin Agarwal from Dam Capital. Please go ahead.

Hi, thanks for taking my question. You know, just sort of referring back to the earlier comment in the opening comments around the fact that we're renegotiating some of our take or pay agreements. I mean, so directionally, what are the [inaudible] to the business in terms of, obviously, when we are letting, what is it that business gaining from a more structured perspective when we're looking at some of these contracts? Just help us understand that a bit better?

Yes. So Nitin, I think Arun mentioned that the customers who we have and we are fortunate to have -- the who's who of the generic industry. Some of these names are in public domain. What we gain from being acting like partners and not like mercenary CDMOs is to really gain a long term partnership with the customers to ensure because we know that the changes which are there are not because of any inherent gap either in their demand forecast or in their willingness to buy. It is purely based on regulatory delays. And that's the reason we are being flexible with some of our key customers, gain their trust, gain their long term relationship. But having said that, that's not with all. There are customers with whom we are invoking these clauses strongly and will continue to do as we progress.

And in these large customers, where are you the flexibility sort of working again? What does it do to the business? Does it mean that you've got more visibility of volumes now, F28 and beyond or what are the changes?

Yes. So we definitely have visibility from customers, in fact, long term, in fact, beyond three years as well. So that we, in fact the whole idea of this is getting into a much longer term, much longer term relationship with them. And that's exactly how, that's exactly how it's a double street we work both ways. We give them flexibility and we get a much longer term view from them. And in fact, that has been one of the key supporters where we have decided to invest 100 million in capex. This is all based upon some very strong visibility from the customers.

And just following up on the business as we -- the newer capacity that you're talking about, what are timelines when these capacities incrementally will start to become available for us?

They are as we have said we are in by end of the financial year FY27, we would be having, almost, let's say, installed almost 200 odd million. I mean, these new capacities will be available. And as we go along in this year, you know, at regular intervals, the capacity enhancement will be happening.

And what kind of regulatory timeline do you have for post when these facilities are available for them to be commercially available for you to supply to customers?

Yes. So we have done that work and for most customers, most markets there will not be any new regulatory impact because many of the markets these are annual reportable kind of changes. So, there is not likely to be additional regulatory timelines involved here.

And secondly, just the last one on this, on the guidance that you put out you've talked about a debt to EBITDA peak guidance of less than one and a half times for FY28. So, just two questions here. One is, what is our expect in the near term what is our peak debt that we're expecting given the delays in revenue recognition? And two, I think we had earlier talked about being net debt, net cash positive over the forecast period. So, what sort of changes this outlook here from a guidance perspective?

Nitin, let me try and answer that. So while on the base business, on a steady state, we expect to be debt free by 28. But given our visibility on the biologics, especially on the microbial, we will need to put more capex. So, 1.5 is more a guided number. On the base, 500 million, 200 million EBITDA, we don't expect to have debt on a regular basis. But we're just keeping that guidance of 1.5 as more an internal measure as we believe that there could be more investments in terms of beachheads in the US and Europe. And also an increased capacity build out in our microbials. So it's more a guidance, guided number. But on the base business steady state there should be no debt.

And if I can stick, I don't know that on the biologics CDMO, there's been a lot of positive commentary in the deck around the progress we've made in biologics CDMO. I mean, if you can help us understand a bit better exactly what is changing and how should we see the, probably a qualitative sense of the trajectory for this business?

Yes. So Nitin, what really is happening number of positive things which are happening both at a macro level and obviously which are flowing through at the company level. So you may have followed and everybody has -- there's a lot of noise around the final approval of the Biosecure Act, right? Which came in but it doesn't matter what the shape or form of the Biosecure Act, what it really does is to actually accelerate the entire diversification, the geographical diversification plan for companies. And that is resulting in a lot of bio-techs, big pharma American, Japanese, European looking at India, especially OneSource as a positive -- as a probable site for drug substance. And something which is more immediate and near-term has been the change in the FDA guidelines on the biosimilar approval timelines which is -- what has happened there is that there's a -- thanks to the change in the guidelines, most biosimilars do not require now or will not require a clinical trial of Phase III. And the two things as a result the cost of developing a biosimilar has come down from 100, 120 million to 30, 40 million. And the timeline of -- from start to finish to -- in the market coming down from almost eight, nine years to half of that. So all these really are in favor of CDMOs especially the CDMOs with capacity as Arun mentioned, microbial. Microbial capacity which we are fairly unique in that and ability to offer a very competitive solution to our customers. So that is really as these things are really helped increase the funnel of biosimilars which we have.

We have the next question from the line of Madhav from Fidelity.

I wanted to understand if the India supplies for example for us starts a little bit earlier than Canada, for example. Is there like a big difference in pricing that we have across different markets? Like if we supply to a customer in Canada versus maybe the same customer in India does the pricing vary from a OneSource perspective?

So Madhav as I said thank you for your question. But as I said earlier for us the market is completely immaterial. Our pricing with our customers is fixed. And it is based upon volumes and not volume tiers and not on end market. So whether they sell it in Canada or they sell it in India, or in Brazil or in Saudi Arabia, our pricing to our customers is the same.

And just one more, if you could share any update on how do you see the supply landscape for generic semaglutide evolving? I know the question is asked to you very regularly. But now that we are very close to generic launches globally. How do you see the supply landscape evolving? What kind of market share we could have? I know that don't need a point estimate. But just very broad thoughts are also helpful just to understand how that shapes up in the next one or two years. Thank you?

Madhav, again I would -- if I answered it at a macro level, we are only seeing the demand continue to be -- actually to expand. And this is true across markets as, as the supply that you've seen, whatever supply improvements have come from Novo have all been taken up and volumes have been boosting across markets in a secular way. That is as far as the overall market is concerned. When it comes to supply position obviously what we have to be very, very clear is the regulatory position it will first is going to be defined by regulatory position. As I mentioned despite the delays, our customers expect to be in the first wave of approvals. And we and our customers continue to believe that they will be very limited number of players getting approved in a market like market like Canada. So for the supply obviously the first movers will continue to get will definitely get a significant share of the opportunity. And overall supply chain I also want to add that the supply chain overall continue to remain constrained, whether it is in API's or in cartridges or in devices. And obviously also in the fill finish capacity. So it will be a factor of increasing supply as the markets open up. And that's what -- that's how we see it happening.

Appreciate that point. My only question was that let's say two years later like really obviously the customer which you'll speak about. And then there could be other customers as well. With these customers do we expect to have a lion's share of their wallets? As they ramp up their volumes globally? Or this could be split across two, three, four CDMO vendors? Like how do you see that sort of evolving in a couple of years' time?

This is -- these drug device…

So Madhav, let me just answer this. So one is -- one of the reasons why we keep extending or engaging with our partners for extended period in contract period is when we renegotiate some of or kind of soften our hard stands on take or pay is when we know our customer is at market formation, will take a significant market share. And that enables us to extend the period of the contract. To answer your point, it's normal that competition generics would come. And then customers would lose market share. So we have to A, position for competitive pricing, which is what we do in terms of batch size increases and stuff like that. Devices -- change of devices, the whole nine yards we do in terms of a CDMO typically to make the partner more competitive. And that allows us to sign up longer term contracts because bulk of the work is suggested and done by us in partnership with our customer. So at market formation it's typical that customers lock in generic companies and buyers universe for a longer period of time. And they typically in the more sophisticated markets like Canada and others will have the first sight of refusal to match pricing. So it's important for us to align with near term significant upsides to long term consistent CDMO contracts. And that is why we are tweaking and remodeling a little bit of our operating model with our customers.

We have the next question from the line of Abhishek Kumar Jain from Alpha Accurate.

Sir, my first question on that Oral GLP-1. So how do you see adoption of the Oral GLP-1 by innovators or generics as a trade to the utilization rate of this new injectable capacity?

So Abhishek obviously this is Oral, especially for obesity has recently been launched. I think we have maintained earlier that Oral will definitely have a place in the entire anti-obesity and diabetes regime. They will certainly have a role to play especially for the patients who have needle phobia or who cannot take needle. But having said that thanks to the difference in the efficacy levels. And because of the frequency of dosing, daily tablet versus a weekly injection. It is widely expected both by all major analysts as well as in fact the companies themselves, Lilly and Novo, have been very clear in saying that Oral will get a share but no more than a quarter to max a third of the total anti-obesity market. That's at the innovator level. You also mentioned generic. There is, no generic pill going to be available at least for the next eight, nine years because there is, these are recent coming in. It's going to be a significant patent protection for a very long time.

Thank you. We have the next question from the line of Sucrit D Patil from Eyesight Fintrade Private Limited. Please go ahead.

Good morning to the team. I have two questions. My first question to Mr. Sharma is as OneSource expands its specialty formulations and CRAMS business. How do you see the product mix and capacity utilization evolving over the next two to three quarters? In particularly, how will backward integration automation in manufacturing and regulatory compliance process be applied to improve efficiency, reduce cycle time, and strengthen the competitiveness in the global market? That's my first question. I'll ask my second question after that. Thank you.

Yes. So, I think we already mentioned that we continue to expand and invest in new capex. And as the commercial approvals come and the volumes ramp up, our supply for drug device combinations will increase and the capacity utilization will move in line with that. We'll keep updating you as and when the new capacities come online. To your question on how we are working on increased productivity, etcetera, you know, I think we are very proud of the fact that we have a legacy and a DNA in sterile injectables going back almost 2.5 decades. And in that area, we are really being pioneers in many, many ways, whether it comes to, how to develop sterile injectables, how to manufacture. And we have a team which we are proud of, both in development as well as manufacturing and quality with a very stellar compliance track record. And we will continue to build on that for our customers.

Thank you. My second question to Mr. Anurag is, with strong cash flows and ongoing expansion, how do you plan to sustain EBITDA margins while funding new investments? From a financial point of view, how will you manage working capital cycles, hedge forex exposure on export revenues, and apply digital cost control initiatives to ensure return on equity remains strong and the balance sheet keeps on strengthening over the period of time? Thank you.

It's a great thank you very much for that question. It's part of our inherent fabric that we have built over time, looking at each of those dimensions that you talk about, built around controls, built around process strengthening, and the use of digital interventions across the board in our financial processes. We are building a future business with very strong foundation, and all of that is part of our process.

Thank you. We have the next question from the line of Mehul Panjwani from 40 Cents. Please go ahead.

Good morning, everybody. Thank you so much for the opportunity. My first question is about the comment about the two soft quarters. So, can we expect complete normalcy to return to the revenue recognition after two quarters? That is my first question.

Yes. So, we have, as Arun mentioned in the that, you know, once we have visibility on the approvals, you know, coming in into the major markets and we start supplying, we are absolutely going to be having sequential improvement in quarter-after-quarter. So, that's exactly the plan as you highlight.

So, when would we know about the visibility on the approvals?

We continue. So, that's what we have If you have seen our customers, especially what is in public domain, Dr. Reddy very clearly said that they are expecting approval coming in any time between February and May, and that's what the confidence level of our customer is on what we are also working towards.

Thank you. The last question is from the line of Abdulkader Puranwala from ICICI Securities. Please go ahead.

Yes. So, this is, a product which is, as I mentioned, which has been approved through the NDA route. It's a branded product. It's a fairly unique opportunity. There is just one more company offering that product in the market, and this is a product which we should be launching in the next quarter. I mean, it should be launched by our customer in the next one quarter.

Got it. And, just on sema approval, so I know that the timeline, would be set by the regulator, but just to understand, in terms of our supplies, so if I say, one of your customers gets an approval in, say, Q4 or Q1, then by when should that exactly, reflect into our numbers? That is when the supply should begin for us.

Yes. So, Abdul, we will, as soon as the approvals come, because there are some aspects which will have to be put on the individual pen post-approval. So, it would be, fairly soon after the approvals come that the supplies will start. Of course, the volume ramp-up, will take its time, but the supplies will start in very short order after the approvals come. So, whether it is in, whether it is in Canada or any other market, very, soon after the approvals, the customer should start putting the product in the market.

Okay. Okay. And a final one from my end. So, we had previously, announced the acquisition of the two injectable facilities. So, where are we in the transaction right now?

Yes. Hi. This is Anurag. The process is working very well. It has moved forward. When we, spoke last, it was an application submitted to the Stock Exchange. There is a discussion between the Stock Exchange and SEBI. You know, process is working very well. We anticipate, us to be able to get the final all regulatory approvals in place by third quarter of FY27.

Thank you very much. Ladies and gentlemen, in the interest of time, that was the last question for today. I now hand the conference over to the management for the closing comments.

Yes. Thank you very much, everyone, for coming in on a Saturday morning and listening to us. We wish you a very pleasant, long weekend. Thank you.

Thank you very much. On behalf of OneSource Specialty Pharma Limited, that concludes this conference. Thank you for joining with us today, and you may now disconnect your lines.