Ladies and gentlemen, welcome to the call to discuss the announcement of proposed merger between Suven Pharmaceuticals and Cohance Lifesciences. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then 0 on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Cyndrella Carvalho, Head Investor Relations from Suven Pharmaceuticals Limited. Thank you, and over to you.
Thanks, Yash. We welcome everyone on today's call to discuss the proposed merger of Cohance Lifesciences with Suven Pharmaceuticals Limited, and the business outlook for the combined entity. Let me introduce you to our management team present with us today. Mr. Annaswamy Vaidheesh are Executive Chairman, Dr. Prasada Raju are Managing Director, Dr. Sudhir Singh are Chief Executive Officer, and Mr. Himanshu Agarwal are Chief Financial Officer. We will brief you on the discussion and take you through a transaction, and then open the floor for Q&A. Now I hand over the call to our Executive Chairman, Mr. Vaidheesh. Over to you.
Thank you, Cyndrella. Good afternoon, everyone. We at Suven would like to take this opportunity to dwell into a significant announcement of the proposed merger between Cohance Lifesciences and Suven Pharmaceuticals Limited. This marks a pivotal moment in Suven's journey, underscoring our commitment to advancing towards leadership in the integrated CDMO space, enhancing the scale of business, ensuring stability in earnings through diversification and fortifying our financial standing. Just to let you all know that we have ensured high corporate governance standards while evaluating the merger due diligence, valuation, and risk. We did have a detailed due diligence undertaken on Cohance by market leading firms. All key items identified in the due diligence have been adjusted in the valuation for potential liability, and the swap ratio has been jointly recommended by two respected valuers, PwC and BDO, and Kotak Investment Banking has provided us a fairness opinion.
Let's run through the key rationale for the merger. First and foremost, through this transaction, we move closer to our goal of creating a diversified end-to-end CDMO leader from India. We will more than double our revenue base with a combination of the two platforms. And two, combination will provide multiple and diverse engines of growth, basically three distinct business units: pharma CDMO, Spec Chem CDMO , and API-plus including formulations. So if you look at CDMO, combination will create an integrated CDMO model which will allow us to follow the molecule through the complete phase of development and lifecycle management for the innovative partner in both pharma and specialty chemical segments.
The addition of Cohance, this is a very interesting element that we all need to know is that addition of Cohance brings fast-growing ADC platform, reinforcing our position as a leading CDMO platform with better offerings for our customers and partners. An interesting event for the API-plus focus on select low-mid and volume molecules with leading global market share backed by deep cost position and robust domestic capabilities. Last four-year revenue carried at 11%, and while the CDMO business growing at 33%, with a healthy mix of increasing share in existing customers, new customer additions, and new products. Overall, the intention is to ensure stable growth profile over multiple engines of growth. So multiple global examples of tiers exist with similar end-to-end capabilities. Probably many of you would be aware. Business mix and service lines were demonstrated scaling up globally.
For the merged platform, combined entity will have significant scale benefits. When I say scale, it will become a leading integrated CDMO player in India and top 10 in Asia, and with a capacity going from 1,400 KL to a combined capacity of 2,650+ KL, and a customer base of large pharma and Spec Chem companies by 1.5x . Very important thing we need to know is that we also now will have an access to niche chemistry capabilities like ADC or antibody-drug conjugates, which can be leveraged to sell to our serve our innovative customers. Access to best-in-class GMP facilities. Very important thing that we all need to know, it expands the scope of product offering to existing customers. They're gaining access to multiple GMP facilities, basically, FDA audited. Quite obviously, the combination will have a best-in-class financial metrics.
We'll be more than double our revenue base with a combination two-platform and continue to have a best-in-class financial metrics, in and around 35%+ EBITDA margins and 30+ ROCE and steady, steady, cash flow generation. You know, we I can go on and on, but I think it's very important that I should ask, my colleague, Dr. Prasada, to take you through the multiple synergy benefits, how this, deal is going to bring. Over to you, Dr. Prasada.
Thank you, Vaidheesh. Very good afternoon to everyone. We'll take this opportunity to share some more additional insights. We expect multiple synergy benefits that can help accelerate growth and improve margins at a combined platform. We are expecting significant synergy benefits through the merger, and we believe if you start realizing cost synergies in the next 12-24 months and a meaningful revenue synergies in 24 to 48 months post-completion of the merger. Some of the key synergies derive from expanded capabilities and competencies. It implies providing a broader bouquet of chemistry and scientific capabilities across the entire platform, which includes adding up niche capabilities like antibody drug conjugates, payloads, electronic chemicals. Interestingly, both segments demand deeper chemistry capabilities to develop and manufacture, enabling us to offer a broader value proposition and to stay more closer to our existing customers.
In addition, lifecycle management capabilities for innovators, thereby demonstrates higher availability of scale to our customers, a higher number of globally regulatory-approved facilities, five more facilities are going to be added from Cohance to Suven, and increased scope to invest for customers as well. From a revenue standpoint, there is a significant potential for cross-selling to customers as a very limited overlap of, key big pharma innovator customers between, both the companies. And we believe leveraging Cohance's capabilities to offer to Suven customers and for Suven to offer capabilities of clinical-to-patent-protected pharma CDMO intermediates to Cohance customers is going to play an important role. Opportunity for Cohance to offer API lifecycle management competency, as we all understand, it needs a different mindset with global regulatory-approved manufacturing facilities to Suven innovator customers for their key molecules as well. We believe these are the two important, elements that can bring revenue synergies.
From cost synergies standpoint, there are three elements that we are looking for. One is, of course, procurement, realized savings in common spending by sourcing materials given the similar nature of the business, people and G&A optimization across the platform as we scale the combined operations together. The immediate important element is best-in-class cost management. We wanted to drive the continuous improvement mindset across the platform are the third, important element. While the merger process takes time, we are prioritizing sharing best practices across commercial sourcing and operational areas across both the organization. Multiple synergy benefits that can help accelerate growth and improve margins are being sized as we speak. Now, let me hand over the session to our CFO, Mr. Himanshu Agarwal, to take us through the deal structure and merger-related aspects. Thank you. Over to you, Himanshu.
Thank you, Dr. Prasada. Good afternoon, everyone. Let me run through the deal structure and the merger ratio. As you would have read, the approved merger ratio as sanctioned by the board is for every 295 shares of Cohance, 11 shares of Suven will be issued based on the swap ratio. Following deal approval, promoter will hold 66.7%, while public shareholders will retain 33.3%. We believe that this transaction is likely to be double-digit EPS accredited to Suven shareholders within the very first year of the implementation of the scheme of this valuation. The merger process is anticipated to conclude over 12-15 months subject to the regulatory approvals.
The indicative timelines seem like we would require four key approvals, the first one being with stock exchanges, SEBI approval, the second one with yourselves as shareholders, third being with NCLT, and fourth, it is likely that we will still require a DOT approval. From a valuation perspective, while Dr. V. Prasada Raju talked about the valuers. So we have appointed PwC, and Cohance has appointed BDO. So both the valuers had asked us to share historical numbers adjusted for the COVID impact, and we have also shared with them the next 2-3-year numbers, which took into account the recovery of the economic cycle. Based on this, they did a fairly extensive exercise and reached a joint ratio of 11 shares of Suven for 295 shares of Cohance, which was then further validated by a fair value assessment, an independent assessment by Kotak, merger bankers.
The entire management team across Suven and Cohance is extremely excited to build this leading CDMO and API player from India and creating value to the shareholders. I'll hand over to Dr. Prasada to walk us through the Cohance business dynamics. Dr. Prasada, please.
Thank you, Himanshu. Let me just quickly take you through the, Cohance business dynamics briefly. Cohance has delivered revenue growth, 16% of 4 years of CAGR, and EBITDA growth, which is 27%+ of CAGR on 4-year basis. With healthy financial metrics includes over 31%+ of EBITDA growth and 34%+ of ROCE. The Cohance business is the outcome of successful integration of three distinctive and unique businesses over the last 3 years. As our chairman did mention in the opening remark, the API-plus business was growing at 11% CAGR, but more importantly, the CDMO business is growing at 33%+ CAGR, which is the most evolving and rapidly growing space. That really gives a lot of excitement to us. The business has been supported by an additional CapEx investment of over INR 350+ crore, and somehow CapEx is at the final stage of deployment.
A unique portfolio has been created under a professional management team. Talking about some of these business growth engines, CDMO contributes to 34%+ of gross profits. 32% of nine months of FY 2023/2024 revenue is business from innovators, which includes pharma CDMO, manufacturing for innovators on patent lifecycle management of molecules. It also has fastest growing, very unique ADC Warheads platform where one of the business units has first-world, world's, synthetic derivative of manufacturing maytansinoid-based payloads and custom manufacturing of specialty chemicals. This constitutes for the CDMO. From API-plus standpoint, 56% of gross profits, 68% of nine months FY 2023/2024 revenue, which includes primarily API, pellets, and some of the intermediates.
The unique differentiation of Cohance's API when compared with the market is they have chosen to be in low- to mid-volume APIs where this API is driven by merchant API rather than a formulation-driven, relatively less competition intensity. If you can build low-cost position backed up with a high degree of backward integration to offer superior supply security to the partners, there is enough chance that they can gain global market share, which is evident by the fact that the majority of the molecules, Cohance secures top three global supplies for most of the molecules. The value-added formulation is predominantly a service business. That is also a conscious choice where it uses captive APIs for forward integration, also including some of the CMO and analytical services. Now, let me invite our CEO, Dr. Sudhir, to share his prospects about the medium-term outlook of Suven.
Again, we'll come back with additional nuances on the overall business. Thank you. Back to you, Dr. Sudhir.
Thank you, Dr. Prasada. So, as we have indicated earlier, we believe that around 3-4 quarters will continue to remain soft. We expect recovery starting in H2 of 2025. Softness is primarily driven by global inventory destocking in the specific chemical segment. We are also observing some select inventory destocking in our pharma customers as well. However, we believe this is temporary in nature. We remain quite optimistic on the recovery and are seeing multiple positive developments that help drive confidence in the medium term. Our RFQs continue to be strong. We have had a positive progress on our Phase III pipeline in Suven Pharma. This is in line with our strategic goal of expanding the pipeline with our customers. Our Phase III product pipeline has moved up from 2 products. Now we have 6 intermediates to now total 5 products with total 10 intermediates.
So earlier, we were having 6 intermediates, which were going on 500 products. Now we have 10 intermediates out of 5 products. Our customer engagement has seen some early success stories. We are working towards elevating a customer-to-estate relationship. We are focused on converting opportunities from the global inventory destocking cycle in Ag Chem business. In parallel, we are building a specialty chemical team as well, as we informed in our video calls. We have onboarded an Ag Chem sales head and further strengthening our team within Ag Chem. Our successful USFDA audit at our custom RRM facility emphasizes our quality focus and efforts dedicated towards compliance from our new and existing team. 2 weeks' rigorous audit by the GMP and API audits resulting with a low number for the 3 observations.
Quality compliance and ESG, we have set our goals and embarked on a committed journey to acquire global accreditation over medium terms, including gold rating from EcoVadis. Now I'll request Himanshu to give a color on our performance.
Thank you, Dr. Sudhir. So from Cohance's perspective, we continue to progress on the growth journey. As mentioned earlier, the CDMO segment continues to reflect sustained growth momentum. It continues to contribute 44% of the gross profit and 32% of the nine months FY 2024 revenue. And we remain positive about this. The ADC Warheads site located at Nacharam Unit has successfully cleared audit by EDQM with no major or critical observations. We've also onboarded two large new innovator pharma customers for the ADC platform and as well onboarded one new life cycle management customer. One of the Phase III products is also progressing well on track. The API segment business is expected to recover from the second half of FY 2025. It contributes 56% of the gross profit and 68% of the nine-month FY 2024 revenue. There's also an update on the two API qualifications.
We have completed one API qualification for the customer, and the another one is progressing at an advanced stage. Cohance has also had eight consecutive successful audits across the platform and operationally qualified kilolab with OEB6 level standards. I would now request Dr. Prasada to give the final remarks.
Thank you, Himanshu and Dr. Sudhir. The EBITDA margins for the combined platform are expected to sit in the mid-30s%. However, in the near term, as we are in the investment phase, we might experience margins to be impacted by a couple of percentage points. However, we expect a progressive trend towards the mid-30s% over the midterm. This merger signifies a transformative step for Suven Pharmaceuticals Limited, consolidating our strength and positioning as for sustained success in the dynamic pharmaceutical and specialty chemical landscape with three distinctive engines of growth: pharma CDMO, specialty CDMO, and API Plus. Let's collectively tread this exciting journey towards a more prosperous future for Suven and open the floor for Q&A. Thank you.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. In order to ensure that the management is able to answer queries from all participants, kindly restrict your questions to two at a time. You may join back the queue for follow-up questions. We have a first question from the line of Rashmi Shetty from Dolat Capital . Please go ahead.
Yeah. Thanks for the opportunity. So first thing, I would like to know that, in the presentation, it is mentioned that, you know, we have paid dividends in Cohance, by increasing our borrowings. So if you can give color on it that, you know, why you have taken borrowings just for paying the dividends.
Thank you, Rashmi. Now I'll request our CFO, Himanshu, to take up the question.
Yeah. So, Rashmi, I think the right way to look at this would be that, as Dr. Prasada mentioned, we have invested significant capital in establishing new CapEx and increasing the CapEx facility for us. I think I would actually say that the borrowing has been more from that perspective rather than coloring it from a dividend perspective.
Okay. So, what is the way forward? I mean, will you look to reduce these borrowings in the next two years?
Absolutely. I mean, there is no doubt in our mind on that. I mean, our sense is that we should be able to have a range of 20%-35% of an EBITDA converted into direct cash every year on year. And that should help us reduce the debt from its current position.
Got it, sir. And, you know, a few more questions, just on the merger part. You know, since the audio clarity was not, I mean, audio voice was not very clear, just wanted to understand more on how is the Cohance CDMO business, you know, different from the Suven CDMO business? Is there any overlap? How are the customers perceiving this merger? And, you know, there are many similar kind of CDMO businesses already, you know, e.g., as an existing player. So, you know, how the customers are really looking at it and how they are going to benefit from this merger?
Let me come back, Rashmi or Prasad here. If you look at the CDMO business between Suven and Cohance, they're completely distinctly different. And Cohance CDMO business is more superior than Suven business because of the following reasons. Number one, Cohance offers platform technology, which has been ingeniously developed, first of its kind in the world. The technology has been developed to manufacture phosgene-based derivatives. However, Suven, we have always been in the service business of offering capacities. Also, the space in which currently the antibody-drug conjugates are evolving right now is evolving at a much faster rate than any other segment in the therapeutic areas. Coupled with, there is also substantial unique science capability and technology capability because of few additions of specialty chemicals and the hardcore chemistry of carbon-carbon coupling or manufacturing. They have a unique capability of even developing and manufacturing OEB6 capacities as well.
From this standpoint, the Cohance CDMO, which is driven by a platform technology, IP owned by Cohance, is much superior than Suven, as we understand.
Just to follow up, so from a margin perspective also, you know, the Cohance CDMO has a superior and better margin compared to Suven CDMO business?
Rashmi, I would prefer to reiterate what we just mentioned. For example, our current gross profit growth of Cohance, 44%, as opposed to the rate at which it is growing at 33%+ CAGR. So obviously, it implies the healthy margins from the business. And subpart of your question also talked about customers. The customer base of CDMO of Cohance and customer base of CDMO of Suven are not same. They are uncommon. One is large US-based innovator company. Another one is Japanese-based innovator companies for which two products already at commercial scale for antibody-drug conjugates scale also.
Okay, sir. Got it, sir. Thank you. That's it from my side.
Thank you.
Thank you, Rashmi.
We have a next question from the line of Darshit Shah from Nirvana Capital. Please go ahead.
Yeah, sir. Thanks for the opportunity.
We can't hear you clearly, sir. Can you use your handset mode, please?
Sure. Yes, sir. Thanks for the opportunity. Sir, just a couple of clarifications. You mentioned that there has been an improvement in the Phase III product pipeline to Q&A. And earlier, kind of, there were 6 intermediates, and or again, 5 were commercial. And that number has now moved from 6 to 10 intermediates. So is the, I mean, understanding correct?
Your understanding is absolutely correct. Now we have 10 intermediates in phase III.
Got it. And, sir, any indication of any of the—I mean, all of the six earlier intermediates which were in phase III? Probably—I mean, indication whether in the next few quarters, something might move up into commercial?
That's our leverage to see how clinical development happens. Now, we cannot define exactly how the improvements will happen. For example, one of the products, it has actually moved from phase I to all the way to phase III because the product has been designated as a breakthrough therapy. It's very difficult for us to predict, Rashmi. However, we are doing whatever is best to make sure that our innovator companies stay relevant for their regulatory cycle.
Got it. And, sir, on the API front, also, you mentioned there are 2 kind of APIs that have been kind of approved with the innovator. So, whether that has been with Suven or Cohance?
That is primarily from the Cohance innovator. They have some of the APIs started looking for qualification as a life cycle management solution to the innovators. That has been the proven trend at Cohance. This is the latest development which has been called out in the script today.
Got it. And, sir, in earlier interactions also, when there were possibilities of doing this lifecycle management and API thing for, you know, Suven innovator clients as well. So would there be now a possibility to fast-track that thing, with both entities combined and more offerings?
Yes. We believe in it, sir.
Got it. And, sir, lastly, on that.
S orry. May I request you to join back the queue, please, as we have other participants waiting?
No, no, no problem. Yes. Thanks.
Thank you.
Thank you.
We'll take a next question from the line of Tarang Agrawal from Old Bridge. Please go ahead.
Hi. Good afternoon. Just a couple of questions from me. One, what's the dividend policy of the combined entity gonna look like? Number two, I'll just finish my questions. Number two, in your ADC platform, you mentioned about payload, but do you also have linker capabilities? And how big would your ADC revenues be, say, in FY25 as a percentage of your overall revenues?
Yeah. I'll take up the question about ADC. You know, you're right. We are also looking for expanding payloads. And from a capability standpoint, currently, the focus is on adding one more payload apart from the maytansinoid-based. And progressively, the objective is to explore possibilities along with customers on the linker. But as of now, it doesn't exist as of today. From a dividend policy, I would request our CFO, Himanshu, to answer the question. Himanshu?
Yes. So, see, from a dividend policy, I think we are gonna be conservative in the payout of a dividend. I think we do believe that we are on the path of a very, very encouraging journey to create shareholder value. And we believe that that would come through investment into business as well as exploring other inorganic opportunities if they were to arise to us. So that's our view on the, on your question of dividend policy.
Okay. Well, I was basically the question stemmed from the earlier question where, you know, about INR 160 crore of dividend was paid out. You, you did mention that borrowings expanded. But typically, it was a, you know, it, it seemed a bit out of the ordinary. So that's where the question is coming from. But I think it's clear now that, you know, you're gonna be focusing on reinvesting back into the business. So that's helpful. Also, how big could the EDC business be, say, in FY25/26 as a percentage of your overall revenues of Cohance or merged entity, rather?
Overall, overall at a CDMO level, we expect a similar kind of percentage growth both on absolute terms as well as, from a percentage term. Currently, we might not be able to exactly give you a specific number what that would be.
Sure. Okay. Thank you.
Thank you. Before we take the next question, we'd like to remind participants to press star and one to ask a question. The next question is from the line of Nitin Gosar from BOI Mutual Fund. Please go ahead.
Hi. Thanks for the opportunity. Let me outright, you know, register a bit of observation. You know, once we are a shareholder, we don't appreciate an entity which tries to, you know, pay out dividend by taking debt, especially where a merger issue is due. Those kinds of events don't really go well. And when you yourself called it out, you know, the intent is to grow the business and keep replaying the cash flow. This kind of action doesn't go well with the guided principle through which you want to grow the business. Going back to the P&L, combined entity P&L shows that right now we are on around 33% kind of range on EBITDA margin. While you were indicating that it will settle down closer towards 30% in medium term, was that the right?
Sir, Nitin, thank you for explicitly mentioning about the dividend observation. As again, Himanshu has mentioned, we reinstated our focuses primarily to invest in the growth revenues of the business. And we continue to remain focused on it. On the EBITDA percentage level, as we were mentioning in the early, early stage of the call, we expect some percentage points of dip in the short term because we have started investing in our human capital as well as some of the operating expenses. Hence, it would be a lower 30s%. And definitely, in the midterm to long term, at a steady state, we will definitely be mid-30s% of EBITDA.
Okay. And when considering the swap ratio, you did mention that we have considered recovery in ACCM cycle for Cohance. This recovery in ACCM cycle is expected in 2025, 2026?
Nitin, just to clarify the question, the ACCM business is pretty much pertinent to Suven at this stage. Based on our understanding about the market, we expect the recovery signals to come in in H2 of 2024/25 towards flagging.
Okay. And last year, with regard to working capital in Cohance that has grown up on nine-month basis, could you clarify the reason behind that?
Himanshu?
Yeah. So, Nitin, I think, we have built in some inventory, especially for quarter four. And as you would notice, that, quarter four cyclically over the period has been a large quarter. And we are expecting a strong quarter in FY 2024 as well. So primarily, that's one place where we have invested behind the working capital. We do expect that. Post-quarter four, the working capital position would steadily improve.
Same may be true for the last year as well when the working capital days were 162. This time, it is around 185.
Yes. That is correct. So there is an investment that's also happened on the receivable side, primarily with some of the businesses that have been impacted because of a currency crisis as well as Middle East concern. So there is some investment that's kind of got blocked because of the foreign currency being unavailable in those countries.
Okay. So our debtor days have got stretched because of the working capital because of the currency not being available at the country where we have made our sales, right?
Yes. Some of the countries where we have made sales which are witnessing some geopolitical issues.
Okay. Okay. Great. Thank you.
Thank you. We have a next question from the line of Vivek Agarwal from Citigroup. Please go ahead.
Hi. Thanks. Thanks for taking the question. So, sir, can you specify as far as the capacity additions are concerned, right? So how much you are planning to invest into the capital expenditure, let's say, over the next 2-3 years, and what kind of the technologies, capacities you are adding. So that would be super helpful. Thank you.
Vivek, let me divide this question into two parts. As you heard us, from a CapEx standpoint, significant investments are already being done in case of Cohance. At Suven, we already have approved CapEx. The immediate priority for the management team is to ensure the 400+ scale capacity of Suryapet is come up and running for commercial. Our primary objective is to ensure that the existing CapEx sweat to a reasonable extent. In such times, we don't have an intent of committing so much of the CapEx. However, progressively, in the next 4 to 6 quarters' time, how the business is to come back, we might take a proper decision on CapEx. Current priority is just to focus on filling up the capacity to sweat the asset to derive the business. Thank you.
Understood. Sir, if we talk about business mix, right, so currently, it's around more than 50% is coming from the CDMO, right? And less than 50% is API. So how that mix should change, let's say, in the next three, four years?
If I'm maybe assuming that your question is related to Cohance business.
Yes. Cohance, it's a combined business, basically.
Yeah. Definitely, as you know, Suven is more than 90+% is more of a CDMO business.
Correct.
With very lots of other businesses. The way historical information talks about 33%+ of CDMO business growing in Cohance, obviously, some total will continue to have dominant growth in CDMO space.
So, do you believe that this 30% kind of CAGR, as far as the CDMO business is concerned, you will be able to do, let's say, over the next few years? So despite all these geopolitical issues, distocking, etc., that is there. And even if you look at last year, multiple CDMO companies have reflected negative growth, decline in margins, etc., so, right? So what gives you confidence that you will be able to continue to outperform the overall market and will be able to do, let's say, this kind of growth, like, over the next few years? Thank you.
Vivek, it's very difficult for us to really define our own trajectory in a CDMO space. By very definition, we got to be close to our customers. And the success of a clinical phase will ensure. However, the assurance of the Cohance CDMO, which is platform-driven product is commercially product is substantially growing on the ADC platform and also some of the controlled substances, makes us to believe that the growth trajectory will continue. Whether it will continue at the same run rate or slightly lower and higher, we cannot predict at this stage. Coming back to Suven, as you understand, and some of your colleagues are also asking about the phase 3 molecule, while we have 100+ projects which are active, the encouraging thing for us in Suven side, especially on the CDMO, is number of molecule in phase 3 got improved.
Today, we have 10 products with 5 major customers. Also, the inflow of RFQs are almost 100% higher than last year. The conversion rate is also upwards of 160+% when compared with the last year. These things make us to believe that we should be able to grow along with the market and our customers as well.
Thank you, sir. That is great. And last question from my side, if you are able to comment on the ongoing geopolitical dynamics, right? The U.S. has come out and tried to come out with a BIOSECURE Act, right? And that may have some kind of impact on some of your competitors in China, right? So how you see this dynamics playing out and any kind of impact that you witness on your business? Thank you.
As you understand, it's a very true broader sense of it, Vivek. Like you, we are also currently observing. From our side, whatever we are capable of doing, we are keeping our internal resource right. And beyond the point, we prefer to not to comment on this.
Thank you, sir. Thank you. Best of luck.
Thank you.
Thank you. We have a next question from the line of Chirag Dagli from DSP Mutual Fund. Please go ahead.
Yeah, sir. Thank you for the opportunity. Sir, just in the presentation, you're talking about potential to drive 10% of incremental EBITDA from various revenue and cost synergies. Question was, is this over what period of time is this? Because you're talking about revenue synergies only in 2-4 years and, cost synergies only in 1-2 years. So just me since you put out a number, just want to understand what does it mean.
Himanshu, could they repeat that?
Yes, sir. So Chirag, I think we are very categorically put up around 10% of incremental EBITDA as a synergy from both the levers. We are more void on the top line while we focus on the cost levers. And, as you would understand, that the revenue levers will take time. And as, Dr. Prasada had mentioned, that, both Cohance has around five innovative customers. And Suven has five innovative pharma customers. And the merger gives us actually 5 + 5, which equals to 10 and not less than 10 innovative customers. So we do find an opportunity where our customer base from a CDMO perspective or from a cross-selling doubles from 5 to 10. And that opportunity is something which we wish to cross-sell and harness. And our sense, which we've estimated, is that we will get 2-4 years.
Similarly, Vivek was mentioning that we are looking at leveraging the material consolidation, so the procurement side of it or the operation efficiencies. Our expectation is that 1-2 years post the merger approval, we should be able to get the basic cost synergies into the business. Next, next.
Sorry.
We are looking at around 10%. Yeah, please. Go ahead. You don't want to say.
No, I understand that, sir. My question was, is this an annual every year feature? Is this cumulative over four years? You know, since you put out it, I just want to understand what the 10% exactly means mathematically.
So mathematically, it is that some part of it. Okay, one, it is not an annualized feature. So it's not that it will generate annually. It is a generation that will happen. And once it is generated, it will remain in the P&L. So for a simple perspective, if there is a cross-sell and I generate additional INR 25 crore-INR 50 crore of revenue, that gets into my base and remains in my base. Similarly, if my cost level goes up goes down from X to Y, it remains in my P&L perpetually.
I understand. So over four years, this is how we should think about, you know, incremental the merged entity delivering 10% synergy over four years.
Yes. But it will.
Cumulative.
CAGR over a period. And yes.
Is. Continue to. I understand.
10% over the 4.
Okay. I understand now, sir. Okay. The other one is on patent expiry for the merged entity. How should we think about it? Is there anything in the base that we should worry about? When is the earliest patent expiry for the merged entity that we should think about, you know, that coming out of the base or hurting the base, etc.?
As per our understanding, absolutely no at this stage.
When is the earliest patent expiry so that we should start worrying about?
We will come back to you once we hear from the customers because it's very important to take this patent expiry language in totality, Chirag. It's not that if the patent expiry happens, product is going to get a half shell. It doesn't happen like that. It all depends on the therapeutic category. It all depends on the patient acquaintance with the molecule. Innovator might decide still continue the same volume at a low price. Hence, the point is, we are very closer to our customers. Whenever we hear back from them, we'll definitely appropriately, once we quantify when it is going to happen, we can certainly come back. Answer to your question, in at least next 1.5 to 2 years, we don't seem to have such kind of a situation because innovators are always inform us in advance.
Does that answer your question, sir?
Chirag,
Ms. Chirag Dagli? Thank you. We'll move on to the next question from the line of Gokul Maheshwari from Awriga Capital . Please go ahead.
Yeah. Thank you for the opportunity. My question is that at the time of the acquisition in September 2023, there was some comments made by the Advent top management on an aspiration to build a billion-dollar CDMO business. Could you just comment whether that aspiration is still there, and how would you plan to achieve that under the combined entity? Thank you.
Well, thank you, Gokul. Let me invite our Executive Chairman, Vaidheesh. Vaidheesh, can you just take up this question?
Thank you. You know, as you rightly said, when you create a platform, you have to have a vision or a kind of a goal to go after. I think that's what Advent had articulated at that point of time, a billion-dollar kind of a platform is the way to go. If you look at the way in which we are now built up, we are almost to that extent of a, you know, with Cohance and Suven put together itself, we are talking about a reasonably 50%-60% of the target and almost 60% of the target. So frankly, in my opinion, that vision will continue to drive our approach. We will look for opportunities, external opportunities that would fulfill our ambition. So the long and short, definitely, that burning desire to become a billion-dollar platform still exists.
We'll continue to look for more options for making that happen in the next 5-7 years' time. But just let me tell you, it's a vision for ourselves. That's our force behind it.
Okay. In the last decade or so, Advent itself has made a lot of investments in a lot of pharma companies globally. So within the portfolio, what kind of synergies or interactions would the combined Suven-Cohance entity have with these businesses? And is that an easy cross-sell or ability to do business with these companies, which are in the portfolio of Advent?
Gokul, currently, we are absolutely focused on work in hand, which is, ensure that, individual, companies versus a combined organization, growth must be accelerated. That's a management focus at this stage. Wherever there is any cross-pollination opportunities with other, investors, primarily because of logical extension and the meaningfulness in the business, which makes more meaningful sense to Suven and Cohance, we might look at it. Otherwise, our current objective is to ensure that enough opportunities are in our hand. We have to convert them into reality. That's the primary objective that we are currently working on.
Thanks. And lastly, you mentioned about the outlook for the CDMO and the API business. Where does formulation fit in, because Suven had invested in Casper, and that is pretty much in underutilized capacity. So if you could comment on the formulation strategy as well.
Gokul, I think it's an important point that you mentioned. We also recognize the fact that there is a non-core business is in existence with us. Instead of interpreting too much, our current endeavor is to ensure that the business fits enough, and it will break even or it will sustain on its own while we try to focus on pharma CDMO and specialty CDMO. The way things are evolving, we expect in 2024, 2025, we should definitely be able to get a cash profit to a neutral stage where the business is not going to hurt us going further. That's the primary objective that we are running right now.
Very so. Thank you and all the best.
Thank you, Gokul.
We have a next question from the line of Ankit Shah from Canara Robeco AMC. Please go ahead.
Yeah, hi. Thanks for the opportunity. Sir, are you guiding for a mid-30 kind of margins in the medium term? And if I look at the nine months numbers, on a combined basis, we're already doing 35% kind of margin. Now, considering that you plan to unlock cost synergies and also CDMO business will grow much faster, at least on the Cohance side. So, shouldn't the margin expectations be higher than what we are currently doing, or do you expect any margin headwinds going forward?
Ankit, very valid point, Ankit. But we got to be a little more careful in our commentary. And we wanted to see how market is going to evolve. We have considered all possible risk adjustments that can potentially can happen. That's the reason we are trying to stick to the narrative of mid-35s, mid-30s, of combined EBITDA margin. However, because we have been investing on some of the important aspects of human capital as well as of ESG, in short term, there will be a little bit of a few percentage point impact. Definitely, in the long-term basis, we should be better or at least not lower than mid-30s is the view that we have today.
Right. And currently, ADC business would be negligible? Would that be fair to say? Or it has fairly scaled up from where you started?
It is fairly scaled up, sir. It is fairly scaled up, Ankit, because there are two products which are already commercial, and both the products are doing extremely well.
Right. And on the ADC side, do you plan to add more capabilities, say, on the conjugation side or the antibody production side? Or immediate term, would you focus extend to that? Or you just focus on adding more payloads in that part of business?
Ankit, I was also responding to Darshit from Nirvana Capital question. The way that we look at this business is ADC, warheads, and payloads. It has been more than two decades of research. Finally, Cohance, with this division, has been able to build that payload capability. The logical extension is not really just sticking to the current campus and base. There are other avenues where additional payloads can be built in. That's what currently our team is focusing right now. In future, if the business demands, probably, we should start looking at linker capacity. We all must understand it's not our choice. Ultimately, we have to look for our customers and partners to see the value in us between India to Western world. Wherever there is an opportunity, obviously, we will also be open-minded for getting into linker placement.
As of now, our focus is primarily to focus on payloads and warheads.
Got it, sir. Yeah, those were my questions. Thank you so much.
Thank you.
Thank you. We have a next question from the line of Nitin Bhoir an Individual Investor. Please go ahead. Mr. Bhoir ? Mr. Bhoir , we cannot hear you.
Can you hear me?
Not clearly, sir.
Hello.
Yes.
Yeah. My question is, what would be a total equity of combined entity and equity capital? Thanks for the question.
Himanshu, can you take up this question? Just to repeat, equity and equity capital is asking about.
Yeah. So I think in the investor presentation, we have mentioned that the shareholder fund as of December 2023 is close to INR 2,000 crore.
Mr. Bhoir , does that answer your question?
Question again. So equity would be INR 20 crore because phase one would be 10 of combined entity, or? Is the shareholder fund on a combined entity?
I'm looking for our—sorry, your voice is not clear. I'm struggling to follow your question, please.
Yeah. I'm trying to understand the earnings per share for combined entity.
Okay. I think, that is a easier way if you just look at the equity capital additions, right? There is a 52% equity capital addition that happened on FY 2023 basis, okay? I'm not even considering FY 2024. And the PAT has been added close to around 70%. So if you just do it from a mass perspective, there is 12%+ EPS acquisition that will happen only on the FY 2023 basis.
Thank you. We have a next question from the line of Mayur Parkeria from Wealth Managers India Private Limited. Please go ahead.
Good afternoon, sir. Thank you for.
Can you use your handset mode, please?
Hello. Am I audible?
Yes. Please go ahead.
Thank you for taking my question. So I just wanted a little more color or clarification. You know, in the presentation as well as in your commentaries, you have talked about, that, you know, a couple of two, three times that we have taken note of the liabilities which could have accrued on the Cohance side. And the Swap Ratio has been adjusted to that impact, and the 30% discount to the valuations compared to other similar businesses which is there. The question here is, what kind of liabilities were we talking of? Where is it? Is it something like what about the dividend payout obligation? Was there, and it got paid out? Was it about ESOP commitments, charges which have already been taken to P&L? Or there are something more on the other sides? And let me ask you a little more specifically.
Are we there? What kind of any potential ones which, you know, are there any open areas around that?
Thank you. It's a very, very relevant question. Let me invite Himanshu to take up this question. Mayur, just give us a second.
Yeah. So Mayur, first, let me address the concern. There is no ESOP. There is no dividend payout liabilities that are there. These are pure, pure operational business liabilities. In any running operations, there would be few items which would have a potential payout arising in the future, be it a tax or be it otherwise. We have been extremely conservative in considering any liability irrespective of the probability that was given to us by the due diligence partner. And we considered the entire aggregate of that liability as a haircut on the valuation adjustment of Cohance.
Okay. Okay. So, just to, do I get the numbers right? It's a clarification, not a question. Just do I get these numbers right that, the EV EV was around INR 8,500 crore, including the increased debt which was there? Will it be a right number? And total EBITDA annualized of INR 400 crore and so is that the right number for Cohance which we should look at?
Yeah. I mean, that's the number broadly. I mean, if you look at it at a very broad level, that's that extent is the right number.
Okay. And, given the outlook currently which we are having of, you know, some pressure on the market side and also on the chemical side or, you know, on the margin side, is it, will it be, you know, how will you call out that will Cohance be in a position to maintain the annual EBITDA run rate of INR 400 crore? Or will it even be lower? Because there's a huge Q4 number which, you know, which is expected. The nine-month is, you know, only INR 250 crore. But that is also in line with the nine-month of previous year. But the, you know, annual FY 2023 EBITDA is much better. So will we be able to maintain 400, 440, 430 kind of EBITDA for Cohance?
Mayur, in all fairness, you've answered the question your own self. I did mention that cyclically, we do have a high quarter four. And it's the same for FY 2023. It is the same for FY 2024.
Right. So despite the outlook being soft, we don't see risk to that number, you know, going down because then that would the discount which we are saying and the things which we if the potential EBITDA is going to be lower even in just a, you know, six months time frame or, you know, in that time frame, we would be looking at a valuation which is different, right?
Okay. No, I didn't really follow your question.
Well, let me answer. Mayur, your understanding is absolutely correct. From the management side, we also looked at what is the existing order book position, what is the manufacturing plan to deliver the set numbers what you did mention. The outlook is definitely Cohance should be able to deliver the number which has been factored in this assessment. That's what our view from an operation side.
Right. Right. Okay. Okay. Thank you so much. That's it from my side. Wish you all the best.
Thank you, Mayur.
Thank you. We have a next question from the line of Gagan Thare ja from ASK Investment Managers. Please go ahead.
Yeah. Good afternoon. I hope I'm audible.
Yes. Please go ahead.
Yeah. Thanks for taking my questions. The first question is, you know, around the EPS situation which you have talked on the FY 2023 basis. If I look on the 9-month year-to-date FY 2024 basis, you know, for more than a 55% sort of a profit accretion, there's barely 4.8% EPS accretion for a 9-month period. And that is on a weak Q3, on a very weak Q3 for Suven. On a normalized Q3 for Suven year-to-date basis, the EPS accretion would have been virtually nil. So I am, therefore, unable to understand, you know, when you say double-digit EPS accretion, why take FY 2023 base? You know, when we know that FY 2023 was something that was impacted by or rather propped up by non-recurring COVID-related products in the base, right? Wouldn't FY 2024 be reflective of the truth in a better way?
If that is the case, then, from, you know, an investor's perspective, there's barely any EPS accretion.
Thank you, Gagan . I would request, Himanshu, can you just take up this question?
Yeah. So Gagan , I think, even when you see FY 2024, there also, you know, if you look at the EV, the EV addition is 52%. And the PAT addition, despite the fact that Suven is also the peers, it is at 57%. And the dividend addition is at 70%.
But the EPS accretion is 4.8%.
Sorry, Himanshu?
The earnings per share accretion is barely 4.8%. On a normalized, quarterly run rate of Suven, you know, it would have been not even there. It would have been probably flat. For all the profit addition that you're doing with the Cohance addition, there's barely any EPS accretion on a year-to-date basis.
I think we will have to look at it from a multiple perspective. We can't ignore the fact that the FY 2023 numbers, even when the number was very, very high, there is an EPS accretion that is happening in FY 2023. And we have to wait for FY 2024 results to kind of mature in terms of seeing as to what trend it makes up, which is why we have said that we will be EPS accretive in the first year of our merger. I mean, we are very, very clear that we will be double-digit EPS accretion in the first year of our merger.
But, but then how does that, you know, sort of stack up with your commentary that your, your margins will be under pressure, in the first year of, of the combined entities operations? You're saying that because you'll be investing in manpower and doing, you know, further OpEx enhancement, there'll be a 200 basis points sort of a margin pressure. And, and despite that, you know, you're talking of EPS accretion on, on this base. So could you maybe perhaps, you know, enumerate or elaborate a little more on the synergy benefit playing out, in the first year or the second year or the third year and give us some idea of, you know, how do you expect EPS EPS accretion to dilate or increase from there on?
The key is to what we can put it out to clarify in the investor deck of what we have done at internal workings, which shows us that we will be EPS accretive in the first year of merger.
Okay. Okay.
We are very clear based on our internal workings that the first year will be EPS accretive double-digit.
Okay. Right. And from a working capital perspective, what will be the, you know, cash conversion cycle for the combined entity, and versus what, where it stands today for Suven and for Cohance separately?
Well, see, as you notice, Suven has been a cash generator. I think year-on-year, we are generating cash. So that situation will remain as it is. And for Cohance, I have said that.
I'm talking about the working capital cycle, sorry.
Sorry. So ultimately, from a working capital cycle perspective, we do expect that, Cohance would remain stable. We would not be investing further on the Cohance working capital.
Okay.
Suven working capital is a. Go ahead, please.
Finally, just one more question, which is, are there any contingent liabilities on the Cohance balance sheet, which come on board with the merger? And if there are, what is the size?
No. There are as I've mentioned to you that, you know, we have taken a valuation adjustment for all potential liabilities in Cohance books. So there is no contingent liability that we expect it to materialize which we have not considered from a valuation perspective.
Who can you enumerate that value?
Gagan , I may request you to join back the queue, please.
Okay. Thank you.
Thank you. We have a next question from the line of Tarang Agrawal from Old Bridge. Please go ahead.
Hi. Just a couple of questions. One, what are the number of shares that are going to be issued? And second, on the reactor capacity of about 2,700 KL for the combined entity, are these all product capacities or there's raw material capacity also included here? And if so, what would be the raw material capacity?
Let me answer the last question and hand it back to Himanshu. This is purely a reactor capacity where between the assets, 1,400 KL and 1,250 KL of Suven and Cohance consecutively comes back to roughly 2,700 KL. As you understand, there is also 400+ KL capacity of project which is up and running in our Suryapet facility of Suven. It is also going to be commercial. Like this, there are about 150-200 KL capacity of Cohance is also coming in play. It is purely a reactor capacity. However, one can look at reactor capacity coupled with classification of OEB. In Cohance side, multiple OEB facilities are also there. As you understand, though it is less than 100 less than maybe 100 liters, that OEB is OEB facility. So that's how one can look at it from a capacity standpoint.
It is not to relate with any raw material side.
Sir, if I may just follow up. I mean, for certain products, right, there may be a possibility that we might be using certain particular intermediates, which could be used across the portfolio. And though and to that extent, whatever is my KL capacity, you know, it'll be more backward integration than actually getting revenue out of it. So my question was from that standpoint that do we have any dedicated capacities for specific intermediates which would tantamount to backward integration?
This is primarily from a business standpoint. Today, these capacities are adding up. We have no plan for using one capacity for additional backward integration. That has not been the initial consideration. However, individual businesses have to continue to grow. If there is any opportunity of any backward integration, for example, in Suven CDMO, we will be open-minded to look at the capacities which are available in hand. Instead of trying to create something, our abilities to have a flexible mapping will be secured. Does this answer your question? There are no common intermediates which are manufacturing today where this manufacturing of intermediates will directly get into our sale. Hence, this capacity is not going to be realized as a sale. That's not the situation. I hope this answered your question.
It does. It does.
Thank you. On the first point, Himanshu, if you can just take it up.
Yeah. No, certainly. So, Tarang, the Suven equity base was 25.4 crore shares. And the ESOPs of 65 lakh were issued, which made the share count as 26.1 crore shares. The post-fully diluted share post the merger will take this to 38.97 crore shares.
Okay. That's helpful. Thank you.
Thank you. Ladies and gentlemen, we'll take that as the last question for today. I now hand the conference over to Ms. Cyndrella Carvalho for closing comments. Over to you, ma'am.
Thanks, Piyush. Thank you, everyone, for your time and joining us and understanding and spending your efforts with us. We respect all the questions. Whatever questions are remaining unanswered, please reach out to me or the CDR team. We will come back with explanations. Thank you so much.
Thank you, everyone.
Thank you.
On behalf of Suven Pharmaceuticals Limited, that concludes the conference call. Thank you for joining us. You may now disconnect your line.