Ladies and gentlemen, good day and welcome to Q2 FY 2025 earnings conference call of Gland Pharma Limited. 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 this conference call, please signal an operator by pressing star 10-0 on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ankit Gupta. Thank you, and over to you, sir.
Thank you, Sagar. Good evening, everyone. We welcome you to Gland Pharma earnings conference call for Q2 of FY 2025. My name is Ankit, and I head investment, M&A, and corporate strategy at Gland. In India office today, we have Mr. Srinivas Sadu, our Executive Chairperson and CEO. Mr. Ravi Mitra, our CFO. We also have Mr. Alain, the CEO of Cenexi, who's connected virtually from France. We'll begin the call with business highlights from Mr. Sadu, followed by an overview of Cenexi from Mr. Alain, and lastly, the group financial overview by Mr. Ravi.
Before we proceed, I'd like to remind everyone that some of the statements made today will be forward-looking and are based on management's current estimates. These statements should be considered in light of the risk associated for our business. The call is being recorded, and the playback and script will be available on our website shortly.
With that, I hand over the call to Mr. Sadu for his opening remarks. Over to you, Mr. Sadu.
Thank you, Ankit. On behalf of Gland Pharma, I extend a warm welcome to the Q2 FY 2025 earnings conference call. As this will be the final call before the end of CY 2024, we wish you and your family good health and prosperity throughout the upcoming season. Today, we'll review our financial results and operational developments for both the standalone entity and the group, which includes Cenexi, our European CDMO business. At a group level, we reported revenue of INR 40,068 million in Q2 FY 2025, compared to INR 13,068 million in Q2 FY 2024, representing moderate growth of 6%. This performance is in line with our expectations, given the slower uptake in the distributor markets for our base business and the impact of the extended annual shutdown at our Cenexi facilities due to the planned installation of a new ampoule line.
Let's take a closer look at our base business performance for the quarter, excluding Cenexi. We achieved INR 10,659 million in revenue, a 5% increase compared to the same period last year. This demonstrates the continued resilience of our operations in a competitive environment. Our base business EBITDA margins were steady at 34%, similar to Q2 FY 2024. On a consolidated basis, our EBITDA margins for the quarter were 21%, impacted mainly by Cenexi, as previously mentioned. We continue to see healthy performance in our core markets of the United States, Europe, Canada, Australia, and New Zealand. These key regions contributed 75% of our revenue in Q2 FY 2025, up from 74% in the same period last year. In the U.S., our largest market, sales increased by 3% year over year. This growth was fueled by both an uptake in existing products and the successful introduction of new products.
During the quarter, we launched six molecules across these key markets, including four in the U.S. alone. Notably, products like Cetrorelix acetate, Ephedrine sulfate, Tranexamic acid, and Diazepam are gaining traction with our partners, and we are very optimistic about the future growth potential. Now, turning our attention to the rest of the world markets, we see that these regions contributed 19% of our revenue in Q2 FY 2025, which is similar to Q2 FY 2024. While we experienced a slight delay in our pickup from Saudi Arabia, we anticipate this will pick up in the second half of the fiscal year. We remain confident in the long-term growth potential of this important market and are actively working to strengthen our presence there. The Indian market recorded INR 874 million in revenue, and this segment contributed 6% of our total revenue.
In Q2 FY 2025, our total R&D expenditure was INR 493 million, representing 4.6% of our base business revenue. During the quarter, we filed seven ANDAs and, importantly, received approval for eight ANDAs. This brings our total ANDA filings in the United States to 363, with 304 approvals and 59 pending. Globally, we now hold 1,726 product registrations, demonstrating our commitment to expanding our product portfolio and reaching patients worldwide. Turning to our complex product portfolio, to date, we have nine filings completed in a targeted portfolio of 19 products. Six of these complex products have already been approved and launched, with three more expected to be approved soon. Our complex products target an aggregate market opportunity of $7.3 billion, reflecting the significant potential of this segment to drive future growth. In the Chinese market, we are adapting our development strategy to address evolving market dynamics.
Four of the nine products in the plan for China market are currently under development, and five have received approvals. On the biologics CDMO business from India, while we await further developments on the previously announced potential collaboration, during the quarter, Gland entered into a binding term sheet with Dr. Reddy's Laboratories to establish a strategic biologics CDMO collaboration. This partnership will leverage our state-of-the-art biologics manufacturing facility at Genome Valley in Hyderabad. We are very optimistic about the potential of this partnership to create value for both organizations, and we expect to sign a definitive agreement soon. Lastly, on Cenexi, the business recorded INR 3,399 million, which is EUR 0.37 million in revenue this quarter, with a gross contribution of 69%. As anticipated, the annual shutdown impacted our performance, and we reported an EBITDA of negative INR 685 million, which is negative EUR 7.5 million for the quarter.
However, our strategic progress at Cenexi is proceeding as planned. We also have Alain on the call with us today to provide a more in-depth update on recent developments and critical initiatives at Cenexi. In closing, Gland has had a good first half of FY 2025 and is optimistic about delivering strong financial results for the entire year. We are executing our strategic priorities, expanding into new markets, and building a solid foundation for the future.
As you may have already read, we are excited to welcome Mr. Shyamakant Giri as our new CEO in January. Shyamakant is a highly accomplished leader with over 25 years of experience in driving growth and success across diverse organizations. This leadership transition is a key step in our long-term strategy, ensuring continued strong leadership and execution. With that, I would like to hand it over to Alain for a closer look at Cenexi's performance.
Thank you. Alain, over to you.
Thank you, Sadu, and good evening, everyone. Cenexi's performance this quarter is in line with what we communicated during our last call. The performance was impacted by the summer shutdown, during which we invested in new capacity and performed annual maintenance. From a site standpoint, first, in Fontenay, we successfully installed the new high-capacity ampoule line which is scheduled to start commercial production in January 2025. Due to our strong oversight, the project progressed well and remains on track with our original plan, both in terms of investment and implementation schedule. This new line will significantly increase our ampoule manufacturing capacity, improve customer service, and generate additional revenue starting in 2025. Secondly, in Hérouville, validation batches for a new inactivated vaccine and an ophthalmic gel are progressing well, and commercial production is expected to begin before the end of the year.
The site is still operating at low volumes. However, we continue to see new business traction. In Braine-l'Alleud, Belgium, we experienced a temporary setback caused by lyophilizer breakdown at the site. We are currently operating at full capacity with our remaining lyophilizers. The issue will be fully resolved during the quarter, and a new backup unit will be installed in the first half of 2025 to prevent future disruptions. While we are making good progress and our course correction plan is gaining momentum, I want to highlight that these temporary headwinds at the Braine-l'Alleud site will impact our quarterly performance. That being said, we continue to strive for achieving our short-term goals: a positive EBITDA for Q4 of full year 2025. We also maintain our medium-term goal of a positive EBITDA for the next fiscal year, driven by an increase in revenue above the EUR 200 million threshold. Thank you.
I will now turn the call over to Ravi to discuss financial performance. Ravi, please proceed.
Thank you, Ankit. Good evening, everyone. We appreciate you taking the time to join us today. Let's review our financial performance for the quarter and first half of the fiscal year 2025. In Q2 FY 2025, our consolidated revenue from operations was INR 14,058 million, a 2% increase year over year, driven by modest growth in our base business in the U.S. At Cenexi, the revenue for this quarter was lower by 5% year on year due to the extended shutdown for installation of the new ampoule line at Fontenay. Base business revenue increased by 5% year on year. For the first half of FY 2025, revenue reached INR 28,075 million, marking a 9% year-over-year increase. Our other income for the second quarter reached INR 596 million. This includes INR 542 million from interest on fixed deposits and INR 45 million in foreign exchange gains.
For the first half of the fiscal year, other income totaled INR 1,111 million, INR 1,023 million from interest income, and INR 45 million from foreign exchange gains. The gross margin for Q2 FY 2025 was 59%, compared to 62% in Q2 FY 2024, primarily impacted by lower gross margin at Cenexi. Gross margin of our base business remained stable at 56%. For H1 FY 2025, the gross margins were at 59% versus 62% in H1 FY 2024. Our Q2 FY 2025 consolidated EBITDA was INR 2,961 million, with a 21% margin. This compares to INR 3,205 million and a 23% margin in the same period last year. The decrease is primarily attributed to losses at Cenexi. Importantly, our base business delivered a strong 34% EBITDA margin, which is similar to the prior year. Operating expenses at our base business remain in line with previous quarters.
The EBITDA for the first half of FY 2025 increased by 5% year over year, reaching INR 3,645 million. This translates to a 21% EBITDA margin for the group, with our base business achieving a 34% margin. Our net profit for Q2 FY 2025 stood at INR 1,635 million, a 16% decrease compared to the same period last year.
For the first half of the fiscal year, our net profit reached INR 3,073 million, with an 11% profit margin. In the second quarter, our total R&D expenses were INR 493 million, representing 4.6% of revenue from operations, excluding Cenexi. This is up from INR 351 million in the same period last year, reflecting our ongoing commitment to adding new products. For the first half of the year, R&D expenses totaled INR 982 million, or 4.7% of revenue. Our effective tax rate remained consistent at 26% for both the second quarter and first half of the fiscal year.
We continue to invest in our future growth. This quarter, we incurred INR 1,037 million in capital expenditures, primarily for the modular expansion of our Pashamylaram plant and Cenexi. This includes that Cenexi invested an additional EUR 7.19 million, primarily towards new capacity and de-bottlenecking . Our strong operational performance generated INR 6,436 million in cash flow from operations during the first half of the year. We ended the quarter with INR 28,201 million in cash and cash equivalents. After accounting for Cenexi's debt, our net cash position was INR 25,413 million. We have also made significant progress in optimizing our working capital, which now stands at INR 20,453 million. Our cash conversion cycle has improved to 149 days, down from 196 days in the same period last year. With that, we will now open the floor to questions.
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 the touch-tone phone. If you wish to remove 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. Our first question comes from Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.
Thanks for the opportunity. Am I audible?
Yes, Tushar, go ahead.
Yeah. So first, to start with the bookkeeping question in terms of this milestone income and the profit share this quarter, if you could share.
The profit share for this quarter is 8% of revenue at Cenexi.
Okay, and the milestone income?
It is 7%.
Okay. So on the core market sales, in terms of the sales have been stable for two quarters now, while there have been two launches as well. So when do we see the pickup in this segment, or meaningful pickup in this segment?
On a year-on-year basis, still, US is still growing. Now, if you see a couple of things which happened, ROW has been degrown. The tender offtake did happen last quarter, which we were expecting in Saudi. It's a big that will happen this time this quarter. That's one aspect, and one big what we got in the Australian country, that also will grow this quarter. So that will be a jump on the US business and ROW business, but basically, it's a steady growth which is happening. We are leaving some products. Whatever we launched in the last few quarters, of course, the few first you see last quarter, we launched eight products. This quarter, we launched six. And always when we launch products, that quarter will have a higher uptake, and then it kind of reduces to normalized numbers. So that's what will happen.
But I think some products will go and will be lesser uptake and some will grow. But overall, I think year-on-year, it's over 9% growth.
So let's say compared to, say, INR 3,260 crores of core market sales in FY 2024, and the first half, we have achieved 16. So likewise, considering these so many launches, what kind of growth can be expected in the second half for core markets?
Are you asking what kind of growth we expect in the second half for the new products launch?
For the core markets, overall sales.
Okay, so first year, we grew by 9%. And considering the factors we just discussed about ROW and US and approval timing, we should be on a full-year basis, should be around what we earlier told you about, single-digit low double-digit kind of growth we are expecting this year.
Okay. And with respect to this biologics agreement, so this is, first of all, for which set of markets in the first place? As in US, EU, ROW?
We can't really comment on that. It's basically some of the biologics products that Ravi is going to develop. So that's a collaboration we have done. And for now, I think that's what we could do.
Okay, and can you do timeline to see the meaningful benefit or the commercial benefit from this agreement?
The initial financial benefits we'll get from the first quarter of next year, and then, depending on the timing of the products and the development, then it will pick up.
All right. So I have no questions on the agenda. Thank you. Thank you.
Thank you. The next question comes from Neha Manpuria from Bank of America. Please go ahead.
Yeah. Thanks for taking my question. Just extending the question from the previous participant. If I look at the U.S. revenue and strip out the profit share and milestone, it's remained at the $70 million for three quarters now, despite the fact that we have launched the number of products that we have. I didn't quite catch your comment on why you think the U.S. should pick up and how that low double-digit growth for the entire standalone business would come through, given if I look at the ROW business, it also would have been declining in the first half. So just trying to tie in your low double-digit guidance with the fact that U.S. has remained flat for three quarters.
So the milestone income and the launches actually are not that much related. Maybe a portion of that will come from the launches. But mostly, it's new contracts that we signed with that quarter. The milestones are also related to that. And also, some of the CDMO, CMO contracts that we signed, we also get milestones from that. It's not directly related.
No, sir. Sorry. My question is, if I strip out the milestone and the profit share, the U.S. revenue for the last three quarters has been about $70 million. I'm not asking about the milestone and the profit share. And I think you did mention in the previous comment that your U.S. business should step up from next quarter. Why do you think, given that we've already seen so many launches and we haven't really seen an improvement in the U.S., what gives you the confidence in improvement in the U.S. business, ex milestone and profit share? And given that we've been flat in the U.S., how do we plan to achieve that low double-digit revenue that you're talking about?
Yeah. So one is, of course, the new launches which will happen every quarter. That's one. Second, as I mentioned, in Upsher-Smith, the new contract that we have signed, it's not dispatched yet. That will happen this quarter. The Civica contracts which are partly signed up. And the Saudi business, the Civica contract, that has not gone. So that is starting in from this quarter. So these are substantial amounts. You can see the ROW business has degrown, primarily because a lot of chunk of business comes from Upsher and Saudi. So that will keep up. Yeah.
Understood. Understood. Okay. And my second question is on Cenexi. It seemed while the summer shutdown was well articulated, and we understand that. But I did see a very sharp decline in gross margins in this quarter. Usually, we do like a 77% gross margin. That seems to have come off fairly sharply. If you could explain that and what we should expect from a gross margin perspective, I mean, is there any one-off in this number from a gross margin that you've reported this quarter?
Yeah. So gross margin this quarter reduction is largely because of the mix of products, where in the Belgian side, there has been lower uptake as compared to last year. And other sites were more or less in line with Q1. But the mix of the sites will depend on will give the gross margin overall basis. So mix is one of the reasons for reduction to 69%.
This should normalize based on the opening comment that we have resolved the issues.
Yeah. It should go back to the earlier gross margin level.
Okay, and so on Cenexi, is it fair to assume that as we go back to the EUR 50 million per quarter run rate in the third quarter, we should be able to achieve breakeven in the December quarter? Would that be a fair assumption?
So third quarter, we're not able to comment. But we are targeting after the new line to be up and running from January. That should definitely achieve.
Okay. Understood. And my last question on the CMO that you signed with Dr. Reddy, are there any more talks with any other partner on this? Or do you think the tie-up with Reddy would be enough for us to fully utilize the capacity that we have?
No. So this is an open contract. So we can still get other series of businesses. Likewise, they don't want to look for other businesses. So it's not that it's fully dedicated to just Dr. Reddy's capacity .
Understood. Understood. And so what would be the peak revenue potential from this CMO opportunity with Reddy? So to just put a number, I'm not asking for a timeline, but what could be the peak revenue in your view?
It's too early to comment right now.
Understood. Okay.
It's one. Yeah.
Okay. Thank you. Thank you so much, sir.
Yeah.
Thank you. The next question comes from Bino Pathiparampil from Elara Capital. Please go ahead.
Hi. Good evening. Starting with this Dr. Reddy's contract, is it for the entire API formulation, etc., or will it be just a formulation?
It's mostly a drug substance.
API.
Yeah.
Okay. And would it be for the semi-regulated markets or regulated markets?
Hi, Bino. This is Ankit. It doesn't specifically mention as to what markets it could cover. They are developing products for the global markets, and our site is also designed to service all kinds of markets. So at some point in time, it will be a combination of both semi-reg markets and reg markets. But let the fine print come, and we'll be able to discuss more specifics then.
Okay. Got it. Second, I didn't quite understand what's the issue with Saudi business. Could you please explain what exactly happened?
So we did win a tender in Saudi. Some of the products uptake has happened. In the US, the uptake has not happened. The quantities from the previous supplies that we made with the previous tender, that was still there. The stocks were there. So that will uptake and start happening from the end of this quarter.
Okay. It's just that it didn't sell in the earlier quarter. There was no specific incident per se.
It was a timing. Yeah.
Okay. Okay. And one last question. You had a tentative approval for Latanoprostene bunod eye drops in the U.S. Is that a product likely in the next 12-24 months, or is it far out?
It's under a Paragraph IV, so I can't comment too much on it.
Okay. Thank you.
Thank you. The next question comes from Jinesh Shah from RSPN Ventures. Please go ahead.
Yeah. Okay. So thanks for the opportunity. So my first question was with respect to the Cenexi business. As you mentioned, that we'll be able to do the breakeven for the EBITDA probably by quarter four. So I would just like to know about the outlook for the EBITDA margins with respect to the Cenexi business, how we are looking for the next year and onwards with respect to EBITDA margins. What is our vision in that?
See, we expect after the new line and some of the additional CapEx to be done, next year, we'll end up at EBITDA neutral or low single-digit. A year after that, when all the capacity is on stream and we get all the pipeline projects commercially on, then we will end up at the old 10% EBITDA level.
Okay. Okay. Then my other question would be with respect to the maintenance shutdown thing. Is it like the annual thing that we will expect in next year in FY 2026 too that will impact one of the quarters with respect to revenue in the business or something like that? It's like the annual thing or it's like the periodic phase that we come into the maintenance shutdown?
It's annual maintenance. Every year, this will have just a few days here and there, but more or less, it will be three to four weeks, but I think the first couple of years, we'll try to use that time to install additional capacity.
So we are expecting in quarter two of FY 2026 as well, right?
Sorry?
So we are expecting another maintenance shutdown in FY 2026 quarter two approximately, if I can assume?
No, no. It will be in August of every year.
Okay. Okay. Fair enough. And my last question would be with respect to the tax rate that I would just like to know the reason that though Cenexi is in a loss-making company at the moment and standard tax rate is around 25%, then how come we are charged more tax, which is approximately 34% in overall consolidated business?
Yeah. Because of Cenexi's limited PBT, there is no tax being created for the corporate tax asset. That is why you're on consolidated, which is you're saying it's a higher tax rate. Once Cenexi comes back to profitability, then we'll go back to our corporate rate.
Okay. Okay. Fair enough. Okay. Thanks a lot. That's it from my side.
Thank you. The next question comes from Saion Mukherjee from Nomura. Please go ahead.
Yeah. Hi. Thanks. You recently announced the appointment of Shyamakant Giri. So can you take us through the thought process of separating your role as CEO? And what were the thoughts of hiring someone like Shyamakant to run as a CEO here? And should we lead something more strategic here? What are you expecting going forward for the new CEO to sort of focus on?
Yeah. I think it's more to extend on the senior leadership to grow the business. And I'll be taking the role of more strategic and long-term, mission-long-term initiatives. And also a bit more time at probably Cenexi. Probably needs a bit more focus. And the new CEO will focus on the rest of the business. And also, he brings in more experience in ROW and other markets also. So that also adds to our strategy of growing business in different markets while we continue to have that solid business in the U.S. market. That's the basis.
Yeah, so does that mean, given Mr. Giri's experience of running plants, especially in ROW emerging markets, is that something you are aggressively looking at going forward? Because you had already mentioned about putting up plants.
Yeah. We are evaluating that option. I mean, there are some points for that. So that's actively in evaluation.
Okay. And secondly, on the bio contracts, so if you can, I think you mentioned about Dr. Reddy's. So how have the discussions evolved? If you can give us a sense now, what kind of traction we should expect, let's say, from a two, three-year perspective? What are the next milestones that we should watch out for?
I would say that this is very important, what we just announced, because it also gives us the experience and learning what is required in this business. Normally, a lot of companies look at what we've been doing because it's a new area they're entering. While we're doing this, we're also having some tangible discussions with some of the other players. This will only probably expedite those kinds of discussions that we're having. I haven't come to the number to it, but it's definitely a win both from while it may not add up huge numbers in the near term. I would say the foundation is laying for the future with smaller revenues in the beginning, but it all depends on how much bigger business we can scale this to move.
Okay. Sure. Thank you.
Thank you.
Thank you. The next question comes from Vivek Agarwal from Citigroup. Please go ahead.
Hi. Thanks for the opportunity. My question is related to US business. So in first half, is it possible for you to quantify the contribution of new products in the US revenue? Basically, how many you might have launched around 10 products, right? So what is the current contribution in the US revenue?
The total contribution for the first half, I think it's around about INR 60 crores.
Okay. So new product contribution is INR 60 crores. Okay. And the second question is how the volumes have grown as far as the rest of the products in the U.S., right, or the baseline products in the U.S.?
From quantity perspective, it's about 5% growth in the U.S. compared to the v olume growth c ompared to the Q1.
Compared to Q1. Okay. And YoY, what kind of volume growth is there?
YOI, it's about similar 5%.
Okay, sir. Thank you. That's from my side.
Yeah.
Thank you. The next question comes from Anubhav Agarwal from UBS. Please go ahead.
Hi, guys. Good evening to all. I'm just trying to understand your R&D. So annually, your R&D is about INR 200 crores. And I understand from past calls that when you report R&D, part of the R&D is spent by the partners also. So can you just help? If you are spending INR 200 crores a year, what would be the gross R&D spend of partner plus you put together roughly?
Anu, just give us a second. Vivek, just correct it. I think year-on-year, the growth based on the volume is about 13%. 5% is quarter-on-quarter, but year-on-year, it's 13%. Quantity increase.
Vivek, you want me to repeat the question?
Anubhav, can you repeat now?
Yeah, absolutely. So my question was on R&D. So client R&D annually is about INR 200 crores. And my understanding was, and you can correct it, that for any R&D that you submit, on average, part of the R&D is reported by you, part of the R&D is spent by your partner. So on a gross basis, the R&D is higher. So I'm just trying to understand when annually your R&D is about INR 200 crores, your partner and you put together, on average, what would be the gross number?
No. So our partner won't put anything into our R&D. It's 100% our R&D.
I'm just trying to understand. You're filing about 20 products annually, and you're spending about $25 million on R&D?
That's correct.
How are you? I mean, you're effectively spending $1 million per product per R&D, give and take, right? And that's a huge payback period. Why are you only filing? I mean, given your cash book, etc., why are you not filing two times the product or three times the product? The appetite is not small. Just trying to understand, first, versus all other companies that we track, $1 million per R&D is the lowest, I think, that we've seen in clients. And then I cannot understand why are you not filing 2x or 3x of the product that you are filing today with that efficiency.
Dinesh, so one is, of course, what is the pipeline left, right? We're already filed 350 products. That's not much pipeline left. That's one. Second, a lot also is going into complex products that takes a larger number of people compared to this. And we have to balance between your fixed cost and also the investments that you make. So a lot of products also we have to look at what capabilities our R&D has. So together, whether they can actually make some of these products. So we have to increase the number of people to double if we have to file more. And we have to look at the and this is not like you can hire today and then remove all the people to your side.
So we have to manage the balance between the filings and how we want to grow this business and then the return on those products also.
But sir, can I ask you one more question on this? But effectively, if you're spending only $1 million per product, I mean, I think you'll be easily able to recover that. There is no question about you having to fire people after two, three years, even if there is a me-too product. I'm not able to understand that if you're spending $1 million per product and not $2 million as a CapEx per product, that in the injectable field, with that margin that you have, you're not even able to recoup the investment. So where does the doubt come in from?
Anubhav, I'll answer this question. See, basically, if you see, today, we are a purely injectable company, and as far as the generic products are concerned, we are by and large covering most of the opportunities that we can do from our R&D in India. We can't do a certain set of therapeutic categories because of contamination or whatever issues, but outside of that, whatever is the addressable market for us, we are doing it from the R&D capabilities in-house. The way we want to fund the future growth is also to look at outsourcing models and maybe co-development models wherein we can partner with somebody who's more specialized in doing those developments and sort of apportion more budgets and capital investments to that side rather than building it only on the organic R&D side. One, it will speed up the overall process of getting approvals.
And second, it will also improve the overall value chain of the products that are going to come on-stream for us in the future.
Sure, guys. I'll take this a little offline as well. Just one more clarity on Genome ready. What is the capacity over there?
So it's about 8,000 liters of flexible plant capacity. And we have only used 30% of the site. So capacity can actually go up very significantly. It has quite a lot of unused land. But today, the installed capacity is about 8,000 liters. And it is a mammalian capacity, single-use area.
For this 8,000 liters, what will be the equivalent gross block here? I mean, what kind of investment would have gone into creating this capacity?
We have invested close to INR 300 crores on the site.
Okay. Sure. Thank you, guys.
Okay.
Thank you. The next question comes from Aditya Pal from MSA Capital Partners. Please go ahead.
Hello. Thank you so much for the opportunity. Sir, a couple of questions on Cenexi. So we're just seeing in Q2, the overheads in Cenexi P&L have come down. Anything that the management has undertaken, any strategy, downsizing, anything that you can highlight on that? Hello.
Give me a second.
So Aditya, the overhead reduction is purely a function of the site running for two months instead of three, and what happens is while we have a fixed cost structure which will not be impacted by a month of shutdown, but there are certain other additional costs which come into play when the site is up and running, say the contract labor and multiple such allied costs. That would not form part of the P&L because the site was not running for, let's say, three to four weeks.
Okay. So this will again go up once we start operating it in the normal periods?
Yeah. Probably for that, we should look at the Q1 numbers. A Q1 kind of expense base is what we would have in Q2 as well. But obviously, the revenues would go up because our month-on-month run rate is now picking up significantly. In fact, September and July were very decent in terms of the monthly run rates we had from the site.
Understood. And just to double-click on the previous participant's question, there was a question about Cenexi break-even period and once the EBITDA starts to mature, that is in year 2, FY 2026, FY 2027. And you had said that this particular company will be generating anywhere between low double digits EBITDA margin. So just wanted to understand the management's thought process when we acquired this business. Even though this is a gross margin accretive business, it is being a bit dragged on the EBITDA margin. So if you can just, it's a bit philosophical question. If you can just highlight that, what is it that we are looking to get from Cenexi?
Because one is the European branded generic business, and we didn't have any presence in Europe. That's one. Second, it's a solid sterile business in spite of the problems and the issues we faced, and the business is very intact with long-term contracts. And this also helps in, and also some of the technologies what this business has, we don't have. So we can use those technologies to file some of our products as well. And also, they also manufacture controlled substances for U.S. and Japan markets. That opens up some of the portfolio for clientele also. So there are several areas that we looked at when we acquired this business. But we always knew that it will be a bit negative for us in terms of diluting the clientele. But we also looked at how we can make it more efficient in a duration of time.
But it took longer than what we anticipated because of the issues that we had there. But in the long run, I think the business is solid, and we also looked—we're looking at a lot of long-term opportunities coming because of this European aspect. Because most of the time, the big pharma in Europe, they want to—we want to get the products from the European manufacturing sites. This will open up those opportunities. So I would say this was a long-term plan what we looked at. And also entering the European market with our own products is more competitive and stable because it is from India. So it was like a combination strategy of CDMO and our own portfolio out into certain areas where we can't enter as a control substance. We can't take it from India to the U.S.
But there's an opportunity where we can take it from there to several other areas.
Also, another question that I had. Currently, we have a gross block of somewhere around INR 4,500 crores. How fast, how quickly can you see that we come back to our normal asset turnovers of two, two and a half times that we used to do two years back? And if you can give me a split between Cenexi business and client business at Cenexi at peak revenues, I'm assuming will be two and a half times gross block.
Yeah. So on the plant side, the new CapEx which we have put up in Pashamylaram site, we come online from next year, which is bag line and the microsphere dry powder line. And a few complex suspension line also will come from next year. So that will bring us back to our old plant asset turn rate, which is two, two and a half. On the Cenexi, this year, we would be like 160-165 million EUR. But next year, we expect to reach 200 million EUR, which is almost like 0.8x. And once we start commercializing the new capacity which we have put in, like one is the PFS line , the new ampoule line, and a few other lines also which we are currently planning, then we should have much higher, between 1-2x asset turn at Cenexi as well.
But that will take on a midterm basis and not next year.
Understood. Just the last couple of questions, sir. So in Cenexi, so what I could understand is that the Normandy site is the one that is causing the overhead to shoot up and our asset turns to be low. Is that a fair understanding?
Yes, that's correct.
Understood. And sir, a bookkeeping question. So goodwill has gone up in September in H2 in the balance sheet. What has led to that? Because we haven't done any acquisition in this H1, correct?
Sorry, your voice is breaking. Can you repeat that question?
So my question is, Goodwill has gone up from March to September in the balance sheet, so.
It's just an exchange difference.
Okay. Understood. Understood. That's it from my side. Wishing you all the very best.
Thank you. The next question comes from Amlan Das from Nomura. Please go ahead. Mr. Das.
Hi, sir. Sir, my...
Yes, sir.
Can you hear me?
Yes.
Yeah. Hi, sir. My question is regarding the ROW markets and for the Saudi Arabia market, how has the performance been in the other ROW markets like Latin? And what is your outlook regarding these markets? Hello?
I agree with that.
So the APAC business has gone up. And there are also several approvals in South Africa which started exporting. Mexico business has started in there. If you actually remove Saudi and see the rest of the business has gone. But once this comes back, then I think overall ROW business will come back a little bit.
Sorry, sir. I dropped in between. I couldn't hear. Could you just repeat once? I'm sorry.
Have you dropped off?
Yeah. Your voice dropped in between. I just couldn't hear. Could you just repeat once?
No. What I said is APAC business has gone, and we also launched a new product in South Africa and also Mexico. The business started last quarter, so we will start taking that. If we actually remove Saudi and see the rest of the business, it has grown up. It has gone up, so once we start shipping out some of the key products to Saudi, then I think overall business will be back on a good track.
Okay, sir. So how has the performance in markets like Brazil and Argentina where you were quite present this quarter?
I think that is steady business we're having in Brazil. Yeah.
Okay, sir. Okay. Thanks. That's all.
Thanks.
Thank you. The next question comes from Shyam Srinivasan from Goldman Sachs. Please go ahead.
Yeah. Good evening. Thank you for taking my question. Just the first one on the standalone or core costs, right? If I look at gross margins, I think are down like 50-60 basis points. So what is explaining just the core gross margins coming up? Is it mix?
So as compared to Q2 of last year, it has come down by 1%. And that's largely a factor of mix which you rightly said. And also the profit share and element on that.
Got it. So this is, say, something like Enoxaparin sodium or any of those products which are higher in contribution today versus last year?
As compared to Q1, our gross margin has gone up, actually.
Correct. Correct.
Yeah. So what is driving that, TOQ improvement?
So that's the mix, actually.
Okay. So versus last year, the mix is inferior, but versus quarter one, it's better.
Yeah.
Got it. And if I look at core margins, have remained flat YOY. So and R&D has gone up 40%. So other expenses excluding R&D is actually down quite a bit. Even quarter, QOQ has gone 20%. So is that sustainable, or is there any one-off there in terms of the lower cost, lower other expenses?
Power and fuel has gone down at India.
No, no, no. In the way you report your power, fuel, employee, you have other expenses above EBITDA. So other expenses, I'm excluding R&D, which is up 40%. So that leaves the other expenses is actually down 25% or something YOY.
So, YOY, other expenses are actually same, but quarter it has come down, right?
Yeah. In other expenses, sir, I'm just removing R&D costs. That's an okay assumption, right? That's why we book R&D, no?
It's largely this quarter is the rate you can consider because there's last previous year, there would have been some consulting expense for acquisition and other strategic advisory we were taking.
Got it. Got it. And my last question, just on guidance. Sorry, I missed it. So we earlier had a mid-teens growth guidance for U.S., right? So you are now seeing it low double-digit, is it? Sorry, I missed this.
That's right. We are seeing low double-digit as the top-line growth expected.
Yeah. And what's driving it is that volume growth seems to be strong. So I'm assuming, is it because of pricing pressure or what explains that or slower new product launches?
Yes. So it's going to be a combination of new launches which are slated to be done in H2 of this year. And then at the ROW level, we did talk about the Saudi Arabia business which is going to get back to normal. There were certain sales to Q3 and Q4 which could pick up. A combination of new launches, a steadiness in base business, and the pickup in ROW would drive this growth.
Understood. Thank you and all the best.
Thank you.
Thank you. The next follow-up question comes from Neha Manpuria from Bank of America. Please go ahead.
Yeah. Just a follow-up question on the CMO biosimilar business. What is the cost that we are booking for quarter in terms of the burn from this capacity? And once the contribution from Dr. Reddy starts coming, is it fair to assume that we'll be able to achieve break-even on the cost starting at 596?
Is it biologics you're asking about?
Yes.
The current cost is about I NR 3 crore-INR 4 crore per quarter. On the revenue side, as we mentioned earlier, it's too early to comment on that.
INR 3 crore-INR 4 crore per quarter. That's all the cost is for the CMO business.
That's the current running cost we are incurring.
Okay. So this is as and when the Reddy's supply comes through, this cost will go up, I'm assuming.
Yeah. This might go up a bit, but the business should cover all those costs.
Yeah. Fair enough. Okay. And my second question is, do we have any GLP products in our pipeline, or have our partners reached out to us for any GLP products given we have a requisite capacity for that, even if it's fill-finish?
Yeah. We have already signed a few GLP-1 contracts on the CDMO side. Yes.
This is for the regulated market, sir?
Yes.
Supplies would start when?
There are all patents around it, right? So.
Sorry, sir.
So we can't really tell the dates because it's all client products. So it's, yeah. But we have signed with, I think, three different customers on GLP-1.
Got it. Thank you so much, sir.
Thank you. The next question comes from Sunil D. Khatri, who's an individual investor. Please go ahead.
Yeah. Good evening, sir.
Good evening.
My question is that when is likely to be like now break-even for the Cenexi business?
Sorry, we lost you.
When is likely like now for Cenexi business? We are not doing any profit. We are incurring losses. So when is likely to be like break-even for the Cenexi business and whatever the capital expenditure you are incurring for this development? So when is likely to be completed and the production like planned will give the 100% utilization?
Cenexi at this level, break-even will happen in Q4, and the CapEx cycle would complete in next one to two years' time.
Two years' time?
One to two years. More than one, less than.
Your India operations are good. Actually, the Cenexi is making a drag on the balance sheet.
Yeah. So as Mr. Sadu mentioned, that this is a business is very solid there. And we need to invest and improve our capability and then the performance is surely followed.
You mean to say that it will take another one and a half years to two years to grow the plant on stream or 100% utilization for Cenexi?
No, no. Currently, some of the plants are already well utilized. There are two plants which are not 100% utilized. So there are several technology transfers which are happening. So by the time those get commercialized, it will take a year or so. So what we are saying is while we want to invest for the new capabilities there, of course, just now somebody was mentioning about GLP-1 capabilities. There is also demand for that in European markets. We're also looking at investing in those new capabilities for future growth of Cenexi. But for the current capacity, a couple of plants are already fully utilized, and a couple of plants, there are projects which are getting transferred. So by the time those get commercialized, it will take a year. And that's why we are saying by next year, first quarter, we'll be able to invest in it.
Okay, sir. Okay. Thank you.
Yeah.
Thank you. Ladies and gentlemen, we would take that as our last question for today. I now hand the conference over to Mr. Ankit Gupta for closing comments.
Thank you, everyone, for joining us today. We appreciate your participation and the questions during the call. If you have any follow-on questions today, please feel free to reach out to us. Looking forward to interacting with you in the next quarter now. Thank you.
Thank you. On behalf of Gland Pharma Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.