Ladies and gentlemen, good day, and Welcome to the Laurus Labs Q1 FY 2021 Earning Conference Call hosted by Kotak Securities 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 the conference call, please signal an operator by pressing star and zero on your touch-tone phone. I would now like to hand the conference over to Mr. Chirag Talati from Kotak Securities Limited. Thank you, and over to you, sir.
Morning, everyone. On behalf of Kotak, I thank the Laurus management team for giving us the opportunity to host this call today. From Laurus, we have with us today Dr. Satyanarayana Chava, CEO, Mr. V V Ravi Kumar, CFO, and Mr. Monish Shah from Investor Relations Team . I now hand over the call to Dr. Satya for the opening remarks. Over to you, sir.
Thank you everyone, and a very warm welcome to our results conference call for quarter one financial year 2021. I wish everyone, their family members, and their colleagues are safe during this COVID pandemic. The national lockdown in late March and most of April 2020 has resulted in very little impact on our operations. We quickly restored operations near normalcy at our plants and other locations by end of April 2020. At Laurus, we are committed to protecting the health and well-being of our employees and their families. We have enhanced the safety and hygiene requirements across all locations with thermal screening on a daily basis, along with elaborate sanitation protocols, maintaining physical distancing norms, and sanitizing all transport vehicles. With all these efforts, all our units came back to normal levels of production during April 2020 itself.
I'm very thankful to all our colleagues for rising up to this challenge and ensuring business continuity. Moving on to our Q1 financial year 2021 revenues. We achieved INR 972 crores revenues, showcasing a robust growth of 77% year-on-year. When you look at our growth pattern, interestingly, Antiviral APIs, we achieved 19% growth, INR 336 crores from INR 283 crores. Oncology, we grew our business by 13%. Interestingly, other products, we increased our revenue from INR 44 crores Q1 FY 2020 to INR 135 crores Q1 financial year 2021. Overall, the generic API recorded a 30% growth, almost INR 150 crores growth from INR 372 crores to INR 522 crores in Q1 current year. Synthesis business also recorded healthy growth, INR 73 crores to INR 100 crores. More importantly, the generic formulations division achieved significant growth of INR 246 crores growth from INR 106 to INR 352 crores.
In total, the INR 551 crores we did in Q1 FY 2020, we did INR 974 crores in Q1 FY 2021. As we were communicating earlier, we are on track to improve our ARV API sales to previous highest around INR 1,350 crores this year itself, based on the current forecast. To begin with, I would like to share key updates on our Formulations Business . The Formulations division reported INR 352 crore revenue. The revenue contributions from the FDF segment has improved to 36% of the quarter as against 29% of the whole financial year 2020.
The growth drivers for the Formulation Business remains business in partnership with Global Fund, PEPFAR, and also from various in-country tender businesses. During the quarter, we also got approval for two first-line products, TLE400 and TLE600, and we expect to generate revenue in the coming quarters. We continue to have good visibility for our business in FY 2021 and beyond.
Apart from the LMIC business, we also have a healthy growth in developed markets of North America and Europe. The sales growth in the U.S. primarily because of increased volumes of existing products and the launch of hydroxychloroquine that happened in the last week of March. With the WHO ending global trials on hydroxychloroquine and a lot of controversies around the product, we don't foresee any increase in demand in the coming quarters, but we continue to maintain our mid-teen market share in phenobarbital. We have a total of eight final approvals and five 30-day approvals, a total of 26 ANDAs filed so far. In Canada, we have five approvals, out of which we have launched three products, and we intend to launch two more products soon.
As far as EU is concerned, I am very happy to share that the contract manufacturing opportunity for certain non-ARV Formulation products is performing very well. We have a very robust order book for FY 2021 and beyond. Besides these current products, we are also in the process of launching two new products in various European markets under our own label. Far, we have obtained approvals for five products, of which we have launched two. We'll be launching one more product in the near future. During the quarter, we acquired Aspen Pharmacare’s through South African subsidiary of Phekolong Pharmaceuticals . We renamed it as Laurus Generics SA (Pty). We did this to help us to enter the South African formulation tender market from the next tender cycle. As you are aware, South African ARV market is the world's largest driven market.
With a robust outlook and order book, we continue to invest in FDF infrastructure. As you're aware, we have undertaken debottlenecking project and a capacity expansion project in the existing building. Both will add to our existing capacities during current yea. We have also undertaken a Brownfield expansion project on the same site with similar capacities, which will become operational during the next financial year in two phases, partly by September 2021 and fully by December 2021. With this expansion, our FDF install capacity will be closer to 9 billion units per year. On the R&D front, we continue to invest similar levels of expenditure. We aim to file about 8- 10 ANDAs every year. R&D as a percentage of our revenue decreased because of increase in revenue to 4.3% for quarter one FY 2021. I'd like to share the status of our filings.
26 ANDAs in U.S., 9 dossiers in Europe, 11 in Canada, 8 with WHO for ARV and FDF products, 2 dossiers in South Africa for ARVs, 2 dossiers in India for the rare disease products, and we also filed 12 products in various rest of the world markets to capture the ARV opportunity. Out of the 26 ANDAs filed in U.S., we believe there are 9 Para-IV , and out of these, 7 First-to-File opportunities, having an addressable market size of over $10 billion. From the beginning, our approach remains product-specific, not market-specific. When it comes to the division-specific information, our Antiretroviral business recorded a healthy growth of 19% for the quarter. The growth was led by higher volumes and uptake in TDF, along with the commencement of third-party sales of dolutegravir.
The second-line ARVs have seen good traction in terms of customer registration. We expect healthy revenue generation from second half of this financial year. I expect this segment to deliver good growth this year on the back of higher sales of the first-line treatment, also the stability in the efavirenz market and third-party sale of lamivudine. When it comes to oncology APIs, we did INR 51 crores in the current quarter. We recorded a 13% growth. I would like to mention that we have one of the largest high-potent API manufacturing facilities in the country. We have seen good traction on the customer front. We expect reasonable growth in this business and confident to increase market share of three of our key products. The most important part of our API business is diversification of API revenues other than Antiretroviral. We did very well in that front.
We did the non-ARV, non-ONCO APIs INR 138 crores in quarter one, with a growth of almost 200% when compared to the previous year. The growth in the segment was driven by new contract manufacturing products along with higher volumes of existing products. We also have a certain amount of dedicated capacities for select opportunities, which will enable us to grow this business further in the next financial year. This business is growing with global partners. We are in a sweet spot to capture opportunities under the current global supply chain disruptions. On the back of sizable order book, new product introductions, and expanded capacities available, we are very optimistic about the growth prospects of generic API contract manufacturing as well. The other business which is also we are very bullish is our CDMO business.
We did a sale of INR 100 crores for the quarter, with a growth of over 37% year-on-year. Currently, we have close to 50 active projects, and we had the highest number of customer additions in the last few quarters with programs in various clinical stages. We have incorporated a wholly owned subsidiary, Laurus Synthesis Private Limited, in May 2020. This was done in order to give the business an increased focus and eventually a dedicated R&D and manufacturing sites in the near future. I would like to inform you that the new subsidiary, Laurus Synthesis Private Limited, acquired assets of a pharma unit in Vizag for a consideration of INR 61 crores in the last quarter. This unit will be used for early clinical phase chemistries for the synthesis division. With that, I would like to hand over to Ravi to share financial highlights.
Thank you, Dr. Satya, and very warm welcome to everyone for our quarter one FY 2021 earnings call. I wish all of you and your family members to be safe and healthy in this toughest time in the history, at least in this century. The total income from operations for the quarter is at INR 974 crore against INR 554 crore, with the 77% growth. With better product mix, we have seen an improvement of gross margin by 4%. This includes the part of the Forex gain to the extent of a couple of percentage points. Our EBITDA margin came at 29%, and this is mainly because of the operating leverage and the change in product mix. Our ROCE improved to 32%, which is because of the higher profitability. Our diluted EPS is INR 16.1 on an annualized basis, with a growth of 150%.
On the CapEx front, we invested about INR 91 crores. Apart from that, we also invested INR 61 crore asset through our wholly-owned subsidiary, Laurus Synthesis Private Limited. We have many opportunities to invest in FDF and API infrastructure. We Will be incurring CapEx close to INR 300 crores in this year. All the CapEx opportunities are Brownfield at this juncture, and we have a short payback period. We expect our CapEx program to be grossly accretive. Of course, we are also looking for an alternative site for the formulations, but that will take more time. With this, I would request the moderator to open the lines for the Q&A. Thank you.
Thank you very much. Ladies and gentlemen, we will now begin the question answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We take the first question from the line of Karan Rathod from AUM Advisors. Please go ahead.
Hi. Thanks for the opportunity. Congratulations on a great set of results, sir. My first question is, we've been hearing a lot of reports with respect to U.S. pulling out of WHO funding, especially for stuff like AIDS and Malaria, et cetera. If you can just comment on what your views on the sustainability of your FDF sales in LMIC countries as the first question, please.
The major funding for HIV, TB, Malaria programs comes from two organizations. One is the Global Fund and other one is PEPFAR, that is President's Emergency Plan for AIDS Relief. The Global Fund operates in 150 countries with a three year funding cycle, the current cycle is for 2020-2023. The current funding cycle pledges $13 billion, out of which $4 billion allocated for FY 2020 for fighting HIV, TB, Malaria. What is also very important, the Global Fund allocated $1 billion to mitigate the impact of COVID-19 on treatment of HIV, TB, and Malaria patients. What it shows, they were increasing the funding during this pandemic. They haven't reduced the funding. The same thing happened with PEPFAR. They operate in 50 countries as against 150 countries with the Global Fund. From the inception, PEPFAR has spent $85 billion on AIDS funding initially, 45% is spent on care and treatment.
Even under this crisis, $500 million additional flexibility was given by PEPFAR to the countries who are using those funds. The U.S. pulling out of WHO has minimal bearing on the funding mechanism. It will have a bearing on how WHO operates in the principles and policy, but WHO doesn't fund any of these programs. Most of the HIV funding is also coming, at least half of the HIV funding is from in-country resources. There is a little or no impact on HIV funding because of this pandemic or because of U.S. pulling out of WHO.
Thanks for the answer. Sir, my second question is that your API sales others are increasing by more than 200%. If you can throw some light, is there any sort of one-off or something which can't be repeated over the next few quarters? Is there anything of that sort within this phase, or you think that this sort of growth rate can be achieved off a base that you've established in Q1?
The only one new product we have launched in Q4 FY 2020 and Q1 FY 2021 is hydroxychloroquine. That generated less than 5% of revenue and less than 5% of gross margin. There is no one-off revenue or one-off gross margin or profitability in the Q1.
Okay. Sir, my last question is, if you can just talk a little bit about the guidance in terms of CapEx for FY 2021 and FY 2022, and with that capacity, what will be peak sales achievable as full utilization for Laurus as a whole?
I can talk about how much capacity CapEx we are investing, and we have to wait and see how much revenue it generates. We are increasing our API capacity by close to 20% in the next 12 months, and we are increasing our formulation capacity by 80% in the next 18 months. We have initiated our CapEx program already, as Ravi mentioned. Earlier, our CapEx is for future requirements. The current CapEx, we know what products we will make and how much we will make. These CapEx also, we are doing in a Brownfield way rather than creating a greenfield sites.
Did you mention 80%? What's the number, eight, zero?
Formulation capacity, 80%.
You are right. Thank you.
Thank you.
All the best.
Thank you. We take the next question from the line of Nikhil Mathur from Ambit Capital. Please go ahead.
Hi, sir. Good morning, everyone. Sir, my first question is that how much time does it take for you to get visibility on order book and then fulfill the order? The reason I'm asking this question is that in this particular quarter, be it other APIs, be it ARV APIs, formulation of synthesis, the growth on a quarter-on-quarter basis is phenomenally high, versus what it was in 4Q or 3Q. What I'm trying to understand is why was the guidance a bit soft during the 4Q results? Surely this order book would have been visible, right?
You're right. Maybe you can blame us as we are a conservative guide giving forecast. We're not giving, but when you're asking, we are not giving how much we will grow also. Today, as everybody thinks, we also have the vision to grow, and we have the ability to grow. We have products, we have facilities, we have all relevant regulatory inspections done. We wish we will also grow as much as we can. We can only comment at that stage, but we are not giving any absolute number guidance for our revenue or profitability from the beginning.
Sure, sir. Sir, across these segments, do you have the order book visibility over the next two, three quarters that whatever sales base has been achieved in different segments that can be replicated in the subsequent quarters? I can understand there can be quarter-on-quarter variations, depending on certain order mistiming or timing mismatch. Are you sounding confident that this particular sales base in all the segments can be replicated over the next two, three quarters?
You have to compare our quarter one FY 2020, quarter one FY 2021. There is a quantum jump. When you look at our quarter two number, quarter two we did more than INR 700 crores. We will see certainly good growth. We can assure you that we have the ability to maintain, to sustain the growth, what we have demonstrated in Q1. I may not be able to give you the exact number, but we have the ability to sustain the EBITDA numbers, our PAT numbers, percentage-wise. Yeah.
Sure, sir. Sure. Another question I have is on the gross margin. Now I think this is very helpful quantification of FX benefit of couple of percentage points. If I still compare it to quarter-on-quarter, I think X of FX also, the gross margin has improved almost 2-2.5 percentage points. This is despite synthesis contribution being lower, which is the usual seasonality in your business. Can you help us understand that what has changed here that even with synthesis contribution being lower, the gross margin is still better on a quarter-on-quarter basis? There were some FX loss in 4Q.
The gross margin improvement, as Ravi mentioned, partly helped by FX gain by close to two percentage points. The other significant reason for gross margin improvement are primarily change in product mix and improved efficiencies in our process and also purchase efficiencies. We can also tell you the gross margin improvement is not because we increased our API prices. It is because of our internal efficiency improvement, we're able to improve our gross margins.
Okay. Just one final question, I'll then jump back into queue again. The employee cost has increased substantially from INR 88 crores to INR 111 crores in this particular quarter versus last quarter. Is it some front-ending of expenses or this is the new base that we should be modeling for remainder of the quarters in FY 2021?
Actually, we were fast-forward through your question very carefully. Can you just repeat the question, if you don't mind?
I'm saying the employee cost on a quarter basis has gone up from INR 88 crores in 4Q FY 2020 to INR 111 crores in this particular quarter. I'm trying to understand, is this a new base or there was some front-ending of expenses and hence in the subsequent quarters, the employee cost might be a bit lower?
We have incurred close to INR 15 crores, INR 16 crores of employee cost as in incentives during the COVID pandemic in the Q1.
The incentives we had to provide an.
Additional transportation cost to our colleagues. Those were closer to the tune of INR 15 crores in the Q1. We don't know how Q2 will behave because still we are not out of the COVID pandemic across the country and world. It all depends on how the COVID situation will vary from Q1 to Q2.
Sure, sir. Just one final question linked to employee cost. When is the usual variable payout for your employees? In which particular quarter is that paid out?
Which one?
Already paid out. Yeah.
It's already paid out. Okay. Thanks a lot, sir. I'll be back in the queue.
Thank you. Before we take the next question, I'd like to remind all participants, please limit your question to two per participant. You may come back in the question queue if you have a follow-up. Next question is from the line of Suji Nahar from Nahar Investments. Please go ahead.
Hello, sir. Thanks for the opportunity. Is my voice audible? Hello?
Hello, yeah. Please go ahead.
Yeah. First of all, congratulations for a great set of numbers. My first question is, can you provide details around volume growth versus the value growth for the different segments like ARV, API, oncology, and other API and custom synthesis?
We are not quantifying volume growth versus value growth. As Dr. Satya said, there is no price increase.
Okay.
You need to take it as.
Volume growth
volume growth only. The whole thing is in volume growth.
Okay, fine. Thank you. Second question is, company has started commercial scale production for four products and custom synthesis. If you can share more details around the revenue visibility or opportunity size for this product.
See, we are not giving the details of revenue per product wise, which is against our principle in giving that sensitive information, how much we are selling API commercially. We can assure you.
Yeah
We foresee volume growth in our commercial products during the current financial year itself.
Okay. Previously I have already sent a mail to the investor relations regarding if you can give some clarity offline or right now on the call for the ANDA approvals that we have received till date or something that you have mentioned in this quarter results. If you can provide that data offline or here, whatever is feasible for you.
Yeah, we will ask Mr. Monish to get back to you with the details.
Okay, sir. Thank you.
Thank you.
Thank you. We take the next question from the line of Prashant Nair from Citigroup. Please go ahead.
Hi. Good morning, everyone. Just had a couple of questions. Firstly, on the other API sales line, how do we see this particular category growing from here? Is this quarter run rate representative of what the ongoing business could be? Secondly, on the broader API business itself, is there any element of stocking up by your customers, given that we are still grappling with the pandemic and different lockdowns? Is this business as usual kind of product?
The contract manufacturing of generic APIs is a growing segment for the company, and we expect you have to look at this contract manufacturing year- to- year rather than quarter- to- quarter. Because of production schedules at our end and at customer end, we do make campaigns of contract manufacturing products. If you take year- on- year, we are very confident to grow this segment. When it comes to, you can't multiply our INR 130 crores into four, can you do INR 500 crores of contract manufacturing? There will be a significant growth year on year, but we can't guarantee you can't do the simple arithmetic 130 x 4.
Prashant, there is no stocking up by the customer.
Okay. It is more a function of timing of supplies from your end then. Okay. Just one more question. Your cost of debt seems to have come down. Can you just give us a sense of what is the current cost of debt and how do you see this over the next year or two years?
The current cost of debt is less than seven, inclusive of everything. We expect to be improved from now onwards.
Okay .
Yeah. Correct.
Thanks a lot.
Thank you. Prashant
Thank you. We take the next question from the line of Nitin Agarwal from IDFC Securities. Please go ahead.
Hi, thanks for taking my question, sir, and congratulations on a pretty solid set of numbers. Sir, two things. One is on the formulation business. Does the impact of hydroxychloroquine reflected in FDF for other APIs, sir?
As I mentioned earlier, Nitin, the contribution of hydroxychloroquine in our formulation business, actually, both API and formulation put together is less than 5% of our sales and less than 5% of gross margin. Our future quarters revenue is not dependent on any opportunistic sales related to COVID or any other one time.
Okay. Sir, secondly, on your finished formulation capacities, last quarter you had indicated that you were almost running at peak capacities. We've had a meaningful delta on that number in Q1. There has been some volume increase in the formulation business, sir. This quarter has just seen a volume increase which have come through in this quarter for the FDF business, sir?
The higher revenue is coming because of volume growth. We have done some operational efficiency programs internally. We are also debottlenecking in two phases. The first debottlenecking will come handy in September. New line addition within the existing building will come by December. We also building a very large capacity in the same site, mostly for non-ARV products. We are having constant capacity enhancements within the existing building as well as we're putting up a new building. Nitin, are you there?
Yes, sir. Sir, just to sort of wrap up, just one last question. Sir, on the gross margin improvement as you alluded to in the past. QoQ, if you look at it, you said 2% improvement essentially is on Forex. On the mix, sir, the bulk of the improvement, is it on any particular segments where the improvement in gross margin has come from on the API side? What has really driven it? It's been a fairly sharpish improvement even adjusted for the Forex gains, sir.
Majority of that gross margin improvement came from API business. You are right, Nitin.
Okay. Thanks, sir.
Thank you.
Thank you. We take the next question from the line of Tushar Manudhane from Motilal Oswal. Please go ahead.
Yeah. First of congrats on great set of numbers.
I'm sorry to interrupt. Your audio is not audible, sir. We are unable to hear you.
Am I audible?
Yes. Thank you.
Firstly, congrats on great set of numbers for the quarter gone by. Just would like to understand on the other API segments, what would be the product concentration, maybe like top three, top five products contributing how much of the revenue?
In other API segment, it consists of non-ARV, non-onco, where we own the DMFs, and we also do contract manufacturing with generic APIs for other customers. There is no product concentration in Other APIs. It's very widespread. In the Other APIs, there is no ARV product or onco product we are doing contract manufacturing.
Okay. Got it. On the ARV API side, lamivudine, when shall we see effect on the external sales side?
You're right. The increase in ARV API sales primarily came from increased volumes of tenofovir and third-party sale of lamivudine and dolutegravir. I'm saying third-party sale of l amivudine , dolutegravir, these are new approvals to our customers. Whereas tenofovir, most of the customers were approved much earlier. The sale improvement came from three APIs: tenofovir, dolutegravir, and lamivudine.
On this DTG side, conceptually, it was like this is relatively low-volume product compared to, say, efavirenz. Despite that, if you can just highlight what kind of market share we have now on DTG API side through sale to the formulations?
Actually, we are trying to improve our market share for dolutegravir. We started commercial sale only in actually Q4 FY 2020. We expect to increase our market share as the dolutegravir increases market share in the first-line treatment. When it comes to efavirenz, what is also interesting, efavirenz demand came down globally by 60%, but our revenue drop in efavirenz is not 60%. That means we were gaining market share of efavirenz even though volumes are going down. We can say the efavirenz sales have stabilized. That was the reason where we had a lower sales in the previous quarters. Now we are back on track to achieve growth led by tenofovir, dolutegravir, and lamivudine. Next year also, we expect to grow in ARV APIs, primarily because of second-line APIs, which we start selling from second half of this financial year.
Got it. That is actually just on this formulation side, while we have eight ANDA approvals, we have commercialized maybe one. Any particular reasons for rather postponing the commercialization of ANDA? Is it to do with the economic viability or the capacity constraints or some other products becoming more interesting?
No. We have a very different plan when we are going to launch it. We are also getting in-country approvals. You get approval from FDA is not the only criteria. You have to get the local country approvals also. We're in the process of getting these approvals, and we will launch a TLE400 in Q2 itself.
Okay. Thank you, sir. That's it. Thank you a lot.
Thank you.
Thank you. We take the next question from the line of Kaustav Bubna . We take the next question from the line of Amey Chalke from Haitong Securities . Please go ahead.
Hello. Thanks for taking my question. Congratulations to the management on great set of numbers. I have two questions. First is related to DLT. Sir, if you can explain the DLT landscape at presently in the tender market, as in how much switch has happened from the older products to the newer therapy, and how many competitors are active in the market? If you can give some color on the expected price going ahead or the new entrants you expect in this product.
In the first-line, DLT treatment occupies maybe 70% of the market share. Remaining 30% is done through TLE or TEE, and we expect that ratio will continue in the future as well. The first-line ARV treatment value broadly will be $1.5 billion. You can say DLT sales could reach $1 billion for all companies put together.
Sir, do you expect any new entrants coming in the DLT market? I believe there are four players currently.
There are eight approvals right now in the DLT. Actually five are commercially selling. I think there is a market for everyone. We are not worried about new players coming in. It all depends on the ability to meet demand when market exists. We believe we are well-prepared to take the opportunity.
Okay. Second question related to TLE and TEE. Now, considering this large part of the market has already been shifted to TLE, do you think there is still good opportunity left in these other approvals?
We strongly believe there is an opportunity in TLE 400. There are only two approvals, and we are the third one. The market shifted from TLE 600 to TLE 400, and we believe TLE 400 will be used primarily for women HIV patients because of significant weight gain observed on dolutegravir treatment. 25%- 30% market share will be abacavir based, and the remaining will be dolutegravir based.
Okay. sir, just to get your some comments on the recent government PLI scheme. How do you view it for the Indian API industry? also, are you looking forward to participate in this scheme? Yeah.
The PLI scheme announced by the government is a good step towards your self-sufficiency in certain APIs. We are evaluating the opportunity, and we will participate in a few of the APIs where there is a product already we have developed and we have capacities. We are looking into it.
Okay. Thank you, sir. Thank you for taking my questions.
Thank you. We take the next question from the line of Kaustav Bubna from Rare Enterprises. Please go ahead.
Hi. Could I please request you to give me the breakup of your generic FDF business? This INR 352 crores of revenue, which you did, could you break up rest of the world, tender, North America and Europe, the amount of revenues in percentage terms?
As we were discussing, this is 3/4 LMIC and 1/4 in advanced market. I think the revenue broadly falls into that ratio. Yeah.
Okay, great. Thanks.
Thank you. Next question is from the line of Madhu from MK Ventures. Please go ahead.
Doctor Sahab, congratulations to you and the entire team for brilliant set of numbers. My question is a little medium-term. With the kind of cash flow which the company is generating, when do you think you'll become free cash flow positive given your robust CapEx plan as well? I think I will ask Ravi to answer this question.
Even in quarter one, we are a free cash flow, but with a small amount because the endeavor is also increased to gear up and further revenue growth in the coming quarters. This year itself, we will have a free cash flow even after spending the CapEx.
Ravi, do you think the debt will come down substantially over the next two, three years?
It all depends on the opportunity. If we have a better opportunity for investment into further CapEx and business, we will not consider a debt reduction. We will use for the CapEx expansions. If we don't find that reason, then we will pay. See, if you look at our debt, the overall debt cost is around 6.6% rather. It will further come down. It is not very significant. Even if you take a tax rate, the effective debt cost will be very small.
Ravi, just one last question from me. What is the risk which you see, if at all any, over the next two, three years for the company?
Hello, sir?
Madhu, the risk will be the regular risk of any of the pharma business, the regulatory and safety. Other than that, we don't find any major risk anticipating.
Madhu, I will add one point here. There is no capacity risk. We have enough capacities. There is no-
Sir, management, we are unable to hear you. Hello?
There is no capacity risk. There is no product risk. There is no regulatory risk.
Please stay online. We are just trying to reconnect the management back.
Hello?
For you, sir.
Yeah.
Hear me?
I can hear you.
Yeah, okay. Good. I think when it comes to the risk, there is no regulatory risk, we believe. There is no product risk. There is no customer risk. In the therapies where we are right now, are chronic, and we don't see any seasonal variance in the uptake as well. Looks like we're in a good platform right now to maintain this growth and provide sustainability to all of you.
This is fantastic, Doctor Sahab. Congratulations once again, and all the very best. God bless.
Thank you so much.
Thank you. We take the next question from the line of Sajal Kapoor from Unseen Risk Advisors. Please go ahead.
Oh, hi. Thanks for the opportunity and many congratulations, Dr. Satya, on this fantastic set of performance. Really beaten all expectations. Just a couple of questions. First up on our CDMO business. Today we have a total of 47 active projects and four new commercial supplies, which is great. Can you also share the number of customers we serve today and how that number has changed over the years? That's one. On the presentation slide deck, you mentioned that several late-stage projects have been executed. Would you mind sharing how many molecules do we have in phase III? Yes. Thank you.
Yeah. Thanks. Currently, we are working with four out of top 10 big pharma and several small, medium, and virtual biotech companies. We had success in all categories, big pharma, medium, and virtual companies. As we mentioned, several in the late stage. We can't quantify right now because that is the challenge with these NCE molecules. We don't know which molecule will move into the next phase and how much market they get. We have added a significant number of customers in the last few quarters. Interestingly, a couple of customers' opportunities are very large opportunities. We can only say this. Beyond this, it is not appropriate for us to give details on the customer projects.
Sure. No, I appreciate the confidentiality in this business. Second question, Dr. Satya, is on this reported shortage of the HIV medicines in about 70 countries. What's your take on this statement? It came from WHO, so it's credible. Also, we now have the market accessibility, so do we have the requisite capacity? Because this shortage should mean that there should be a surge in the requirement, and the restocking has to take place because it's essential medicines. Yeah, what's your sense of this acute shortage in the HIV medications that several countries are now reporting?
Yeah. There are two aspects here. Most of the countries are going to multi-month dispensing. Earlier, they used to dispense monthly medicine. Now they moved to three months. Eventually, they want to move to six months pack. That means they get 180 tablets when they go and see a clinician. That is one. Second, the supply disruption happened, especially with one drug called lopinavir ritonavir, where there is a lot of hype because it is used in the COVID treatment. A lot of stocking happened in that drug. That was in shortage in many countries, in the second line. There were alternatives for second line. I don't think the same kind of scarcity exists today, because many studies prove lopinavir ritonavir is not very effective in reducing the treatment time for COVID. That hype is over. We don't expect any shortage of HIV medicines right now. Yeah.
Sure. Very quickly, if I may, one last question on pregabalin. Pfizer recently reported a significant drop in the revenue of Lyrica, which is their brand. It's down 20%, which means that we should be gaining more market share in the near future. What's your take on this one?
I think we are maintaining our market share. Pfizer losing revenue is because they lose market share to other generic companies. We haven't seen any increase in our share, but we are glad that we're maintaining our share right now on pregabalin.
Thank you so much, and all the very best. Thank you.
Thank you.
Thank you. We take the next question from the line of Cyndrella Carvalho from Centrum. Please go ahead.
Thanks for the opportunity, and congratulations on great set of numbers. just want to understand your thoughts. You mentioned that on the second-line ARV treatment, we expect to see more growth. Could you help us understand, highlighting any market share that we intend to garner there? when we will be able to achieve that, if over coming two years or so? What's your thought on that?
In the second line, we filed DMFs last year, and our customers have taken material for intermediate batches, and we expect approvals to come in the second half of this financial year. Significant revenue will come in the next financial year. With the development of several second-line APIs, we believe now we have a full basket of APIs covering both first line and second line, including some pediatric products.
Any comment on the lamivudine that is expected to reach?
Lamivudine primarily is used in first line. The second-line APIs are abacavir, atazanavir, lopinavir, ritonavir, darunavir. Now we have the APIs DMF file reviewed by global regulatory authorities, and our customers will get approval soon. lamivudine is not widely used in the second line. It is used primarily in the first line.
Okay. sir, any thoughts on the recent volume growth that you alluded to in the other API segment? What are the key drivers in terms of any strategic change that you are seeing here because of the disruption on the supply chain or the China episode? What are the key long-term drivers that you see, and are we receiving more inquiries to add some new products to our kitty with our clients? What is the sense on these? Yes, good morning, sir.
We haven't seen any growth coming out of the current supply chain disruptions. We expect more opportunities to come in the near term, and we are planning to create capacities to take these opportunities. As we mentioned, the change of an API source will take anywhere between 18- 24 months. If supply disruptions happened last month and somebody's getting an opportunity, I don't believe so. We have some inquiries for contract manufacturing or opportunities for non-ARV APIs, which we expect will materialize in the next two years. We see a lot of opportunities.
Okay. Thank you so much, sir.
Thank you. We take the next question from the line of Surajit Pa l from Prabhudas Lilladher. Please go ahead.
Yeah. Thanks for taking my question. I would like to ask one question, is that given the kind of scenario in the Global Fund, where we are seeing a lot of diversion of fund going crazily for COVID-19, R&D expenditure as well as procurement going forward, when vaccine will come or remdesivir will come more. Do you think in short to medium term, there could be shortage of , as far as HIV drugs? In long term, there could be possibility that out of the total pie allocated for HIV, Malaria and TB, we'll also have to give a space to this contagious disease because that could be very dangerous for the HIV patients, and that could go in for a lower price for DLT.
The amount of money spent on HIV drugs is INR 2 billion out of close to INR 20 billion spent on the HIV pandemic. In the INR 2 billion, if you take countries like South Africa, Nigeria, India, China, Thailand, Brazil, Mexico, they have 40% of HIV-infected patients in these countries. These countries' economies are good enough to fund on their own, even if there is a challenge. If at all there is a challenge, will they stop giving drugs to the existing HIV patients, or will they stop enrolling new patients? We believe the money for treating HIV patients is not a challenge because so much advancement is done in controlling and eradicating this epidemic, and this will be continuous.
My point is that it will definitely continue, and definitely they cannot let go of the HIV patients. The point is that either they can force the companies to reduce the DLT price forcibly because they also have to fund the contagious disease which is currently going on. That might be something like, say they might be going TLE if companies are not reducing price of DLT, or they might be reducing DLT where the commercial prospect or the attractiveness might be lower than what it is currently.
We haven't seen such kind of pressure coming so far. There is a possibility, but we haven't experienced that.
Yeah. Sure.
Here, just to give you a overview how the procurement mechanism works. The procurement happens for quarter one, calendar year 2021 right now. People buy for future supplies. Nobody buys August supplies in July. We haven't seen any pressure on pricing so far.
Okay. Could you please elaborate in terms of Forex gain this time?
Yes. Forex gain because the rupee has been depreciated. It's almost like five rupees when compared to the average of last quarter and this quarter.
Okay. What is the quantum in your numbers this time?
The quantum, we were saying around 2% gross margin increase, that is around INR 15 crores-INR 20 crores.
Okay. Any further explanation for your huge jump in EBITDA in your overall fronts?
The EBITDA is only because of the volume increase. We got an operating leverage.
Okay, that is the main reason for such a jump in margin in EBITDA leverage?
Yes. Correct.
Okay. Thank you, and wish you all the best.
Thank you.
Thank you. We take the next question from the line of Ranveer Singh from Sunidhi Securities. Please go ahead.
Yeah. Thank you for taking my question, and congratulations to management for a great set of numbers. Sir, few questions. On Europe, our contract manufacturing for that formulation business, I wanted to understand a little bit in detail. Though this is a small business right now, but if you could give some more light on what therapeutic category we are catering to in that CRAMS? And how many customers currently we have for this business. Overall, where we see next two, three years this business going to?
In the FDA contract manufacturing, right now we have one customer. We are doing up to 1 billion units in bulk for that customer per year right now. We have a few more products addition in the next year, and we're also adding one more customer. We expect the 1 billion tablet contract manufacturing in the next 18 months, we will go to 2 billion, for which we are already creating capacities.
Okay, fine. secondly, what we purchased from Aspen's, what was the cost of that acquisition? The unit we purchased from Aspen.
We only acquired a company. We purchased the shares of the company with ZAR 75,000.
ZAR 70,000?
ZAR 75,000, yeah. Thousand rands.
Okay. Not a big one. Just a note on debt. What's your current debt right now?
Sir, around INR 1,100 crores. The same level of debt we are maintaining for several quarters.
We are not expecting it to go down. You said, you'll focus more on CapEx, right?
Yeah.
Okay. Fine. what's your CapEx you guided for FY 2021?
Around INR 300 crores. That's what we said.
Already INR 150 crore we have done in this quarter, INR 91 crores plus INR 61 crores. .
No, when we say CapEx is only CapEx, that is out of INR 90 crores we have spent. the-
Okay.
INR 60 crores is an additional. Yeah.
Okay. Fine. If, this is the last one. On the DMF front, how the demand is linear. Every quarter we see the demand is coming in a similar way. Obviously, some, currently the order we have. What percentage we have already catered and what opportunity remains, or it is difficult to quantify? What is it?
It is difficult to quantify, but we are running at optimum capacity on that product. We are also increasing capacity for that product. Yeah.
Okay. That's it from my side.
Thank you.
all the best. Thank you.
Thank you. We take the next question from the line of Gagan Thareja from Kotak Alternative Asset Management. Please go ahead.
Yeah, good morning. Am I audible?
Yes.
Yeah. The first question around the gross margins. A lot of API companies seem to have an expansion in gross margins in the last two quarters. I presume key starting ingredient prices have come down. Would you also have experienced a drop in key starting ingredient prices? If so, what could have been the contribution of that in your gross margin expansion?
We can't quantify, but there is a softening of some raw materials. See, overall, I would say the gross margin improvement primarily attributed to the product mix, process efficiency, raw material purchase efficiency, and as Mr. Ravi mentioned, it also because of Forex gains.
Yeah.
Price gain because of Forex gains.
the impact of a droping KSI is negligible.
Very negligible. Yes.
Okay. The fixed gain that you have had in your gross margins, eventually, do you feel that might have to be passed on, or you feel that the gross margins as they stand in 1Q are fairly sustainable for you going ahead?
No, we are not passing on that. Actually, probably it will be sustained if the exchange rate is at INR 75 in the similar level. If rupee appreciates, this will come down.
Okay. A second question around your formulation sales. Can you give the growth for the LMIC formulations and the regulated market formulations separately? What would have been the growth in both of these?
We are not giving that allocation. Broadly, as I mentioned in the previous questions, we are doing 3/4 of our formulation revenues in LMIC ARV markets, and then 1/4 in the advanced markets of North America and Europe. Yeah.
Okay. The LMIC formulation sales would entirely be coming from the dolutegravir formulation as of now?
No, it's the dolutegravir and other formulations as well. majority is dolutegravir-based.
How much is coming from the TLE combinations out of the total? Ballpark, any idea?
TLE400 and TLE600, we are going to launch only in this quarter, so revenue will only come in Q2. We haven't generated any revenue in Q1 from TLE.
Given that you are running at full capacity, and TLE presents a very good opportunity for you in the TLE400 market, would your debottlenecking by September be able to address your need of capacity to service the TLE400 market?
Yes.
Okay. Since this is a three-player market, do you see the possibility of significantly higher market shares there vis-à-vis the dolutegravir market?
The dolutegravir market is much bigger than TLE market. Even we may get higher market share in TLE, but the quantum of revenue coming from dolutegravir-based formulations will be much higher than the efavirenz-based formulations.
Could you give us some idea, at optimal LMIC formulation sales, what could the combination be between dolutegravir and the tenofovir and the TLE combinations? Would it be 70:30? Would it be 80:20? Any ballpark number?
No. We are not giving that kind of minute details right now. Yeah.
Okay. The formulation capacity you are expanding by 80%, if I got it correctly. Is that going to entirely be for the LMIC market or is it also to address the other opportunities, and by what timeframe do you feel you'll be able to optimally utilize that?
Our new Brownfield capacity is coming in two phases, partly by September 21 and fully by December 2021. We expect about 4 billion tablet capacity. That additional capacity which will come next year will be primarily used for non-ARVs. Nothing will be used for ARVs there.
Okay. South Africa, you've always maintained that it is a bigger TLE market vis-à-vis the dolutegravir combination. Now that you are prepared for the new tender cycle there, can you give us an idea of what's the ratio of doluteravir to tenofovir TEE combinations in South Africa, and when does the new tender cycle happen?
New tender cycle will start from 2022. Right now it is evenly divided between efavirenz, dolutegravir treatment in South Africa. By the time next tender cycle starts, we expect it will be 75:25 in favor of dolutegravir.
Okay. Within tenofovir, there is also some talk of shift from TDF to TAF, which is the alafenamide formulation of tenofovir. Do you see that happening in 2021?
We don't expect that shift will happen.
Okay. on the-
Sir, could we request you to rejoin the question queue for your follow-up, as we have people waiting for their turn?
Okay.
Thank you. We take the next question from the line of Kunal Mehta from Vallum Capital. Please go ahead.
Sure. I have a simple question. Sir, for the benefit of all the participants on this call, can you just explain the whole cycle of procurement for Global Fund? You mentioned it's a three-year cycle and after three years you would have different set of contracts which will be renewed based on the interest will be considered at that time. could you please tell us how does the contract work on a three-year basis, and how are the business allocated for a year? once the contract ends, how does the annual process work?
Actually, your voice is not very audible. Maybe can you repeat your question?
Sure, sir. Sir, I wanted to understand, could you please explain how the cycles for the Global Fund procurement would work? You mentioned that the current contract is available till 2023. Can you please explain to us how would the renewal of the contract take place from Global Funds? Would it be bidding all over again once this period expires?
The Global Fund procurement work based on they will allocate a certain percentage of their purchases during this period. They may not give you the exact number. Companies will get certain percentage of their purchases. That is the contract they sign, and typically they honor that contract. Prices will be negotiated for every set of orders. I will not say every order, set of orders. They only commit percentage of their purchases. They generally buy more than that. They don't commit to 100% of what they will buy. They commit maybe between 60% to 80% of their purchases to the established players and keep certain percentage for the new entrants. That mechanism is working very well for the previous cycles also.
Sure. Sir, just a follow-up on this one. Sir, you mentioned that you have strong visibility to FY 2021, till the end of this financial year, and the additional capacity which you are planning to add is mainly non-anti-retroviral. I just wanted to understand, so what visibility do you have for the LMIC business in FY 2022, and would you be focusing light on this?
See, if you look at our API journey, and we also mentioned in our investor presentation how the diversification happened from 80% of our revenue coming from ARV APIs in 2016 to 33% of revenue coming from ARV APIs in quarter one FY 2021. A lot of diversification happened, and we expect the similar diversification will happen in formulation business where majority revenues are coming from ARV right now. That diversification will take its own time, and we started taking steps towards that by building capacity mostly for non-ARV products. Coming back to your question, will the company have enough capacity to take more opportunity in ARV? Answer is yes.
Sir, just wanted to understand this better. We are seeing that once we reach a certain level in ARV, supposed to reach INR 1,300 crores by the end of this year. For the next leg of growth will come from non-ARV products rather than ARV on the LMIC side. Is that understanding correct, sir?
We have lot of scope to grow in ARV also. We have enough capacities for ARV growth, but we know how many products we have filed in non-ARV, when we are getting approval. Based on the timeline, we are increasing the capacity non-ARV.
Understood, sir. Thank you for answering my question.
Thank you.
Thank you. We take the next question from the line of Sangeeta Purushottam from Cogito Advisors. Please go ahead.
Yes. I'm Andrey Purushotham, Sangeeta's partner here. We are relatively new to your stock, so I just want to understand the FDF business which has exploded in the last two years. Can you explain to us what has led to this spectacular success? What are the drivers of the success, and how do you see these drivers sustaining in the next, let's say, year or two?
Okay. In the formulation business, our growth primarily came from ARV LMIC market, and growth from Europe came from contract manufacturing, and in U.S. from our own products. We expect all these three will grow, ARV LMIC, as well as European business, because we are also launching new products in Europe on our own label and also contract manufacturing expansion to other customers. In U.S. and Canada, we are launching in Canada two new products this financial year, and in U.S., we expect to launch at least four products this financial year. Our growth trajectory is very healthy in all these markets.
Sir, this is Sangeeta Purushottam. I had a question on your numbers. You mentioned that there has been an exceptional 200 basis points benefit that you got because of exchange this quarter. That would account for roughly, say, INR 18 crores-INR 20 crores. At the same time, you also had some extra expenses which you incurred because of incentives and COVID, right? I think you mentioned the number was again in the mid-teens, like INR 14 crores-INR 15 crores. Would that be right?
Yeah, you're right.
Broadly, the benefit would in some sense have got netted off by the extra expenses that you have incurred. You have some 5% of your business has come, which is in the form of one-off. If we sort of net this out from your total performance, then we're really looking at maybe a PAT of somewhere in the region of INR 155 crores- INR 160 crores, if we were to net out all these impacts. My question is, sir, is there a seasonality to your business? When we are looking at the company, can we expect some, and trying to project for this year, for the remaining quarter, should we expect a similar or can we expect a similar performance or there would be some seasons which would be impacting the performance of the company?
There is no seasonality in our product portfolio.
Okay.
As you mentioned, the hydroxychloroquine contributed less than 5%.
Right.
Less than 5% of our sales and gross margins in Q1. That doesn't mean we are not selling anything in Q2.
Right.
We continue to sell hydroxychloroquine in Q2, Q3 also. We expect the revenue will remain in the same level. There is no one-off. You can net it off in Q2.
Right.
Except you calculated very well the COVID-related expenses and finance Forex gain.
Right.
Yeah. Other than that, there is nothing to subtract our Q1 numbers for Q2. Yeah.
Right. Okay. Sir, the COVID-related expenses, I'm assuming would continue for a few more months, right? Because the situation has not really changed too much or would that be not a right assumption?
Probably we'll continue, but to a lesser extent. In the quarter one, we also incurred almost $1 million on the extra freight.
Right.
That was not there in Q2 for sure. Yeah.
Right. Okay, fine. Thank you very much, and congratulations on a great performance.
Thank you. We take the last question from the line of Aakash Manghani from BOI AXA. Please go ahead.
Yeah, thanks for taking my question. Could you help me understand the strategy behind the synthesis business? As of last financial year close to INR 400 crores in revenue . Could you talk about the next three to five years, how you expect this business to shape up, given that a lot of the products are going into the commercialization. The opportunity size is very large, probably the largest across all your different segments. What is the thought process behind this segment? How would you like it to shape up there? Thanks.
Synthesis business, the gestation is very, very long. It is also very interesting business because there is no development risk, because customer will give you the product basic process, and you optimize and start giving. There is no price pressure. Volume will only go up if molecule move from early clinical phase to advanced phases and commercial. We have lot of hope, opportunities, and we are also putting best efforts to grow this division. We are also confident because of the product pipeline, what we are working with our partners. This division will definitely grow, but you can't quantify this division based on quarter-on-quarter. Because of the supplies do happen in one labs. As you have seen, in Q4, our revenue for this division was almost INR 150 crores because of supplies of a commercial product.
We will have similar supplies in Q4 of FY 2021 also. Because the customer will take between January and March commercial supplies. Because of the opportunities we see, we have created 100% subsidiary for this division. We acquired a asset of a facility to give more focus and flexibility to the division. We feel we are in a right position, and we are moving in the right direction.
Could you talk about what is the profitability in this segment? Some of your listed peers report profitability in excess of 40%, 50% in that range. Could you give some coloring or aspiration?
We do run profitability division-wide, but we cannot share those details. Yeah.
Okay. it would be the most profitable segment for you by far?
Pardon?
It would be the most profitable segment for you by far?
Yes.
If your corporate average is 29% in this quarter, I mean, this would be way higher, I assuming .
Yeah. Absolutely right. Yeah.
Okay. Should one assume that based on the opportunities and the commercialization of the products that we are looking at of the 47 products, I mean, it could be in the vicinity of INR 800 crore-INR 1000 crore of revenue in the next three to four years in this vertical?
We are not giving guidance, but products have a lot of scope to generate significant revenues if they move from early clinical phase to commercial phase. Yeah.
Got it. Any focus you have between biologics or the small molecule side of regular pharma, or it's nothing of that sort?
That segment is we have molecules in different therapies. Yeah.
Okay. All right. Thanks a lot for sharing with us.
Thank you.
Thank you. Ladies and gentlemen, due to time constraint, we take that as the last question for today. I would now like to hand the conference back to the management for their closing comments.
Thanks, everyone, for the very interesting questions on the gross margin, EBITDA and future growth, ARV opportunity. Thanks to Chirag and Kotak team for organizing this conference call. Thank you.
Thank you.
Thank you. On behalf of Kotak Securities Limited, we conclude today's conference. Thank you for joining. You may now disconnect your lines.