Ladies and gentlemen, good day, and welcome to Q3 FY 2024 earnings conference call of Strides Pharma Science Limited. As a reminder, all participants' lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you, sir.
Thank you. A very good afternoon, and thank you for joining us today for Strides earnings call for the third quarter ended financial year 2024. Today, we have with us Arun, Founder and Executive Chairperson and Managing Director, Badree, Executive Director and Finance and Group CFO, to share the highlights of the business and financials for the quarter. I hope you have gone through our results release and the quarterly investor presentation, which have been uploaded on our website, as well as the stock exchange website.
The transcript for this call will be available in a week's time on the company's website. Please note that today's discussion may be forward-looking in nature and must be viewed in relation to the risks pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to the investor relations team. I now hand over the call to Arun to make his opening comments.
Thank you, Abhishek. Good evening, everybody. Appreciate your time today. Very, very delighted to announce a very strong Q3, continuing with our guidance, beating our outlook, with regards revenue growth. We're upping our EBITDA well on track, making our U.S. guideline of the higher end of the $250 million run rate. Three consecutive quarters of gross margins, closer to 60%. Very significant improvements in free cash generation, debt reduction, completion of our network optimization. So overall, a great quarter for the company. And what I would now strongly believe is a stabilizing period of our growth and then growing from here on. All our businesses have done well.
We do have a lumpy ex-U.S. market business, which is a small subset of our emerging market team, but outside of that, the business has done, all our business have done extremely well. Quickly, considering the individual regional businesses, we can just discuss a little bit about that. Historically, we do have a very strong portfolio of cold and flu products. Although we do not have a heavy flu season in the U.S., our $67 million, it has got tailwinds of stockpiling by wholesalers in this case, but more importantly, a bulk of the revenue growth has also come from our recent launches of icosapent through our partner, Amneal. We also had two significant approvals during this quarter, including SUPREP.
We expect SUPREP to be in the market in the next couple of weeks. And icosapent is already in the market. We continue to maintain sustainable, profitable growth, 34%. 34 products of our 65 commercialized products out of our 280-odd INDs filed in the approved and filed now rank amongst the top three in terms of market share. This constitutes 75% of our total U.S. revenues, heavily supported by great customer advocacy, best-in-class service levels that we have now been accorded, and amongst the Indian companies to record amongst the fastest growth amongst the top 10 companies operating in the U.S. market.
So overall, the last two quarters have been very good for Strides, and this quarter has been more focused on the absolute EBITDA growth, which is what we said we will over revenues. Having said that, revenue growth for the first nine months has exceeded our outlook of 15%. We now have grown by 17%, so that's keeping all the outlook parameters, guidance parameters, intact. Pleasingly, debt to EBITDA now annualized quarterly is now 2.8 x from 5.7x odd in FY 2022. That's been a massive shift, and year to date, it's still under 3x. So we are a quarter ahead of our guidance in terms of debt reduction. We continue to see free cash generation.
We funded all our CapEx growth and our incremental revenue growth of 17% without increasing our debt profile. Clearly focusing on the quality of our business and our operating leverage and the total working capital employed. As we exit Q3, we now are at a historical 13.5% gross margin, and as we move forward, we now believe that this will steadily increase in the next quarters. Our asset turn is amongst the best in class. We now turn our assets around 7x-8 x, and we'll continue to focus on sustainable growth in the regulated markets.
We do have the luxury, like I mentioned in all my calls, of letting go of products when challenged for price, because we have a long tail of approved products that are being ready for launch, every quarter. So we constantly are very focused to keep our market share, but in a profitable manner in the U.S. The other regulated market has been flat from QoQ, has grown 21% year-on-year. All markets in this region have operated well, and we continue to drive businesses. We have won several new approvals in Europe, and very critical licensing deals have now been secured, and we will see those flow throughs in FY 2025, and our investment in the other regulated markets is playing out well.
Product portfolio expansion, network optimization, continued momentum of filings, will be the key focus for improved market share in the other regulated markets. We have recently won several new businesses in our South African operation from a long-term tender business. So that will also add to some, some important upticks, in value and business. Our growth markets are very small in terms of size, but has grown by a whopping 71% to $19 million, in spite of the fact that the access market business has been lumpy. The access market business is not necessarily our primary focus as we build our proprietary IP-owned businesses in the U.S. and in other regulated markets. Overall, we already spoke about debt.
Very strong performance on the balance sheet, and we've had a last loss pickup from Stelis, and this is nothing to do with Sputnik. We have already written off all the inventories related to Sputnik and Stelis. Having said that, we had several consumables that can be used for many years in our other plants, but we have provided for them such that we operate once they're listed as OneSource's pure play CDMO. We have provided for all of those inventories and there are no more one-time pickups from Stelis going forward. Q4, as you can see, Stelis has grown its business significantly. Last year, we had revenues of only INR 5 crore to now INR 60 crore, and we would have even a stronger quarter in Q4.
We have guided that in H1 we will be EBITDA positive. We will be EBITDA positive in spite of a marginal negative reporting of EBITDA in this quarter. We completed the Syngene transaction. Although we announced the deal at INR 700 crore, both Syngene and Stelis agreed that we retain 20,000 liters of equipment for our build-out in our unit two, which is already FDA approved, considering that we are now full up on our Biologics capacity. We have had great success in the last nine months in Stelis. We have now added more customers on a regular basis. We have 16 unique customers. We have secured master services agreements for $56 million in the first nine months, which is significantly greater than all the contracts we have signed in our four years of CDMO operation.
We have now, our partners now received approved status or close to receiving approvals for the first GMP, and we have already received our first commercial order for a significant value in FY 2025, and we are now more and more confident to guide that the business in Stelis will be path positive from next year. We have also reduced our corporate guarantees issued by Strides by almost INR 600 crore, and debt, including new debt that is just being in the process of being secured, will mean that the net debt will come down quite significantly, to just some, to about INR 450 crore, including the debt surrounding the process that we have. As regards the scheme for OneSource, we are in the process of addressing queries from the exchanges.
We expect to hear more from them in the next couple of weeks, and we are confident that we will still be in a position to file our NCLT applications for the demerger and listing, merger and listing in this quarter. We have received all the significant NOCs from lenders to which has now been secured, and we look positively forward to a great outcome from OneSource. That's a fairly longish introduction, and I'm very happy to take questions. As always, if there are listeners who would want to ask these questions later, please do not hesitate to contact us separately. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question, may press star and one on the touchtone telephone. If you wish to remove yourself from question queue, you can 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. The first question is from the line of Akash, from Motilal Oswal Financial Services Limited. Please go ahead.
Thank you for the opportunity, and congratulations on the good set of number. I have a couple of questions. My first question is, the commercial service agreement for GLP-1 product with one customer is for which market?
It is for regulated markets.
Okay. And the second question is on icosapent approval. There are almost seven to eight players now. How do you think the business potential is for Strides? And also, could you share the API source for the product?
Well, we don't share API source, but we do not have a constraining situation with API, which is why many of the existing players do not have a significant market share. So I can only tell you that. I expect we expect our market share to be a leading market share, like in all soft gelatin capsules that we have.
Okay. Okay, thank you. My next question is, like, what kind of price erosion is witnessed in the base portfolio in the U.S.?
Negligible or hardly any, as I mentioned in my opening statement.
Okay. And could you just could you tell the reason for lower depreciation, which is down QoQ and YoY basis?
We announced the Singapore divestment in the last quarter, and we also mentioned that this divestment has got significant line items below EBITDA, because it had lease rentals. Since that was sold and completed, the depreciation and the line items attached to those data set is now completely gone, and this will be the new level of depreciation.
Okay. And, my last question is, how much scope, how much is the scope for further improvement in gross margins from current level of 59%?
Well, I think at 59%-60%, we already are amongst best in class. Maintaining this would be more challenging than growing it. So I think in all your modeling, you should consider that at 60%, as a gross margin for our model.
Okay. Thank you, sir.
Thank you.
Thank you. Before we take the next question, a reminder to all participants, you may press star and one to ask question. The next question is from the line of Shantanu Maheshwari from, an individual investor. Please go ahead. Sorry, sir, you're not audible.
Am I audible now?
Yes, sir.
Yeah. So my question is regarding the U.S. business. So we have seen a decent ramp-up in the U.S. business over the last few quarters. What is the global situation now?
Sorry, Shantanu, you're breaking, so you may want to check your, from your end. Can we take the next question, please?
Yes, sir. The next question is from the line of Sarvesh Gupta from Maximal Capital. Please go ahead.
Good afternoon, sir, and congratulations on a decent set of numbers. Sir, first question is on the corporate guarantee. So we can see in the annexure that the corporate guarantees provided by Stelis stood at around INR 500 crore. So I'm assuming that this is after the reduction of INR 600 crore achieved on sale of the facility. So it was INR 1,100 crore going down to INR 500 crore. Now, there are two questions related to it. First of all, you know, now again, there's a proposal to increase the corporate guarantees by INR 350 crore. This is despite the fundraising at the Stelis level. So if you can throw some more light on why we are again going back on increasing the corporate guarantees? And secondly, why are these corporate guarantees much in excess to the gross loan which Stelis has got at its balance sheet level?
Good questions. So corporate guarantees are a function of total loans outstanding, and we are in the process of getting our banks to reduce it to the level of outstanding. So the gross to net gap is almost about INR 250 crore. The second point is that we have not raised. We have the ability to raise up to $100 million in OneSource pre-listing. At this time, what we are now taking a new facility is only a bridge to the listing, and the corporate guarantees of Strides will completely go off the balance sheet in the next 12 months.
Okay, so this is just a temporary facility, and according to you, once this demerger takes place, then all the corporate guarantees, which are basically every liability that Strides has towards Stelis, it will manage.
Don't forget that the Strides shareholders are the biggest beneficiaries of OneSource. And, and obviously, all of this is one of the other reasons why it is the beneficiary, for which, for having supported and sustained the company. But once it's listed, all of these guarantees will go off the hook.
So, sir, as part of this demerger, lenders are okay with such an arrangement wherein, you know, Strides will no longer have any corporate guarantees towards Stelis?
Because there will also be that much less loans in OneSource, right? The new company.
Understood. Understood. And secondly, this, you mentioned about the one-offs which we have taken pursuant to that injectable business in Stelis. So now we have arrived at INR 7 crore EBITDA loss as per the presentation. So what was the, what was the write-off that we have taken, and what would the EBITDA be ex of this write-off at Stelis level for this quarter?
The write-offs are all discontinued business write-offs and has got nothing to do with the EBITDA. It is below the EBITDA line item.
Okay, okay, okay. Understood, sir. Thank you, sir, and all the best.
Thank you. A reminder to all participants, you may press star and one to ask questions. The next question is from the line of Aditya Sen from Robo Capital. Please go ahead.
Hi, thank you for the opportunity. Sir, one of our main growth factors for the coming two to three years will be the product launches. This is what we understand as per our research, and we have guided—we have been guiding that we'll launch 15 products roughly per year. So, we just want more light on this subject, like, how certain are we of the 15 product addition per year, and roughly how much revenue addition do we expect per year in the, in the coming two years?
Yeah. So we don't have specifics, Aditya. We have close to about 150 approved ANDAs that are in the process of doing significant rework for it to be cost leaders or quality, to ensure that the quality is the right quality, because many of these ANDAs are old, and they've been acquired from our Endo transaction.
Mm-hmm.
So we are very confident of launching these products already approved, so we are not dependent on any ANDA approvals to launch 50-odd products per year. So there's no lack of confidence on that. But the timing of these launches is a function of the right market opportunity and the pricing that we get. And until we know that, we are a very patient player in the market, and that is how we've been disciplined to deliver the kind of gross margins that we have in the last three quarters consistently. So to answer your point, we have the approved products. We have high on confidence to launch 50-odd products, which should we launch 15, should we launch 10, that's a function of the market.
Mm.
Ensure that we have guided the market that we aspire to be a $400 million company in the U.S. We currently have a run rate of around $280-odd million, $260-odd million, $70-odd million. We're very confident to get to $400 million. We have all the tools in hand, but we are timing it and calibrating it to ensure that our margin profile does not change.
All right. All right, and also, we previously guided that, we will be doing some sort of cost optimization to, boost our EBITDA to approximately 21%-22% range. So, are we on track on this?
Yeah.
How is it going?
Presently, you will notice that our costs have not changed in the last many quarters.
Mm-hmm.
We're very focused on cost control. There is more to go, and we believe that getting to a 21% EBITDA is realistic, and that's what we are focused on.
All right. Got it.
Thank you.
Thanks for your time.
Thank you. Before we take the next question, a reminder to all participants, you may press star and one to ask questions. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Thanks. Arun, on the U.S. sales for this quarter, you know, you've talked about icosapent being launched in the quarter. So has the full impact or the peak impact of that visible in the quarter, or there is more to come for further launch?
No. So basically, Nitin, this, as we announced, this is in partnership with Amneal. So our profit share, a part of it will flow through in the coming quarters. What you see is, what you see in the revenue uplift is basically transfer pricing. So there's more to come from.
And like what SUPREP you said, it's gonna be more like a Q1, Q4 launch. So the full impact of these two launches should be visible more like in Q4 and Q1.
Q1 of next year, we'll have full launch. This will be just a few weeks in this year.
Thank you.
Sorry, in Q4, it'll be a few weeks. You'll have a full impact in Q1.
For both the launches?
Yes. I think to a very large extent, icosapent, you will see it fully in Q4, but we're not sure about our profit share coming through in Q4, because typically this takes, there's a lag of four to five months before the profit shares come through.
Okay. Secondly, in terms of when you look through the next year and the 10-15 launches you've talked about, a nd when you sort of look at these two launch approvals which have come through, like SUPREP and icosapent, do you have in your portfolio, in your assessment, similar sort of opportunities which are there for future approvals, you know, in the coming quarters?
Yeah. So, Nandan, we spoke about this last, so just to reiterate that we do have, we're moving the needle in terms of our products, product size for market, in the molecule in the marketplace. So effectively, we've started investing in products which now average $15 million-$20 million. So ICO, SUPREP, are products that meet that criteria. There are few more coming our way. There are some in the end of portfolio that would reach that milestone, with the work that we're doing with the FDA to be cost competitive or source changing and revalidating the product on the newer processes and technologies that are currently required to meet the compliance standards of the regulator.
So yeah, I think that the era of $4 million-$5 million per product is now behind us, because that also complicates our manufacturing and supply chain process with so many changeovers and SKUs. So yeah, so we are now invested in that $15 million-$20 million ideas, and we, we seem to have a fairly reasonable success rate of selecting and getting products approved very quickly, in that budget.
Thanks. And secondly, on, the other regulated markets, you talked about, a lot of things starting to flow through in FY 2025. So FY 2025, growth trajectory-wise, do you see a meaningful delta over what you've done in the last couple of years in this business?
From H2, yes. We've just secured some major product approvals through the DCP process. We are going through the national filing. These have been licensed out to some of the largest players in the market, for pan-European launches. So the DCP process has been already approved, so product approval is behind us, but the national process takes upwards of three to four months, and these very large companies take. So H2, FY 2025, you can see a meaningful bump up on our numbers from the other regulated markets.
And finally, the last one. On, on the biologic CDMO component of the business, which is there in Stelis, you know, can you help us understand in terms of how do you see that piece really playing out over the next four, five, three, four, five years?
We guided, we are guiding again, firmly that in the next four to five years, look at Stelis part of the business to be a $400 million CDMO business, and we expect the EBITDA to be in the 50% range.
In that, if you can take it further, the biologic CDMO is going to be one segment of that. I mean, that is right now probably the smallest portion in the OneSource business as it is envisaged. I mean, how do you, what kind of trajectory do you see for that business, the segment rather?
A lot of the growth is coming from Biologics.
Okay.
In the INR 400 million.
Okay. Thank you.
Thank you. A reminder to all participants, you may press star and one to ask questions. The next question is from the line of V.P. Rajesh from Banyan Capital. Please go ahead.
Hi. Thanks for the opportunity. My first question was regarding the outlook for the rest of the world business, or excuse me, rest of the regulated market business. The way you have given guidance for the U.S. side, do you plan to share that now or in a couple of quarters down the road?
Yeah, a couple of quarters down.
Okay. And on this quarterly revenue that you have posted, how much of the business is going to go away to OneSource?
Of the total revenue, so we guide—when we announced OneSource, we did say that we will still, in spite of the business going close to about INR 150 crore of EBITDA going moving away, we will still do INR 750 crore next year.
Right. I was just asking about this quarter. So you have done INR 1,000 crore-INR 1,100 crore or so of revenue.
Yeah.
How much of that is going to go away?
Yeah, we are trending quite equally for quarter, so you should assume it's INR 150-INR 160 divided by four.
Understood. Okay. Lastly, on the timeline, you know, from today, how many months before OneSource get listed in your estimation?
I think outer limit would be 12 months from now. We obviously are. This is all subject to the exchanges giving us their approvals, and from there on, it could be six to nine months, and then the listing process.
Got it. All right. Thank you. That's all I have, and all the best.
Thank you. The next question is from the line of Tushar Bohra from MK Ventures. Please go ahead.
Yeah. Thanks for the opportunity, and congratulations to the management, for a good set of numbers. Just a quick clarification, in the response to a previous participant, did we mention, OneSource has, INR 400 million revenue, which is guided earlier, but 50% EBITDA margin?
Yeah. So the question to Nitin was, Nitin was asking me what is the OneSource business, which is, which we said we have already guided $400 million. The Biologics part of the business is where the growth engine is a 50% margin business. The rest of the business is a 30% business. The bulk of the growth comes from Biologics. So when we list, when we carved out OneSource, we did mention that FY 2025 revenues will be about $180 million, with about $65 million of EBITDA.
We are now in a strong position to reconfirm those numbers. We also guided in that document that four years from there on, we should be a $400 million business, with that bias to increase EBITDA. The EBITDA bias comes from the fact that the Biologics division delivers EBITDA of close to 50%.
Got you. And this, we would have some contractual visibility as well, right? Because we already have some contracts in place for the next two to three years. Right? So it's fair to assume that there's a proper contractual basis for some of this outlook, bullishness for us.
How the CMO business works. You can't, w e are not, we are a concentrated customer base. We have 16 customers with very large accounts, and we have fair visibility of forecast, and we do a sensitivity on that forecast, and yet we come up with those kind of numbers.
Got it, sir. And, regarding the U.S. business, I think, in second quarter call, we had, sort of guided that the journey from $250 to $400 would be fairly evenly split, something like $320, $330, or rather $320 next year. We're good for that, right? We continue to maintain an outlook, or will it be a stronger growth next year and then, a gradual one the year thereafter?
No, if it's stronger, if it's quicker, then the quality of the business is back. So you're right, it's more graduated and calibrated in that phase.
Got it, sir. But the incremental delta coming from U.S., but our gross margin guidance remains at around 60%. So is it fair to assume that, you know, we are being conservative here, or do we see a pressure on some of the base business, which last few quarters has not been the case with us? Or is it any of the other markets where we are being more conservative on the margin side?
So we are consciously moving some of our products B2B in the U.S., which we never used to do. And that is why the related associated costs are much lower, because it gives us an improved working capital cycle time, which is our focus, improve free cash generation. So gross margin is not necessarily an indicator of EBITDA or what the EBITDA could be. So the reason why we say that we do not wish to increase our guidance on 59.3, the flow through from 63 to, it does not make it 18%-21%. 59 can also be 21, with OpEx leverage.
Thank you. The next question is from the line of Omkar, an individual investor. Please go ahead.
Sir, good evening. Am I audible?
Yes, sir.
Sir, congratulations to you and entire Strides team for great set of numbers in terms of gross margin as well as operating profit margin. I'm having two questions, sir. As more products will get launched every quarter in U.S., can we say now our quarterly run rate will be around $70 million per quarter? And when can we expect growth in ORM, I mean to say, as we are doing consistently $40 million revenue per quarter in ORM market?
Thank you for your commentary on our performance, but, I would not judge numbers. We have given a general guidance that, we will do $50 million this year. We are well on track. We have alluded to the fact that a $310 million-$320 million is possible. Next year, we will do that. So that could be more than $70 million, it could be more than $80 million. And in the other regulated markets, we have just mentioned to Nitin's question earlier, that H2 will be much stronger than H1, and that will also ensure that the business grows beyond the $40 million per quarter run rate.
So, sir, as far as [ORM] is concerned, when the other regulated markets start performing, because as we are doing consistently that INR 40 million revenue per quarter, so when can we see the momentum in other regulated market also?
But on a year-on-year basis, it has grown 21%, right? So it is not consistently 40. It's actually grown by 21%. So-
Sorry to interrupt, but I track Strides' performance every quarter properly, so I know your average revenue in other regulated market is always $36 million-$40 million. YoY have gone up, but I know all the quarterly figures, how Strides is performing, and they are doing very good job. But just asking for ORM. For U.S., Strides team is doing excellent, but just wanted to confirm for the ORM also, because as of now, we are still at that $36 million-$40 million revenue per quarter.
Yes, so Omkar, it's going to be like that for another two, three quarters.
Okay.
There is a process called registration and national registration. We've got a lot of great product approvals in the last one month, but the process of national approvals will take another three to four months. So in H2 of next year, you will see significant improvement in our numbers. Till then, if we get to $40 million per quarter, we think we are doing a great job with the other eight markets, too, given that we started investing in this market recently.
Thank you. The last question is from the line of Aditya Sen from Robo Capital. Please go ahead.
Hi, thank you for having me back again. On the debt part, sir, I guess I missed it. Probably we are, we have a target to reduce debt by INR 750 crore by FY 2025. Am I getting that right?
No. Where did you get that from?
I'm not sure. Probably older PPTs or something. So, where are we? What is the target? How are we placed on this?
So we have already met our target. We are not going to guide on debt anymore. We are under three.
Okay.
We speak ahead, a quarter ahead of it, and we are in a very comfortable position with debt. Our focus is on the balance sheet, and consequently, debt reduction is a natural extension of our operating leverage. We do not have any inorganic strategies or major CapEx that we can't fund ourselves.
Mm-hmm.
So consequently, all our free cash generation is going to debt reduction. We don't have a specific number, but it's normal in our business that if you generate INR 750 crore gross margin, you generate free cash flow close to INR 450 crore-INR 500 crore.
Right.
So after CapEx, it's quite feasible for us to reduce debt by INR 300 crore-INR 400 crore every year, like we did this year, like we will do this year, like we did last year.
Mm.
We'll continue to do that in the following years.
All right. Okay, got it. That was my question. Thank you.
Thank you. As that was the last question, I would now like to hand the conference over to management for closing comments.
Thank you. I appreciate your arranging this conference, and to our friends and investors, thank you for listening in. Like I said, if you have any questions, please feel free to write to us or to contact Abhishek. Thank you. Have a great day.
Thank you. On behalf of Strides Pharma Science Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.