Ladies and gentlemen, good day, and welcome to the Strides Pharma Science Limited Q2 FY 2024 earnings conference call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Abhishek. Thank you, and over to you, sir.
Thanks. A very good afternoon, and thank you for joining us today for Strides earnings call for the Q2 ending financial year 2024. Today, we have with us Arun, Founder, Executive Chairperson, and Managing Director, and Badree, Executive Director of Finance and Group CFO, to share the highlights of the business and financials for the quarter. I hope you've 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 risk 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 relation team.
I now hand over the call to Arun to make his opening comments.
Thank you, Abhishek. Good afternoon, and good evening to everybody joining in. Really appreciate your time today. I know it's a busy earnings season, so we appreciate your time today. We have reported a very strong quarter. It's our sixth consecutive quarter of absolute EBITDA growth and also an all-time high in terms of revenues. Just to avoid some confusion that could have occurred with our steady reporting, I would like to mention that the INR 269 million shown as other income is income earned on IPs, which are in our normal course of business, and it is not a one-off income.
As the company moves more and more to B2B, part of this business model is to license products to partners and also would get, you know, upfront payments for licensing incomes, but also for use of IP. I just want that to be clarified so that there is no confusion on the numbers. Having said that, it's a milestone in terms of revenues for the company to have crossed INR 1,000 crore. All businesses have done well. There has been no business that has underperformed. We provided a new slate of guidance as we were busy resetting the company since the last six half quarters. I'm pleased to confirm that all our outlooks are on track. One, to stay on, stay with revenue growth at 15% on continuing business. This has already been 16%.
Historically, the H2 is a significantly stronger part, stronger half of the year, and we are therefore confident to even beat the revenue growth. The exit run rate of the company in this quarter on constant currency is approximately $500 million of run rate. And I think that's, that's a decent base, for those of you who follow us and write about us to consider as a, as a more reset base after course correction. We are also pleased to guide, EBITDA now to the higher end of the range. This is based on our strong order book in H2.
Several product approvals that we received recently, including the critical product of Xifaxan, generic Xifaxan, which would be launched in this quarter, that thereby giving us confidence that we will be closer to the higher end of the range. We're also pleased to see a significant improvement in our net debt to EBITDA ratios. We started the year in FY 2022 at the reset at close to 8 times. We ended FY 2023 at 5.3 times. H1, this is now improved to about 3.3 times. And with our continuing free cash generation, we are very confident of meeting our net debt to EBITDA target of under 3 in FY 2024, as we had committed. Our network optimization program has been complete.
As many of you know, and as we have guided earlier, we mothballed our Singapore unit since the last two years. Considering that we have now had a manufacturing facility in New York, Singapore therefore became unviable for us to operate because it was mainly meant for the VA business and the government procurement programs, which qualifies "Produced in Singapore." Considering moving all our products to Chestnut Ridge or critical products in Chestnut Ridge facility in the US, this facility had become redundant. So this was sold, although we incurred a one-time loss, this gen, this gen...
This improves our EBITDA and EPS flow through to by almost about 60 crore a year, considering that there are several, a significant part of the depreciation line item, including lease rents, which is part of our Singapore asset that we've got. This will improve both EBITDA and below EBITDA line items. All of these proceeds will be used to reduce debt further, and, with our net debt reduction of INR 62 crore, this is in spite of the fact that we continue to invest in, with CapEx, ongoing CapEx needs in India, but also in the U.S., but also the fact that we grew the business by 16%.
Our focus on free cash flow generation, reduction in our cash to cash cycle times, which has been reduced by 30 working days, approximately from FY 2022 to now to just under 125, 126 days. And we'll further work through those days as our business quality improves. The business moving more and more to B2B will mean that our licensing incomes will continue to grow. So also will there be a reduction in our cash to cash cycles. This will bring in further improvements in our debt pool. I would specifically, if I take regions, the US, we guided in the last call of revenue guidance of $240 million-$250 million.
Considering H2 is a significant part of our U.S. business, with our cold and flu and acute therapies, and with some important product approvals like the ones I mentioned in my opening statement, we are now very confident of achieving the higher end of our guidance of $250 million. With the completion and closure of the warning letters issued to Pondicherry, which was closed out last quarter, we are now expecting several product, new product approvals, and that also, and a continuing work on getting products that we acquired through the Endo portfolio. That continues to be brought to India to be more competitive, to have more robust manufacturing processes around them. Approvals around them also continues to grow.
The stellar performance from our other regulated markets is mainly driven by a continued growth of business in Australia, the Nordic regions, and a significant uptick in our business in continental Europe, consequent to a complete shift to B2B in these markets. We continue to add new partners, we continue to get several products approved, several products filed, and we believe our front-end operations in the U.K. and the Nordics, added by our strong partnership model in the rest of Europe, will help us drive this momentum. Our strategy, obviously, is to have the other regulated market mirroring the U.S. market so that we de-risk the higher dependency on the U.S. business. We see the access markets, the growth markets, as we call them. As you would see that the growth markets have started to show results.
We are continuing to develop these products with these markets, with increased focus on new geographies and new portfolio. And we believe in the next two to three years, the growth market and access market will become as important as a market as the rest of the world, the, the other regulated markets. So overall, it's been, a pleasing result, for the quarter. A lot of the work that we have invested in the last eight odd quarters is now playing through. We're very pleased with our operating leverage, our free cash generation, our gross margin improvement, which at close to 60%, is almost industry high, considering that we do not have a domestic business. And again, the one-offs, in Strides with all the work that we have done with network optimization is complete.
A large pickup from our JV, as we guided, in Stelis from our associate company, Stelis, from H2, will be very negligible. The business in H2 will be EBITDA positive. We continue to add significant new contracts in our CDMO business in OneSource, and we expect to close the Syngene transaction, as guided in this quarter. Consequently, our targeted debt reduction of about INR 700 crore between the two companies will fall in place, but will also release significant amount of corporate guarantees of Strides. So in all, we're very close to achieving everything that we committed would be our focus. And I think we got the company back to a state of continued growth. You will see significant upsides in terms of new product launches.
We have some several nice products coming our way in the next couple of quarters, and we'll keep you posted as soon as we get those approvals and give you continued information on market share. We continue to see important price stabilization for our portfolio. There are cases where we have price pressures in one or two products. We apply a very disciplined approach to product market share, and that's not on price leadership. But because of our large portfolio of products, we can afford the luxury of letting go of pipeline of products that don't meet our margin criteria. Having said that, we have enough ammunition with products approved or under process of site changes from Endo to India for us to be more competitive.
So overall, a good result, and we will continue to grow from here. Our focus obviously now is the conversion from EBITDA to free cash, and to ensure that the PAT percentages increase considering the one-offs are all sort of solved for. So that's the general overview of the quarter. We are excited about the prospects for the second half, and we continue to be very excited about OneSource that we announced recently. And we believe that there will be significant value accretion for all our stakeholders in the coming days. So thank you for your patience, and both Badree and I am very happy to take any questions that you may all have.
Darren, we're good to take the Q&A.
Thank you, sir. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. 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. The first question is from the line of Rohit Mundra, an investor. Please go ahead.
Thank you for the possibility, sir. My first question is on the US business. So we have sustainably achieved $60 million quarterly run rate now for our US business, and I think we are very much on track for our FY 2024 guidance. So what will drive the next level of growth, and how should we look at the pace of $240 million, growing over the next couple of years?
So we've mentioned that to maintain the kind of margins that we are focused on the U.S. market, we would peak out closer to $400-odd million. That's our first near milestone. We have all the products approved to get there. We believe that this can happen in the next two odd years as we slowly build out this business with the kind of margin profile that we are currently operating at.
Okay, got it. Secondly, could you provide your view around the current competitive scenario in the U.S. market and something around the price erosion that we faced during the quarter?
So I think that there is generally a more disciplined approach in terms of pricing, both with the buying universe and the selling universe. That doesn't mean that there aren't one-off irrational pricing that we see. So it's a lot better than what it used to be, but it's not vanished from the marketplace. Although the product shortages are increasing, but irrational pricing still continues. Considering that we have a very niche portfolio with over 30 products of ours in one or two in terms of market share for many years, we have been able to maintain these market shares, and therefore, we, I'm not saying that we are not immune to price pressures, but it is relatively small for our type of business.
Got it. Thanks, sir.
Thank you. Participants who wish to ask questions may please press star and one. The next question is from the line of Aman Vij from Astute Investment Management. Please go ahead.
Good afternoon, sir. My first set of questions is on our GLP-1 portfolio. So in the last last call, you had mentioned that we had made some solid investments in devices and are a leading drug device player globally. So I would like you to elaborate more on this part. So are we saying that we have started manufacturing these self-injection drug delivery systems also, which is required for GLP-1?
So the GLP-1 is part of Stelis, which is an associate company of Strides. We currently have about 15 customers, and we partner with several companies worldwide, for and we have filed all the weight loss and diabetic drugs which are in drug device formats. Not only Wegovy and Ozempic, but a lot of other, other programs too. So to answer your question, we are in a very strong position, but the patents for this start going off partially in FY 25, and the main patents get off only in 2030. So commercial supplies will not start quickly. But having said that, we do a lot of R&D.
We do get a lot of R&D income, and we do hold a very large order book for our contract manufacturing opportunities led by GLP-1 in OneSource, which is a company that we just announced as a carve-out in the last quarter.
Sure, sir. Just one... That clarification was left on this comment of leading drug-device manufacturer globally. So you are saying we have started manufacturing this, the devices, the drug delivery system, self-injections, in that subsidiary, OneSource?
Yes. What I was saying is that we have already started manufacturing products for several customers who have made their filings with the regulators. Once their products get approved, and when the patent regime opens up, we will start commercial production. At this time, they are development and filing batches that we have done for companies.
Sure, sir. You mentioned there are like 14, 15 customers, and last fall, I think it was also mentioned that they have given some kind of rough visibility of around $300 million number in the next 2-3 years. So according to your estimate, these 14, 15 customers will have what kind of market share combined? Can we as a CDMO partner for them, can this be like a 10, 20, 30% market share opportunity for us based on-
We can't predict market share on behalf of our customers. Our model as a CDMO is to do services. If a customer wants capacities, we either they reserve those capacities on a take or pay basis or a contract. And based on certain sensitivities that we do on these forecasts, we believe that our peak revenues will get to about $300 million in the GLP programs. But that is dependent on our partners getting approvals, but also when we can actually start selling, given the patent regime in various countries. So I can't give you more specifics beyond that.
Sure, sir. And you said initial sales will happen some part in FY 2025. So, my understanding is, I think, this is you are mentioning for liraglutide, right? So liraglutide sales, FY 2025, FY 2026, can it be, like $50 million kind of sales, or it will also take time to come in?
Sales will commence, but I'm not willing to put a dollar number.
Sure, sir. Just one final clarification on this part. So we used to have a tie-up with international PM known as Oven Mumford for this drug delivery devices. So given now we have it in our own subsidiary, so that tie-up is no more valid, or we'll do both the things. We'll have tie-up with international platform companies as well as we'll do-
Owen Mumford is not a platform company, it's a device manufacturer. We have several device manufacturer partnerships. So they make the device, we make the drug device, so we put the drug in the device.
Okay. So devices we are not making for any of our products?
You need to get back in the queue because there are other people waiting to question.
Okay, sure, sir. I'll get back in the queue. Thank you.
Thank you. Ladies and gentlemen, to ask a question, you may please press star and one. We have the next question from the line of Shantanu Maheshwari, an investor. Please go ahead.
Hi, thank you for the opportunity. My question is regarding the Other Regulated Markets performance, which has been quite strong. We have mentioned in our Other Regulated Market slides in the investor presentation that we have a strong funnel for the European B2B partnerships under the Synergize to drive growth. Can you please put a little bit of light on this?
So Synergize is our B2B, the name of our B2B platform. It's a platform that sells capabilities for both Stelis and for Strides under one platform, so that we offer multiple services to a customer. And Synergize is only a logo of a B2B arm of Strides. And we partner with major companies in Europe and out-license our products, and that is how we get licensing income, profit shares, and all of that. And Synergize is the name, is the logo that we use for customers to differentiate our B2B business from our B2C business.
Noted. Noted. Thank you.
Thank you. Participants, you may press star and one to ask a question. We have the next question from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Thank you. Nitin Agarwal. Just, leading back to your earlier remark, just to reconfirm that you said the U.S. business sales for us can be $400 million in the next couple of years?
Yeah, I mean, if we, I'm saying that if we want to do this calibrated, disciplined approach for our U.S. business, in spite of us having so much of approved pipeline, we will believe that $400 million is the right size for us to keep the margin profile that we currently achieve in the U.S., and also to have a backup when we are challenged on certain products.
Right. And sorry, but, by when do you see getting to this $400 million mark, you said?
I would assume not later than two financial years from now.
Okay. Thank you. Secondly, you know, in terms of some, you mentioned about some meaningful launches being there in the second half of the year. I mean, is there a number that you have in mind, you know, and, and these launches are what? Are we talking about meaningful launches of more than $20 million products?
Yeah, I mean, Nitin, we have moved up the ante in terms of our average product range being $4 million-$5 million, to now products delivering more than $10 million-$12 million. But we do have... I mean, you will appreciate that Vascepa itself should be about $20 million product by default of the size of the market opportunity. And there are several other products that would come our way very soon. So yeah, we should have three, four products, which are $20 million and above, by the end of the year. I mean, exit run rates.
I guess, so sir, is it fair to assume that, you know, bulk of the revenue realization from these products should be visible next year, depending on at what time of the year in second half they really hit the market?
Correct.
And secondly, on the operating leverage, which is inherent in the business, with the scale-up that you're talking about in the business, I mean, again, is it fair to assume that, you know, we've, we've been really consistent with our overheads position now over the last two, three quarters. So does this $200 million sort of annualized run rate for overhead sustain, and then whatever incremental gross profits you make, sort of, flows with the bid then, Pat?
Yeah, you're right. So we don't believe our OpEx levels are going to increase greater than $200 million for several years. And that is because of our very keen focus on costs and also a lot of things that we do in terms of optimization, OpEx leverage, and OE improvements in our plants. Having said that, the only variable would be the freight and associated warehousing costs for increased revenues. But for that, the flow through from gross margin to EBITDA could be strong, and we believe that would be the singular point pointer towards improved EBITDA margins.
If I just take it forward, I mean, what does it really imply for your EBITDA targets for this business ex of, you know, the Gelatin business that you will dispose of, rather divest to, to OneSource? When you look at Strides as a business, you know, over the next two, three years, where can net debt to EBITDA level be for this business?
You're talking about net debt, net debt to EBITDA levels, or you're talking about?
Net net debt to EBITDA.
We strongly stand by our guidance that in spite of about INR 150 crore of EBITDA moving to OneSource, we will still achieve our current EBITDA. Effectively, we are telling you that like to like, our EBITDA will be closer to INR 950 crore in the next year. In spite of INR 150 crore of that moving away, we will still achieve our current EBITDA and revenues. There will be no drop in revenues and EBITDA. We believe that in the next two years, our debt to EBITDA, therefore, will be much below 2, given the strong performance that we are now achieving through our reset.
Second question, the last one. In the past, you've had, you know, you know, I mean, when you look through again the next 2-3 years, given the way you're thinking about the business, do you see opportunities or avenues for meaningful inorganic growth using the cash flow that will come through? Or how do you emphasize the business growth over this period of time?
Well, not in the case of Strides. I mean, I think there are the cheaper asset side in markets that we probably don't want to expand beyond the size, which is mainly the US. Every other markets are not necessarily cheap. So I think, Nitin, we are just signing, you know, it's a—we are breathing a lot more easy now, considering where we started the reset. And I think we need another 2-3 quarters of consolidation and reduction of debt, which is what we are focusing on. I mean, the debt is not a no hang, it's working capital debt. And with $35 million moving away to OneSource, it actually becomes even better for Strides to operate.
But I think for the next 2-3 quarters, our focus would be to, improve our CCC, which, like I said in my opening, started off at 150-odd days, is now 127. Our target is to bring that down by another 15 days, so that we don't have to worry about incremental working capital in spite of a 15%-16% top-line growth. So that's our focus. I think, maybe you should ask this question to us after about 3-4 quarters.
Thank you, there. My best luck.
Thank you. Ladies and gentlemen, to ask a question, you may please press star one. The next question is from the line of Sarvesh Gupta from Maximal Capital. Please go ahead.
Good afternoon, Arun, and congratulations on another steady quarter. Just for this clarification on that U.S. business, currently we are trending around 16% odd annual growth. While you are saying that we can reach maybe $400 million in a couple of years, that would mean around 30% CAGR. Are we talking about doubling the growth in the U.S. in the coming two financial years?
Yeah. So basically, what I said is that you look at our exit run rate, for us to be at $250, we need the exit run rate will be close to about $280 million, right? $270 million-$280 million. So if we do an absolute number of $240, the exit run rate is about $270, $280. So you calculate from there on. And it is not a 30% CAGR. Obviously, the US growth is going to be stronger because I was explaining to Nitin, we don't have... Most of our new products are in the $15-$20 million range, compared to our historical $5-$7 million. So that is the reason why we are upping our num...
I mean, reducing the time while the growth on the other markets will be slower, but a lot more steadier.
Understood. And given the strong traction that we have now found in the other regulated markets, would you like to call out some sort of a guidance in terms of growth or, you know, where we want to be in a couple of years?
It's too early to call out a guidance, Sarvesh. I think our idea is to grow the other regulated market as a mirrored market to the US. So if our product design strategy plateaus at $400 million in the US, we would like the other regulated market to mirror that size. So it will take us a lot more than two years to get there, considering that currently our exit run rate is likely to be about $200 million, which is almost 50% growth in the last two years. So we think that there's a lot of momentum coming there, and then, as you can see, we are also building the growth markets. So we have three-...
We will probably plateau the growth for the US, not because the opportunity is not there, because we may not want to grow that business beyond that, because it may kind of impair the pristine of our margin focus for that market. So that's, that's more it. The idea is to build the other eight markets to about mirror the US market, but that's not going to happen in two years. It's going, it's going to take probably four or four and a half years. But that's the idea. Can we create two or, two or three mirrored markets, in terms of revenue and margin profile?
Understood. And finally, on the exceptional items, you know, this facility that we have sold, it looks like we have only realized maybe 50% or lower of the book value of that asset.
Yes.
Any particular reason why we had to incur such sort of a sharp drawdown on the stated book value?
One is that, you know, it obviously we had mothballed this facility now for a good two years, considering ever since we bought Chestnut Ridge. Post-COVID, Singapore for generics just became very unviable. We had a choice to continue to mothball or just move on, because, like I said, our focus now is the EBITDA to cash to EPS conversion. While we took a one-off hit, this delivers close to INR 70 crore of margin improvements from EBITDA to PAT, and that made better sense to us, and also from a ROCE standpoint.
So we have completed everything that we needed to do to build the company for the next 3-4 years, and we didn't want to have any overhang or any extraordinary exceptionals coming forward in the Strides system, which will not be there, I can confirm that. So it's just to just move on, you know, cutting off the side cover, which didn't probably add to the strategy going forward.
Understood, sir. And this INR 15 crore one-off expense cost increase in the other OpEx, what was that, sir, in the personnel cost?
So we had a policy earlier where a lot of our colleagues in Strides were on variable pay. As part of our banding exercise and other programs that we did, we realized that only about 70 or 80 people make significant direct impacts to the P&L, and everybody else are subject matter experts or are very important associates of the company. So rather than making variable pay a function of uncertainty for employees, especially when we are coming back from a difficult chapter, we decided to cut off the variable pay for several of these employees, but added it back to their CTCs. So that is why we took a one-off. But we are now provisioning that on a quarterly basis, so you will not see this, see this, regularly.
The new base of INR 185 crore is now our personnel cost, which will be more or less steady state going forward, except for standard increases on an annual basis.
Understood, sir. Congratulations and all the best for the coming quarters.
Thank you. Participants who wish to ask questions may please press star and one at this time. The next question is from the line of Aman Veech from Astute Investment Management. Please go ahead.
Well, if you can talk about where do we see our CDMO business in the next two years?
So the CDMO business, once OneSource is up and running, we had put up a detailed presentation. We said that the business will be about $150-$160 million at launch year, which is next year after the NCLT process is complete. And we expect the business to hit $400 million in FY 2027.
Sure, sir.
Any other question?
Yeah, yeah, sir. So, I was talking about that product, one of the products which we had launched a few months back.
You can ask me this several times. I am obliged not to give you any of those information. We work with partners. We are, we are committed to confidentialities. I can't give you the kind of granularity you are seeking in a CDMO business.
No, no, my question is not on that side, sir. My question was on the other product, basically, which is telaprevir. We had launched this product in a lot of markets, and I believe the U.S. opportunity is also coming in. Do we think, are we planning to launch the same? If you can talk about—
Time for the European and other markets, we are not selling this product in the U.S.
Okay. We don't even plan to enter after the expiry of this product.
Thank you. That was the last question. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thank you. Thank you all for joining us today, and thank you for your support all these quarters. If you have any questions, please do not hesitate to call us, or Abhishek, or write to us. We'll be very happy to address them. Thank you all. Have a good evening.
Thank you. On behalf of Strides Pharma Science Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.