Ladies and gentlemen, good day, and welcome to Strides Pharma Science Limited Q3 FY 2022 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone 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, Pradhan. A very good afternoon, and thank you for joining us today for Strides earnings call for the third quarter and nine months ended financial year 2022. Today we have with us Arun, founder and non-executive chairman, Dr. Anant, Managing Director and CEO, and Badree, Executive Director - 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. The transcript of this call will be available in a week's time on the company's website. Please note that today's discussion will 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 the opening comments.
Thank you, Abhishek. Good afternoon, everybody. We have reported our numbers earlier today, and we continue to have a muted performance in our Q3 of FY 2022. However, we do see significant green shoots in our business, and we are now more than confident for a full recovery in the next couple of quarters. The gross margin compression in Q3 is mainly due to a portfolio and business mix, and also the fact that we had inventory of increased raw material prices, which were being adjusted to the lower realizations that we are receiving the front end in some of our markets.
key this year, this quarter has been that, after two quarters of sequential drop in revenues and gross margins, our regulated businesses are now steady state and the losses have been arrested in terms of both revenues and gross margins. We are now seeing very significant upticks with opportunities. In reflection, we believe that some of the products that we let go due to intense competition is playing to our favor as we are now seeing several rebids on the products and contracts that we had lost. We are seeing green shoots in opportunities and increased businesses.
key to our success the next year is for us to retain and achieve our guidance of $250 million of revenues up from about $150-$160 million this year in the U.S. with the add-on of the Chestnut Ridge integration, which is now going to plan. We are now very confident that our business will be on track to meet $250 million in FY 2023 in the U.S. We are also not seeing too much of linearity moving towards H2. We'll see fairly significant pick-ups of our annualized, I mean, our quarterly run rate starting from Q1.
Just earlier this week, we completed successfully an FDA inspection of our Chestnut Ridge facility with two minor observations, which is great considering that we are just completing a transition and yet through our IT systems and our own internal SAP program. This was a not necessarily planned inspection while we were integrating the business into our system. But nonetheless, we had a good outcome, and we're delighted with the continued compliance status of that facility. We have now got our Other Regulated Markets business, as we call it, the ORM, to its previous historical peaks, as we are seeing strong rebound in demand in markets which have opened up for business as usual, especially in U.K. and in other parts of Europe.
Clearly, about three or four quarters into the last year, we've been very focused on cost control. We've seen some of that playing through earlier this quarter. Our focus is to drive our margins through cost improvement programs and also reducing our OpEx and CapEx across our global system. Recently, one small part of the promoters, ex-promoters, the Sachin family requested a declassification which shareholders voted for. Consequently, to ensure that the promoter holding is retained, the family office is committing to invest close to INR 200 crore in different instruments for which we will seek shareholder approvals in the next couple of days. Consequently, we will infuse this cash, which will also augment the growth strategies for Strides.
Stelis after five or six years of incubation finally has achieved its first operational breakeven in Q3 of FY 2022. None of this was led by any business related to Sputnik. This is all with the CDMO businesses, and we had an operating EBITDA for the first time ever, which is very pleasing. We believe that we should be able to ride the upside of the Sputnik opportunity, we have received an NOC to export 50 million doses. We are in the process of getting the product tested as per our regulations, as per our requirements with the Gamaleya Institute in Russia. Once we have those test results, which will come in the next three to four weeks, we are confident that we will start invoicing Sputnik starting from this quarter.
Of course, the COVID opportunity itself is shrinking as we all know. We believe that the need for vaccines in the under-vaccinated countries are significant, and we believe that Sputnik's clinical data supports an opportunity. We could see the potential opportunities beyond the 50 million doses of Sputnik Light, while at the same time, Sputnik V continues to be a technical challenge, like most of us in the industry in solving for that. The Russians have also moved their focus to Sputnik Light, and we hope to be a leading player in that, in their supply chain. Of course, I'll be available for questions later part of this conversation. I'll now pass the mic on to Anant for his comments and to also give you a more granular overview of the business.
Thank you, Arun. Good afternoon to all of you. Quarter three of FY 2022, while we delivered an 8% sequential revenue growth for our business, the operating leverage continues to be subdued. As regards to the regulated markets, we've seen a growth coming back in the regulated markets. Our regulated markets reported $78 million of revenues growing up by 9% sequentially, and the regulated market constitutes about 73% of our total revenues. The U.S. revenues for the quarter three stood at $38 million, up 13% quarter-on-quarter, representing 36% of our consolidated revenues. The integration of Chestnut Ridge commenced in October 2021 and is on track. The site contributed to revenues, however, only for a few days in the quarter.
This facility, as Arun mentioned earlier, completed a successful FDA inspection on February eighth, with two minor observations. We've retained volume market share for key base molecules, and the new launches from Chestnut Ridge portfolio will expand product offerings in the coming quarters. We also completed the divestment of our Florida site at the end of this quarter, and the growth plan for manufacturing business, including the VA opportunity, is now consolidated under the Chestnut Ridge facility. The quarter-on-quarter trend for the generic Rx in the U.S. is showing signs of stability. However, we believe that full recovery is still two or three quarters away. Chestnut Ridge portfolio will therefore help ramp up new product launches, which we have a clear visibility on specific products from quarter one of FY 2023.
We are optimistic to be on track to achieve our growth outlook of $250 million in U.S. sales during FY 2023. Our other regulated markets also continued to be steady, and we had growth of 6% quarter-on-quarter. The other regulated markets reached back to the peak sales that we had in FY 2021 of $40 million. Other regulated markets, despite the surge in COVID cases due to the Omicron variant, have given a steady growth, and we continue to witness healthy traction across the key trended markets and partnership business in Europe. We do expect overall growth momentum to continue for the other regulated markets in the coming quarters. Outlook for the established business continues to be robust given the strong order book visibility and product portfolio expansions.
Emerging markets revenue for Q3 FY 2022 stood at $29 million, up 6% quarter-on-quarter and up 41% year-on-year. The emerging markets business represented about 27% of consolidated revenues for this quarter. The institutional business reported revenue up 20% quarter-on-quarter, led by better uptake from partners. The Africa business, however, reported a reduction down by 17% quarter-on-quarter, but up 19% year-on-year. The Africa business during this quarter was impacted with several countries reporting a high COVID caseload, leading to lower doctor visits and prescription generation. In terms of the operating cost, our operating cost for the current quarter includes the impact of the Chestnut Ridge for the full quarter.
While the freight rate continued to stay at elevated levels versus historical levels, a superior supply chain execution has enabled us to shift towards higher sea shipments, thereby helping container logistics cost quarter-on-quarter. The logistics cost during this quarter was at INR 606 million versus INR 897 million from the previous quarter. Our cost initiatives have started yielding results and will continue to drive operating leverage in the coming quarters. With that, I will hand it over to Badri for his comments on the financial aspects.
Good afternoon. So I'll cover some of the key highlights. Company's overall revenues grew by 8%. The first time we're seeing growth across markets, you know, across all markets. Gross margins for the quarter is at 50%. For the year to date it's at 51.7%.
All these revenues include some few days of revenues of Chestnut Ridge, and it also absorbs all the costs during the quarter. The revenue has not been done up to the full potential, but all costs have been absorbed. The manpower cost increase is mainly predominantly because of Chestnut Ridge integration. Despite the increase in the operating cost because of Chestnut Ridge, we also had the cost management programs which had also started to play in, and started to show the leverage. Acquisition continues to be constant for the base business and the main increase is because of Chestnut Ridge facility. Interest is at a similar range. Stelis had a positive EBITDA and correspondingly, the benefit is also seeing the equity pick up.
The debt is in line with the previous communication. We said that the debt will be at INR 18 billion in Q3. The base business there is no increase in the debt. The main debt increase is because of the Chestnut Ridge to fund its acquisition as well as its working capital. The investment cycle is behind us and with the growth coming back, operating leverage coming back, we'll continuously be focused on the debt reduction. You would also seen the announcements with respect to the equity infusion. This will also help the balance sheet position and growth going forward. With this I'll hand it over to Abhishek to take it forward.
Arun, can we open for Q&A, please?
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their 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. Reminder to the participants, anyone who wishes to ask a question may press star and one. Participants, to ask a question you may press star and one.
Okay.
The first question is from the line of Omkar, individual investor. Please go ahead.
Sir, very good afternoon. This is Omkar here. Just wanted to check, as in quarter one you said you acquired Endo, and that at least will give a revenue of around $70 million in quarter two you said, but later on you said because of pricing pressure, at least it will deliver $48 million-$50 million per annum. What is the contribution in quarter three from Endo portfolio?
Endo consolidation, although we have consolidated starting from Q1, the sales started only. We have taken only for two months.
Okay.
15 numbers or over six weeks. It's a very small portion. That run rate that we had indicated to you will happen from Q3.
Can we expect at least INR 12 million-INR 14 million business per quarter at least? As you have acquired this portfolio, you were expecting INR 48 million-INR 50 million. That is what you said in quarter two commentary.
Correct. You will, you'll see that in Q4. The deal closed only in the last few weeks of the last quarter.
It means that 20 commercialized products is already on, right? You don't have to introduce again. That is already on, and that business will come in quarter four.
Exactly.
Okay. Thank you very much.
Thank you. A reminder to the participants, anyone who wishes to ask a question may press star and one on your touch-tone telephone. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.
Yeah. Am I audible?
Yes, Tushar.
Sir, just on U.S. business, while the target of $2-$50 million from the current annual rate of $14 million, and also on your comment in the sense that it would be more of starting with FY 2023. We are only like in mid-February. So this would be more supported with the launches of already approved products or some new approvals to drive this to start with?
We have, between the Endo portfolio and the Strides portfolio, a little over 70-odd products that are not launched but approved. Most of it is coming from the Endo portfolio. We don't have this revenue of $250 million. It is very a small portion of that only dependent on new product approvals.
These would be at the similar gross margins as the on the existing U.S. business has?
Correct.
All right, sir. That's it. That's it from me. Thank you.
Thank you.
Thank you. Participants, to ask a question, you may press star and one. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Hi, thanks for taking my question. Now, Arun, on the, you know, for the business next year, you know, we've had over the last two, three quarters very choppy gross margins. What, given what you see in the market, what is sustainable gross margin for the business or normalized gross margin for the overall business for us going forward?
Well, with the price drops and other things, the gross margin should settle closer to the 55% levels that we had indicated earlier. We still sit on inventory that is coming to us at a greater cost, right? That adjustment was taken this quarter and will have little impact on the next quarter. I think the next year you should be able to, we should be in that business around 55% in the regulated markets. Of course, these gross margins come down if the institutional business increases quite significantly.
55% for regulated market and lower margins, obviously, for the non-reg market businesses.
Yeah, there are no related CNA costs to that business.
Right. On the Badree, on the overheads, we have about INR 210 crore of overheads, including staff costs and expenses this quarter. I think what we understood is the Chestnut cost is completely into these overheads. This INR 210 is a number that one can analyze or there is a meaningful delta increase on this number for in the coming quarters?
Yes. You're talking about the cost, right? INR 210.
Right.
That would be the basis from an operating cost standpoint. There is a reduction from Q2- Q3 to the tune of about-
No. Badree, Nitin's question is on people cost, which is currently INR 210 crores.
Which is 100.
He's saying it's 200.
Yeah. Okay.
Oh, okay. OpEx. Oh, sorry. I thought it was two. I thought you were referring to people cost. My bad. Please go ahead.
Yeah. From an operating cost standpoint, we have started to see the cost savings programs playing in terms of logistics and all other costs. I think it will settle down at the similar levels.
Badree, safe to say just adding the staff cost, about INR 390 crore, INR 395 crore number that we have for the quarter, that should be an average normalized EBITDA number for next year, so full- year next year?
That's correct. Only one thing I just want to add here that we started consolidating business from October 12th. Maybe 20 days of additional cost can be, that change to that number.
Okay.
That will be marginal.
Got it. Arun, on the other regulated market businesses, you know, we are about $40 million run rate. But I think we mentioned we achieved the previous high pre-COVID highs. Now, I mean, is this business also facing the same sort of challenges as U.S. or were the dynamics at least in this part of the business?
Not really. That is, this business was impacted by demand, especially in Europe. It's clearly come back for it to get to its numbers. I think, there would be, this could be the base going forward, and we will see improvements from this number going forward.
Sorry, lastly, on our institutional business, you know, how should we think about this business? There has been significant pressure on ARV pricing and sales this whole year. In fact, I mean, most companies have suffered meaningfully on a Q-O-Q basis. We've done well still. We've grown a bit on a Q-O-Q basis. But how should we look at this business given this has become, I think, apparently a lot more competitive than it's been over the last couple of years?
Yeah. It is a competitive business, Nitin, and from our perspective, it supports the manufacturing cost, right? It's an important business for us. The volatility is very dependent on how much business that we win. You know, the level, if you look at the $25-$29 million range, has been fairly steady state. That is because that's the minimum quantities of business that we will normally get even if we are not very aggressive on the pricing. But the gross margins in this business keep shrinking given that in some, most of U.S. companies are dependent on key intermediates being imported from China. We do have some challenges there.
Yeah, it's a hard business to predict growth, and that is why we are more confident telling you numbers around the U.S. and the other way.
Okay. Thank you.
Thank you. The next question is from the line of Sarvesh Gupta from Maximal Capital. Please go ahead.
Hi, Arun. This new draft.
Mr. Gupta, we are not able to hear you, sir. Please increase the volume of your device.
Yeah. One thing which is, you know, as per the news items, that there is a new law proposed in the U.S. wherein U.S. FDA inspections can be done, without informing the same about the respective sites. What is the impact that you foresee, for us in terms of the compliance cost or in terms of business because of this proposed law?
Well, I think, Sarvesh, to be in this business, you have to be every day ready for audits. So those costs are already incurred. This regulation that they will end up at your gate in the morning without informing is not gonna change your cost upwards or downwards. You are supposed to be, you know, ready every day to be audited.
We have been doing this and following it in many cases.
Even in India, in the last one or two years, the FDA has landed up in plants without notice. I think that just is more a press article. As of late, we are seeing the audits are all without any written intimation.
Understood. On your employee expenses, you know, now we understand that Chestnut Ridge has been recently acquired, but at the same time, your Florida employee expenses would have gone out, right? Net-net of that, what explains the 50% YOY increase in your employee cost in such a environment?
Last year, this time our Florida was not there. That's clearly the reason.
Florida was much smaller in size.
Okay. In terms of your U.S. business guidance, you are guiding for almost a 50% YOY increase, starting from Q1 itself, and it is supposed to be not backended in H2 of next year. Is that the right understanding?
What I'm saying is that there will be fair amount of linearity in that $250 million number, and it is not going to be backended into H2 and other things because we are not dependent on product approvals. We are dependent on launches which are in our control.
At the average FY 2023 gross margin level of 55% for the company level, including all of this impact.
In the regulated markets, yeah.
Okay. How do you see the growth pan out in other regulated market, for the coming year?
I think we can now consider the INR 40 million as a new base, and we will use it Q-O- Q growth most quarters. I think for 40 into 4%+ standard growth is something that you can bake in the model.
Is it okay to consider?
Can't hear you, sorry.
For Stelis we have gone into operating break even this quarter. Should we expect a PBT level break even ex of COVID impact or ex of the COVID vaccine impact next year?
Yeah. See, we are a CDMO. We manufacture Sputnik as a CDMO. We are not selling it, that is in India with Dr. Reddy's. As a CDMO you can make any product. The idea is that Sputnik being a large CDMO contract, we are calling it out. Yeah, we will be dependent on Sputnik sales to commence for us to be PAT positive, which we hope to be soon.
Understood. Thank you and all the best.
Thank you.
Thank you. The next question is from the line of Tushar Bohra from MK Ventures. Please go ahead.
Yeah, thanks for the opportunity. Just a couple of line items in notes or elsewhere mentioned in the filings. One was mentioned that management is in discussion with Arrotex to collect deferred consideration by March 2022, and I think the amount mentioned is INR 534 crore. Could we just help understand this better? What is the status or anything around it?
It's a deferred consideration from Arrotex for that amount, which is due in this calendar year. Okay? It's due in December. We are in negotiations with them to see if we can bring it forward.
Okay. Management is hopeful that we should be able to do it. As per your-
Correct. Contractually it is due in December.
Right. The amalgamation of Vivimed Life with Strides, which was, you know, essentially approved in October 2020, but you're doing it now. Any implications and any reasons why it's being done now?
There are no implications because there was already a merger which was really in progress in the last one year. We have to complete the emerging markets business, B2B. We are running through a separate company called Strides Emerging Markets Limited. That amalgamation was going on. Now that is complete. Now we have taken a step, taken this up. These are all 100% stock merging into the parent company, and there are no implications.
Sure, sir. For Stelis, so we did INR 61 crore revenue this quarter. Even other than Sputnik, should we be able to annualize at 61 into four or do higher next year? Not including COVID, Sputnik.
You win contracts and then some of them are long- term, some of them are short- term. That's how a CDMO operates. All we are communicating is that the business is now delivering, bringing in customers. We are producing, we are invoicing, we are shipping. It's taken us five years to get here and we thought it was an important milestone for us to explain to our investors who are patiently still with us on this investment.
Sure, sir. One last one, teriparatide. Like, what is our estimate for the plant inspection? Any kind of visibility we have, sir?
We had a plant inspection announced on January 10th, which got canceled because of Omicron. I'm pleased to tell you that as of this morning, we got an intimation of an inspection in March.
Great, sir. Assuming all goes well in the plant, we are looking at what kind of timelines for approval?
Within this calendar year.
Within this calendar year. Sure. Thank you very much, sir. Joining the call.
Thank you.
Thank you. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Hi, thanks for taking my question. Again, Arun, on the vaccine facility in Stelis, you know, as you mentioned, the COVID opportunity is shrinking. We've spent a fair bit of money in putting that facility together. How are you thinking about leveraging this facility, if Sputnik, I mean, to whatever extent can this go to, this opportunity go to, and what do we do beyond this?
As a CDMO, we offer multiple capabilities, right? With this viral vector capabilities and maps, microbial, and we are now full services CDMO. It's typical that you build the infrastructure ahead of your customer demand. We are in discussions with various customers. The viral platforms work in cell and gene therapy, so we are in discussions with customers. We have a fairly good funnel of new customers that are auditing facilities remotely or visiting us wherever they can. The idea is to get enough customers to use most of our capacities. Sputnik gives us a tactical opportunity in terms of capacity utilization.
Having said that, considering that we are now at fairly large kiloliter scale of Sputnik, that's up to 2,000 l, we believe that we have established good credentials in the CDMO space, and we're onboarding customers in various different types of requirements through maps or microbials or vaccines or simple viral platforms which are not vaccines.
Would you be able to hazard any guess in terms of by when, say your second or third meaningful client additions can happen in this business?
We hope to have at least two significant customers to be added this year. With that, we believe that we would be on a constant basis without Sputnik profitable.
Sorry. When you said this year, you mean FY 2022 or 2023?
Calendar year. I'm talking of the calendar year.
Okay. Okay. Thank you.
Thanks, Nitin.
Thank you. The next question is from the line of V.P. Rajesh from Banyan Capital. Please go ahead.
Yeah, hi. Thanks for the opportunity. Most of my questions have been answered. Just on the Sputnik debt, what is the guidance on this? We ended the December at INR 1,860 crores. Should we expect for it to go further up from here, or do you think it will start coming down?
Yeah. With the growth coming back and the operating leverage, it should start coming down. It will be in a range. The intention is that, once, our focus will be on the debt reduction.
Okay. Thank you. All the best.
Thank you.
Thank you. The next question is from the line of Aditya Malaiya from
Hello, can you hear me?
Yes.
Yeah, thanks for the opportunity. My question is on the debt reduction front. In FY 2023, what kind of reduction we can expect, like at what levels it can come down?
Yeah. We, if you really see from an overall standpoint, which is get the growth and profitability back, once we are able to demonstrate in the coming quarters, the debt reduction is automatically a consequential thing. If you really see, traditionally, if we add X, the debt reduction will be about 0.4 of X. That's how it works, and that's what we are aiming for.
Okay. My next question is on the IPO for Stelis Biopharma. We heard last year that you will be demerging the business and coming up with a public offering. Is there any plan in FY 2023 for the same?
We have already started engaging with bankers, as we explained in the last quarter. No changes from that. They are currently evaluating the best options and timing and what exactly needs to be done. We had committed ourselves for FY 2023. There's no change to that commitment.
Okay. The last question is on the stock pledge perspective. We see that there was a significant increase in pledge by the promoters in last few quarters. Now the valuations are coming down significantly. Do we see any risk over here? What is the promoters' plan to reduce that pledge of stock?
There's no absolute increase in the promoter family office debt related to the pledges. It's obviously to do with the fact that the share price corrections resulted in incremental pledges, but it is not leading to increased borrowings. We think that this is a comfortable situation for us to be in terms of servicing, and we don't see any risk to this. We haven't seen this in 15 years, so we don't see this to be a problem. Plus we have obviously just announced a commitment to invest more money into the company, and that is coming from sources outside of LAF and other pledges. We don't see this to be a concern.
Yeah. Thanks for the clarification on that. Thank you.
Thank you. As there are no further questions from the participants, I would now like to hand the conference over to the management for closing comments.
Thank you. Thank you all for participating today, and if you have any questions, please feel free to write back to us, and we'll be happy to engage. Thank you. Good day.
Thank you. Ladies and gentlemen, on behalf of Strides Pharma Science Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.