- 2 years ago
#Q2WithBQ | Laurus Labs’ net profit and revenue see double-digit decline.
Founder & CEO Satyanarayana Chava talks about the recovery strategies and growth outlook for the coming quarters. #BQLive
Founder & CEO Satyanarayana Chava talks about the recovery strategies and growth outlook for the coming quarters. #BQLive
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00:00 Lotus Labs came out with numbers which relative to Bloomberg estimates were much lower,
00:04 but XPO, I think the revenue numbers look okay on the CDMO side as well,
00:09 which might give a semblance of balance. The question to Dr. Chawla, as he had said at the
00:13 end of FY23, that FY24 will be a consolidation year, while the first half has not looked like
00:20 that, can it become that way in the second half, with multiple initiatives that they are doing.
00:24 Dr. Chawla, thanks so much for taking the time out. Lovely having you as always.
00:28 And your view on Q2 and H1, sir, because H1 by itself, when I look at purely the numbers,
00:34 reported numbers, it does not, it has not quite started off as a consolidation year.
00:40 Good morning, Dinesh. The Q2 numbers, except synthesis, all other divisions did very well
00:51 as per our expectations. And when we did our budget at the beginning of the, end of the last
00:59 financial year, this is the one we predicted, this was not a surprise for us, that's the,
01:05 whereas market can assume, but this was as per our plan. And the TRVs, we have maintained our
01:16 leadership position, oncology, surprisingly, the volume pickup was much beyond what we anticipated,
01:22 since we have capacity, we were able to meet, and we're also expanding capacities for oncology.
01:28 Although we have the largest oncology capacity in the country, we're expanding. That shows
01:33 our partners' willingness to bet on us in buying more and more APIs and also more volumes of the
01:42 same API. And when it comes to ARV formulations, we also did very well. You can't compare it
01:51 quarter on quarter because last year was very low in ARV formula, this year we did well.
01:58 And our non-ARV formulations also picking up. About one third of revenue came from non-ARV
02:07 formulations. Earlier it used to be one fourth of the revenues coming from non-ARV, now it is
02:13 moved to one third. That's where we also see some growth in non-ARV business.
02:19 Got it. Sir, I'm first sticking to numbers, then I'll go to everything else. So, I take on both
02:25 the point. I looked at the investor presentation, it's evident that ex-CDMO, the other aspects have
02:30 done well. I'm just trying to understand first from a numbers perspective on the reported numbers
02:35 basis. And I agree that there was a base of last year as well. But considering all of that,
02:41 because the reported numbers include everything, let's say against the 793 crore PAT of FY23,
02:48 the first half PAT is about 64 crores. Revenues, yes, because of the base of PO, but relative to
02:55 H1 lower EBITDA lower. So, would you say that it will be a consolidation year ex-PO or would it be
03:04 a consolidation year even considering the high base of PO? I think consolidation I would say
03:10 ex-PO. The reason why our numbers look lower, see we did invest in cell therapy, our associated
03:22 company is also making losses. So, we are absorbing that losses to the shareholding what we had.
03:28 And we gave research grant to IIT Kanpur to continue their gene therapy assets.
03:37 And we also invested a lot in new facilities, which are fully equipped, fully manned, but no
03:46 revenue coming from. So, you are aware, we never wanted to capitalize any of these expenses.
03:54 So, all those were absorbed in Q2. So, that was also one factor for numbers are not so attractive.
04:03 The one where we always concerned and worry is if our gross margin is going down, that is a big
04:12 concern. So, sales is somewhat external and somewhat internal both, but whereas the gross
04:19 margin is absolutely internal. So, that shows our quality of business. Despite of not getting
04:26 significant revenue share from CDMO, we maintained our around 52% gross margin. That is the
04:34 quality of the business. So, our profits are going up. If we sell more, we have more revenue,
04:41 despite of less gross margin, we can increase our profits. But we have to look at the quality
04:47 of business, we never compromised on that. For the sake of revenues, we do not want to undercut
04:53 our prices or do anything which is going to hurt our gross margins. So, we are able to maintain
04:59 gross margins very well. And the numbers were looking not so attractive, I fully agree with
05:05 you in my opinion. The reason is about 1000 people in our entire team strength are in the areas where
05:16 there is no revenue coming up. So, that all absorbing that consolidation in our opinion,
05:21 we are making this company foundation much stronger than what it was to have a very great
05:30 and bright future. Yeah. And Dr. Chawal, I'm going to come to that at the end to try and
05:38 understand your vision of where you want to see Loris 5 years out, right? Because there's a lot of
05:42 like the presentation also mentions, like you mentioned in the past, the kind of strength in
05:46 R&D, the spends there, the capacities that you're building, because companies don't over wait for
05:51 you to build up capacity, they want ready capacity to place orders. So, I'll come to that in a moment.
05:56 I'm just trying to get with the nitty gritties out of the way first. So, let's start with CDMO.
06:00 The presentation says that the CDMO business project pipeline has scaled up along with the
06:04 expansion of the strategic manufacturing partnerships. Can you elaborate a bit on this?
06:09 So, what we are doing in CDMO is worth mentioning. So, everybody is talking about CDMO. Unless we
06:15 give what we are doing, people also may not appreciate. We are building a competitive
06:21 advantage. What is our competitive advantage? We have the ability to deploy up to 1000 scientists.
06:30 That's one competitive edge. Our impeccable regulatory track record is also competitive edge.
06:37 And we have added 3 million liters of reactor volume in the last 24 months.
06:45 That is also competitive edge. So, we are creating competitive edge
06:49 with resources, quality, manufacturing assets, and also we have expanded our chemistry capabilities.
06:57 So, how many CDMOs are fully, full spectrum of chemistry service they can give? We can give
07:06 bio-analysis, we can do continuous flow chemistry, we can do hydrogenation, we can do cyanation,
07:11 we can do low temperature, you name any chemistry, we are able to do it. We never had an instance to
07:16 say, "No, no, we don't have this capability." That is a competitive edge. It will take time
07:20 for us to build a competitive edge. Once we build a competitive edge, people will realize
07:25 and people also acknowledge. That is the reason why we are hosting so many customer visits
07:32 and going to customer audience. So, actually, this is the busiest year for us. Okay,
07:37 leave numbers aside. This is the busiest year. This is the exciting year for us.
07:42 Okay. Dr. Chawla, typically, when do such quantum of, I mean, let's assume that your
07:50 business allows you to try different things, build out different things and then take a
07:55 decision of when to scale what. You are saying that there is a lot of customer visits that are
08:00 happening. Typically, in your experience or in your assessment, when do some of these things
08:06 take real shape and form in terms of you getting larger scale orders as a result of these visits?
08:14 Does it take one year, two years, three years? Is there a timeline-based thing
08:17 or is it a capability-based thing? It all depends on what we are getting.
08:21 If we are getting phase one projects, it will take four, five years for us. If you are getting
08:27 a phase two projects, it will take maybe three years. If you are getting phase three, it is much
08:32 harder. So, in this diversification, because of our ability to deliver, we got some phase three
08:40 opportunities also. So, people are moving their phase two assets. If not, they are moving,
08:46 they are adding additional phase three source because of our capabilities. That's the
08:53 beauty spot where we are in right now. Okay. A couple of other questions. You mentioned
09:00 about how commercial scale validation supplies for the animal health product has started.
09:04 How big can this be? By what quarter can some of these show very strong tangible results, Dr. Chawla?
09:15 The full facility will go commercial during 2025. That is FY26.
09:26 So, in the meantime, we will do maybe 20 validations. So, as we started with
09:36 first round of APIs, they liked our approach and they got the second round of APIs. Now,
09:43 we are doing third round of APIs with the same power. So, that entire facility,
09:48 earlier we used to have one block additional capabilities to build, but now that also we are
09:56 building. So, we are adding, so that entire site will be utilized for one customer and fully
10:01 go commercial by end of 2025, all products. So, that comprises of NCEs,
10:12 still molecules are patented by the innovator, generic, high potent molecules,
10:18 steroids, hormones. So, that is people are envious about that deal what we did because of
10:27 the kind of molecules what we are going to make. You are asking about potential. So, it is too
10:36 early to say, we know the numbers, but I will give a range. It may be above $60 million.
10:43 Okay. And we might see some evidence of that, early evidence of that only in FY26 because
10:53 that is when the most... No, no, no. So, it is a gradual ramp up.
10:57 So, starting from FY25, you will see some commercial supplies.
11:05 FY26, right? FY25 also will have some commercial supplies.
11:09 Got it. The presentation also speaks about a multi-year commercial contract with a leading
11:14 global crop science company, signed. Is this different from the one that was done in Q1,
11:20 or is this the same one, sir? We have signed,
11:23 one we have signed, another development agreement we have signed. So, eventually we expect once the
11:32 development is completed, we will also enter into commercialization.
11:34 Okay. But the multi-year commercial contract with the...
11:39 With the previous one, yeah, that we have concluded.
11:41 Fair call. I am just trying to understand Dr. Chawla, because of the capabilities that you are
11:48 building and you spoke about, would you reckon that the next few years in the CDMO business can
11:54 actually surprise investors with either the quality of the work, the pace of the work or
11:58 the combination of both? We do anticipate and expect that the CDMO has a lot of bright spots
12:09 and we do expect we will have a good run at our parts. See, if you look at,
12:18 if we do not have visibility and we are not confident, why we will build 3 million litres
12:26 capacity and continue to invest over 100 billion dollars. So, we have visibility and we have
12:34 conviction and we are building the competitive advantages over others. So, which CDMO has
12:42 built 3 million litres? Many CDMOs does not have 1 million litres capacities, why not about 3
12:47 million? So, we are building the competitive edge and that is helping us. And I do not expect
12:56 all programs what we are doing will succeed and at the same time I also do not worry all programs
13:02 will fail. If majority of the programs fail, I think we have to put more capacity. So, when
13:09 people are thinking why we are putting a lot of capacity, sometimes if the success rate is
13:13 high in our projects, we are worried how much more capacity we have to put.
13:18 Okay. Well, may you have a lot of such problems Dr. Chawla as opposed to the other ones. I am
13:24 just trying to understand one more thing. The presentation also speaks about 1000 crores of
13:29 CapEx, give or take in FY24. Now, my only question is, do the current cash flows plus reserve enable
13:36 you to execute that easily or will some things have to change, maybe debt have to be taken,
13:42 anything on that aspect? So, currently, we do expect our debt by EBITDA ratio will go a little
13:49 bit higher than last year, but that has no bearing on our ability to invest.
13:56 Okay, but in order to make those investments, currently you will have to
14:01 maybe resort to some bit of debt. Yes, yes, you are right.
14:04 Okay, is there a number in mind Dr. Chawla? It is not going to be significant, but some
14:10 additional debt will, see, we are not only investing in CDMOEF, we are also investing
14:15 in our biodefusion plan. Across, across, yeah, most certainly, yeah.
14:19 And we are creating a, so I think if you look at our investment is going into the very rich areas,
14:23 we are not putting just brick and mortar. If you look at we are investing in capacity and precision
14:30 fermentation, we are investing in IIT Kanpur for CGMP gene therapy and vector manufacturing.
14:38 So, these investments, I am sure these investments are, per se, people think high risk,
14:45 but we believe it is a high reward for us. Yeah, most certainly, I mean, you increase
14:50 stake, I believe in the first half in both Immuno Act as well as, a lot of biologics as well, so
14:57 a lot of bio, so most certainly I can see that. By the way, since we are on that topic, Immuno Act,
15:02 it is a shot in the arm, a big positive news for Immuno Act and you, tell us a bit about this and
15:08 the opportunity size that something like this could bring in. So, we did series A, series B
15:14 investment and we tell them that is one of the well-funded startup. So, they still have a lot of
15:21 cash to grow and they are building their own large-scale facility to offer cell therapy products.
15:29 The current facility, we understand up to 500 treatments per year they can make and when the
15:35 new facility will be ready by early 2025, the treatment capacity will go up to 3000.
15:42 And we will assess in the meantime. One thing what we are adding is we are not adding anything
15:49 in the operational front, we are only helping them in thinking strategically and also creating
15:54 market intelligence and then capacity, not for yesterday, we are to create capacity for tomorrow.
16:02 That is what we are trying to help our team at the Immuno Act. And see, look at this is the
16:09 first indigenously developed and manufactured cell therapy. That is a big positive milestone
16:15 for cell therapy research in India and also a great example for academia and industrial collaboration.
16:24 Most certainly. So, I have a two-part follow-up here. One is purely by virtue of the fact that
16:29 it is such a big medical feat, if you will, the first time in India, so to say, if I am not wrong.
16:35 So, do the benefits of this from a medical fraternity perspective remain back-ended in
16:41 the decade or do they happen earlier? And for Loras Labs financial investors, that is the
16:47 second part of my question, do the commercial benefits if everything goes right for Immuno Act
16:52 happen back-ended in the decade or do they come in earlier?
16:55 We are not thinking decade. Our associated companies plan to launch the product in the
17:02 next few months. So, the benefit of this launch will come in the next financial year. We are not
17:10 waiting for a decade, but they are spending some additional resources on, we do not want
17:17 Immuno Act to be a one-product company. So, we want them to develop more cell therapy products,
17:23 the one in clinical work, the one in the lab, even early stage of the group of concept work.
17:30 So, they have good pipeline also. So, they will also not just one product, they want to
17:36 become a center of excellence for cell therapy research in India. And similar, whereas in
17:46 IT Kanpur investment what we did, there we need to wait three, four years for us to commercially
17:52 benefit. Unless we offer that facility for contract manufacturing, which customers are interested,
18:00 so then benefit may come in the year three for us. We are not waiting for a decade.
18:06 To look at in cell and gene therapy, as a company, we are very happy that country is able to
18:16 develop and launch products four, five years after those are available in the developed countries.
18:22 Got it. Got it. Got it, Dr. Chawla. Okay, the other aspect is Loras Bio, it is a small,
18:29 they are small, small piece of your business thus far, but I see increased revenues,
18:35 you increase the stake as well meaningfully out there. One, what is the current stake,
18:39 do you intend to take it more? And what is the run rate on Loras Bio according to you going ahead?
18:45 In H1 they did very well. In H2, the Q3 they may do a little lower because they are starting the
18:54 biggest facility for modifications, whereas Q4 they will be very close to H1 and H2 also.
19:03 And with that R2 will go fully commercial, there is no scope to expand. That is the reason we are
19:11 very eager to bring more capacity in R3 that is at Mysore. The planning is done and probably
19:18 groundbreaking will be done soon. So, there the opportunities are also becoming large for us.
19:28 So, we are talking about making our medium for cell and gene therapy. We have the outlet. So,
19:38 our associate companies in cell therapy, we have our own gene therapy has been going to come up in
19:43 compotes. So, the bio is trying to build capabilities in making media for cell and
19:50 gene therapy commercial production. That is one advantage. And second, we are also working on
19:56 non-fossil fuel based flavors and fragments. That is also becoming very, very interesting.
20:05 So, there we are not doing it to mass enzyme manufacturing. We do not want to be an
20:11 industrial engine company. I want to make it very clear. We want to be a niche player in our
20:17 precision fermentation. We want to make engines for biocatalysis. We do not want to make engines
20:21 for industrial use. So, there we are creating a niche and once our R3 at Mysore comes,
20:30 they will have a quantum cap. Got it. This is end of a particular year,
20:36 maybe FY25 or thereabouts? We expect to partial facility will be utilized in end of FY25.
20:45 Sorry, your stakes are out there. Have you increased stake in the last half in Loras Bio?
20:54 Loras Bio, we increased the stake now currently, including ESOPs, we are about
20:59 84-85% of shareholding. Okay. You have also laid out H2 priorities, Dr. Chawla,
21:07 including higher capacity utilization across the network to support the growth acceleration
21:12 or scale up the new animal health commercial asset. Could you talk about this?
21:17 So, we are increasing our capacity utilization in ARVs, oncology, and other APIs. And while
21:28 servicing increased demand for our formulation contract manufacturing to the local partner.
21:36 So, see, we have better visibility for H2 now will be very good when compared to H1.
21:44 The capacity just will be very high in H2. And some new CDMR execution also will happen in H2.
21:51 Whereas our animal health, see, we will do commercial validation,
21:56 already started, but we will not be able to do commercial manufacturing of those
22:02 until any next financial year. Okay. So, you will do much better. And again,
22:10 sorry, I'm getting back to numbers before I get back to quality. But you reckon that the trend
22:16 that we have, we moved down from 285 crores in quarter 4 on the EBITDA front to sub 200 currently,
22:24 you think you can break above that 200 mark sometime in quarter 3 or quarter 4?
22:28 Sure, definitely. I'm not giving an absolute number, but we will cross that. EBITDA of Q3
22:34 is going to be bigger than Q2 for sure. And that could show in margins as well,
22:39 right? You reckon? So, margins will remain same. So, we expect higher sales. See,
22:43 I'm not expecting we will have more margins. Okay. Think about this 15% range for the second half.
22:51 50-52% range will be there. That we are very confident. Quality of our business is very,
22:57 very good. So, and we will have more sales. And if you have, I mean, giving a number,
23:03 if you have 200 crore additions, it's 100 crore EBITDA will go.
23:06 Got it. One last couple of questions, Dr. Chawla. One is on this increased USFTA activity. I see a
23:14 number of announcements around EIRs, around FTAs. I know you've fed up fairly well on that front.
23:21 But is there any thought that you have on this increased activity,
23:24 but also the increased engagement between Indian pharma and the US market?
23:30 I think one good thing out of this strict audits is quality of products will go up.
23:38 And second is, it is good for good people. Companies who are on the good side of the quality,
23:49 it is good. So, our oncology sales growth is because our regulatory is very tracking.
23:54 People want to buy from us because they don't see any challenge putting their
23:59 all eggs in one basket. So, we believe we have best practices in the industry.
24:07 And we also had one surprise instruction in the last year, we mentioned. So, we are okay with that.
24:13 We went through an investor audit last week for two units. So, I think nowadays, because of our
24:22 multiple sites, and the largest capacities, we also go through a lot of inspections. I think
24:29 we are inspection ready 24/7. That's good to know. Dr. Chawla, one last question.
24:37 Somebody mentioned this that at times a stable bread and butter business, whatever it be in
24:42 whichever field, in pharma, it could be generics, in some other business, it could be something else,
24:47 gives companies the ability to test multiple other things, try and see how their possibility
24:54 to scale up and then at an opportune time, decide to scale up as well. I'm trying to understand
24:59 if you following that model because of the stability and the consistency that they are
25:03 the API or 30% brings to you, while other businesses move around FDF is stable, but CDMO
25:10 maybe not so as of now, and then it gives you the ability to scale up at the opportune time that you
25:15 want. Are you in that phase, sir? Are you thinking like that also? Or is this not quite what LORIS is?
25:22 No, no, you have articulated very well because you see our ARV, APS and formulation is like a
25:30 cash cow for us. So, that margin can run the company. So, we are putting bets on putting
25:40 investments, bet is not the right word, but investments into the areas where the company will
25:47 be book a finished one. Earlier we are known for ARV, APS and then ARV formulations. Now,
25:54 nobody is talking about company is only dependent on ARV, APS and formulations. We have many other
25:59 pieces right now, but each of these will take its own time to mature. And when we are putting
26:07 investments, we are very cautious, although outside is the, they were putting a lot of money
26:12 on the ground. That is the strength, that is the opportunity as I discussed in the last call also.
26:18 This geography diversification will not be there for next 10 years.
26:23 It will be there for, in our opinion, 2-3 years, out of that one year is already gone.
26:29 So, people who have to capture that is the right time.
26:35 And we believe we are in the right place with the right capacity, right quality and right team.
26:40 Got it. Dr. Chagla, always a pleasure talking to you. We wish you all the best for the second
26:46 half. Thanks so much for taking the time out. Thank you, Nils. Thank you. Always nice talking
26:51 to you. The feeling is incredible, sir. We always thanks for tuning in. Thank you.
27:01 Thank you.
27:01 Thank you.
27:02 Thank you.
27:02 Thank you.
27:03 [BLANK_AUDIO]
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