LAURUSLABSNSEOctober 21, 2022

Laurus Labs Limited

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Management on call

Satyanarayana Chava

FOUNDER &

V. V. Ravi Kumar

EXECUTIVE DIRECTOR &

Vivek Kumar

SENIOR GM/INVESTOR

Monish Shah

ANTIQUE STOCK BROKING

Key numbers — 40 extracted

30%

esses, which is expected to deliver a strong revenue growth and a stable EBITDA margins of around 30% for the entire financial year. However, in near-term, we'd like to provide you an update on our e

1 billion

financial year. However, in near-term, we'd like to provide you an update on our earlier goal of $1 billion revenue by FY '23 sales target, which could potentially get delayed due to changed competitive

INR 1,576 crore

the first half of FY '23, which was led by an exceptional growth in non-ARV numbers. We achieved INR 1,576 crores in revenues for the quarter, showcasing a 30% growth year-on-year. In the Generic FDF, for the q

70%

wcasing a 30% growth year-on-year. In the Generic FDF, for the quarter, our revenues were down by 70% year-on- year. For H1, our revenues were down by 51%. And our revenue degrowth was about INR520

51%

F, for the quarter, our revenues were down by 70% year-on- year. For H1, our revenues were down by 51%. And our revenue degrowth was about INR520 crores when compared to H1 FY '22. However, our antivi

INR520 crore

wn by 70% year-on- year. For H1, our revenues were down by 51%. And our revenue degrowth was about INR520 crores when compared to H1 FY '22. However, our antiviral APIs have shown a healthy growth, INR 407 cro

INR 407 crore

520 crores when compared to H1 FY '22. However, our antiviral APIs have shown a healthy growth, INR 407 crores in quarter 2 versus INR 339 crores in quarter 2 FY '22. For the first six months, we did the INR

INR 339 crore

'22. However, our antiviral APIs have shown a healthy growth, INR 407 crores in quarter 2 versus INR 339 crores in quarter 2 FY '22. For the first six months, we did the INR 790 crores ARV API sale versus INR

INR 790 crore

ores in quarter 2 versus INR 339 crores in quarter 2 FY '22. For the first six months, we did the INR 790 crores ARV API sale versus INR 752 crores in last financial year six months. Oncology, de-growth was vi

INR 752 crore

ores in quarter 2 FY '22. For the first six months, we did the INR 790 crores ARV API sale versus INR 752 crores in last financial year six months. Oncology, de-growth was visible in our Q2 numbers, but this i

rs,

INR 752 crores in last financial year six months. Oncology, de-growth was visible in our Q2 numbers, but this is momentary and we expect overall Oncology will have a growth by end of the financial ye

INR 115 crore

Noteworthy to have to observe, our other APIs has grown significantly in the current quarter from INR 115 crores to INR 222 crores. In Generic APIs, overall, we did INR 680 crores versus INR 527 crores in Q2 F

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Guidance — 20 items

Satyanarayana Chava

opening

“However, in near-term, we'd like to provide you an update on our earlier goal of $1 billion revenue by FY '23 sales target, which could potentially get delayed due to changed competitive landscape and adverse pricing impact in ARV APIs and offtake in ARV formulations.”

Satyanarayana Chava

opening

“Oncology, de-growth was visible in our Q2 numbers, but this is momentary and we expect overall Oncology will have a growth by end of the financial year.”

Satyanarayana Chava

opening

“During H1, we launched lopinavir-ritonavir combination in the US and also received US FDA approval for tenofovir-lamivudine combination in the second quarter, which we expect to launch shortly.”

Satyanarayana Chava

opening

“We expect US filing pace to pick up during the second half of this year.”

Satyanarayana Chava

opening

“And we intend to launch two more products in the rest of the financial year.”

Satyanarayana Chava

opening

“We expect a significant upside from these products in the coming quarters.”

Satyanarayana Chava

opening

“And we will be launching few more products in the rest of the financial year.”

Satyanarayana Chava

opening

“We intend to file NDA for this novel pediatric product during the current quarter.”

Satyanarayana Chava

opening

“Overall, demand stays softer and we expect volume and prices are going to stabilize around the current level.”

Satyanarayana Chava

opening

“We are also initiating validation for several APIs and expect to see a good filing in FY '24.”

Risks & concerns — 15 flagged

This division reported revenues of INR 498 crores for the H1 of this financial year with almost 50% decline year-on-year.

— Satyanarayana Chava

Increase in the generic volumes have been able to offset the pricing pressure.

— Satyanarayana Chava

Onco APIs reported about INR 51 crores sales during this quarter, a decline of 30% year-on-year.

— Satyanarayana Chava

Satyanarayana Chava There was a decline in ARV API prices and there is a deleverage in ARV formulations.

— Jeevan Patwa

These two led to the overall decline in EBITDA margins.

— Jeevan Patwa

That's negatively impacted by ARV API as well as formulation price decline.

— Satyanarayana Chava

The biggest negative contributor to our margin, not significantly decline, some decline was there despite we have done very good in CDMO is because of the pricing pressure in ARV.

— Satyanarayana Chava

So there is no challenge in the margins of CDMO business.

— Satyanarayana Chava

But in ARV, there is a decline in margin, that contributed to drag the overall margins for the company.

— Satyanarayana Chava

So if the pricing is under so much pressure, wouldn't the other competitors be facing a lot of pressure on their profitability as well?

— Madhav Marda

In the Q1 and Q2, the contribution from long-term allocation was less and we didn't have success in getting non-long-term tender quantities, which there was a lot of pricing pressure.

— Satyanarayana Chava

Broadly put together, I know it's difficult to calculate, but broadly put together, how much of the market would be long-term contracts and how much would be short-term?

— Binu Pathiparambil

The challenge is how to make cost effective API is one challenge and winning the tenders is another challenge.

— Satyanarayana Chava

Making formulation is never going to be a challenge for anyone, including us.

— Satyanarayana Chava

Given the very high base that we will create in CDMO this year, is it fair to expect a flat to a growth number next year on this date or given the very high base this year, that would be difficult?

— Nitin Agarwal

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Q&A — 13 exchanges

I have three questions. Firstly, so earlier we have 5 billion tablet capacity. And at the peak utilization, we'll be around INR 500 crores revenue from that formulation. Now we have increased it to 10 billion tablet capacity. So the potential for formulation actually is INR 1,000 crores per quarter now, but this quarter, it's been almost only INR 149 crores. So I just want to understand by when you think we'll be able to utilize the increased capacity? We are also even thinking of going to 15 billion tablet capacity. So obviously, we must be having the visibility of utilizing this formulation

Satyanarayana Chava

Jeevan, the 10 billion capacity, you can't have just multiply some factors to arrive at the revenue, each tablet can be sold at different prices. No, I understand that, sir. I just want to understand the utilization. When can we utilize. By end of this financial year, we expect about 75% utilization of 10 billion units. Still we have some spare capacity. And for us to enhance capacity from 10 billion to 15 billion, we also need 12 months to buy equipment, install, qualify it and validate the product. We need 12 months. So in anticipation of business, after 12 months, we need to start the inves

We don't expect a lot of inventory in the channel. It's quite visible that our API sales and ARV increase to a normal level. The reason for lower sales of ARV formulations in Q2 - Actually, we saw that impact coming from Q1 itself and significantly lower number in Q2. We didn't adjust the pricing in our tenders. So we lost lot of tenders. But we have calibrated and we are on par with competitive pricing environment. So that's the reason we expect Q3, Q4 to be better. Sudarshan Padmanabhan: So we would now participate in the forthcoming tender? I mean, at the recalibrated price?

Satyanarayana Chava

Yes, you are right. Sudarshan Padmanabhan: And what was the kind of extent of pricing drop we have seen between first quarter and the second quarter? Broadly, in the formulation, the price drop was 20% actually. Sudarshan Padmanabhan: 20% price drop and 50% volume drop in the second quarter over first quarter of this year. I said from the Q2 FY '22 versus Q2 FY '23, the pricing difference is may be closer to 15%, around 15% price drop one time. Sudarshan Padmanabhan: And sir, on the CDMO side, we've seen a very strong growth in the last three quarters consistently, I mean, can you give some co

I have two questions. First one was, during the initial remarks you've mentioned about some delays on to our revenue target due to change in competitive landscape. Could you please elaborate what exactly is that on? Is that just on the ARV side or was that for something else?

Satyanarayana Chava

Competitive landscape changed significantly in the last 12 months to 18 months in ARVs. In the rest of the businesses, we are seeing good traction, positive traction, actually. So our Oncology business grew, our non-Oncology non-ARV business grew significantly, our non-ARV formulations also we have good progress, good approvals, our CDMO is doing exceedingly well. So, except to the landscape change downwards in ARV, APIs and formulations, rest of the segments are looking very positive. And this level of pricing for the ARVs, the way at least I understand is Laurus is amongst the lowest cost pr

My first question was on the FDF business. If you could just clarify how much of the FDF sales in the first quarter and the second quarter of this financial year was from ARV?

V. V. Ravi Kumar

ARV is INR 55 crores this quarter against INR 275 crores in the previous quarter. So out of INR 150 crores in formulations, only INR 50 crores came from ARVs, the rest came from non-ARVs. And as a percentage of the total revenue, what percentage was ARV versus non-ARV for this quarter? There's about 29% is total ARVs. So that's 70-30 now? 29%, yeah. Less than 30% contribution came ARVs, both APIs and formulations put together.

A couple of questions. One, Dr. Chava, could you please make us understand a little bit about the mechanics of this ARV formulation tenders? Are these like tenders which happen every other day or every other a week for a fixed amount of supply or are these like a longer term supply contract which tranche through months or years?

Satyanarayana Chava

In the Q1 and Q2, the contribution from long-term allocation was less and we didn't have success in getting non-long-term tender quantities, which there was a lot of pricing pressure. But now, the other agencies are about to announce their long-term allocations in this quarter. So, we expect some stability will come in our forecast for the coming quarters. So our lower sales is because we didn't win tenders in the non-long-term focused agencies. So it's basically a mix of both. Broadly put together, I know it's difficult to calculate, but broadly put together, how much of the market would be l

Sir, on the ARV business, you had earlier indicated that you would probably be around a run rate of INR3,000 crores per year. Whatever is changing, happening in the landscape, do you think that number needs to be toned down a bit in your assessment?

Satyanarayana Chava

It will be down, but not significantly. If you look at our ARV API is almost INR 790 crores in the past six months. So it's easy, you can expect it to be between INR 1500-1600 crores for the entire year for our API. So our formulation sales is lower in the Q1, Q2, especially very lower in the Q2, but we expect bounce back in Q3, Q4. So, it will be somewhere between INR 2,500 crores and INR 3,000 crores total ARV, API and formulation sales. And sir, this is a rate we should assume even on a going forward sustained basis? We expect so. We don't expect growth in this segment We will be probably i

Sir, given the kind of disruption that has already happened on the pricing on the ARV front, even if you win the contracts, what gives us confidence that we'll be able to do 30% margin because the ask rate for second half FY '23 would be 32% plus of the margin, to achieve 30% margin for FY '23?

Satyanarayana Chava

For the first half of the financial year, we are already at 29% EBITDA margin. So when we are saying we will maintain about 30% EBITDA margins, doesn't mean we are saying 30.00%. We have to improve beyond 29% to go closer to 30%, which we are very confident. As we mentioned to some of the investors in this call earlier, because of the deleverage happened in formulations, that was compensated by higher margin Synthesis deal, otherwise, we could have done better. And in fact, even in the sales run rate of the non-ARV formulation has been relatively lesser for the quarter. Any particular reason t

One basic question on the CDMO business. So right now, when there is a new RFP that has been floated, have you seen any change in the trend of new RFPs being floated, given the biotech has been under lot of pressure on the US side?

Satyanarayana Chava

We haven't seen any decline in the number of RFPs being floated by our partners from Q1, Q2 to current quarters. Actually, maybe trend is positive rather than negative in the number of RFPs. And a number of people bidding for particular RFP, have you seen any change in trend over the last couple of quarters We don't have visibility on that. We can't comment on how many people receiving same RFP. We have no visibility on that. And one question on the ARV business. When we say that short-term contracts, the pricing has gone down, but the long-term contract, allocation is about to happen. But doe

Sir, firstly, I just wanted to understand, so our FY '23 growth has two big components to it. First is your CDMO business doing phenomenally better, because of the large purchase order and now we're looking at a price erosion in ARV, API and formulation business both. So on that base, FY '24 growth seems to be a bit difficult or do we have more levers which can actually aid us to grow next year?

Satyanarayana Chava

We are creating a lot of capacity. We have the levers to grow, but we will give you more color and updates as we come closer to the financial year. Secondly, you have revisited our guidance of $1 billion target at INR 7,200 crores, but now given that currency depreciated and we have rationalized our guidance by 10%, but effectively a 20%, 25% cut in the rupee term that you would have expected. So is the understanding right? You are absolutely right. See, as we gave numbers in our presentation, our decline in formulations in the past six months is almost INR 500 crores. So that means we are not

Last quarter, there was an increase of other expense by INR 70 crores and the reason mentioned that time was, due to a one-time cost of power, fuel and Forex loss and this is one-time. And even in this quarter, we see that the increase of INR 70 crores in other expenses. May I know the reason for this?

V. V. Ravi Kumar

I think Forex loss even in the second quarter is also there, though it is unrealized. And of course, power and fuel, it got restored. The additional expenditure in the power and fuel what we have spent in quarter one is not figured in quarter two. Yeah, but then it should reduce, right? The other expense will reduce, but it's still at the elevated level. There are some other expenditure also there. We are adding new blocks and new capacity added for formulation. For that, we have to recruit more people, etc and more operating expenses also to be incurred for those. And in the Board meeting tod

I just wanted to follow-up on some of the questions that have already been asked. You mentioned that by the time we exit this financial year, our formulation capacity, we would be able to exit at like 75% kind of utilization for the 10 billion capacity. Can you share what our utilization was in 1Q and 2Q?

Satyanarayana Chava

It was less in Q2, very visible of our lower sales. But if you want to share a number, if that's possible for 2Q or 1Q? We can't share more granular than this. We're sharing a very detailed number. But if you want, maybe you can reach out to Vivek and he will be able to have a discussion offline. I think it's been very fungible capacity. It is very difficult to explain like that. And then for the ARV long-term tenders, pardon me, this has been discussed in earlier calls. But how long are these long-term tenders that shall we expect? Long-term awards typically for three years. We allocate certa

Sir, my question is largely on the non-ARV formulations side. If you could give more guidance on the growth visibility there pertaining to launches that we have made so far? And also, I think end of FY '22, you mentioned opportunities in the gliptins and sartans segment because of the kind of superior purity of the product that we have, shows better quality that we have and we'll be able to garner better market share? What is the progress there?

Satyanarayana Chava

So when you compare our formulation sales in Q4 last financial year, we did about INR 500 crores, which has de-grown, to INR 150 crores. So there is a room for us to go back to INR 500 crores. The growth will happen from ARV and non-ARV both. But maybe by end of FY '24, most of the growth in the formulations will come from non-ARV. Like our API growth is coming from non-ARV APIs, by end of '24, most of the growth in formulations also will come from non-ARV. In ARVs, there is a limit for us to grow in both APIs and formulations. We believe by end of next year will reach the plateau. And then gr

Thank you, Monish for organizing this call. Thank you participants for asking very interesting questions. And we wish you happy and safe Diwali. Thank you.

V. V. Ravi Kumar

Thank you.

Speaking time

Satyanarayana Chava

Moderator

V. V. Ravi Kumar

Bharath

Jeevan Patwa

Neha Agarwal

Nitin Agarwal

Kunal Dhamesha

Gaurav Singhal

Madhav Marda

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Opening remarks

Monish Shah

Thank you. Good evening, and welcome to Laurus' Q2 FY '23 results conference call. We thank the management for giving us the opportunity to host this call. Today, we have with us Dr. Satyanarayana Chava, Founder and CEO; Mr. V.V. Ravi Kumar, Executive Director and CFO; and Vivek Kumar from the Investor Relations team. On behalf of Antique Stock Broking, I would like to wish the management and all the participants a very Happy Diwali. I will hand the call over to Dr. Satya for his opening comments. Thank you and over to you.

Satyanarayana Chava

Thank you, Monish. Thank you for joining us for our Q2 FY '23 and H1 FY '23 results conference call. We wish everyone participating in the call and their families very happy and safe Diwali. We are pleased to have this opportunity to update you on our progress and answer your questions. Our strong start to FY '23 continued in the second quarter. Our H1 financial results demonstrate favorable change in our business mix and sustained profitability. This was despite ongoing disruption in the business environment due to continued pandemic situation and also emerging geopolitical issues. Q2 results were driven by continued strong growth in our CDMO business with additional support from Non-ARV API segments. Overall, FDF ARV division performance was subdued and was impacted negatively by lower formulation molecules and adverse pricing dynamics in both API and Formulation. Supply chain logistics scenario has slightly eased, driving moderation in imported RM prices. However, the ground situati

V. V. Ravi Kumar

Thank you, Doctor. A very warm welcome to everyone for our Q2 and H1 FY '23 earnings call. Before starting anything, I want to wish a very happy Diwali, healthy, wealthy, safe Diwali. Total income from operations for H1 is INR 3,115 crores against INR 2,482 crores, a growth of 26%. During the quarter, we have 31% growth with INR 1,576 crores against INR 1203 crores. Gross margin slightly decreased to 55.1%. This is because of the product mix and some of the lower prices in the ARV segment. Our EBITDA for Q2 was INR 449 crores with 28.5%, whereas for first half is INR 903 crores with around 29% margin. This has happened due to better division mix, the CDMO mix is being helping for this. Our diluted EPS for the quarter is INR 4.30, a 16% growth and INR 9 not an annualized basis for H1, the growth of 10%. Our ROCE is stable at 28% on annualized basis. This is on the back of better product mix. On the CapEx front, we invested INR 416 crores in the first half. And we are broadly in line wit

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