Cohance Lifesciences Limited (COHANCE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Suven Pharmaceuticals Limited Q4 and FY '23 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Rishab Barar from CDR India. Thank you, and over to you, sir.

Good day, everyone, and thank you for joining us on this call to discuss the Q4 and FY '23 earnings for Suven Pharmaceuticals. We have with us Mr. Venkat Jasti, the Managing Director; Mr. Venkatraman Sunder, Vice President, Corporate Affairs; and Mr. Subba Rao, CFO of the company. Before we begin, I would like to mention that some statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. Documents relating to the company's performance have been e-mailed to you earlier. I would now like to request Mr. Jasti to share his perspective on the performance and outlook. Over to you, sir.

Thank you, Rishab, and thank you, everyone, for tuning into this conference call on the results of year ending March 31. As I was telling last year that year '22, '23 will be flat to a little bit lower side on the revenue side later, we have updated that it may suffice a little bit. So finally, it has come out with very well muted growth on overall perspective. And it is in line with what we have expected at the -- informed you. The CDMO business reduced from the -- in the pharma reduced by about -- roughly about 10% due to the -- some of the molecules which are being used for the COVID were not repeated, whereas the Specialty Chemical has gone up by 15% to compensate for the things that has lowered in the CDMO pharma. Overall, other than the one-off of last year's sale of pricing stake, otherwise the results are in line and we have positive growth. If you see quarter-on-quarter for the last quarter to this quarter it's a very good jump in revenues and the profitability but a year-on-year basis, if you take out the one-off items then it will be around -- the same as the last year more or less. So this year, it's very early for us to give SME guidance. But we also see a little bit softness in the spec chem side [indiscernible] because of the climatic condition. Otherwise, we expect they stay in line that we'll have much more visibility as we pass through. I think it's better for me to answer your questions rather than give you -- because you have the results with you and it's better I answer the questions rather than giving you upfront, any other information, which may not be relevant. So I now ask the moderator to go for the question answer session.

[Operator Instructions] The first question is from the line of Rushabh Shah from o3 Securities.

Am I audible now?

Yes. Slightly better.

So first question, I have a couple of questions. My first question is the formulation business, is it possible to focus less on that business and focus more on the business where our revenue share is 60%, the CDMO. So is the formulation business as we've seen since 2 financial years has been flattish.

Yes. Formulation business is mandatory item for us, but it's a leverage exercise as we told earlier, and we are expecting something to grow, but it also depends on the approvals that are to be placed. So we have files around 25 accounts, 27 ANDA. So far, we have only 12 approved, not all of them are, as you know, ours is a really specific molecules, not a blockbuster value-based molecules. And we expect more 7 or 8 approvals during this year and that will add to revenue eventually. But in general, it is a flattish growth, not much to talk about on these operations.

And my second question is, if you could give us the repeat percentage of the business, like what percentage of clients do they come back with the repeat orders. And if that number is on the larger side, so what different does Suven do in that business?

What was it, again? I could not make out the question.

Sir if you could give me the repeat percentage of orders of the business, what percentage of clients do come back with the repeat orders for the business? And if it's on the larger side?

This is not a generic business, as you know, where once our molecule is supplied and if there is a success in the clinical trials, you will automatically get the repeat order. And similarly, on the commercial scale, you have a repeat order once a year or whatever it is on a continuous basis, depending on how the product is growing. If it's growing, you'll get a little bit more orders, but it's less -- but you still get the repeat order, but it will be little bit less. So this is the way it works, unlike a generic where you would go and sell it. Here, it is automatically because we are one of the suppliers for this particular molecule. So it will be coming that way. So repeat orders are based on the success of the molecule in the clinical trials at the early stage. And if it's the commercial, it is success of the molecule in the market. This is the way you get the repeat business.

Okay. And sir, my last question is, in the previous con calls you said that the duration of a project can be 3 to 4 months or even it would take 5 to 6 months, which is very lengthy in nature, so how do you take the guidance for that? And how do you project the revenues going ahead?

That's why we don't give you a guidance and very new projections. They come as a [indiscernible]. This you cannot go quarter-on-quarter basis, you have to go more or less on a year-on-year basis only. And the -- again, it is based on the success of the molecules, both in clinical trials and when it's launched on the success in the market. So it's not a straightforward, but at the same time, if you see last 4 years, we had [ 21% ] CAGR growth in there. So then see some single -- I mean what do you call, regularity with which we are getting it, but it cannot be on a quarter-to-quarter basis.

So do you project the same going ahead in the next 3 to 4 years?

We hope to, and it may be better, but we cannot tell because as I said, we have only the visibility of 5 to 6 months. More than that we don't have. But we -- based on the past record, we go by a decade and essentially last 4, 5 years, is going good, and we see increase in the infrastructure and hopefully, the new technologies, which we are going to based on the request of the customer and the -- especially on the success of the molecules that will certainly give -- certainly can go -- in 1 year, it can go also much higher than what the average was, but that we cannot tell at this time.

[Operator Instructions] The next question is from the line of Rashmi Sancheti from Dolat Capital.

One question related to this quarter, we are seeing that this time in this quarter there's a higher share of CDMO Pharma, and lower share of CDMO Chemical -- Specialty Chemical Business, but despite this our gross margin is on Y-o-Y and on a quarter-on-quarter basis, contracted. And despite our gross margins are down, our EBITDA margin is high. So because are -- because there is a lower cost in terms of manufacturing and other expenses. So what is happening on the cost side? And why are the gross margins contracted, if you can give us the specific reason for it.

I think you know really well the type of business we are in, and it is not the same model molecule, so you can compare it quarter to quarter. It is the mix of the -- product mix is the one that gives you the margins, right? So 1 quarter it may be high-value product maybe there you -- then you get a high gross margin, whereas sometimes now some of these more early-stage projects are there where the gross margins will be less. So this is the way it works. It cannot be catered to one or other, it's all the -- mainly the product mix that determines the gross margins and the EBITDA and the net profit.

And sir, on the cost side, like are you taking some cost control initiatives because I'm just seeing that on quarter-on-quarter, our expenses have actually come down which is actually led to improvement in EBITDA margins. So if you can throw some color on it?

No. There is no major change that has happened. The only thing different in quarter or quarters, sometimes, whatever feels like -- other manufacturing expenses, some of the other costs, there is a slight reduction, if you really see [indiscernible] INR 80 crores this year was INR 55.4 crores. The changes which are -- which Jasti was explaining actually which is really the cost related to the product changes actually. There is a cost of changes [indiscernible]. All those things are variable in relation to the production. And that's the reason it has happened actually. If you're making [ cost gain action effect ], overall [Technical Difficulty] increase actually, but efficiency has been maintained.

Okay. And sir, my second question is on your acquisition and mortgage process. Where are we currently in this process related to the tender and related to the acquisition process and the mortgage process.

No. We are still waiting for the regulatory approval for the acquirer to get all the approvals to do CCI, [ they ] owe me a lot actually, and they are still waiting for that. Once it is completed probably there's a [indiscernible] we're not -- got the approval as such, we are waiting for the approval.

Sir when the regulatory approval comes in, that time we first acquire the promoter stake and sold that only to tender or hope that? Is that understanding correct?

That is correct. Only after the acquisition of the promoter stakes that is [indiscernible]. Correct.

Abdulkader Puranwala.

So on the CDMO Pharma side, I just wanted to understand the spike what we have seen in this quarter, I mean, is this more related to some new products getting commercialized or just some movement happening between the clinical trials?

So it's a combination, both -- we cannot pinpoint to one thing that has come. There is nothing new that has come. It is only the mix that -- sometimes what happens is, some of the material is almost ready but not to ship it in the last few days, so it goes in the next quarters. Those things also can happen. So not much changed, only the values are based on some of the fact is product mix. But as you're asking, what is better this quarter is, so there is no new launches or anything that have taken place.

Understood, sir. So sir, basically on the...

Sorry to interrupt you sir, you are not audible.

Am I audible now?

Yes.

So sir, on the new molecule [indiscernible], I mean how is the traction with our key customers. Are we seeing some renewed interest there? And if you could also highlight the number of molecules, which are on the Phase II now and Phase III as well.

Yes. I mean what I'm saying is the traction of getting the new RFQ, till now that stuff is a little bit -- still a little bit slower. We thought it will happen post-COVID and it's started, but interest is there, heavy interest rate, but the pace is a little bit slower. And no molecules or in general, none of the molecules in various spaces has not gone from one stage to other to have a substantial impact on our results as of now.

Sure, sir. And just a final one on the [indiscernible] any update from the customer's audit parts, so you're early expecting some to happen in this fiscal.

Yes. The update is that yes, customers are coming and are eating and it will take some evaluation after this will be given eventually, but it is a long drawn process because it will take 1year, 1.5 year before you see full-fledged approach.

Next question is from the line of Cyndrella Carvalho from JM Financial.

Congratulations on delivering the guidance, maintaining the EBITDA margin. Sir, I want to understand, is there any expected new approvals from pharma side in the coming 2 years? FY '24, '25? Any indication on that?

No, the customer will not be knowing until the clinical trails data comes out and then it goes to the next stage. So far, we don't have an indication as of now, any of the phase III molecules will be moving into the commercial or any phase II it will come into phase III, so no indication as of now. It can happen any times, but as I said, right now. They don't have an indication. Unless they have an indication, they actually can't tell us. So we'll not be able to give you any guidance on that at this time.

And on the second side, apart from the earlier 3 products, anything more in there?

As last year, I told you it will be in the 2024 timeframe, it will be even more when we plan into commercial product, not until that time.

Okay. And sir, if you look at the global environment, you highlighted that it is slightly slower. But we hear a lot around the China's Plus One movement. Is there any update on the overall R&D outlook of our partners? And how do we expect this to pan out? Any thoughts from an industry perspective and our business perspective will be helpful.

Yes. Industry perspective, The China Plus One, yes it may be passable in the nonregulated regime like maybe generics and some intermediates and something else, but on the innovative side, it takes time for any changes or any new things to come and have tangible results. When we came back from the [ decatch ], the feedback from there is, yes, we are thinking of moving away from China and all that stuff. But that's the same thing, when they have to implement it. If it's a regular product for buying in, what we call regular, intermediary or so that is much easier for them. But when you're going for the innovative product and aligning, it takes time. But it is a positive side and the time will tell when those things will come. I think that is a good overview. In the long run, yes, it will be good. But right now, what I was telling you is we might say that the COVID-related activity moving into the regular activity with [indiscernible] with more traction of the new projects, but that will begin a little bit slow, but it will come. As you know, [indiscernible], they were saying about moving towards India, similarly the [ decatch ] and also, [indiscernible] so I think it will come, but for a general purpose, for the industry sake, yes, it will come, but it will take time, especially the states where we are in, it will have a long-drawn effect and when once it starts, yes, it will have a good -- and years to come, it will be very good.

Did you share a number that if we remove the COVID portion from the base, what will be our growth for FY '23? Did we share that number?

No.

Can we share that number, sir, if it is available.

Well, it is not like -- we said earlier, it was about INR 120 crores, what was there in FY '22 Whether, it will be [ weighted ] because it may not be...

And I already told that percent is less because of that already in the CDMO revenue of the pharma that's only thing I can tell you.

Yes. Rather than we were [ even able to ] specifically perform the customer itself in the conference call and make very easier for us to maintain that because of the confidentiality what we have with out customers.

Helpful, sir. Sir, just one question on the raw material and logistics side. How do we see the scenario now as we hear a lot of peers saying that there is improvement in both the sides? Has it happened for us? And do you see the trend improving going ahead. And given that we've delivered on annual level almost of 42%, plus EBITDA margins, do you see this improving further with the help of softening of logistical and raw material costs?

Yes. I mean, naturally, what happens is the shortage is going to be a problem, not the cost itself, more or less this will be compensated itself, [indiscernible] business we're in, except 1 or 2 places we may not be able to get the compensation. So when it goes down, naturally, the price to the customer also will be [indiscernible] and it will go down. So we hope to maintain the sales margin. But based on that, I don't think you'll have any improvement in the margins. The only reason is not able to have the things [indiscernible] somewhere else and high prices in -- sometimes it's affected. But in general, the trend is good now. The availability is good and the price is also stable. Prices of raw materials is also stable.

[Operator Instructions] The next question is from the line of Chirag Dagli from DSP BlackRock.

Our commercial supplies in pharma, excluding the COVID supplies, has there been a dramatic change in that number for the full year of FY '23, sir?

There is no dramatic change. As I said, if it is a dramatic change, there should have been an improvement in the, what do you call the, sales revenue of the CDMO Pharma. As I said, year-on-year, it is 10% less than the last year's. So there's not an improvement. And whatever the decrease is because of the -- mainly because of the -- some of the molecules used for the COVID are not repeated during this year. That's why the slow there.

The 10% is lower because of that COVID not coming through is what you were saying.

Yes, yes, yes.

Understood, sir. Okay. And secondly, sir, we've seen some players talk about funding winter and this impacting the funnel for CDMO business from a lot of emerging biotech companies. Are you seeing similar trends, if you can just talk a little bit about the overall environment as far as your mix and match business, as you traditionally call, what are the trends that you're seeing over there?

Actually, as you know, we are dealing with only the medium size and big pharma only. And that part of the pharma will not be there, we are not working with any biotechs. So I'm not aware of that. I can see the trend as far as the big pharma is concerned. But the only thing is the changes on the COVID-related activities to the regular activity, so we thought it will be a fast track, but it's coming slowly. But I think we see the way we people are talking and all that stuff. And a couple of quarters from now, it should come back to the normalcy and maybe fast tracked also for the regular items.

Next question is from the line of Pranshu Jain from [ NewMarkets ].