Cohance Lifesciences Limited (COHANCE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the call to discuss the announcement of proposed merger between Suven Pharmaceuticals and Cohance Lifesciences. [Operator Instructions] Please note, that this conference is being recorded. I now hand the conference over to Ms. Cyndrella Carvalho, Head Investor Relations from Suven Pharmaceuticals Limited. Thank you and over to you.

Thanks, Yash. We welcome everyone on today's call to discuss the proposed merger of Cohance Lifesciences with Suven Pharmaceuticals Limited, and the business outlook for the combined entity. Let me introduce you to our management team present with us today. Mr. Annaswamy Vaidheesh, our Executive Chairman; Dr. Prasada Raju, our Managing Director; Dr. Sudhir Singh, our Chief Executive Officer; and Mr. Himanshu Agarwal, our Chief Financial Officer. We will brief you on the discussion and take you through the transaction and then open the floor for Q&A. Now I hand over the call to our Executive Chairman, Mr. Vaidheesh. Over to you.

Thank you, Cyndrella. Good afternoon, everyone. We at Suven would like to take this opportunity to dwell into the significant announcement of the proposed merger between Cohance Lifesciences and Suven Pharmaceuticals Limited. This marks a pivotal moment in Suven's journey, underscoring our commitment to advancing towards leadership in the integrated CDMO space, enhancing the scale of business, ensuring stability in earnings through diversification and fortifying our financial standing. Just to let you all know that we have ensured high corporate governance standards while evaluating the merger due diligence, valuation and risk. We did have a detailed due diligence undertaken of Cohance by market-leading firms. All key items identified in the due diligence have been adjusted valuation for potential liability. And swap ratio has been jointly recommended by 2 respected valuers PwC and BDO and Kotak Investment Banking has provided us a fairness opinion. Let's run through the key rationale for the merger. First and foremost, through this transaction, we move closer to our goal of creating a diversified end-to-end CDMO leader from India. We will more than double our revenue base with the combination of the 2 platforms. And two, combination will provide multiple and diverse engines of growth, basically 3 distinct business units: pharma CDMO, spec chem CDMO, API++, including formulations. So if you look at CDMO, combination will create an integrated CDMO model, which will allow us to follow the molecule through the complete phase of development and life cycle management for the innovative partner in both pharma and specialty chemical segments. The addition of Cohance -- this is a very interesting element that you all need to know, is that addition of Cohance brings fast-growing ADC platform, reinforcing our position as a leading CDMO platform with better offerings for our customers and partners. And interestingly, even for the API++ focus on select, low-mid end volume molecules with leading global market share backed by deep cost position and robust chemistry capabilities. Last 4-year revenue, CAGR at 11% and while the CDMO business is growing at 33% with a healthy mix of increasing share in the existing customers, new customer additions and new products. Overall, the intention is to ensure stable growth profile over multiple engines of growth. So multiple global examples of peers exist with similar end-to-end capabilities, probably many of you would be aware, business mix and service lines from demonstrators scaling up globally. So the merged platform, combined entity will have a significant scale benefits. When I say scale, it will become a leading integrated CDMO player in India and top 10 in Asia and with the capacity going from 1,400 KL to a combined capacity of 2,650 plus KL. And the customer base going up large pharma and spec chem companies by 1.5x. Very important thing we need to know that we also now will have an access to niche capabilities like ADC or Antibody Drug Conjugates, which can be leveraged to sell to our -- service our innovative customers. Access to best-in-class GMP facilities, very important thing that we all need to know, it expands the scope of product offerings to existing customers by gaining access to multiple GMP facilities, basically FDA audited. And quite obviously, the combination will have the best-in-class financial metrics. We will be more than double our revenue base with a combination of 2 platforms and continue to have a best-in-class financial metrics in and around 35% plus EBITDA margins and 30 plus RoCE and steady -- sturdy cash flow generation. I can go on and on, but I think it's very important that I should ask my colleague, Dr. Prasada to take you through the multiple synergy benefits, how this deal is going to bring in. Over to you, Dr. Prasada.

Thank you, Vaidheesh. Very good afternoon to everyone. We'll take this opportunity to share some more additional insights. We expect multiple synergy benefits that can help accelerate growth and improve margins at the combined platform. We are expecting significant synergy benefits through the merger, and we believe we should start realizing cost synergies in next 12 to 24 months and a meaningful revenue synergies in 24 to 48 months post completion of the merger. Some of the key synergies derive from expanded capabilities and competencies, it implies providing a broader bouquet of chemistry and scientific capability across the entire platform, which includes adding the niche capabilities like Antibody Drug Conjugates payloads, Electronic Chemicals, interestingly both segments demand deeper chemistry capabilities to develop and manufacture, enabling us to offer a broader value proposition and to stay more closer to our existing customers. In addition, lifecycle management capabilities for innovators, thereby demonstrates higher availability of scale to our customers, a higher number of globally regulatory approved facilities, 5 more facilities are going to be added from Cohance to Suven, and increased scope to invest for customers as well. From a revenue standpoint, there is a significant potential for cross-selling to customers as a very limited overlap of key big pharma innovator customers between both the companies, and we believe leveraging Cohance capabilities to offer to Suven customers and for Suven to offer capabilities of clinical to patent-protected pharma CDMO intermediates to Cohance customers is going to play an important role. Opportunity for Cohance to offer API lifecycle management competency, as we all understand, it needs a different mindset, with the global regulatory approved manufacturing facilities to Suven innovator customers for their key molecules as well. We believe these are all the 2 important elements that can bring revenue synergies. From [ CA ] synergy standpoint, there are 3 elements that we are looking for. One is, of course, procurement, realized savings in common spending by sourcing materials, given the similar nature of the business, people and G&A optimization across the platform as we scale the combined operations together. The immediate important element is best-in-class cost management. We wanted to drive the continuous improvement mindset across the platform, are the third important element. While the merger process takes time, we are prioritizing sharing best practices across commercial, sourcing and operational areas across both the organizations, multiple synergy benefits that can help accelerate growth and improve margins are being sized as we speak. Now let me hand over the session to our CFO, Mr. Himanshu Agarwal to take us through the deal structure and merger-related aspects. Thank you. Over to you, Himanshu.

Thank you, Dr. Prasada, and good afternoon, everyone. Let me run through the deal structure and the merger ratio. As you would have read, the approved merger ratio as sanctioned by the Board is for every 295 shares of Cohance, 11 shares of Suven will be issued based on the swap ratio. Following the deal approval, promoter will hold 66.7%, while public shareholders will retain 33.3%. We believe that this transaction is likely to be double-digit EPS accretive to Suven shareholders within the very first year of the implementation of the scheme of the amalgamation. The merger process is anticipated to conclude over 12 to 15 months, subject to the regulatory approvals. The indicative timelines seems like we would require 4 key approvals. The first one being with stock exchange, SEBI approval; the second one with yourselves, our shareholders; third being with NCLT; and fourth, it is likely that we will still require a DOP approval. From a valuation perspective, while Vaidheesh talked about, the valuers, so we had appointed PwC and Cohance had appointed BDO. So both the valuers had asked us to share historical numbers adjusted for the COVID impact, and we had also shared with them the next 2 to 3-year numbers, which took into account the recovery of the Ag Chem cycle. Basis this, they did a fairly extensive exercise and reached to a joint ratio of 11 shares of Suven for 295 shares of Cohance, which was then further validated by our fair value assessment, an independent assessment by Kotak Merchant Bankers. The entire management team across Suven and Cohance is extremely excited to build this leading CDMO and API player from India and creating value to the shareholders. I'll hand over to Dr. Prasada to walk us through the Cohance business dynamics. Dr. Prasada, please.

Thank you, Himanshu. Let me just quickly take you through the Cohance business dynamics briefly. Cohance has delivered revenue growth 16% of 4 years of CAGR and EBITDA growth which is 27-plus percent of CAGR on 4-year basis. With healthy financial metrics includes over 31-plus percent of EBITDA growth and 34-plus percent of RoCE. The Cohance business is outcome of successful integration of 3 distinctive and unique businesses over the last 3 years as our Chairman did mention in the opening remark. The API++ business was growing at 11% CAGR. But more importantly, the CDMO business is growing at 33-plus-percent CAGR, which is the most evolving and rapidly growing space that really gives a lot of excitement to us. The business has been supported by an additional CapEx investment of over INR 350-plus crores and some more CapEx is at the final stage of deployment. Unique portfolio has been created under a professional management team. Talking about some of these business growth engines, CDMO contributes to 44-plus percent of gross profits, 32% of 9 months of FY '23/'24 revenue, it is business from innovators, which includes pharma CDMO, manufacturing for innovators on patent lifecycle management of molecules. It also has fastest growing, very unique ADC warheads platform, where one of the business unit has first world's synthetic surrogate of manufacturing camptothecin based payloads, and custom manufacturing of specialty chemicals. This constitutes for the CDMO. From API++ standpoint, 56% of gross profits, 68% of 9 months FY '23/'24 revenue, which includes primarily API pellets and some of the intermediates. The unique differentiation of Cohance API when compared with market is, they have chosen to be in low-to-mid volume APIs where this API is driven by merchant API rather than a formulation-driven, relatively less competition intensity. If we can build low-cost position backed up with high degree of backward integration to offer superior supply security to the partners, there is enough chance that they can gain global market share, which is evident by the fact that majority of the molecule, Cohance secures top 3 global supplies for most of the molecules. The value-added formulation is predominantly a service business that is also a conscious choice, where it uses captive APIs for forward integration, also including some of the CMO and analytical services. Now let me invite our CEO, Dr. Sudhir to share his prospects about medium-term outlook of Suven. Again, we'll come back with additional advances on the overall business. Thank you. Back to you, Dr. Sudhir.

Thank you, Dr. Prasada. So as we have indicated earlier, we believe that around 3 to 4 quarters may continue to remain soft. We expect recovery starting in H2 of financial year '25. Softness is primarily driven by global inventory destocking in the Specialty Chemical segment. We are also observing some select inventory destocking in our Pharma customers as well. However, we believe this is temporary in nature. We remain quite optimistic on the recovery and are seeing multiple positive developments that helps drive confidence in medium term. Our RFQs continues to be strong. We have had a positive progress on our Phase III pipeline in Suven Pharma. This is in line with our strategic goal of expanding the pipeline with our customers. Our Phase III product pipeline has moved up from 2 products. Now we have 6 intermediates, to now total 5 products, with total 10 intermediates. So earlier, you were having a 6 intermediates which were going in a 5 final products. Now we have 10 intermediates for 5 products. Our customer engagement has seen some early successful stories. We are working towards elevating the customer to a strategic relationship. We are focused on converting opportunities from the global inventory destocking cycle in Ag Chem business. In parallel, we are building a Specialty Chemical team as well as we informed in earlier calls. We have onboarded an Ag Chem sales head and further strengthening our team will be taken care. Our successful US FDA audit of Pashamylaram facility emphasizes our quality focus and efforts dedicated towards compliance for our new and existing team. 2 weeks rigorous audit by -- with GMP and PAI audits resulting with our low format 483 observations. Quality Compliance and ESG, we have set our goals and work on a committed journey to acquire global accreditation over medium terms including gold rating from Ecovadis. Now I will request Himanshu to give color on our performance.

Thank you, Dr. Sudhir. So from Cohance perspective, we continue to progress on the growth journey. As mentioned earlier, the CDMO segment continues to reflect sustained growth momentum. It continues to contribute 44% of the gross profit and 32% of the 9 months FY '24 revenue. And we remain positive about this. The ADC warhead site located at Nacharam Unit has successfully cleared audit by EDQM with no major or critical observations. We've also onboarded 2 large new innovator pharma customers for ADC platform and as well onboarded 1 new lifecycle management customer. One of the Phase III product is also progressing well on track. The API segment business is expected to recover from the second half of FY '25. It contributes 56% of the gross profit and 68% of the 9 month FY '24 revenue. There's also an update on the 2 API qualifications. We have completed one API qualification for the customer, and the another one is progressing at an advanced stage. Cohance has also had 8 consecutive successful audits across the platform and operationally qualified Kilo Lab with OEB6 level standards. I will now request Dr. Prasada to give the final remarks.

Thank you, Himanshu and Dr. Sudhir. EBITDA margins for the combined platform are expected to settle in mid-30s. However, in near term, as we are in investment phase, we might experience margins to be impacted by a couple of percentage points. However, we expect a progressive trend towards the mid-30s over the midterm. This merger signifies a transformative step for Suven Pharmaceuticals Limited consolidating our strength and the positioning us for sustained success in the dynamic pharmaceutical and specialty chemical landscape with 3 distinctive engines of growth, pharma CDMO, specialty CDMO, and API++. Let's collectively trade this exciting journey towards a more prosperous future for Suven and open for the floor for Q&A. Thank you.

[Operator Instructions] We have our first question from the line of Rashmi Shetty from Dolat Capital.

So first thing, I would like to know that in the presentation, it is mentioned that we have paid dividends in Cohance by increasing our borrowings. So if you can give color on it that why you have taken borrowings just for paying the dividends?

Thank you, Rashmi. Now I'd request our CFO, Himanshu, to take up the question.

Yes. So Rashmi, I think the right way to look at this would be that, as Dr. Prasada mentioned, we have invested significant capital in establishing new CapEx and increasing the CapEx facility for us. I think, I would actually say that the borrowing has been more from that perspective rather than coloring it from a dividend perspective.

Okay. And so what is the way forward? I mean, will you look to reduce the borrowings in the next 2 years?

Absolutely. I mean, there is no doubt in our mind on that. I mean, our sense is that, we should be able to have a range of 20% to 35% of an EBITDA converted into direct cash every year-on-year, and that should help us reduce the debt from its current position.

Got it, sir. And a few more questions just on the merger part, since the audio clarity was not -- I mean, audio voice was not very clear. Just wanted to understand more on how is the Cohance CDMO business different from the Suven's CDMO business? Is there any overlap? How are the customers pursuing this merger? And there are many similar kind of CDMO businesses already as an existing player. So how the customers are really looking at it and how they are going to benefit from this merger?

Let me come back, Rashmi. Prasada here. If you look at the CDMO business between Suven and Cohance, they're completely, distinctly different. And Cohance CDMO business is more superior than Suven business, because of the following reasons. Number one, Cohance offers platform technology, which has been indigenously developed first of its kind in the world, the technology has been developed to manufacture camptothecin based derivatives. However, Suven, we have always been in the service business of offering capacities. Also the space in which currently the antibody drug conjugates are evolving right now is evolving at a much faster rate than any other segment in the therapeutic areas. Coupled with, there is also substantial unique science capability and technology capabilities because of few additions of specialty chemicals and hard core chemistry of carbon-carbon coupling or manufacturing -- they have a unique capability of even developing and manufacturing OEB6 capacities as well. From this standpoint, the Cohance CDMO, which is driven by a platform technology, IP owned by Cohance is much superior than Suven as we understand.

And just a follow-up. So from a margin perspective also, the Cohance CDMO has superior and better margin compared to Suven CDMO business?

Rashmi, I would prefer to reiterate what we have just mentioned. For example, our current gross profit of the growth of Cohance 44% as opposed to the rate at which it is growing at 33-plus percent of CAGR. So obviously, it implies the healthy margins from the business. And some part of your question also talked about customers. The customer base of CDMO of Cohance and customer base of CDMO of Suven are not same. They are uncommon. One is large U.S.-based innovator company, another one is Japanese-based innovator companies for which 2 products already at commercial scale for antibody drug conjugates payloads.

We have our next question from the line of [ Daljit Singh from Nirvana Capital ].

Sir, just a couple of clarifications. You mentioned that there has been an improve in the Phase III product pipeline in Suven and earlier kind of there were 6 intermediates and out of them 5 were commercial. And that number has now moved from 6 to 10 intermediates. So is the, I mean, understanding correct?

Your understanding is absolutely correct. Now we have 10 intermediates in Phase III.

Got it. And sir, any indication of any of the -- I mean, out of the 6 earlier intermediates which were in Phase III, any indications whether in next few quarters, something might move up into commercial?

That's our endeavor to see how clinical development happens. We cannot define exactly how the improvements will happen. For example, one of the products, it has actually moved from Phase I to all the way to Phase III, because the product has been designated as a breakthrough therapy. It's very difficult for us to predict Ranjit (sic) [ Daljit ]. However, we are doing whatever is best to make sure that our innovator companies stay relevant for their regulatory cycle.

Got it. And sir, on the API front, also, you mentioned there are 2 kind of APIs that has been kind of approved with the innovator. So whether that has been with Suven or Cohance?

That is primarily from the Cohance [ innovator ]. They have -- some of the APIs started looking for qualification as a lifecycle management solution to the innovators. That has been the prudent trend at Cohance. This is the latest development, which has been called out in the script today.

Got it. And sir, in earlier interactions also when there were possibilities of doing this lifecycle management and API thing for Suven innovator clients as well. So would there be now a possibility to fast-track that thing with both the entities combined and more offerings?

Yes, we believe in so.

We'll take our next question from the line of Tarang Agrawal from Old Bridge.

Just a couple of questions from me. One, what's the dividend policy of the combined entity is going to look like? Number two, I'll just finish my questions. Number two, in your ADC platform, you mentioned about payload, but do you also have linker capabilities? And how big will be your ADC revenues be, say, in FY '25 as a percentage of your overall revenues?

Yes. I'll take up the question about ADC. You are very right. We are also looking for expanding the payloads. And from a capability standpoint, currently, the focus is on adding one more payload apart from the camptothecin based and progressively objective is to explore possibilities along with customers on the linkers. But as of now, it doesn't exist as of today. From a dividend policy, I would request our CFO, Himanshu, to answer the question. Himanshu?

Yes. So see from a dividend policy, I think, we are going to be conservative in a payout of the dividend. I think, we do believe that we are on the path of a very, very encouraging journey to create shareholder value, and we believe that, that would come through investment into business as well as exploring other inorganic opportunities if they were to arise to us. So that's our view on the -- on your question of dividend policy.

Okay. I was basically -- the question stemmed from the earlier question where about INR 160 crores of dividend was paid out. You did mention that borrowings expanded. But typically it was a -- it seemed a bit out of the ordinary. So that's where the question is coming from. But I think it's clear now that you're going to be focusing on reinvesting back into the business. So that's helpful. Also, how big could the ADC business be, say, in FY '25/'26 as a percentage of your overall revenues of Cohance or merged entity rather?

Overall at a CDMO level, we expect a similar kind of percentage growth both on absolute terms as well as from a percentage term. Currently, we might not be able to exactly give you a specific number what that would be.

[Operator Instructions] The next question is from the line of Nitin Gosar from BOI Mutual Fund.

Let me outright register a bit of observation. Once we are a shareholder, we don't appreciate an entity, which tries to payout dividend by taking debt, especially where a merger issue is due. Those kinds of events don't really go well. And when you, yourself called it out, the intent is to close business and keep deploying the cash flow. This kind of action doesn't go well with the guided principles through which you want to grow the business. Coming back to the P&L, combined entity P&L shows that right now, we are around 33% kind of range on EBITDA margin, while you were indicating that you will settle down closer towards 30% in medium term? Or is that the right...

Yes, Nitin, thank you for explicitly mentioning about the dividend observation. And again as Himanshu has mentioned, we reinstate, our focus is primarily to invest in the growth avenues of the business and we continue to remain focused on it. On the EBITDA percentage level, as we were mentioning in the earlier stage of the call, we expect some percentage points of dip in the short term, because we have started investing in our human capital as well as some of the operating expenses. Hence, it would be a lower 30s, and definitely in the midterm to long term at a steady state we will definitely be mids 30s of EBITDA.

Okay. And while considering the swap ratio, you did mention that we have considered recovery in Ag Chem cycle for Cohance. This recovery in Ag Chem cycle is expected in year '25, '26?

Nitin, just to clarify the question. The Ag Chem business is pretty much pertinent to Suven at this stage. And based on our understanding about the market, we expect the recovery signals to come in, in H2 of '24, '25 towards fag end.

Okay. And lastly, with regard to working capital in Cohance it has gone up on a 9-month basis, could you clarify the reason behind that?

Himanshu?

Yes. So Nitin, I think, we have built in some inventory, especially for quarter 4. And as you would notice that quarter 4 cyclically over the period has been a large quarter, and we are expecting a strong quarter in FY '24 as well. So primarily that's one place where we have invested behind the working capital. We do expect that post quarter 4, the working capital position would steadily improve.

But same may be true for the last year as well when the working capital days were 162 and this time, it is around 185.

Yes, that is correct. So there is an investment that's also happened on the receivable side, primarily with some of the businesses that have been impacted because of a currency crisis as well as Middle East concern. So there is some investment that's kind of got a blocked because of the foreign currency being unavailable in those countries.

Okay. So our debtor days have got stretched because of the working -- because of the currencies not being available at the country where which -- where we have made our sales, right?

Yes, some of the countries where we have made sales, which are witnessing some geopolitical issues.

We have our next question from the line of Vivek Agrawal from Citigroup.

Sir can you specify as far as the capacity additions are concerned, right? So how much you are planning to invest into the capital expenditure, let's say, over the next 2, 3 years? And what kind of the technology capacities you are adding? So that would be super helpful.

Vivek, let me divide this question into 2 parts. As you heard us, from a CapEx standpoint, significant investments have already been done in case of Cohance. And at Suven we already have approved CapEx. The immediate priority for the management team is to ensure the 400-plus KL capacity of Suryapet is come up and running for commercial. And our primary objective is to ensure that the existing CapEx sweat to a reasonable extent in such times, we don't have an intent of committing so much of the CapEx. However, progressively in the next 4 to 6 quarters time, how the business is going to come back, we might take appropriate decision on CapEx. Current priority is just to focus on filling up the capacity to sweat the asset to derive the business. Thank you.

Understood. And sir, if we talk about the business mix, right? So currently, it's around more than 50% coming from the CDMO right, and less than 50% is API. So how that mix should change, let's say, in the next 3, 4 years?

If I'm assuming that your question is related to Cohance business?

Yes it's a combined business basically.

Yes. Definitely, as you know, Suven is more than 90-plus percent is more of the CDMO business, with very less of other businesses. And the way historical information talks about 33-plus percent of CDMO business growing in Cohance, obviously, some total will continue to have dominant growth in CDMO space.

So do you believe that this 30% kind of CAGR as far as CDMO business is -- you will be able to do, let's say, over the next few years? So despite all these geopolitical issues, destocking, et cetera, that is there. And even if you look at last year multiples, CDMO companies have reflected negative growth, decline in margins et cetera, so right? So what gives you confidence that you will be able to continue to outperform the overall market and will you be able to do this kind of growth like, over the next few years?

Vivek, it's very difficult for us to really define our own trajectory in the CDMO space by very definition. We have got to be close to our customers and the success of the clinical phase will ensure. However, the assurance of the Cohance CDMO, which is platform driven, product is commercial, product is substantially growing on the ADC platform and also some of the controlled substances makes us to believe that the growth trajectory will continue. Whether it will continue at the same run rate or slightly lower and higher, we cannot predict at this stage. Coming back to Suven, as you understand and some of our colleagues are also asking about the Phase III molecule. While we have 100-plus projects which are active, the encouraging thing for us in Suven side, especially on the CDMO is number of molecule in Phase III got improved. Today, we have 10 products with 5 major customers and also the inflow of RFQs are almost 100% higher than last year. The conversion rate is also upwards of 160-plus percent when compared with the last year. These things makes us to believe that we should be able to grow along with the market and our customers as well.

That is great. And last question from my side, if you are able to comment on the ongoing geopolitical dynamics, right? The U.S. has come out and trying to come out with a Biosecurity act, right? And that may have some kind of impact on the -- some of your competitors in China, right? So how you see this dynamics playing out and any kind of impact that you witnessed on your business?

So as you understand, it's a very true broader sense of it, Vivek. Like you we're also quietly observing, from our side, whatever we are capable of doing, we are keeping our internal resource right and beyond the point, we prefer to not to comment on this.

We have our next question from the line of Chirag Dagli from DSP Mutual Funds.

Just very -- in the presentation, you're talking about potential to drive 10% of incremental EBITDA from various revenue and cost synergies. Question was, is this -- over what period of time is this, because you're talking about revenue synergies only in 2 to 4 years and cost synergies only in 1 to 2 years. So just put out a number, I just want to understand what does it mean?

Himanshu, you wish to take this up?

Yes, sure. So Chirag, I think, we are -- we have categorically put up around 10% of incremental EBITDA as the synergy from both the levers. We are more buoyant on the top line while we focus on the cost levers. And as you would understand, that the revenue levers will take time. And as Dr. Prasada has mentioned that both Cohance has around 5 innovator customers, and Suven has 5 innovator pharma customers. And the merger gives us actually 5 plus 5, which equals to 10 and not less than 10 innovator customers. So we do find an opportunity where our customer base from a CDMO perspective or from a cross-selling, doubles from 5 to 10. And that opportunity is something which we wish to cross-sell and harness and our sense which we've estimated is that we will get around 2 to 4 years. Similarly, there was a mention that we are looking at leveraging the material consolidation. So, in the procurement side of it or the operation efficiencies. And our expectation is that, 1 to 2 years post the merger approval, we should be able to get the basic cost synergies into the business. Net-net, we are looking at around 10%. Yes, please go ahead. You want to say something.

No. I understand that sir. My question was, is this an annual, every year feature? Is this cumulative over 4 years? Since you put out it, I just want to understand what the 10% exactly means mathematically?

So mathematically, it is that some part of it -- okay, one it is not an annualized feature. So it's not that it will generate annually. It is a generation that will happen, and once it is generated it will remain in the P&L. So from a simple perspective, if there is a cross-sell, and I generate additional INR 25 crores, INR 50 crores of revenue, that gets into my base and remains in my base. Similarly, if my cost level goes up -- goes down from X to Y, it remains in my P&L perpetuity.

Understood. So over 4 years, this is how we should think about incremental -- with the merged entity delivering 10% synergy over 4 years. Cumulative.

Yes. But it will, CAGR over a period and yes it continues to be in 10% over the 4 years.

I understand now. Okay. And the other one is, on patent expiry for the merged entity, how should we think about -- is there anything in the base that we should worry about, when you see earliest patent expiry for the merged entity, that we should think about, that coming out of the base or hurting the base, et cetera?

As per our understanding, absolutely no at this stage.

But when is the earliest patent expiry sir that we should start worrying about?

We will come back to you once we hear from the customers. Because, it's very important to take this patent expiry language in totality, Chirag, it's not that if patent expiry happens, product is going to do the half shelf, it doesn't happen like that. It all depends on the therapeutic category, it all depends on the patient acquaintance with the molecule. Innovator might decide, still continue with the same volume at a low price. Hence the point is, we are very closer to our customers and whenever we hear back from them, we'll definitely, appropriately once we quantify when it is going to happen, we can certainly come back. But answer to your question, in at least next 1.5 to 2 years we don't seem to have such kind of a situation, because innovators will always inform us in advance.

Does that answer your question, sir? We'll move on to the next question from the line of Gokul Maheshwari from Awriga Capital.

My question is that at the time of the acquisition in September '23, there was some comments made by the Advent top management on an aspiration to build a $1 billion of CDMO business. So could you just comment where that -- is that aspiration still there? And how would you plan to achieve that under the combined entity?

Thank you, Gokul. Let me invite our Executive Chairman, Vaidheesh. Vaidheesh, can you just take up this question?

Thank you. As rightly said, when you create a platform, you have to have a vision or a kind of a goal to go after. I think that's what Advent had articulated at that point of time, $1 billion kind of a platform is a way to go. If you look at the way in which we are now built up, we are almost to the extent of a -- with Cohance and Suven put together itself, we are talking about a reasonably 50% to 60% at the target, and almost 60% to -- of the target. So frankly, in my opinion that vision will continue to drive our approach. We will look for opportunities, external opportunities that would fulfill our ambition. So the long and short definitely that burning desire to become a $1 billion platform still exists and we will continue to look for more options for making that happen in the next 5 to 7 years’ time. But just to let me tell you, it's a vision for ourselves. That's our force behind it.

Okay. In the last decade or so, Advent itself has made a lot of investments in a lot of pharma companies globally. So within the portfolio, what kind of synergies or interactions would combined Suven, Cohance entity, has with these businesses? And is that an easy cross-sell or ability to do business with these companies which are in the portfolio of Advent?

Gokul, currently, we are absolutely focused on work in hand, which is ensure that individual companies versus a combined organization, growth must be accelerated. And that's our management focus at this stage. And wherever there is any cross-pollination opportunities with other investments, primarily because of logical extension and the meaningfulness in the business, which makes more meaningful sense to Suven and Cohance, we might look at it. Otherwise, our current objective is to ensure that enough opportunities are in our hands, we have to convert them into reality. That's the primary objective that we are currently working.

And lastly, you mentioned about the outlook for the CDMO and the API business. Where does formulations fit in because Suven had invested in Casper, and that is pretty much an underutilized capacity. So if you could comment on the formulation strategy as well?

Gokul, I think it's an important point that you mentioned. We also witnessed the fact that there is a non-core business is in existence with us. Instead of interpreting too much our current endeavor is to ensure that the business sweats enough, and it will breakeven or it will sustain on its own, while we try to focus on pharma CDMO and Specialty CDMO. The way things are evolving, we expect in '24/'25, we should definitely be able to get a cash profit to a neutral stage where the business is not going to hurt us going forward. That's the primary objective that we are running right now.

We have our next question from the line of Ankit Shah from Canara Robeco AMC.

Sir, you guided for a mid-30s kind of margins in the medium term. And if I look at the 9 months numbers on a combined basis, we're already doing 35% kind of margin. Now considering that you plan to unlock cost synergies and also CDMO business will grow much faster at least on the Cohance side. So shouldn't the margin expectations be higher than what we are currently doing? Or do you expect any margin headwinds going forward?

Ankit, very valid point, Ankit. But we got to be a little more careful in our commentary, and we wanted to see how market is going to evolve. We have considered all possible risk adjustments that can potentially can happen. That's the reason we are trying to stick to the narrative of mid-35s, mid-30s of combined EBITDA margin. However, because we have been investing on some of the important aspects of human capital as well as OpEx. In short term, there will be a little bit of a few percentage point impact. Definitely in the long-term basis, we should be better or at least not lower than mid-30s is the view that we have today.

Right. And currently, ADC business would be negligible, would that be fair to say or it has fairly scaled up from where you started?

It is fairly scaled up. It is fairly scaled up, Ankit. Because, there are 2 products which are already commercial and both the products are doing extremely well.

Right. And on the ADC side, do you plan to add more capabilities, say, on the conjugation side or the antibody production side or immediate term, would your focus extend to that? Or you just focus on adding more payloads in that part of business?

Ankit, I was also responding to Ranjit (sic) [ Daljit ] from Nirvana Capital question. The way that we look at this business is ADC warheads and payloads. It has been more than 2 decades of research. Finally, Cohance, this division has been able to build a payload capability. The logical extension is not only just sticking to the current camptothecin based. There are other revenues were additional payloads can be built in. That's what currently team is focusing right now. In future, if the business demands, probably we should start looking at linker capacity. We all must understand it's not our choice. Ultimately, we have to look for our customers and partners to see the value in us between India to Western world. Wherever there is an opportunity, obviously, we will also be open-minded for getting into linker business. As of now, our focus is primarily to focus on payloads and warheads.

We have our next question from the line of [ Nitin Bhoir ], an individual investor.

Yes, my question is what would be a total equity of combined entity and equity capital?

Himanshu, can you take up this question? Just to repeat equity and equity capital, he is asking about.

Yes. So I think in the investor presentation, we have mentioned that the shareholder funds as of December '23 is close to INR 2,000 crores.

So, equity would be INR 20 crores? Because base value would be INR 10 crores of combined entity or...?

Sorry, your voice is not clear. I'm struggling to follow your question, please.

Yes, I'm trying to understand the earning per share for combined entity.

Okay. I think that is an easier way. If you just look at the equity capital additions, right, there is a 52% equity capital addition that's happened on FY '23 basis. Okay? I'm not even considering FY '24. And the PAT has been added close to around 70%. So if you just do it from a maths perspective, there is 12%-plus EPS accreditation that has happened only on FY '23 basis.

We have our next question from the line of Mayur Parkeria from Wealth Managers India Private Limited.

Sir, I just wanted a little more color or clarification. In the presentation as well as in your commentaries, you have talked about that in a couple of -- 2, 3 times that we have taken note of the liabilities which could have accrued on the Cohance side and the swap ratio has been adjusted to that impact and the 30% discount to the valuations compared to other similar business which is there. The question here is what kind of liabilities were we talking of is it something like about the dividend payout obligation was there and it got paid out? Was it about ESOP commitments charges which have already been taken to P&L or there are something more on other sides. And let me ask you a little more specifically, are there -- what kind of any potential ones which -- are there any open areas around that?

Thank you. It's relevant question. Let me invite Himanshu to take up this question. Mayur, just give us a second.

So Mayur, first, let me address the concern. There is no ESOP. There is no dividend payout liabilities that are there. These are pure, pure operational business liabilities in any running operations, there would be a few items which would have a potential payout arising in the future, be it a tax or be at otherwise. We have been extremely conservative in considering any liabilities irrespective of the probability that was given to us by the 2 divisions partner. And we consider the entire aggregate of that liability as a clear cut on the valuation adjustment of Cohance.

Okay. Okay. So just -- do I get the numbers, that is a clarification not a question. Just do I get this number right, that the EV was around INR 8,500 crores, including the increased debt, which was there. Will it be the right number? And on a total EBITDA annualized of INR 400 crores. And so is that the right number for Cohance which we should look at?

Yes. I mean, that's the number broadly. I mean, if you look at it at a very broad level, that's directionally the right number.

Okay. And given the outlook currently, which we are having of some pressure on the market side and also on the chemical side or on the margin side, is it -- will it be -- how will you call out that -- will Cohance be in a position to maintain the annual EBITDA run rate of INR 400 crores? Or will it even be lower? Because there's a huge Q4 number, which is expected, the 9 month is only INR 250 crores, but that is also in line with the 9 months of previous year. But the annual FY '23 EBITDA is much better. So will we be able to maintain INR 400 crores, INR 440 crores, INR 430 crores kind of EBITDA for Cohance?

Mayur, in all fairness you've answered the question your own self. I did mention that, cyclically, we do have a high quarter 4 and it's the same for FY '23, it is the same for FY '24.

Right. So we -- the -- yes, so despite the outlook being soft, we don't see risk to that number going down because then that would -- the discount which we are saying and things which -- if the potential EBITDA is going to be lower even in just 6 months' time frame? Or in that time frame, we would be looking at a valuation which is different, right?

No, I didn't really follow your question.

Let me answer. Mayur, your understanding is absolutely correct. From the management side, we also looked at what is the existing order book position, what is the manufacturing plant to deliver the said numbers what you did mention. The outlook is definitely Cohance should be able to deliver the number which has been factored in this assessment. That's what our view from an operations side.

We have our next question from the line of Gagan Thareja from ASK Investment Managers.

The first question is around the EPS accretion that you have talked on the FY '23 basis. If I look on the 9-month year-to-date FY '24 basis for more than 55% sort of a profit accretion, there's barely 4.8% EPS accretion for the 9-month period. And that is on a weak Q3 -- on a very weak Q3 for Suven. On a normalized Q3 for Suven year-to-date basis, the EPS accretion would have been virtually nil. So I am, therefore, unable to understand, when you say double-digit EPS accretion, why take FY '23 base? When we know that FY '23 was something that was impacted by -- rather propped up by non-recurring COVID-related products in the base, right? Wouldn't FY '24 be reflective of the growth in a better way? And if that is the case, then from an investors perspective, there's barely any EPS accretion.

Thank you, Gagan. I would request Himanshu, can you just take up this question.

Yes. So Gagan, I think even when you see FY '24, there also, if you look at the EV, the EV addition is 52%. And the PAT addition, despite the fact that Suven results are depressed, it is at 57% and EBITDA addition is at 70%. So right now...

Sir, but the EPS accretion is 4.8%. The earnings per share accretion is barely 4.8%. And on a normalized quarterly run rate of Suven, it would have been not even there, it would have been probably flat. So for all the profit addition that you're doing with the Cohance addition, you're barely -- there's really any EPS accretion on a year-to-date basis?

See I think, we will have to look at it from a multiple perspective. We can't ignore the fact that the FY '23 numbers, even when the numbers were very, very high, there is an EPS accretion that is happening in FY '23. And we have to wait for FY '24 results to kind of mature in terms of seeing as to what's really it bakes up, which is why we have said that we will be EPS accretive in the first year of our merger. I mean, we are very, very clear that we will be double digit EPS accretion in the first year of our merger.

But then how does that sort of stack up with your commentary that your margins will be under pressure in the first year of the combined entities operations? You're saying that because you will be investing in manpower and doing further OpEx enhancement, there will be a 200 bps sort of a margin pressure. And despite that, you're talking of EPS accretion on this base. So could you maybe perhaps enumerate or elaborate a little more on the synergy benefit playing out in the first year or the second year or the third year and give us some idea of how do you expect EPS accretion to dilate or increase from here on?

Let me see as to what we can put it out to clarify in the investor deck of what we have done our internal workings, which shows us that we will be EPS accretive in the first year of merger. And we are very clear based on our internal workings that the first year will be EPS accretive double digit.

Okay. Right. And from a working capital perspective, what will be the cash conversion cycle for the combined entity and versus what -- where it stands today for Suven and for Cohance separately?

So see, as you noticed, Suven has been our cash generator. I think, year-on-year, we are generating cash. So that situation will remain as it is. And for Cohance, I have said that...

I'm talking about the working capital cycle, sir.

So ultimately, from a working capital cycle perspective, we do expect that Cohance would remain stable. We would not be investing further on the Cohance working capital. And Suven's working capital is a -- go ahead, please.

No. Finally, just one more question, which is are there any contingent liabilities on the Cohance balance sheet, which come onboard with the merger? And if there are, what is the size?

No, there are -- as I've mentioned to you that we have taken a valuation adjustment for all potential liabilities in Cohance books. So there is no contingent liability that we expect it to materialize, which we have not considered from a valuation perspective.

Can you enumerate that value...?

May I request you to join back the queue, please? We have our next question from the line of Tarang Agrawal from Old Bridge.

Just a couple of questions. One, what are the number of shares that are going to be issued? And second, on the reactor capacity of about 2,700 KL for the combined entity, are these all product capacities or there's raw material capacity also included here? And if so, what would be the raw material capacity?

Let me answer the last question, and hand it back to Himanshu. This is clearly a reactor capacity where between the assets, 1,400 KL and 1,250 KL of Suven and Cohance consecutively, comes back to roughly 2,700 KL. As you understand, there is also 400-plus KL capacity of project which is up and running in our Suryapet facility of Suven, which is also going to be commercial. Like this, there are about 150 to 200 KL capacity of Cohance is also coming in play. It is purely a reactor capacity. However, one can look at reactor capacity coupled with classification of OEB. In Cohance side, multiple OEB facilities are also there. As you understand, though there is less than maybe 100 liters, that OEB is OEB facility. So that's how one can look at it from a capacity standpoint. It is to relate with any raw material side...

Sir, if I may just follow up, I mean, for certain products, right, there may be a possibility that we might be using certain particular intermediates, which could be used across the portfolio. And to that extent, whatever is my KL capacity, will be more backward integration than actually getting revenue out of it. So my question was from that standpoint. Like do we have any dedicated capacities for specific intermediates, which would tantamount backward integration?

This is primarily from a business standpoint. Today, these capacities are adding up. We have no plan for using one capacity for additional backward integration, that has not been the initial consideration. However, individual businesses have to continue to grow. If there is any opportunity of any backward integration, for example, in Suven CDMO, we will be open minded to look at the capacities which are available in hand, instead of trying to create something our abilities to have a flexible mapping will be secured. Does this answer your question? There are no common intermediates which are manufacturing today, where this manufacturing of intermediate will directly get into sales. Hence this capacity is not going to be realized as a sale. That's not the situation. I hope this answered your question.

It does. It does.

Thank you. On the first point, Himanshu, if you can just take it up.

Yes. No certainly, so, Tarang, the Suven equity base was 25.4 crores shares and the ESOP of 65 lakhs was issued, which made the share count as 26.1 crores shares. The post fully diluted share, post the merger will take this to 38.97 crores shares.

Ladies and gentlemen, we'll take that as the last question for today. I now hand the conference over to Ms. Cyndrella Carvalho for closing comments. Over to you, ma'am.

Thanks, Yash. Thank you, everyone, for your time in joining us and understanding and spending your efforts with us. We respect all the questions and whatever questions are remaining unanswered, please reach out to me or the CDR team, we will come back with explanation. Thank you so much.

Thank you, everyone.

Thank you.

On behalf of Suven Pharmaceuticals Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.