Cohance Lifesciences Limited (COHANCE) Earnings Call Transcript & Summary

The Cohance's portfolio is little curated and a niche. It doesn't have so much of a pricing pressure. However, what we see in coming years is going to be other way around, there can be a possible pricing appreciation. And in general, the pricing is also a factor of markets. And as we are speaking, our market expansion is on the more pharma emerging markets, where the pricing will be much better than what it is today. Combination of both, we feel the price appreciation will be better than the current baseline what we have.

Okay, got it, sir. And the second question is on the comments which you made that -- there are increase inquiries in the CDMO segment, especially which you have seen in quarter 4, are the inquiries related to more developmental projects, which are in earlier phases or is it more related to Phase II and Phase III pipeline?

It's a combination of both, but more importantly, very exciting the laterals have actually come in and some of them are Phase II and beyond.

Got it, sir. And one last question if I may. In the CDMO segment, earlier we said that we are actually revising the clientele of Suven Pharma. So how many new clients you have already revived and how many new are getting added, if any clarity if you can give on that part?

So our current objective is, Rashmi, to form with existing customers. However, during our last call also we did mention. One of the relationship is becoming more strategic partnership, more number of us RFQs are coming. That's the view that we have.

The next question is from the line of Chirag Dagli from DSP Mutual Fund. Yes, please.

Yes, sir. Am I audible?

Yes, please. Mr. Chirag, please go ahead.

Sir, like you have given in your presentation pipeline -- Phase III pipeline intermediate for Suven. Similarly, can you share for Cohance as well? I don't know if this covered in the Cohance presentation, but I'm sorry, if you can repeat this.

So we haven't covered this as such because it's at a different broader base of the business, but we will share that in the coming quarters.

Understood. Sir, the kind of traction that we are seeing in the Suven business, your Phase III pipeline has almost doubled, right? If I just look at the number of intermediate pharmacies in FY '23 to [ 13 ] similar traction has been seen in the Cohance CDMO piece as well?

Absolutely. There are 2 parts to it. One is on the non-ADC as well as ADC space as well. More specifically on ADC space, it's almost doubled. 2 commercial, 2 more new products have come in. We are slightly constrained with the obligations of the innovators, otherwise, you must have picked up. We are also working on few designer payloads, exclusive to few clients. And we are also expanding to a new payload business, which is an adjacency of coming from topoisomerase to tubulin isomerase. Otherwise, work is happening. We see the same traction all across the platform. Just to give a prospect as you understand, between last year to current year, the number of clinical products in pipeline are increased by 16%, standing at 22,600 approximately, which is also been seen by the industry Chirag. That's an additional insight for you.

Understood. Understood. And in terms of the reaching out to the clients, on the -- are we now reaching out to clients as a merged entity or that is still pending, we are still reaching out separately. Just some color around operationally? Is the merger happening or we wait for the legal merger to happen before we reach out I mean as [indiscernible]?

So it's currently a conscious positioning is happening, Chirag. Conscious position is happening. And as we are speaking, some of the competencies of the -- mutually, from Suven to Cohance and Cohance to Suven customer also wanted to do that. So consciously, the cross-pollination is already started.

Understood. Fair point. And sir, on the agrochemical piece, while you said that things should improve, the way -- how should we think about -- we are at multiyear is low as far as the current year -- current run rate for the second piece is concerned. And this is coming on the back consecutively off a very high base. So the earlier peak for us to reach that -- was there any one-off in that earlier peak that it will be difficult for us to reach that peak back. Some color around that was at some inventory seen in that earlier peak, et cetera. Just how should we think about growth of this low base that we are witnessing in FY '24. Is this going to be a more linear recovery or if this is going to be a non-linear recovery? Just how are you thinking about this?

There are 2 comments, Chirag, it's a very valid point. If you look at the journey from FY '22 now, the base started from INR 309 crores and the peak you've seen up to I said INR 533 crores. If you look at the composition, dominance of 1 or 2 products are there, today, which is getting nullified with multiple number of products. Today, the pipeline is better, which is one important factor. Second, whatever the big product has a bit of challenges of destocking and having a little bit of adverse impacts on the overall uptick of the product, which is also coming to a normalcy. So combination of situation becomes normal, coupled with wider basket of products makes us to believe that it will come back to the growth trajectory. And we are having a very close engaged conversations with our partners. And we also have decided that it is not just one more service line item for us, it has to be a separate strategic business unit. We are also getting one more senior leader, who can actually take up this business as a BU Head. And all these things are actually giving more confidence to our partners also to see us as a part of their new product pipeline as well.

Okay. Just lastly on the merger, while you indicated 12 to 15 months of February 2024, when you announced in terms of the deal milestones, if it's just timing that it is going to take? Are there any specific issues that you witnessed in consummating the...?

As of now, it's on track, Chirag. However, I would request Himanshu to elaborate anything.

So Chirag, I mean -- we are progressing in line with what we had estimated. And I think we don't sense that the estimated time lines is going to overrun. But having said that, it is a regulated environment, and we do need regulatory approval. So -- and there is all initiatives and full steam ahead in terms of getting the merger approval. We are more keener than anybody else to get the merger and get the synergies because that's -- as you recollect, during the merger presentation also, we had mentioned that the entire drive for merger is because the customers are seeking it. And I think you also asked a question about how we are approaching the customer. So yes, we are very, very keen in terms of progressing the merger. And we are quite confident that we should be able to reach in the stipulated time that we have mentioned.

Understood. I also want to just give a comment. Thank you for indicating the consolidated pro forma numbers for us, how do you look and providing a history -- 5-year history for that, very helpful, it was a long way in our decision.

The next question is from the line of S. Ramesh from Nirmal Bank Equities.

So in the fourth quarter, gross margins have improved, but your EBITDA margins are down. So barring the impact of the option expenses in employee cost, what is the reason for the increase in employee cost and the other expenses? And is there something which will possibly even out? Or is it something which we should assume will be the trend for the next 4 quarters?

So first, Ramesh, we don't look at our business on a quarter-to-quarter basis. I mean I think as you understand that we are a lumpy business. And the fact is that it's best to look at our business on a yearly basis, because it's basically a long-term business, okay. Having said that, I mean, I wouldn't really read on the quarter 4 margins. I would kind of draw your attention back to the FY '24 margins. And I think what I said in the previous response also that we are growing the business, and our expectation is that the growth will be faster than the expense growth. I think Dr. Prasada has also mentioned in various communications that we are investing in the business, and we continue to invest in the business because, for example, we talked about our strategy business unit, we converted for Spec Chem. And that will require investment because I think that's the way we expect that the customers is designing of the business and the focus that we require in the business. And so yes, the employee cost will increase. We are expanding and adding high-quality manpower, which is so very required for this business. I think we've already talked in the previous conversations also about a very, very strong commercial engine we made and that comes with the cost. So yes, I mean, I think the net answer at a summary level is that margins will remain healthy, and we continue to invest in our business for a progressive growth.

Okay. So if you look at the history over the last 5 years, after '21, you've kind of grown for 2 years and then your numbers have gone back to where you were I think in -- I'll say in '21. So what's actually -- apart from the headwinds, most of the industry has faced in FY '24. Is there any company specific or client specific factors, which has actually dampened your performance in '24? And what is the time frame over which one can expect that growth phase to come back, say, to take a 2-, 3-year view. And secondly, what is the reason for the sharp increase in net debt-to-EBITDA between FY '23 and '24, for Suven -- key ratios as per the Slide 27. And when do you see this net debt-to-EBITDA ratio being brought back to something reasonable?

I think 3 points, Ramesh. One, I think we have in various earlier conversations mentioned about the COVID sale. And I think the COVID sale has had a huge base effect, right. If I talk about the Ag Chem stocking and the impact of the destocking that we are facing in the business. That's, an industry-wide phenomena, which is there. So I think that's part one to the question that you have. I think the other part, which is there is, I think we did mention that we have around INR 800-plus crores of cash in the balance sheet. So I think that's the other aspect that has to be covered in terms of when you're looking at the various ratios.

No, I'm just looking at the net debt-to-EBITDA ratio, given in Slide 27. So that must be adjusted for the cash, right? So it's increased from 0.7x to 1.8x. This is net cash, okay. So normally, we put. So this is a net cash ratio. So I can correct it. Okay. So that we -- normally, we take cost fee figure as net debt. Okay. Fair enough. So if you look at the overall product mix, will CDMO remain the dominant segment? Or will you see some increase in Spec Chem and Agro Chem, say, in the next 2, 3 years? How do you see that? And how do you see the return ratios in the acquired entity, Cohance catching up with the Suven ratios because Cohance seems to have lower return ratio. So how do you see that improving, say, in the next 2, 3 years?

Let's -- again, I think dissect the subject. You have multiple questions. I think what we need to first understand is that for us, we are creating Spec Chem as a strategic business unit. The direction and the need for creation of a Spec Chem as a strategy business unit is because we do believe into that business unit. And therefore, we would continue to invest for growth in that. We -- during our merger exercise, we had mentioned that we are creating multiple engines of growth, and therefore, all engines of growth will eventually fire. And in our commentary today, we have said that other than Ag Chem destocking, we are not sensing that any BU will not fire. So all these BUs is firing, and we are expecting and experiencing expect the growth to come in FY '25 onwards.

Yes. And on Cohance, how do you see their balance sheet ratios improving?

See, I think, again -- these are 2 very different business.

Okay.

So it is -- I mean, I would say that it would be almost like comparing apples and oranges. So we want -- I think it's a very, very different business. So don't -- I mean, I would assume that both the businesses will improve, but not that A will reach to B or B will reach to A.

Okay. Fair enough. Wish you all the best.

The next question is from the line of Gagan Thareja from ASK Investment Managers.

I hope I'm audible, sir?

Yes, please, Gagan, please go ahead.

Sir, the first question is while you've given the profit contribution from Cohance. Is it also possible to give the operating cash flow and the free cash flow contribution from Cohance for the year?

Gagan, I believe it is there in the presentation. Can I request you to please look at the presentation. We have also analyzing the data from there.

Whcih date, sir?

[indiscernible] understand that -- I think we can send it across later. I don't have an offhand recollection on which page it is.

Okay, because I was unable to find any cash flow contributions related to Cohance. What I could find was that the net working capital on Cohance has increased, and so also it would seem for Suven. If you could give some idea of how to think about working capital for the year or years ahead?

Yes. So certainly, that's -- see, on a working capital basis, I think -- there is work as we speak, on the working capital that is actively being [indiscernible] Cohance management. I mean that's what we have seen and learned from Cohance management. I believe that the ratios will improve over the period.

Can you enumerate it, I presume Cohance this year was 180 or 180-plus days of working capital. What sort of cash conversion cycle are you sort of looking at after improvement perhaps next year and there after?

I mean I would not be comfortable at this point of time to indicate a number, right? I think let's wait for 6 months to see as to what kind of numbers are delivered by the business.

Okay. And you indicated that over the next 5 years, you think the combined entity can double on the top line. Is it possible to segregate the growth outlook for Suven separately and Cohance separately, when you say doubling in 5 years, you are essentially talking of a 15% CAGR. Do both businesses grow at the same pace? Or do they grow at separate paces?

We expect similar kind of growth ratios between both Cohance and Suven. The reason being Gagan, pipeline of Suven as well as Cohance and the right inputs to deliver the growth has been factored. Hence, [Audio Gap] one of the important aspect is we have multiple engines of growth. All multiple engines of growth will have to grow disproportionately to what we have today. Hence, this is what the belief that we have.

Okay.

And predominantly, it is led by CDMO from both sides. If you look at it, the gross contribution of Cohance business close to 42%, while the 5 years CAGR is 13% revenue, it is more than -- CDMO growth is more than 30-plus percent. So these are all the things makes us to believe that the both growth engines will continue to propel.

Okay. If I refer back to your previous quarter's transcript, you've indicated that there might be 3 to 4 quarters of softness, and then growth will recover. So while you give a 3 to 4, 5-year guidance of 15% CAGR, from an immediate 1-year perspective, are we still looking at growth to be sort of below the mid-year -- midterm guidance that you've given and then recover thereafter?

So second half onwards, the recovery is going to be seen in both the businesses, Gagan, because there are enough evidences as you understand, there is a lag in each of the businesses. And based on the view that we have. Second part of the year onwards, the degrowth challenges are behind us. It is only just growth is fully back to us and a full year basis, there will not be any challenge. And second half is the real evidence that we can see.

Okay. And again, referring back to previous quarters call transcript, you indicated -- I mean, the merged entity pro forma operating margin would be mid-30s. And you indicated that you would be in an investment phase in a team building phase for some time to come, which would mean that margins would probably dip before they -- sort of inch up again and improve. Does that -- is that still the case? And do you feel that or perhaps the next couple of years because you'll be in a team building phase, the margins might sort of take some sort of an erosion before they come back again?

Gagan, the right way is to look at given the growth aspiration, we have indicated mid 35s or mid 30s is what we have indicated as the long-term margins for the business. We would want to stand by to that statement. That's the direction that we should look at.

Yes, that's the long-term. But how does it pan out over the next year, 2 years, 3-year time frame? Do you first come below the mid 30s and then go back up towards mid 30s?

We are not expecting that to happen.

Okay. So it will sustain it where it is right through, is what you're saying?

Long-term, we will be mid 30s.

You are mid 30s already, right, on a pro forma basis.

Yes. So we will sustain it around that.

Yes. So final question from my side and this is for Vaidheesh. Vaidheesh you have a very storied past in Glaxo. Just trying to sort of get your inputs on that, that business was a branded generic business, and you would have -- I mean, you're a seasoned professional there. You bring superb insights from that market. I'm just trying to sort of understand how will those insights aid the growth of the CDMO business merged entity over the next 4, 5 years, how do you sort of bring to bear your experiences in this market?

Thanks very much. I appreciate your sentiment. See, first and foremost, at the end of the day, every business has certain business models, certain insights, right? As long as we stay close to customers, we understand how to serve them, how to prepare yourself to deal with the customer needs, right? Business -- every business, whether it's a branded generic or whether it [indiscernible] business, I personally believe that Suven and also the combined entity is well poised for a good growth because of the fact that phenomenal understanding of customer insights are going into serving them, right? So being an innovator company, since I had experience in innovator company, likes the idea of doing the right things, doing world-class processes. And this company is well suited, now Suven as well as Cohance is well suited to serve the needs of the innovators or the global MNCs. So that is the most exciting part, I would say, yes.

Gagan, just to close that loop with the first point, what you mentioned. We expect to see a full year basis, we will continue to grow, and there are enough signs for this acceleration. And this acceleration is much better in '25, '26. That's the view that we have it on the ground.

That's helpful.

Ladies and gentlemen, we will take that as a last question. I would now like to hand the conference over to the management for closing comments.

Thank you, everyone, for joining us today and your valuable input. We look forward to our future interactions. Thank you, and good night, everyone.

Thank you, everyone.

Thank you.

Thank you. On behalf of Suven Pharmaceuticals Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.