Dishman Carbogen Amcis Limited (DCAL) Earnings Call Transcript & Summary

So good afternoon, everybody. We, at Dishman Carbogen Amcis Limited, hope you and all your family are safe and well. I'm going to give a short introduction, and then I'll hand over to Harshil Dalal, our CFO. So we've had a solid performance this quarter. The key highlights are a successful completion of an FDA audit for a confidential client's launch in November '21 of the lung cancer indication at one of our Swiss sites. That follows on from a successful paper audit by the FDA early on in the year. We continue to have excellent progress on the rebirth of our Bavla location in India, and we have continued to supply customers with product, and we continued to open new facilities, reopen facilities and bring our products back on to line. The construction of our new commercial facility for formulation in France is on target, and the facility looks fantastic, and we're really, really looking forward to that. Marketing efforts have already commenced. The commercial pipeline remains very strong, and the market remains very active. Ongoing validation activity is high with 3 completed this year so far and 2 more targeted for late fiscal year '21, '22, one in antiviral for bone marrow transplants and the other for multiple myeloma. Our activities in vitamin D analogs is continuing. Our patent has now been filed and it's been published. We now are waiting for a period of time for any challenges as is normal for any patent application. And the drug product that was manufactured in India for the research and development clinical trial against COVID is now with the clinic, that is going to commence the clinical trial in this next quarter. With that, what I'd like to do is to hand over to Mr. Harshil Dalal, our CFO, and he'll give you some of the financial highlights. Over to you, Harshil.

Thank you very much, Mark. Hello, everybody. A very good evening to all of you. Regarding the financials for the quarter ended September 2021, we would like to state that this was a pretty good quarter for us, especially from a margin perspective. And this was driven largely by the resumption of production and sales of sort of molecules from the India operations, as well as solid growth shown by our Netherlands business, our Vitamin D business as well as from Carbogen Amcis AG. So the revenue from operations for the quarter stood at INR 459 crores as compared to INR 439 crores in the comparable quarter last year, which is a growth of about 4.5%. The cost came in at around 9%, which obviously is not sustainable. Our average COGs for the full year are close to about 18% to 20%. But this quarter was pretty good because we did realize a good amount of gains on certain commercial products. The employee expenses for the quarter stood at INR 235 crores. This is in line with what we had in the previous quarter. EBITDA for the quarter stood at about INR 99 crores, which represents about 21.6% margin on the revenue from operations. Depreciation and amortization was pretty much in line with the previous quarter. Finance costs, including the ForEx impact, stood at about INR 13.69 crores. We had a small exceptional item where we had written down the value of certain old inventory, which was no longer usable for certain projects. So that was to the tune of about INR 2.5 crores. This all resulted into a profit before tax of INR 18.59 crores. The tax expense was at about INR 7.4 crores. It does appear a bit higher this quarter, largely because at the India stand-alone level, we had received certain dividends from the subsidiary. While the dividend gets knocked off, but the tax expense is something that remains on a consolidated basis. And this resulted into a profit after tax of about INR 11 crores. As far as the performance of the various segments is concerned, CRAMS India did a revenue of INR 39 crores. For the first half, this translated into INR 71.5 crores. CRAMS Switzerland, France and China cumulatively did a revenue of INR 282 crores as compared to INR 319 crores in the comparable quarter last year. We had one particular shipment, which actually got deferred to Q3 of the financial year at Carbogen Amcis AG, because of which it kind of shows a decline as compared to last year's same quarter. But otherwise, it was a solid performance by the Swiss entity. CRAMS U.K. reported a revenue of INR 33 crores as compared to INR 27 crores in the comparable quarter, which is a 20% growth. Carbogen Amcis BV, on the marketable molecule side, did -- I mean it was again a fantastic quarter for The Netherlands business, did a revenue of INR 71 crores as compared to INR 52 crores in the comparable quarter, and this resulted to about 36% growth. As we saw in the fourth quarter, they did a growth of about 60%. So the cholesterol and Vitamin D analog business remains extremely strong for us. The other segment, which predominantly includes our traditional businesses, which are the [ COTS ], intermediates, PTCs, disinfectants, et cetera, that did a revenue of INR 33 crores as compared to INR 35 crores in the comparable quarter last year. From a margin perspective, we are finally able to report positive EBITDA at the CRAMS India level, thanks to all the efforts that are being put in for the resumption of operations in India. So CRAMS India delivered a 22% EBITDA margin. CRAMS Switzerland, France, China put together, again, delivered a solid 20% -- 20.5% EBITDA margin. CRAMS U.K. did a margin of 24%. On the marketable molecule side, Carbogen Amcis BV had another strong quarter with 31.7% EBITDA margin, and the other segment did an EBITDA margin of 7%. So these were more or less the financial highlights for the quarter. Overall, we do expect, as we had mentioned in the last call as well, the India operations will sequentially keep on showing a good amount of growth, and we expect to be back on track as far as the production is concerned out of the India facilities, especially Bavla, to be more or less back to what it were pre-COVID levels by Q4 of this financial year. I think with that, moderator, we can open the floor for Q&A or Sanjay bhai, if you have any final comments.

Actually, you have summed up. The only 1 or 2 very quick observations. As you would have seen, I think most of the units, the major units of Bavla has started operations in this quarter. And I think 7 -- 6 or 7 key operative units have already started production. And I think by Q3 end, we should be able to make Bavla absolutely back to normal. So I think from Q4 of the current fiscal, we should see the normal run rate coming in Bavla and most of the key customers having already completed or about to complete their revised risk assessment processes, and even the compliances from an EDQM standpoint getting hopefully over by end of Q3. And as Mark explained, all the pipeline projects appear to be very, very strong and going very satisfactorily. So I think let's open the house for Q&A.

[Operator Instructions] The first question is from the line of Vishal Manchanda from Nirmal Bang.

So just wanted some understanding on the gross margin expansion. So 90% during the quarter, is this on account of some validation projects being indicated during the quarter?

Yes. I mean it's on account of 2 things. One -- well, actually 3 things. One is obviously validation of certain projects that were undertaken during the quarter. Plus, there were also commercial supplies going out of the India operation. So as you would have seen in the previous quarters because of the fixed cost burden and lower sales in India, the EBITDA margin was kind of negative. So since we were able to supply a good amount of orders in this particular quarter and produce a good amount of inventory as well. Obviously, that had a positive impact on the overall gross margin. Plus, we also had a positive impact because of the foreign exchange gains on -- because of the exchange rate fluctuation. So all these 3 put together resulted into about a 90% gross margin. But if you see for the first half, it is close to about 17%. So I would say for the full year, we should be anywhere between 17% to 19%.

Okay. So this will be still better than -- a bit better than what we have been doing in the past.

Yes. Exactly.

And so you said how many validation projects have been executed? I missed that number.

Three this year so far. And another 2 are planned to be complete before the end of this fiscal year.

Pardon, how many?

Two more before the end of the fiscal year. Three so far, the best the company has ever done.

Okay. So generally, during validation stages, the gross margin is higher, is what I understand. So Q3, Q4 is also -- could there be a chance we should see higher gross margins in subsequent quarters also?

That's our hope.

Okay. Okay. And with respect to the deferral of shipment from Switzerland to Q3, what -- so had that not happened, we would have been flat Y-o-Y?

No. So then the revenue would have shown a further increase. So that was a shipment of about CHF 3.8 million, which has now happened in October.

Got it. Got it. Okay. And with respect to India CRAMS, how many molecules are we currently commercializing. So we had about 4 or 5 large commercial molecules, so how many are we currently doing?

I would say, except for 1 or maximum 2, we are now manufacturing almost all of the molecules, though the shipments would happen in the later part of this year as well as during the course of the next financial year.

[Operator Instructions] The next question is from the line of Satish Bhatt from Anvil Shares.

Congratulations on a decent set of numbers, Mark. And I think the way the company is shaping up in terms of I think the pipeline. Can you just throw some light on how has been the pipeline update during this quarter? And how do you see that things commercializing for us in the next 1 or 2 years, you even said that you've already for the patent for your Vitamin D analog. If you could throw some light on that, how far we are from the commercialization of the thing?

Yes. Sure. So in terms of the CRAMS pipeline globally, Bavla is getting back on its feet now, which is tremendously exciting for all of us. And the folks there have done a tremendous amount of work to turn around the situation there, and that can only get better. And as that capacity comes online, that really helps the entire organization. That's the first thing to say. Secondly, the market itself is extremely strong and remains strong. And I've been pretty consistent about this message over the last year or so, that the market remains strong. Inquiries are still coming in and inquiries for both parts of our platform in Europe and in India. So we're very encouraged by that. So that means that we have opportunity in the market. Competition is strong, but customers still want what we provide. And that's a really good thing to do. The pipeline continues to get replenished. As things go through validation and get commercialized, we have an early phase pipeline, preclinical Phase I and Phase II, which is still very strong. We're in preclinical Phase I and Phase II, probably something approaching 80 to 100 molecules. And those will -- the fallout rate is a lot higher, as you will appreciate. But a number of those will frutify over the next 2 or 3 years into late Phase III and validation projects. And then, of course, the drop out rate is lower. By the time you get to that level, the drop out rate is significantly lower. So as I said earlier with the previous question, we've never done 5 validations in 1 year out of Europe ever -- well, as far as I know and I've been in the company for 21 years. And we've never done 5 validations in 1 fiscal year. It's remarkable. It's absolutely remarkable. And it plays to the strength and the work that we did 4 to 5 years ago, in building that pipeline and really focusing on the early phase because these projects are starting to fruition. So with 5 projects going into completing validation this year, we hope, that means we've got at least another 1, potentially 2 FDA audits. We've already had 2 this year, which we've successfully passed. It's difficult to say exactly what that will turn out in terms of revenue, because we don't know when the customers are going to be launching. We don't know how successful we're going to be in the market. But the one that we've just passed the FDA audit for is a multiple indication drug for a Japanese customer, and the indication we've just been validated for by the FDA was for another indication for that drug. So that could be massive for us, it could be massive for us. But as you know, we're cautious about giving predictions when we're not in control of the process, the customers are. As it relates to the vitamin D analogs where we are in control, the patents -- so we've been talking about filing those patents, they've been filed. They've been accepted. They've now been published. That's the latest news. They are now open for challenge, of course. In the meantime, we've shipped our products to the clinic through the research COVID trial. If that is successful over the next, say, 3 to 6 months, then we will start to look at our commercial strategy for that product. And I would say that we'd be looking to commercialize within the next 18 to -- 18 months to 2 years realistically with that product. And there are a number of other vitamin D analogs which we're looking at, at a much earlier research stage. And again, we've been consistent about putting some investment into research and development on our product business, such that we can continue to strengthen the pipeline of our own products. And we see that combination of being a product company, but also having service, insulating the organization from the vagaries of the market. So I think we're all very comfortable at a management level that we're putting some effort into our products as well, which we haven't, frankly, put a lot of effort in. We put a lot of effort into service to grow to where we are and products are now becoming very important to us as well. So it's a multi-arm strategy. We'll always be a CRAMS company though, that being said. Harshil, is there anything you'd like to add to that from a forecast perspective?

No, I think Mark you covered pretty much everything. So overall, if you take a 3-year perspective, things really look very exciting for all of us. And that is on the back of the molecules that we have in Phase III. So as you would have seen possibly that last quarter, we had about 15 in late Phase III, those have increased to about 18. So we have added 3 more in late Phase III. And with the French expansion very much on track and also for the ADC molecule that we are undertaking in Switzerland, I think all of that should come to fruition in the next 2 to 3 years' time, that's when we'll be starting to realize substantial revenue from these projects. So overall, the outlook looks pretty good, and that is what we have discussed internally as well.

Thanks. And just one thing to remind everybody. When we look at these molecules, it's a 10-year process from discovery to commercialization on average. So when -- forgive me when we talk about quarter-on-quarter performance, we're talking about a business where our customers are coming to somewhere between 8 and 9 years before there's a chance of commercialization. So sometimes things move fast. But generally speaking, things don't change remarkably on a quarter-by-quarter basis. What happens is if you look over a year or an 18-month period of the performance of the business, you see this consistent growth in the pipeline. And the pipeline is what's going to sustain this business long term. So what we have to do is we focused on the late phase pipeline, that's now bringing to fruition the revenue and the customer relationships we hope. What we're now doing is starting to focus a bit more on our early phase pipeline again because we've got to keep that machine moving. And that's really where we see the opportunities now. And Bavla has a very important role to play in that, of course, and is playing an important role now providing intermediates and starting materials for some of our commercials out of Switzerland. But we're also generating interest with the Bavla capabilities with other customers that we've never worked with before. So we're actually working with a customer at the moment to pull some quotations together for some interesting molecules out of Bavla, and we've never worked with them before. So there are opportunities out there, and the market is strong. So that's the message I'd like to give everybody.

Sir, just today, you have given one press release regarding your European supplier taking batches of your drug for further validations in the cancer things. So can you just throw some light, are we any financial partner with that company or just we are CRAMS player?

No, we have no financial. We are a service provider to them. We are a selected service provider. They're a Japanese customer. We have got an arrangement with them where they're co-investing in some additional capacity for their molecule in Switzerland. That investment...

Mark, I think Satish is talking about the French one that we announced today.

Yes. Yes.

No, no, no. We are a service provider for them, same message. We're a service provider. We've been working on that molecule. We used to make the API many years ago. But for certain capacity reasons, they moved that API to another supplier. But we are now manufacturing drug product for them for their clinical Phase III trials. And we're a service provider to them. At the moment, we're the only service provider who are manufacturing the drug product.

And sir, what's the update on your -- the ADC joint, the joint manufacturing, which is -- or how are the things going on that front? Throw some light on that, how you want to see that much just from that plant?

Yes, there hasn't been a huge amount of progress from last quarter. We're still -- we've completed the validation. The customer is going through his filing process now. He's also going through some licensing processes to license the drug or the technology to some other partners. And we continue to make Phase III batches. So that's moving forward. We don't believe that they're going to do their full application before the end of this fiscal year. But again, we don't have a huge amount of detail at the moment. They're a relatively small company and they are partnering and that's what they're trying to do right now is to partner with some other organizations for that molecule. But clinically, the molecule shows really good efficacy.

[Operator Instructions] The next question is from the line of Vishal Manchanda from Nirmal Bang.

On the marketable molecule front, is there any benefit that you are currently drawing because of vaccines? Because what I understand is RNA vaccines use cholesterol as an input and the benefit straight away going forward?

We've had some discussions with a couple of potential clients. The biggest challenge is that our cholesterol is, although very, very far back in the synthesis, is animal-derived. And the cholesterol that all of these companies are using at the moment is synthetic. We have an R&D program ongoing at the moment for synthetic cholesterol, which is not from an animal-derived source, but from a plant-derived source. So that's how we're attacking that. Unfortunately, they're all using synthetic cholesterol as an adjuvant.

So synthetic cholesterol is cheaper -- is also cheaper compared to the one that you manufacture? Is that also...

No, synthetic cholesterol is actually probably more expensive because it's more difficult to extract. It's coming from a plant. So the yield out of the -- the initial yield is quite low. So the cost will be a little bit higher at least initially. The benefit of being nonanimal-derived is that you don't have any risk of BSE or TSE. Although in Europe, BSE and TSE is pretty much extinct. It's a concern for vaccine manufacturers. So that's the advantage of going to synthetic cholesterol, not cost. Its BSE and TSE-free.

Okay. So there is no extraordinary influence on the number right now. So these numbers that you're doing will be sustainable?

Yes, these numbers represent steady growth, and they represent the plan that we put together 6 or 7 years ago for that particular business unit where we were going to move away from a supplier model to a product-owner model and a B2B business model. So instead of giving lots of margin away and focusing on top line, we are working directly with customers and generating more profit. And that represents that strategy. We're still walking that strategy. And level 2 of our strategy, as I mentioned, is the investment in R&D for new products in that business unit, where there is a tremendous opportunity.

I missed your earlier comments on the CapEx. So basically, I wanted to understand the plan where your Japanese partner is co-investing for an ADC project. So when that will be commercialized and start reflecting in revenues?

Well, it's already commercial, and we're supplying material to them, which is going into commercial products on one indication in the U.S. This is the one that we've just been validated for by the FDA, we heard a few weeks ago, I think, that we've been successful in passing the audit. That investment is being built at our Bubendorf site at the moment, and it's about halfway through its delivery process, so the construction is about halfway through. That completion will kind of tie in with the increase in volume that they require towards the middle of next year. That's when we hope to have that complete sort of around about April, May. And that coincides with an increase in volume based on their targets.

Should be triggered by any indication approval, that is volume expansion?

Yes. Well, they're launching in the U.S. in November for a different indication than the initial one. So that's for lung cancer. So that was the FDA audit that we had a little while ago that was specifically for that product being launched in the U.S. for treatment of lung cancer.

This would be one of the validation products that you will be running this year. Is that the right understanding?

Correct. Correct. That's 1 of the 3 that's already been validated. Yes.

And finally, just on this EDQM inspection for India plant, any time lines you can share, when can you expect that?

Harshil, do you want to take that?

Yes. Yes. Sure. So Vishal, the plants that we have completed implementation of roughly 80% of what we wanted to, the rest 20% should get completed in the next, I would say, 4 to 5 months' time. And after that, we intimate the EDQM to perform either a remote audit or if they want a physical audit. So in terms of time line, we can estimate maybe around Q1 of next year is when it is likely that they might undertake the audit. But then it depends upon them when they wanted to audit.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Okay. So before I hand over to Harshil, we very much hope that you are starting to see the delivery of the plans that we put in place a couple of years ago with the business. We are consistently working very hard to keep the pipeline moving, which is the lifeblood of the business, whilst maintaining a focus on some of our products as well. And you will see additional investment in the next few years into our product business to ensure that, that has a long-term sustainable future. We want to thank you for your continued support and confirm to you that this company is working very, very hard indeed to deliver its promises. Harshil, can I hand over to you? And then maybe to Sanjay bhai.

Sure. Thanks, Mark. Yes, I would just like to echo what Mark mentioned, we seem to be on the right track. We are putting in the right efforts. And the EDQM that happened last year, observations received, we have taken it quite, I would say, positively in order to make sure that whatever actions need to be undertaken, including upgrading the quality software, getting the SAP validated, restructuring the manpower, having a global management team, all of those things are being put in place in order to make sure that we do not have any kind of hiccups in the future for the growth that we are envisaging for the next 5, 10, 20 years. So overall, the pipeline looks quite robust. The expansion that we are doing, we are very much on track. And we are really excited for the next stage of growth. With that, Sanjay bhai, if you want to add something?

Just one concluding remark that as the results have started to show a distinct improvement, we do expect the second half of the current fiscal to be definitely much better, both in terms of the top line which could be a little moderate growth as compared to first half, but definitely in terms of the bottom line. And then next year, with Bavla working with full throttle and the new expansion part of it, overseas is also likely to come in production next year, I think we should see that, hopefully, things will look much better in '22, '23. I think with that, Harshil, you can just conclude the call.

Yes. Thank you very much, everybody, and wishing you and your family a very happy Diwali and a prosperous New Year. Thank you.

Thank you.

Thank you. Ladies and gentlemen, on behalf of Dishman Carbogen Amcis, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.