Eris Lifesciences Limited (ERIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '25 Earnings Conference Call of Eris Lifesciences Limited. We have with us on the call today, Mr. Amit Bakshi, Chairman and Managing Director; Mr. V Krishnakumar, Chief Operating Officer and Executive Director; Mr. Sachin Shah, Chief Financial Officer; and Ms. Kruti Raval, Head, Investor Relations. [Operator Instructions]. Please note that this call is being recorded. I now hand the conference over to Mr. V Krishnakumar, Chief Operating Officer and Executive Director of the company. Thank you, and over to you, sir.

Thank you. Good afternoon, everybody. Thank you for joining this call. So getting into the details right on. We start with the overview of the Domestic-branded Formulations business, which is our largest piece. So the summary for quarter 2 is that we have built on the trajectory of quarter 1. So total branded formulations revenue of INR 644 crores in quarter 2, with the Base business giving INR 510 crores and the Biocon segment giving INR 134 crores. So the Base business is tracking at a 9% to 10% growth for FY '25 based on H1 actuals, excluding our new product pipeline. The Base business has witnessed significant margin expansion in quarter 2. Quarter 2 gross margin was up by 359 bps year-on-year, and quarter 2 EBITDA margin was up by 374 bps year-on-year. The second half of this financial year will be new launch-heavy. We have several first-in-market approvals in hand. In comparison, most new product launches in the last financial year were concentrated in the first half. We have launched early, which is our brand of Liraglutide, last month. With respect to the Biocon/Biologics business, we have seen supply shortages across segments in quarter 2, and this is expected to continue through to the end of '25. Our Bhopal facility, which we recently acquired, is commencing the production of insulin vials from next month, and the gross margin benefits will start accruing from quarter 4 of this year through quarter 1 of next year. So overall, we are on track to deliver our FY '25 guidance, DBF revenue of INR 2,600 crores with an EBITDA margin of 36%. We have witnessed some strong execution in the first 6 months of this year, which has led to a stronger balance sheet and higher returns. So with the FY '24 base, our return on capital has increased by 600 bps on an annualized basis at the end of the first half. And the adjusted ROCE, which excludes the impact of M&A-related amortization, that has increased by 400 basis points from FY '24. So ROCE stands at 17%, and adjusted ROCE stands at 23%. Our operating cash flow stood at 119% of EBITDA in quarter 2 and at 94% of EBITDA for the first half of the year. We are also happy to share that we are ahead of schedule in terms of debt repayment. So net debt at the end of Q2 stood at INR 2,500 crores vis-a-vis our year-end stated target of INR 2,600 crores. Strong execution on manufacturing has been driving significant gross margin improvement in the DBF segment, and there are 2 parts to this. Firstly, the ramp-up of our Ahmedabad site operations, which we have commented about in quarter 4. So we have been steadily ramping up over the last 2 quarters, as you can see. And the second very important lever we've been talking about is a Derma in-house production, which we said we have started in January. So you can also see the way that has ramped up. So 30% of our quarter 2 Derma business was produced in-house, and this number is increasing month-on-month. And the gross margin benefits are starting to accrue. So on a serial basis, the Base business has witnessed a gross margin expansion from 83% in quarter 4 to 86% quarter 2. And the Derma business has seen a margin expansion from 76% in quarter 4 to 79% in quarter 2. And the additional benefit of doing more manufacturing operations in Ahmedabad is that we get additional fiscal benefits under Section 115BAB. So overall, Q2 gross margin improved by 359 bps. And the Bhopal side, which we expect will start producing insulin vials from next month, will start delivering margin benefits over and above. Moving on to the integration. We are happy to share that the businesses have been successfully integrated, and this has resulted in significant fixed cost synergies in the Branded Formulations segment. So the first piece that I would like to call out is significant scale benefits in our Diabetes business. So pre-Biocon, we were at INR 600 crores per annum, predominantly OHA business, with 900 MRs across 4 divisions, so average YPM of around INR 5.5 lakhs. Post-Biocon, we are at INR 1,000-plus crores Diabetes business, with around 1,200 MRs across 5 divisions, with a much higher YPM of 7-plus lakh. The Insulin business is deriving significant tailwinds from our credibility with the Specialist segment, which has been cultivated over the last 15 years. We are also witnessing a multiplier effect at the field level, resulting from the fact that the OHA and the Injectable teams are complementing each other in terms of market presence and, hence, recall. And at an overall DBF level, we had 15 divisions prior to the Biocon acquisition. We now have 21, so we have better absorption of fixed costs. So fixed costs as a percentage of revenue in quarter 2 has reduced by 509 bps year-on-year. Our investment in R&D has started yielding substantial results. So this is a snapshot of our first-in-market pipeline, a lot of which we expect to come through in the near future. So there are 5 products already approved for launch and many more in late stages of approval. Moving on to Swiss Parenterals. So over the last 6 months, we've been focused on 2 aspects: one is strengthening the core business; and secondly, adding new business segments in terms of new growth engines. So in terms of strengthening the core business, we've been focused on business integration. So we have significantly expanded the customer-facing team, which is business development and regulatory. We've added 6 senior-level people. Significant expansion in R&D and analytical team. So pre deal, the R&D team used to handle 80 to 90 projects at any point in time. Now their bandwidth has been doubled. So they are handling about 170 projects at this point. Systems, processes and compliance have been adequately strengthened. And both facilities has fully inspected by EU-GMP and PIC/S in this quarter, and both of these are repeat approvals. We've also launched soliciting new business segments. So OSD exports is something we have spoken to you about earlier. So in terms of enabling this business, our Ahmedabad facility is awaiting EU-GMP and ANVISA inspections in Q4. We have also launched EU-focused Injectable CDMO business. So we are the only approved Indian injectable player in India with the entire suite of injectable dosage forms. So liquid ampoules, liquid vials, dry powder, lyophilized, PFS, and name it and they do it. So the target audience for this business is European big pharma and large generic companies. And the business model would be to look at 3- to 5-year manufacturing contracts for sale in the EU, and these come with higher customers stickiness and lower price sensitivity given that these are injectables. In terms of the financial update for the Base business: Q2 revenue of INR 82 crores and first half revenue of INR 155 crores; Q2 EBITDA of INR 27 crores, first half EBITDA of INR 53 crores. The return on capital in this business is in excess of 50%. The Base business is on track to deliver against our FY '25 guidance, and we expect the new business segments to start contributing from financial year '26 onwards. Moving on to our Biologics play. So the Indian biologics market is a large market, around INR 15,000 crores per annum, with very, very strong growth trajectories. So we have the old MABs segment, INR 9,000 crore market, growing at 24%, 25%. We have the Injectable Anti-Diabetes segment, which is on the threshold of major disruption from GLP-1. The whole IVF/Hormones space is also growing well. And this is a oligopolistic market in terms of high-entry barriers. And what we have seen and understood is that vertical integration is key to profitable growth. And all the stages and all the capabilities that we need to have are outlined in terms of product development, bulk manufacturing, fill-finish and marketing. We see that the domestic market has only a handful of vertically integrated and scaled up biologics players. We have a dominant presence in insulin, a start presence in onco, and we are not present in any of the other segments. So with a view to build a strong position in Biologics, we are looking at a strategic partnership with Levim Lifetech, which would give us a vertically integrated biologics presence and access to a very exciting biologics product pipeline. So we started with the acquisition of the Biocon Biologics business in quarter 1. We complemented that with the addition of the Bhopal site, which gives us capability for biosimilars fill-finish manufacturing. We're commencing insulin vials manufacturing starting from next month. And with Levim, we get access to an asset which has a demonstrated track record of product development and commercialization in 3 products: Liraglutide, Streptokinase and Pegaspargase. So our Liraglutide brand is driven by the bulk active manufactured at the Levim facility. Their successful execution of Liraglutide builds confidence for a future GLP play. There is a large-scale bulk manufacturing facility at Levim that will be commissioned mid next year. And the R&D pipeline is something we expect to significantly expand post the deal. In terms of the deal contours, Eris plans to invest INR 54 crore for a 30% equity stake. And this strengthens our value proposition and business economics in the biologics market. Moving on to the consolidated P&L for the quarter and the half year. Consolidated operating revenue for Q2 grew by 47% to INR 741 crores, and H1 revenue stood at INR 1,461 crores, which is a 50% growth. In terms of Q2 margin, gross margin was down by 641 bps due to changes in our product and business mix, which was almost entirely offset by the fixed cost leverage. So EBITDA margin of 35.7% is more or less in line with the prior period. Quarter 2 EBITDA stood at INR 265 crores, which is a year-on-year growth of 46%. H1 EBITDA stood at INR 515 crores, a year-on-year growth of 47%. So this year, we are taking the full impact of all amortization and finance costs. Book tax rate in quarter 2 was 25% of PBT, and cash tax rate was 22%. Operating cash flow was 119% of EBITDA in quarter 2 and 94% in H1. Cash EPS stands at INR 20 in H1, same level as last year. We are ahead of schedule in terms of rebuilding balance sheet strength. So these are the numbers that we had shared with you at the end of quarter 4, that we are looking to be at INR 2,600 crores net debt by the end of this year. And we are presently at 2,500, so that puts us ahead of schedule. In closing, we reaffirm our business guidance for this financial year: DBF revenue of INR 2,600 crores, with a 36% EBITDA margin; Swiss Parenterals revenue of INR 330 crores, with a 35% margin; at a consolidated level, revenue of INR 3,000 crores, with a 35% margin; CapEx of INR 100 crores to INR 120 crores; and a INR 54 crore investment in Levim. All the other parameters remain the same as outlined before. So with this, we come to the end of the presentation. Thank you.

[Operator Instructions] The first question is from the line of Amlan Jyoti Das from Nomura.

Sir, my question is regarding the Base business. What is the Base business growth in Q1 and Q2? Could you help us know that?

So Amlan, the H1 growth of the Base business is 7% in H1, which is like 10% and 4%. 10%, Q1; 4%, Q2. So those are the growth numbers.

Sir, so at the end, growth of 9% to 10%, what would be the levers for H2? Are there any particular levers? Yes.

Yes, yes, of course. So I do look at two things. One is the last year H1 was very heavy on new launches. This time, we were integrating the Biocon business. And most of the new launches planned in this year are DCGI approval, which are from our R&D. So we'll see a flooding of launches in the second half. So that should compensate for growth for the entire year. And anyway, if you look at our number H1 into 2, we are more or less like 9%, 10%, and that's been the case. Now we've been doing a 50-50. We expect to do a 50-50 plus some new products, so that's how we are looking at that.

Sir, just wanted a clarification, this 9% to 10% growth is excluding Biocon or including Biocon, you're saying?

So This is the DBF. This is the organic base.

Organic base, right? Okay.

Yes.

So it will be majorly, majorly led by the new product growth then?

Absolutely. Majorly led by new. Well, had some shortages around this time, [indiscernible] supply plus insulin. Insulin is a little bit of a problem. I think, globally, we are having a little bit difficulty. So those are minor things. But majorly, it's going to be about new products, which we see a lot of them being launched in the second half.

The next question is from Ashish Kanodia from Northbridge Capital.

Yes. I had 2 questions. Firstly was, can you please talk about the growth opportunities and trajectory for us in the injectable space in India? And secondly, on the overall solids in Africa, what is the progress on that?

Would you please repeat your question?

Yes, yes. Can you talk about the growth opportunity and the trajectory for us in the injectable space in India? And what about the oral solids in Africa? What is the progress on that?

So you're talking about the export thing or you talked about the Indian thing?

Firstly, you can -- yes, yes, the Indian thing. Firstly, the Indian thing.

Okay. And this is injectable other than insulins?

Yes.

Okay. So if I understand you correctly, you're talking about the piece we acquired and we wanted to build up the India business, the injectable India business.

Right.

So India Injectable business is online. We are doing roughly INR 7 crores a month at this point of time. We planned around INR 100 crores. We should be nearing that number. Still, integration is going on. That is one integration, which is still work in progress. So we've got some new hires there. So I will say, the India injectable is still work in progress. I don't see this kind of creating a huge growth this year. Next year, it should get better. So that's the domestic India injectable piece. The rest, I think, KK will answer.

Yes. So the second part of your question was on the [indiscernible] exports. And so these will be enabled by the approval of PIC/S and/or EU-GMP for the Ahmedabad plant. And the calendar that -- I mean, given that how these regulatory agencies operate, you can't predict it [indiscernible]. But [ basis ] current activity and communication, we are targeting a Q4 inspection. So Q4 of '25 or Q1 of '26, that is when the inspection is likely. And once we go through the successful inspection, then I think it is a matter of 2 to 3 months before you can start shipping out. So which is why oral solid exports from the Ahmedabad facility is something where we see in '26.

Okay. '26, okay. I had one more question. How do you see the GLP-1 transition changing our business? What sort of scale is possible in GLP-1? And how would that affect our existing brands?

Ashish, this is like a long answer, but yes. Look, GLP is going to be a game-changer therapy, and it will cut across many more therapies than diabetes because obesity is in the center of so many things. So GLP, whenever it comes in India, it will be a game changer. We have just launched Liraglutide. The opportunity in Liraglutide is also immense. But we are still not confident about the supplies. The supply is a little bit restrained. So I will need 3 more months to tell you. The opportunity is quite big, but we might have supply issues. So we are just trying to work it out. How does it play out? And then you know semi is '26. Of course, semi [ will increase ] dramatically. 'Til that point of time, Lira is the game which we want to play. And if everything goes well, Ashish, then we might have the first GLP for obesity in India also. So let's see how it pans out.

[Operator Instructions]. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Am I audible?

Yes. sir.

Yes, Tushar, you are.

Sir, just continuing to the earlier participant question. Now with these products taking up or will be scaled up, let's say, over next 2 to 3 years, subsequently, what impact it would have, at least, on our Base business, which we might grow in FY '25 by 9% to 10%? But will that have some cannibalizing impact, say, in FY '26, '27?

Which -- what are you talking about, Tushar? The diabetes-based business?

Yes.

So look, we have seen the data in U.S. and across, where they have been available for a long time. We can't really say that it has put a break on something. But what we see is that, you know, people -- more and more people are reaching their targets. Even U.S. data says that even after everything, the average U.S. diabetic was at 8.2% HbA1c, while the target is close to 7%. So this drug will generally bring more people into the target range, not necessarily getting out for a couple of months. But to be -- if you really want me to tell what is the future, so guys, the future is insulins, GLPs, Dapa and DPP-4 inhibitors globally. And India, we will -- we can't get rid of [ sulfonylureas ]. Yes. So the top 4 picks would be GLP should come at number one. We believe we are at around 1,100, 1,200 of OAD; 3,000, 4,000 of injectables. Once these injectables come, the injectables growth will be very substantial. But we don't feel as of now, that it will -- the [indiscernible] will recede. The only thing is more people will attain their target. So that's what we know at this point of time.

Got you. Sir, with respect to this Levim facility, does it have currently any regulatory approvals? Or this will now happen in the due course?

So they have been supplying -- there's RoW business they have, right? Their approvals, I will have to check. KK, any idea?

So Tushar, you're talking of Indian approvals or international?

More, sir, as in domestic as [indiscernible]. Is it the one you're going to utilize for exports?

Yes. So presently, they have 3 commercial products, Liraglutide API, which we also use in our product. Then they have Streptokinase and Pegaspargase. So these 3 are commercially manufactured bulk actives for them. They sell it in India, and they have a handful of export markets. And then they have another product pipeline. So they have a certain scale at which they produce these products now, which will be substantially enhanced by mid next year.

Yes. So Tushar, what we see in the Indian setup now, not many people are able to scale up to commercialization. And scaling up from [ clone ] to commercialization is something which not many have achieved. So we are very confident about their ability, and they have done it in Liraglutide, which is a little difficult to kind of get your arms around. So we are quite confident about their capability. The whole game is how fast we kind of develop more products and scale up the entire production facility.

So like 30% is with Eris. So remaining 70%, is there any other customer also of [indiscernible] who's got the stake in this? Or this is more like the promoter's stake, the remaining 70%? And what's your thought on -- for Eris to acquire, if at all, further stake in this?

So Tushar, there is no other investor. It's only promoters and us at this point of time. Because this business, the idea of getting into this business is not what they are selling today, but what they are capable of the future. So generally, when we go through in such businesses, we thought more about milestones. So our investment will further increase. That is almost given. But that will happen with more milestones coming together. So that's how we are trying to play this up.

Okay. I mean was there a scope of getting an exclusive sort of a manufacturing arrangement with them instead of taking the...

Yes, of course, there's a scope. There is a scope, but it will happen with milestones. One by one, we will kind of -- it will start from the development, the clone stage, the scale-up stage. And so there are many factors to it. So as and when, there will be a proof of concept. We will try and scale it up.

The next question is from the line of [ Gautam Rajesh ] from [ Leo Capital ].

My first question was, how do you see the growth of the Insulin business in the next 2 to 3 years?

Gautam, we are very positive in all the businesses which we have acquired from Biocon. It is the insulin which is leading the pack in terms of growth. And we are confident that insulin business will keep on going -- keep on doing well in the next 2, 3 years. We expect a very strong, more than team, around 18% to 20% growth in 2 years' time. The only thing which we -- yes. The only thing which we were a little worried is about the supply. So that's the only thing which is a little bit of a problem. But we are trying to make sure that we don't regret -- we don't run out of insulins.

Understood. And my next question was, what is your outlook on the Swiss Parenterals business growth, both in exports and domestic injectables?

KK, will you talk about this?

Yes. So the Base business of Swiss Parenterals, which is the injectables exports business, we have guided to INR 330 crores this year, which is around 15%.

Parenterals business, sir?

Am I audible?

Yes, sir.

Okay. On Swiss Parenterals, the Base business, we have guided to a growth of -- guided to a number of INR 330 crores this year, which represents around a 15% growth on their last year base. And as of now, we have very good visibility of that. This business is H2 heavy. So H1, we've done INR 155 crores. So we will keep updating as we go forward. In terms of 3-year outlook, we are very excited about the new lines of businesses that we've launched here. So as mentioned earlier, we have launched a CDMO business, which is focused on European injectable market, [ diabetes ]. So this is a complementary business to the RoW business. So the RoW business has its own growth path. The CDMO business, which is a new business unit, it will start contributing from FY '26 onwards. Then we have an oral solid dose business, which, again, will start contributing from '26. So that's the broad outlook.

Sir, what about domestic? And I had just one more question after that.

Gautam, we just talked about domestic. I'll just repeat quickly. We are looking at around -- we are run rating around INR 7 crores a month, right? It is work in progress. It's still taking off. We believe that next year will be far better than this year. This year, still not on top of that, so still work in progress.

Okay, sir. Final question is on what is the supply problem in the insulin GLP-1 that you were referring to earlier? Is it an industry issue, like industry issue? Can you talk more about it if it's just in India or like more on that?

So Gautam, that is like -- that could be discussed offline. But globally, insulin is going through certain challenge because of the -- I think, because of the [ form and fill ] plant. But this is a transient that I think it will be overcome.

Due to what client, sir?

Boss, we'll have to talk offline. This is -- it's quite a large conversation.

[Operator Instructions]

Vishal, if there are no more questions, maybe we can close.

Sure, ma'am. Thank you very much, ladies and gentlemen. As there are no further questions from the participants, I now hand the conference over to Mr. V Krishnakumar for closing comments. Over to you, sir.

Thank you all for your presence today. To summarize, our consolidated Q2 revenue was INR 741 crores, with a 47% growth. Consolidated Q2 EBITDA was INR 265 crores, with a 36% margin and a 46% growth. Robust execution in manufacturing has led to a jump in branded formulations gross margin. Successful integration of acquisitions has led to a significant fixed cost synergies as well. At the end of Q2, we have a stronger balance sheet and higher return ratios. Consolidated ROCE is up by 600 basis points to 17%, and adjusted ROCE is up by 400 basis points to 23%. Operating cash flow for Q2 was 119% of EBITDA. We are ahead of schedule on debt repayment. Net debt at the end of Q2 stood at INR 2,500 crores. Our strategic investment in Levim will make us a vertically integrated biotech player with a strong new product pipeline. We are on track to deliver our guidance of INR 2,600 crore revenue in branded formulations, with a 36% EBITDA margin; and a consolidated revenue of INR 3,000 crores, with a 35% EBITDA margin. Good evening, and I wish you all a happy Diwali in advance.

Thank you very much, sir. Thank you, members of the management. Ladies and gentlemen, on behalf of Eris Lifesciences Limited, that concludes this conference. Thank you for joining us, and you may now exit the meeting. Thank you.