Gland Pharma Limited (GLAND) Earnings Call Transcript & Summary

Good day and welcome to Gland Pharma conference call on proposed acquisition of Cenexi. [Operator Instructions] Joining us today from the Gland Pharma Limited management team is Sumanta Bajpayee, Vice President, Corporate Finance and Investor Relations. I now request Sumanta Bajpayee to begin the proceedings of the meeting. Thank you, and over to you, sir.

Thank you, Peter. Good evening, everyone. A warm welcome to all of you to discuss about the potential transaction with Cenexi Group that we have executed the put option today; to discuss on this and give you the clarity about the strategic objective, I have with me Mr. Srinivas Sadu, Managing Director and Mr. Ravi Shekhar Mitra, our CFO. Before we start with the call, please note that the safe harbor language contained in our press release is also applicable to this call. Also please recognize that some of the statement made in today's discussion will be forward-looking. So please consider that with the industry risks and uncertainties. Thank you all. I now request Mr. Sadu to start the call with his opening remarks.

Thank you, Sumanta. Good evening, everyone. I'm glad to welcome you all to this conference call organized to take you through the proposed acquisition of Cenexi. As you all know, this proposed acquisition will be our first international acquisition, and it perfectly support our deepening access into the European market. This acquisition would help expand our global presence and also solidify our presence as injectable-focused CDMO company. We see exciting energy -- synergy opportunities from leveraging our combined sterile expertise and development capabilities to expand our customer base and increase our share of wallet. The acquisition will not only act as a sustainable lever for long-term growth, but would also establish a leading -- service as a leading European platform and reach our offering, and increase value to our customers. I will run through the presentation quickly so that we'll want to give you a better understanding of Cenexi and how it will add value to both the companies.

Thank you, sir. I'll project the presentation. The same presentation is also available in the stock exchanges for your ready reference.

Let me start by walking you through the strategic rationale of the transaction. As you all know, we did lay out a strategic roadmap a few years ago where Europe was also a part of our growth strategy. This acquisition will solve for the strategic objectives of Gland. It not only expand our CDMO footprint, but also it expands -- accelerates our product portfolio into the European market. If you see the Europe market in terms of the offerings what Cenexi gives, it's about $4 billion in terms of CDMO services in the FDF side. And globally, the offerings they do captures about EUR 20 billion. And it has a great manufacturing presence in Europe, and this will also give us access to these manufacturing sites, where we can actually release some of our products moving forward. It also gives us technological access, which we don't have today. They have technologies in terms of ophthalmic gels, they have needleless injectors, fills, where we can develop more products and also have development capabilities and also manufacturing capabilities to make some suspensions and the hormonal products. So this will increase our portfolio in the future as well. From a manufacturing perspective, they have 3 manufacturing sites in France, one site in Belgium. The Fontenay site in France, historically, it's been Roche site and this manufactures a lot of ampoules and also the capability of PFS and vials in other sites. All the sites are approved by FDA. And also, they have several regulatory approvals. The current business in sterile and injectables is about 70%, which is expected to grow to 82% in the next few years. With the Gland joining hands, probably the focus on injectables will be higher. And I know the target to move towards a more injectable-based CDMO will be faster. They also have a solid expertise in terms of potent solids, which is again niche. And also they operate some control substances in their Osny sites. They have employee strengths of about close to 1,400 people. And they have out of this, about 120 employees, employees are from the services, which help them technology transfer of products and also develop some of the products for their customers. And if you go from the services perspective, they offer both manufacturing and developed services to clients. It has 3 development centers and large FDF capacities across dosage forms. Its business model is very similar to Gland, where they do the -- except the marketing and distribution the API production and the basic discovery research, they have capabilities to work on the other aspects of the supply chain or the manufacturing value chain. The business integration should be natural process because we are also in the similar space. And our own revenue share of the CDMO business will substantially increase because of this acquisition. The facility at Fontenay is largely focused on ampoules. They also have some capabilities in manufacturing tablets and capsules, but it's one of the largest ampoule production sites in Europe. The site at Herouville has pre-filled syringes vials and Lyo capacities and also some ampoule capacities along with [indiscernible] capabilities. The Osny site is focused on high potent solids, hormones and some AA tablets. They also have technology capabilities in manufacturing needleless injectors as well. And what does Services do, the Cenexi development services business is highly synergistic with the CMO business and helps to offer comprehensive range of services from early to latter development to product transfers. This valuated partnership approach builds strong customer relationships and visible growth. Next slide. In our view, this transaction is a win, win combination for both Cenexi and Gland and together, which have become one of the leading CDMO focused players globally. And it will have an ability to further invest in nurturing the entire com. The combined manufacturing presence would offer much more options to customers, both from Gland and Cenexi's perspective, and they drive firmer relationship with clients. This will further help to explore ability to expand the product portfolio with our current customers, and it also help us launch more products from our own portfolio through these sites in Europe. The development and manufacturing expertise at Cenexi with respect to cytotoxic and biologics can be scaled further once we come together. Our expertise of manufacturing products at scale with experience of different regulatory organizations and quality-first approach; it will help support Cenexi and will help us to grow to the next stage of growth here, I would say. As highlighted, the customers of Cenexi are spread across specialty pharma and large cap pharma. For greater than 70% of customer portfolio, as you see, Cenexi is a sole manufacturing partner it has over 100 customers. They have several contracts with some biologic customers. The end product reaches over 120 countries. And if you see 80% of revenue generated in the last 5 years, are there with them for more than 5 years. And they have -- they serve these customers from the multiple sites at multiple projects. Over the last couple of years, the focus has been to move towards high-value large margin -- high-margin products. Historically, it's been an antigen-driven business. For the last 2 years, you have seen they have moved towards pre-filled syringes, Lyo vial products as well as some highly technical products, including suspensions and hormonals. This is a slide which shows the historical financial numbers. CY '21, January to December, the numbers of EUR 184 million as revenue and EUR 23 million EBITDA. In the first half of this year, they have done EUR 100 million of revenue and EUR 19 million of EBITDA. The enterprise value agreed for this acquisition is EUR 230 million, which comes to an equity value of EUR 120 million. And the transaction will be funded by internal resources with no recourse to third-party funding. So I am going to take questions of the asset and anything with the business and how it benefit Gland to grow in the future.

[Operator Instructions] The first question is from the line of Ankush Agrawal from Surge Capital.

Congrats on the acquisition, sir? So my first question is just trying to understand the business a little bit better. So Cenexi is basically they offer end-to-end from development stage to commercial manufacturing for the end customers. But from the presentation what I see that they are not into API manufacturing. So I wanted to understand, would Gland, given that we have some API manufacturing capacities, do we believe that we will be supporting, like we will be, kind of, adding that to the value chain and you're leveraging that to increase the value, if you can highlight that?

It could be one of the synergy aspects I would think. Currently, Cenexi is a fully finished product company. And they don't develop on their own. It's a CDMO company. So either they do technology transfer from other companies, or they do some development work for the other companies and then they commercialize in that site. But they can always offer, if somebody is looking for it, or they can offer APIs from the sites, if they wanted to so that it could help them in whether it be a margin profile or help them the company's [indiscernible]. Yes, that could be an advantage that the company can exploit, yes.

But that is not a near term, like, part of the strategy, it could be in the future.

It could be once closing happens, then when the customers work the products have to come on and then the seats in a portfolio or if it's there, we can always join. Yes.

And second question is, would you be able to give some broad color on how much of the business is innovator led NC and how much is generic? And within the innovative-led CMO part, like how much of the business comes from the development, which is the services business and how much is the commercial manufacturing, broad color?

So if you look at the revenue perspective, the Services business about EUR 25 million -- EUR 20 million, EUR 25 million -- and the only the biologics place they are working with the new companies and the new molecules. But mostly it's branded generics, I would say, the companies who have launched these brands over many years, they're looking at alternative sites. These are the company -- so Cenexi acts as a manufacturer for these brand companies for these branded generics.

Okay. So it's entirely generic CMO as you're saying.

It's a combination of both. They also do some development for work for some biologic companies who are working on newer molecules. But from the finish side, from the regular products, it's branded products, branded companies, but for the branded generics.

The next question is from the line of Saion Mukherjee from Nomura.

Sir, just can you provide some brief background about the company, the management there and the current ownership and the continuity of the management post the transaction?

Yes. So the current ownership is private equity or capital, so management is there for many years culturally it looks similar to Gland, I would say, many people are there for many -- several years. And we do have a management incentive package to retain skill. And good thing is, like I said, a lot of people are attached to the company from the previous owners. The private equity has taken over from a promoter company. So the people are in line. I think they are aligned to stay with the company for a while, yes.

So it's 100% private equity owned at this point?

Yes.

And the second, the strategic rationale for having presence in Europe for a branded generic service company. I think we are seeing a lot of issues in Europe. And typically, the talk is that manufacturing is shifting to places like India, for instance. So in the current context, why you think a presence in Europe is required, why not in India? And can't you could -- I mean, what you get as part of this acquisition, I mean, which you could have built organically as well?

And we've been saying actually to launch our products into the Europe, we need to have a local site. It's more expensive to transfer products there. You need to have a local release, you should have a local testing done before a product is released. So if you look, most of the Indian companies as well, they have a [indiscernible] site. So one is your base itself, your own portfolio can be launched into the European market through these assets, one. We -- today, if you look at our revenues, it's a mix of CDMO and our own B2B generics space. This will add to a solid CDMO business where the clienteles are there for many years. And it's the sole supplier for a lot of companies who are large in nature. And the branded generics, what they're doing is not like a normal generic like you say company -- in many companies in Europe. Still there's a substantial chunk of businesses lies with the branded generics like India. These are the brands which these guys manufacture. And more and more, they're moving towards the high-end kind of CDMO business. So it gives access to the market to take our products into the market. Also, it is also giving us the customer base, which Cenexi has and also some of the technologies, which we don't have today, whether I was talking about new needleless injectors ophthalmic gels. They also manufacture suspension. They also manufacture hormones, where we don't have today. So this can actually help us in developing some of products what we have. In other words some of the investments we can make actually in India and they also have a knowhow of manufacturing. So we can develop this for ourselves. So it's several things actually we can get through this acquisition.

And just last one, is there any product or customer concentration that you would like to highlight in this business currently?

Now it's spread across a lot of customers, and that's a good part. And last few years, the customer base has increased drastically. If you look at the development services revenue has gone up also in the last 2 years, there are efforts made to move this business just for match this to other products and other technologies. That's why you're seeing, there is a lot of new customers got added in the last couple of years, and the profitability of the business also has increased question.

The next question is from the line of Neha Manpuria from Bank of America.

Sir, if I look at the revenue numbers that you put in the PPT, the revenue has been fairly range bound for this company. Given what you're seeing, is there scope to expand the Cenexi revenue base from the existing manufacturing facilities other than the fact that we can launch the Gland owned products, et cetera. Can this in, in your view, meaningfully higher, that's my first question. And second, if I were to look at margins in the first half of '22, there seems to be a very sharp jump. So has this something -- is it sustainable? Has something changed in the business to report such higher margins year-on-year?

If you look at the history of this company, right, when it started from Roche, most of the business was ampoules which is a low-margin business. That's been the focus for many years. And it started to shift from, I would say, last 3 years when they acquired the Herouville site in 2017. The other sites, they start investing into the new assets. So now a lot more products are moving towards the areas of syringes, Lyo, suspension products, these kind of products. And that's one of the reasons you also see the development service income has gone up in the last 2 years. So a lot of these projects are getting into fruition stage now and some technology transfers are happening, so it will get commercialized in the next year or so. So we will see because they're moving away from ampoule business, there's a loss of that revenue, but also there's addition of other revenues which is coming from other sites. So from a revenue perspective, that's a shift that has happened, which is good in a sense because they're moving towards the higher value products and more difficult products to make. So the 3 sites other than the Fontenay, they have a lot of scope to add -- actual -- to make actual investments and expand capacities and capabilities. The projects we are currently doing, I think there is a lot of scope to grow. And with the customers base they have created over the last 3 years, I think there's a lot of scope to grow. And we also need to look at not just as a stand-alone basis, and look at it as a together, as Gland with them, what all can we do because now they have access to our own capabilities, which if they want, they can agree. And we have our own customer base, who have a presence in Europe, but currently, they are not taking product from us because they're currently sourcing from other contract manufacturers in Europe. Now this will also help us opening up discussions with our own partners. So it's a win-win for both in a way. They'll have access to our technologies, quality and our own customer base, and we'll have the same thing.

So just to add to that, the half-year number should not be annualized because there is [indiscernible] attached to it. But if you see over the -- generally over the last 3.5 years, the margin percentage has been increasing for the reason Sadu was just explaining that in the product mix and moving towards high margin and high complex value products more to the sterile side.

And just a follow-up on that. What would be the average capacity utilization, sir, for the facilities that they have there? Does it require incremental investment if we have to launch more Gland products through those facilities?

So Fontenay has capacities, which are, I think, running at peak it's an ampoule production site mostly, but we will invest into new automated lines that could increase the output and the yield efficiency. So we have several levers which were identified during the 6, 7 months journey what we have gone through them. In other sites, I think we need to add some capacities because for the next growth, we need to add some investments to increase the capacities, whether it's localization or it's some vial capacity we should increase. So that will help them grow in the next curve because a lot of development projects are taking up once they get approval in a year, 18 months' time, that's when it starts fruition. So while the capacity is still not high in other sites compared to Fontenay site, that's still take care of in 12 to 18 months, but still we'll start looking at it because it is a long term when we have to invest. But they have enough space and area to expand.

The next question is from the line of Prakash Agarwal from Axis Capital.

First, a clarification, why it says put option and you also said it's a proposed. So are there any legalities, regulatory approval required? Or what are the approvals that we would be needing?

Yes, it's a regular French approval process. This first step is put option agreement, when we also agree on all these SPA terms, but it should not be signed, it has to go through a work council clearance, where we have to share the SPA document what are your terms, what you agreed, they will review it. You should give them 30 days’ time. It's not approval process, but it's an information process where we have to give them that 30 days’ time. Then the SPA will be signed, then we have to go through the normal FDA process in France. So the estimated time is around March, I would say, February, March.

And if you could share a little bit more on the financials, like the gross margin of the business and the tax rates?

So gross margin we cannot share at this point of time because that we will be sharing post our closing. On the tax rate, they are at the margin tax rate, which I think is about 27%.

Why I'm asking is I'm trying to understand that what are the key levers of EBITDA margin improvement? Could it be gross margin itself or it would be more on the operating cost side, if you could help us understand because you are sitting at a margin of 35%, you acquired an asset, which is half of your currently. So I'm sure you would have looked at opportunities to play out. If you would expand on that.

Yes. I think it's a combination of a few things. One is the operational efficiencies. We identified a few things where something can be automated, where fills can be [indiscernible] especially in the Fontenay site. And the -- and we always in injectable, there's a breakeven point above which whatever you do revenue adds up to your bottom line. So I think that's what we're looking at. Any additional revenue, which hits these sites will be added EBITDA margins to it. Most of it gets to the bottom line. So you was mentioning about other sites where there's a scope of improvement of margins. And once you start launching more products, once you start taking more projects, most of it will flow through the bottom line. That's how we have designed it as.

So what would be the peak EBITDA margin that you would be looking over 2, 3 years?

No, no, we will not comment on that at this point of time, Prakash.

But the improvement is possible is what you are saying?

Yes, absolutely. Okay. Okay.

And last one, if I may, seasonality you mentioned. So is it like normally the December quarter, the season, but for this business, which quarter or which half is the highest season? If you can clarify?

It's a seasonal business so they don’t really go by the seasonality. At least we have not studied honestly. So it's Jan to December calendar year [indiscernible] by the time we consolidate in the first half of next year, financial year. But I think it depends on when the projects have transferred and so when it happened, there are various factors which impact which revenue [indiscernible]. Yes, you should have analyzed that, that was the point because they have orders in December [indiscernible] production.

The next question is from the line of Nithya Balasubramanian from Bernstein.

Sadu, if you can give us a little bit of color about the biologics, CDMO in terms of capabilities, capacities, customers, the website does list a fairly long list of technologies that they can do. So in terms of -- if you can just give us a bit of color around that.

So for biologics, they're currently only doing the finished product. So they have contracts with 3 companies for taking subclinical batches some, I think, have already gone for clinical phase. So they have [indiscernible] to some of these players. They're also discussing 4 or 5 other players to get in line with this. So currently, they don't have any drug substance. So probably this will help us into getting that space where we're going to add value to it. From other technology perspective, they do make some suspensions, hormonal products. They also make the needleless injector products. They have agreement -- I think exclusive agreement with 7 or 8 products with some company. So that will give access to us for our own products where we can develop those products in that technology. So it also gives us access to some of the ophthalmic sterile gels. We have regular suspensions and solutions. We don't have to give additional bandwidth for us as well from technology perspective.

You had mentioned in various forums when talking about what type of M&A you're looking at, you were actually talking about fermentation [indiscernible] capacities, control substances potentially in the U.S. technologies, but I think microsphere was what -- microsphere or some of those complex injectables is what you were alluding. But the asset you have now picked up doesn't really fit into this bucket. So how does this make sense given what your original priorities were?

So we didn't mention about entering into Europe as [indiscernible] mentioned that to take our portfolio to Europe we need a local asset. So that will add to that. And then also from a technology perspective, they do have, like I said, some suspensions, products like testosterone where we don't have those capabilities. So it will add from that, that angle as well. And to launch our own products into Europe, we need this kind of asset. So we didn't mention in our roadmap, one of this -- they also make actually controlled substances. This asset has a line where they can make controlled substance as well. But at least it solves for European [indiscernible] where we can make these products. So to mention a [indiscernible] that was very volatile. So we're still actually looking at other assets as well.

The next question is from [ Kunal Raveria from Nuvana ].

So I think you briefly touched upon this. So would there be some sort of manufacturing rejig like some low-value items to be shifted to India and then some new innovative products at EU plants? Because in the absence of this, I don't really see a lot of commercial cost synergies coming.

Let me say a lot of European customers, their sourcing of products mostly happens in Europe. Not many companies in India actually manufacturing products for European region. There are a couple of reason, one is they are still closed countries. The other is the cost of making it here, transporting to Europe and doing a local release is more expensive. So most of the production is happening for the European client base, for the European market is local. That's one of the reasons you see even the customers who we have U.S. and other markets, their European business stays in Europe. So this is one of the -- one of the steps towards that to get that kind of clientele where they're looking for a local base. So that too add benefits. And they have access to the branded generic products from Europe. Again, unlike U.S. where once the [indiscernible] brand completely goes away, but Europe still have a substantial portion of branded generics like in India. So we are entering into that space where we can cater to that need as well. And we talked about technologies where we don't have, where we can actually start working on some of the products with -- we were reluctant to invest in because of a few products there. So we can use their know-how to make this kind of products, sell these products for U.S. and other markets. And of course, the synergies will always come up in terms of whether some of the APIs where somebody is asking can be add future, yes, there are synergies on that. In terms of efficiencies can we exchange some ideas how to improve ourself. And you also see a lot of these plants are automated compared to India. So there's a lot of learnings in terms of how they run the platform, they run the business. So I would say there are a lot synergies which will happen in terms of operational things. But also from a business perspective, whether we launch our own products in Europe, whether we're now getting into a space where we don't have the customer base, what we have is completely -- most of it is completely new. So we're going to access -- we're going to have access to those customers. They're not just selling in Europe. They're also selling in outside Europe. They're selling in Asia, they're selling in Japan, selling in China. So now with this plant we can also use -- can we get our products through this plant into other markets. So there are other areas where we can actually focus on to increase the standard business what they are having today.

And if I were to just maybe just push a little bit on this, 38% of the revenues come from RoW and Asia. So I assume most of it would be emerging markets and maybe there could be some -- because regulatory requirements there would be lower. So would that manufacturing part of it maybe at least one where you have the technology can be transferred or even if that's possible?

So just to clarify, see most of the products we don't sell directly in these markets. The clientele are mostly Europe, the products go to this market. So these companies have their branded presence in these markets. So like a brand company selling their brands in India. So they might make the product for that company, but they're selling in India. Is this kind of a business. The end products reaches the emerging markets, but they are higher-margin products, but the customer is saying the product profile or the margins are same for the Cenexi.

And just one more, sir, your sites, if you are FDA approved and what is the U.S. contribution at the moment, maybe just I think 1%?

Pardon.

Sir, your site is FDA approved, right, all your sites.

Yes.

But U.S. contribution, I think, is just around 1%.

You mean Cenexi, okay. So currently, their focus is completely European clientele. That's what I'm saying. So currently, the focus is Europe and clientele most of the business is coming from Europe. So although it is approved by FDA, but the focus has been to cater to the European needs. And we also need to see how effectively they can supply to Europe in terms of costs and all that where Indians and other companies can sell. So this company is focused on supplying companies for the European base, as well as other markets where there's a branded generic business is available.

Sir. And just one more, if I can squeeze in. Sir, in the revenues that you mentioned for Cenexi are any COVID element over there, maybe I mean the one-off kind of sales?

No, they are not a --no, they don't have any COVID products. Yes.

The next question is from the line of Tushar Manudhane from Motilal Oswal.

So just from the financials first, if you could share at least the gross block and the working capital days for this business?

Yes. So the gross block is about EUR 90-plus million which is -- they have invested across also ramping up investments in these facilities as we have been talking about. And on the working capital, we'll not comment on the day side, but they have a normal level of working capital, which a normal CDMO players and that Europe maintains. And there is not much fluctuation also. So I think working capital, I would say it's a stable working capital they have.

And maybe except the Fontenay site, other sites have got what kind of capacity utilization?

I would say around 30%, 35%, I think.

And has there been like historically similar kind of capacity utilization? Or it's been...

So most of the capacities have come online last couple of years. You could see the acquired heavily [indiscernible] in 2017, so it's 5 years ago. And they started adding lines and different capabilities. And some of are specific to certain company's associated products. So it's added up -- I think over the last few years, have invested into this capacity.

And just on the business model, is also having a cost-plus markup kind of business model? Or is there a profit sharing element on there?

I think it's more a transfer price model. They don't have -- because it's on local [ series ] of business, so they have cost model.

The next question is from the line of Abdulkader Puranwala from Elara.

Sir, just wanted to understand the past financial track record of this company. So as you previously said that EUR 90 million is the gross block acquired and then there is some amount of debt of to an extent of, say, maybe $110 million. So just wanted to understand what led to this debt pile-up considering that they are quite profitable at 10% to 12% EBITDA margin?

Yes. So typically, in France, these [indiscernible] add on private equity on a review model. So that's the reason all the debt is on the company's balance sheet. And our capital sector is definitely going to be different than the review model and that is how we see the net profitability increasing from the previous past result.

And sir, secondly, on the regulatory track record. So the Fontenay site, I believe we had some [ OEINB ] back in 2015. So some color on how the regulatory status has been though North America was just 1%. But in the future, if we have to use the site for certain manufacturing, just to get to some glimpse on that side?

So Fontenay is mostly ampoules. So not much actually happens for the U.S. market and the markets. But it's been addressed. And currently, it's a FDA-approved site now. But most of the production actually happens from the other 3 sites for other markets. So Fontenay is mostly ampoule driven market for local -- for European market.

The next question is from the line of Kunal Dhamesha from Macquarie.

So first, just a clarity on the access to the Europe market. Does this mean that you would utilize those whatever is required in terms of access, maybe the testing purpose, but the manufacturing for Europe market would still happen in Indian facilities.

That's one of the ideas. Yes. So like I've been saying, either we have to repack in Europe and then release in Europe. So that will be economical. So that's one of the growth drivers, I would say. In addition to the access to the customer base of Cenexi and giving more products from -- even we can give our products to the customers as well, as well as they can actually use our customers base to get in. And even our customers who we have a relationship with in the U.S. and other markets, they have a presence in Europe. So even that manufacturing can actually happen in Europe, where they're getting currently done in other sites.

And let's say, if we want to launch end product in Europe from our current portfolio, would we be doing it directly or you would approach some of the customers of Cenexi to launch those products.

It could be [indiscernible] some portfolio, we can use them because some of these companies have actually acquired some plants from big pharma and then selling in Europe. So they could use -- some of them could be our customers. And also, the sites can be used to pack and release our products as well in the future.

Is there any ball park number of from, let's say -- and I assume that you can only launch your own ANDA, which you have developed in-house in the Europe market. What would be the addressable market size of actually the products you have currently under your portfolio for the Europe market, maybe over 3 years.

That is too early because whatever we sell in Europe and U.S. may not be just be translated to let's say to Europe. So we have to analyze which products, which we can take there. So it's just a start.

And then last one on is Jelmyto a big product for this company?

Which product?

Jelmyto is mitomycin gel.

Yes, that's also one of the products.

But is it a big product over the last couple of…

I can't comment on the size of the product, but, yes.

But the margin improvement that we are seeing is not a function of that?

It could be a function of many things because they have a whole bunch of transfers which are happening even today in terms of newer products, which will be launched in the next 12 to 18 months. So it could be a function of many other products as well. Because -- really get into brands and the products and all that because there also some contract [indiscernible]. Like I said, they're working on a lot of branded products.

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

I just wanted to check, first of all, on the return on investment on this because if I do some back of the envelope calculation, it looks like it's sort of a single-digit ROI versus what you do in 20%, 25%. So is this the best use of your capital? Or how can you unlock value?

Right. So you have to look at this as an integrated basis, and this was definitely synergy is driven acquisition, not a stand-alone basis. So when we have evaluated this, we have definitely relied on what's synergy and additional growth levers they have and it may not be a reflection of the past financial numbers. So we have gone by our historical and internal threshold of 20% IRR. And that's how we have looked at the acquisition.

So sir, when you say that, you mean to say that over time, this will also yield you the number that you just said, 20% or so ROI. So it probably means $40 million, $50 million net profit, do you think this is even possible?

Yes. So there is definitely a lot of opportunity to scale up. And with the synergy, we have been discussing about -- but I'll not comment on a number now at this point of time. But yes, the IRR we definitely have looked at is the basis of all this.

Sameer, just one point here. When we refer IRR for internal there is a limit, it's not a project IRR we always consider equity IRR. That is our internal just for additional level of clarity because in the capital structure efficiency possibilities is obviously there, which we will evaluate once we complete the entire process of culmination of all the pending item. So definitely, we looked at from the perspective of equity IRR.

And sir, second question is, sir, how -- can you share some thoughts on the bidding process? Was it an open process and there were many suitors? Or how did you come up on this?

Yes. So basically, the process being done [indiscernible] over on the sale side. We have disclosed that. So Jeff is under full process. They were participants from the private equity as well as strategic guys. And eventually, we decided to take this forward.

And if I may, 1 or 2 more. Can you talk about the site why is the revenue split up? Is there some very big ones and some very small ones?

I think the Fontenay site, it's about EUR 70 million. EUR 77 million, EUR 78 million, that's the large side. And the rest comes from the other 3 sites. Like I said, the other 3 sites are newer sites where they have invested in the last couple of years. That's where the -- most of the new projects are happening. So those will grow in numbers in the next 12 to 18 months.

And sir, one final question from my side. You did talk about a very fragmented customer base, but just to be very sure, what's the top contribution from top 3 customers and top 3 products, if you can just share -- any rough number would be okay.

We can come back to you. Right now, it is not available with us. Actually Sameer one very critical point is we are talking about the [indiscernible] so the entire business model based on the customer and contract where that is most important than the product. So capabilities we judged in those capabilities, what kind of product that they can develop and execute. That's what is the main criteria we evaluated other than getting into product because if the customer and content is there, product will come.

Then can you talk about the top 3 customers in that case?

Yes, that's a little bit of capital available in the presentation itself. You can see it. It is available in the presentation. The Organon and Roche and in CHEPLAPHARM, they are good we have a good set of products. Subsidies are the top customers on it.

The next question is from the line of Vishal Manchanda from Systematix.

Can you share some color on the pipeline of Cenexi, like how many products that are manufactured that will be manufactured by Cenexi are undergoing regulatory review?

Like I said, they're not a product company, right? They're CDMO company where they develop or do technology transfer for other companies and they manufacture other companies. So they don't have their own pipeline of products.

So what I mean is basically registered by third parties, but to be -- so Cenexi is the manufacturing side, that's part of the [indiscernible] assumption area.

[indiscernible]

When this is appropriate we will do stock disclosure to avoid any [indiscernible] disclosure chance.

The next question is from Vivek Agrawal from Citi.

Can you also talk a bit on the addressable market? You have highlighted that it's around $4 billion in Europe. So how that is growing so that is the first part of the question. And is it possible for you to throw some light on who are the competitors, immediate competitors [indiscernible] at this point of time?

See when you mentioned $4 billion specific to current [indiscernible] what they're offering. The $4 billion is there for the European market, specific to that. But there are other areas where it can be done. We talked about clients selling its products, launching its products is completely different. Then products can go out of Europe from this network. That would be a different market. So it's very difficult to tell like that. But if you look at competitors' perspective, there are I think over 10 companies in [indiscernible] factor a lot of smaller companies that are there. So all these are, in a way, competitors to us. It depends on which specific area the CDMOs are focusing on. Some are focusing on biologics, some are focusing on this. Cenexi is focusing on branded generic portion. Historically it's been ampoules and some of the other products. Now they're also moving towards the high-end products. That's what.

So as far as the growth is concerned, do you depend on the new launches on a consistent basis? Or is it that the existing products also have some potential to grow from here on?

So some of the products like any CDMO business, you signed a contract with somebody, once their market grows your production also goes up. So there's a potential to grow if the products what they're launching with their customers once they grow, naturally, they grow. These many projects are transferred to these are new additions to your business. It's similar to Gland where we do a lot of technology transfers from small companies. Today, we talk more about Gland selling its own products. But actually, if you look at CDMOs it's different -- lots of projects where we do. And we obviously [indiscernible] that's why a lot of projects are getting transferred to Cenexi sites. The newer platforms that have developed in the last 2 years. That's what we're looking at rather than historical ampoule business, which is a smaller technically, it's not that difficult business. But I know that's why the margin profile is also shifting. And that's where the growth is also coming from last 2 years, and that's what attractive was. What is that it's giving Gland in terms of what kind of products I can launch in Europe, whether they have capabilities to do it, whether these sites have regulatory capabilities, quality standards, which can help us to take our products to the market. The other is technologies, where I don't have today, capabilities. It takes years to learn some capabilities, they do have manufacturing capabilities. So suddenly I can develop some a bunch of complex products, which we can manufacture there. That's the other thing. Then the customer base. This customer base in Europe is complete [indiscernible]. Normally, these customers generally get products from European manufacturing sites. And now I'm opening up that area where I don't have an entry all these years. Currently, my business is outside Europe. Now I have our customers who have -- and we can give more offerings to these customers because of our capabilities in India. So that's one way we're also expanding the business. So there's several, I would say, levers which can give drive growth. So if you look at this asset, not just as a stand-alone company. But after integration in 14 to 18 months, we -- of course, we need to do planning and which products we take to market, which are the customers, what they're asking. All that integration will happen in the next 18 months. And then in the long term, how much return this asset is going to give us, because a solid base, which is giving us, we're not going there with 0 revenue. No. We have a base, we have a manufacturing site. Already there has been established a team which is there. Now what all we can jointly do to increase profitability and revenue share for this company? That's what we're looking at.

Thanks For the region answer. Just a last thing, if you can help us. What's the current number of depreciation potential.

Sorry, what is the depreciation…

Can you share the depreciation number?

Their depreciation number would be about 10%.

[Operator Instructions] The next question is from the line of Prashant Nair from AMBIT Capital.

So can you give a sense of whether there's any product overlap between what you currently sell in Europe and the product portfolio? Or is it mostly complementary?

I don't see any products, at least [indiscernible] there is no overlap. But you got to look at this is a CDMO business, whereas ours is more our own product. So even if there's one, that's not a problem because like we do a tech plans for B2B seeding of business, but we will also be the same molecule for ourselves. This still is not considered as an overlap. So as far as I know, there's no overlap, but even if there is an overlap, there's not an issue because there the Cenexi is not developing this product, it's more collaborative approach between the companies on that.

And just one more question. So would you be able to quantify what kind of investment you would need to make into this asset over the next, say, you said 15, 18 months to get -- to unlock the commercial synergies? Or would the investments be required after that -- synergies are not related to what you need to invest?

Yes. So we will not put a number right now at this point of time. But definitely, we would be supporting the management in terms of the CapEx requirements. So most of the historical CapEx for the last 2, 3 years has been focused on along maintenance, additional capacity and capability, especially on the other 3 sides rather than continuing. So they have plans to increase the capability and capacity on all these 3 sites, and we are there to support them in that capacity as well.

Just to add, this is Mitra. That [indiscernible] CapEx plan being factored into y value in the enterprise value. So that we have already factored into. If anything incremental is required for the joint team or for -- to achieve some incremental business, we will definitely be there to support them.

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

Just the first one is on the valuations that we have paid. It's difficult to look at the 2021 and 2022 half year to come to a conclusion of what the underlying EBITDA is. So any sense, one is 12.5%, other is 19%. So is the right EBITDA on that 10x is it 6x? So if you could help us understand? And also 11 months have passed in 2022, right? So a little difficult to work with 6-month data. So just going back to Sumanta's point on don’t use twice the first half number. Any sense you can give on what the right EBITDA or EV/EBITDA multiple for at least calendar year 2022?

Just 1 minute. Just 1 minute. So if you go by 21 EBITDA it's around close to 10, if you go by the previous year. But we have to look at the current situation in terms of energy costs in Europe and all that you have to see. So when we have evaluated this asset, we have considered the downsides, temporary downsides of this asset in terms of costs and the inflationary cost for the year too. And also the CapEx, like you said, all this have been considered when we came out to establish.

But when you make the assumption of the 20% IRR, that multiple seems fair is another question.

Yes. [indiscernible] And -- so the CY '22 number is anyway is not relevant from the perspective of our consideration. So we'll start kicking in when we start consideration. So the first half you have seen, the second half is -- so you are seeing this heightened inflation, energy and all related costs we have already factored in. So basically, the beginning of our FY '24 is the beginning of the evaluation we have considered.

I am not trying to debate, but in an inflationary environment, our margins have gone up. I don't know whether that is sustainable or not, I'm in…

So I think that could be just a timing issue where in some of the projects in [indiscernible] to another quarter because it's also -- when you hit a milestone, you'll get some revenue. So it was a timing issue also. So we can't -- like Ravi said, you can't just annualize whatever they have in the first half.

Last question, just to belabor. So when we look at European businesses in general, in other parts, they typically have lower margins, say, the generic or CDMO. Should we assume that this European business will also be lower margin for an extended period of time versus, say, your business or, say, U.S.-based business?

So the idea is, I'm now looking at the way this business is moving and with synergies kicking in after 2 years, so initially, probably the EBITDA percentage will be dilutive or the EBITDA is accretive [indiscernible] for a temporary period. But for longer perceptive, our efforts are to get to the levels as a company what we're looking at. And we have a plan the strategies and growth levers and also how the business is moving from lower [indiscernible] business to the outside. So hopefully, we should get into the ballpark range what we normally look at from a margin perspective.

The next question is from the line of Ritesh Rathod from Nippon.

Can you just highlight, at the cost of repetition what would be top 3 priorities to generate synergy on a near- to medium-term basis?

I think one is the -- some of the operational efficiencies at the Fontenay site where they have 5 manufacturing lines, which could probably consider more efficiencies there and generate more EBITDA margin. The other 3 sites are pretty good in terms of efficiencies. So they've already invested into a new line, which is getting installed. So the investments already made. That will create a lot of efficiencies, I would suggest, some orders require that line. So that will -- that's one. The other is, of course, the technical type of products was happening in the last 10, 12 months that we say accelerated, they're going at a pace but probably the process has slowed down a bit. So that's a focus on how well can that be transferred. One is from Services revenue perspective other is how soon can we commercial the other sites. Then adding the third one is of course adding the actual capacities and capabilities in these sites. They are the Herouville site and Braine site which have good teams in terms of quality as well as infrastructure. So they need to add some capacity but that could [indiscernible] on this. Of course, in parallel the customer base, what we have in other markets, we'll start talking to them with the products what they're getting in Europe, can we start doing it or transferring to capacities. That's other one. So I would say there's 3 things from one from a customer perspective. One is efficiency perspective, other is accelerating the technology transfer projects what they already signed up for.

And maybe on the branded portfolio Cenexi has, how pricing has behaved in the end market if you take the top 20 products of Cenexi, even though it's a cost-plus kind of a business, just to get a handle how that has panned out for the customers in the last year or so?

So I think one good part of the European model is they also have built in -- the contracts are built into based on the inflation, they can increase the price by the index. So many of the contracts are written like that, unlike I think, some of the contracts which we signed in other markets. So the end market price actually do not dictate too much. It's mostly to do with price between the customer and Cenexi team. And the customers are pretty clear how -- the contracts are particular how the price can be increased based on the annual increase of costs and inflation.

So my intention of asking the end market pricing was for the products already matured and well [indiscernible] customer on [ pension ] or the price dilution I got your point on transfer pricing.

It's already is having a branded section over many years. And this is actually -- like in branded generics. They have their own place in the market, they only have margin market. So the brands generate that additional margin compared to a pure generics. I think that's where the pay is. So because of the branded products that are operating in -- I think these are at a little higher margin level compared to other products.

And just to your point on the transfer pricing and ability to pass on inflation, those kind of reset happens annually with clients or it's a quarterly trigger how frequent is that -- if you can give some color given the cost and the energy inflation in Europe.

Yes. So -- no, it depends on -- we cannot generally comment on that. But definitely, the objective and passing on is built in, in the contract, but we'll not be able to comment on whether it's quarterly, or anything.

Next question is from the line of Madhav Marda from Fidelity International.

I just had one question. The EUR 90 million gross block, which you mentioned, what would be peak revenues that we can generate, basically, what could be the big revenue to the existing site without incurring any additional costs?

Yes, they're doing about EUR 180 million to EUR 185 million revenue towards the…

So the assets are fully utilized is what you saying? Right now, they're running full throttle almost across all plants?

No, no. So yes, it all depends on the product mix also, right? Because when they're in at 80, 180, 185, the product mix more of ampoules the revenue will be lower, but you are utilizing more of ampoule capacity. But you have other capacities in other lines. So once it shifts, then the revenues can be higher. So it all depends on what products you make on other sites. There is capacity available. But where they are going to tell that -- what is the peak or the value of the product and what the product transfer to the sites.

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

Sir, the first question is again around capacity utilization. Do you specifically deal in your the capacity utilization in plants, plant wise Fontenay and the other plants, you could help us understand what sort of peak potential is available from the other sites. Because I think EUR 78 million comes from Fontenay is what you said, right?

So if you want specifically to particular line for a start, I think we'll take it top line because we have it on hand. But the other are [indiscernible] But to understand what is the pre-capacity from other sites in the event of Fontenay to do some low value products, and high value products then certainly, the capacity is the same, but the revenue might be higher. So it's generally put a number on how much a site can generate. It all depends on what projects it can run.

Just to add to that there are also different like sort of an example in Braine, you have to look at how much line is utilized, how much -- you can generalize and tell that.

Just in the same context, are the live lines or the PFS lines sort of equally distributed across facilities? Or are they more available on sites other than Fontenay?

No, they are available in a Herouville and the other 2 sites. They have only 2 sites they have this…

And when you say that you could substitute low value products being currently manufactured by high value. And I mean a very naive question here. Can you site transfer the RoW sort of sales of -- into India, register the Indian site and get it manufactured from India and sell off in RoW and then the capacity that gets vacated there, you can use it for higher-value products in European Union. Is that a possibility?

So there are a lot of opportunities out there. We just need to take step by step because when I said the high-value products replaced with low value products what I was saying is earlier, only Fontenay site was there mostly on production was there until 3, 4 years ago. Now the other sites have come up with new the higher-value products, whether it's syringes, it's normally high-value products. Lyo vials is a little higher value compared to ampoule. Now more and more business is coming to these plants. So the high-value products are coming to Cenexi. So the margin percent is improving. So that's what I meant to say when you're saying in products. But moving out of products from site to site, that it's worth it to some products from Europe to India. All this is like in the future, you have to see what are all the levers, what we have to optimize so that we will get maximum benefits after the acquisition.

And if we can go through the transcripts of Lonza or Recipharm, or Siegfried they had a very good first half of this year, or then they have reported very strong top line growth. And they have, in fact, indicated on their commentary that it's now a trend of insourcing into Europe while you talk about China plus 1 benefit in India, there's always it all seems to be a case of China plus one actually benefiting the European manufacturing entities and the American entities as well because people want close sourcing. That being a trend, do you see that leading to benefits for Cenexi also in the coming years.

Actually, Europe always been a bit of like that because most of the manufacturing for European first happen in Europe. It's more and more now. It's just not Europe, I think most of the counties are looking to in source within the country. Europe has actually -- while it could be temporary, is set back in terms of the inflation and the cost. But if you've already seen a lot of European countries are as competitive as Indian manufacturers because -- they're way ahead in the automation of lines manufacturing. If you look at a number of people looking for the same number of manufacturing lines in India, they're far lower. While the cost of labor and number is higher, still the number of people used are lower and there's a lot of more automation is happening in Europe. That way they are being competitive. But yes, you're absolutely right in terms of countries are looking at more in-house manufacturing. They want to keep the production in the [indiscernible]. And some of the countries that are already there from long time to keep manufacturing within the country, and it's more and more prevalent now, yes, you're right in that sense.

And finally, sir, are there any significant earn-outs or incentives for the management and any severance packages related to whatever automation that you plan and also goodwill if you could point out related to the acquisition.

So we are entering this on a positive note. So we want to increase the manpower, we want to increase the business. We want to increase the manufacturing capacity capabilities rather than going with a negative mindset by automation on this. I would say we'll automate it, but then we'll also add one more lines, we will increase the business so that we need not get to a place where we want to look at a reduction. So the idea is to build business there. There's a lot of opportunity. I think we are the first one to have entered the CDMO space within Europe from India. So opportunity is there. How we can join hands with Cenexi to offer more services to their customers, what we can do from India, as well as what our own customers can get out of the European Union because they also have a lot of presence in Europe and taking services from other companies. So when we join hands there can be opportunities. So we're looking at a larger growth rather than looking at just automation and the disputes and all that sort of points. It is how to build business from here.

And is land and utility available for future expansion? Or will you require to do greenfield for future expansion here?

No, they have enough land at the other 2 sites to expand this.

So any idea one can get to be able to build equivalent capacity as they currently have, what would be the CapEx required given that it would be brownfield.

I mean you want to double the capacity that's what you mean?

Yes. I'm actually saying double or maybe add 50%, whatever -- just…

Probably EUR 70 million -- EUR 70 million, EUR 80 million.

[Operator Instructions] We'll take the next question from the line of [ Mitesh Shah from Millbank ].

I just have a couple of questions. Energy crises are impacting our margins or our production as well.

It's not impacting the production because I think they have enough supplies I think it is just the cost, but also I think there are some subsidies some grants [indiscernible] but like I said, they do have some contracts where they can pass on certain costs. But when we have done our valuation exercise for this asset, we did consider all these incremental costs for the [indiscernible] of the first 2 years.

My second question is regarding the contract with the customers. It would be how long it will be a long-term contract or it is shorter term, it will be renewed by [indiscernible] it would be anything order book position for the company?

Yes, it varies from customer to customers. So we can't really comment on how long it is. But I guess the good thing is most of the -- I think 70% of the customers are the sole supplier. So that itself gives us confidence that the customers will stick. And most of them are there for more than 5 years. So I don't see them moving out. And there was another question?

Just one last question. [indiscernible] you have said are dumbing down. So what would be the percentage on last 3 years that came down or 3 years back and today?

Sorry, couldn’t get. What is coming down.

Active portfolio. You said...

I think there is a misunderstanding, we didn't say about active portfolio, no.

No issue.

Just one point present before we close, we would like to give a brief summary about [indiscernible] to just give a broad happening on the business side of the existing… So from a current business perspective, I think we talked about the shortages over the last couple of quarters. I think it's kind of settling now. I won't say 100%, but it's still settling down. So it's coming back to normal. The competition is intense. We all know about it. We are launching several products. Approvals are in track. The filings are on track. From U.S. launches and U.S. filing perspective, we are on track for those. RoW business, some of the markets are coming back again. It is a slow progress, but I think we're getting there. From a margin perspective, there's a pressure on the costs we all know. So it should be there for like a quarter or so there. But again, the [indiscernible] costs are coming down. So probably hopefully, it should settle down by next quarter. So as from business perspective I would say, it's stable business. The competition, you might have heard from the news, a lot of companies actually are exiting. We see a lot of companies -- they're getting out of certain products. So we anticipated these changes to happen. I think I did mention a couple of quarters ago. We see some irrational pricing in the marketplace. That's kind of going away little by little. Some assets are going up to sale. So I think it's always towards the best players I think the players will come down, hopefully, because the competition in place in the market. So we're just watching and seeing how the portfolio behaves. We are in fact in most of the molecules because a lot of shortages again is seeing in the market because the companies are exiting. But are we able to react to the market demand like before, not because of skills [indiscernible] several components are longer. So if you look at 3, 4 years back, which we react very quickly, we were able -- where I think we increased our inventories [indiscernible]. So it's a dynamic situation which should settle in I think 3 to 4 months [indiscernible] our business.

Thank you very much. On behalf of Gland Pharma Limited management, I would like to thank each one of you for taking time out and joining the call. We now conclude the call, you may click on leave button to exit the meeting. Thank you.

Thank you.

Thank you.

Thank you, sir.