Laurus Labs Limited (LAURUSLABS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Laurus Labs Limited Q1 FY '22 Earnings Conference Call hosted by AMBIT Capital Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nikhil Mathur from AMBIT Capital. Thank you, and over to you, sir.

Good morning, everyone. On behalf of AMBIT Capital, I thank the Laurus management for giving us this opportunity to host their 1Q FY '22 earnings call. Today on the call, we have Dr. Satyanarayana Chava, Founder and CEO; Mr. V. V. Ravi Kumar, EV and CFO; and Mr. Vivek Kumar, Senior GM, Investor Relations. I now hand over the call to Dr. Satya for his opening remarks. Over to you, sir.

Thank you. Thank you for joining us on our quarter 1 FY '22 results conference call. We are pleased to have this opportunity to update on our progress and answer your queries. I hope everyone and their family members, colleagues and friends are safe during this second wave of COVID-19 pandemic. The second wave of COVID pandemic was more severe, impactful when compared to the first wave in terms of infections and fatality across regions. The regional lockdowns during the Q1 had some temporary impact, but the agility and resilience that our teams have shown in the face of this challenge helped us to maintain normal operations across all locations. We are very thankful to our colleagues for rising to this challenge and ensuring business continuity. At Laurus, we are committed to protecting the health and wellbeing of our employees and their families. We continue to implement rigorous safety and hygiene practices across all locations without any complacency. We continue to conduct regular testing for all the employees and provide flexibility to work from home for employees wherever possible. Coming to the results of Q1 FY '22. These results reflect a very healthy start to the financial year. We increased our focus on having a better product mix and focusing on margin sustainability. We achieved these results despite the pandemic-induced operation challenges. And we stand reaffirmed on our aspirational revenue target of INR 1 billion by FY '23. And this was supported by a healthy demand outlook and capacity expansion plans lined up across all of our business segments. We achieved INR 1,279 crore revenue in Q1 FY '22, with a 31% growth year-on-year. Our antiviral segment shown a growth of 23%, and oncology, 16%, whereas non-ARV, non-oncology product sales regrew by 30%, whereas overall generic APIs have shown more than 27% -- around 5% growth. The Synthesis division has shown robust growth with over 95% growth from INR 100 crores to INR 195 crores. This is the first time we are also reporting numbers for our bio division, with INR 14 crores coming from quarter 1 FY '20. To begin, I would like to share key updates on our Formulation business. The Formulation division reported highest ever revenue of INR 521 crores, strong growth, up 38% year-on-year. The contribution from Formulation segment has improved during the quarter to 41% to our revenues compared to 35% for the financial year FY '21. We have seen good growth in DG and supported by ramp-up in global funds and [ supplies ] in the LMIC markets. And we are also in the process of obtaining in-country approvals for our [ channel based ] fixed dose combination. And we are on track to launch this product in the current quarter. Apart from LMIC ARV business, we have also seen growth in developed markets, in North America and EU. To leverage our front end in the U.S., we commenced marketing of in-licensed products. We have done 6 products in license. And out of those, 3 were launched. And we are in the process of launching remaining 3 during the current financial year. We filed the 2 ANDAs during the Q1 FY '22. With those, we have a total of 28 ANDAs with [indiscernible], 9 final approvals and 9 tentative approvals. In Canada, we have 10 product approvals. And we have launched 5 of those already. And we intend to launch 2 more in the Q2 and Q3. In the EU, we have validated 2 additional products as part of our contract manufacturing partnership, and we expect a significant upside in FY '23 from these products. Out of 5 approved products, we have launched 2 products, and we are in the process of launching one more product across many countries in Europe. With the robust outlook and order book, we continue to invest in our FDF infrastructure. We have commercialized the debottlenecking project during the quarter 1. This is expect to add 1 billion units capacity to the current. With that, we have 6 billion units capacity operational right now. Further, our brownfield expansion at the same site, which is expected to add another 4 billion units capacity. With that, we will have by end of this financial year 10 billion units of [indiscernible] capacity. On the R&D front, we continued to allocate critical resources to our research initiatives and investing in portfolio based on complexity and scale. Overall, our R&D spend to the sales for the quarter was at 4%. We have a total of 66 products in R&D pipeline, either under development or under priority review. Overall market -- our absolute market size of over INR 37 billion. As we also mentioned in our investor presentation, the current basket, what we're looking at, only 20% is ARV and 80% is non-ARV. This is in line with our expectation to diversify our revenue base by FY '25. So we are investing into non-ARV product development, both in APS as well as in the population. Of the 28 ANDAs filed in U.S., we believe that 2 [indiscernible] and 7 first to file opportunities having a big addressable market size. As you have seen, our approach always remain product specific, not market specific. That is clearly visible in our dossier filing. We have 11 dossiers in Europe, [ 515 ] in Canada, 8 with [indiscernible], 2 in South Africa and 4 in India, and 15 products filed in various rest of the world markets. When it comes to the generic API, our ARV API recorded a healthy growth when compared to the quarter-on-quarter. This was led by higher volumes of top line APIs. On a sequential basis, sales were moderately impacted, partly due to demand normalization, which is in line with our expectations. A second line ARV APIs continued to see healthy sales during the Q1. We continued to maintain leadership in our key products, while we expect to increase our supplies to developed markets in Europe and U.S. Revenues from [ anchor ] APIs were INR 1,659 crores for the Q1. The segment recorded a growth of over 16% quarter-on-quarter. Laurus Labs, as you're aware, we are one of the largest high potent API capacities in the world. And we are adding more capacity to augment our offerings and also meet the customer demand. We have high potent capabilities now in Unit 1, Unit 3, Unit 4, Unit 5. And we are adding more capacities in Unit 4. When it comes to non-oncology non-ARV APIs, we have seen a decline of sales. This will be back on track from Q2. During the first quarter, we have filed 5 DMFs in non-ARV category, taking the total number of DMFs filed to 66. We also initiated the validations for the few other APIs and expect to see significant growth from Q4 FY '22 onwards. We have very good order book visibility in non-onco non-ARV APIs. And we are investing into capacity enhancement to meet our demand in these APIs. When it comes to Synthesis business, this division delivered robust growth for the quarter and grew over 95% to INR 195 crores. This strong growth was led by sustained new client addition and increased business from existing customers and commercial supplies are for existing products. We are pursuing several interesting active projects in the late-stage clinical programs. We are also doing capacity expansion to support this division's growth plans. We commercialized the LSPL Laurus Synthesis Private Limited Unit 1 during the quarter 1 FY '22. Also, our proposed greenfield investment to set up a dedicated R&D center for Synthesis division at Genome Valley Hyderabad and 2 manufacturing units in Vizag under LSPL is progressing as per our plan. All these units are expected to be operational by FY '23. The site will have the capabilities to handle [indiscernible], high potent molecules apart from other large volume products. Laurus Bio recorded a sales of INR 14 crores for the quarter. As however Richcore was renamed as Laurus Bio, and transaction was closed during the month of February 2021. And sequential numbers reported for this quarter are not comparable. On a normalized basis, quarter-on-quarter run rate was very stable. During the quarter, we commissioned 2 of the 4 fermentation vessels. And all the 4 fermenters will be operational from Q2 onwards. So we expect full benefit of ramp-up of the new capacity from Q3 onwards. We're also in the process of acquiring additional land to further expand our manufacturing capabilities in the fermentation. With that, I would like to hand it over to Mr. Ravi Kumar to share financial highlights.

Yes. Thank you, Dr. Satya, and very warm welcome to everyone on our quarter 1 earning call. Total income from operations for the quarter is at INR 1,279 crores against INR 974 crores, with a growth of 31% year-on-year. With a better product mix, gross margin, we could be able to improve almost by 2%. Our EBITDA for the quarter came at around INR 400 crores and the EBITDA margin is 30% on a full year basis. And diluted EPS is at INR 4.5 on a [ not annualized ] basis, which grew over 41% growth over the corresponding quarter. Our ROCE improved to 32.6% on an annualized basis. And the backlog sustained operating leverage at [ plus ] units. See as you're aware that we have embarked on our CapEx plan of INR 1,500 crores to INR 1,700 crores for the 2 years, FY '22 and FY '23. The -- all the projects are on track, except maybe some of the projects maybe in 4 to 8 weeks delay. And we have invested around INR 213 crores in the quarter 1 for the CapEx. With this, I would request moderator to open the lines for the Q&A.

[Operator Instructions] The first question is from the line of Krish Mehta from Enam Holdings.

Sir, I had 2 questions. The first is on Richcore. So we have incremental capacity addition of 1 million tonnes, as we spoke about. So could you tell us what the revenue contribution would be for this incremental capacity?

In the quarter 1, we commissioned the 2 fermented fermenters, 45,000 each. And in the quarter 2, we will complete the rest of the 2 fermenters of 45,000 liters again. So with those 4 fermenters coming online by end of September, the R2, where the 4 new fermenters are located, we're able to deliver about INR 20 crores revenue per quarter.

Okay. And the other question I had was on the breakup of non-ARV revenue as a whole for Q1.

Non-ARVs we have done, [ we have this ] about 33% of revenue in quarter 1 came from ARV APIs.

Sorry, I was asking for ARV as a whole, including FDF, APIs, everything.

Oh, 2/3 of revenue came from ARVs, both APIs and formulations.

Okay. And if I could ask a last question. I just wanted to know, on the CDMO business, as you've seen tremendous growth this quarter, are there any one-off impacts in terms of orders that you've got in this quarter? Or is this a sustainable run rate going forward?

We don't have any one-offs in the Q1 for our CDMO division. We expect that this division will positively surprise as well as all of you, yes.

The next question is from the line of Dhaval Shah from Girik Capital.

Sir, a couple of questions from my side. Sir, first, the doubling of FDF revenue post our expansion. So the sales will double from the FY '21 base?

The sales for the unit of tablets were -- so you can't do our automatic way of we are increasing capacity, so the revenue will increase. All depends on what products we make. So currently, we have 6 billion tablet capacity, which is operational and additional 4 billion will be operational in a phased manner from November to March current financial year. And the significant revenue upside from the expanded capacity will come in after '23. And the expanded capacity is -- will be primarily used for non-ARV.

Non-ARV? Got it. Got it. Got it. Sir, our finance cost is higher quarter-on-quarter. So what is the increase in the debt? And what is our current debt -- our gross debt as on today? Yes. And also with this, so last con call, we had given a range for the CapEx for '20 to '23 because you are finalizing certain projects. So have we finalized the exact CapEx number?

CapEx, as we mentioned just now, we believe we will invest anywhere between INR 1,500 crore to INR 1,700 crore during FY '22 and '23. In the Q1 FY '22, we already have done INR 213 crore CapEx.

That CapEx is a range only at this juncture because it's very [ slippery ]. And finance cost is concerned, actually, there is an exchange rate adjustment, that is a one contributor for the additional finance cost. And second is we also borrowed an additional loans in the first quarter.

Okay. What is the gross debt?

Sorry?

What is the gross debt as on today?

It's in a couple of hundred crores higher debt in the first quarter.

Okay, okay. And on Page 25 in the presentation, you mentioned about renewed market share gains in the ARV portfolio in LMIC. So can you elaborate on this line? What does it mean? So we've gained market share, or what is it?

So no -- gain market share in the first line. We have a significant presence in the DLT-based first line. And we are expanding our registration footprint in various countries for TLE400 and our triple combination products. So thereby, we will strengthen our position in the first line. As ever, we don't have any product in the second line right now. So we will start getting registrations for second line products also. With those, we will increase our share of market in the both first line and second line.

The next question is from the line of Amish Kanani from JM Financial.

Sir, if you can elaborate on the mention that we have made about the CDMO business there. You said multiple partnership proposal is in collaborative phase. If you can elaborate on that. What are the plans or what are the discussion trends? Or is it the part of the CapEx that you are planning and stuff like that?

We are investing into 2 new locations as part of our growth plan and business negotiations that we are having with current partners. The new greenfield units which will come up in Vizag will be to service our offerings, service, or what partner is needing. And that is the reason we are investing heavily into CDMO. We can't give you more details of what products and what customers right now.

Okay. Okay. And sir, also, if you can give us some color and sense on the first to file and those 7 products that you have done even to a more exclusive opportunity. If you could give us some flavor there in terms of market size or the timing of those potential launches if any? And what is the status of FDA approval for those set of products? Is it getting delayed because of the -- as we are not being able to approach and [ knock on for the cycle ]?

Out of 7 first to file and [ before ] opportunities, we got tentative approvals for 3 opcos already. And we expect to get tentative approval for 2 more ANDAs during the current financial year. And from the tentative approvals, what we got 3, we are well positioned in 2 of those, because there, the number of FDF companies are limited. So those products, current brand value is about $5 billion.

Okay. Okay. And sir, any tentative time line for -- if not quarters, say, first half, second half of which fiscal year is the...

No, no. This is -- these launches will happen after 2025.

These are all 2025?

Yes. These launches will happen after 2025.

Okay. Okay, sir. And sir, in that context, the 11 billion, of which 85% ARV opportunities of the 33 approved. Is this the marketable -- addressable opportunity for us for, say, next 2 to 3 years? Is that the way we can think?

Can you repeat your question? We didn't get exactly what you're looking for.

Sir, you say approved. We have about 33 products approved with an 11 billion market opportunity, right, in [ ESMU ] addressable market opportunity that we have shown. My question is, is this the short term or short to medium term, next 2 to 3-year addressable market opportunities for us in EU and U.S.?

These products which are in development, where we mentioned 37 billion opportunities, this will be long term. I don't see these will have benefit in FY '22 and '23. So for a product which we have to get revenue in FY '23, we might have filed already ANDA [ and are able to get approval ].

Yes. That's the clarification I was asking, sir. So that is 37 billion is for the long term, which is 66 projects under development and pending? Yes. I was asking, there was an 11 billion opportunity that we are showing in a presentation where 33 products are being approved. So at least those are the ones where we can get the benefits of market share and approval and [ this thing ] in the medium term, which is 2 to 3 years. Is that the way to look at it?

Well, one product where we expect to launch in FY '23 out of the opportunity what we have mentioned. Only one product will be launched in '23.

The next question is from the line of Nimish Mehta from Research Delta Advisors.

Yes. And congrats on a great set of numbers. Sir, picking up on the previous participant, is it fair to -- I mean, we have seen the generic FDF growth sequentially, much better than a generic FDF on ARV, growing much better than API ARV, on a sequential base. On a sequential base, the API ARV is down. You mentioned that even the [indiscernible] pick up probably is one of the reason of [indiscernible]. So why is it not also translating into API growth? I mean, so what is the disconnect? I'm trying to understand that.

Very interesting question. So for the API sales, it depends on how much of our partners are getting market share. And their inventory level, their other book. We can't sell more than what our customer needs. Whereas in the case of formulations, we know what orders we won and when to supply, to which region we need to supply. But we do expect this API supplies to our third-party ARV customers will resume to normal level soon, yes.

Yes. So I mean I'm assuming that the products are overlapping. I mean when it comes to API ARV and the generic FDF ARV. In that case, because we have leadership, cost leadership in most of the ARV products, is it not fair to assume that we will always have higher growth in ARV formulation than we are in the API? Because we will get bulk of the market share also our competitor. I mean that's what I'm essentially trying to understand.

Look, in most of the ARV formulation business, the tender split is very even. So tenders are not awarded to the lowest bidder 100%. Winner doesn't take out. So there will be a distribution between L1, L2, L3, L4. And there are certain capacities allocated for the new entrants. So even somebody wants to crash price, doesn't mean you will get 100% of the tender. At the best, you will get 30%. So it is not easy to assume we're able to garner all the market. There will be an opportunity for us to play a good -- get a good share while we continue to supply APIs to our partners.

Understood. So the next question, actually, probably partially, you will have answered, but let me just reiterate in case I need anything. The other thing I wanted to know is that, while we are expanding into other products, second line treatment in terms of capacities. So -- because there is enough competition already there in those products, how do we see ourselves gaining more market share? Because like -- what is the uniqueness? Again, it's the cost leadership. Or what is it which will help us gain market share?

I would focus in other therapy areas, especially is on antidiabetic segment and the cardiovascular. In the anti-diabetes segment, the new class of drugs, especially the DPP4 inhibitors, vildagliptin, sitagliptin and other liptins will go off patent from next year onwards. So we have a full basket now for products in the diabetes segment. So there, we have created capacity for both the APIs and formulations. And when it comes to the cardiovascular segment, this nitrosamine impurities disrupted the market share in the cardiovascular for the sartans. So we invested during this crisis to enhance capacity and the best quality product. And we do see the opportunities for a fully integrated player in both cardiovascular as well as the diabetic segment because these are large volume products. And the capacity demands are also high, quality demands are also equally high. There, we believe we can play a role. We have capacity. We have a right quality material to get to the market.

Understood. Actually, I was asking more about the ARV products where we are expanding to second line treatment, especially for...

Okay. So I'll answer that question as well. The second line of the product market is limited. And the competition is also limited. Not all the ARV players are having integrated second-line therapy offering. So we are creating -- we're developing ANDAs to capture market not only in the LMIC region, but also in Europe and U.S.

And that is on the base of, again, we being the least cost because we are integrated? Is that the right way to understand?

Yes. Yes.

[Operator Instructions] The next question is from the line of Nitin Agarwal from DAM Capital Advisors.

Sir, you mentioned that FY '25...

Nitin, sorry to interrupt you, may I request that you speak a little louder?

Hello, can you hear me now?

Yes. Thank you.

Sir, on the -- you mentioned FY '25, you're looking to diversify it away from the ARV business. Right now, as you mentioned, we are about 65% ARV business in the overall revenue mix. How do you see this proportion changing by FY '25?

We can only guide you, but we can't give you the exact number. We do believe by FY '25, the ARV, both the APS and formulation business, would come down from 2/3 to 1/3.

Okay. And sir -- okay, that's fair enough. And sir, on -- we are right now at doing about $500 million of revenues on the ARV business on annualized basis, give or take. In your assessment, what is -- how big can this business really get over a period of time? Given the size of the market and the way the competition is essentially as -- there are some challenges in terms of some maybe competitors are not very aggressive in this business. How big can the speeds get for us from $500 million where it is today?

Maybe one could grow single-digit, I would say. It's not easy to grow teens or higher growth. Because market -- the number of patients coming on treatment is not increasing like in the previous years. So there is a shift from the weaker players to stronger players. But otherwise, if you look at the entire ARV formulation business is between $1.5 billion to $1.8 billion, and $500 million is almost 33% of revenues coming to us. We do believe we have the ability to gain market share, but it will not be significant. That is the reason we are investing our resources both in R&D as well as in CapEx to non-ARV and non-oncology.

Got it, sir. And sir, lastly, on that point, sir, on the non-ARV business, since you've talked about obviously a very large or significant growth in the business, because the business you say has almost become 2/3 of -- from 1/3 where it is today over the next say 4 years. Apart from oncology -- or apart from diabetes and CBS that you mentioned, where the integrated play for us will come in handy -- what are the other -- these will be the primary drivers? Or are there any other drivers of business which will sort of reduce this -- which will drive this non-ARV piece of business for us?

We have a reasonably developed portfolio apart from anti-diabetes and cardiac segment. We have a few other APIs being developed and as being developed. Those are complex and scale projects. Maybe we will let you know at an appropriate time.

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

Sir, just on this bio business, when at the time of acquisition, first half FY '20 had a sales of about INR 30 crores, which was without commercialization of 2 fermenters. And now for the first quarter, with commercialization, we are at INR 14 crores. So just to understand this disconnect.

So I think the 2 fermenters which came into operational only in the June. So there is no -- not a significant revenue generated in the first quarter from the new fermenters. You will see the full bridge the revenue out of a second unit from -- probably from third quarter.

Understood. Understood. Secondly, on the formulation side. If you could share how much is in-licensed product what have contributed for the quarter? And would it be at a similar profitability as we make in the products which we manufacture?

The revenue from in-license products in U.S. is not that significant in Q1.

Yes. That's it for me. And just lastly, the [ opportunity ] also is still a benefit is there in 1Q? Or that would come from 2Q onwards from the formulation side?

The formulation side, the debottlenecking was done by end of June, end of -- put into operation only in July. Yes.

So that revenue could also get reflected in 2Q?

In the current quarter, in Q2, yes.

The next question is from the line of Harith Ahamed from Spark Capital Advisors.

My first question is on the CDMO business. How much of this business will be coming from supplies to Aspen? And what exactly are the nature of these supplies? And similarly, what is the contribution from what we previously used to call ingredients supplies in the overall [ figure ]?

The active ingredients and the supplies to [ Aspen intermediates ], about 40% of our CDMO revenues in Q1.

Okay. And the nutraceutical parts of CDMO, how much will that be?

Put together. Both Aspen CDMO and the customer [ we spoke to, this is 40% ].

Okay. And on the formulation side, what is our PLD market share in LMIC currently? And for the quarter, what would be the breakup of FD sales between LMIC ARV and U.S./Europe? Is it-- the split are the same as what we've seen in recent quarters, around 75-25?

Yes. Around that. 70-30 ratios, yes.

And then our market share for TLD and LMIC...

TLD LMIC is in higher teens.

The next question is from the line of Naresh Suthar from SBI Life Insurance.

My question you answered partly already. So I just wanted to get here. From here on, majority of your non-ARV CapEx and benefit of that is coming more towards the end of this year and more in FY '23. So next 9 months, can I say that our EBITDA revenue will be broadly in our range until the non-ARV picks up significantly from next year? Is it the right understanding?

We have added the -- APA capacity became operational in Q4. And we will -- we are expecting one more APA block will be operational by end of December. So we are putting capacity into commercialization on a regular basis. So when we are saying our formulation capacity will be ready by March. That means the revenues from that expanded capacity will come in FY '23. You're right. But as we mentioned, we -- our debottlenecking activity also gave 20% more capacity, which became operational by end of Q1.

Right. But that -- for that, you said the LMIC -- I mean the ARV formulation market is now will be growing at some maybe -- some single digit. So I don't know -- so there will not be significant growth, but there will be some growth that's what I thought...

There is a growth. So see we can ramp up to production depending on opportunity. So our 6 billion current capacity is not utilized 100% even in this month. So there is a scope for us to take more [ service ].

Okay. And sir, one more question. On CDMO side, can you help us for the amount which we are investing in terms of CapEx in -- particularly for that segment?

In the formulation, we're investing around INR 400 crores CapEx for this new capacity expansion.

In CDMO? CDMO formulation?

So in CDMO, we will be investing in FY '22 and '23 maybe around INR 500 crores.

The next question is from the line of [ Forum Parikh ] from [ Choice Investments ].

So my question is on Laurus Bio. I understand that the contribution to the EBITDA would be niche at this -- in this quarter. But going forward, just wanted to understand how much would Laurus Bio contribute to the EBITDA? And second question is on the CDMO side. I see that we have commercialized 4 projects as on Q1. So going forward, how many projects do we intend to commercialize out of these 50 clients?

We will continue to supply these 4 commercialized products in FY '23 and thereafter as well. New commercial launches will happen in FY '23. We don't expect anything in FY '22, yes.

Okay. And Laurus Bio contribution to the EBITDA?

We are not giving a division-wise EBITDA contributions. But when we are in operation to give, we'll provide it, yes.

Yes. Okay. And sir, just a last question, if I may. FDF capacity utilization, if you can just give us an idea.

We're at about 80% capacity utilization in FDF right now.

Okay. And we have any scope for improvement? I mean, expansion in that?

We can take more others and service in the current capacity itself.

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

Sir, just on the CDMO piece, on the investment of INR 500 crores, what kind of asset turn can be expected?

These are greenfield projects. These are not brownfield. The groundbreaking will happen next quarter. These investments will give revenues probably FY '23, last quarter of FY '23, not before, yes.

Yes. And what is the kind of an asset turn which we can expect from this investment?

Difficult to predict right now. But this will be in line with the industry, [ development ] industry. As you see with our current asset turn ratio, it is closer to 1.4. So we'll be in that range, yes.

So it will be like in the range of 1.4? The average driver is around 2, 2.5...

We expect so. Yes.

The next question is from the line of [ Omkar from Sri Consultancy ].

Yes. One of my questions has been answered. The second question is regarding, do you have any plans for debt reduction given the cash you are generating from the profits?

No immediate plans. So we see the business opportunities in front of us, and we're investing. And our cost of debt is not that huge where we will stop CapEx and return debt.

What's your debt to equity currently?

Debt to EBITDA is less than 1.

Debt to EBITDA is less than...

Yes. It's 0.58.

The next question is from the line of Samir Palod from AUM Fund Advisors.

Sir, one clarification. You had mentioned that you are looking to split this contribution of ARV. Just want to retake, sir, but which year do you expect to do that?

FY '20 -- 2025, we're saying.

2025. So which means that it's -- how do you see the ARV business growing for the next 4 years?

It will grow single-digit. We don't expect it will grow significantly. See, as you have seen, ARV contribution, both the APIs and formulations, was very significant in FY '20, FY '21 and FY '22. So this growth will moderate FY '23 onwards. And the new investments like we're making in non-ARV will start giving revenues from FY '23 itself.

Understood. Sir, other question was on the CDMO business. Do you expect to have any ARV contribution?

In CDMO, no.

And Biologics, sir?

No, no, no. See, contract manufacturing, I wanted to clarify. We do contract manufacturing in generic APIs. We do contract manufacturing in generic formulations. We do contract manufacturing in NCEs. See, when we are talking about CDMO business, it is primarily in the NCE. So our generic APIs, generic formulation contract manufacturing is not added yet. So that way, our -- today, revenue contribution from contract manufacturing as a whole is 25%, a little more than 25% when you add the APIs, formulations and NCEs. So when we are talking about the CDMO business, this is primarily meant for NCEs, customer ingredients, one product to one customer in the NCE space.

And they're both in the non-ARV space, right?

Yes.

Then see the formulation of both the non-ARV space?

Yes.

The next question is from the line of [ Naveen from Kotak ].

Yes. Sir, my first question is around the capacity that you have for formulations with the 6 billion tablets. Can you give a split of how much of this is going for your ARV formulations and how much is going for your generic contract manufacturing of formulations?

About -- I'll give you a broad number. About 20% of capacity is utilized for contract manufacturing. And 40% is utilized for ARVs and 40% for other products.

Sir, out of that 6 billion, 40% is for ARVs, 20% is for your generic formulations contract manufacturing, CMO. And the rest is for -- the other 40% goes to?

The non-ARV formulations.

Okay. Whereas from a value perspective, the ARV formulation...

It's significant.

Okay. Okay. And for the additional 4 billion...

I wanted to clarify here, when we talk about the ARV, the ARVs we do create [indiscernible] into one pill. So our 40% units may consume more equipment than our 40% where we use one API only. So when you're talking just to, I guess, the 20, 40, 40 in number of units, but the number of equipments used to get this are much larger [ than the ARVs ]. So we -- in other APIs and other formulations we use the one [ API, 2 APIs ]. Where in ARVs we now used 3 APIs. So the number of equipments used is much more than the other tablets or capsules.

Okay. I get your point there, sir. And then for the additional 4 billion target capacity, could you just give us a ballpark figure? Because you said, by and large, this is for generic CMO, if I understood it correctly. Maybe you could give some idea, a numerical sort of Q2 access to how much of this 4 billion is for generics CMO?

In the new expanded capacity, about 1 billion will be used for CMO and then remaining 3 billion will be used for non-ARVs.

[Operator Instructions] The next question is from the line of [ David Morta from Capital Group ].

Hope all well. Just 2 questions, please. So firstly, on the CDMO. Was there any one-off in the quarter? Or this is just kind of business as usual, clients ramping up, 2 projects commercializing?

As we clarified, there is no one-off in CDMO revenues in Q1. This is business as usual.

Got it. And secondly, can you just talk to what happened on the other APIs? Is this just timing mismatch? Or is there something else to -- because the other API segment kind of declined quite a bit. So just curious to know what happened there.

There is no mismatch. There is only shipping supply schedules.

Okay. Got it. And the other last question, if I can squeeze in one more. On the margin, so if I look at the margin sequentially, gross margins have gone up, but the EBITDA margin has gone down. Can you just talk through what's caused the gross margin to go up and what's caused the EBITDA margin to go down sequentially?

Because of our preoperative expenditure or increased R&D expenditure, our -- we were down by about 1% on the EBITDA. But at the same time, we were almost INR 100 crores less revenue from Q4 to Q1.

As for EBITDA, yes. But the gross margin, it is in a mix so far as more synthesis revenue we have. So that contributed in the better gross margin.

Perfect. So if I understood correctly, the gross margin is because of mix. The EBITDA margin is primarily negative operating leverage and preoperative expenses. So basically, FY '23 onwards. So a lot of these 3 operative expenses will go away because -- I mean, as your transformation this year, there will be some costs this year, but next year, you won't have the same preoperative expense drag on EBITDA?

Yes.

The next question is from the line of Tarang from Old Bridge Capital.

Sir, just wanted to check, what would be your conversion costs per million tablets in case of formulations and maybe per kiloliter in case of APIs?

Those details are, I'm afraid, we can't give you yet.

The next question is from the line of Nitin Agarwal from DAM Capital.

Sir, on the CDMO business, obviously, we've come a long way from where we started largely with spend to where the plans that we have for this business. Sir, if you can probably give us a little qualitative sense on, how have you seen the business evolving? What kind of opportunities are you beginning to see now? And what is it -- I mean, what is the USP that we bring to the table which is getting clients attracted to us for this business?

So if some company looking to outsource there actively, they're right to file names in India with technical capabilities and scale, I'm sure Laurus Labs is there. So that is one way we are attracting customers. We have 4.6 million liters we add to volume right now, and we're adding almost 1 million liters more in the next 18 months. So we are one of the top 5 companies with react volume. And we have demonstrated our expertise in certain type of chemistries as firstly the [ chemistry ], large-scale manufacturing large-scale chromatography capabilities, high-potent capabilities. So there, we have earned a lot of reputation with our customers. So that is helping us to bring more new projects into CDMO.

Right. And sir, most of these projects that you're talking about, like also the 2 greenfield projects that we talked about, these are what? These are products which are already commercialized? Or they are in late phase of development and will get commercialized? What is the typical nature of the business that you're looking to get incrementally?

We have commercialized 4 products, 3 APIs and one advanced intermediate. Those suppliers are going on as planned. And we have several projects in Phase II and -- actually, we have 2 projects in Phase II, which are oncology. And we have one in Phase III right now. So we have a mix of high potent molecules in various clinical phases. And we have a few in where we have to use our large scale manufacturing expertise.

And this is -- you talked about the greenfield projects, sir.

These are in clinical phase.

And sir, you mentioned about you putting up green -- 2 new greenfield projects, right, in consolidation with the clients. What would be the typical nature of this kind of -- these would be, again, large-scale volume manufacturing contracts that you are getting for which you need to...

We'll give more details at an appropriate time on those. So it's premature for us to give more details, but we'll share those details when appropriate.

The next question is from the line of Krish Mehta from Enam Holdings.

Yes. I wanted to ask on the net debt as of 30th June '21.

Net debt is [ around INR 170 crores increase ].

INR 170 crore increase?

Yes.

And the CapEx for this quarter, as you said, was INR 213 crores. So what's the guidance for the remaining 9 months going forward for FY '22 as well as FY '23, if you could share that, for CapEx.

For CapEx, actually, for 2 years, we gave a guidance of INR 1,500 crore to INR 1,700 crore.

Right. But just to get a -- like can we use this INR 213 crore as a run rate for the rest of the year?

Yes. In an average, maybe. Around that. Actually, we can't say exactly INR 200 crore. But when I say it's INR 1,700 -- or INR 1,500 crore to INR 1,700 crores, it is similar.

The next question is from the line of [ Haresh Kumar from Express Value ].

My question is for Dr. Chava. I guess the approvals for global tenders in FDA formulation is valid for 3 years. And I think the approval you got in 2018 for these global tenders would be expiring this year. Can you please let us know if this approval is getting renewed now?

So the Global Fund tender was for 3 years, you are right. And due to this pandemic, they extended the tender period from 3 to 4 years.

Okay. So still for next year, 2022.

Yes, yes. So these tenders are valid until the end of next year.

Okay. And my second question is regarding ARV API revenue. May I know whether you anticipate any growth in FY '22 compared to FY '21? I'm asking because in last con call, you were like guided for single-digit growth for FY '22 for ARV API. Is this guidance still valid?

We do expect so, yes.

Okay. And my last question, if I may. In the recent interview with one of the international media channel, when you were asked a question on what excites you in future in Laurus, you said that you expect the -- there would be an overall drug for COVID. And if it comes, it will be a big opportunity for Laurus. May I know if there is any COVID -- what are drugs in pipeline like for Laurus?

As you're aware, we in-licensed 2 [indiscernible], for which we are gearing up for launch in the next few weeks. We're in the regulatory approval process. And other than that, we are working on other drugs, but we don't know when the approvals come or -- it's too early to predict.

Next question is from the line of Jeevan Patwa from Candyfloss.

Just one question. So you -- in your presentation, you basically said we are basically going for 1 million fermentation capacity in Phase I. So are you thinking of any Phase II as well?

Currently, the R2 will give 180,000 liter of new fermentation capacity. And we are looking for a land -- with regards to go to a new site for every million liter. So the new land -- what we are looking at is fairly big, about [ 230-acre ] land bank. And there, we can go to 3 million to 4 million liters fermentation capacity. But we'll start with 1 million liter.

Ladies and gentlemen, I now hand the conference over to the management for closing comments.

Thank you, everyone, for participating in this conference call, and also, for your very insightful questions. And please do keep safe. Thanks.

Thank you.

Thank you very much. On behalf of AMBIT Capital Private Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.