Laurus Labs Limited (LAURUSLABS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Laurus Labs Q2 FY '27 Earnings Conference Call hosted by DAM Capital L. [Operator Instructions] Please note that this conference is now being recorded. I now hand the conference over to Mr. Nitin Agarwal from DAM Capital Advisors Limited. Please go ahead, sir.

Thank you. Good afternoon, everyone, and a very warm welcome to Laurus Labs Q2 FY '27 Earnings Call hosted by DAM Capital Advisors Limited. On the call today, we have representing Laurus Labs management, Dr. Satinarayan Chhawa, Founder and CEO; Mr. V. V. Ravi Kumar, Executive Director and CFO; Mr. Krishna Chhettania Chawa, ED, Head CDMO; Mrs. Soma Chawa, ED, Affordable Medicines and Commercial; and Mr. Vivek Kumar, AVP, Investor Relations. Before we proceed, I would like you to remind you that some of the statements made during the call today could be forward-looking in nature, and a safe harbor statement to this effect has been included in the press release that has been shared on the company's website. I hand over the call to Dr. Chawa to make the opening comments, and then we'll open the floor for questions. Please go ahead, sir.

Thanks, Nitin. Good afternoon to all our stakeholders. We are pleased with the substantial progress company making across various business segments. We continue to report strong growth in CDMO business, steady momentum in affordable medicine portfolio because of our major advancement in our partners' clinical and commercial programs. The strong performance reflects sustainable robust demand for our specialized capabilities, integrated offerings, depth of our customer relationship and disciplined operational execution by our team. In line with our accelerating transformation strategy, we are actively investing into building scientific capabilities and capacities across complex and new modalities. The company's total reactor 1 for small molecules API in operation has now reached over 9,000 kiloliters and will continue to expand further. We are also pleased to highlight some of the important disclosures we have made in this quarter's investor presentation on the advancements we are making in our integrated peptide CDMO capability. We commissioned commercial scale peptide manufacturing block. Our current reactor volume for solid phase peptide synthesis is over 16,000 liters, and we have taken up a significant further expansions to meet diverse program requirements. We continue to strengthen the capacity of liquid phase peptide synthesis and several new technologies. We are also augmenting our capacity through disciplined business development. During the quarter, we have announced investment into 2 technology platform companies. The one is an agreement to acquire majority 60% stake in Canada-based Galenus Sciences, specializing in oligonucleotides and precision magnetic nanoparticles-based purification. By leveraging Galanos's expertise in early-stage oligo projects, process development, conjugation, precise purification and fill finish, along with Laro's large-scale expertise in complex chemistry, we intend to support clients with seamless journey from complex RNA DNA-based therapies as a one-stop solution. Together, this will expand Laro's position to participate in emerging high-growth oligo market. Second is an acquisition of majority stake in SA&C Resins, a peptide resin technology-focused company based out of Hyderabad. This will allow us to enhance long-term supply security by in-sourcing critical solid support resins for peptide synthesis and also chromatography stationary phases for large-scale peptide purification. This will bolster Lara's manufacturing completeness and reliability with our current and future partners programs. These acquisitions are aimed to advance Lara's integrated scientific capabilities under one roof. These acquisitions are strengthened by Lara's quality infrastructure that will cater to more complex customized projects, along with significant increase in future therapeutic demand. Moving on to our financial results. Lar has maintained its growth trajectory and once again delivered record revenue and profits for quarter 2. Total revenues were INR 2,206 crores, reflecting a continued strength of our CDMO platform, growing contribution from commercial supplies and ongoing momentum in affordable medicines portfolio. Gross margins were also healthy and maintained at around 63% and EBITDA margins further expanded over previous quarters by 2.7 percentage points to 34.5%. Our product mix and operating leverage continue to do well, supporting healthy margins. I would request Mr. Krishna to share key updates on our CDMO business.

Thank you. Coming to the small molecule CDMO, the business has continued to deliver robust operational execution in Q2, reporting an 86% growth with the sales of INR 875 crores. For the first half of the year -- of the current financial year, the division recorded INR 1,710 crores. That equates to about 77% growth. This performance was driven by successful delivery of critical late-stage programs as well as commercial API supplies to multiple global partners. We also continue to see encouraging demand on the newly commissioned assets across both Human Health and Animal Health businesses, both in terms of the volumes and opportunities with existing partners as well as with new client engagements. The company remains focused on enhancing our core capabilities and capacities to better meet customer demand driven by continuous expansions. As Dr. Ray highlighted in the opening remarks, we have commissioned our peptide manufacturing facility and our investment towards other multiple large-scale API opportunities continues to take place in our Vizag side. Strategically, we are elevating client collaboration on complex new modalities and our focus remains on securing fully integrated projects, seamlessly supporting partners from preclinical development going all the way to finished drug product services. Driven by this end-to-end capability, our CDMO pipeline continues to expand. We are adding clinical programs across a highly diversified mix of manufacturing technologies as well as therapeutic indications. I would say with our capability expansion, deeper integration and expanding pipeline, Laurus is well positioned to sustain a healthy business growth in the coming years. Now moving on to LordRBio. The Laure Bio division reported a Q2 sales at INR 29 crores. And for the first half of this financial year, that is at INR 64 crores. The year-over-year variation is primarily due to the campaign phasing, though our underlying pipeline momentum remains strong. We are actively increasing longer-term strategic relationships with our major customers across both AOF as well as CDMO programs towards anchoring our future pipeline. On the capacity front, our commercial fermentation facility, Laurus Bio is progressing as planned, and we expect this to be operational by the end of this year. And we are already advancing on customer capacity reservations for this facility. Now I would request Mr. Sanjay Sawa to share key updates on our affordable medicines portfolio.

Thank you. Revenues from the affordable medicines stood at INR 1,302 crores in Q2, which represents a strong 15% year-on-year growth. For the first half of this financial year, we achieved a healthy growth of 13%. This growth was driven by continued expansion of our order book across various established portfolios, which was also supported by stable pricing in both our ARV portfolio and developed market portfolios. Looking ahead, we remain committed to investing in the business in line with evolving market requirements. Our positive long-term outlook is underpinned by a robust pipeline of new product launches, integrated CMO engagements and ongoing expansion of product registrations across emerging markets, which is creating new business opportunities for us. I'm also pleased to report that despite the heightened global volatility, our supply chain has demonstrated exceptional agility, enabling us to maintain highly reliable delivery performance for all our global partners. With respect to our strategic Karka joint venture, progress at the formulation facility remains firmly on track. The Phase 1 production blocks are scheduled to commence operations in mid-2027, which will significantly enhance our commercial capabilities with a focus on high potent and general OSD manufacturing. On the filings front, we have cumulatively filed 92 DMS to date. In developed market formulation business, we filed 2 dossiers and received 2 approvals during H1. Overall, we have cumulatively filed 96 products to date. Thank you.

Thanks, Krishna and Samya, for the overview on CDMO and affordable medicine segments. On the R&D front, overall spending to sales for the first half of this financial year was at 4.3%, increased by over 34% year-on-year, which has been exceptionally high, primarily on account of capability development efforts for our gene therapy ADC technology infrastructure. We maintain our commitment to invest in portfolios focusing on product complexity, scale and sustainable technology platforms. I would also like to share a brief on quality and ESG. In the first half, underwent quality audits by multiple regulatory agencies and key partners and has been successfully cleared audit inspections without any critical findings. On ESG front, we continue to drive sustainability initiatives with continued recognition by leading global rating agencies. Meanwhile, we're also making operational progress against our SBTI validated near-term GHG reduction targets. You can see more in our IR slides. To conclude, we are pleased the way we are executing our transformation strategy and we are making into building a stronger foundation for future. By broadening our integrated capabilities, diversifying our pipeline and advancing key commercial opportunities, we are well positioned to accelerate our long-term growth trajectory. Now I request Mr. Ravi Kumar, our CFO, to share overall financial highlights.

Thank you, Dror. A very warm welcome to everyone to our quarter 2 and H1 earnings call. Let me take quickly through the highlights. Total income from operations for H1 is at INR 4,233 crores, registering a growth of 31%. We continue to deliver strong growth mainly due to continuing strength in CDM execution and stable performance in affordable medicine. For the quarter 2, total income from operation is INR 2,296 crores, which is the highest in the -- from the beginning. Gross margin maintained at a healthy level for H1 at 62.9% and for quarter 2 at 63%, mainly due to better product mix and division mix and improved operational efficiencies. EBITDA for H1 stands at INR 146 crores with a margin of 3.2%. For the quarter 2, EBITDA reported at INR 762 crores with a margin of 34.5%. This profitability is on account of improved operational leverage. Profit after tax for H1 at INR 809 crores and for the quarter 2 at INR 441 crores. So our ROCE is moving upwards to 22.5% for the H1 FY '26 of 17.7%. On the CapEx front, we invested close to INR 470 crores for the quarter and INR 864 crores for the H1. We are making good progress in executing ongoing key CapEx across diversified growth projects. Our net debt stood at INR 2,466 crores and debt-to-EBITDA is around 1.02 versus 1.28 for the last quarter on the back of strong internal cash flows. On the capital allocation front, our strategy remains unchanged, and we will continue to prioritize investments into high-value business segments to drive near and long-term growth for all our stakeholders. You can refer to our IR presentation for more details. With this, I would request the moderator to open the lines for Q&A. Thank you.

[Operator Instructions] Comes from the line of Tushar from Motilal Oswal Financial Services.

Sir, firstly, on the peptide scale manufacturing block started. So as a trajectory, how to think about the commercial level sort of revenue coming through, considering the customer might require certain regulatory approvals to come in place or you will have the inventory buildup quantity. If you can just explain that business...

Would you like to answer this question?

Sure. Thanks for the question, Tushar. As you rightly said, for every program, there's a certain runway towards commercialization, as you rightly identified related to validations and regulatory approvals. With that being said, we have several programs in the pipeline, which I can't really divulge too much about, but that are in various stages, including development, scale-up validations. So we already have a visibility into how we would leverage these facilities and thereby having the visibility to invest more in furthering this capacity.

For the existing capacity, can you just considering not getting into product specific or company specific, but in terms of time line where we see the commercial benefit starting -- and what would be the quantum for the existing capacity, maybe in terms of asset turn over a period of time, how to think about it?

For the commercial revenues, we expect somewhere on the '29 time frame for some of these peptide capacities that we are talking about today. But with that being said, in terms of utilization, even for some of these validation campaigns also, it will be fairly high for the asset itself.

As we -- Tushar, as we mentioned in our investor presentation, we are also expanding our peptide capacity significantly. We'll give you more details as and when the facilities are qualified. So we have good visibility on the programs, progress of the programs and the volumes requirement for these programs, we have visibility. One point I would like to add here is peptide manufacturing capabilities are fully integrated. In the sense, we are not making fragments. We are doing complete synthesis of the peptide purification and isolation. We are offering an API, not just to fragments.

Got it, sir. And on the -- that's really helpful on peptide side. And on the overall CDMO side, like considering multiple projects at multiple stages, is there any -- maybe in the near term where the inventory buildup has happened at the customer end and hence, there would be some buffer before the revenue picks up on the overall basis in the CDMO segment? Or we have certain projects which are yet to sort of scale up and hence, we will continue to have growth in this segment maybe over the next 12 months or 6 to 9 months...

Based on what we know at the moment, we don't anticipate such a situation. But with that being said, we have several programs that are commercialized in nature. So these volume changes generally tend to balance out. So we are not anticipating any such surprises, at least from the perspective that we have today.

The next question comes from the line of Sajal Kapoor from Anti.

So congratulations, Dr. Satya, Ravi and team Yes, sure. The numbers are finally catching up with the work you have been doing for years, well deserved. I have 3 questions. First, Dr. Satya, if you remember in April 2023 on that NDTV profit interaction with me, you agreed that a bigger surface area would mean better growth. And since then, CDMO has grown about 4x. What can Laurus do for customers today that it couldn't 3 years ago?

As years pass by, we are not just adding reactor volume. We are also adding various technical capabilities as well. See, our first commercial scale biocatalysis happened in 2021. And then flow chemistry happened later on, hgination happened later on. fermentation happen later on. So we're adding technical capabilities for a period of time. Today, if any partner comes with a tech -- we will not say no because we don't have capabilities, except monoclonal antibodies and the cephalosporin and pensilins. Those are the areas we don't have right now. Other than that, we can offer any chemistry, any modality, any scale, any potency also. So we just commercialized OEB facility for pay linker now. So we are adding capacity and capabilities for a period of time. In 2023, we don't have this many capabilities. Now we have capacity and capabilities -- and so my sense is execution.

No, I am. I think there is a slight delay, but I think I'm audible. And so my second question is execution to my mind is earning customer trust and trust is bringing more complex programs, something you alluded to in a private function at the CPHI. Over the next 5 years, what is most likely to break this winning loop? That's my second question. And I've got one more.

It is difficult to predict Si Kapoor. We are putting our best efforts to keep our serv level constant, if not increase. So our ability to take projects, we are very cautious not to compromise on our service levels. So our project abilities, we are choosing where we will add value to our customer, not deplete value to our customers. That's where we would like to maintain service level business will not come today, will come tomorrow. So we don't want to spoil partnerships or relationship by taking too much that we cannot handle.

That's helpful. And finally, Dr. Satya, alongside the large CapEx, you are making small bets across peptides and oligonucleotides, which one could become a flywheel for Laurus in, let's say, 5 years, give or take?

Our investment in peptide resins is not going to give so much a financial benefit, but we will strengthen our position in our peptide synthesis. But our investment in oligo peptide start-up Vllinas in Canada, we don't -- we have no customer right now in oligos. So we believe that will have significant value in the near to medium-term future.

And I think Dr. Satya, is that exactly the loop that we have been playing over and over again, we try and control the full value chain integrated. And I think what we did with ARV, we are kind of, in my view, and correct me if my understanding is wrong here, we are just playing the same playbook of integrated end-to-end value capture in the entire pharmaceutical space and new modalities are the thinking for the new modalities is along the same playbook as we have already executed over the period of time. Is that how one should look at this transaction? Because you're not spending too much into this, but the capability that you are getting is meaningful, perhaps 5 years, 6 years out, if not immediately.

A, I think it is -- I would say it is not same, but maybe similar. The scale is also not same. It could be -- scale could be different. ARV is, but I don't expect the oligos will go to ARV level in the next 4, 5 years. We are investing because our customers are asking. It's not that we are investing, we are liking. Our customers are asking us to get there. So we're investing. That's the message I can give you right now...

The next question comes from the line of Chirag Shah from White Pine.

Congratulations for good set of numbers. Sir, I have first a very short-term question. If I look at Q1 to Q2 on the CDMO side, can you give some color what has driven such a strong ramp-up sequentially? Is it on large-sized molecule you have supplied -- or is it some projects have moved from either Phase I to Phase II or Phase I to Phase II that has driven number of molecules for which the supply has happened is driving it? So it would be helpful if you can give some more granular whatever you can share on the qualitative side.

I think it's like a meaningful growth between the quarter 1 of this year and this quarter. But as we've highlighted in the quarter 1 conference call, we expect this to be pretty consistent is what we have alluded to also in the last call. But to answer your question, there's no specific one-offs that we are looking at in this case.

Okay. No, it's not about one-off, it is about the quality and the nature that is driving it. Is it more molecules getting added or it is some large molecule or some Phase II, Phase III movement which is driving this? So I'm just trying to understand that side.

I think if you look at the increase in quarter-on-quarter by INR 200 crores is because of the overall revenue increase. The CDMO revenue increase only contributed by INR 40 crores. But the rest of the -- our affordable medicine increased by INR 160 crores. It is the overall performance.

And sir, second, on the peptide side, can you just indicate the kind of capacities that we have currently? And the infrastructure, what kind of capacity addition that can happen? So that's one. And I presume you already have soft commitments or soft confirmations from customers or that is also yet to happen because it's a new facility, that's why I'm asking.

So on the capacities for the peptides on the -- only quoting the SPS synthesizer capacities as we've captured in our investor presentation, it's a little over 60. And of course, LPS, I don't want to quote at this point in time. But like we've always maintained, we'll provide a meaningful update whenever we reach that stage. But yes, generally, we tend to shy away from quoting too much information, which might not be meaningful or translate into actual numbers. Again, I think we'll keep you updated on peptides as and when there's some updates there. But yes, that's something that I can share at the moment that we are -- we continue to invest extensively in enhancing the capacity further.

And is a fair assumption the lead times are longer in peptides versus small molecules? It's a fair assumption, right?

It depends on which -- I mean, it's not a statement that's always true. It depends on the complexity of the small molecule, the number of steps involved and also the complexity of the peptide, if you're doing the fragment, if you're doing the API. So it is a question that has probably 3, 4 follow-on questions. But yes, I think at a high level, maybe you could say that, but it might not be always true.

The next question comes from the line of Shekhar Karya from Family Office.

So Dr. Chawa, congratulations on just for the quarterly numbers, but I think the journey that Lars has been giving all of the investors quarter after quarter. My question is primarily on the peptides, although many questions were already there, but I think I wanted to get a broader color from you or from Mr. Krishna. So in the peptides world, I think what we've been hearing about is the solid state, liquid state, hybrid. And then, of course, I also read somewhere that fermentation peptides are the cheapest one in terms of manufacturing. So what I would like to understand from you is how do you see this whole scenario emerging in terms of how over the next 3 to 5 years, would it be the hybrid that will probably drive most of the manufacturing? Or could it be fermentation -- and how Plus is preparing as we are building the peptid capacities and the fact that we also have the fermentation capabilities, how we are preparing for this 3- to 5-year sort of a story. If you could throw some color. I don't need the numbers, but just the color on peptide manufacturing and how we are developing our capabilities.

The use of fermentation and peptide synthesis depend on how many amino acids -- natural amino acids are there in sequence. If it is -- the sequence is small, nobody will go to fermentation based. Currently, the programs what we have mostly SPS, LPPs are hybrid. So that's where our capacity expansion is also going...

Just to add on to that, I think every program in the peptide space is unique and comes with its own unique requirements. So it's not very easy to say that 5 years down the road, there'll only be a certain type of programs. We believe there will continue to be a space for STPS, LTPS, hybrid and as you've said, for the fermentation base as well. But they'll continue to play a meaningful role because they offer unique characteristics for -- depending on the peptide requirements.

My second question and the last question is, if you could throw some light on the fermentation. In terms of our facilities, if they are GMP approved, do they have any limitations, so to say, or they could do any type of fermentation requirements that our customers have...

See, we have GMP facility in Bangalore that will do up to 500 liters -- 5,000 liter fermentation. And we have a grade industrial grade facility in Tumkur with 200,000 liter fermentation capacity. And we are building 500,000 liter facility, which will be operational in this quarter. That's also food grade and industrial grade, not a GMP grade. We're also building a GMP-grade fermentation facility for some of the products in animal health. That will be operational second half of next year.

The next question comes from the line of Parekh from BOB Capital Markets.

My first question is on the CapEx. We have announced INR 3,000 crore CapEx over a period of '27 to '28, and it's across various modalities. So could you give us some color which modalities would have like higher contribution? Or would the CapEx be equally distributed amongst oligo peptides, some color there?

It's difficult to break into several segments for combination purpose. So we are investing significantly in growth CapEx and majority into API...

Okay. My second question is on the EBITDA margin. While on a sequential basis, I see gross margin is almost flat, but EBITDA has increased, EBITDA margin has increased. And I see that's largely because of R&D cost rationalization. So just wanted to understand why has R&D come down steeply on a Q-o-Q basis? And how sustainable is it?

I think the -- for quarter 1, we have filed some ANDAs. So there's a reason the cost has gone up in quarter 1. It is not that we are refocusing on our R&D expenditure.

And second, there is operational leverage as well. So from Q1 FY '27 to Q2, we already -- we also achieved INR 200 crores extra revenue. So our EBITDA margin improvement, not just to lower R&D cost, but higher operational leverage.

Sure. And sir, any guidance on the sustainable run rate of EBITDA margin because 34% seems to be the highest ever. And now CDMO segment is also stabilizing at 40% contribution. So what's the stable EBITDA margin we can expect for the year?

At the beginning of the year, we already indicated we are comfortable in maintaining over 60% gross margin and over 30% EBITDA. I think that's -- we still stick to our guidance. So it could -- that's the number you should take in your mind...

Sure. And my last question is on the, again, custom synthesis side. Sir, some color or some dynamics like how many molecules have been commercialized and how many molecules are there in Phase III?

Fortunately, that is not something that we are in a position to divulge ma'am because of various confidentiality reasons. And also, like we've alluded to in the last call as well, that at least internally, we believe that number does not necessarily translate into the actual numbers like in terms of revenue because one program might give, let's say, $1 million versus another program could potentially give $100 million. So that number, at least from our end, we believe, does not paint the full picture, and that's why we've always refrained from quoting that number.

Okay. And sir, lastly, if you can give us the number on the CC constant currency growth and the percentage exports of the total sales?

Percentage exports, I check. I think majority is there actually, I think we -- domestic, domestic must be less than 20%. And the constant currency on a sequential basis, it's not a significant number on a sequential basis. It's about INR 12 crores.

The next question comes from the line of Rahul B, an individual investor. Sir, you...

So my question is primarily to understand the CDM a little better. So we probably have around 100-plus active programs. Can you give us some color into what percentage of the commercial stage supplies they are originating either from, let's say, Phase II development versus late-stage tech...

I think it's difficult to give that granular answer for this question. See, as Krishna mentioned, the number of projects may not give you right color of revenue. So we have projects from $200,000 to several tens of million dollars. So if we give -- say, we have 200, 300 projects, whether we multiply that number by $200,000, multiply that number by $10 million. So I think that may not give you a right picture to our investors. So we refrain from giving that number.

The next question comes from the line of Dhaval from Jefferies.

So again, joining the peptide bank wagon, what is the gross block of the peptide facility that we have put up? And any very broad high-level estimate what peptide business can generate in terms of peak asset turn whenever we achieve, but very high level?

I think after a lot of deliberation internally, we agreed to give the reactor volume. I think beyond that, we are not going to give you how much of CapEx we invested, what is the asset turn ratio we are going to get. So that's -- unfortunately, we were not able to give you further details.

Okay. And in the call earlier, it was mentioned that even the validation batches will require significant capacity and will drive a good utilization. So any broad time line when these validation batches you think could begin for the peptide?

In the modalities like peptides, the complexity of synthesis is very high. So nobody would like to do validation at some scale and scale up later on our M reactor, our M facility move manufacturing block. So for these modalities, the commercial scale facilities are needed for the validation itself. So we have built facility, not just do validation, but also meet our customer commercial demands from the same manufacturing block.

Yes, yes. Definitely. I got the concept. But any broad time line you think when these validation batches could begin?

Broadly speaking, 12 to 18 months is the number that you can take. But again, in clinical programs, things can move around, but you can assume that number.

Okay. And last question, it seems like we are trying to do some backward integration in SPPS manufacturing by investing in resin facility and resin capabilities. So again, approximately how large is resin cost when the peptide is getting manufactured using SPPS or hybrid? Again, it can vary a bit. I understand it depends on how large the fragment is, how much is SPPS, how many LPPS. But very broadly, given you guys are doing investment, what is the typical resin cost versus the total cost of manufacturing the peptide?

I be able to give you a range. It's a smaller the fragment, the cost of resin is higher. longer the peptide, the resin contribution is less. So it will take -- in the cost of manufacturing of raw material cost of peptide, it will vary between 10% to 20%...

Raw material cost...

Price. raw cost peptide resin contribution vary between 10% to 20%, depending on the length of the fragment of the peptide.

Got it. Understood. Very helpful. And any other major cost beyond resin, which is involved? Or is it all the regular solvents and typical raw materials, nothing specific beyond resin that one should be aware of?

We will not give you that granular we are not building a model cost model, is...

So I think it's difficult for us to go...

The next question comes from the line of Vivek Agarwal from Citigroup.

Sir, one question is on CapEx. So this year for this as well as the next year, you have guided INR 3,000 crores CapEx. So how good you are in terms of completion of this amount given that in the first half, the run rate is slightly on the lower side? And second, a related question, how do you see investments or the overall CapEx, let's say, even beyond 2 years, even '28 -- and if you want to look at, let's say, another 3 years '29...

Vivek, your voice is not clear. Can you just remove your speaker?

So in terms of CapEx, we have guided INR 3,000 crore CapEx for this as well as the next year. And given that the current run rate is slightly on the lower side, how good you are in terms of completion of this? And second, even beyond these 2 years, if you want to build the model, let's say, for another 3, 4 years, what kind of the investment or the overall CapEx you are envisaging?