Orchid Pharma Limited (ORCHPHARMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Orchid Pharma Limited Q1 and FY '27 Earnings Conference Call hosted by Systematix Shares and Stocks. [Operator Instructions] This conference call may contain forward-looking statements about the company, which are based on beliefs, opinion and expectation of the company as on date of this call. These statements are not guarantee of future performance and involve risks and uncertainties that are difficult to predict. I now hand the conference over to Ms. Loveleen Bagga from Systematix Shares and Stocks. Thank you, and over to you, Ms. Loveleen.

Thank you, Danish. Good evening, everyone. On behalf of Systematix Institutional Equities, I welcome you all to the Q1 FY '27 Earnings Call of Orchid Pharma. We thank the Orchid Pharma management for giving us an opportunity to host the call. Today, we have with us the senior management of the company represented by Mr. Manish Dhanuka, Managing Director; Mr. Mridul Dhanuka, Whole-Time Director; Mr. Nishant Dalal, VP, Finance; and Mr. Kapil Dayya, Company Secretary. I will now hand over the call to the company management. Over to you, sir.

Thank you. Good evening, ladies and gentlemen. I'm Manish Dhanuka, Managing Director of Orchid Pharma, and I welcome you to our discussion on the results for the first quarter of financial year '27. As you may be aware, on 10th of July, the merger with Dhanuka Laboratories became effective with an appointed date of 1st April 2024. Accordingly, the FY '25 comparative and FY '26 results have been restated to reflect the combined operations of Orchid Pharma and Dhanuka Laboratories. The financial numbers that we will discuss today are, therefore, on a combined and comparable basis. They will differ from the Orchid-only numbers discussed in earlier calls. As we had indicated in our last call, financial year '26 was a difficult year for cephalosporin business. It was among the most challenging environments our cephalosporin franchise has faced in the last 15 to 20 years. In a number of important products and markets, both volumes and pricing were affected with declines of 15% to 20% depending on the product. On a restated combined basis, revenue from operations was INR 1,233 crores for financial year '26 compared with INR 1,398 crores for the financial year '25. After the first quarter, our focus was on protecting volumes and customer relationships in the challenging market. This involved accepting some pressure on margins, particularly because of product mix and pricing conditions. Consequently, combined gross margin moderated by approximately 4% to 32% in financial year '26 compared to approximately 36% in financial year '25. We remain disciplined on controllable costs. Combined employee and other operating expenses were broadly flat at INR 353 crores in FY '26 compared with approximately INR 353 crores in FY '25. However, this cost discipline could only partially offset the effect of lower revenue and gross margin compression. Turning to the current quarter. We have begun financial year '27 on a better footing. Revenue from operations increased to INR 304 crores in Q1 '27 from INR 263 crores in corresponding quarter last year, representing growth of approximately 15%. Combined gross margin improved by approximately 3 percentage points to 33% in Q1 '27 compared with approximately 30% in Q1 of '26. EBITDA improved to INR 25 crores in Q1 of '27 compared with EBITDA of INR 10 crores in Q1 of '26. Though we can see some improvement in sales over last year, we feel the industry is still facing overcapacities leading to cutthroat competition. Our focus remains on growing volumes with discipline, improving product mix, maintaining tight control over operating costs and progressively strengthening the underlying profitability of the combined platform. We have also started a number of focused integration projects to crystallize savings from this merger. We expect initial benefits of these initiatives to begin becoming visible in the next financial year. The AMS business continues to be managed with financial discipline. Its quarterly EBITDA drag has reduced significantly, while we continue to build the platform and its long-term strategic relevance in antimicrobial stewardship. I will now move to the operational and strategic updates on other businesses and projects. Let me begin with Exblifep. We continue to make measured progress in building Exblifep as a global commercial platform. In Russia, the estimated 10-year value of our licensing arrangement is approximately USD 178 million. This is an estimated long-term value and not current period revenue. Execution will depend on registration, launch and market development over time. In Europe, the business is growing at a steady manner. Vials volumes grew by approximately 300% in Q3 of '26, 170% in Q4 of '26 and about 50% in Q1 of '27. So there is a significant Q-o-Q growth in the volumes. We remain focused on building the business country by country rather than extrapolating early growth rates. In the Middle East and Africa, registration in South Africa has been completed. We now have coverage across the GCC markets. Planned launch activity in the region has been affected by the recent regional conflict and timing of commercial rollout will depend on normalization of conditions in the Middle East. We continue to engage with potential partners in other markets and are at an advanced stage of discussion for South America, Mexico, Philippines, Thailand, Morocco and Australia. These agreements will lead to large-scale availability of Exblifep across the globe. We are also in discussion with prospective candidates in U.S. and China. Coming to cefiderocol, the project remains on schedule. Some equipment originally sourced from China had to be rerouted through Italy. While this created execution complexity, it has not changed our overall project time lines. We target commissioning by December of '26, followed by validation and initial batches during January to March '27 period. Commercial launch will be subject to the approval process from DCGI. Separately, GARDP has floated a global RFP process for broader market access. And once they finalize the distributors in different countries, as you know, 135 countries are entitled to get the product from GARDP. We hope to start the supplies as per their progress in the agreements. Finally, on the 7-ACA project, our objective remains unchanged, commissioning and the first commercial batch by March of '27. This is among the largest and most complex fermentation projects being executed in the country. It's a critical backward integration project, which can provide the advantage of scale to Orchid, and we are putting our best efforts to execute the project successfully. More broadly, while the first quarter has shown improvement, it would be premature to assume the straight-line recovery. Pricing and demand conditions in our core markets remain competitive and the benefits of merger synergies, product mix improvement and new projects will emerge progressively rather than all at once. Our near-term priority is clear: protect and grow the core business with cost discipline, improve margins through volumes and product mix and execute our capital projects safely and on time. Over the longer term, we remain constructive about the opportunities before us. The combined Orchid-Dhanuka platform, backward integration into 7-ACA, the Cefiderocol access project, Exblifep commercialization and selective expansion into regulated finished dose markets create a more diversified set of value creation opportunities than the company had in the past. However, these opportunities will create value only through consistent execution. We will, therefore, remain focused on operational discipline, prudent capital allocation, regulatory compliance, timely project delivery and transparent communication with all the stakeholders. Thank you for your continued trust and support in Orchid Pharma. We now welcome your questions.

[Operator Instructions] Our first question comes from the line of Shashwat Vijay with SIC Wealth Management.

Congrats for a good result. I just wanted -- I just had 2 questions. The first, it was that, as you said that the industry pricing pressure cycle is still on. I wanted to understand what is the management thinking? Will there be any margin recovery in H2? Or will it take more time? Will it [ go to ] FY '28?

See, I believe that in the non-regulated market, the competition will continue. And generally, it depends on the cycle of demand. So it's very difficult to predict in that area. But for us, what is important is the regulated market demand, which also is kind of cyclical. And we have seen that the quarter where we have more of the regulated products demand, that is much better. And I would consider this quarter as a mediocre in that terms. So we hope in the next 2, 3 quarters, our demand for the regulated products will improve, and we can do better performance.

Okay. And another one was that since the Jammu facility of 7-ACA will start in February 2027. So I wanted to know what the expected ramp-up curve and utilization trajectory for that facility? And how much will be the output be captive and how much will be a third-party sales?

So our ramp-up plan is to go to about 80% to 100% by the end of the first year. Initially, it would be slow and then increasing progressively. With respect to utilization, our long-term guidance on this is 80% in-house use and 20% selling to third parties. Initially, the entire product would be used in-house as we develop customer approvals from the new site because it's a pharmaceutical product. So our customers would have GMP approval cycle. Once that starts, third-party sales can also start.

Our next question comes from the line of Tarun Krishna with IthoughtPMS.

It like exports of 7-ACA from China to India is concentrated with 2 to 3 Chinese companies? Or is it like there are a lot of companies with export to India and you can name some of them. And another one, are you expecting them to drastically reduce their prices once our 7-ACA site is fully commissioned?

Yes. Thanks for your question, Tarun. It's concentrated between 3 to 4 companies only. Not too many companies make this product. It's a complicated fermentation synthesis. The second question is with respect to price reduction. So although you can't predict the Chinese, but what I believe is all the companies now want to make profit. It's a different situation compared to what used to be 15, 20 years ago when the state was funding most of the companies. So private enterprises want to make profit. The pricing in 7-ACA has been stable over the last 10 to 12 years. The weighted average is about $60. So we believe that there is not much room to reduce prices drastically.

Okay. That's helpful. Can you name some of these Chinese companies as well?

So there's a company called Sinopharm Weiqida. There's a company called Zhuhai United. Then there is [indiscernible] Pharmaceuticals and there's a company called Livzon Pharm.

Okay. Got it. And next one on commercializing Enmetazobactam. So for the countries that we have signed the marketing partnerships with, will we be also manufacturing the products for those partners?

So we have acquired the asset from Allecra, and they already had a CMO in China. They have a long-term agreement of providing the product from the CMO in China. So the supplies will start from that CMO itself, but we will have our margin in the supplies. And we do have the right to start manufacturing. And as our Cefiderocol project will get started, say, in the next year, then we will take validation batches. And hopefully, after 2 years, we would be able to once we are able to register the product from our site, we would be able to supply some percentage from our site. That's our long-term plan.

So currently, we are not producing Enmetazobactam [indiscernible]. It's fully partnered...

No, we are producing for our consumption for domestic market. We manufacture, supply to Cipla and we sell in our own brand ORBLICEF in India. That is manufactured by us completely.

Okay. So all the international sales of Enmetazobactam is from the third party?

It will come from our CMO in China to begin with. And slowly, we will get registrations from our site and partially start to supply from here also.

Okay. Understood. Understood. The next one on GCLE. So can we talk around where exactly is this product used in our value chain? And will commencement of our 7-ACA plant affect our procurement of GCLE?

No, it will not. GCLE is used for different products and 7-ACA is used for different products.

Okay. Got it. And our share of business with Otsuka Chemicals has been increasing since the last 5 years. So what would be the reason for this?

I'm not really aware how much...

You're talking about from the related party report, are you reading from there?

Yes.

So that is the procurement of GCLE largely that you can see there. So it is dependent on the product demand. As we shared last year, the number had significantly reduced due to overall demand reduction of 15% to 20%. So that is why you see a decline in the overall value.

Yes, absolute value, yes. But if I take it as a percentage of our materials cost, that number has been increasing in the last 5 years. That's the point I wanted to make.

I'm not sure which number you're reading from. So unfortunately, I cannot clarify further on this call.

Actually, the prices also vary and the volumes vary depending on our demand. So that would have led to some changes. But as such, in a strategic alignment with Otsuka with respect to GCLE, there is no change. We procure our 100% GCLE from Otsuka. So the values may change depending on our demand and the pricing [indiscernible] .

[Operator Instructions] Our next question comes from the line of [ Nishita ] with Sapphire Capital.

So I just wanted to understand with the new facility coming in everything, what kind of CapEx have we budgeted for FY '27?

So as such, we have not considered very significant CapEx in the next financial year. In this financial year, we will be completing our projects of Cefiderocol and 7-ACA. So the entire CapEx would be spent.

Okay. Like can you quantify the CapEx?

Yes, it's already there in the presentation, but INR 750 crores is for the 7-ACA project. And $20 million to $25 million, I don't remember the [ total ] amount we have disclosed...

Okay. And my next question is on -- so you mentioned that for regulated markets also our demand is cyclical. So like can you specify more like in which quarters do we have more demand? So you mentioned that Q1 was mediocre in that sense. So like if you could say is H2 better for us in regulated markets?

Yes. Last year trend we have seen with the second half is generally having more demand from the regulated. It's probably the winter season there.

Right, right. So like can we expect the Q-o-Q growth to be better than in H2? Like in this -- in Q1, we had a 15% Q-o-Q growth. So can we expect that growth number to be better in H2?

Yes, we hope to have better sales Q-on-Q basis.

Okay. So like if you could give some sort of guidance Y-o-Y, what sort of growth can we do for FY '27 because we are going to have a Q-o-Q growth. So I'm assuming like can we achieve around 20% growth for the whole year?

I don't think it will be prudent to give you any number at this time.

[Operator Instructions] Our next question comes from the line of Dhwanil Desai with Turtle Capital.

My first question is on the 7-ACA project and I think in line with one of the earlier participants. So what happened in PenG with [indiscernible] when China dumped and reduced prices, and we have seen that across many APIs where to start new capacity and try to take market share, China is just doing irrational pricing. So do we have a plan B on that just in case if they decide to dump at a price which is not sustainable, what will happen to the CapEx investment, everything? Anything on that?

Yes, I would say rather than having plan B, we decided to have a good plan A, and that's the reason we went to Jammu get some GST benefit, go to a state where the electricity cost is the cheapest in India. The water is abundantly available. The boiler, the steam cost is lower due to available of abundant agricultural waste. And obviously, we are working aggressively towards improving our overall titer concentration so that our yields can improve. Our pilot plant team is working towards that. I think the best you can do is use all your resources to improve efficiencies, and that is our target.

And when you compare with PenG, what happened, Dhwanil, we have talked about earlier in other calls. In PenG 3 of the large manufacturers came together and decided to collectively increase prices because they knew India could not buy from anyone. And because they increased the prices from $10, $12 to $30, $40, they had that opportunity to crash the price. So you can see the price crashing after PLI. But in 7-ACA, that joint cooperation or whatever you want to call it was never happened and the prices have been stable. So therefore, I said I don't see much room for China to drop the prices. But having said that, they are unpredictable. Sometimes other things can still happen.

What he is trying to say is that even in PenG, the Chinese have not dropped the prices to below pre-PLI level. If you look at the prices of PenG, the current prevailing prices are same as they were in 2019 or '20. So because of the PLI, they had increased to probably create a war chest. They were preparing themselves to fight when the PLI companies start their production, and they brought it back to the normal level. Like Mridul said earlier also, now these companies are largely privatized. And we don't know what future holds for us, but the intent is not as it used to be 20 years back to just flood the market. They want to work on a profitable model. That's the general belief now for the Chinese companies. And we have seen in other products also. We believe that they are dumping the product. But whenever they reduce the price, they definitely have some cost advantage. So we have changed -- at least I have changed my thinking about the Chinese. If I find that the Chinese selling something cheaper, I would want to believe that their technology is better, and I should look at my technology. That's my belief these days.

Got it, sir. Got it. Very clear. Sir, second question is, I think we have a technology partner, and I think they also supply to the Chinese manufacturers. So do we have only the process technology transfer or the strain part also is given by them because the high-yielding strain will make a lot of difference in terms of the end competitiveness. So how is it working?

We have a comprehensive agreement with them. They will handhold us during manufacturing process. They will support us in the production stabilization. They will continue to develop strain and provide with better strains when they come up with that. And they will help us in improving the technology over the years. They have some incentive to give us those improvements.

Okay. Got it. And last question. So sir, with all this in place, typically, we have seen that fermentation product takes a longer time to ramp up. So where are we today? And when you say commercial batch, I think that would be a very -- the first part of the ramp-up. But eventually, the stabilization will take 12 to 15 months. Is that the time line that you guys are working with?

We're guiding 12 months, but -- and I have said that again earlier that Aurobindo looking at other experience, it might be longer. Although we have, like Mr. Manish said, the technology partner with us all the way to make sure the risks are lesser. But it is something unpredictable, and we wait -- we'll have to wait to see what actually happens. We have been successfully been able to commercial -- scale up our existing pilot plant by 20x, and we have to another do about 800x from there to Jammu. But it's a little unpredictable. We still remain hopeful that we'll be able to reach full utilization in 1 year -- by the end of 1 year.

And we'll come to know the end output is good in terms of quality and yield by March, right? That's a fair way to. So 20x to 800x that we are talking about, that will happen in February, March of '27.

Yes, the first batch, yes.

The first batch?

yes.

Our next question comes from the line of Rupesh Tatiya with Long Equity Partners.

First question is some data you gave on vials. I don't know if it was for Enmetazobactam. So could you please just repeat that?

Which one?

Russia...

Yes, $178 million for Russia. That's what you're talking about?

No, no, no, from vials, you gave some growth data, Q2 this much -- these many vials, Q3, these many vials, So what was that?

Europe number of vials growth data, we were just trying to talk about how the business is growing in Europe as more and more markets get added. So in Q3 FY '26, there was a 300% growth Q-o-Q. And in Q4 over Q3, it was 175%. And in Q1 FY '27, there was a further 50% growth over that. So as the volumes are increasing, we are seeing this J curve continue to play out. That's what we were trying to shape.

Okay. Okay. So now has Advanz Pharma launched the product in all the markets where it is registered?

Sorry, Advanz Pharma, what?

Have they launched in all the markets? Or are there still some markets where launch are pending?

Advanz Pharma is focused in Western Europe. Big 5 would be their largest markets, which is Spain, Italy, Germany, France and U.K. They've launched in all of those big 5 markets and some of the other Nordic countries. But for Eastern Europe, they will have B2B partnerships that they will forge. They have the license for full EU. But rest of the Eastern Europe, they have not made the partnerships to launch yet.

Okay. Okay. And I mean, I don't know at what point does this Advanz Pharma stream start becoming 5%, 10% of the revenue? Do you think it is FY '28, FY '29?

I would not guide on Advanz Pharma specifically becoming 10% of our revenue, although I would be happy to see that. So our long-term guidance on this is remaining the $1.1 billion to $2 billion that we came up with in 2021. And looking at even the Russia numbers, we remain optimistic that the partners continue to believe that it's a viable asset, but to actually sell a product and get value out of it is a long-term thing and things can change over time. So it would be difficult to say the answer to your question.

Okay. Okay. And Russia, what are the time lines for registration and commercial launch?

So the agreement is just signed, we announced last month. And since that time, I think registration dossier submission and launch would take about 1.5 to 2 years.

Okay. Okay. Okay. Now coming to Cefiderocol, any update on trial waiver? How is that discussion going?

Sorry?

Trial waiver, right? DCGI, we have to do a trial for Cefiderocol for launching in India. And I think we are hoping for a waiver on that...

Yes, that we will come to know only after we apply. So as you know, there's a set committee that sits in DCGI after your application. So we are working with GARDP to engage the stakeholders in the usefulness of the product and the strong unmet need in the country. But the actual result will come to know after the application.

Is there any precedent for the waiver?

Sorry?

Is there any precedent for where DCGI has granted a waiver in the past?

Yes, yes, our [indiscernible] Enmetazobactam itself is a precedent. We got the waiver because the committee thought that because of the antimicrobial resistance, the country needs new antibiotics. So we ourselves have got this waiver. That's why we are more hopeful actually.

I see. I see. Okay. Okay. And this GARDP RFQ, do you need any registration for regulatory approvals? How does that work because for 125 countries -- or just WHO enables you to supply to 125 countries, WHO countries...?

The overall target is that getting the WHO PQ, if you get WHO PQ, then the process of registration in many countries becomes very simplified. And when the product is distributed by nonprofit organizations like CHAI and GARDP, then it becomes further, I would say, faster. So our target is to file with the WHO Geneva and get the PQ.