PI Industries Limited (523642) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the PI Industries Limited conference call for analysts and investors. [Operator Instructions] Please note that this call is being recorded and the call will be for a duration of 30 minutes. I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you and over to you.

Thank you. Good morning, everyone, and thank you for joining us on PI Industries conference call to discuss acquisitions announced into Pharma API & CDMO space. Today, we are joined by senior members of the management team including Mr. Mayank Singhal, Executive Vice Chairman and Managing Director; Mr. Rajnish Sarna, Joint Managing Director; and Mr. Manikantan Viswanathan, Chief Financial Officer. We also have with us Mr. Anil Jain Managing Director at PI Health Sciences Limited. We will begin the call with comments from Mr. Singhal and thereafter, Mr. Jain. After that, the forum will be open for question-and-answer session. This call is being posted to facilitate a discussion around the announced acquisitions. Being in silent period, the management will be constrained not to respond to queries on any other aspects, including financial performance. Participants are therefore requested to limit their questions only to the announced acquisitions. Before we begin, I would like to underline that certain statements made on the conference call today may be forward-looking and the disclaimer to this effect has been included in the conference call invite shared with you earlier and is also available on stock exchange website. I will now hand over the call to Mr. Singhal. Thank you, and over to you, sir.

Yes. Once again, good morning, everyone, and thank you for joining the call today. We have circulated the relevant documents pertaining to the acquisition on April 27, '23. And these are also available on the website of the stock exchange. Hope you have had a chance to go through this. Thanks. So now I would like to quickly summarize the same for you. PI Health Sciences Limited is a wholly owned subsidiary of PI Industries and has executed the definitive documents with 1. Therachem Research Medilab and promoters and Therachem Medilab India Private Limited. TRM India has acquired 100% shareholding of TRM India, which is an Indian subsidiary of TRM USA. And with TRM U.S. and promoters and Solis Pharmachem Private Limited to acquire 100% shareholding of Solis Pharmachem, which is again an Indian subsidiary of TRM U.S. Further, PI Health Sciences Netherlands B.V. is a wholly owned subsidiary of PI Health Sciences, entered into a share purchase agreement with Plahoma Twelve GmbH, which is an existing sole shareholder of Archimica S.p.A. for acquiring 100% stake in Archimica S.p.A. Also PI Health Sciences USA, LLC is a wholly owned subsidiary of PI Health Sciences Netherlands B.V. and has entered into asset purchase agreement with TRM USA, and its promoters for acquiring certain identified assets of TRM U.S. These announcements are in line with PI's long-term strategic vision of building a differentiated CDMO offering across the pharma value chain. We're excited about this acquisition as this marks accelerated beginning of the PI journey into the pharma space, a unique ability to build concrete offerings from extracts, abstracts, situations and leveraging our capabilities across complex chemistries and business build up capabilities in the value chain, once again, helping create a differentiated value proposition to our stakeholders. These acquisitions are also aligned with PI's approach of working with global innovators at the forefront of innovation, science, technology and human ingenuity to create transformative solutions in the life sciences for the purpose of reimagining a healthier planet. Further, the purchase considerations will compromise for TRM, USD 50 million and an additional $25 million on performance-linked pay-outs over the next 6 years. For Archimica, with EUR 34.2 million, upon closing. These purchase considerations will be paid in cash and funded from the completed qualified QIP placements proceeds and internal accruals. Both acquisitions are expected to be earning accretive and immediate effect. I would like to add that the consummation of these transactions and integration into a corporate structure of PI is expected to be completed in Q1 '24, subject to fulfillment of customary closing conditions and regulatory approvals. With this, I would now like to conclude the opening remarks, and I would hand it to Mr. Anil Jain, the Managing Director, PI Health Sciences, to take it further to give you further inputs on these. Thank you, all. Over to you, Anil.

Thank you, Mayank. Good morning, and a warm welcome to everyone on the call today. Let me briefly explain the differentiated business model that we intend to build in the PI Health Sciences. As a long-term strategy, we are building a niche and integrated business model, starting from R&D, starting materials to APIs, it's a one-stop solution. We are building a world-class integrated pharma research center in ITP Hyderabad, which is in Genome Valley for CRO and CDMO offerings. This will notably widen the set of target customers across the entire pharma value chain by helping us to leverage the expertise of the acquired entities, R&D capabilities. Let me tell you briefly. TRM is innovative chemistry driven solution provider with medicinal chemistry research, process research and development specializing in the rare disease area, which ultimately connects to the rare disease platform in the advanced markets. It provides services and products to pharmaceutical and biopharmaceutical companies in the preclinical and clinical stages. It has manufacturing facilities in India and R&D facilities in India and U.S. TRM R&D team works closely with marquee publicly listed U.S. biotech companies and big pharma companies based on Asia Pacific in developing their product pipeline. TRM had consolidated revenue of USD 33 million, with a normalized EBITDA of USD 40 million for the year ended 31 March 2022. About the other transactions, Archimica is our Italy based, highly reputable small-scale API manufacturer and contract development and manufacturing organization, servicing over 60 marquee customers in more than 30 countries. Currently, Archimica owns 24 US DMFs, they are for all the niche APIs. GMP manufacturing facility for the APIs and intermediates across wide therapeutic and substance class such as oncology, anti-ulcer, and anti-rheumatics. And all these therapies are right now in the -- progressing more than the average rate. Archimica's manufacturing facility, near Milan is certified by the major regulators like US and the local regulator like AIFA. Archimica had revenue of USD 45 million and EBITDA of $7 million in the year ended 31st December 2022. While the acquisition of the Archimica has been completed with effect of 27 April 2023, and therefore Archimica has become subsidiary of PI Healthcare Sciences Netherlands B.V. We expect to close the acquisition of TRM and Solis by end of the May 2023. Our object is to build a unique position for ourself in the high potential space of pharma API and CDMO by leveraging our inherent competencies in complex chemistry, process development, operational excellence, technology platforms and global reach through collaborators with prominent innovators. This concludes my initial comments. I will now request moderator to open the forum for question-and-answer. Thank you very much.

[Operator Instructions] We have a first question from the line of Aditya Jhawar from Investec.

Congratulations to the team for a wonderful acquisition. My first question is, what is the capacity utilization of Archimica? And what are the CapEx plans for the company for the next couple of years? And just to add to that, if you can also highlight that what are the growth drivers considering we had 11 to 12 active. And -- but still, we have about a 24 DMFs. If you can just speak about this?

Okay. Let me give you some background. Archimica is a 75-year-old company and this 24, 25 DMFs have been filed over a period of time. Out of that, 12 products are right now active which right now, which you mentioned. As far as the capacity is concerned, the 50% of the capacity is currently employed in making this niche API and 50% capacity is available for us to make a further CDMO activities, which we want to wish to do over there. I hope it answers your question.

Yes. And the CapEx plan, sir?

So it's a very much running asset and -- so there are normal CapExes which are required to be done. There are no specific requirement for any particular CapEx. So it's normal running plant, which is acquired. And some strategic CapEx, we might do it in the coming days based on our business development activities.

And sir, last question. I mean, the management retention plans of Archimica, and we clearly have staggered payment in TRM?

Come again. You asked management retention plan of Archimica?

Yes.

So Archimica is currently employed -- owned by a fund which we have bought over and we have directly taken it as a complete dealer system [indiscernible] and we don't see any challenges of any current retention there. There's good leadership there which will continue to work and grow the organization.

We have a next question from the line of Rohit Nagraj from Centrum Broking.

My question is we have been telling that on the pharma side, we have done a lot of trials in the R&D as well as pilot stage. So what is the commercialization schedule that we are looking at across these 3 geographies over the next maybe 1 to 3 years?

So currently, both these companies which we acquired, they are all running and they are producing and they are selling products in the market. And I think you are -- are you referring to research center, which we are building up a new?

So I understand that we have done pharma-related trials at our R&D and pilot and those products were supposed to be commercialized, but since we did not have any facility. This is the facilities which we will be using for commercializing these products. I was just asking from that perspective.

As you know, from the pharma strategy, we work on certain initiatives that in the non-GMP space. So these 2 are not related, to be very frank. This is then -- the CRO, CDMO [indiscernible], that's more on the intermedium chemistry-based capabilities.

We have our next question from the line of Vivek Rajamani from Morgan Stanley.

Congratulations for this acquisition. Sir, you earlier highlighted in the past that you've been looking for pharma assets that could complement your existing portfolio. So just wondering from these assets that you've acquired, are you looking to extract any kind of synergies with respect to the facilities that you have that could help in your own product development and our customer acquisition?

The pharma space is a bit different than the agri space. The only synergy that could be a potential, which would be late stages to look at value received from backward integration and non-GMP intermediates for the PI existing assets. The key complementary capabilities will be in the area of complex chemistry business processes, operational excellence and understanding global customer management. And those are the capabilities, which could be quickly leveraged to create integrated play and a differentiated value offer to our customers.

In the strategic front, there is one more area which we are also looking. Currently, the one company is working the pre-clinical and clinical side of it. They have been working in this space for the last 8 to 10 years. Now many of the programs have moved to the Phase II and Phase III parts. So now these all programs would complement us for the GMP asset which we have bought in the Europe, so that's the strategy which will happen.

We have our next question from the line of Rachit Ganatra from Max Life Insurance.

Sir, could you spell out the prime concentration for both of these companies for TRM as well as for Archimica?

So prime concentration, right now, both -- Archimica has more than 60 clients right now for the revenue of USD 40 million. And similarly, TRM has more than 10 clients where we are working with. So there is no as such any dependence on a particular client, but then the services by [indiscernible] are open. So we are in touch with many clients which we are doing this type of activity. Plus we are setting up a new full fledged business development capability within this organization to leverage further.

Okay. And then what will be the split of under patent products versus generic products for TRM and for Archimica?

So TRM is right now dealing with all the under patent products only. There are no generic products that in the TRM platform.

Okay. And for Archimica?

Archimica, currently, we are dealing with niche APIs. So majority of the APIs lost the patent time. Now they are all generic.

They are all generic. Okay. And then sir, what would be the sort of targets that you would have set for these companies, the kind of revenue potential that you see over the next few years? Could you spell out something on this one?

We have -- obviously, we are looking at the whole integrated business model in the process of [indiscernible]. Obviously, we look at the current growth rates. And obviously, the key challenge we are going to do for the next 3 years internally has actually built a strong platform for the rest of the growth going forward.

And sir, I guess this question was asked earlier also, but lastly, could you please spell out to what is the kind of CapEx or investment that you would look at for the pharma vertical for the next few years?

We look at about $10 million to $15 million CapEx for now. And obviously, as we get into these assets, and we'd see larger opportunities and we look at what we need to build. The CapEx will be optimized to work with the team, and that's what [indiscernible] in the next couple of quarters.

So $10 million to $15 million per year for the next few years, both TRM and Archimica combined.

Right.

Okay. And this will exclude the CapEx that you will do in India to build up the capacity for production?

No. This is all inclusive for all 3 set-ups, the R&D set-up, the TRM set-up and the Archimica set-up, all 3 put together, it will be kind of investment plan we have as of now. But as you can imagine, that as we get into these companies, assess the current capacities and utilization and also the pipelines of the molecules at our end and their end, then we will have a firmer plan on the CapEx. So fundamentally, the CapEx is going to 3. One is looking at capacity based on pipelines. We are just looking at business capability build-out. And the third investment will be going in asset quality of conditions.

[Operator Instructions] We have a next question from the line of Vishnu Kumar from Spark Capital.

Congrats for the acquisition. Part of my question was answered, but I wanted to understand the size of the pie in terms of opportunity that we are looking with these 2 businesses, and over a 3, 5 years, how much can we target out of that pie in these 2 acquisitions, if you could help us understand?

Vishnu, that is best answered by you. Visible side of the pie running several million dollars. A percentage of that pie, right now, it is too early for a company of this scale to actually answer the next 3 years. I think the pie is big enough for us to build aggressive plans. I think the side of the pie, I would say, more 10 years in the pharma play which is going to be more than $1 trillion industry in the future.

So this is a solid runway, we have built in right now. Solid runway we have built in, now the flight is about to take off now.

Understood. Also one question is that from a point where we were trying to look at assets which are very, very costly and now we have kind of bought at relatively substantially at very good pricing. Just to understand, is there anything -- there is a general question in the market that how are we able to get these at a much lower pricing just if you could help us understand on this?

Well, not to be fair -- to be fair. I mean, we look ,as you know, we have been evaluating. And that's the tip of the trade. We look at opportunities and actually we are looking at the capabilities to bring them together to create the value. That's the way I would take that for now.

Now these valuations are different perspectives, different ways of looking at it, and now there is also scalability, there is also investment for scalability on these assets. So all these aspects need to be looked into. We look at valuations with respect to large scale performance.

We have our next question from the line of Abhijit Akella from Kotak Securities.

Sir, I have few points. I will try to squeeze them into 1 question, if you permit. One is just for Therachem, is it possible to share with us the -- actually the preliminary numbers for FY '23 in terms of revenues and EBITDA? Second, why are there 2 entities within Therachem? What exactly is the business that Solis is involved into? I guess it doesn't really generate any revenues at this point in time? And the last part is just with regard to the financial aspects of the transaction. If you could help us with the breakdown between, say, the goodwill, fixed assets, working capital and also any debt that you might be acquiring as part of the transaction.

Thanks, Abhijit. So first of all, these '23 financials are still in preparation. So obviously, we cannot right now share with you. As far as -- and in any case, TRM closing is to happen. So you can imagine that these numbers, et cetera, will have to be done only after the closing. Your second question about the breakup. Obviously, in our stock exchange intimation, we have already mentioned the net worth of these targeted companies. So it is not really difficult for anyone to work out what is the goodwill part of this, okay? Obviously, the working capital part is one. But in case of TRM that is close to $5 million and rest is all goodwill and the customer contract value, that is what majorly there. In case of Archimica also, I mean we have very clearly articulated the -- we mentioned number of net worth in our press release, the stock exchange release. So the remaining part is all the goodwill.

Got it. Sir, that's helpful. Just one last clarification. The pharma industry in general has seen a very difficult FY '23 after a much better FY '22 and the aftermath of COVID. So is it possible that TRM might also have adjusted a little bit of a decline in sales in the preceding year?

So the product portfolio of TRM or Archimica are not COVID specific for COVID prone portfolio, but I will still ask Anil to elaborate more on that.

Right now, if you see this little bit data, there are more than 20,000 drugs which are in various pipeline of the development and out of that, majority of the candidates are in the pre-clinical Phase I, Phase II, Phase III space. So this market has got immense opportunity right now. And I think this is independent of this kind of scenario, what we are talking right on COVID or any other. So there is ample scope to continue. And I do believe this is something which is going to persist for years to come. So as such, we have not seen any sort of impact coming in because of the COVID in this pipeline.

We have a next question from the line of Saurabh Kapadia from Sundaram Mutual Funds.

TRM, if you look at after '22, there is a sharp jump in revenue. So was there any one-off? Or is it because of some new commercialization? And secondly, if you can talk about pipeline in long-term contracts for TRM?

So this particular objection, what you said is correct. One of the programs which got advanced in the various clinical space. And hence, the need for supply of the quantities are higher. And therefore, you have seen the spike going in the particular year. As such, there are many programs coming in and sometimes some programs get advanced, some programs get delayed. So it -- we are very hopeful with based on our understanding that this program will be continuing, and there are certain programs which are also going to add during the course of the year. So we are very hopeful on continuing the strength.

And any long-term contracts and your comment on pipeline of the products?