Rubicon Research Limited (RUBICON) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Rubicon Research Q1 FY '27 Earnings Conference Call hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Tushar Manudhane from Motilal Oswal Financial Services Limited. Thank you, and over to you,sir.

Thanks. On behalf of Motilal Oswal Financial Services, I welcome you all for Q1 FY '27 results earnings call at Rubicon Research Limited. From the management side, we have Mr. Parag Sancheti, Chief Executive Officer; Mr. Nitin Jajodia, Chief Financial Officer; and Mr. Sagar Oak, Senior VP, Corporate Development and Strategy. Over to you, sir, for opening comments.

Thanks, Par, for hosting us for this earnings call. And also thank you, everyone, for joining the quarter 1 FY '27 earnings call. I'll take you through the highlights of the financials. So we've again had a very strong quarter. This is the first quarter we are reporting since Arinna acquisition. The Arinna acquisition got closed in the month of April, and the revenue impact is roughly around INR 12 crores. There is no material impact on EBITDA. If you look at our Q1 revenue from operations came to INR 54 crores. EBITDA came out at INR 131 crores. PAT came out at around INR 86 crores. So if you just on a percentage growth, year-on-year revenue has grown by 51%, EBITDA has grown by 55% and PAT has grown by more than 100%. I'll request Nitin to take us through the detailed income statement and balance sheet.

Thanks, Parag, and good evening, everyone, for joining this call on the Slide #6. So all the numbers are in -- so our revenue from operation for the quarter was INR 5,343 million, a growth of 52% versus the same quarter last year. The profit was INR 3,543 million versus INR 2,440 million in the quarter 1 previous year, again, a strong growth of 46%. Our pre-R&D EBITDA was at INR 1,871 million, translating into 35% pre-R&D EBITDA margin versus 32.5% for the quarter 1 previous year. Our R&D expense for the quarter was INR 580 million, translating into a 10.9% R&D as a percentage of revenue versus INR 355 million in the quarter 1 previous year. Our operating EBITDA for the quarter was INR 1,291 million versus INR 791 million in the quarter 1 previous year, again, a strong growth of 63.2% and operating EBITDA margin was at 24.2% for the quarter 1 this year versus 2.4% previous year. During the quarter, we had a one-off item in other income that was in the form of insurance claim against our goods locked in transit. So after that onetime other income, PAT was at INR 848 million versus INR 423 million the previous year, a strong growth of 96%. Overall, a strong performance and EPS was at INR 58. Moving on to the next slide, Slide #7 on balance sheet. So as Parag mentioned, this balance sheet reflects Arena's consolidation effect as on 30th June '26. As on that day, our capital employed was INR 14,778 million. And it was after excluding cash and cash equivalent of INR 2,408 million. The net working capital for the quarter or as on 30th June '26 was 114 days versus 126 days as on 31st March '26. While there is an improvement in net working capital days, I think we should not read too much into it because it's also a function of the quarterly fluctuation. And we see working capital in the range of 125 to 130 days as we have guided earlier as well. ROCE for the quarter was strong 36%. And I would like to highlight one point that this ROCE of 36% was despite close to 1/4 of our capital employed being there in investments, which are either pre-revenue or which are yet to materially contribute to the revenue. So again, the point is a strong ROCE. Now moving on to the next slide on cash flow statement. Our operating cash flow before working capital change for the quarter was INR 1,390 million. Cash flow from -- net cash flow from operating activity was INR 285 million. In this quarter, the cash flow was impacted because of some delay in GST refunds. And these refunds are getting normalized, and we should see the impact of this in quarter 2 in terms of healthy cash flow for the quarter. In this quarter, the cash flow in investing activities was primarily driven by our acquisition of Arinna Life Sciences and some CapEx. So that's broadly on the cash flow statement. And with this, I'll hand over to Parag, and he'll take us through the business performance for the quarter.

Thanks, Nitin. So just going -- touching on some of the key highlights for the quarterly performance. So we'll start with the revenue growth. As I mentioned, we had a strong, again, revenue growth. And as we go ahead also, we do see a strong traction for revenue. If you look at the growth has been broad-based again as line is, top 5 products contributed 49% of the revenue in the quarter 1 and top 10 products contributed 55% of our revenue in quarter 1. Again, this is broadly in line with last pricing continues to remain stable because of our portfolio, which is focused on specialty and differentiated products. As mentioned earlier, we continue to see very strong visibility for revenue in coming quarters. Our USD revenues of Q1 was $55 million, which was up 22% year-on-year from $42 million. There's a slight sequential drop owing to the tactical measures we have taken, which we had spoken in the earlier quarters with respect to gross margins, and I'll explain that in detail when we go to gross margins. But Q2 FY '27 is tracking strong for sequential US revenue growth. Coming to cash flow. The cash flow from 285 million. This along with which this was impacted by certain GST refunds which were stuck. But in this quarter, that should normalize. Coming to the approvals for the products, we received 2 approvals in this quarter. The commercialization rate remains strong at 88%. Some of these products need to be commercialized in the coming 2 quarters. And also would like to highlight specialty portfolio contribution to gross profit for the quarter is 36%. Specialty focus underpinned by a very, very robust pipeline is expected to keep on growing as we have mentioned in our earlier analyst calls. So coming to the next slide on gross margins and EBITDA. I wanted to highlight a few things. Again, this is in line with the commentary what we have given earlier. Our gross margin increased sequentially by around 140 bps to 67.7%. This is despite we have had sequential increase in key input costs, freight cost due to the geopolitical conditions. In Q3 FY '26 update, we had flagged that stronger-than-anticipated revenue traction, coupled with our own constraint in manufacturing was leading to a larger reliance on contract manufacturing, which was specializing our GM and the company was in looking to do some tactical measures to ensure that we are able to meet the demand. But at the same time, we are also focused on the gross. So post that, I think the company over the last few quarters have taken those tactical measures. And what we have done is we have given up relatively lower-margin businesses, which has led to a marginal sequential drop in the U.S. revenues, but it has led to a decrease in the gross margin. These tactical measures allows us to prepare better with mix of our own versus outsourced manufacturing reliance in light of the strong demand generation or revenue traction expected over the next coming quarters. Coming to EBITDA. The operating EBITDA rose to 74.2% compared to 23.1% in the sequential quarter, which is again despite sharp increase in our import and freight costs due to the prevailing geopolitical conditions plus employee appraisals, which have been concluded in the remaining 3 quarters, I also want to call out in FY '27, we would some specific costs which could impact EBITDA margins such as ESOP cost, which is arising from the new ESOP stream, Arena costs which are related to growth for Arinna and the pre-revenue cost for the new facility which we acquired in New Jersey and [indiscernible]. But despite all these cost impacts, we are slightly up guiding around [indiscernible] Earlier, our guidance was 22% to 23% on EBITDA. But now we are comfortable to revise this upwards for the whole of FY '27 to 23%. We can move to the next slide. Sagar, if you want to take over [indiscernible]

Thank you. Thank you, Parag. Good evening, everyone. So I'm on Slide 11 of our presentation, and I will take you through the updates with respect to our manufacturing facilities. Starting off with Pithampur. So in early July, we had informed that the FDA conducted an unannounced inspection 483 was issued with 2 observations, which we had said we were confident of concluding the evaluation in a timely way. The observations were procedural. We are happy to report that we filed an appropriate response and also received FDA approval on a regulatory filing after the inspection was concluded. So we pretty much delivered in line with what we had said in early July. So we are on track to ramp up commercial operations at this facility from first quarter of calendar year 2027 as we had previously guided. The second update is relating to our recent announcement of the acquisition of a manufacturing site in New Jersey, U.S.A. So we acquired this facility, which is in East Brunswick via a court supervised bankruptcy process. The total purchase price was $2.9 million. Now the site has -- in terms of size and in terms of footprint, it's similar to our manufacturing site at Satara in Maharashtra, but we believe it adds a completely different dimension to our supply chain with on-site or onshore manufacturing presence in the U.S. This facility has over a decade-long track record with U.S. FDA. And in a way, I think the timing was quite good that FDA carried out an inspection in May of 2026, roughly a month before we closed our acquisition. So it gives us a good and I guess, an authentic and official assessment or evaluation or due diligence almost, if you will. I can also tell you that as of today, the updated status on the FDA's for the May 2026 inspection is a VAI or voluntary action classification. So this is again in line with our commentary when we announced the acquisition. You may recall that at that point in time, the FDA had issued a 483 with 6 observations, which we believe were largely procedural. We also announced that they had been responded to within the prescribed side. And I think now the current outcome sort of best testimony to the fact that the inspection has been successfully concluded. This facility offers us a number of benefits. It is located adjacent to our distribution operations that sit within our subsidiary, AMRX 3PL. If you actually see a slide later on in the deck showed that they actually share a wall. It's also not very far away from our U.S. headquarters, which is also in New Jersey. So we believe the facility from an operational efficiency standpoint brings in a fair amount of synergy for us. Our intent is to focus on specialty and high-value products from this site as well as demand from certain customers such as U.S. government departments where having an on-site for onshore manufacturing presence is [indiscernible] we expect commercialization to start in calendar year 2027 once we have -- once we are done with implementing our quality management systems at this site.

Yes. And, I would just like to add also, since we're talking about facilities, quality culture inspections, we just -- I just want to emphasize the way we have built this over the last few years with inorganic acquisitions of capabilities, like it be the facility of [indiscernible] from Cipla or this facility that we bought from [indiscernible]. I think I'm very happy the way team has executed the right culture before these sites have been offered to [indiscernible] and with the first inspection, we have been able to resolve the issues or the points which the competitors have highlighted. So we continue as we build the facility in the U.S. I think the important part we really focus on is building the right culture and the right systems that allow us to -- once we commercialize these sites, we know that we are going in the right direction from a quality and compliance perspective.

Absolutely, Parag. Fully agree. I'll move now to the next slide, which is Slide #12, relating to R&D and the impact on -- for the quarter, expenses were 10.9% of our consolidated operating revenue. As we have said in our previous calls, R&D spend is sort of the lifeline or the lifeblood of our business, the lead indicator for future revenue. And we measure R&D productivity by comparing the incremental revenue to lagging total R&D spend, which you can see on that slide. Now just to quickly recap what is there on the slide, if you consider a typical development time line and FDA approval time line, the products that you begin working on today will come to market about 2 years [indiscernible] when you consider that along with our measured approach of building market share, a product that we began development in fiscal year '20 would typically register meaningfully in revenue by fiscal year 2024. So we look at incremental revenue over a 3-year time frame, and we compare it to the 9 quarters total R&D spend on a lag basis. So in this case, comparing '21 with '24, we are taking 2 full years of R&D spend, which is fiscal and adding in Q1 of fiscal '22 to account for cases where development may have been largely completed, but filing would have been done in the first quarter of the next year. So by comparing that INR 165 crores of R&D spend with roughly INR 539 crores, INR 540 crores of incremental revenue, it's the 3.3x multiple on R&D productivity that we've pointed out. We've shown this analysis on a rolling 3 years basis, '22 versus '25 versus '22, '26 versus '23, '27 versus '24. Just want to call out here that the '24 and '27 analysis is based on an arithmetic annualization of the quarter 1 revenue. Simplistically, we've -- for the purposes of this analysis, we've multiplied Q1 revenue by [indiscernible] and as you can see, our current R&D productivity based on this Q1 FY '27 is about 5.5x. Now this is on revenue that does not include Arinna Life Sciences. So we expect that the multiple will expand during the course of the year as the revenue ramps up. And we already spoke about how Q1 revenue compares year-on-year with Q1 of last year. Coming then to our guidance. We had guided for INR 5 billion or INR 500 crores of R&D spend over 9 quarters of fiscal '26, '27 and Q1 of fiscal year '28. We have completed spend of about INR 251 crores out of INR 500 crores in 5 quarters. The current rate of spending is about INR 60 crores, INR 600 million per quarter. So we believe we are on track to comfortably meet the INR 500 crore spend guidance by Q1 of next year. And also just want to call out in our unlisted space, we invested significantly in R&D. So fiscal year '22 relative to revenue was just under 40%, 39.5% R&D spend. Since that has normalized to what is still an industry-leading 10% to 11%, which as we have previously stated, we will continue to FY '27 is the last year of what you see on screen as on a cumulative 3-year 9-quarter basis, reducing R&D spend from FY '28, you should see the impact of the increasing absolute spend as well, and I'll just clarify what I mean by that. So if you look at 9 quarters R&D spend fiscal year '24 plus '25 and quarter 1 of '26, these are all, of course, actual numbers. That is a total of INR 278 crores. Moving forward 1 year, '25 plus '26 and Q1 of '27, again, actuals, INR 380 crores and then there is the period for which we have guided INR 500 crores, which is fiscal year '26, '27 and Q1 of fiscal year '28, which is our current guidance. I think at this point, it's also useful to highlight our track record of market execution because along with R&D, the second part to this slide is revenue. And if you look at how we have executed in the past on revenue generation, I'll ask you to see Slide #22 later on in this deck. And this actually shows for the 6 products that we had showcased as part of the IPO process, we subject the data added on fiscal year '26 and I think what you can see here is the ranked #1 in all of these products despite the competitive scenario not having changed much. In fact, there is one product where market share is a tad down, ranking has gone up. Another where market share is marginally down, but the ranking has been maintained. And the remaining 4 products where ranking as well as market share have both gone up. Our market execution for us is a moat, and I think should be seen hand-in-hand along with product selection as well as R&D execution. With that, I'll hand it back to Parag and we would go to Slide #13.

Parag is joining this call from U.S. So there may be some...

Sorry for this. I think there was some technical -- so coming to Slide #13, and I think this is a very important slide and a very important organizational update. As Rubicon vision to grow and become a global pharmaceutical company, we've been -- as you've seen that we've been working in various areas. And that also with a growing organization, it was important also to create management bandwidth, succession planning and everything what is required to ensure that for the next phase of growth [indiscernible] I'm very happy to state that Nitin, who is currently the CFO, is moving on to the Chief Commercial Officer role. And Rohit, who right now as a CFO designate, as Nitin transitions his CFO responsibilities to Rohit, Rohit would move into the CFO role. And this is why I wanted to lie this is an important update because as the company is getting into newer areas, it's important the management bandwidth also keeps in the same. We are focusing on building that management bandwidth within our company, also growing our own folks leadership, also looking at the right talent from outside to ensure that we have the -- we have the right people as we look at expanding our business. Nitin joined us in 2021. He immensely contributed in building the business, whether it be supply chain, IT, business transformation, organizational development. Nitin has played extremely critical role in building all these functions from the scale we have grown at least we were at -- when Nitin joined, we were roughly around like INR 400 crores revenue. Today, last year, we closed at INR 1,700 crores revenue. So he's been an integral part of the journey and a pillar of the management team. So this is after 5 years, I think it was a fortune time that we use Nitin's focus on business functions where we are seeing tremendous amount of opportunities to grow our business. So completely appreciate Nitin's efforts as a CFO and also welcome Rohit to the Rubicon family.

[Operator Instructions] Your first question comes from the line of [indiscernible]

Congrats on the good set of numbers. So my first question is about the product contribution. So currently top 10 products contribute around 5% of the revenue. So if you can give some color in terms of therapeutic area from which these products contribute and also which are the products are maturing or still growing? And also going ahead, how many products we can expect the products to commercial with relatively large total addressable market?

Do you want to take that?

Growth maturity, just to tell you, we continue to see growth across. There are products which we launched a couple of years back, continues to grow. If you look at the Slide 22, which Sagar talked about, these are the products which we had launched 8, 10 years back. Even in those products, we continue to see strong growth, strong demand. So as we mentioned earlier that our portfolio is pretty broad-based. If you look at the concentration of top 5, top 10 products over the year have continued to come down. Even if you look at last few quarters, it's range bound, okay? So that's the point that it's a fairly broad-based portfolio [indiscernible]

Sir, my second question is about the artificial intelligence. So artificial intelligence, our efficiency in terms of product development cycle and R&D? And in Rubicon perspective, are we currently leveraging AI and how AI improve our efficiency and all business processes, especially in terms of [indiscernible]

So I would put AI automation, other process technology, I would say. And we adopt technology wherever and we are very actively adopting technology wherever we see that technology is valued in the work we are doing in terms of increasing efficiency, increasing compliance, reducing errors. So that's one of our guiding principles which are there, and we continue to invest and find use cases of doing it in an appropriate way. I do not want to specifically comment on AI because AI is a very evolving area. We are definitely looking at it. But in pharmaceutical, we -- regulatory is a very important aspect. So whenever they adopt we have to give regulators the confidence that whatever we are using has enough checks and balances which allow the technologies giving consistent, predictable and robust results. So we are definitely adopting it in the right processes. But again, it's a very, very large deal, and we don't want to specifically comment on the AI part of it.

Okay, sir. And lastly, on the product pipeline, how many are in the Phase I, Phase II and Phase III in the development cycle? And how many molecules are commercial as of now?

I think we do not comment specifically on Phase I, Phase II, Phase III. But in terms of -- I think there is a slide which is there. I think Sagar can point the number of products which are approved. And we have also mentioned our commercialization rate is strong at around 88% and if you look at the DRHP at that point of time when we had filed the DRHP, we had mentioned 60 products were at advanced stages of development, which were qualified by the appropriate consultants after looking at the data.

That number was 63 at the time of filing RHP.

So just to add to that, Akshay, we usually do not comment on product level developments and pipeline is something that we prefer not to go into too much detail because it's -- but if you look at Slide 28 of the current quarter's earnings presentation, it provides an overview of how the portfolio has evolved with time. And in terms of how we expect portfolio to impact business, that's what we talk about as we went through Slide #12 on R&D productivity. But at this point, we would not be commenting further on that.

The next question comes from the line of [indiscernible]

[indiscernible] questions from my end. One, the rate of approvals seems to be marginally slowing, while revenue growth obviously continues at very healthy pace. Is this a bigger strategy now? Or how should one think of molecules [indiscernible] that is question one. Question 2 is in light of the acquisition in New Jersey, how should one look at the manufacturing footprint breakout between U.S. and India? And in that context, how should one think of gross margins? And third one was on the churn in your specialty portfolio where you classify products only being specialty comp. So what's the churn there? And if you could give us some idea on how many products you have currently that you would classify as capacity, you mentioned that there is headroom for expansion. So if you could clarify on what the capacity is what do you mean by headroom for expansion? Is there more land available? How should one think exist?

So I think the first question it's more -- again, this is as per the plan we have or what we were expecting in our -- as we are expecting approval. And more importantly, we are very, very conservative [indiscernible], when we look at getting revenue forecast from that product. So I think right now, I wouldn't comment the approvals have slowed down. Also, I think you alluded that we are going to take approvals, but I think you are referring to request approvals and big numbers. I don't think that's the right way of putting it. I think we still follow a very clear portfolio strategy. So I think the numbers of how many are coming, what are coming, I think it just indicated, but I think I can assure you that we are on track for the approvals which we have on which forecast the plan is on. Nitin, you want to [indiscernible]

Siddharth, if I understood correct, your question around gross margin, can you please repeat once?

Sure. In context of the U.S. acquisition of the manufacturing facility, how do you see the manufacturing footprint playing out within U.S. and India? And how should one think of gross margin in context of the [indiscernible] India and U.S.?

If you look at the acquisition of U.S. facility, okay, that is a fairly strategic move for us because it gives us lots of revenues, it gives us ability to enter into government -- it gives us ability to be closer to our customer. It gives us flexibility to manufacture certain strategic product in United States. So also, we mentioned that it also gives us advantage in terms of being a next door facility to our warehouse for the warehouse in the United States. So from that perspective, this is a valued addition. And we don't see margin, I would say, getting diluted because of this, okay? We definitely see that it will be -- in the overall scheme of things, should be margin accretive only.

To add, Nitin, I would just -- so Siddharth, I think what Nitin is just summarizing in a simple way, it's a very strategic move, then I think -- and when we look at financials, obviously, from a strategic perspective, an extremely important move we have done, we obviously don't see impact on gross margins or again, our forecasting, we build some of these things into it. And what we have said also that we are going to focus on value-added differentiated products, which will create business for the government. Also, this will create risk diversification for us in terms of our customers getting some of these very important products from 2 sites, one in India, one in the U.S. and mitigating any risk in terms of supply chain. So I think strategic impact, which customers can view very positively and can give us some, I would say, some premium in the market when we do something like that.

Siddharth, I think the other question you had was around composition of specialty pipeline. So I think it's obviously sensitive from a competitive standpoint. So we've tried to strike a balance of providing thoughtful disclosures to help investors track in the long run without jeopardizing sort of the -- so we share on an ongoing basis what is the share of gross profit of the specialty portfolio. Once a year, we also talk about number of specialty products that we have. And I think we want to be consistent with our disclosures in that sense. So I think at this time, we wouldn't be sort of expanding set of disclosures around specialty.

Sure. And the last one was on the clarification on the headroom on the slide of manufacturing facilities, if you could share?

So headroom for expansion, you are referring to at Pithampur?

Give me a second. I will tell you the slide number I'm referring to [indiscernible] all the 4 manufacturing facilities. This is Slide #30.

Yes, absolutely. So if you look at the site in Pithampur, which is a pretty large nearly 30-acre area site, of which today we are using barely 5, 6 acres. So we have significant room that we can expand that -- and just for sort of order of magnitude, I mean, that amount of space is, Nitin, correct me if I'm wrong, greater than the footprint of all of our sites put together.

In addition, I think Nitin in the slide as mentioned, we have a facility in CS, which is the dosage forms, which is kind of modular ready, which is there. So again, there is headwind to grow this business from a manufacturing standpoint. We have different areas we are having ability to grow facilities.

[indiscernible]

The next question comes from the line of [indiscernible]

[indiscernible]