Sai Life Sciences Limited (SAILIFE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sai Life Sciences Limited Q2 FY '26 Earnings Conference Call. [Operator Instructions]. I now hand the conference over to Mr. Diwakar Pingle. Thank you and over to you, sir.

Thank you so much. Good evening, good morning to all the participants of the call, depending on the geography you're logged in from. Before we proceed to the call, let me remind you that this discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties, and other factors. It must be viewed in conjunction with a business risk that could cause future results performance or achievements to differ significantly from what is expressed or implied by such forward-looking statements. Please note that we have mailed the results and the same are available on our company's website. In case you don't have it, please write to us and we'll be happy to send the same over to you. To take us through the results and answer your questions today, we have the top management of Sai Life Sciences Limited, represented by Mr. Krishnam Kanumuri, Managing Director and Chief Executive Officer, and Mr. Siva Chittor, Whole-Time Director and Chief Financial Officer. We will start the call with prepared remarks on the quarter gone past and then conduct a Q&A session. With that said, I'll hand over the call to Krishnam. Over to you, Krishnam.

Thank you. Good evening, everyone. Thank you for joining us today. I am pleased to share that Sai Life Sciences has delivered another strong quarter, continuing the positive momentum across the discovery, development, and manufacturing businesses. This performance reflects the trust of our global innovator clients, the strength of our scientific teams, and our focus on consistent execution. At Sai, we have been on a journey to evolve into a truly integrated, innovator-led global CRDMO. Our goal is to be not just a reliable execution partner, but a strategic collaborator for our clients, one that can enable faster, safer, and more sustainable development of new medicines. Our growth strategy continues to rest on three core pillars, scientific depth, technological differentiation, and global scale. The macro environment. The overriding macroeconomic themes in recent times that have consumed our mind space in the industry have been China Plus One and slowdown in biotech funding. I want to address both of these directly. Our experience based on multiple conversations that we have been having with pharma innovators is that the companies are definitely seeking to rebalance their global supply chain. Major events over the last few years have uncovered the risks associated with concentration in one single geography. And so the broader trend towards supply chain rebalancing is already underway. We believe that the new outsourcing business will be more geographically balanced, that ongoing geopolitical ups and downs are not likely to impact the fundamental trend. On Biotech funding, there is a perceived slowdown, which is having an impact on the overall innovation pipeline flowing through the existing and new biotech companies. I'm pleased to say that we've been able to offset the impact of the biotech slowdown with pharma clients and deliver industry leading growth. Large pharma innovators are still in the early stages of the India supply chain build-out, and this is a process expected to be a multi-year journey ahead. Biotech funding, too, has witnessed multiple ups and downs and will return sooner or later, adding to the overall upside. As a company, Sai Life Sciences has a strong presence in both customer segments, while offering multiple entry points to onboard client programs. This, combined with our quality of science, regulatory record, and above all, a stable, globally diverse management team makes us very well-positioned to ride this growth. Our conversations with companies are more about how we can be strategic partners, covering a bouquet of services over the medium and long-term. The case in point has been the extended number of early-stage development projects that we've secured in recent months, with dedicated FTE contracts with multiple pharma companies that will naturally scale up at Sai once the development stage is complete. This is bound to develop a robust pipeline of late-stage and commercial projects over the long term. During the quarter, we made meaningful progress in deepening our capabilities in new technology and modalities, reflecting our readiness to support the next wave of complex therapeutics. In peptides, we are following the molecule by extending our work with large pharma partners from discovery into development and scale-up capability. In flow chemistry, we have successfully demonstrated commercial scale capability at our Bidar facility, which ensures faster, safer, and more sustainable processes. In the ADC area, we have commenced work with a large pharma on a long-term collaboration involving linker chemistry. We have successfully completed bioconjugation work at the discovery stage for another large pharma client. We are in the process of building OEB-6 labs to strengthen our capabilities in both Discovery and CMC. We are validating the phosphoramidite process for a commercial oligonucleotide molecule, reflecting our steady progress in supporting more complex emerging modalities. Beyond scientific advancement, we continue to invest in building capacity and infrastructure to meet rising client demand. The Phase 2 expansion of our Vivarium at Hyderabad R&D Center is now complete, doubling our footprint and significantly enhancing our preclinical assay capabilities. This investment strengthens our ability to deliver integrated Discovery programs and accelerate early development for global clients. Alongside our growth, we continue to uphold the highest standards of quality and compliance. For the past 12 months, Sai has successfully completed 35 customer audits and 3 regulatory audits across its manufacturing and R&D facilities, with zero data integrity deviations and zero critical observations. This track record reflects a strong operational discipline and commitment to global regulatory excellence, a core reason clients continue to trust Sai with their most advanced programs. We are also expanding into adjacent growth areas. The launch of our dedicated Veterinary API facility marks our strategic entry into the animal health segment, building on a longstanding foundation of chemistry and manufacturing. We have already partnered with 3 of the top 5 global animal health companies, and we see this as just the beginning of a long-term growth opportunity where Sai can play a meaningful role in shaping the next phase of innovation in animal health. Our recent collaboration in the U.K. further enhances Sai's ability to serve clients across the development value chain, from API development to drug products, manufacturing, and clinical trials. This reflects a broader commitment to provide integrated end-to-end solutions on a global scale. Each of these initiatives brings us closer to our long-term vision of being among the most trusted and science-led global CRDMOs. We are scaling our operations, strengthening our technology base, and expanding our reach to align with the evolving needs of innovators worldwide. We also continue to make progress in embedding sustainable practices across our operations, ensuring that growth remains responsible and environmentally sustainable. In summary, Q2 FY '26 was a strong and strategically significant quarter for Sai Life Sciences. We are executing well today while continuing to invest in science, infrastructure and partnerships that will drive long-term profitable growth. With that, I would like to hand over the call to Mr. Siva Chittor, our CFO, who will provide an update on the financial performance.

Thanks, Krishnam, and good evening, everyone. We continue to build on our momentum that we've built over the last couple of quarters. We've delivered solid growth across our business, keeping Sai Life Sciences firmly on track towards its long-term aspiration. Total revenue for H1 fiscal '26 stood at INR 1,034 crores, a 53% increase over INR 675 crores in the corresponding H1 FY '25, driven by healthy growth across both the CRO and the CDMO business. The CDMO business contributed 64% of the total revenue, recording INR 667 crores. This is up 72% year-on-year. This is supported by a continuous scale-up of late-stage and commercial programs. The CRO business contributed 36% of the total revenue. Revenues for H1 FY '26 were INR 367 crores, up 28% year-on-year, reflecting sustained engagement with both large pharma and biotech firms. EBITDA for the period was INR 281 crores, compared to INR 140 crores in H1 FY '25. This represents a 101% increase. EBITDA margin improved by 650 bps, 27%, driven by better utilization, operating leverage, and continued cost discipline. PAT for the period, stood at INR 144 crores. We incurred a CapEx of around INR 248 crores for the first half, against a plan of INR 700 crores for the entire fiscal '26. This expenditure was primarily focused on expanding our R&D infrastructure, strengthening process development capabilities, and advancing investments in new modalities and technologies such as peptides, ADCs, and oligonucleotides. Looking ahead, our capacity expansion plans remain on track. We are currently in the process of scaling up our total installed capacity from approximately 700 KL to 1150 KL by the end of FY '27, which will further enhance our ability to serve growing client needs across clinical and commercial manufacturing. Our CapEx strategy continues to focus on building scalable infrastructure and technology depth, not just for current programs, but also to stay ahead of future scientific and manufacturing needs. We will remain disciplined in our capital allocation and will balance growth investments with profitability and returns. The focus going forward will be on improving asset productivity, optimizing working capital, and continuing to strengthen our margin profile. We are working with global consulting firms in terms of future-proofing some of our productivity gains and also making sure that our cost structure remains in balance. In summary, it has been a strong quarter with consistent performance and steady progress on our long-term priorities. We are confident that our investments in capability, capacity, and technology will continue to position Sai Life Sciences for sustainable and profitable growth. With this, we will open the floor for questions.

[Operator Instructions] The first question is from the line of Binay Singh from Morgan Stanley.

My first question is on the gross margin. We have seen gross margins expanding despite the share of discovery coming down. So could you share a little bit about factors that led to gross margin expansion, and the outlook on the same?

See, there is an increase in gross margin on account of operational efficiency that we gained on certain commercial products between the period. That is the reason for the expansion in the gross margin. We are not giving a specific guidance on where the gross margins are, but what we have given guidance is the 28% to 30% EBITDA (sic) [ EBITDA margins ], and we continue to remain focused on that.

So there is no one-off, right? So the understanding remains that discovery has higher gross margins, so there is nothing, no one-off sitting over here on the CMC side.

There are no one-offs in the gross margin side, that is correct.

And then secondly, just looking at the other expenses, we have seen a pretty sharp increase, almost 60% on a Y-o-Y basis. Could you talk a little bit about that also? What drove that?

Yes. Broadly, I think if I look at the Q2 versus the Q2, I think we had around 14% or so in Q2 of FY '25, probably around 16% or so in FY '26. I think if I break it into actual dollar numbers, there is probably 50% plus of this number is primarily driven by dollar increase and rise in operation. What we have done is, part of it, I mentioned this in my speech earlier, we are working with the top consulting firms. They kind of work on future-proofing us and benchmarking ourselves as global CDMO, both in terms of productivity and cost, and working on certain tech-related benchmarking. So we have incurred certain costs, which I would call one-offs, because it is a consulting firm piece that is included as part of the cost.

Okay. Lastly, just I missed the opening remarks. You said something about building pipeline. Because when I look at the presentation, the commercial and Phase 3 looks unchanged versus last quarter. So that is something more you are expecting in the future quarter. Was that the comment that you made in the start, opening?

I'm sorry, Binay, the line was not very clear. Can you repeat one more time?

In the opening remarks, I think you talked something about building pipeline of molecules. So just wanted to see if there's any update? Because as per presentation, the data is largely the same between quarter 1 and quarter 2.

No, it is true. I think there are a few that would get to the late phase. It has happened slightly at the end of the quarter, which is why the quarter number is also not mentioned. We also do not update this data on a quarter basis, but there have been some additions to the late-stage pipeline.

Okay. Any number you would broadly add to that?

There are three products that have moved to the late-stage pipeline.

The next question is from the line of Amey from JM Financial.

Yes. Congrats to the management for good numbers. So the first question I have is on the first half performance. The performance is staggering in terms of growth. The second half is also likely to be good, looking at the exports. In light of this, how should we see the next year for commercial projects or CDMO? Do we have some visibility for next year, which can help us lead this performance?

Amey, good question. I think without getting into a specific guidance with respect to numbers, we feel good about the business. Additionally, the second half has been always, from a Sai's historical perspective, has been better than the first half. From a pipeline and the next year, based on what we are seeing, we see trends looking very favorable without getting into a specific number, but we continue to remain confident of meeting the 15%, 20% revenue growth over a 3 to 5 year period. We continue to believe that's an achievable number that we have put out.

Sure, got it. And on the CRO side, we are engaging with several partners, but the biotech funding still remains volatile. It's not showing any direction. In light of this, how much growth visibility -- or conservatively, what we can guide for the CRO for our business?

So I think Krishnam addressed this in his part of the speech. One of the things that has helped us -- there are two factors that have helped us grow the CRO business if you look at the last 3 years or so. Against most indications, our revenues have continued to grow on the CRO business. And we attribute this to two factors. One is, I think, the ability to deliver on integrated programs, which is something that we've been able to achieve along with the presence in the U.S. of a biology center. The second one is our pharma presence over the last 4, 5 years has significantly increased. From a very negligible number in pharma, we today have a significant uptick in pharma. So whatever impact a potential biotech slowdown would have had has been more than compensated by increase in pharma clients and revenue. That's really what Krishnam also covered as part of his speech.

Sure. Just last one if I can squeeze in. You have mentioned on the ADC, on the presentation, if you can elaborate on that more, as well as the oligonucleotides, if any project wins if we have during the quarter?

So on the oligonucleotides, I think we've said this in the past, we've been working on the technology for a fairly long time. At this point in time, we are working on validating a commercial product for a large pharma. The validation, as we have mentioned, is in process and will probably take us 15 to 18 months before it becomes commercial with the potential of another product that potentially is in Phase 3. That's broadly what our oligo pipeline looks like. As far as ADC is concerned, most of our work that we're doing today, we have a collaboration with large pharma where we're working on the linker chemistry, and we've also done some work on bioconjugation at the discovery. We've done some linkers and stuff for clinical manufacturing, but that's an area that we said Krishnam mentioned last time that we are evaluating very seriously. And once we have some more data, we will come back and make an announcement.

I just want to add a little context to this whole ADC and oligonucleotides. There's a lot of confusion in the market. Everybody says they're experts in ADC and bioconjugation, but the actual fact of the matter is that most large pharma companies are building their custom oligo platforms and custom ADC platforms and we're involved with these companies in terms of the next generation modalities and technologies coming in. So we are very close to the pharma development pipeline just given the collaboration we have. We're not coming in and saying, we're an oligo company, we have these products, so we're making a payload. We actually are building the pipeline where the companies are evolving. So we are actually working with our customers to grow the pipeline ground up, rather than saying I'm providing you a piece of the puzzle. Our whole strategy is to be a much bigger piece of the overall pie for our customers than just being a product service provider where a lot of other companies are focusing on at this point.

So does it mean that we are building a portfolio for linkers, et cetera, where we can provide services through that platform to the innovators?

We are working with customers on what their proprietary linkers are. And most companies are building their proprietary linkers, so we are involved in what is going to their clinic in the next generation linkers than what we see today. So we're involved in working with proprietary linkers. We will not have a product by ourselves. As a rule, Sai will never have a standalone product by itself. We will only work with our customers on their custom projects. That's our specific strategy, how we operate. We are not a product company, we are a services and strategic partners.

[Operator Instructions] The next question is from the line of Sajal Kapoor from Antifragile Thinking.

Congratulations for sustaining a very strong execution in an uncertain environment. I have two questions. One, how does the organization maintain empathy and ethical behavior under high performance pressure, especially in process R&D and scale-up engineering?

That is the fundamental of the company. Our company is based on a foundation of trust and customers. So that's the ethical value we've built for the last 20 years. Our basic premise of the company is that when you do the foundation and basics right, then you are a successful company. And that's what customers value in us. We take a lot of pride in terms of our integrity as a company and that is non-negotiable for us.

That's probably the most amount of time we spend with our employees on. And that's the training that somebody will need when they join us.

And you have to understand that our relationships are 10, 15 years old. People don't come to this relationship unless there is implicit trust of every interaction they have with us, be it somebody in the plant, somebody in the lab, or be the management. That is the reason why we have a strong relationship with our customers.

That's very reassuring. And the second question is, how does management determine the optimal degree of spare capacity that balances near-term utilization efficiency with kind of long-term flexibility for capturing large and potentially high-value opportunities?

Generally, 60%, 65% is considered reasonably full if you are working on a CDMO environment and you are talking about the next plant in a brownfield setup. Probably a little earlier if it's a greenfield setup. That's the general sense and a benchmark that most companies tend to follow. That does not sacrifice operational efficiency while taking care and making sure that we're not losing efficiency. That's the broad thought process.

I think there's a different way of looking at it. There's one approach, say, I'm going to build a large capacity, and guess what, suddenly there's immediate need for a large capacity product. I'm set for that. We don't build for that once-in-a-lifetime opportunity. We build more for a question of higher certainty of filling the pipeline rather than the blockbuster to come in. Yes, sometimes it feels bad when you lose the blockbuster. But for us, continuous supply and the progression of pipeline is more important than building a capacity for the few blockbusters that might happen. So you have to pick where you fit in that market, so to speak. So we're positioned differently than other companies you're talking to in this space.

Wonderful. Can I ask one more question, if I've got time?

Sure.

So the number of AI-discovered molecules entering early human trials, i.e., Phase I, is increasing quite significantly, so upwards of 60% growth annually basis some reports. And that's all AI discovered, kind of. At this Phase I, success rate is materially higher, 80% to 90% compared to the historical averages of anywhere from 40% to 65% for Phase I for traditionally/manually-discovered drugs. So this implies that AI is not only generating higher volume, i.e., more candidates, but AI is also helping, and that's early data, but it suggests that these candidates may be of higher quality, particularly regarding safety and early-stage progression. So AI is not just increasing the volume of molecules entering Phase I, but it's also ensuring that the better quality, fitter molecules enter Phase I. So the key question is, does this not suggest that there is -- or there will be, at some point, a critical juncture where the need for clinical development capacity, including the physical infrastructure and technical staff will probably outpace the available and upcoming capacity? Can that scenario emerge, maybe not immediately, but 2 to 3 years out, because AI will get better?

Unfortunately, I think at this point, we're way too early to make that determination. If you go back and research the data on AI molecules, the majority of them have failed miserably in the clinic. All the AI companies have actually saw the stock price drop significantly. We see AI as a tool, which is similar to what you have in terms of computational chemistry, in terms of high-throughput expectations, et cetera. AI probably will enhance the quality of molecules coming in. I don't think that fundamentally changes the volume of pipelines in the immediate future. So I don't think there's a material impact yet in terms of pipeline of later-stage molecules yet which have made an impact in AI. They might happen down the road, but it's very, very unlikely it's ever going to pace the capacity you have in developmental clinical trials. That's a long shot at this point.

The next question is from the line of Madhav from FIL.

On the pipeline, I just wanted to understand that over the next, say, 18 to 24 months, how many of our sort of Phase 3 projects have a clinical readout lined up? If you could give some color there, that would be helpful.

Madhav, we don't have that data, because a lot of things change in that. So we don't track that data as much. But there are at least a couple of them that are expected to kind of show up. I don't have an exact data that I can share with you right now.

Okay. Understood. Any visibility into our CapEx for FY '27? This year, obviously, we are investing a lot, almost INR 700 crores. Is there any buildup into next year as well?

We will come back and provide that guidance. We're working through a few things at this time, but we will come back and provide that guidance.

Got it. All right. And just one more question. On the other expenses bit, I think you have clarified to a previous question that -- I mean, the number went up a fair bit year-over-year, almost 60%. You said there was some consulting fees which is included as part of this. Could you clarify how much of that is that kind of fees sitting in the P&L?

So the way that number is -- close to around double-digit crores is where that number is.

Just in one quarter, is it?

Yes.

Okay. So it's a substantial number then. I mean, it's a meaningful number for us.