Shilpa Medicare Limited (530549) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Shilpa Medicare Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Monish Shah from Shilpa Medicare. Thank you, and over to you, Mr. Monish.

Yes. Thank you, Virat, and a very warm welcome to everyone on our first quarter FY '27 results call. Today from the management, we have with us Mr. Keshav Bhutada, Executive Director and CEO of Shilpa Pharma Life Science; and Mr. Alpesh Dalal, our CFO. The financial results and the presentations are uploaded on the stock exchange, and the transcript along with the audio will be available on our website and also on the stock exchanges. Please note, today's discussion might include certain forward-looking statements based on current expectations and assumptions. These statements are subject to risk and uncertainties that could cause actual results to differ materially. The company undertakes no obligation to publicly update or revise any forward-looking statements. With that, I would like to hand the call over to Mr. Keshav for his opening remarks. Thank you, and over to you.

Thank you, Monish. Good evening, everyone. I want to start not with this quarter's numbers. We will get to those, and they are the best in our history. But with simple question, what kind of company Shilpa Medicare becoming? 3 years ago, the honest answer was a solid hard-working API business, carrying a lot of debt. Our net debt-to-EBITDA was 6.7x and our ROCE was in single digit. Today, we have net debt to EBITDA of 1.3x, a ROCE of double digit, a credit rating just upgraded to A- and portfolio that no longer makes ingredients. It develops first-in-class drugs, partners with global innovators and manufactures some of the most complex molecules. As I have mentioned previously, I would like to reiterate on operational leverage. Still, our big bets in biologics, CDMO, novel drug delivery, NBE are under monetization. As those plants fill up, we are confident of incremental revenue and better margins. In simple terms, the reinvesting is largely behind us. The harvesting is ahead of us. Let me walk you through our quarter 1 performance division-wise. My overall commentary will be divided into 3 segments: API division, Formulation division and Biologics division. In API division, we remain largely focused on CDMO, peptides and oncology as a portfolio, and we continue to invest our resources in it. On CapEx side, we are doing large capital investment in peptide manufacturing capacity in India, which will have capability of manufacturing from start to end in solid-phase synthesis and block will complete commissioning by end of FY '27. In CDMO side, we have totally 3 NCE advanced programs, which will get commercialized in FY '28. We remain on track to complete 15 new oncology product validations on the generic side in FY '27. In total, we are working on 25-plus NCE programs in our API division, in which many of the programs are in early stage Phase I, Phase II and 3 programs in late stage. Overall, API business is likely to have a steady growth in FY '27. Now I'll start briefing about Formulation division. Our first NCE molecule, NorUrsodeoxycholic acid, which was approved last year in India, is performing as expected, and we are seeing some very good early clinical outcomes in patients in the end market. And we have strong visibility of orders for FY '27. Nor-UDCA as a product, we are also taking this globally. And in global market, we have successfully completed European and U.S. scientific advisers, and we will be starting global Phase II clinical studies in FY '27. 3 commercial 505(b)(2)s, which were approved in last year, are performing well as expected, and the sales are -- remain growing quarter-on-quarter. Three important near-term filings, which are Abraxane, Enzalutamide and Abiraterone formulation are on track to be launched in FY '28. Rotigotine transdermal patch, which is one of the complex transdermal patches and for the product since we already have received approval in Europe, the same product has been successfully filed in U.S., and we have already partnered with one of a very stronger -- strong U.S. partner in U.S., and we remain on track for launch in FY '28. OLC opportunity with Unicycive Therapeutics, where we are their CDMO partner for API and Formulation. The partner is working very closely with U.S. FDA on the recent CRL received, and we are working closely with our partner for next steps. Apart from above, we have very good strong complex pipeline for which product-wise status is already given in investor presentation, and I request all the investors to go through it. Overall, existing and new pipeline launches, there is likely strong growth possibility in Formulation. Now I'll start briefing about Biologics division. Our second biosimilar product, which is Aflibercept, the product clinical studies have been successfully completed, and we remain on track for launch in India market in FY '27. For the said product, already we have partnered with one of the best Indian companies, we have partnered with 3 companies who have decent market share in the ophthalmic industry in India. Our first European partnering of Nivolumab with Orion Corporation gives us further assurance on commercialization of our biosimilar pipeline globally. For Nivolumab product, India clinical study has already started, and we remain confident for launching this product in FY '28 in India. On the other biosimilar pipeline, we have more than 5 biosimilars for which details and status are already given in the investor presentation. On CDMO side of business, Shilpa Biologics has very unique capabilities of manufacturing any product from clone development to Fill & Finish. And with this capability, we today have more than 6 active NCE programs already working with various partners. In which the one of the program has -- will be entering into human clinical studies in FY '27 by our partner. Two NBE programs where we have done strategic investments, the program with mAbTree and Alveolus Bio are on track to enter human studies in FY '27. Our first ADC biosimilar is also on track for entering human studies in FY '27. Today, Shilpa Biologics is one of the very few integrated ADC manufacturing company in India. On new biological entity, which is recombinant human albumin, as mentioned previously, we are confident of starting human clinical studies in current year, and we remain on track for filing in next year in India. So let me bring back to where I started. The transformation is already on scorecard in the delivering, in rerating upgrade, in returns, in a record quarter driven by every part of business returns. We, as a company, have done the hard patient building work and are now positioned to convert into higher growth and margins. We have built it to last. We have built it to compound. And we would thank to all our investors in trusting us and staying alongside us always. Thank you. And I now hand over the call to Alpesh Dalal for talking on financials.

Thanks, Keshav, and good evening, everyone. Welcome to our Q1 FY '27 results call -- financial performance for the quarter. I'm really pleased to announce that we have delivered our highest ever quarterly revenue and EBITDA for the fourth successive quarter and with our quarterly revenues at INR 469 crores, reflecting a growth of 43% year-on-year, backed by healthy gross margin of 71% for the quarter. And EBITDA for the quarter was INR 139 crores, again, growing at 42% with an EBITDA margin of 30%. During the quarter, our operating PBT, which is before share of profit from JVs and associates and for exceptional items was INR 92 crores against INR 50 crores in the same quarter last year, whereas our reported PBT stood at INR 98 crores, growing at 98% year-on-year. During the quarter, we had a negative tax rate on account of reversal of deferred tax liability for Shilpa Medicare, where the company is planning to switch to new regime on account of lower tax incidents under the new regime. Reported PAT for the quarter was INR 101 crores, growing at 115% year-on-year. Going forward, we expect the tax rate to normalize at around 25% for the coming quarters. On the CapEx front, we have spent about INR 114 crores in the first quarter, and the CapEx is primarily funded through our internal accruals and deployed across our different businesses. The improved performance and positive operating leverage that we have witnessed has helped us in improving our return ratios during the past 2 years with ROCE improving to 12.5% from 8.8% in FY '25. And on adjusted for biologics and NBE businesses, the ROCE actually stood at 18.3% because these businesses are -- as Keshav was mentioning, they are still at early stages and have a lot of revenue generation opportunities still left there. With all the key verticals showing strong revenue momentum, coupled with pipeline of finished launches, we remain confident of improving our operating leverage during -- driven by improved business mix, resulting into higher ROCE in the coming years. And before moving to the segmental highlights, I would like to reiterate what Keshav has just mentioned that our company has received a credit rating category upgrade has been from A+ to AA-. This reflects a significant improvement in our operations and financial performance over the past few years. Besides this, I'm also happy to announce that the company has been certified as a Great Place to Work, a recognition that reflects our culture, trust and commitment towards healthy work environment. Now let me walk you through the segmental performance. Our API business clocked a revenue of INR 260 crores for the quarter, growing at 15% year-on-year. And our non-captive third-party API sales also witnessed around 16% growth year-on-year. The growth was on account of improved offtake of our -- of key products from newly expanded capacities, coupled with strong captive demand coming from our FDF -- finished formulation vertical. Even the specialty CDMO within the API division witnessed a strong traction driven by new client acquisition in developed markets. The Formulation revenue for the quarter were at INR 198 crores, growing over 100% year-on-year. And ex licensing income, the base business reported robust revenue growth of approximately 112% during the quarter, largely driven by complex FDA portfolio in U.S. region, supported by EU and ROW regions. Moving to the Biologics segment. Our Biologics segment reported revenue of INR 52 crores, growing at 42% year-on-year. This strong growth was driven by continued deal momentum towards licensing and partnership and CDMO businesses. With that, I would like to request the moderator to open the line for Q&A.

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

Amazing execution team. Congratulations for that. Just 2 questions. First is, as our existing investments start monetizing, and we can see that in the numbers, what would make you say we have enough capability for now and prioritize sweating existing assets over building the new one?

Yes, Sajal, thanks for your question. See, I think most important point here, if you see our historical CapEx run rate, right, we have invested heavily in Biologics. We have invested heavily in Formulations. And those investments for us could translate into sizable revenue because there the capacity utilization, what we have currently in some of the specialty divisions where we invested is very less today. So we have room for decent capacity utilization there. Coming to API, where we have high capacity utilization, that is where we are already doing additional capital -- CapEx investment, where we feel that there is a lot of room for additional capital investment and additional growth. That is -- the mix of these 2 is something which makes us more confident to tell that we have enough capital already deployed for upcoming growth.

Yes. That's helpful. And the -- given that we have a diverse set of capabilities, including biologics, including peptides and including CDMO, what is becoming cheaper or faster to develop because all these capabilities now exist in the ecosystem and we can leverage them in combination. So what I'm trying to understand here is, are we getting a sense that 1 plus 1 is greater than 2 now?

No, Sajal, I think to answer in simple words, right, Shilpa as a company, the way we are built is integration. If you see our API is integrated with Formulation or Biologics is integrated from clone to Fill & Finish. Same way our Albumin, we do from starting from clone development to Fill & Finish. I think today, what industry needs is the plant, the capabilities of one-stop solution, that is what we have.

[Operator Instructions] The next question is from the line of [ Gaurav Bhardwaj ] from [ TechSec Funda Investment Managers ].

First, congratulations for your stellar results for consecutive quarters. Sir, I have 2 questions. First question is, how do you see the company down the line in 2, 3 years in terms of profitability and ROCE? And sir, my second question is, shall I continue with second or later on?

Yes. Go Ahead. Go ahead.

And sir, my second question is, as there are many developments are going on in our company, sir, what barriers can come in to slower -- slow down our path -- growth path.

Yes. Okay. So I'll take the first question and second will be taken up by Keshav. So as far as the growth momentum is concerned, as we have been regularly saying that we may not be able to provide guidance for the future. But as a general rule or the way we have been working at various aspects and the way we are developing our pipeline, we can visualize a very healthy and steady growth. As Keshav had mentioned in his speech also that we are looking at monetizing more and more of our investments that we have done in Biologics and niche kind of Formulation business as well. So those are high-margin, better profit yielding businesses. So they obviously are expected to generate significantly better returns as well. So whilst we may not be able to provide you a specific number, but what we can see from here on is that the growth trajectory looks very robust and with a faster-growing trajectory on the profitability resulting into better ROCEs across the board.

Okay. That's very helpful.

Yes. And what could be the challenges that we could face or what could slow down our growth? Probably -- see, the thing is the regulatory pathway in pharmaceutical industry is a very critical aspect. Whilst we are working towards being very robust and compliant with our practices, once in a while, the way regulatory authorities look at us could be a bit different. And if some of those challenges come up, unexpected challenges come up, that might slow down the growth trajectory that we have. But general trend towards moving further on the growth trajectory will continue. It might slow down if some such regulatory challenge comes up.

The next question is from the line of Krisha Kansara from Molecule Ventures.

Firstly, many congratulations to the entire team on a very good set of numbers. Firstly, on Nor-UDCA, I have 3 questions. First, post our launch in Q3 of FY '26, we have seen 2 quarters of commercial revenue. And our domestic Formulation segment has contributed INR 59 crores in these 2 quarters. So how much of this INR 59 crores came from Nor-UDCA? Second, we have now completed the disease curability duration of 6 months, as you rightly mentioned in the previous con call. And you also highlighted in your opening remarks that the clinical data is positive. So could you please elaborate on this? And third, in the last month, Emcure Pharma, which is the marketing partner for Novo Nordisk, semaglutide, they received CDSO approval for an additional indication for treatment of fatty liver. So what is the management's thought on this?

So Krisha, to give you simple answers, I think product level, we don't give sales numbers, so sorry that we cannot give. But as I mentioned, we have very strong order trajectory. I think that should give confidence to everyone on the product. Coming to the third question, I think, which is very important, the products like semaglutide or other products which people are doing for indications like nonalcoholic fatty liver disease. See the mechanism of action of Nor-UDCA and any other product which today many studies are going on is completely different. Nor-UDCA directly attacks the liver enzyme. That is the major advantage what is there in the product against products like semaglutide, which has a different mechanism of action for liver fibrosis.

Okay. And what about the data, the 6 months curability data that you mentioned?

Yes. See, on the clinical data, if you read online, all the data of our product is already published. And we are already doing the Phase IV clinical study. Once that data is available, that also we will be publishing. I think that should suffice the requirement.

Okay. And can I just pitch in one more question?

Yes.

Yes. So this is on the Biologics team. So firstly, congratulations to Dr. Uday Harle on joining Shilpa Biologics. I would like the management to spend some time in highlighting the strategy of building a dedicated team in Biologics division. Last year, we were able to clock around INR 150 crores of revenue. And now for us to scale this business from INR 150 crores to, let's say, INR 300 crores, INR 400 crores, I assume we would need the right kind of talent to work with Dr. Uday and Mr. Madhav. So what is the team building strategy, specifically on the Biologics side?

So Krisha, I think it's something which is more operational question, which we can connect later. But to give you an idea, we have a very strong team of different experience and wide experience. And not only internal team, we are also engaging some very good consultants who have very good understanding of U.S. and EU regulations. So I think mix of that is something which will surely help us in our overall strategy, the plan, execution. And I think further details on this, if required, you can connect to Monish further, okay?

Sure, sure. And just on Rotigotine, are we on track to introduce this before September this year in the European market?

So Krisha, I think there are many people waiting in the line. Sorry for that. So maybe you can come back on queue if it's okay.

The next question is from the line of Yash Doshi from Unifi Capital.

Congratulations for a good set of numbers. Yes. Regarding Nor-UDCA, if you see quarter-on-quarter in Q1 FY '27, basically your domestic revenue has dipped a bit. So is it -- what's the exact reason for it? Because I think we launched 6 months ago. So ideally, the products will scale up, but that's a small blip.

No, yes, it's not the small blip. If you see, I have again mentioned everyone that this is not a product level detail. So you are just seeing the total domestic sales, right? Nor-UDCA as a product, if you see historically and quarter-on-quarter is something -- some quarter, someone will do more stocking. Sometimes we will manufacture more. Some quarter we'll manufacture less based on the demand, based on the delivery schedule. I think that's not the right way of seeing the product. Overall, the product is doing good. That's what I can tell you.

Understood. And another question was regarding the API division, which we grew at 16%, and it was led by your specialty CDMO. So just wanted to check in that -- was it more contributed by normal innovative CDMO portfolio or polymer division?

Innovative CDMO.

Innovative CDMO. And just last question. This quarter, we onboarded 2 Japanese customers, right? I think it was late-stage projects. So can you talk about the background of the clients, whether it's a big pharma or biotech? And what can be the opportunity size?

Yes. I think I'll tell you more details on this in the upcoming call because we have some confidentiality on the program.

The next question is from the line of Nikhil Upadhyay from SiMPL.

Congrats on a good set of numbers. 2 questions. See, if I look at our -- and one thing I should appreciate the kind of details you put in your presentation, it's phenomenal. It gives a very good understanding of where we are going. 1 question on Slide 12, if we look at it on the API side. Now we see that -- and if we track over the last 4 quarters, the number of programs on the specialty CDMO have increased significantly. Would it be right to say that the next leg of growth on the API side would be more driven by the CDMO part of the business scaling up from where we are today? Like should that be a right way to think about it? Or -- and how many projects do you think will start getting commercial sales in '27-'28?

Yes, your point is well taken. And yes, specialty CDMO will be a growth driver for us. Not only that we have other oncology pipeline and peptides also. But yes, specialty CDMO will be one of the leading drivers for us in the API division. Number of programs and the details around that, we don't disclose. So sorry for that. But to give you a fair idea, we have almost 3 late-stage programs, which will enter into commercialization next year.

Okay. And second question is a little longer. See, if you look at our company, from 2018 to 2023, '24, we were in investment phase in different, different segments on Biosimilar, on Albumin, on APIs. And the fruits of which we are now seeing over the last 2 years and should continue. Now when you are thinking about investments today and looking at next 3 to 5 years, how are you thinking about the future investments and which would be the segments where you are putting most of your energies?

Yes, Nikhil, I think already the investments what we have done, if you see in last 5 years, right, we have still not even finished the utilization of that. And we still feel that at least for next 3 years, we don't need any significant CapEx in some new investments like in Biologics or in Albumin, where we have already done a lot of investment. So I think that will take care of our growth in these divisions for the next years to come. And as I mentioned already, like in the divisions where we feel capital is still required, like API and in some Formulation new molecules, there the investment we are continuing. But we don't want -- we don't foresee any significant CapEx today. That is what we want to inform all our investors.

Yes, that is one part on the CapEx. But on the R&D side, where are you putting most of your energy? And because one side, we have our own specialty 505(b)(2) molecules and specialty molecules where we are doing the clinical trials. And there is another part which is equally interesting is the Biologics CDMO and API CDMO, which is again a strong growth engine for the whole industry. So between these 2, how are you thinking about like on the R&D investment, not on the CapEx investment?

In the R&D investment, each division has their own R&D budget, which we will continue to do every year. How much in each division, et cetera, that's a lot of detail which we don't inform. But to give you a fair idea, our investments in R&D continue on pipeline, and we will continue to add several new products and also advance existing products.

The next question is from the line of Rakesh Mehta from Elite Bridge Capital.

First of all, congratulations team for the fabulous set of numbers. I have 2 queries. One is biological business contributes just 11%, that is close to INR 52 crores. What would be the growth trajectory going forward? This is one. Go for next question.

As you mentioned, right, see Biologics business from a growth trajectory perspective should witness a significantly higher growth purely because it's on a smaller base and also a lot of future lies in the Biologics side. Again, I would reiterate that we would not be in a position to provide exact numbers, the kind of growth and all because we don't provide that kind of a guidance. But the growth potential of Biologics is significantly higher, especially because it's a new area and it's on a lower base. And also the industry is moving more towards Biologics. So it provides that additional growth opportunity.

Okay. And what would be the contribution in India and the outside India business in case if you are planning think about Biologics?

See, in Biologics, our large portion of our CDMO and other work that we are getting is from outside of India. In India, we have -- we do have our own pipeline, and that will also take shape. But a larger portion is expected to come from international markets.

Okay. Second query is current EBITDA is around 29%. First of all, whether it is -- how it is sustainable? And what would be the trajectory going forward in case if you can throw some light?

So see, this EBITDA margin, in fact, I had only a couple of -- 2, 3 quarters back, I had mentioned that this is obviously on a slightly better side, and we might see some change happening there. But we have been consistently able to maintain that around 30% levels. So there is a constant performance showing that we are in that particular range and region. At this stage, I wouldn't want to get hopes very high. We would like to be conservative and overdeliver. So we would put margins to remain in a similar range.

The next question is from the line of Deepak Sharma, an individual investor.

Congratulations to the management for the excellent performance. My question is CDMO has been one of the major growth factor for the company. So how do the management see CDMO journey in the next 3 years? And second question is from Unicycive drug. What is the next step? And what are the time lines for this drug?

Yes, Deepak, there are -- like you rightly mentioned, CDMO remains a very focused business for us as a company. And if you see even in India today, if you count, right, there are not many companies who has the capability of doing small molecule, doing large molecule, doing API, doing payload, doing linker, doing conjugation, doing ADCs, doing mAbs, right? So the way our company is built is we have a very strong integrated capabilities. So usually, we get customers who want one-stop solutions. So we remain very confident and positive that CDMO as a business will continue to grow. And already, many of the programs, what we are working, many of them still are in early stage, some are in Phase I, right? As and when the program will advance of suppose more than 25 programs, even 10 programs go commercial, we can see a sizable CDMO business, okay? And the second question was on the Unicycive part. See, on the Unicycive part, because it's a partner program, it's already there in the public domain. They have mentioned that they will be -- they have received the CRL letter from U.S. FDA, and they plan to refile in Q3. I think that's the update which we also have in the public domain.

The next question is from the line of Tushar Bohra from MKVentures.

Congratulations to the management for a good set of numbers. There have already been a lot of questions on CDMO, but just maybe a couple more on the same theme. Just looking at your presentation, the slide highlighting CDMO capabilities vis-a-vis peers, right? When we talk of Indian CDMOs, most of these are materially larger than Shilpa's CDMO business today. Also have several years of both capacity and capability investments. right? So I just want to understand, while we are benchmarking against these companies favorably today, do you think that we have similar ambitions and we have the wherewithal to get to, let's say, so typically, most of these companies are upwards of INR 800 crores to INR 1,000 crores revenue comfortably. So do we feel that, that is the kind of scale up that is possible for Shilpa or we will need specific investments into either capacity or capability building to really achieve the full potential? And second, when we talk of CDMO, we are still talking API CDMO, but we have a separate Biologics CDMO division as well. And we have CMO activity in Formulations and specific niches like ADCs and peptides. So how is it that you're approaching the entire business development part on CDMO? Are you approaching it as one single division across a range of capabilities or each division has its own funnel for building the business?

Tushar, I think we have never said as a company only API, we are also promoting and I have told in my talk also that we have already several CDMO programs in Biologics also, okay? Coming to the size, yes, we feel it is sizable business. How much the value we don't want to disclose. But to just give you a fair idea, today in Shilpa in the overall Shilpa Group, we have only one product, which is commercial on the CDMO side. We have more than 25 such NCE programs in various stages of development. I think as and when these molecules advance, you will see the growth trajectory accordingly. And coming to business development side, we have in respective division, respective people who promote and get the project for us. I think that will remain continuing, and we have decent budget allocated for each of the division.

And on the initiatives that you mentioned on the NCE programs, so what is the ramp-up possibilities you're expecting over the next 3 years? How many of these -- you mentioned 3 late-stage programs, I think. How many of these over the next 3 years will mature potentially?

It depends on our partner because these programs are not run by us, right? But I think today, as on today, what visibility we have for next year, we have 3 NCE programs, which will enter commercial phase.

And just one last on the same theme. We have, in a lot of these cases on the CDMO contracts struck very interesting contracts, right, where we've invested in these smaller biotechs, smaller companies. So possibly, there's an angle of even a profit share or a component that is over and above the supply contract. So is it fair to assume that the outcome for Shilpa in this case would be materially higher than what a normal CDMO would realize from these programs if some of them do work?

Yes, you are right.

The next question is from the line of Sumit Gupta from Antique Stock Broking . Sorry to interrupt Mr. Gupta, we are not able to hear you.

Congrats on a great set of results. Sir, one thing regarding the gross margin. So what is driving -- 2 things, first is what is driving the gross margin? And second is with respect to the 1Q last year. So gross margin was around 75%. However, I think it was largely due to the branding. So ex of that, what would be the gross margin last year?

So Sumit, I think we don't disclose product level margins. But I think to give you a fair idea on the gross margin, right, the kind of product sales what we will have in this year and upcoming launches, which I mentioned in my speech, all these are complex products like Rotigotine transdermal patch is a very complex, very few generic players are in the market. Abraxane is again a very complex product. We have such complex products, which will be launched every year and also our existing pipeline like Nor-UDCA, which is NCE product. We have 505(b)(2)s, which are again a very different product with no generics. I think all of this are driving our gross margins. And how much the percentage and all the details, I think you can connect to Monish later for more detail.

And just to give you some idea around the slight dip that we have seen in the gross profit margin. That also has to do with -- because of the recent political situation globally, the raw material prices and all have gone up, and that ends up impacting margins at least for the time being. So that has been one of the reasons for us, a slight dip that you have seen on the gross margin front.

Understood, sir. So ex of that, so like when the things normalize, so in that case, what would have been the gross margin.

It's difficult to quantify that. It's difficult to quantify that, Sumit, because there are times, a part of it you are able to pass on to the customer, not the full piece. So it changes the entire equation depending on where we stand at a point in time.

But you are able to pass on partially?