Strides Pharma Science Limited (STAR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Strides Pharma Science Limited Q2 and H1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you, sir.

Thank you. Very good afternoon, and thank you for joining us today for Strides' earnings call for the second quarter and half year ended financial year 2025. Today, we have with us Arun, Founder and Executive Chairman; Badree, Managing Director and Group CEO; and Vikesh Kumar, Group CFO, to share the highlights of the business and financials for the quarter. I hope you've gone through our results release and the quarterly investor presentations that have been uploaded on our website as well as stock exchange website. The transcript of this call will be available in a week's time on the company's website. Please note that today's discussion will be forward-looking in nature and must viewed in relation to the risks pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to Investor relation team. I now hand over the call to Arun to make his opening comments.

Thank you, Abhishek. Good evening, everybody. Thank you for joining our call. I know today is a busy earnings day, so we appreciate your attendance to our call. It's been a good quarter again. We have reported a very strong quarterly performance. We are out-beating each quarter, which is great news, and we are delighted with our performance. What is critical here to note is that we have moved our revenue growth quite significantly after 4 steady quarters of growth. We have top line stagnation by design. But we had significant gross margin and EBITDA growth as we were cutting out all the inefficiencies in the operation. And having settled on that, we have now activated our growth, and you will now get to see these levels of growth in the next 2 to 3 quarters. Consequently, we are now very comfortable in guiding and confirming that all of our previously guided numbers would now be achieved more trending towards the higher end of our guidance outlook. Overall, it's been a great quarter like I mentioned. All our financial metrics and ratios and debt-to-EBITDA ratios have significantly improved and will continue to improve. Pleasing, of course, was our outstanding U.S. performance. We are trending ahead of our run rate. We had $75 million of revenues this year. A lot of this growth is coming from the fact that we've been able to slowly but steadily relaunch products from the government portfolio that we acquired from Endo and taking significant market share and consequently improving revenues in the U.S., especially from our manufacturing operations in the U.S. EBITDA at INR 235 crores -- INR 236 crores is again our highest ever reported EBITDA and our -- while our reported PAT, INR 93 crores, adjusted for the loss pickup of depreciation and interest from OneSource at INR 100 crores is again our highest ever reported PAT. I think we are on a very steady footing to grow our business from here on. and we are very confident about the quality of the business and the teams that are leading this business to its stated objectives. Quickly, taking through the numbers, you will see a tad reduction in our gross margin, which is because of the growth of our access market, which, as everybody knows, is a low gross margin number, but that's not material. Having said that, we are trending very close to the EBITDA range that we have guided. Historically, for the last 2 decades, those of you who have been following Strides know that typical H2 is in the 55:45 ratio as in H1 being [ 45, 52 ] and 55% being H2. That's because we continue to have a steady focus on the acute therapies, which actually have greater sales during winter in most parts of the countries that we operate. We -- so if we go by specifics, the EBITDA to cash conversion has been very high and my colleague, Vikesh, will speak more in detail about that. Revenues -- I'm breezing through the H1 numbers. Revenues are trending strongly at 17% growth. EBITDA at INR 452 crores is almost 45%, 47% of our range, and we're very confident of hitting our stated objective of INR 950 crores to INR 1,000 crores, including OneSource, and taking off OneSource business, we are very confident of hitting the INR 750 crores to INR 800 crore EBITDA range. And you will see that the retail business of Strides will continue to grow from that size. We now have one additional product where we are market leaders in the quarter in the U.S., and we now have -- we have increased our commercialized products to 71, 2 new products approved and 2 from -- sorry, 1 new product approved and 3 from our dormant product list. But we have identified 60 products that meet our criteria, and obviously, the success of those launches are flowing through, are beyond generics, beyond $400 million. So our $400 million strategy for FY '27, '28 is reaffirmed. We are very confident we can get there with the kind of margin profile and price discipline that we are known for. We continue to be the best performing provider of generics in the industry with almost 0 failure to supply. This is the hallmark of the company, and we're building on that relationship for better pricing, that have share of the wallet, which we're successfully achieving month on month. On the other regulated markets, to be candid, we are not extremely delighted with the growth the other regulated markets have delivered, save for our strong performance in Australia and the U.K. The market -- the rest of the markets have been a little tepid for us, and that is mainly in Continental Europe. We have had several products approved, but our partners are very significant, the top 5 generic players in Europe. And typically, there, we're signing to a partnership to actual launch. It's taking a lot longer than what we have hoped for and anticipated. So we're just saying that growth is there. Our partnerships are very solid. We probably will see more accelerated growth early next year. But having said that, the other regulated markets continues to be a key focus area for us, and we probably are 3% or 4% short of our target rate -- growth rate in the other regulated markets. Having said that, the overall guidance would be easily met with outperformance in U.K., Australia and also in the U.S. The new markets that we have been focusing on is growing steadily. And this is a new -- these are new markets that we have seeded and includes the African region where we have a branded strategy, the access markets and new regions of APAC and MENA. They continue to grow. They are always lumpy because it's a subscale, suboptimal size, scale now. But for the efforts and the teams that we have in place, we believe that this will be the star -- these markets will be the star-performing markets for us in the years to come. Much better margin profile in these markets, but we are currently seeding them with investments of portfolio and foot soldiers. So obviously, you will see benefits coming through in the next several years. And I'm going to leave matters related to debt and balance sheet to my colleagues, both Badree -- and [indiscernible] Badree and Vikesh. I just want -- I'm sure that many of you would be interested in the updates on OneSource. So you will notice that we have updated our -- sorry. So we've updated our debt and -- just 1 second. My apologies. I had a wrong set of documents in front of me. On 26th September, we updated an investor deck prior to our capital raise. We have guided -- we're now guiding for $160 million to $180 million with a 34% EBITDA margin. Please understand that this H1 from Stelis has been EBITDA positive, but it's still a PAT loss. That would change significantly in Q3 and Q4 as we start commercializing our GLPs. We are now very comfortable guiding, trending more towards the higher end of our guidance. In our investor meets, we have guided for $59 million to $60 million of EBITDA with an exit quarter EBITDA of $20 million. We are very comfortable staying -- reaffirming those numbers in today's call. We are very excited about the opportunities that we have signed up in OneSource. We continue to receive very significant RFPs and contract signing. We currently are fully sold out with our capacities. We are commercializing the liraglutide GLP starting from Q4. And we are back ordered as some of our customers have forecasted significantly lower volumes. But having said that, we're trying to do everything to debottleneck and take in as much business as we can. So we are reaffirming higher end of the guidance closer to the $59 million, $60 million guidance exit run rate of $20 million fourth quarter and a very strong order book where you will see growth at the annualized exit run rate of $80 million in the business. We've had a great response for our capital base and we've got -- we're very delighted to have marquee investors on our cap table at OneSource. This has also led in releasing close to about $700 million to Strides shareholders, and we are grateful for your patience while we build Stelis through its difficulties. And I think the investment -- the $100 million investment and the soft gelatin business has resulted in a significant outcome to Strides shareholders, and we're delighted with that. Use of funds of this $100-odd million, $95 million would be to reduce our debt, including paying bridge loans that we have taken in anticipation of this process. We expect to be net cash by '27. This assumes a CapEx of approximately $100 million that will be required for -- required that will be a combination of customer advances, the $50 million that we will invest and also the free cash that the business will generate once the merger is completed. We are sitting on an extremely strong order book, and therefore, we are very comfortable to also guide the $350 million, $400 million revenues over the next 3 to 4 years. Adjusted for the H1, we already are running a 30%, 30-odd percent EBITDA business for the rest of the businesses. And we expect with the exit quarter run rate of $20 million to already reflect an EBITDA very close to 40%. So the 40% is more likely our exit quarter run rate as early as this financial year. Overall, we are superbly excited with the number of RFPs that we have been issuing, especially post the Biosecurity Act, and we have very pleasing response to our drug substance capabilities. And we are actively closing out opportunities and businesses that we are very, very confident of winning. Our win ratio now is about 40%, which is quite a good number for a new CDMO player. And that is a pleasing number for us to share with you today. And I'm also excited by the fact that we have completed our soft gelatin capsule capacity expansion. And all of the excess -- all of this additional capacity is now sold out, and we should be sharply increasing our capacity by another 1 billion units for the next year to meet continuously increasing demand for softgels. Overall, good product approvals in our injectables space, Health Canada approvals between the 2 facilities, and overall, it's been a strong comeback for the group, especially a great outcome for OneSource and what the future looks like. On the NCLT process, we are on track. We hope to have the NCLT a positive outcome, obviously, subject to regulatory approvals and the compliances that are required for us to get an NCLT order in place. We expect news -- positive news before the end of this calendar year. And typically, the 60 days from that is when the -- is the outer limit when we expect the stock to be listed. So yes, that's -- I'm now going to request Vikesh to speak about the financials, the ratios and our debt. And one -- just one last point on the debt. Obviously, we have a close to INR 300 crore pushdown once OneSource happens. And consequently, we would be having -- we would have brought down debt in the last 3 years from a high of INR 3,000 crores to INR 1,500 crores just through internal operations -- I mean, operational efficiencies, which is also a testament to our teamwork here, our great focus on efficiencies and compliance. Thank you, and over to you, Vikesh, and then we'll open the house for questions.

Thank you, Arun. Good morning. Good afternoon, and good evening to all of you. I'm very pleased we are reporting another quarter of solid all-round performance. Our focus on delivering this momentum is visible across our metrics of profitability, efficiency and growth. Arun covered on the EBITDA and PAT performance, a very strong performance that we've had both quarter and this first half. On the efficiency metrics, we have seen further improvement in our cash to cash cycle, which is now at 126 days. This has significantly helped us generate operating cash despite a very significant [ growth ] that we had during this quarter. On an H1 EBITDA of INR 453 crores, we have generated cash flow from operations of INR 418 crores. And this has also helped continue our investment in growth CapEx, our CapEx spend of INR 92 crores in H1. With this strong operating cash generation, our debt is also reduced. Our net debt [ at ] INR 1,902 crores is a reduction of INR 133 crores in H1. With this reduction, our net debt-to-EBITDA ratio is at 2.1x. And I'm very happy that we are tracking ahead of our net debt to EBITDA guidance of less than 2 for FY '25. Our all-round performance is also reflecting in the ROCE metric, has now improved to 17.2% from 12.8% that we ended in FY '24. Covering some of the specific cost line items, our expense for the quarter have remained steady on an increased revenue base. That has led to an improvement in our operating cost to revenue ratio. Our net interest costs for the quarter are lower at INR 52 crores -- INR 54 crores, and this has been aided by an interest income on tax refunds that we have recorded during this quarter. With the reduction of debt, we also expect our cost -- interest cost to [indiscernible] in H2 and going forward. Our effective tax rate at 17% is in line with our estimates, and we expect it to remain in this range of 17% to 20% for '25. It has been a very remarkable and comprehensive performance in the first half, and we remain focused on achieving our outlook for the rest of [indiscernible]. Thank you. I'm happy to take any questions that you may have.

[Operator Instructions] The first question is from the line of Mr. Rupesh Tatiya from Intelsense Capital.

Congratulations on the fantastic performance. My first question, sir, is teriparatide launch. Can give you some update on this now? Do we have all the approvals are in place? And when can we expect commercial launch of this product?

All approvals for Europe are in place, and we expect the launch to happen within this financial year.

But Q3, Q4, sir, like any...

More like Q4.

Sorry?

Q4.

Q4. Okay. And then another question, sir, is this contract project we have won for -- in animal health for a biologic with innovator. This project, when can we see some commercial revenue from this project? Is it like 2, 3 years away? Or it's not that far? And then do we need to do some CapEx for this project?

Yes. So we are -- we do not discuss specific phases in which we are with the product. We believe you're right. This is more like a 3- to 5-year product commercialization, but we will have a very meaty R&D income in that time frame. We do -- we will probably need some more CapEx to do that, but we believe strongly that within the $100 million range that we have indicated as CapEx to get to the $400 million revenues, all of this will fit in.

Okay. Okay, sir. And then, sir, this -- in the presentation you gave for OneSource, not this one but last one, you said you're also working on 10 non-GLP drug device combination projects. So maybe qualitatively, can you give some idea about these are biosimilars, biologics or these are some other products? Some qualitative understanding of this, and then when...

And then it's both. It's a combination of both biologics and non-peptide drug device combinations, long-acting injections and stuff like that. But we can't -- I mean, please try and understand we are a CDMO. We are bound by confidentialities. We are -- our primary responsibility is to protect our clients' IP and protect the relationship. So we can't get into specifics, but yes, it is a combination of biologics and non-biologics.

And sir, I mean, these are also long-term commercialization or we can see maybe 2, 3 commercialization next year?

We have one product approved this quarter, and we expect commercialization to happen in Q1.

Okay. Okay. And these also -- I mean, relatively, sir, this would be as large as...

Rupesh, you have to come back on queue. There a lot of people who would like to ask us questions, please.

[Operator Instructions] The next question is from the line of [ Naman ] from Nine Rivers Capital.

I have 2 questions. First is on the gross margin side. So any one-offs during the quarter leading to the sequential decline? And what would be the steady-state gross margins we are aiming at? And second is on the last participant's follow-up. And then on the mobile biologics projects, what could be the potential scale for us in the project?

So what do you mean by scale?

In terms of our revenue potential.

We will not be able to give you specifics. What is important is that we have won our first NDE for a large company. And it's a full program, which is in late stage development and commercialization. Okay? Gross -- your question on gross margin, we are in that 59%, 60%. That is our target range. Like we said, we had a slightly elevated access market business and a lower European sale. That's why we had a tad 75 bps reduction this quarter. But for your modeling purposes, you should look at more like 59% to 60%.

And the next question is from the line of Nitin Agarwal from DAM Capital.

Congratulations on a pretty solid share of numbers. Arun, on the OneSource business, I just want to quickly check on the softgel part of the business. I mean you talked about significant improvement in momentum in the business. Any particular reasons, which are driving this improvement -- I mean, this pickup in momentum?

So Nitin, we have been in soft gelatins for 20-odd years as you cover us well for so many years, but we've never offered soft gelatin as a CDMO opportunity at all. And given the disruption globally with capacities and there has been a very significant intake of capacity requests and RFPs that we are currently servicing, we have already onboarded one of the world's largest consumers of soft gelatins as our first customer and with commercial shipments starting from this year. And you'll see a full blast volume increase with this 1 single customer getting to closer to 1 billion units in the next 2.5 to 3 years. So we are building -- and as we move away from the current suppliers, it takes time because onboarding private labelers in softgels is a long-run process. But I'm delighted to say that we have secured our largest business there in a multiyear contract. And that will get to full blast volumes in about 2 years, but we are starting commercial supplies in about a few months -- few weeks rather. And it took us ever since we announced that we have become a CDMO to onboard them. So that's the time it takes to onboard a customer of that size and scale. But now that we are in the shipment phase, we're quite excited about the opportunity.

And secondly, on the GLP-1 business, I mean, what is the feedback that you're getting from the clients in terms of their demand outlook for both lira and the sema in the emerging markets over the next 3, 4 years? There are concerns around the fact that there could be significant pricing erosion, which may come through in these products. I mean does it have any implications for our business for fill/finish?

So see, obviously, we have to be practical with -- currently estimating demand for GLP is hard. On lira, we are seeing a surprisingly increased volume demand for 2 reasons. One is that the dose requirement of pens is double. So from a CDMO perspective, be agnostic if we are making semaglutide or liraglutide, right? From that perspective, it's a good uptake. We are also saying that considering that Ozempic, Wegovy and the -- of each main GLP is a back order. We are seeing a kind of revenge pickup on volume for lira. So I think some of our customers have forecasted volumes wrongly, and they're seeing more demand than that originally is planned. So we are seeing interesting volumes, but we have really such limited capacity at this place allotted for Lira. And we are disciplined with our approach for capacity because customers -- our customers have also started booking capacities for sema launch at risk starting as early as August of next year. So we are balancing our capacity between these 2 acts. But yes, we are in a good place now to say that it looks like we'll be able to sell most of our 40 million units probably 6 to 8 months ahead of schedule.

And again, that's probably prompted you to go for the capacity expansion from 40 million to 140 million. And what kind of visibility do you have on probably in terms of utilization of this incremental capacity also?

Nitin, our incremental capacity is now being funded through take or pays. Okay? So everybody is throwing big volumes at us, and we're telling customers that you have to participate in the CapEx to have capacity result. And we are able to get that today, in today's circumstances, the GLPs we are because we have -- we are as ambiguous as you on how big this business could be, right, how disruptive it could be positively or negatively. So we are cautiously optimistic and we're telling partners to take equal risk, and we are today in a position to seek and receive capacity reservations and -- so the 150 million units, I think we have fairly good visibility.

And if you can squeeze in a last, Arun. On the continuing business for Strides, how should we think about this business? Obviously, we are on track to deliver this year's number. But qualitatively, we've got the $400 million milestone for the U.S. over the next 3 years. I mean what else -- I mean, what are the other sort of broad milestones that you sort of leave us with in terms of to visualize this business on its own over the next 2, 3 years?

I think you'll see the [indiscernible] business of Europe, the other reg markets to have, I won't say a hockey stick growth but significantly different level of growth in the next year onwards. The -- so we already told you that we'll be filing -- we have a nice range of controlled substance nasal sprays. We have commenced -- we should file our first key product in the first -- in March of this year, and we have 3 programs and very, very solid opportunities because the controlled substances can be produced only in the U.S., requires a very specific device, which we have manufacturing capabilities. So we're quite excited about that entire niche. We believe the nasal spray niche will completely replace the loss of the soft gelatin volume and EBITDA.

The next question is from the line of Abdulkader Puranwala from ICICI Securities.

Sir, just a couple of questions on the GLP-1 and the non-GLP-1 opportunity under OneSource. I mean, sir, we have talked a lot about the GLP-1 opportunity. But how should we look at the capacity at OneSource, which is not GLP focused? How is the kind of ramp-up you expect there? Where in the past, you've talked about certain biologics, and you're now talking about doing some novel biologic work as well. So any color you could provide on that front would be helpful.

Yes. So we do have -- I mean OneSource is a combination of complex and specialty injections, GLPs, but it also has lot of other parts of the business, right, like penicillin, where we are one of the largest penicillin manufacturers and other standard injectables, where we are partnered with. We see interest in all of our businesses growing. I think the Street is talking only about the GLPs, but we are excited about several subparts of our business, which is growing nicely. Of course, the GLPs take the limelight in terms of capital allocation capacities and the fact that we are first to file, it's now in the public domain that we and our partners have licensed the product to Viatris, and they have settled with the innovator. We are first to file. We do have a profit share, which we split with our partner, Natco, in this. So it's all in the public domain. Obviously, there's a lot of excitement around it. But we are equally excited about the other parts of the business. you should look at us being completely full up on our approximately taking 7,000 to 8,000 liter mammalian and microbial capacity or increasing the microbial capacity to 4,000 liters to be fully sold out within the next 12 months. And then we have to probably look at this conversation later. But -- so we are adding a lot of customers, the specialty products that are already approved. With the Chinese angle, we're already securing our first major European contract, which we should be in a position to give more granularity soon. But yes, we're winning businesses, and we will add capacities and like I told earlier colleague of yours that there would be participation of our partners in the investment program. And we are now positioning ourselves as a global CDMO. For pricing, we are offering it a -- the pricing has a price. We are not leading contract winning by price but by service and therefore our pricing is not necessarily low. But we -- there is kind of interest that we didn't expect earlier until the Biosecurity Act came into play or is in play, of the nature of customers and RFPs that we are currently selling in and a number of RFPs. So I think, overall, you should strongly believe that all engines are on fire, and yes, this is a good space to be. And I think we are all very excited about every small bit of our business in OneSource.

The next question is from the line of Aman Vij from Astute Investment Management.

Three questions, first on OneSource GLP-1. So you have talked about one commercialization in Q4, one CSA. So how many CSA do we expect in, say, FY '26 to get commercialized?

In the GLPs?

Yes, yes.

Between 5 and 7.

5 and 7.

Yes.

And is it safe to assume given there will be the semaglutide expiries happening for the Indian market, for non-U.S., non-Europe market, so can some of these -- these are also getting launches next year, FY '26?

It is possible. We can't be specific. Canada is the first market going off patent January...

Yes, yes. Sorry, you mentioned January what, January?

January of '26, the patent goes off in Canada, in March of '26 in other countries.

Sure. And normally, what is the lag between, say, a CDMO player supplying versus the actual launch date? So patent expiry is happening in, say, Jan 2026. Can we expect the 6 months before these...

Yes. We can't give you specifics because there are confidential information around this product and the patent regime. But it always has to be much before the launch date, right? So it depends upon customers and their risk appetite and production at risk and their launch capabilities. But yes, you can see 5 to 7 unique customers, GLPs, commercial supplies from OneSource in the next financial year.

Sure, sir. That's helpful. On the softgel side, sir, we have expanded the capacity a lot and we are again talking about more expansion. So can you give roughly what is the revenue we are getting from Strides itself versus what the revenue is roughly from outside customers, non-Strides for softgel?

We have guided earlier. It's about half and half, and we stay with that. But there's no incremental growth coming from Strides. All new contracts are only with third parties.

Okay. So even the incremental 1 million you're talking about and you've talked about 1 customer who is scaling quite fast, that is also all outside, right?

Yes. But we also announced when we did this deal that outside of the businesses that are already contracted, that Strides will only be the logistics partner. The economics stays with OneSource. So we will not add any new products to avoid any related party issues going forward.

Great answer. My final question is given teri launch, lira launch and you've talked about 5 to 7 launches, CSA launches in FY '26, softgel expansion, steady [ sciences ] growth, can we expect maybe like the $300 million kind of number for OneSource in FY '26?

No.

It's lower or higher?

We have guided numbers for this year. We've given an exit run rate of growth over the exit run rate of $80 million on the EBITDA. Focus on EBITDA. This is a business that is very focused on margin expansion. We are not -- and we have given you a view that, in 3 to 4 years, we'll be $350 million to $400 million. We are on track for all that.

Okay. So in spite of all these positives, 5, 7 projects and all these new things, revenue might be lower but will cover up in, say, EBITDA growth and all these things.

You'll have a significantly different EBITDA profile for FY '26 if I may say.

Our next question is from the line of [ Ritesh Oswal ] from [ NRO Invest ].

Congratulations for good numbers. On Slide 19, you mentioned about tirzepatide. When will -- when supply will be start for tirzepatide?

We mentioned this earlier, Q4 of this year.

Q4. And it's for innovator?

No, no, sorry, my mistake. So I got confused between PTH and tirzepatide. What we are saying here is that we have signed our first CDMO contract to develop this drug. Product patent goes off only in 2036.

So supply will start after 2036?

It depends upon, again, like in semaglutide, the patent regime is different from various countries. All we are announcing is that out of the 8 GLPs, commercially, we now have 7 contracted GLPs.

The next question is from the line of [ Darshil Jhaveri ] from Crown Capital.

All my questions have already been answered. So just wanted to get a sense, like, I think on our investor deck, we've said revenues might grow at 12% to 15%, and you're seeing that they'll be reeled on the higher side. But we've already, I think, grown at 17%, right? So are you being more conservative or just -- just wanted to pick your brain a bit like in terms of FY '25 and FY '26, what outlook could we assume, sir.

So the outlook is there. We said we will grow 15%. We are currently at 17%. It's a marginal increase of what we said on the higher end. Yes. And I think sometimes it's good to err at the side of caution. Obviously, when you launch a new product, especially in the U.S., you do not anticipate the level of success you achieve. And we can -- we have always been trending -- like, today, I already alluded that we will be trending to the higher end of all the parameters on the outlook. So that already means that we are upping our guidance towards the higher end of margin, right?

Okay. Fair enough, sir. And sir, any guidance you would like to give for FY '26, sir?

Not yet.

The next question is from the line of [ Raj ] from [ Aja Partners ].

Sir, am I audible?

Yes.

Just, sir -- am I audible?

Yes, yes.

When are we going to commercialize Ozempic?

Sorry. Yes. So technically, you can commercialize Ozempic in some countries in -- from -- starting from January to March '26.

Sorry, I didn't get your answer. Can you repeat it again?

I think you're on a speaker phone, and that is why you can't hear me.

As there are no further questions, I would now like to hand over the conference over to the management for closing comments.

Thank you all. Appreciate your time today. And as always, if you have more questions, please write to us at our investor deck or please feel free to talk to either of us -- anyone of us rather. Thank you, and much appreciate your time today.

On behalf of Strides Pharma Science Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.