Satyanarayana Chava, Founder and CEO of Laurus Labs, is confident that the contract development and manufacturing organisation (CDMO) business will have a strong growth this year.
"We see significant growth. It is not in teens; it is much higher that that," he told CNBC-TV18.
The outlook is based on the number of projects the company is managing right now, the technological applications they have developed, and the customers' interest, he said.
This is the verbatim transcript of the interview.
Q: There has been market rumour for a month or so, and you briefly spoke about it in your concall as well about the alternate API supplier for some new innovator. Could you tell us what is the timeline by which we could hear about this? The Street believes it could either be Merck or MSD. Tell us more about this opportunity.
A: We don't want to comment on the confidential projects for our partners. But we can tell you there is a shift from the big pharma and also large biotechs to diversify their supply base from one country to multiple locations. We have seen that shift and have expanded capacities, and our technical capabilities at the right time. We are working with six out of ten big pharma and we believe our contract development and manufacturing organisation (CDMO) will definitely be a driving force for our growth in the medium to long term.
Q: You are also looking at an alternate API supplier to an innovator, and it's in initial phases. By when could we hear about the outcome of this potential large-sized deal that you could be bracing for?
A: We already supply four APIs for new chemical entities (NCEs), for various big pharmas. This year will be remarkable for us because there are two abbreviated new drug application (ANDAs) being filed using our API in the US. So, once the ANDAs, the approval will be less than 12 months, then we will have commercial opportunities for two APIs. There are multiple phase three projects under execution, and we believe we will have a good times in CDMO in the near future.
Q: We understand there's going to be one more customer. We know this is confidential, so we won't push you, but is this transformative in terms of the size of the opportunity?
A: These are high-priced, large-volume products where ANDA is being filed. These are not small, these are not in single-digit million. This is multi-million dollar opportunities we will capture once the ANDA is filed and then we start supplying the commercial volumes. And also, we have seen a lot of customer visits also happening. That is also an indication that big pharma and large biotechs are looking at diversifying their supplier base.
Q: This news about the US FDA issuing an untitled letter on May 16 for your manufacturing facility in Andhra Pradesh. Could you tell us the status? Is this plant affected, and what percentage of sales from this plant is your US revenues?
A: We acquired a unit in 2020 called Phalanx Labs. When we acquired it, this site already had an import alert. So, we took that facility and did remediation measures and used that for in-house intermediates. Based on the in-house intermediate uses, FDA inspected in December 2023. We responded to that and FDA sent another correspondence on 16th of this month. Untitled letter as per FDA forum regulatory document is a correspondence to the industry where the GMP deviation doesn't meet the threshold of a volume. This is a correspondence with us, gives us an opportunity to address two more issues.So we had a five-point 483 when FDA inspected. In the untitled letter, they only raised the concern on two points. We will address that.
This unit contributes less than 1% of our revenue. Also, this unit is not used for any third-party regulatory sales. There are no drug master files (DMF) filed from this unit so far. We are trying to resolve the issues of the import alert on that unit and we don't see any impact on the corporate level.
Q: There are some concerns about delays in a couple of your critical CDMO projects. You saw growth of just 4% in the quarter gone by. By when do you think you can get back to double digit growth? And these concerns about the delays in some of your projects, would you want to alleviate any of those concerns?
A: There are no delays in the projects. If you look at the drug discovery from, phase 2 to phase 3, and phase 3 to ANDA, it takes its own time and that's the reason people who are in the CDMO business they are fully aware. A CDMO business is very lumpy, so you can't measure the CDMO business quarter-on-quarter. But we know how many projects we are handling, and what are the customers' interest in us, what kind of technology applications we have done. So we are very bullish on this segment.
Read Here | Laurus Labs Q4 Results: Stock falls after earnings miss; Management sees better margin in FY25
Q: You said the business is lumpy. But even if you look at it annually, you were sitting on about ₹2,100 crore in the CDMO business. That's down to about ₹920 crore in FY24, a significant fall. What kind of growth do you look at in FY25 on average?
A: It's going to be significant growth in this year.
Q: Could it be 15% or 20%? Quarterly, you are doing about ₹200-240 crore in the CDMO space. Can you take that up to ₹400-450 crore?
A: Last year, as you mentioned, we did more than ₹900 crore. This year, we see significant growth. It is not in teens it is much higher that that.
Q: In the last year what was encouraging is that the margins steadily recovered all through the year and the Q4 margins were much better than the Q1 margin. When do you get to 20% margins and what should we work with for FY25? Also, the debt is in excess of ₹2,000 crore. You are also doing some capex. What is the guidance on margins as well as on debt?
A: We hope to do 20% plus EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins this year. What we measure in our business is the gross margins. Are we doing better in our gross margin? The answer is yes. We are able to maintain around 50% gross margin. As we are not clocking revenue, our EBITDA margins are coming under pressure. As we increase our revenues, things will fall into place and we believe this is the year where we will start improving our EBITDA margins. That is on the EBITDA margins.
Q: What about on the debt, which is currently at ₹2,300-$2,400 crore?
A: We will not increase debt. We will not go past ₹2,500 crore. Because we have done major capex already in the last three years. This year, we will do about ₹700-800 crore capex that will come from internal. We don't need to raise any further debt.
Q: So will it come down from this ₹2,500 crore?
A: It will come down.
Q: On top line, sir, what numbers should we sort of expect for FY25? What kind of growth from ₹5,000 odd crores?
A: We have stopped giving exact guidance. But this year will be definitely, we will see growth in all segments. generic APIs, formulations, oncology, CDMO, this year will be good for us.
Q: The anti-retroviral (ARV) business did quite well and ARV formulation was up almost 25% year-on-year. In FY25, what kind of a sustainable growth do you see in ARV?
A: We don't expect significant growth. We believe that will stagnate the current levels, but remaining segments are very good.
Q: Last year has been strong. So what is the reason for ARV seeing stagnation in growth?
A: The number of new HIV patients getting into the treatment is limited now and there are less new infections. So the number of people on the treatment is not growing much. So the growth is also limited because of that.
Q: A quick word on ImmunoACT. You have a 34% stake there. What is the plan going forward? Do you plan to raise your stake further and what is the contribution that you see from ImmunoACT?
A: As of now we don't have any plans to raise, they don't need money, they are well funded, we did two tranches and they started commercial supplies and they are doing good, they don't need more money.
For full interview, watch accompanying video
Also Read | Laurus Labs shares may fall 23% in 12 months, says Goldman Sachs citing a skewed risk-reward
"We see significant growth. It is not in teens; it is much higher that that," he told CNBC-TV18.
The outlook is based on the number of projects the company is managing right now, the technological applications they have developed, and the customers' interest, he said.
This is the verbatim transcript of the interview.
Q: There has been market rumour for a month or so, and you briefly spoke about it in your concall as well about the alternate API supplier for some new innovator. Could you tell us what is the timeline by which we could hear about this? The Street believes it could either be Merck or MSD. Tell us more about this opportunity.
A: We don't want to comment on the confidential projects for our partners. But we can tell you there is a shift from the big pharma and also large biotechs to diversify their supply base from one country to multiple locations. We have seen that shift and have expanded capacities, and our technical capabilities at the right time. We are working with six out of ten big pharma and we believe our contract development and manufacturing organisation (CDMO) will definitely be a driving force for our growth in the medium to long term.
Q: You are also looking at an alternate API supplier to an innovator, and it's in initial phases. By when could we hear about the outcome of this potential large-sized deal that you could be bracing for?
A: We already supply four APIs for new chemical entities (NCEs), for various big pharmas. This year will be remarkable for us because there are two abbreviated new drug application (ANDAs) being filed using our API in the US. So, once the ANDAs, the approval will be less than 12 months, then we will have commercial opportunities for two APIs. There are multiple phase three projects under execution, and we believe we will have a good times in CDMO in the near future.
Q: We understand there's going to be one more customer. We know this is confidential, so we won't push you, but is this transformative in terms of the size of the opportunity?
A: These are high-priced, large-volume products where ANDA is being filed. These are not small, these are not in single-digit million. This is multi-million dollar opportunities we will capture once the ANDA is filed and then we start supplying the commercial volumes. And also, we have seen a lot of customer visits also happening. That is also an indication that big pharma and large biotechs are looking at diversifying their supplier base.
Q: This news about the US FDA issuing an untitled letter on May 16 for your manufacturing facility in Andhra Pradesh. Could you tell us the status? Is this plant affected, and what percentage of sales from this plant is your US revenues?
A: We acquired a unit in 2020 called Phalanx Labs. When we acquired it, this site already had an import alert. So, we took that facility and did remediation measures and used that for in-house intermediates. Based on the in-house intermediate uses, FDA inspected in December 2023. We responded to that and FDA sent another correspondence on 16th of this month. Untitled letter as per FDA forum regulatory document is a correspondence to the industry where the GMP deviation doesn't meet the threshold of a volume. This is a correspondence with us, gives us an opportunity to address two more issues.So we had a five-point 483 when FDA inspected. In the untitled letter, they only raised the concern on two points. We will address that.
This unit contributes less than 1% of our revenue. Also, this unit is not used for any third-party regulatory sales. There are no drug master files (DMF) filed from this unit so far. We are trying to resolve the issues of the import alert on that unit and we don't see any impact on the corporate level.
Q: There are some concerns about delays in a couple of your critical CDMO projects. You saw growth of just 4% in the quarter gone by. By when do you think you can get back to double digit growth? And these concerns about the delays in some of your projects, would you want to alleviate any of those concerns?
A: There are no delays in the projects. If you look at the drug discovery from, phase 2 to phase 3, and phase 3 to ANDA, it takes its own time and that's the reason people who are in the CDMO business they are fully aware. A CDMO business is very lumpy, so you can't measure the CDMO business quarter-on-quarter. But we know how many projects we are handling, and what are the customers' interest in us, what kind of technology applications we have done. So we are very bullish on this segment.
Read Here | Laurus Labs Q4 Results: Stock falls after earnings miss; Management sees better margin in FY25
Q: You said the business is lumpy. But even if you look at it annually, you were sitting on about ₹2,100 crore in the CDMO business. That's down to about ₹920 crore in FY24, a significant fall. What kind of growth do you look at in FY25 on average?
A: It's going to be significant growth in this year.
Q: Could it be 15% or 20%? Quarterly, you are doing about ₹200-240 crore in the CDMO space. Can you take that up to ₹400-450 crore?
A: Last year, as you mentioned, we did more than ₹900 crore. This year, we see significant growth. It is not in teens it is much higher that that.
Q: In the last year what was encouraging is that the margins steadily recovered all through the year and the Q4 margins were much better than the Q1 margin. When do you get to 20% margins and what should we work with for FY25? Also, the debt is in excess of ₹2,000 crore. You are also doing some capex. What is the guidance on margins as well as on debt?
A: We hope to do 20% plus EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins this year. What we measure in our business is the gross margins. Are we doing better in our gross margin? The answer is yes. We are able to maintain around 50% gross margin. As we are not clocking revenue, our EBITDA margins are coming under pressure. As we increase our revenues, things will fall into place and we believe this is the year where we will start improving our EBITDA margins. That is on the EBITDA margins.
Q: What about on the debt, which is currently at ₹2,300-$2,400 crore?
A: We will not increase debt. We will not go past ₹2,500 crore. Because we have done major capex already in the last three years. This year, we will do about ₹700-800 crore capex that will come from internal. We don't need to raise any further debt.
Q: So will it come down from this ₹2,500 crore?
A: It will come down.
Q: On top line, sir, what numbers should we sort of expect for FY25? What kind of growth from ₹5,000 odd crores?
A: We have stopped giving exact guidance. But this year will be definitely, we will see growth in all segments. generic APIs, formulations, oncology, CDMO, this year will be good for us.
Q: The anti-retroviral (ARV) business did quite well and ARV formulation was up almost 25% year-on-year. In FY25, what kind of a sustainable growth do you see in ARV?
A: We don't expect significant growth. We believe that will stagnate the current levels, but remaining segments are very good.
Q: Last year has been strong. So what is the reason for ARV seeing stagnation in growth?
A: The number of new HIV patients getting into the treatment is limited now and there are less new infections. So the number of people on the treatment is not growing much. So the growth is also limited because of that.
Q: A quick word on ImmunoACT. You have a 34% stake there. What is the plan going forward? Do you plan to raise your stake further and what is the contribution that you see from ImmunoACT?
A: As of now we don't have any plans to raise, they don't need money, they are well funded, we did two tranches and they started commercial supplies and they are doing good, they don't need more money.
For full interview, watch accompanying video
Also Read | Laurus Labs shares may fall 23% in 12 months, says Goldman Sachs citing a skewed risk-reward
(Edited by : Shweta Mungre)
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