Sai Life Sciences Limited (SAILIFE) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Sai Life Sciences 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. Diwakar Pingle from E&Y Investor Relations. Thank you, and over to you, sir.

Thank you so much, Sagar. Good evening to all the participants on this call. I warmly welcome you to the Q1 FY '27 Earnings Call of Sai Life Sciences Limited. Before we proceed, on the call, let me remind you that the discussion may contain forward-looking statements that may involve known and unknown risks, uncertainties and other factors. It must be viewed in conjunction with our business risks that could cause future result performance or achievement to differ significantly from what is expressed or implied by such forward-looking statements. Please note that we've mailed the results and the same are available on our website too. In case you've not received the same, you can write to my team at EY, 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. Krishna Kanumuri, Managing Director and Chief Executive Officer; and Mr. Siva Chittor, Whole-Time Director and Chief Financial Officer. We will start the call with a brief overview of the quarter gone past and then conduct the Q&A session. With that said, I'll now hand over the call to Krishna Kanumuri. Over to you, Krishna.

Thank you, Diwakar. Good evening, everyone, and thank you for joining us for our Q1 FY '27 earnings call. We are pleased with the progress we have made in the first quarter and importantly, with the momentum we are seeing across our business. Revenue from the quarter grew by 12% year-over-year, supported by growth across 2 businesses, firstly in the CRO, which grew by 26% year-over-year. The Q1 performance has been in line with our expectations, and we remain confident about our growth trajectory and prospects. As we have discussed in the previous earnings call, we expect a stronger H2 with planned capacity expansion going live in the second half of the year. As we look ahead, we believe Sai is at an important point in evolution from being a strong small-molecule CRDMO to becoming a technology-led multi-modality partner with capabilities spanning discovery through commercial manufacturing. Let me begin with the broader environment. From a customer standpoint, geopolitical uncertainty and concerns around intellectual property have made India an increasingly important part of their diversification strategies. I would say this trend has not only continued, but strengthened. In the biotech environment, we have seen several large acquisitions and about 18 IPOs in the U.S. As investors cash out, we expect capital to flow back into funding new biotech companies. The clear message we are picking up is that these new companies will be built with even leaner in-house capabilities, which should continue to support healthy demand for our sector. Our pipeline is being built for the long haul. Through dedicated FTE models, we are building deep global relationships with our customers' development teams. This is impacting our pipeline in 3 distinct ways. Molecules from biotech companies that we have supported being acquired by our pharmaceutical collaborators, molecules from acquired companies transferred to us. And finally, molecules from our FTE relationship progress into late-stage development. Together, these 3 create a broad and sustainable funnel for the business. As we engage with our customers, it is clear that the complexity and range of technologies they are pursuing are broader than ever. This aligns very well with our strategy of building strong R&D capabilities across a diverse range of modalities. We believe the biggest long-term opportunity is to continue building a fully integrated delivery engine from discovery through commercial manufacturing. We are seeing a clear traction with our clients beginning to engage across the full spectrum of our services. We are well positioned to transition from integrated small-molecule CRDMO to a full-fledged multi-modality integrated CRDMO. We have already made meaningful progress, and we'll continue to accelerate this build-out. Peptides are an important modality for us. We are one of the largest and fastest-growing peptide teams within the discovery. While GLP-1s received significant attention, there is substantial work underway in macrocyclic peptides, peptide drug conjugates and linker chemistry applications. Our first dedicated peptide development lab is coming online shortly for a top-tier pharma company. We're also expanding the scope of our peptide center of excellence to support both discovery and development teams with ability to deliver pilot quantities for clinical trials. In addition, we plan to break through a peptide manufacturing facility at our new greenfield site near Hyderabad, which is expected to be operational in 2028. We are close to opening our XCC Center of Excellence, which will support both discovery and development teams in the synthesis of payloads, linkers and conjugation across antibodies, peptides, PROTACs and oligonucleotides. There is increased need to support our development programs with greater speed and flexibility. We are working on building new capacity, specifically designed for early to mid-stage deliveries, and it will be an important part of our expansion at our new greenfield manufacturing site. Formulation is another area we're entering. While we are still about 6 months away from being operationally ready, we are seeing significant interest from our pharma partners. There's a clear demand for integrated offering that can deliver both first-in-human APIs and drug product with speed, helping us to accelerate development time lines. Scientific excellence remains at the heart of this evolution. For the past few years, we have deliberately invested in strengthening our scientific capabilities, infrastructure and talent across the organization. Recent successes have been reinforced the belief that we are on the right trajectory. For example, we recently developed capabilities in ADC, bioconjugation characterization and analysis and recently published our work in high-impact peer-reviewed scientific journals. During the quarter, we also published a joint paper with AstraZeneca on experimental approach determining reaction kinetics early in development. The objective is to generate better process understanding earlier in the life cycle and ultimately support smoother scale-up and technology transfer. We believe these are important indicators of the scientific depth we are building at Sai and not only in terms of services we provide to customers, but also in our ability to develop and contribute new approaches to solving complex scientific and technical problems. Technology remains central to the proposition we offer customers. We are making meaningful progress in advanced process technologies. Recently, we successfully scaled up a late-stage GMP [ campaign ] for large pharmaceutical customer at our manufacturing facility using flow chemistry. The experiment continuous downstream operations, including extraction, distillation and crystallization with a long-term objective to developing more flow applications in our commercial manufacturing. These capabilities are particularly relevant as we see increasing complexity of molecules entering our development and manufacturing pipeline. Talent development is an important part of this journey. We have kick-started a campus strategy program led by a former Board member, the objective of establishing Sai as an employer of choice for life science talent. We are putting in place a more structured approach to how we attract, develop and retain scientific and technical talent. We are establishing structured management development programs with first-time experienced managers based on external technical and behavioral assessments, making them more targeted and outcome oriented. We are also increasing the intensity of Sai Academy, our strategic capability building program designed to create common scientific, technical and operational standards across the organization. We believe building this depth of talent and capability is essential as we make -- take on more complex programs and move into new modalities. In conclusion, there's a clear evolution of what large pharmaceutical companies are looking for from their outsourcing partners. The expectation is the strong scientifically led partners who can take greater ownership of discovery and development programs rather than simply execute individual pieces of work. We believe that the combination of our technology-based scientific talent and culture is a key reason why large pharmaceutical companies are increasingly bringing a significant work to Sai through the strategic engagements. These engagements will create a healthy and sustained pipeline over multiple years. With that, let me hand over to our CFO, Siva, to take you through the financial performance and progress we are making in the business.

Thanks, Krishna. Good evening, good morning, everyone. Let me start with the financial performance for the quarter and provide commentary on the 2 businesses. For the quarter ended Q1 FY '27, total revenue stood at INR 553 (sic) [ 554 ] crores representing a year-on-year increase of about 12% compared to INR 496 crores in the quarter last year. The CDMO business contributed approximately 60% of our revenues and the CRO business is the remaining 40%. On a Y-o-Y basis, CRO revenues increased by about 26%, while the CDMO revenues grew by around 6%. Our balance sheet remains healthy, and we continue to maintain the financial flexibility required to invest behind the opportunities we see across the business. We will continue to balance investments in future growth with disciplined capital allocation and returns. In the Discovery business, the Discovery Chemistry services continue to scale. During the quarter, we successfully converted a pilot collaboration with a large pharmaceutical company into a long-term high-volume discovery chemistry partnership. This is exactly the kind of progression we were looking for, starting with a focused engagement, demonstrating value and expanding the relationship over time. We've also completed a large-scale DMPK data generation project for a biotech customer and have continued to build capacity to support our growing base of large pharmaceutical customers. A few years ago, we made a deliberate decision to move beyond being a low-value chemistry services provider and invest significantly in biology and DMPK while continuing to expand our discovery chemistry capabilities. Those investments in infrastructure, technology and people are now translating into integrated service delivery for approximately 65% of our customers, today, primarily biotech customers. We are now seeing the same model gaining traction with large pharma. We are already in discussions with several large pharmaceutical companies and hope to transition at least 2 large pharmaceutical customers to an integrated model this year. Moving now to the CMC business. The underlying health of the CMC business continues to be strong with 33 active commercial molecules and 14 molecules in late-phase. As Krishna mentioned in his opening remarks, dedicated FTE development contracts are expected to be a key differentiator for Sai Life Sciences in augmenting our pipeline of late phase and commercial molecules. Over the last 15 months, we have added 6 late-phase molecules to our pipeline. 5 of which have come through large pharma clients with whom we have ongoing FTE engagements. One such collaboration with a top-tier pharma company, which began at a small scale, has now expanded into a sizable dedicated FTE contract. With this customer, our engagement now extends end-to-end truly from discovery to commercial with active programs across the life cycle from early discovery to late-stage manufacturing. We've also begun negotiations for another large pharma FTE engagement on the process development side, which we expect to close by the end of Q2 with work expected to commence from Q3. With respect to the Phase III pipeline, one of our customers received an approval during FY '26. 2 more have regulatory milestones during this financial year and one is expected in Q2 of FY '28. An equally important indicator of the quality of our customer relationship is the level of repeat business we generate. We continue to add new customers, but returning customers accounted for over 90% of our revenue in fiscal '25 and '26. We believe this is a strong reflection of customer satisfaction and the value we are creating for customers over the course of their programs. It also reflects our ability to deepen engagement with clients over time. We're also increasingly seeing evidence of our ability to support customers through the full life cycle. In calendar 2025, Sai contributed to 5 FDA-approved molecules, meaning we were part of either discovery or development or commercial manufacturing for the product. Over the past 5 years, we have supported 17 launches, demonstrating our ability to supply launch quantities and play a meaningful role in commercialization. I am also pleased to report that we secured the prestigious EcoVadis Platinum Rating 2026, placing us among the top 1% of the companies assessed worldwide for sustainability performance. Overall, we believe the quarter reflects continued progress across both the businesses and our longer-term strategic priorities. Notwithstanding the inherent lumpiness in the business, the long-term opportunity for the CRDMO sector remains robust and our integrated model with strong pharma relationships and technology investments position us well for sustained growth. We remain confident in our ability to sustain our longer-term revenue growth guidance of 15% to 20% and the EBITDA range of 28% to 30%. With that, we'll be happy to take your questions.

[Operator Instructions] Your first question comes from the line of Binay Singh with Morgan Stanley.

In the opening comments, we talked about strengthening relationship with Big Pharma. We talked about integrated CRDMO, long-term discovery contracts, more FTEs. And you also made a comment on intellectual property. Do you think these things have accelerated this calendar year or it's more a continuation of what you were seeing last year also was similar? Or there is some sort of a change in environment where we are highlighting these more in this calendar year?

So Binay, I think we are looking at the progression of business. I think if you look at what is really happening, customers are trying to build sustained relations over the next 5, 10 years. So you will see a gradual increase in these relationships in terms of one service at a time and starting small and growing big. But I think we are in very early part of this journey in terms of expanding the relationship. So we think that these risks all have potential to expand significantly over the next 5, 10 years. So I think they're all in the early stage evolution, but we are seeing acceleration in terms of the scale and scope of the services we offer.

I think just to add, Binay, I think when we started, for example, on the FTE relationship that you pointed, right, -- we started this a few months ago, we said this is starting small. We know this is very different. This is how China built some of the larger CDMOs and we said we are seeing this for the first time in India. But if you look at where we are today, we are today -- we are saying on one customer, we're already on an end-to-end basis. We are talking about molecules that have transitioned. So it's not just early phase development, it's late-phase development. As Krishna mentioned, we are talking about molecules that are being acquired by pharma that is being pushed into our FTE development so that a robust development process can be developed and then scaled up. So I've talked about 6 molecules in Phase III over the last 15 months come to this process. So there is a progression happening. I think this -- the broader sentiments are there, which remain the same. But as we kind of get into this and start working with the customers, acceleration with respect to size is what we are seeing. That's the sentiment that we are expecting.

So Binay, to give you a little more context, right? If you look at, let's take a WuXi model, the customers are doing discovery -- integrated discovery services, then they are doing all the FTE development services and commercial manufacturing. What India has seen as the first phase is discovery chemistry services and then tech transfer at late-stage commercial manufacturing. But what we are seeing now is the middle part, which is FTE collaboration, which -- where basically WuXi had all the relationships starting to migrate here. And we're also starting the early phases of that discovery program going to integrated programs. So it just shows that this is a very early part of opportunity. I think these have a long way to go in terms of scale.

My second question is earlier in the call, I think in the last call, Krishna had commented that how in financial year '27, the second half will be stronger than the first half. But if you see in the past also leaving aside financial year '26, that is generally the trend, 40-60 between first half, second half. So this year, you called it out is more because of more capacity coming this year that the skew of second half will be a little heavier than first half. Is that the reason you had called it out?

That is true. Plus also fiscal '26 for us was a little out of the ordinary in terms of how our numbers panned out. We are roughly 48-52, if I remember the number right, Binay. And this was -- if fiscal '26 for us was slightly, I would say, very different. It has always been historically 40-60 kind of a period, but fiscal '26 kind of was almost flat. And hence, we just, for the last call, just trying to make sure that we kind of give advance intimation on how we are seeing our next year.

[Operator Instructions] The next question comes from Amey Chalke with JM Financial.

Congrats to the management on good numbers. I have first question on CRO. We have said in the opening remarks also in PPT that we have added one large customer in the CRO side in chemistry in this quarter. What has worked in our favor to convert this relationship? And also how big is this relationship could be for us in terms of number of projects or revenue, if any quantification you can provide?

Generally, we don't quantify what we're doing with each customer. But it's just not one, we converted a couple this quarter. So I think that tends to -- the multiple we are actually converting -- it's just not one. We just -- some of them are converting more linearly. Some of them are basically doing more integrated, but we have more than one customer expanded collaboration for this quarter.

Sure. Your voice is not a bit clear. But what I heard is the -- our integrated platform, it is what helped us to convert these customers. Is that right? Or...

No, I'm just saying we are seeing both growth in terms of scale in terms of certain lines of service like let's say, discovery chemistry, but some customers are also expanding more gradually in terms of integrated service as well. And this growth is not contributed by one customer. There are multiple customers with this who have potential to scale up as well.

Got it. And the second question I have on the 4 commercial contracts, which are -- which will be added this year. I think 3 of them have been added in the first quarter. Is it possible for us to give some clarity in terms of modalities where these 4 products would be and also whether we would be a primary supplier or the secondary supplier for these projects? And have these projects have been already commercialized or these are newly commercialized products?

So 3 of the 4 that we will be working on this year, as we had mentioned during the last call, will be commercial supplies. Primary, secondaries as we've discussed before, right, they are -- I think we probably are primary in 2 out of the 3, but this is more anecdotal than what I can tell you at this point in time.

At least if you can provide the revenue per product potential, would it be in line with our -- some of our top commercial products? Or will it be sizably below or over and above that? If you can give color on that?

I think what we had mentioned in the last call, Amey, was that we said this would be a decently sized product. Looking at our size and revenue, we said this is a decently sized product. The 3 of them would be decently sized products and one of them will be a lower volume product. This is what we had the fourth one, we said will be a lower volume product. That's what we have had mentioned last year so -- last quarter. So we'll stay with the same comment.

So by size, you mean value or volume for all 3?

Value. Volume does not matter. Value is what I'm talking about. I'm talking value with respect to how our revenues are, I think it's a decent price volume.

Sure, sure. And one more question I have on the formulation capabilities where we are entering. What would be the -- like what kind of formulation capabilities would that be? I think we have written drug product. So is it a biologic -- the fill and finish facility, which we expect to construct here? Or is it something else? And what visibility we have in the pipeline for these projects?

As of now, we are building the small molecule primarily oral solids at different forms up to Phase I and Phase II. We have significant interest from multiple of our large pharma partners already who are working with on the chemistry side to be able to support them on their early clinical formulation. So we have significant interest for that piece.

So typically, we have not seen CDMOs entering into oral solid formulation capabilities. So what's the thought process here? The reason being is the profitability in these segments are typically on a lower side. So is it something different for these projects?

Look, right now, we're only talking about clinical up to Phase II supplies. We're not talking about commercial supplies at this time. And this was driven by our discussion with customers where the need is. And their need is very specific to supplying China Plus One, where they're getting a lot of clinical materials early phase, and this fits in with the China Plus One strategy of our partners at this point. And it just -- this only works well when you have existing relationship on the development side, not stand-alone.

[Operator Instructions] Your next question comes from the line of Akshay from AK Investment.

Sir, my first question is about the therapeutic wise split in the revenue. So what is the therapy-wise currently split or exposure for different therapeutic mix in the revenue and also in the pipeline as well, which are the therapeutic areas are we focusing on?

So I think we've given the therapeutic distribution for the last financial year. I think that's part of the investor deck. We do it on an annual basis. On a quarterly basis, this does not make any sense. So it's available in the deck that we have uploaded on the investor presentation. We've given you a detailed presentation on that one. This is -- if I remember, it's Slide #21 of the investor presentation.

Okay, sir. And for the pipeline in the product as well, that would be more or less similar in that line also?

I'm sorry? Can you repeat your question, please?

Yes, yes, definitely. Sir, also for the products in pipeline as well, that split will be more or less similar in that category as well?

It's difficult to say, right? It's about what our pharma customers are looking to innovate on. Finally, we will be driven by what the innovator pipeline looks like. But this is just a reflection of where we are today or how our revenues were in the last year, at least from our books perspective. That's really what we have reflected there.

Okay, sir. And my second question is what is the CapEx guidance for FY '27 and FY '28?

So what does that for '27 and '28, sir?

CapEx, capital expenditure guidance for FY '27 and '28?

We have given an FY '27 CapEx guidance of INR 1,100 crores to INR 1,300 crores. That still stands. We haven't provided a guidance on fiscal '28. We will come back to you with a guidance at an appropriate time.

The next question comes from the line of Sajal Kapoor with Antifragile Thinking.

Krishna and Siva, congratulations. What stands out over the last year is not just the growth, but the deepening big pharma relationships and Sai getting involved earlier in the development cycle. So very well done. Two questions. You mentioned that 5 of the 6 late-phase molecules added over the last 15 months came through large pharma FTE relationships. Does getting involved through these dedicated development teams materially increase Sai's probability of retaining those molecules for commercial manufacturing versus programs where you enter later through an RFP or tech transfer?

The first intent of every pharma company is to leave the program because of the commercial. So I think it's only in the cases where there must be maybe a mismatch in capacity, we would leave out. But the primary intent -- a stated intent is leave it with Sai all the way through the life cycle of the product.

Sure. And you also said around 65% of Discovery customers now use integrated services, and you hope to transition at least 2 large pharma customers to that model this year. So as large pharma moves from single service engagements to integrated programs, do you see a meaningful change in revenue per customer and relationship duration? In other words, getting more wallet share per relationship?

Yes, Yes. So that's the reason we also brought up a point on -- while if you look at our growth, right, last year, we grew 30%, but 90% -- more than 90% of our revenue came from our existing customers. So whatever we've done over the last 2 years, it's kind of -- now that you are working with 19 of the top 25 pharma companies, there's a tailwind with respect to how India outsourcing is panning out. So the objective is to go find out how much wallet share can you increase and what kind of services. So we want to be careful when we do, the wallet share increase. One, we want to increase commercial, but we also want to increase the spectrum of services that we go. We also then kind of -- we are able to then transition work across. We are able to kind of be present in every part of their services, and it also helps us derisk our overall revenue concentration even within the same customer.

Can I ask one more, please?

Sure.

Yes. So you are entering a much heavier investment cycle with up to INR 1,300 crores of CapEx, which includes a greenfield for peptides. Given the greater customer and pipeline visibility you now have, what internal return threshold do you use before committing this capital? And what would make you slow down or defer an investment?

So typically, we have certain internal hurdle rates, which will be generally higher than the ROCE, ROE from a company perspective targets that we put. That would be slightly higher than that. So we kind of use that as the model. And then we kind of set this based on what we are seeing. We evaluate capital expenditure as we kind of put things in. There are certain expenditures that you are putting in because you have to build a capability and you were expecting a certain amount of revenue based on certain assumptions once you build that capability. In those cases, it may be slightly difficult to defer unless there are severe business circumstances. But if you're doing a capacity addition, we evaluate the capacity addition as we kind of run through our CapEx. And there are times in history where even inside where we have demonstrated that when we have seen capacity addition requirement slows down, we slow down the CapEx. And that's the only way to kind of control and be modular and be as just in time as possible as is needed for the business.