Concord Biotech Limited (CONCORDBIO) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Concord Biotech Limited Q2 FY '26 Earnings Conference Call hosted by AMBIT Capital. [Operator Instructions] Please note that this conference is being recorded. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements do not guarantee the future performance of the company, and it may involve risk and uncertainties that are difficult to predict. I now hand the conference over to Mr. Pranav Chawla. Thank you, and over to you, sir.

Welcome to the Q2 and H1 FY '26 Earnings Conference Call of Concord Biotech Limited. We thank the management of Concord for providing us the opportunity to host this earnings call. From the company today, we have Mr. Sudhir Vaid, Chairman and Managing Director; Mr. Ankur Vaid, Joint Managing Director and CEO; Mr. Lalit Sethi, CFO; and Mr. Prakash Sajnani, AVP, Accounts and Finance. I would now invite Mr. Sudhir Vaid, Chairman, Managing Director of Concord Biotech Limited to give his opening remarks. Over to you, sir.

Good afternoon, everyone, and thank you for joining us on our Q2 and H1 FY '26 Earnings Conference Call. Revenue for Q2 FY '26 stood at INR 247 crores, while H1 FY '26 revenues were INR 451 crore. The subdued performance is primarily due to delay in written confirmation from CDSCO government of -- government tenders for Middle East region and shift in procurement patterns from U.S. customers on the back of tariff uncertainties. We have experienced a cycle and uncertainties in the past and emerged stronger. We believe that this is just a timing difference and postponement of sales and not loss of business. Based on early discussions and forecasts, we anticipate a stronger performance in H2. On the EBITDA front, the decline was primarily due to the commercialization of our new injectable facility at Valthera, which had a temporary impact on margins. Excluding these initial start-up costs, our EBITDA margin stood at 41%. As the facility ramps up and achieved higher utilization levels, we expect it to start contributing positively to our overall margins in the coming quarters. Despite the challenges, I am pleased to share that the last 6 months have been quite eventful on the regulatory front. We hosted multiple site inspections across our facilities. Unit 2 went through its emerging market inspections, Unit 3, our largest fermentation facility successfully completed its first EU inspection. We also had successful inspections at Unit 1 Dholka from key global regulatory agencies, such as U.S. FDA and EU authorities. These successful outcomes give us the confidence and the credentials to enter new markets and secure regular supplies. In addition to the strong regulatory progress, over the last 6 months, we also successfully executed several key strategic initiatives. Notably, we received U.S. FDA approval to market teriflunomide tablet making another important addition to our portfolio. We also incorporated Stelon Biotech Inc., which will drive the marketing, distribution and commercialization of Concord Biotech products in the U.S. market. Stelon will manage end-to-end commercial operations while ensuring full regulatory compliance, establishing our direct commercial footprint in the U.S. and advancing our goal of expanding market access and unlocking greater value across key global markets. We incorporated Concord Lifegen Limited as a wholly-owned subsidiary to strengthen our domestic marketing, sales and distribution capabilities. This move will enable us to sharpen our market focus, deepen customer engagement and enhance our brand presence in India. We have also invested in Cellimmune Biotech Limited, which is working on new ways to treat cancers using the body's own immune system. Cellimmune is developing advanced therapies like CAR-T cells, which are specially designed to find and destroy cancer cells. This goal is to move beyond traditional chemotherapy and offer smarter, more personalized options for treatment. Speaking about our CDMO opportunities, we remain actively engaged with clients and remain optimistic on finalizing some of the opportunities in the near term. With our strong portfolio -- product portfolio requisite regulatory approvals, marquee clientele base and diversified business opportunities, we remain confident on our long-term strategies to grow. With this, I hand over the call to Mr. Ankur Vaid, Joint Managing Director and CEO of Concord Biotech Limited. Thank you.

Thank you, sir. Good afternoon, ladies and gentlemen. We have reported revenue of INR 247 crores in Q2 FY '26, a growth of 21% compared to last quarter. However, on a year-on-year basis, there has been a dip of 20%. For H1, our revenue stood at INR 451 crores. The subdued revenue performance has been on account of three major reasons impacting the overall growth. First, being the renewal application for written confirmation from, CDSCO, New Delhi a prerequisite for selling products in the European Union. Although the application was submitted in July, processing delays impacted our EU sales as shipments could not be dispatched without this approval. We received the written confirmation on 4th November, and it is now visible on their website also. Shipments that were on hold have now resumed and contributed to revenues in the current quarter. So in summary, this is not a business loss. This is just a timing difference where we were not able to sell in Q2, but in Q3. The second issue relates to our government supply contract in Middle East that was being executed through an Indian entity. This contract has been deferred due to regional uncertainties and ongoing conflict. We remain optimistic that the contract will resume soon, allowing us to recover the associated revenue going forward. Lastly, we experienced a temporary shift in the procurement patterns, particularly from U.S. customers, driven by the ongoing tariff situation. However, following the clarification in September that these tariffs do not apply to generic drugs, order inflows have now returned to normal levels. Additionally, progress on the second source opportunity had also been slowed due to this uncertainty, but with the tariff clarity, clients have begun responding more quickly. This positive development positions us to accelerate our second source engagements with multiple customers and capture a larger share of the market. Overall, these are largely timing-related factors rather than structural ones. And we will try to mitigate the impact in H2 for the shift in the business. Having said that, we remain confident about the underlying demand and the strength of our products, which will enable us to capture a larger market share. If we exclude these timing-related issues and the temporary shift in the business, the underlying unit economics remain strong. The deferral of revenues to the following period affected overall margins due to de-operating leverage. However, excluding this impact, both gross margins and EBITDA have remained stable to improving. Additionally, if we adjust for the expenses for our injectable facility, where revenues will occur in the upcoming period, our EBITDA margin stands at a solid 41%. With higher revenues expected from the injectables facility, and the recovery of the deferred revenues in the second half, we are well positioned to sustain and further strengthen our margins going forward. Now let me speak about a few positive developments. Over the past 6 months, we have secured multiple regulatory approvals across our sites, strengthening business continuity and enhancing global market access. Our Dholka facility has received U.S. FDA, EU GMP and Russia GMP certifications, while our Valthera facility obtained NAFDAC approval from the Nigerian authority for the oral solid dosage facility. Additionally, our Limbasi facility has been granted EU GMP certification. These approvals will help us broaden our customer base across regions and ensure consistent supply. We are also in advanced discussion with innovator companies for generic API supplies and are witnessing strong positive traction on this front. Furthermore, we have been actively pursuing qualification initiatives for second source opportunities, which are now progressing at an accelerated pace. Once we achieve second source qualification, it will only be a matter of time before we expand our wallet share and potentially transition into a primary supplier over the long term. Speaking about our newly commissioned injectable facility, we are witnessing a strong rise in inquiries and revenue traction. Our products have been successfully validated and customer acceptance continues to grow. With the increasing interest and improving revenue run rate, we anticipate stronger visibility and sustained growth from this segment going forward. Alongside injectables, our CDMO business continues to progress well and represent a significant long-term growth driver with a large addressable opportunity. We possess both the capability and the capacity to serve this market effectively. We remain actively engaged with clients and remain optimistic on finalizing some of the opportunities in the near term. Over the years, we have been successfully positioned Concord as a leading supplier of fermentation-based APIs creating a distinct niche within this space. Our business is built on deep expertise in complex fermentation processes, operational excellence, product development and R&D capabilities, all of which have enabled us to create strong entry barriers and establish a sustainable competitive advantage. With a diversified portfolio across therapeutic areas, scaled up manufacturing facilities, flexible plant configuration, robust regulatory approvals and an impeccable compliance record supported by backward integration we have emerged as a trusted partner for our global customers. With this, I hand over the call to Lalit Sethi, our Chief Financial Officer, for financial and operational performance. Thank you.

Thank you, sir. Let me take you through the financials and operational performance for the quarter. On the revenue front, our revenues for quarter 2 of financial year '26 stood at INR 247 crores as compared to INR 310 crores in the same period last year, a degrowth of 20%. However, on a quarter-on-quarter basis, revenues have grown by 21%. Our revenue for H1 financial year '26 stood at INR 451 crores as compared to INR 526 crores in the H1 of the last financial year. Revenue from API business stood at INR 345 crores in H1 of this financial year against INR 401 crore during the same period last year. Revenue from formulation business in H1 of this year stood at INR 106 crores as compared to INR 125 crores in the same period last year. The revenue from domestic business stood at INR 247 crore in this H1 and from exports stood at INR 204 crores. Speaking on EBITDA. EBITDA for this quarter stood at INR 88 crores. And for H1 financial year '26, it stood at INR 150 crores compared to INR 218 crores. EBITDA grew by 44% on a Q-on-Q basis. EBITDA margin stood at 36%, but if we negate the impact of the expenses of injectable facility, the comparable EBITDA stood at 41%. On the profit after tax, profit after tax stood at INR 63 crores for quarter 2 of financial year 2026. And for H1 '26, it stood at INR 107 crores with a PAT margin of 24%. With this, I shall now leave the floor open for question and answer.

[Operator Instructions] The first question comes from the line of Chintan Sheth from Girik Capital.

On the results front, if you can quantify the revenue loss for the EU part, just to help us how much of growth we have anticipated, which resulted -- which we couldn't execute because of the challenges we faced during the quarter. If you can just quantify, if those challenges were not in place, how much revenue growth or how much revenue can get spilled over into the subsequent quarters would be helpful.

Sure. So on account of the written confirmation, the total amount was close to around INR 20 crores to INR 25 crores, which, as I mentioned, that has been realized in quarter 3. On account of the Middle East tender, that amount also stood at around INR 20 crores, where, as I mentioned, that still we do not have clarity and there is a deferment of the tender. So part of it has been realized in quarter 3. The other part, we are still awaiting clarity from the government on the tender results when it will be opened up.

And that seems the full year guidance will continue to be healthy. If we add this back up, we are anyways single digit or slightly lower on a Y-o-Y basis. But prima facie the annual run rate or annual growth doesn't seem to be very much affected because of the weak Q2 and the first half?

No. I mean, as I mentioned that there has been a temporary shift in the procurement patterns because of the U.S. customer -- U.S. tariffs and this has impacted the industry as a whole. So as I mentioned that we expect to recover this deferred revenue in the coming quarters, but the exact timing and the quantum is difficult to specify at this stage. But that being said, our current visibility for H2 is strong, and we are seeing positive indicators. And we anticipate delivering growth in H2 higher compared to what it was in FY '22 of second half. But the magnitude will depend on several factors. So we are kind of working towards achieving that growth, but we'll be in a better position to provide clarity only by quarter 4.

And on the CDMO opportunity, any color on the ongoing -- what are the projects we won last quarter? Any color on how it is progressing? You mentioned that the final or confirmed offtake guidelines will be provided next year as the product has launched and ramped up in the consumer -- in the end market. But if you can -- how that has been the progress and would be helpful?

Yes. I mean, again, there is no change there. So we continue to supply them quantities. They have -- they are also in the process of increasing their field force to cater to this new product that they have launched in the U.S. And we will be getting the visibility on the forecasting by, as I mentioned earlier, also in our previous discussions by the next year. So we have executed orders. We continue to have orders in place that we will be executing. But our customer will be able to provide a much better visibility by the beginning of next year. Because by then, they would have the field force and they would have also put the inventory or put the material finished products in the market in all areas.

And sir, last bit on the U.S. part. I believe last year, full year, the contribution of U.S. to our overall revenue was somewhere around INR 100-odd crores, 10% of the overall -- 10%, 12% of the overall revenue. Given the fact that the visibility on the -- because of the tariff situation, even though the clarity has came through, the pattern still remains a little blurry for you to provide at that the timing of the reversal of all the shipments, which couldn't deliver this quarter. Do you feel that, that portion of the business will have -- will face some degrowth this year or how should we look at it?

No. So as I mentioned earlier also that while our direct sales to the U.S. was around 10%, but we are also supplying material to Indian companies and they are manufacturing the finished formulation and then supplying to the U.S. market.

Indirect [indiscernible]

Exactly, exactly. So the impact would also have come through the indirect route, as I mentioned. But as I mentioned that our current visibility on H2 stays strong. And this deferment of revenue, we will try to mitigate to the extent possible. But the magnitude at this point of time, I'll be unable to kind of get through. But definitely, the H2 is going to be stronger than H2 of '25.

The next question comes from the line of Hardik Doshi from White Whale Partners.

Just continuing on the previous question. See, if you add, let's say, even INR 50 crores of revenue from these 2 one-offs, there is still a slight degrowth on a year-on-year basis for the overall revenues [indiscernible] get to about INR 300 crore versus INR 310 crore last year. And I understand that there is this U.S. demand deferment as well that happened, some of it would have come indirectly, as you mentioned from the customers. Is there any way to quantify that? And the second question is, so what happens to the customers in Europe who did not get the orders in time? I mean, do they kind of switch to other suppliers? And then how does this impact your long-term relationship with them?

Sure. So it is difficult to quantify because when we supply the API to our domestic formulation customers, they make the formulations and cater to global markets such as U.S., Australia, New Zealand, LatAm and other markets. So how much quantity of that has moved to the U.S. as API manufacturers, we would not know of. But we know that we have issued them the letter of access for different markets. So that we know that their end markets are which all, but what has been the split between those markets, even as API manufacturers, we would not know of. So that is to answer your first question, the second question that with respect to the EU, our EU customers also were very worried in terms of this delay of the written confirmation because some of them were at a stock-out situation, close to stock-out situation, so -- and they were worried that if this thing would have moved on to December, we would be somewhere getting closer to the December holidays for Europe. So they were also worried and there were concerns with them also. But in the APIs and particularly in the fermentation where there are limited players, there is also a lot of stickiness. So -- and our relationship with these customers go much beyond 10 to 15 years. So our customers also understand that this is not something that is in the hands of Concord, but we are also relying on third party. But yes, they were also a bit jittery in terms of them not able to get the material delivered. But positively, that thing is behind them, and we have not seen any concerns after that once we informed them about the written approval.

Has this issue happened with the TDSU in the past as well? Or this is the first time?

So we get the approvals once every 3 years. So the last time, there was no issue as such. It's not an annual thing. But yes, I mean, for us, such a long duration was first of... first time.

The other question I had was we've been talking about kind of diversifying into other areas like I mean away from immunosuppressants and build in the other verticals. So can you maybe give us some strength or color in terms of numbers in the sense that what is the proportion last year? Where is it now? And what kind of growth rate is happening in immuno versus the rest?

So most of the development that is happening on the new product side is primarily happening in the nonimmuno segment. The product like Nystatin that we launched in February, March and where we have said that we are seeing a lot of second source conversions also happening. That second source conversion in Nystatin we continue to observe. But in this case, the quantum of API required is relatively very small. So you may not see it in the revenue contributions, but that effect has already started taking place in Nystatin and we're pretty confident that once the product becomes commercial with them, you will see a good market penetration on Nystatin, which is an anti-infective product. The couple of innovators that we said that we are trying to work with, one of them is in the oncology segment. So there also, it is in the nonimmuno. So as time progresses, and we will see greater market penetrations in the other segments. It is just that immunosuppressant has seen a much longer life cycle and because of which the contribution levels are higher. So it is also, in a way, an added advantage because our innovators see as Concord that you have a good market share with the generics. So why not work with Concord for their supplies as well. So it also in a way helps us to kind of build business with the innovators on the immunosuppressant. But the new products work -- new product penetration is also happening in the non-immunosuppressant as I mentioned.

What is the current -- like what percentage of revenue is coming from immunosuppressant currently?

So for the 6 months, it will be 76%.

Okay. And let's say, 2 to 3 years out, I mean, can this come down to like 50% or it would not be that actually?

No, no, it won't dip that much because, as I said, newer products will take time to kind of build up, but we anticipate to bring it below 70%.

And just one last question is on the pop. We are obviously expanding our formulation business. Just from a customer perspective, I just want to understand, does that create any conflict because we're going to the market and kind of competing with them in certain products?

So it's been 9 years now that we have been on the market on [finish]. I have -- we have not seen any concern on that matter.

[Operator Instructions] The next question comes from the line of Alankar Garude from Kotak Institutional Equities.

Sir, firstly, the delay in EU as well as Middle East, was it for API or formulations or both?

APIs.

So then what is the reason for the sharp drop in formulation sales on a year-on-year basis?

Sorry, my mistake. The -- again, I stand corrected. The written confirmation is on the API and the Middle East one is on the formulations, which is through an Indian entity that we have supplied to. [indiscernible]

Okay. Got it. Ankur, this CDSCO deferral, I mean, it seems a bit uncommon. So you explained the issue. But what can we do to avoid such issues in the future?

We all can represent the government that they should move ahead. I mean, actually, I'll tell you the reason was that there were certain issues at the -- with respect to compliances, we did face that cough syrup issue because when we followed up with the authorities, they mentioned that around that time, this whole cough syrup issue came up. And all the authority people were very occupied with addressing that issue. So there was a lot of delay in terms of looking at the documentation because of this matter. So I think this delay probably is to our understanding because of that. Of course, we don't know the reasons for that. But what we believe is that it is because of this.