Piramal Pharma Limited (PPLPHARMA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Piramal Pharma Limited Q2 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Gagan Borana, Associate Vice President, Investor Relations and Enterprise Risk Management. Thank you, and over to you, sir.

Thank you, Shaya. Good morning, everyone. I welcome you all to our post results earnings conference call to discuss our Q2 and H1 FY '27 results. Our results material have been uploaded on our website, and you may like to download and refer them during our discussion. The discussion today may include some forward-looking statements, and these must be viewed in conjunction with the risk that our business faces. On the call today, we have with us our Chairperson, Ms. Nandini Piramal; CEO of Global Pharma, Mr. Peter DeYoung; and our CFO, Mr. Vivek Valsaraj. With that, I would like to hand it over to Ms. Nandini Piramal to share her initial thoughts.

Good morning, everyone, and thank you for joining us on our post results earnings call. we delivered a strong performance in Q2 and H1 FY '27 with broad-based contributions from all 3 businesses with a significant improvement in profitability. In Q2, revenue grew by 28% year-on-year to INR 2,617 crores, while EBITDA increased 72% to INR 385 crores. For H1, revenue grew 23% to INR 4,887 crores, with EBITDA increasing 72% to INR 669 crores. In our CDMO business, performance was supported by demand across India and overseas sites, improved execution and a sustained buildup in RFPs and orders. Our complex hospital generics business continued to perform well, supported by growth in inhalation anesthesia in the rest of the world markets and the initial contribution from Kenalog. In Consumer Healthcare, our brands and e-commerce continue to perform supported by portfolio premiumization and expansion across channels. More importantly, the strong top line growth translates into significant improvement in profitability, better capacity utilization and operating leverage supported by disciplined execution and our continued focus on productivity and cost management, enabled us to expand EBITDA margin from more than 350 basis points in both Q2 and H1 FY '27. We achieved this performance while maintaining our rigorous focus on quality and regulatory compliance. On H1 FY '27, we successfully completed 12 regulatory inspections and 110 customer audits. Since FY 2012, we have successfully cleared 427 regulatory inspections, including 51 U.S. FDA inspections with no official action indicated, classifications across our U.S. FDA inspection. Moving on to business-specific highlights. Starting with our CDMO business, revenue grew 36% year-on-year to INR 1,424 crores in quarter 2 FY '27. And for H1, revenue increased 28% to INR 2,611 crores, reflecting robust growth across the network side. Profitability in the CDMO business also improved meaningfully during the period driven by robust revenue growth, better capacity utilization and operating leverage, particularly across our India, North America sites, along with disciplined execution and cost management. We continue to see an increase in RFP activities and order flows across the network sites, helped by sustained recovery in biopharma funding in an enhanced commercial team. The sustained buildup in RFPs and orders provide greater visibility going forward. Supported by this order momentum and with H2 typically stronger than H1, we expect this growth momentum to continue throughout the year. During H1, we added 22 new customers and successfully cleared 110 customer audits. Product during H1, we witnessed meaningful progress across multiple key metrics, which included over 50% year-on-year growth in ADC revenues, 29% year-on-year growth in revenues, on patent commercial manufacturing contribution from innovation-related work moving to 49% compared to 46% in H1 FY '26, and an increase in Phase III molecules from 25 as of March 2026 to 28 as of September 2026. We're also strengthening our differentiated capabilities across the CDMO network. We acquired a controlling stake in the up and buy to expand our biologics platform, while capacity and capability expansions are [indiscernible] for high potency APIs completed and [indiscernible] fill finish progressing as per plan. Contribution from differentiated revenues to our CDMO business increased to 43% compared to 40% at the end of the last financial year. Moving on to our complex hospital generics business. Revenue grew 22% year-on-year to INR 849 crores in quarter 2 FY '27. For H1 revenue increased 24% to INR 1,592 crores, reflecting good traction across the existing portfolio and initial contribution from Canada. In inhalation [indiscernible], we maintained our leadership position in the U.S. sevofluran market with a 48% value share. We also witnessed a healthy pickup in fuel flowing sales across the rest of the world market. In intrathecal therapy, we retained our #1 position in the repeat of that open market in injectable pain management, we're ensuring availability of our products to focus supply and collaboration. Catalog sales contributed to CHC revenues during the quarter. Kenalog is a good fit for our compact hospital generics portfolio and will be an important growth catalyst for FY '27. We're currently working to transition the Kenalog manufacturing to a new CDMO and accordingly and to be an associated regulatory approval. Looking ahead, continued expansion in market share and in relation on the CCL segment in rest of the world markets and contributions to [indiscernible] expected to support [indiscernible] throughout the second half. We continue to invest in the linear portfolio differentiated and specialty products through [indiscernible] opportunities, complex generics, branded products and licensing and co-development. These investments are aimed at strengthening the long-term growth profile of the business. Moving on to Consumer Healthcare. Revenue grew 13% year-on-year to INR 359 crores for Q2 FY '27 for H1, [indiscernible], revenue increased 14% to INR 706 crores. As I continue to branch during increase contributed to 53% [indiscernible]. Cost health care sales almost to a 22% growth in net business, reflecting the increase important additional capital in our portfolio. We the innovation strategy by driving fewer larger and higher potential launches, portfolio realization also remains a pretty key focus with original mix of high log products. During the period, we produced a visible range under [indiscernible] to address the growing back for premium skin care products. We continue to support our brands through focused investments in media trade promotion across digital and traditional channels. During H1, these investments represented approximately 11% of Consumer Healthcare sales. We're also strengthening our multichannel distribution network with the presence across 180,000 cements and cosmetic outlets over 13,000 modern trade outs with more than 20 e-commerce platforms. Our focus remains increasing reach across all accounts, on trade and non-Chemist channels. The sales and distribution agreement with Bio expire naturally at the end of its term in December 2026. We're working jointly to ensure an orderly transition with minimal disruption. Given the low margin nature of the arrangement and the continued growth of our brands, we do not expect it aspire to have a material impact on our FY '27 outlook. Going forward, the continued scaling of our power brands and e-commerce together with portfolio premiumization and channel expansion, which is expected to support growth and margin improvement. Overall, our first half performance and the progress across all 3 businesses have strengthened our confidence in the full year trajectory. As has been the trend in prior years, we expect H2 to be stronger than H1. In CDMO, the sustained buildup in RFPs and orders provides greater visibility going forward. In complex hospital generics existing portfolio [indiscernible] continued expansion of rest of the world and contribution from [indiscernible] expected to [indiscernible]. In Consumer Health on e-commerce portfolio from premiumization and channel expansion remain key growth drivers. Given this broad-based performance and an outlook for the second half we are upgrading our initial guidance, but earlier guided [indiscernible] growth with the logistical asset revenue. We now expected annual revenue growth of approximately 19% to 20% with a meaningful higher growth and profitability. We remain focused on executing against the opportunities across our businesses, improving capacity utilization and maintaining discipline around productivity, cost investments and quality. With this, I'd like to open the floor for Q&A. Thank you.

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

A better set of numbers, teams, so congratulations for that. A couple of questions. Peter, in Q1 earnings call last time around, you said big pharma isn't really showing a preference for near shoring and that the RFP pickup was kind of broad-based. Add to that, we know that select India-centric CDMOs are actually winning and growing new customer relationships without comparable Western manufacturing footprint. So what does the Western manufacturing footprint, whether it's U.K. or U.S., that India -- many Indian companies haven't got, what it gives us today? And if we were to sort of redeploy all of that capital fresh without any baggage of hindsight, will we be repeating the exact footprint that we have today or we would rather do something different?

so I think -- thank you for your question and your positive remarks about our near-term performance and outlook. I think the -- perhaps the comment may have -- we maybe miscommunicated or it may have been misinterpreted, we were trying to say that we have a broad-based demand for our services across our network, and I was trying to give the fact that it was not a one-off in terms of 1 geography or 1 capability. And so the intention being the come out to say that we are getting interest in the North America, but -- and also our U.K. and also our India. And we're getting interest across our differentiated offerings in addition to ADC. So it was an attempted time to say that it's not a single piston or engine firing. It's multiple pistons or engines to use the analogy. So I think that's the first point. The second point I would say is that the North America region in this period so far this year has been performing ahead of prior years and ahead of plan for us across all of the sites. And so we're seeing an uptick in that demand. And again, I want to make the additional comment that it's not at the expense of the India region where we also have strength, for example, and so what we're trying to give is a concept of balanced growth, and we are seeing significant client interest in considering North America offerings, and that's showing up through a few dimensions. The first would be RFP inflow, which is up. The second would be order booking, which is up, and if there would be on our revenue realization from those orders, which is also up. And so we think that actually this is a period where the multi-geography strategy is being validated because we have the assets in place with the track record so that when customers are considering whether they be large or biotech onshore offerings, we can provide them a credible alternative. And so I think, in fact, I would say that the onshore offering is being validated by the current macroeconomic environment. And if we were to do it again, the only thing I would say our lesson is that fewer larger sites in the U.S. would have been a hindsight strategy that we are now applying to all future M&A, where we're going to try and look carefully about any site addition that it needs to be above the minimum size because when you do acquire smaller sites, you have a certain runway to get to the minimum scale. And if there's a macro downturn in that period, you can end up with a protected time frame. And so our big lesson would be not U.S., it would be fewer larger if we were to do it. And I'm not saying we're committing to more M&A and the thing that the lessons we've learned from that experience.

So that's encouraging to hear, Peter, and thank you for that clarification. And second question is setting aside what's already been invested if you were deciding today whether to own more pets, given the U.K. losses and U.S. FDA September observations and of course, the exit cost there, I mean, pension liabilities and whatnot. What -- considering the cost of capital and return on capital from that perspective, what is the future for more from here on?

So we see in this increasingly global, local in the right phrase environment where people do want global capabilities, but they also want local capabilities and in particular, for a drug product facility, to be near the end market and the end market in this case being defined as U.K. and EU. You can provide supply chain solutions that sites and other confidence cannot simply compete with. And so we see meaningful benefit to having a European drug product facility and while obviously we did have FDA observations, we've responded to the FDA in due course, and we expect a timing resolution of that through our monthly updates as has happened with all of our prior audits across our different sites. And so we anticipate that being resolved in due course. And for us, having a U.K. facility that can do that DP in some cases, DS capability in the region for the region is an important component. From a capital allocation perspective, we're investing primarily in maintenance and compliance CapEx at that site. We're not investing significantly in growth CapEx. And so in terms of the overall CapEx, capital allocation perspective, most of the capital, other than maintenance and compliance will be going into the growth areas that we described while this site has potential to soak up demand for that region in the region.

Right. So Peter, just to clarify, of course, there will be some remediation capital or work or effort resources, et cetera, that would be required to bring it up to the standard that U.S. FDA demand. In addition to that remediation-related CapEx work, if any, and there is no immediate need for any growth CapEx or fresh capital allocation for mortise. Is that a fair assumption?

We think that most of the remediation for the FDA is around people and processes. In fact, our prior CapEx had been around the infrastructure, and there will be continued site appropriate and size appropriate CapEx and maintenance. But there's no -- at this time, based on what we know as of today, there's no large CapEx specifically related to the remediation it's much around people and processes, which is something that we have capability in and teams that can support. And so we don't see any major CapEx trajectory change in light of the audit.

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services Limited.

Sir, first, on the ADC revenue, like if you could share how much now it contributes and what capacity utilization we have leased for the meeting?

We give the ADC figures on [indiscernible] basis, Tushar, and we'll continue to maintain that. The capacity utilization is improving at the site, as we've called out before that the capacity utilization for ADC is improving because of an improved order book inflow at the size in H1 rotation all ADC services revenues that we have across all sites is about 40 million and it's growing meaningfully.

Got it. And Secondly, this increase in on pet and commercial manufacturing, which is almost 19%. So if you could share if it is to do with a certain customer or certain product, which is driving in what is the sustainability of this number?

I think it's fairly broad-based, and it's across multiple products. So it's not just a single product.

Just to build on that, I think we don't have, at the current moment, very high single customer concentration. I think we shared our numbers at the end of last fiscal, and we haven't seen any major change in that. We will update that from time to time. But if the concern is about customer concentration risk, we don't see that at this moment.

Got it, sir. And lastly, in terms of net debt increasing over the past 6 months, is it more to do with the currency impact? Or is there any I think there [indiscernible].

Lexington expansion, that catalog acquisition and the currency impact. All of those. And [indiscernible].

To add to that, the net debt to EBITDA is at 3.4%, so it's lower than the 3.7% that we had in March.

The next question is from the line of [indiscernible] from ICICI Securities Limited.

Sir, if we can dissect the growth in CDMO, the growth is from commercialization of Phase III molecules? Or is it the addition of Phase I, Phase II or Phase III molecules over there, if you can give some qualitative comments over there? And if it is mix, then can you quantify?

So I'll give a first pass it and Vivek can add anything he wants to after that. You can kind of see the on-patent percentage, innovation that we're growing as from an increased share. So what that means is that we've had a disproportionate amount of our growth coming from the innovation at work, which is what we would broadly characterize as development services and on patent and commercial. We've obviously also shared with you the on-patent commercial separately, the ADC separately and you can see that those are even growing faster. So you'll see the and obviously, the differentiated services. So we're trying to give you different lenses. But if you look at our LRP guidance, we said we're going to grow our on-patent innovation work faster, which this first half demonstrates, we said we were going to grow our differentiated services, including ADC faster, and we've shown that in this first half. And that also, we're going to continue to invest in those late-stage clinical assets and you'll see that with our net increase in the Phase III program. So I think a lot of the, what I would call leading indicators of future financial performance and alignment of our CapEx to our revenue growth are showing up in the first half, and we're expecting this sort of trend to continue in terms of the disproportionate growth in these areas because essentially, what we're trying to say is we put our CapEx into certain places, and that's where we think the opportunities are, and we think that those are then translating into the leading metrics of future performance.

All right. Second, sir, on Kenalog since we have integrated it in our CHC portfolio, how is our current run rate over there? And I believe we were like we are contract manufacturing it from other players where does our CMO facility is? And how does the opportunity for Kenalog looks like?

so with Kenalog, we've started to get some of the revenue post the acquisition. So there was a period where there was no revenue, but now we are in the period of getting revenue. The revenue is coming from that current CMO. There was a CMO transition underway at the time of the transaction, and we've continued to make good progress with that new CMO, and we're expecting that to be the future supply for this product. in the interim period, while we do have revenue from the current CMO, it is tight, and we expect that supply to remain tight. Nevertheless, we are on the market, and we are getting benefits in revenue from the acquisition.

So validation from the new CMO is done, like when it is expected?

We haven't communicated specific time frame with the new CMO, but they are proceeding through the normal steps you would expect in tech transfer which involve the whole range of you have validation [indiscernible] have engineering batches, you validation batches, then you wait for stability than you do filing. So we're in that overall cycle. And so far, the CMO has met all of their time lines. They've committed to the original owner and then later to us.

Got it. Last one, if I can just squeeze in, it's for Vivek. So during the quarter, we had a stable GPMs, while I understand the growth for the CDMO was across India and North America site spot. So can you throw some light that is it because of the balanced growth from both the facilities? Or why is it the stable GPMs? My understanding should be that there should be some increase over there? How should I look to go there?

So [indiscernible] said there's more a balanced growth across facilities. It's a little bit more complex because it also depends upon what the quantum of pass-through revenues that get built in during a particular period. And what's the quantum of fixed cost overhead movement in inventory. So all those factors to come into play. As we historically said, typically 64%, 65% is the kind of average gross margin, and that is what we will move towards even on a full year basis.

The next question is from the line of [indiscernible] from Goldman Sachs.

Just some qualitative color on the 22 new customers in H1, right? So what are the typical profiles biotech versus big pharma? If you could kind of give us some qualitative splits what are they coming and asking us for in terms of is it our differentiated offerings with ADCs, innovation. So just some qualitative color and are these first-time customers to us? I would presume, sir, in new customers, but just want to understand what's helping us win these new customers.

So when we say new logo, it means that we haven't done business with that company before. So this is the outcome of kind of a hunting strategy. And so we're quite excited I think we discussed our commercial transformation earlier and how it's got multiple components. And so by definition, if you want new logos, you will have a little bit more of a biotech heavy angle to it, but there are also some nice big pharma components to this. But if you look at the sheer numbers, you would have a more biotech heavy nature of that due to the simple nature of that's where more logos exist. But we not only that and so we are seeing the both aspects. In terms of the qualitative components, obviously, as our Phase II went up that's a net basis, which means additional attractions, the outcome is up, that would imply that some of these are in that Phase III category. And I think the other one, we already covered some of the geographic and differentiated capability mix, it's all linked into this. So I would say the new logos are somewhat aligned with the overall other KPIs we shared, they're not in contract with or an opposition too.

Helpful, Peter. And if I were to look at how are utilizations at our overseas plants versus India, India, I know has been pretty okay. And I think earlier participant also asked about onshoring. So I just want to understand if you could share maybe quantitatively, what utilization levels are? Are we seeing -- is some of these customers actually coming for the continent of U.S., for example? I'm just trying to get that angle as well.

So I'll just repeat, maybe in trying to use some different words, the same concept is that if you look at our North America region, we would say that the inflow is up. The order booking is up, the revenue was up. Our fixed costs are largely not up. And so the outcome is that the EBITDA contribution from the region is improved. And so I think that's, from a financial metric perspective, the more important component, which is getting that fixed cost coverage and then getting that EBITDA margin improving. And so obviously, the first half is a lower revenue half than the second half generally. And so we wouldn't really look at our normally communicate utilization side or regions or even partial year wise. But I think it shows up in the financials and that again, we've discussed this on many calls and you've been on many of them. There's a certain fixed cost element to this business at both the site level and the business level. And so when we can grow it has disproportionate benefit on margin, which is why when we always discuss with you all ambitions are reasonable is that the top line doesn't always proportionally increase the cost, and that's why we get these swings up when we get the revenue growth.

Got it. My last just housekeeping question. Any word on the large PO order we had from last year. Is there any update? Or are you still waiting to hear back?

We're no longer really talking about individual customers. I think that 1 became an outcome of certain analysts covering Axiom exports at certain frequencies. But I think we're -- our customers really don't want us to talk about these elements. And all I'd say is that you can see our growth numbers would suggest that the business is healthy. The customer concentration numbers would suggest that we aren't highly concentrated. And we're continuing to win new business. So I think that's the way we'd like to attain the discussion going forward.

The next question is from the line of Parikshit Gupta from Fair Value Capital Limited.

Many congratulations on a great set of results. My first question on the CDMO segment. While it is very appreciated that the ADC segment grew by over 50%, I just wanted to understand in our $2 billion top line aspiration in which, I guess, the CDMO share is expected to be around 60% of the revenue. How much of revenue contribution have we anticipated from the ADC's business specifically?

A fair question. We haven't broken it out separately However, I would give a qualitative guidance that we would expect our ADC share to be growing disproportionately better than the overall revenue guidance along with our differentiated services, of which it is a part. And so we have invested in this capability across 4 sites. We have available capacity. If we were to need to, we would enhance that capacity. We see ADCs is 1 of the Sunrise sectors or we now bioconjugation to use around it. And so we would expect it to grow higher than and probably meaningfully higher than our overall growth rate.

I understand. Now in terms of the -- on patent manufacturing, again, the 39% growth is appreciated. I just wanted to understand if you could share what is the contribution from the GLP-1 injections? And while I know that the market leaders, patent expiry extends well into the mid or the late 2030s with demand still strong. However, if there are alternatives developed or possible reduction in demand given certain side effects, have we anticipated any risks from that?

Correct. I mean we're not really participating in the GLP-1 kind of opportunity. I think our focus is on more niche peptides and also call contract manufacturing for our other deepen terms of peptides. So I'd say I think we're not suited for the GLP-1 opportunity.

And to further clarify, the on-patent commercial manufacturing numbers are as described. And so a generic product offering even for third parties would not be in this metric.

I understand. Now in terms of the complex health generics business, what has been the growth rate ex of Kenalog for this quarter?

We haven't broken it out separately. I would mention that we've had a few prior earnings calls where there were questions about our RW based business growth, and we are quite pleased with the first half performance in that area. And so I think the message you could take away is that the catalog obviously provided relevant growth in the period, but we also had good performance with the base business and especially in an area of prior discussion of ex U.S., if you will, inhaled anesthesia.

Yes, I was just about to ask on that part. In the previous con call, we discussed about the cboflorine growth was a mix from existing and new markets. But I was really hoping to understand how the ROW contract wins were progressing so far?

We had a couple of nice wins in the period, which contributed to the what we call base business growth. And so then that's been a nice addition, and that's been substantial in terms of the driver of incremental growth year-on-year for the what we call base business.

I understand. Just my final question on the Consumer Health business, please. I understand that many products in the portfolio have been through acquisitions that Piramal Pharma made and hence, enjoy the sole discretion on the product strategy. However, I still want to understand how much of the portfolio ex of Bayer products is outside of discretion of Piramal Pharma. I just want to understand what happened with there. Is there some part of the revenue also at risk of the similar risk, please?

So I think now with the exit of Bayer, everything is owned and managed by Piramal Pharma. We can do I guess, whatever -- I mean we can do whatever we like with those brands in terms of extensions, in terms of kind of distribution selling price, et cetera. So it's all our products.

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

Thanks for making the disclosure first half basis. My first question is with regards to the ADC revenue in the quarter we have seen. So if you could highlight how much of this growth has been driven by our partnership with Ajinomoto? And what is the actual growth in the base business of, say, the 26 million what you had last year?

We don't obviously disclose individual collaboration-related revenues. I would say that the collaboration that we had marketed would be a modest contributor to our overall revenues. It's more marketed towards potential customers than to investors, but we can segment our communication strategy and the intention of both us and our partner with that communication is to say we -- their technology works in our manufacturing and development and vice versa and to give a customer or potential customer confidence. But from an investor perspective, this is based off of the bread-and-butter conjugation, linker halo, the MAB and [indiscernible] of which that would be a modest contributor.

Sure. Got it. And second question with regards to the distribution agreement with in December. So I mean on the manufacturing side, how are we looking at it in the call out for a post contribution from order top line, you also looking to divest any manufacture, which would be associated with this momentum what we have?