Piramal Pharma Limited (PPLPHARMA) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Paramil Pharma Ltd Q2FI27 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Gagan Burrana, Associate Vice President, Investor Relations, and Enterprise Risk Management. Thank you, and over to you, sir.

Thank you, Sharia. Good morning, everyone. I welcome you all to our post-results earnings conference call to discuss our Q2 and H1 F527 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 risks that our business faces. On the call today, we have with us our Chairperson, Ms. Nandini Piramal, CEO of Global Pharma, Mr. Peter D. Young, and our CFO, Mr. Vivek Valtraj. 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 FY27 with broad-based contributions from all three businesses with a significant improvement in profitability. In Q2, revenue grew by 28% year-on-year to 2,617 crores, while EBITDA increased 72% to 385 crores. For H1, revenue grew 23% to 4,887 crores, with EBITDA increasing 72% to 669 crores. In our CDMO business, performance was supported by demand across India and overseas sites, improved Good execution and a sustained buildup in RFPs and orders. Our complex hospital generics business continue to perform well, supported by growth in inhalation, anesthesia, and the rest of the world markets, and the initial contribution from Canaloc. In consumer healthcare, power brands and e-commerce continue to perform well, 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 a continued focus on productivity and cost management, enabled us to expand EBITDA margins by more than 350 basis points in both Q2 and H1 FY20. We achieved this performance while maintaining our rigorous focus on quality and regulatory compliance. On H1 FY27, we successfully completed 12 regulatory inspections and 110 customer audits. Since FY2012, we have successfully cleared 427 regulatory inspections, including 51 USFDA inspections with no official action indicated classifications across a USFDA inspection. Moving on to business-specific highlights. Starting with our CDMO business, revenue grew 36% year-on-year to 1,424 crores in Q2 FY27. For H1, revenue increased 28% to 2,611 crores, reflecting robust growth across the network sites. 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 and 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 and biopharma funding in an enhanced commercial team. The sustained buildup in RFPs and orders provides 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. Further, during H1, we witnessed meaningful progress across multiple key metrics, which included over 50% year-on-year growth from ADC revenues, 39% year-on-year growth in revenues from on-batten commercial manufacturing. Contribution from innovation-related work moving to 49% compared to 46% in H1FY26, 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-by-it Expander Biologics platform while capacity and capability expansions of revenue for high-potency APIs completed and a Lexington for sterile fill finish progressing as per plan. Contributions 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 32% year-on-year to 849 crores in quarter 2 FY27. For H1, revenue increased 24% to 1,592 crores, reflecting good traction across the existing portfolio and initial contribution from Kenilaw. In inhalation anesthesia, we maintained our leadership position in the U.S. saver flooring market with a 48% value share. We also witnessed a healthy pick-up and silver-floring sales across the rest of the world market. In intrathecal therapy, we retained our number one position in the intrathecal back-up and market. In injectable pain management, we're ensuring availability of our products to focus supplier collaboration. Kenalog's sales contributed to CHD revenues during the quarter. Kenalog is a good fit for our complex hospital generics portfolio and will be an important growth catalyst for FY27. We're currently working towards transitioning the catalog manufacturing to a new CMO and are accordingly, actively advancing the associated regulatory approvals. Looking ahead, continued expansion in market share, inhalation, anesthesia segment, and the rest of the world markets and contributions from catalog expected to support the business throughout the second half. We continue to invest in building a portfolio of differentiated and specialty products through 505b2 opportunities, complex, generics, branded products, in 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-old. 359 crores for Q2 FY27. For H1, FY27, revenue increased 14% to 706 crores, led by continued traction in our power brands and e-commerce channel. Our power brands grew 21% during H1 and contributed to 53% of consumer health care sales. E-commerce delivered a 32% growth and accounted for 28% of sales, reflecting the increase. We're sharpening our innovation strategy by prioritizing fewer, larger, and higher potential launches. Portfolio premiumization also remains a key focus with a richer mix of high-margin products. During the period, we introduced the visible range under lacto-calamine to address the growing demand for premium skincare products. We continue to support our brands for 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 multi-channel distribution network with a presence across 180,000 chemists and cosmetic outlets, over 13,000 modern trade outlets, and more than 20 e-commerce platforms. Our focus remains increasing reach across smaller towns, modern trade, and non-chemist channels. The sales and distribution agreement with Bio will expire naturally at the end of its town 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 to have a material impact on our FY27 outlook. Going forward, the continued scaling of our power brands and e-commerce together with portfolio premiumization and channel expansion is expected to support growth and margin improvement. Overall, our first-half performance and the progress across all three businesses has 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 generic existing portfolio, continued expansion, rest of the world market, and contribution from catalog are expected to support performance. In consumer healthcare power brands, e-commerce portfolio premiumization and channel expansion remain key growth drivers. Given this broad-based performance and outlook for the second half, we're upgrading our FY27 annual guidance with earlier guidance to early to mid-teens revenue growth with EBITDA to grow faster than revenue. We now expect an 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. Thank you very much.

We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchstone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Sajal Kapoor from Antifragile Thinking Limited. Please go ahead.

Yeah, thank you for the opportunity and 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 nearshoring and... The RFP pickup was kind of broad-based. Add to that, we know that select India-centric CDMOs are actually winning and growing U.S. customer relationships without a comparable Western manufacturing footprint. So, what does the Western manufacturing footprint, whether it's UK or US, You know, 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? Thank you.

So I think, thank you for your question and your positive remarks about our near-term performance and outlook. I think perhaps the comment may have miscommunicated or it may have been misinterpreted. We were trying to say that we have a broad-based. And I was trying to give the fact that it was not a one-off in terms of one geography or one capability. And so the intention behind the comment was to say that we are getting interest in the North America, but and also our UK and also our India. And we're getting interest across our differentiated offerings in addition to ADC. So it was an attempt to kind of 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 a 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 the third 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 a 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 protracted timeframe. 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. I'm just saying that the lessons we've learned from that experience.

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

So we see in this increasingly global, local, I'm trying to use 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 UK and EU, you can provide supply chain solutions that cites in other Continents 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 timely 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 UK facility that can do that DP and 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, From the 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 the region in the region.

Right. So, Peter, just to clarify, of course, there will be some remediation capital or work or effort, resources, etc. that would be required to bring it up to the standard that USFDA demands. In addition to that remediation-related capex work, if any, there is no immediate need for any growth capex or fresh capital allocation for Morpeth site. Is that a fair assumption?

We think that most of the remediation for the FDA is around people and processes. In fact, our prior capexes had been around the infrastructure, and there will be continued site-appropriate and size-appropriate capex in 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 more on 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.

Okay. Okay. Many thanks, Peter. Thank you so much. Thank you. That's all.

Thank you. The next question is from the line of Tashar Manidhane from O.T. Lal Oswal Financial Services Limited. Please go ahead.

Thanks for the opportunity. So, first on the ADC revenue, like if you could share how much now it contributes and what capacity utilization we have reached for the facility.

We developed the ADC figures on an annual basis, Dushar, 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 ADCs is improving because of an improved order book inflow at the site. Thank you. The total of all ADC services revenues that we have across all sites is about 40 million and it is growing meaningfully.

Got it. And secondly, this increase in on-patent commercial manufacturing which is almost 39%. So if you could share if it is to do with a certain customer or certain product which is driving and what is the sustainability of this?

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. 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 six months, is it more to do with the currency impact or is there increasing...

I think there is a Lexington expansion, there is a Kenalog acquisition and a currency impact.

All of those. And Yapan. 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.

Thank you.

Thank you. The next question is from the line of Shubh Mehta from ICICI Securities Limited. Please go ahead.

Yeah, thank you for the opportunity. Sir, if we can dissect the growth in CDMO. The growth is from commercialization of phase 3 molecules, or is it the addition of phase 1, phase 2, or phase 3 molecules over there? If you can give some qualitative comments over there, and if it is mixed, then can you quantify it?

So I'll give a first pass to Vivek and add anything he wants to after that. You can kind of see the unpatent percentage. Innovation-related work growing from an increased share. So what that means is that we've had a disproportionate amount of our growth coming from the innovation-related work, which is what we would broadly characterize as development services and on-patent 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 then, obviously, the differentiated services. 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. Also, we're going to continue to invest in those late-stage clinical assets, and you'll see that with our net increase in Phase III programs. 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 this first half, and we're expecting this sort of trend to continue in terms of that disproportionate growth in these areas, because essentially what we're trying to say is we... 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 these leading metrics of future performance.

Perfect. Second, sir, on Kenalog, since we have integrated it in our CHC portfolio, how is our current trend 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 opportunity for Kenalog looks like?

So with Kenalog, we've started to get some of the revenue post-see. 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 the 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 and revenue from the acquisition.

So, validation from the new CMO is done, or 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, you know, the whole range of you have validation. Well, you have engineering batches, you have validation batches, then you wait for stability, then you do filing. So we're in that overall cycle. And so far, the CMO has met all of their timelines as they've committed to the original owner and then later to us.

All right, all right. Last one, if I can just squeeze in, is for Vivek. So, you know, during the quarter, we had a stable GPMs. While I understand the growth for the CDMO was across India and North America sites both, so can you throw some lies 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 over there?

So, Shubh, as you rightly said, there's more a balanced growth across facilities. It's a little bit more complex because it also depends upon what's 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 do come into play. As we have 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.

All right. Thank you so much. I'll join back the queue. I have a few more questions.

Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Yeah, good morning. Thank you for taking my question. Just some qualitative color on the 22 new customers in H1, right? So, you know, what are the typical profiles, biotech versus big pharma? If you could kind of give us some, you know, qualitative splits, what are they coming and asking us for in terms of, is it our differentiated offerings, ADCs, innovation? So just some qualitative color and, you know, are these first-time customers to us? I would presume so, 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 that, due to the simple nature, that's where more logos exist. But it's not only that, and so we are seeing both aspects. In terms of the qualitative components, obviously, if our Phase 3 went up, That's a net basis, which means, you know, addition, subtractions, the outcome is up, that would imply that some of these are in that phase three category. And I think the other one, we already covered some of the geographic and the 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 contrast with or in opposition to.

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

So, I'll just repeat, maybe, and try and 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 is 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 or normally communicate utilization site or region or even partial year wise. But I think It shows up in the financials in 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, our... LRP 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 we're still waiting to hear back?

We're no longer really talking about individual customers. I think that one… It became an outcome of certain analysts covering Exxium exports at certain frequencies, but I think our customers really don't want us to talk about these elements, and all it says 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 frame the discussion going forward.

Got it. Thank you. Thank you, Peter. All the best.

Thank you. The next question is from the line of Parikshad Gupta from Fair Value Capital Limited. Please go ahead.

Thank you very much for the opportunity and 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?

It's 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 four sites. We have available capacity. If we were to need to, we would enhance that capacity. Indeed, we... We see ADCs as one of the sunrise sectors, or we now, you know, bioconjugation is another phrase 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 leader's 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?

I think we're not really participating in the GLP-1 kind of opportunity. I think our focus is on more niche peptides and also contract manufacturing for other people in 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 if for third parties, would not be in this metric.

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

We haven't broken it out separately. I would mention that we've had a few prior earning 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-US, if you will, inhaled anesthesia.

Yes, I was just about to ask on that part. In the previous con-call, we discussed about the ciboflurine 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.

So 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 though. Driver of incremental growth year-on-year for 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 X of Bayer products is outside of discretion of Piramul Pharma. I just want to understand what happened with Bayer. Is there some part of the revenue also at risk?

No, I think now with the exit of Bayer, everything is owned and managed by Baramal 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, etc. So it's all our products now.

These are very helpful. Thank you very much for your answers, and good luck for the current quarter.

Thank you. The next question is from the line of Abdul Qadir Puranwala from ICICI Securities Limited. Please go ahead.

Yeah, hi. Thank you for the opportunity, and thanks for making these disclosures on a first-half basis. My first question is with regards to the ADC revenue and the uptick, what we have seen. So, if you could highlight, you know, how much of this growth has been driven by our partnership with Taji No Moto, and, you know, 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't segment our communication strategy, and the intention of both us and our partner with that communication is to say their technology works in our manufacturing and development and vice versa. And to give customer or potential customer confidence. But from an investor perspective, this is based off of, you know, the bread and butter conjugation, linker payload, the MAP, and then finally the fill finish. And of which that would be a modest contributor.

Sure. Got it. And our second question is with regards to the BA distribution agreement, which expires in December. So, I mean, on the manufacturing side, how are we looking at it? And, you know, while we have called out for a 5% contribution from that to the overall top line, are we also looking to divest any manufacturing assets which would be associated with this, you know, venture that we had?

I think the buyer manufacturing agreement, I think, still continues. And I think we see them as good partners going forward.

Okay, understood. Thank you, and I'll get back in the chat.

Thank you. The next question is from the line of Alankar Garuday from Kotak Institution. Please go ahead.

Hi, good morning, everyone. Peter, can you talk a bit about the nature of your recent conversations with CDMO clients? Clearly, you've seen an improvement in the client engagement levels. Just wanted to understand how the discussions have evolved over the past few quarters.

I think we discussed this maybe in some prior calls, and maybe we were able to try and signal to you all that it was going in a positive direction, but I'll just maybe repeat some of the themes. The first is, obviously, it helps if clients have money, and if you look from October of last year to today, there's been a meaningful improvement in funding available for our current and potential clients, and that shows up in their floating of RFPs. The second thing is that then the RFP inflow numbers are significantly up, and especially so maybe not last calendar year, year on year, but much more starting this calendar year, January, they've been up meaningfully. And so that's showing up to be in kind of overall inquiries for a potential business. And then that's then translated into decisions. And we've started to see that uptick of decisions, I would say, Q4 last year and then through this year. And I think what's notable is historically H1 has been soft in terms of order booking, given the normal seasonal patterns, but maybe due to our actions and also the actual environment, we've seen more order booking in H1 than we have historically in the past. Maybe some other indicators, if we look at, you know, major conferences or engagements we have with our customer advisory board, I would say the discussions have more of an action-oriented feel. There is a more general volume of interaction. I don't think that's unique to us from the industry perspective. I think overall, if you look at, let's say, the endpoints survey that just got released, you know, the sector sentiment is significantly improved versus. One or two quarters ago, and so we're doing our best to take advantage of the actual environment, and I'll wrap it up with just two other comments. As mentioned in prior calls, we did a pretty substantial transformation of our go-to-market organization, which is still underway, but we're starting to see some benefits of that new approach, and along with that approach, we increased the total number of people out in the market interacting with customers. To be candid, the transformation will show benefits in this time period, but the new additions of staff, they would probably only really start to bear fruit or show results in coming quarters. And so, given the time from when you bring someone on board to when they can meet a customer to the whole RFP cycle. But overall, it's the macro, the transformation on our go-to-market and then our increased feed on the street, if you will.

That's helpful, Peter. Just a follow-up there. How big a factor do you think has been the funding environment in driving this uptick? I mean, the question is, if we assume a scenario where the funding environment slows a bit versus the current levels, does it have a meaningful impact on your CDMO outlook?

I think if you were to look at a 10-year horizon and you were to look at CDMO as a sector, The CDMO sector does well when funding is available, and when FDA is approving drugs, and when M&A takeouts occur, because that all allows recycling of money. One of the elements of our strategy with the commercial transformation was to significantly enhance our approach to key accounts and large pharma, and we have started to see some nice early results from That strategy, and the benefit, if we can continue to show progress in that strategy, is that large pharma R&D and development spending is more resilient than biotech, and we've been historically more prone to volatility there, and so we are expecting one of the benefits of our commercial transformation should be a better weighting towards large pharma, which will take some time to achieve, but it won't change the overall sector. Linkage to volatile funding and biotech funding is a cyclical situation and it is linked to CDMO performance. So I'm giving you a bit of a roundabout answer to saying it's true to everyone. We've historically been non-exposed. Our commercial strategy is aimed at making us less exposed, but the cycle remains.

Got it. That's helpful. The second question is, you had a target to improve margin substantially to double digits in the OTC segment by FY30. And you had spoken about operating leverage, lower marketing spends. Please wanted to understand qualitatively, where are you in this journey?

I think we're, as we said, we're single-digit profitable at the moment. We're continuing to focus on profitable growth, which is kind of, you know, between premiumization, price, and volume to kind of look at how do we improve margins.

So, Nandini, can we say that you are on track to get to that double-digit number?

Yeah, we'll be close to it.

Got it. That's it from my side. Thank you.

Thank you. The next question is from the line of Gaurav Bama from GM Financial Limited. Please go ahead.

Hi, hi. My question has been answered already. Thank you for the opportunity.

Thank you. Thank you. The next question is from the line of Sudarshan Padmabhan from Ashika Investment Manager. Please go ahead.

Yeah, thank you for taking my question and congrats on your top number. So my question is related.

I'm sorry, can you speak a bit louder? We can't hear you clearly.

Yeah, I'm audible now. Thank you.

Yes.

Yeah. So my question is, you know, we have seen the on patent commercial manufacturing by improving and overall the innovation related work improving as a percentage of the business. And given that we are seeing a fair amount of, you know, interest from clients and also the fact that the phase three molecules are also, you know, increasing, you know, from a directional perspective, where do we see both the innovation and the on patent commercial manufacturing as a pie to increase, say, in the next two to three years as we achieve our, you know, directional target in 2030.

I think we expect them to grow faster than the rest of the business, and in the next couple of years, they should easily take over about over 50% of the business.

Okay, okay. And incrementally, you know, when we are talking about, you know, addition of new customers, how many customers would primarily be, you know, into the value chain of on-pay, attented, and say, innovation-related work?

It's more. More are in that category than not. Because if you think about it, the generic industry is consolidating to some degree, and we would probably already be working with many of them. So if you want to get new logo, it's largely innovation-oriented. Not fully, but largely.

Sure, sure. So we should be able to see consistent, you know, increase in the pie, probably, you know, as some of these, you know, clients start getting converted into business.

Yes, that is expected.

Yeah, yeah. And apart from ADC, where we have seen a significant growth, I mean, we do have a fair amount of, you know, offerings in other complexities like peptide. I mean, you mentioned that we are largely not in GLP, you know, sterile injectables and various other things, including hormonal. I mean. In the overall pie, how do we see this composition of, if I put it as, in a complex product where the capabilities is being built as compared to the utilization of capabilities that we have built currently, and how do we see this pie improving, say, in the next two to three years?

We would expect to see growth in peptides, if that's the question. From a relative capital allocation, we have put more money more recently into the U.S., specifically in the area of the fill-finish, and we've also put in money into the high-potent API, and we put money into the bioconjugation areas, and so those did receive some amount of capex. And we've been more modest in our investment in the peptides. But nonetheless, we have put some money into that area, and we are expecting to see nice growth there. And it remains to be an attractive area. And I just add one further clarification that while we do certain peptide-related activities in our Turbay facility near Mumbai, we also can do some more earlier stage peptide activities in our traditional small molecule facilities. At Digwell and Enor, and we are seeing orders in that area as well because they can work in traditional reactors. And so we see we're going to be just participating in peptides both at different stages in the value chain and not only at our TURVE facility.

And one final question before I join the queue is, you know, with the distribution agreement with Bayer coming, you know, to a close by the end of the year, while you had highlighted about the revenue impact, largely this business, I would assume, would have lower margins primarily because this is largely distribution, right? So, as far as the margins and profitability is concerned, the impact should be much lesser and probably it would be better from a margin perspective given that when the business goes off, the absolute margin should actually look much better. Would that be right?

Yes.

Okay. Sure. Thanks a lot, Ajahn. That's okay.

Thank you. The next question is from the line of Dhaval Khur from Jeffrey. Please go ahead.

Hi, thank you for taking my question. Can you inform us about what is the current business mix at Lexington? Is it more clinical or commercial, small molecule versus biologics and ADC? And secondly, you know, at Lexington, what is the quantum of capacity expansion in terms of, you know, the number of units that we have, that we are currently undertaking, and the key inflection timeline we should watch out for.

So, the. Again, we don't give all of those details, but I would say, broadly speaking, it does have commercial, but the commercial is more modest, and it's predominantly from a mixed perspective. It's a much heavier mix towards development, and part of the reason why we went under the expansion is so that we could attract tech transfers at the commercial level, but also... Certain development customers that would not want to have to leave if they were to graduate to commercial. And so we would anticipate one of the benefits of the expansion is that we could get more larger late-phase clinical and also commercial and shift the mix to be more commercial, which we think will be beneficial from a margin profile as well. So, from a... The scale perspective, Vivek will, or we will get back with the exact percentage increase, but it's a massive increase in overall capacity for both vials, but also, even more importantly, liabilization capability and capacity. In terms of timing, it's the end of calendar year. Next year, we would be going live. We're expecting three separate go-lives. We have to be in the business of marketing as well. And so the... The first go-live already happened. It's our micro expansion, which went live, I believe, earlier this month around CPHI. This is the lab that is used for the legacy facility, but also the new facility block. The second go-live will be most likely early next year, which will be an improvement in background grade that would reduce any ambiguity around Annex 1 compliance. And that would be the second go live for the legacy facility. And then the third go live would be the full expansion. And that would be at the end of the calendar year. And we're particularly excited to mention that we already have the anchor customers for first, second, and third customer that would be using the expansion signed up for their specific batches. So now anyone else who were to agree to the expansion would not have to worry about it my first, second, or third.

So, for these customers, do we have any, you know, data readouts that will be important to watch out for, which will determine, you know, the quantum of business that we can get from these customers?

That's the nature of the business. It's a, the site has a wide range of development clients at different clinical stages, and every one of them is going through their own clinical journey, and They each have their own binary events for their upcoming clinical readouts, and so that's the name of the game in this business, and all I can say is that it's part of what we have to live with, and it's also the opportunity, because when they get the good news, it means that the growth goes up. So I'd say that yes, but that's true of all of our sites serving innovation customers, and most of what we do in North America would be in that bucket.

Thank you. Just one last question, if I can squeeze in. For sellers with a very, very high level, you know, when do you think we can break even at EBITDA level? We already have informed about one, you know, contract. But is it more like a, you know, 18 months sort of a timeline wherein we can break even or it's much more long-term and tougher tasks to turn around that site? It's more like a three, four, five-year journey from here on.

From an EBITDA perspective, I think I alluded to it in the earlier remarks. Obviously, we only produce our subsidiary accounts at certain intervals, but from an EBITDA perspective, we're seeing Nice translation of the improved revenue in this current year itself across our four North American sites. And so if this trend continues, we would expect our dialogue to change around some of our North American sites.

Okay, thank you.

Thank you. The next question is from the line of Vinod Jain from WS Advises Limited. Please go ahead.

Yeah. Congratulations on the improved working and return to profitability. Sir, the higher tax incidence of the company remains a coagmire to understand. While in the past you have explained this higher taxation as profits from taxpaying jurisdictions, And that the benefit of carry forward losses, though not high in the current year, would accrue in the future. If that is the case, I would like to know in which year or years the benefit of the substantial carry forward losses is likely to accrue in time.

So, Mr. Venos, as you rightly mentioned that the tax outflows currently are in taxpaying jurisdictions. We do have almost 580 million of carry forward tax losses at our overseas entities. This utilization of this will be very specific to each and every site depending upon how the turnaround at the site happens. As Peter mentioned, that each of our North American sites is currently seeing good improvement in the profitability. As per our long-range plans, we were expecting that we should be able to start utilizing this over the next two to three-year period. But it's very entity-specific and will depend upon which of the entities start turning positive. As you can imagine that from an accounting standpoint, the moment they turn positive, we should be in a position to recognize the Deferred Tax Asset in the books. That's how it will work, and one by one, as each entity starts moving towards profitability, we will start accounting for that.

Sir, the tax incidence is so high that almost the entire profit for the quarter is wiped out. Is there a possibility of taking an active step in managing the tax liability in terms of sharing the business between various facilities you have so that the facilities become more tax efficient?

So, Mr. Vinod, from a transfer pricing perspective, you obviously do what is best possible within the reallums of what the law permits. If you have looked at the standalone accounts, you must have noticed that 70% of the tax is actually paid in India, where the profitability coefficient is relatively higher. And trust me that whatever is best possible within the reallums of what the tax laws permit, we optimize on all of that.

Okay, one last question. The deferred tax asset net of 494 crores in the balance sheet, is it indicative of the future tax benefits entirely?

So, as I said, we have carry forward losses of about 580 million, which means the potential deferred tax asset that we could create is about 120 million.

Okay. All right. Thank you.

Thank you. The next question is from the line of Vedisha, an individual director.

Please go ahead.

Hello, am I audible? Yes, you are.

Yes, sir. So, just wanted to understand what led to the margin ramp up and like, are these kind of margins sustainable? The next thing.

Yes, the margins are sustainable. As we mentioned that the fixed costs have been largely controlled, so if the revenues go up, a lot of that extra goes down to EBITDA.

Okay, and do we see further margin increment from your own work?

I think we will see some as if revenues continue at the pace that they're meant to.

Thank you, Nadia.

Thank you. As there are no further questions from the participants, I now hand the consent over to Mr. Gagan Burana for closing comments.

Thank you very much. We hope that we were able to answer most of your questions. In case you have any follow-up questions or any clarification, please feel free to reach out to me and I will be happy to respond. Thank you and have a good day.

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