Eris Lifesciences Ltd (NSE: ERIS) Q2 2025 Earnings Call dated Oct. 25, 2024
Corporate Participants:
V. Krishnakumar — Chief Operating Officer and Executive Director
Amit Bakshi — Chairman and Managing Director
Kruthi Rawal — Head, Investor Relations
Analysts:
Amlan Jyoti Das — Analyst
Ashish Kanoje — Analyst
Tushar Manudhane — Analyst
Gautam Rajesh — Analyst
Presentation:
Operator
Ladies and gentlemen, good day and welcome to the Q2 and H1 FY ’25 Earnings Conference Call of Eris Lifesciences Limited. We have with us on the call today, Mr. Amit Bakshi, Chairman and Managing Director; Mr. V. Krishnakumar, Chief Operating Officer and Executive Director; Mr. Sachin Shah, Chief Financial Officer; and Ms. Kruti Raval, Head, Investor Relations.
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. Please note that this call is being recorded.
I now hand the conference over to Mr. V. Krishnakumar, Chief Operating Officer and Executive Director of the company. Thank you and over to you, sir.
V. Krishnakumar — Chief Operating Officer and Executive Director
Thank you. Good afternoon, everybody. Thank you for joining this call.
So getting into the details right on. We start with the overview of the domestic branded formulations business, which is our largest piece. So the summary for quarter 2 is that we have built on the trajectory of quarter 1. So total branded formulations revenue of INR644 crores in quarter 2 with the base business giving INR510 crores and the Biocon segment giving INR134 crores. So the base business is tracking at a 9% to 10% growth for FY ’25 based on H1 actuals, excluding our new product pipeline. The base business has witnessed significant margin expansion in quarter 2. Quarter 2 gross margin was up by 359 bps year-on-year and quarter 2 EBITDA margin was up by 374 bps year-on-year. The second half of this financial year will be new launch Heavy. We have several first-in-market approvals in hand.
In comparison, most new product launches in the last financial year were concentrated in the first half. We have launched Early, which is our brand of Liraglutide, last month. With respect to the Biocon/Biologics business, we have seen supply shortages across segments in quarter 2 and this is expected to continue through to the end of ’25.
Our Bhopal facility, which we recently acquired, is commencing the production of insulin vials from next month and the gross margin benefits will start accruing from quarter 4 of this year/quarter 1 of next year. So overall, we are on track to deliver our FY ’25 guidance, DBF revenue of INR2,600 crores with an EBITDA margin of 36%.
We have witnessed some strong execution in the first six months of this year, which has led to a stronger balance sheet and higher returns. So with the FY ’24 base, our return on capital has increased by 600 bps on an analyzed basis at the end of the first half and the adjusted ROCE, which excludes the impact of M&A related amortization, that has increased by 400 basis points from FY ’24. So ROCE stands at 17% and adjusted ROCE stands at 23%. Our operating cash flow stood at 119% of EBITDA in quarter 2 and at 94% of EBITDA for the first half of the year.
We are also happy to share that we are ahead of schedule in terms of debt repayment. So net debt at the end of Q2 stood at INR2,500 crores, vis-a-vis our year-end stated target of INR2,600 crores. Strong execution on manufacturing has been driving significant gross margin improvement in the DBF segment and there are two parts to this.
Firstly, the ramp up of our Ahmedabad site operations, which we have commented about in quarter 4. So we have been steadily ramping up over the last two quarters as you can see. And the second very important lever we have been talking about is the Derma in-house production, which we said we have started in January. So you can also see the way that has ramped up. So 30% of our quarter 2 Derma business was produced in-house and this number is increasing month-on-month. And the gross margin benefits are starting to accrue.
So on a serial basis, the base business has witnessed a gross margin expansion from 83% in quarter 4 to 86% in quarter 2. And the Derma business has seen a margin expansion from 76% in quarter 4 to 79% in quarter 2. And the additional benefit of doing more manufacturing operations in Ahmedabad is that we get additional fiscal benefits under Section 115 BAB. So overall, Q2 gross margin improved by 359 bps and the Bhopal site, which we expect will start producing insulin vials from next month, will start delivering margin benefits over and above this.
Moving on to the integration, we are happy to share that the businesses have been successfully integrated and this has resulted in significant fixed cost synergies in the branded formulation segment. So the first piece that I would like to call out is significant scale benefits in our diabetes business.
So pre-Biocon, we were a INR600 crores per annum, predominantly OHA business with 900 MRs across four divisions. So average YPM of around 5.5 lakhs. Post-Biocon, we are a INR1,000 plus crores diabetes business with around 1,200 MRs across five divisions with a much higher YPM of 7-plus lakh.
The insulin business is deriving significant tailwinds from our credibility with the specialist segment, which has been cultivated over the last 15 years. We are also witnessing a multiplier effect at the field level, resulting from the fact that the OHA and the injectable teams are complementing each other in terms of market presence and hence recall. And at an overall DBF level, we had 15 divisions prior to the Biocon acquisition. We now have 21. So we have better absorption of fixed costs. So fixed costs as a percentage of revenue in quarter 2 has reduced by 509 bps year-on-year.
Our investment in R&D has started yielding substantial results. So this is a snapshot of our first in market pipeline, a lot of which we expect to come through in the near future. So there are five products already approved for launch and many more in late stages of approval.
Moving on to Swiss Parenterals. So over the last six months, we’ve been focused on two aspects. One is strengthening the core business and secondly, adding new business segments in terms of new growth engines. So in terms of strengthening the core business, we’ve been focused on business integration. So we have significantly expanded the customer facing team, which is business development and regulatory. We’ve added six senior level people, significant expansion in R&D and analytical team.
So pre deal, the R&D team used to handle 80 projects to 90 projects at any point in time. Now their bandwidth has been doubled. So they are handling about 170 projects at this point. Systems processes and compliance have been adequately strengthened. And both facilities have been successfully inspected by EU-GMP and PICS in this quarter. And both of these are repeat approvals.
We’ve also launched some interesting new business segments. So OSD exports is something we have spoken to you about earlier. So in terms of enabling this business, our Ahmedabad facility is awaiting EU-GMP and Anvisa inspections in Q4. We have also launched EU focused injectable CDMO business. So we are the only approved Indian injectable player in India with the entire suite of injectable trojetons [Phonetic]. So liquid ampoules, liquid vials, dry powder, lyophilized, PFS and name it and they do it. So the target audience for this business is European big pharma and large generic companies. And the business model would be to look at three year to five year manufacturing contracts for sale in the EU. And these come with higher customer stickiness and lower price sensitivity, given that these are injectables.
In terms of the financial update for the base business, Q2 revenue of INR82 crores and first half revenue of INR155 crores, Q2 EBITDA of INR27 crores, first half EBITDA of INR53 crores. The return on capital in this business is in excess of 50%. The base business is on track to deliver against our FY ’25 guidance and we expect the new business segments to start contributing from financial year ’26 onwards.
Moving on to our biologics play. So the Indian biologics market is a large market around INR15,000 crores per annum with very-very strong growth trajectories. So we have the whole MAP segment INR9,000 crores market growing at 24%, 25%. We have the injectable anti-diabetes segment, which is on the threshold of major disruption from GLP-1. The whole IVF hormone space is also growing well. And this is an oligopolistic market in terms of high entry barriers. And what we have seen and understood is that vertical integration is key to profitable growth and all the stages and all the capabilities that we need to have are outlined in terms of product development, bulk manufacturing, fill finish and marketing.
And we see that the domestic market has only a handful of vertically integrated and scaled up biologics players. We have a dominant presence in insulin, a starting presence in Onco and we are not present in any of the other segments. So with a view to build a strong position in biologics, we are looking at a strategic partnership with Levim Lifetech, which would give us a vertically integrated biologics presence and access to a very exciting biologics product pipeline.
So we started with the acquisition of the Biocon Biologics business in quarter 1. We complemented that with the addition of the Bhopal site, which gives us capability for biosimilars fill finish manufacturing. We are commencing insulin vials manufacturing starting from next month.
And with Levim, we get access to an asset which has a demonstrated track record of product development and commercialization in three products, Liraglutide, Streptokinase and Pegaspargase. So our Liraglutide brand is driven by the bulk active manufactured at the Levim facility. Their successful execution of Liraglutide builds confidence for a future GLP play.
There is a large scale bulk manufacturing facility at Levim that will be commissioned mid-next year and the R&D pipeline is something we expect to significantly expand post the deal. In terms of the deal contours, there is plans to invest INR54 crores for a 30% equity stake and this strengthens our value proposition and business economics in the biologics market.
Moving on to the consolidated P&L for the quarter and the half year. Consolidated operating revenue for Q2 grew by 47% to INR741 crores and H1 revenue stood at INR1,461 crores, which is a 50% growth. In terms of Q2 margin, gross margin was down by 641 bps due to changes in our product and business mix, which was almost entirely offset by the fixed cost leverage. So, EBITDA margin of 35.7% is more or less in line with the prior period.
Quarter 2 EBITDA stood at INR265 crores, which is a year-on-year growth of 46%. H1 EBITDA stood at INR515 crores, a year-on-year growth of 47%. So this year, we are taking the full impact of all amortization and finance costs. Book tax rate in quarter 2 was 25% of PBT and cash tax rate was 22%. Operating cash flow was 119% of EBITDA in quarter 2 and 94% in H1. Cash EPS stands at INR20 in H1, same level as last year.
We are ahead of schedule in terms of rebuilding balance sheet strength. So these are the numbers that we had shared with you at the end of quarter 4 that we are looking to be at INR2,600 crores net debt by the end of this year and we are presently at INR2,500 so that puts us ahead of schedule.
In closing, we reaffirm our business guidance for this financial year. DBF of revenue of INR2,600 crores with a 36% EBITDA margin. Swiss Parenterals revenue of INR330 crores with a 35% margin. At a consolidated level, revenue of INR3,000 crores with a 35% margin. Capex of INR100 crores to INR120 crores and a INR54 crore investment in Levim. All the other parameters remain the same as outlined before.
So with this, we come to the end of the presentation. Thank you.
Questions and Answers:
Operator
Thank you very much, sir. We will now begin the question-and-answer session. [Operator Instructions]. The first question is from the line of Amlan Jyoti Das of Nomura. Please go ahead.
Amlan Jyoti Das
Yeah, hi sir. Sir, my question is regarding the base business. What is the base business growth in Q1 and Q2? Could you please help us know that?
Amit Bakshi
So Amlan, the H1 growth of the base business is 7% in H1, which is like 10% and 4%. 10% Q1, 4% Q2. So those are the growth numbers.
Amlan Jyoti Das
Sir, so to attain a growth of 9% to 10%, what will be the levers for H2? [Speech Overlap]. Yeah.
Amit Bakshi
Yeah, yeah, yeah, of course. So Amlan, look, two things. One is the last year H1 was very heavy on new launches. This time, we were integrating the Biocon business and most of the new launches planned in this year are DCGI approval, which are from our R&D. So we’ll see a flurry of launches in the second half. So that should compensate for growth for the entire year.
And anyway, if you look at our number H1 into 2, we are more or less like 9%, 10%. And that’s been the case now. We’ve been doing a 50-50. We expect to do a 50-50-plus some new products. So that’s how we are looking at that.
Amlan Jyoti Das
Sir, just wanted a clarification. This 9% to 10% growth is excluding Biocon or including Biocon, you’re saying?
Amit Bakshi
No, this is the DBM. This is the organic base.
Amlan Jyoti Das
Organic base, right? Okay. So it will be majorly led by the new product growth, then?
Amit Bakshi
Absolutely. Majorly led by new. But we had some shortages Amlan this time. You know, MJ didn’t supply us insulin. Insulin is a little bit of a problem. You know, I think globally we are having a little bit difficulty. So those were minor things. But majorly it’s going to be about new products, which we see a lot of them being launched in the second half.
Amlan Jyoti Das
Okay, sir. Thank you.
Amit Bakshi
Thank you.
Operator
The next question is from Ashish Kanoje from Northbridge Capital. Please go ahead.
Ashish Kanoje
Yeah. Good evening to the management. I had two questions. Firstly, can you please talk about the growth opportunities and trajectory for us in the injectable space in India?
And secondly, on the oral solids in Africa, what is the progress on that?
Amit Bakshi
Would you please repeat your question?
Ashish Kanoje
Yeah. Can you talk about the growth opportunity and the trajectory for us in the injectable space in India? And what about the oral solids in Africa? What is the progress on that?
Amit Bakshi
So you’re talking about the export thing or you talk about the Indian thing?
Ashish Kanoje
Firstly, you can — yeah, yeah. The Indian thing. Firstly, the Indian thing.
Amit Bakshi
Okay. And this is injectable other than insulin?
Ashish Kanoje
Yeah.
Amit Bakshi
Okay. So if I understand you correctly, you’re talking about the piece we acquired and we wanted to build up the India business, the injectable India business.
Ashish Kanoje
Right.
Amit Bakshi
So India injectable business is online. We are doing roughly INR7 crores a month at this point of time. We planned around INR100 crores. We should be nearing that number. Still integration is going on. That is one integration, which is still a work in progress. So we’ve got some new hires there. So I will say, the India injectable is still a work-in-progress. I don’t see this kind of creating a huge growth this year. Next year, it should get better. So that’s the domestic India injectable piece.
The rest, I think, KK will answer.
V. Krishnakumar
Yeah. So the second part of your question was on the oral solid exports. And so these will be enabled by the approval of PICS and/or EU-GMP for the Ahmadabad plant. And the calendar that, I mean, given that, how these regulatory agencies operate, you can’t predict it, but basis, current activity and communication, we are targeting a Q4 inspection.
So Q4 of ’25 or Q1 of ’26, that is when the inspection is likely. And once we go through the successful inspection, then I think it is a matter of two months to three months before you can start shipping out. So which is why oral solid exports from the Ahmadabad facility, is something where we see in ’26.
Ashish Kanoje
Okay. I had one more question. How do you see the GLP-1 transition changing our business? What sort of scale is possible in GLP-1 and how would that affect our existing brands?
Amit Bakshi
Ashish, this is like a long answer. But yes, look, GLP is going to be a game changer therapy and it will cut across many more therapies than diabetes because obesity is in the center of so many things. So GLP, whenever it comes in India, it will be a game changer. We have just launched Liraglutide. The opportunity in Liraglutide is also immense, but we are still not confident about the supplies. The supply is a little bit restrained.
So I will need three more months to tell you. The opportunity is quite big, but we might have supply issues. So, we are just trying to work it out. How does it plays out? And then, you know, SEMA is ’26. So post-SEMA, everything plays dramatically. Till that point of time, Lira [Phonetic] is the game which we want to play. And if everything goes well, Ashish, then, you know, we might have the first GLP for obesity in India also. So let’s see how it pans out.
Ashish Kanoje
All right. Thank you, sir.
Amit Bakshi
Thank you.
Operator
Thank you. [Operator Instructions]. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.
Tushar Manudhane
Hi, am I audible?
Operator
Yes, sir.
Amit Bakshi
Yes, Tushar, you are.
Tushar Manudhane
Sir, just continuing to the earlier participant question. Now with these products taking up or they will be scaled up, let’s say, over the next two years to three years. Subsequently, what impact it would have at least on our base business, which might grow in FY ’25 by 9% to 10%. But will that have some cannibalizing impact, say in FY ’26, FY ’27?
Amit Bakshi
Which, what are you talking about, Tushar? The diabetes-based business?
Tushar Manudhane
Yes.
Amit Bakshi
So, look, we have seen the data in US and across where they have been available for a long time. We can’t really say that it has put a brake on something. But what we see is that people — more and more people are reaching their targets. Even US data says that even after everything, the average US diabetic was at 8.2 HbA1C, while the target is close to 7. So these drug-based businesses, generally brings — bring more people into the target range, not necessarily getting out a couple of drugs. But today, if you really want me to tell what is the future, so guys, the future is insulins, GLPs, DAPA, and DPP-4 inhibitors globally.
And India, we will, we can’t get rid of sulfonylureas. So the top four picks would be GLP should come at number one. We believe we are at around 11,000-12,000 of OED, 3,000-4,000 of injectables. Once these injectables come, the injectables growth will be very substantial. But we don’t feel as of now that it will — the OTA will recede. The only thing is more people will attain their target. So that’s what we know at this point of time.
Tushar Manudhane
Got you. Sir, with respect to this Levim facility, does it have currently any regulatory approvals, or this will now happen in the due course?
Amit Bakshi
So they have been supplying this, some ROW business they have. So if there are approvals, I will have to check. KK, any idea?
V. Krishnakumar
So, Tushar, you’re talking of Indian approvals or international?
Tushar Manudhane
Both, sir, as in domestic as well as — in shut on we are going to utilize for exports.
V. Krishnakumar
Yeah. So presently, they have three commercial products, Liraglutide API, which we also use in our product. Then they have Streptokinase and Pegaspargase. So these three are commercially manufactured bulk actives for them. They sell it in India and they have a handful of export markets. And then they have another product pipeline. So they have a certain scale at which they produce these products now, which will be substantially enhanced by mid next year.
Amit Bakshi
Yeah. So Tushar, what we see in the Indian setup now, not many people are able to scale up to commercialization. And scaling up from prone to commercialization is something which not many have achieved. So we are very confident about their ability, and they have done it in Liraglutide, which is a little difficult to kind of get your arms around. So we are quite confident about their capability. The whole game is how fast we can develop more products and scale up the entire production facility.
Tushar Manudhane
Got it. So like 30% is with Eris. So remaining 70%, is there any other customer also of Liraglutide, who’s got the stake in this? Or this is more like the promoter’s stake, remaining 70%? And what’s your thought on for Eris to acquire, if at all, further stake in this?
Amit Bakshi
So Tushar, there is no other investor. It’s only promoters and us at this point of time. Because this business, the idea of getting into this business is not what they are selling today, but what they are capable of the future. So generally, when we go through in such businesses, we talk more about milestones. So our investment will further increase. That is almost given. But that will happen with more milestones coming together. So that’s how we are trying to play this out.
Tushar Manudhane
Okay. I mean, was there a scope of getting an exclusive sort of a manufacturing arrangement with them instead of taking the equipment?
Amit Bakshi
Yeah, of course, there’s a scope. There is a scope. But it will happen with milestones. You know, one-by-one, we will kind of — it will start from the development, the clone stage, the scale up stage. And so there are many factors to it. So as and when, there will be a proof of concept, we will try and scale it up.
Tushar Manudhane
All right. Thank you.
Operator
Thank you. The next question is from the line of Gautam Rajesh from Leo Capital. Please go ahead.
Gautam Rajesh
Hi, good evening, sir. My first question was, how do you see the growth of the insulin business in the next two years to three years?
Amit Bakshi
Gautam, we are very positive in all the businesses which we have acquired from Biocon. It is the insulin, which is leading the pack in terms of growth. And we are confident that insulin business will keep on going, keep on doing well in the next two years, three years. We expect a very strong more than team around 18% to 20% growth in two years’ time.
Gautam Rajesh
CAGR?
Amit Bakshi
And the only thing which we — yes. The only thing which we are a little worried is about the supply. So that’s the only thing which is a little bit of a problem. But we are trying to make sure that, you know, we don’t run out of insulin.
Gautam Rajesh
Understood. And my next question was, what is your outlook on the Swiss Parenterals business growth, both in exports and domestic injectables?
Amit Bakshi
KK, will you talk about this?
V. Krishnakumar
Yeah. So the base business of Swiss Parenterals, which is the injectables exports business, we have guided to INR30 crores this year, which is around a 15%…
Gautam Rajesh
Pardon, can you repeat this, sir?
V. Krishnakumar
Am I audible?
Gautam Rajesh
Yes, sir.
V. Krishnakumar
Okay. On Swiss Parenterals, the base business, we have guided to a growth of — we’ve guided to a number of INR330 crores this year, which represents around a 15% growth on their last year base. And as of now, we have very good visibility of that. This business is H2 Heavy. So H1, we’ve done INR155 crores. So we will keep updating as we go forward.
In terms of three-year outlook, we are very excited about the new lines of businesses that we’ve launched here. So as mentioned earlier, we have launched a CDMO business, which is focused on European injectable market. The idea is — so this is a complementary business to the ROW business. So the ROW business has its own growth path. The CDMO business, which is a new business unit, it will start contributing from FY ’26 onwards. Then we have an oral solid dose business, which again will start contributing from ’26. So that’s the broad outlook.
Gautam Rajesh
Sir, what about domestic? And I have just one more question after that.
Amit Bakshi
Gautam, we just talked about domestic, I will just repeat quickly, we are looking at around, we are operating around INR7 crores a month, right, it is work-in-progress.
Gautam Rajesh
Okay.
Amit Bakshi
It is still taking off, we believe that next year will be far better than this year. This year, still not on top of that, so still work-in-progress.
Gautam Rajesh
Okay, sir, final question is on, what is the supply problem in the insulin GLP-1 that you were referring to earlier, is it an industry issue, like industry issue, can you talk more about it just in India or like more on that?
Amit Bakshi
So, Gautam, that is, that is like, that could be discussed offline, but globally insulin is going through certain, certain challenge, because of the, I think, because of the farm and field plant, but this is transient and I think it will be overcome.
Gautam Rajesh
Due to what plant, sir?
Amit Bakshi
Boss, we will have to talk offline, this is, you know, it is quite a large conversation.
Gautam Rajesh
Okay, sir.
Amit Bakshi
Thank you.
Operator
[Operator Instructions].
Kruthi Rawal
Operator, if there are no more questions, maybe we can close.
Operator
Sure, ma’am. Thank you very much. Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference over to Mr. V. Krishnakumar for closing comments, over to you, sir.
V. Krishnakumar
Thank you all for your presence today. To summarize, our consolidated Q2 revenue was INR741 crores with a 47% growth. Consolidated Q2 EBITDA was INR265 crores with a 36% margin and a 46% growth. Robust execution and manufacturing has led to a jump in branded formulations gross margin. Successful integration of acquisitions has led to a significant fixed cost synergies as well.
At the end of Q2, we have a stronger balance sheet and higher return ratios. Consolidated ROCE is up by 600 basis points to 17% and adjusted ROCE is up by 400 basis points to 23%. Operating cash flow for Q2 was 119% of EBITDA. We are ahead of schedule on debt repayment. Net debt at the end of Q2 stood at INR2,500 crores. Our strategic investment in Levim will make us a vertically integrated biotech player with a strong new product pipeline. We are on track to deliver our guidance of INR2,600 crores revenue in branded formulations with a 36% EBITDA margin and a consolidated revenue of INR3,000 crores with a 35% EBITDA margin.
Good evening and I wish you all a happy Diwali in advance.
Operator
[Operator Closing Remarks]