ARV guidance upgraded from INR2,500 cr to INR2,800 cr.

There is a significant jump of gross margin in this quarter. It increased by around 500 basis points. We are now at 59.5%. Can we expect this kind of high gross margin will be maintained in future too as the share of CDMO increases? Or do you see it as a one-off and it's too early to expect this kind of high gross margin?

If you look at our gross margins over several quarters, we're always informing and also maintaining around 52%. Now you can say as the contribution from CDMO business increases, we expect the gross margins will remain between 55% to 60%. That's what we expect in the coming quarters.

On the bio side. On the food protein side. We are basically about to set up a facility for 2 million liter and then 4 million liters. So on the food protein side, what is the progress, sir? Are we now started putting any work there? If orders have been placed for the reactor?

As I mentioned, Jeevan, we are installing 400 kiloliters of fermentation capacity in Vizag greenfield project that's the Phase 1. As you mentioned, overall capacity at that site will go to 2 million liters in 2 more phases. In Phase II, Phase III put together, it will go to 2 million liters. And we have very good visibility about the utilization of that fermentation site, which product, which customer and all. Like we are gaining confidence and gaining visibility in our small molecule CDMO segment. We're also seeing a lot of visibility now what customer, what project, what price, what time lines on our large molecule CDMO. As you were talking about our focus on food proteins, we are focusing also on other proteins, cosmetic proteins, some polymers produced by fermentation. So the offerings are becoming very interesting, which are also at scale.

On the gene therapy, we are setting up a viral vector facility in Kanpur. Any update there?

So there is a change in our approach because our thought process changed fro m 2,500 square meter facility to 6,000 square meter facility. So there is no space available at Technopark in Kanpur. So we have moved idea of that facility to Hyderabad, Genome Valley, where we have broke the ground for a 6,000 square meter facility. And whatever gene therapy, viral vector and also that building houses antibody drug conjugate GMP facility as well. So because we have added another therapy ADCs, we thought to move to Hyderabad.

At any point in time, do you see these divisions becoming big to the extent that there may be a possibility of listing these as separate entities and business?

We don't have any plans for that.

Would it be a right statement that in gross margin -- in CDMO, your gross margin would reasonably be stable irrespective of the stage of project, whether it's an early stage or late stage? Or it materially varies gross margins on the stage of the project that you are?

You are right. Generally, the gross margins remain similar irrespective of stage and scale of the project.

Which part of the non-CDMO business has been contributing to margins? Because there is a significant improvement of almost 700 bps to 1,000 bps in non-CDMO gross margin. Is it the ARV part or FDF part which is driving?

It's majority came from non-ARV.

Now that the animal health facility is commissioned, even agrochemical. Has this contributed meaningfully for the CDMO business for the quarter? Or if you could break the CDMO business into Human health, Animal health and the Agrochemical and Ingredients?

The contributions from Human health and Animal health were there in this quarter. Nothing significant from crop sciences in this quarter.

Will meaningful revenues from crop sciences come up in the coming quarters?

We expect meaningful revenues from crop sciences will only come next financial year.

From a return on investment perspective, the KL facilities whether to utilize for the ingredients, for Human health or Animal health or Crop sciences. Is it the similar chemistry and hence, it's just a different application or how to think about it strategically for next 5 to 6 years?

So the facilities for animal health are segregated and dedicated. We can't use that for Human health or Crop sciences. Similarly, the Crop science facilities are also segregated and dedicated. So those can be us ed for only Crop sciences. So interchangeability of these 2 facilities are not possible. Whereas Human health, we have large capacity where we can do these projects in multiple sites at multiple scales.

On Bio side, where there has been certain issues with the customer. Probably if that customer comes back or if we have new customers, like tentative time line approximately for this business to sort of revive?

There is no challenge. It's only delay. The project now the bottleneck was resolved. Things are back to normal. And we don't see any big challenge achieving what numbers we thought at the beginning of the year.

Any progress update you can share regarding the Willow Bio and AI-driven bioengineering platform partnership we are progressing with? What advantages does bioengineering provided over conventional chemical synthesis in terms of efficiency, cost and sustainability?

Sajal what programs we are working with Willow using their AI -driven enzyme engineering platform, primarily hydroxylation platform. Adding hydroxy groups on stero idal backbones. That's the one we are working. There are multiple programs. Maybe in this financial year, one program will go from lab to pilot mode. And we expect 2 more programs in the next financial year.

Do we expect the learnings out of this program to be kind of integrated into some of our future ventures?

Our partnership with Willow is primarily meant for steroids and hormones. Our Bengaluru team is doing development, whereas Willow is doing research. I think they identify the enzyme and then they give it to Bengaluru team for optimization. So that partnership is working well. And currently, we are not intending to use that technology on any other program right now.

This new capex investment of over INR5,000 crores that you have announced in Andhra Pradesh, will be executed over multiple phases and years. Can we therefore anticipate maintaining a healthy net debt-to-EBITDA ratio despite this massive growth capex?

Yes. As we indicated before, we are going to invest INR5,000 crores in the next 5-year time. I think internal cash flows will be sufficient to take care of it. As we indicate, we don't want to make our net debt more than 50% of our revenue at any point of time.

You have mentioned that there is a pricing challenge in that particular slide for the Laurus Bio. Could you please share the details on the pricing challenge? And the second question is that how big it can become in the next 5 to 10 years at Laurus Bio itself?

See, the pricing challenge at Bio pertains to hiring reactor months to product billing. So that was the one shift happened b ecause in the trials since we don't know how many days fermentation will take, how many days the downstream processing happens. So customer used to pay per month or per batch. Once the product stabilizes, then the billing will go to per kg. So that's the pricing shift happening for them when the product mature. And the question regarding the opportunities in the next 5 years, we see significant potential. That is the reason we are investing a lot of money in greenfield projects. As we mentioned, the Phase I itself, we are creating 400 kiloliters capacity and eventually, it will go to 2 million liters fermentation capacity.

If you can see on a quarterly basis, there has been a reduction. The volatility in these numbers have been there for the last 4 quarters in the generic FDF. Is this going to continue? Is there any stability that is going to be there in the generic FDF and generic portfolio?

The majority delta in our sales in FDF is coming from how many millions of packs of antiretroviral we are shipping in the quarter. So overall, we are shipping the same numbers, but depending on the approvals from various countries to ship logistics and all, revenue recognition because most of them are sea shipments. So those are the factors contributing to the variation in the generic formulation sales.

Just a bookkeeping question on the ARV business, if you could give break up of formulation and API please?

Yes. Just give me 1 minute, we'll give you the ARV APIs is INR363 crores and formulations is INR284 crores. About INR640 crores both put together.

The non-ARV formulation we've seen a bit moderate run rate over the past maybe few quarters, if you could share how we sort of think of growing business in this segment?

We are expanding our capacity for non -ARV formulations and which will be qualified by end of this year. So we can expect non-ARV formulations should grow from Q4 onwards.

On the product approval side also, there has been bit slow, correct me if I'm wrong.

Revenue growth primarily comes from contract manufacturing of integrated formulations, both the API and FDF. We are doing tech transfers. Once the capacity is qualified, we don't see lag in revenues.

What are we doing from here on to improve that part, that piece of gross margin further?

As we grow our CDMO business, today, we haven't achieved operational efficiency, still a lot of unutilized capacities and all. As we grow our revenues, we are not going to grow our R&D and quality staff proportionately. We are going to increase other expenditure proportionately. If you look at when our revenue was less, our cost of employees went up to 16%, 17%. Sometimes it was around 10%. So we are at the beginning of that benefit to operational efficiency. Yes. Once we improve revenues, our percentage of expenditure will come down. So that is another metric, which will help us to improve our numbers, EBITDA as well as return on capital.

On the CMO business, which we have in both API and formulations, can you give us some color on when do you see momentum picking up on those pieces? Because we've seen sudden flattening out of the API business in the formulation business ex of ARVs also, we've not seem to have picked up much over the last few quarters.

It will pick up from Q4 onwards, Nitin, yes.

Is this driven by certain specific contracts? Or what will drive the timing from Q4 onwards on these businesses?

Right now, the tech transfer batches are going on in formulations. And the capacity enhancement is also going on parallelly. So both we expect will be handy to get higher supplies and higher revenue from Q4 onwards.

On the API business, ex of the ARVs, last year, we had a bit of a slump in the oncology part. How do we see the non-ARV API piece going forward? Are we seeing momentum coming in that business at some point in time?

Not in the next few quarters.

What is the reason because of which there has been some challenge on this piece over the last?

It's not a challenge is by choice, actually. The reason is we have allocated more resources to take up more CDMO projects instead of allocating to a significant number to generic API development. So we took that as a decision made by internal people. I think we are also expanding our R&D strength. Once that is done, we will put resources back in development, validation of generic APIs. We also need capacity to do that. So there are multiple things. So right now, we made an informed decision internally to allocate resources to CDMO projects.

On the ADC front, we have mentioned a couple of times that we endeavor to go into the ADC side also. May I ask which part of the ADC are we looking at? Is it the payloads, linkers, bioconjugation?

See, we already make payloads and linkers. And we don't want to make mabs. We'll do conjugation, purification and fill finish. That's the infrastructure resources we are building. Internally, we make payloads, linkers and then do bioconjugation, purification and fill finish. We will not make Mabs.

Out of this INR5,000 crore capex that we have announced, would it be possible to give some color there, like how much capex would go towards the ADC side?

This new INR5,000 crores capex is in Vizag, none of that capex will go to ADC.

This quarter, we've seen a significant jump in your employee expenses, almost 21% quarter-on-quarter, year-on-year. Any nonrecurring expenses here? Or this is the new base?

The part is nonrecurring in the sense, once in a year, actually, we are giving a long-term service awards for the people who stayed us for a longer period. And of course, there is an increment over the last year, last quarter. That's also reflected apart from the additional manpower.

On the ARV side, we've seen year-on-year growth in this quarter, but you're still maintaining your guidance of no growth for an overall full year basis. Any particular reason why still you're not seeing growth in this segment for the full year? Is it just uncertainty on the global tender?

We kept some margin. We have seen significant price drops in ARVs. If there is no price drop, we may go a little better. If there is a price drop, our incremental volumes will compensate the price drop. So we are keeping that cushion when we are committing INR2,500 crores ARV plus or minus INR200 crores.

The net debt for EBITDA right now is 1.8. What is the management's guidance for the debt over the next 2 years or next 3 years?

We are not expecting a significant increase in the debt. So as we have said We will try to manage with 50% of our revenue levels, the annual revenue levels. That means debt by EBITDA, maybe 2, 2.5 is max.

The INR5,000 crores that you're going to plan to do in the next, I presume next 3 to 4 years. What is the breakup? Are you going to do internal accruals or you are planning to do more JVs with other companies?

Mostly from the Laurus Labs side and majority of funding will be through internal accruals.

As the percentage of CDMO in your total sales rises and since CDMO is a higher gross margin business for you, is it reasonable to assume that it will take the aggregate or average margin -- overall margin trajectory of the company upward?

Yes. As the contribution and percentage from CDMO growth, we expect both gross margin and EBITDA margins should continue to go up.

On the ARVs, lenacapavir and cabotegravir, both have issued voluntary licenses. Even WHO today now seems to stand very strongly behind bringing in lenacapavir advocating for lenacapavir as probably the preferred treatment and bringing it in the emerging markets as well via the voluntary license route. Would Laurus have an opportunity in lenacapavir?

We are not part of the licensee of lenacapavir. And the Lenacapavir will be part of the guidelines for prevention rather than the treatment. That's one. And the cabotegravir, rilpivirine we have developed API. And we have a few partners using our APIs. Lenacapavir, we are not part of the licensee.