Strides Pharma Science Ltd (BOM:532531) (Q1 FY27) Earnings Call Highlights: Ex-US Growth Drives ...

Negative Points

• The US business revenue remained flat at $68 million, impacted by increased competition in certain products, and the company expects H1 to remain soft.

• The ex-US business saw a sequential decline to $63 million from $70 million in Q4 FY26, due to supply chain disruptions and shipping delays, though management views this as a timing issue.

• Freight costs increased to 6.2% of revenue from 5.3% a year ago, reflecting ongoing geopolitical disruptions and inflationary pressures.

• The company faces uncertainty regarding proposed US tariffs on generic pharmaceutical products starting August 2028, with limited visibility on the final implementation framework.

• Controlled substances growth has been slower than expected, with quota allocations taking longer to materialize, and the segment currently contributes only about 5% of revenues.

• The company experienced delays in some product approvals, which are expected to materialize over the coming quarters, impacting near-term US growth.

• Cash-to-cash cycle increased by 7 days year-on-year to 123 days, driven by a 24-day increase in inventory levels as the company prioritized supply chain resilience.

• Operating cash flow conversion was at 47% of EBITDA, lower than ideal, due to increased working capital requirements.

• The company's ROCE on a TTM basis moderated to 15.3% from 15.8% in FY26, as capital employed grew on recent investments and currency movements.

• The geopolitical situation remains volatile, with ongoing supply chain disruptions, elevated freight costs, and longer transit times, which could continue to impact operations.

Q & A Highlights

Q: How will Strides bridge the gap to reach the aspirational $375 million in North American revenue for FY28 from the current base, and what are the key growth levers? A: Badree Komandur, MD and Group CEO, outlined five key levers to achieve the additional ~$90 million: 1) The OTC business, where aggressive work is expected to show "green shoots" immediately. 2) Controlled substances, which should see growth now that the company has completed two years of demonstrating its past sales history. 3) New product launches from a pipeline of over 100 products, which will be launched systematically starting Q2. 4) Expansion in new and specialty channels. 5) Expanding partnerships in Canada and other geographies. He emphasized that the groundwork is in place and execution is key to achieving this goal.

Q: Can you provide an update on the USFDA inspection at the Bangalore plant and its potential impact on US business growth? A: Badree Komandur, MD and Group CEO, stated that the inspection occurred in May, and the company has submitted a comprehensive response to the USFDA. They expect a reply by the end of August or September. He confirmed that the situation does not affect current supplies and that they do not anticipate any impact on the US business growth aspirations for the next four to five quarters.

Q: What is the status of the nasal spray portfolio, and what are the expected approval timelines? A: Badree Komandur, MD and Group CEO, provided updates on two nasal spray filings. The first, filed last year, is in advanced stages of review with approval expected in Q3 or Q4 of this fiscal year. The second was filed about a month ago and is expected to take 12-15 months for review. He also mentioned that the company is working on five to six nasal programs and will file a third product in the next few months, with significant filing traction expected in the next 12-18 months.

Q: Can you explain the cyclicality in the ex-US business, which saw revenue decline from $70 million in Q4 FY26 to $63 million in Q1 FY27, and clarify if the Sandoz acquisition is included in these numbers? A: Badree Komandur, MD and Group CEO, clarified that the decline was due to supply chain disruptions and geopolitical issues that prevented the fulfillment of certain orders, calling it a timing issue rather than a demand issue. He confirmed the ~$7 million gap from Q4 will be recovered in coming quarters. He also stated that the Sandoz acquisition is not part of the current numbers, with the deal expected to close in Q2 and contribute to results in H2.

Q: How does the quota allocation process work for controlled substances, and when can we expect a meaningful ramp-up in this business? A: Badree Komandur, MD and Group CEO, explained that quota allocations happen twice a year (June and December) and are based on past sales history. For new entrants, demonstrating this history is difficult and requires customer sponsorship. Strides has been demonstrating its history for about 20 months with four products, which currently contribute ~5% of US revenue. He expects the June cycle response next month and believes that, like other companies, quota allocations should increase significantly after the initial 1.5-2 year demonstration period, driving growth from now on.

Q: What is the company's CapEx plan for the next two years, and are there any greenfield projects? A: Badree Komandur, MD and Group CEO, stated that the company's annual investment, combining maintenance CapEx and R&D expenses, is in the range of INR2.5 billion to INR3 billion. He clarified that there are no greenfield projects planned at this time, with investments focused on high-impact line items within existing facilities.

Q: What is the trajectory for reducing net debt, and what is the current weighted average cost of borrowing? A: Badree Komandur, MD and Group CEO, stated that the current net debt is ~INR1,420 crores, excluding the OneSource investment valued at ~INR320 crores. He expects the company to be "fairly neutral" in terms of debt in two to three years. He also noted that while the company reduced debt by ~INR3 billion last year, the impact was masked by rupee depreciation from INR82 to INR95-97. Rakesh Sinha, AVP - Production, added that the weighted average cost of debt is ~7.6%, which has stabilized at a reasonable level.

Q: How many product launches are planned for the US this year, and will they be higher-value products? A: Badree Komandur, MD and Group CEO, confirmed that the company is on track to launch about 10 products by March 31st. While he did not specify a dollar value for each product, he reiterated that new product introductions are one of the six levers to move the US business from $285 million to $375 million. He expects the full impact of these launches to be visible in the next fiscal year.

Q: Can you provide details on the divestment of Vivot Path and the rationale behind the valuation? A: Badree Komandur, MD and Group CEO, explained that Vivot Path is a Global Capability Center (GCC) with two businesses: third-party and captive. He advised against evaluating the deal based on standalone revenue, as it does not contribute significantly to the Strides Group's revenue. The company sold the business for INR100 crores, retaining a 20% stake, and believes the business will perform well as it expands its third-party operations, potentially adding to PAT in the next four to five years.

Q: What is the company's strategy for the ex-US business, and how is it expected to perform going forward? A: Badree Komandur, MD and Group CEO, described the ex-US business as broad-based, comprising B2C markets (UK, Nordics, South Africa, Francophone Africa, Kenya) and B2B markets (Europe, Australia), with LATAM, MENA, and APAC in the regulatory filing stage. He noted that B2B provides stability to B2C and that margins are improving. The company expects the ex-US business to grow faster than the company average for the foreseeable future, with new contributions from regulatory filings expected from FY28-29 onwards.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .