Aarti Pharma Labs

Sharing my AGM notes below:

1. Xanthine derivatives:

• Only non-Chinese integrated player in caffeine. Product quality and reliability [supply chain] has made us the leading caffeine provider in the world
• End-usage: 70-80% FMCG, 20-30% pharma
• Margin expansion in last two years due to good demand environment (both pharma and FMCG) and availability issues in China due to plant closures
• Seeing softness in prices now, RM prices have decreased. New capacities have come up in China. We see some correction in margins
• Our customers are inquiring on how we can work more with them and asking us to become China independent. Hence, moving Cyanoacetic acid in-house for which we were dependent on China earlier
• Backward integration effects will start in later part of the year, which will fetch us premium over Chinese players and allow us to make reasonable margins
• We are looking at further debottlenecking by 30-40% (in addition to recent expansion of 1000 MT) in the same facility or by acquiring some land parcel. Will be able to conclude the decision this year and then in next 1-1.5 years can implement it
• There are smaller players in the Xanthine space, companies have different niches. We are focused on couple of products caffeine, theophylline etc. It’s not so easy for new players to enter, takes 2-3 years to get the necessary approvals/ certifications
• Overall, Xanthine should contribute 30%-60% of the business [in medium-long term]

2. CDMO/CMO and intermediates:

• Commercialized 16 products, 12 under development for CDMO. Working with 14 innovators/big pharma companies. These projects are 100% with innovators
• Facilities for CDMO/CMO and intermediates are shared currently
• CDMO/CMO is a higher margin business (didn’t reveal exactly how much)
• New R&D centre will exclusively focus on CMO/CDMO opportunities and better meet the needs of innovators
• Hydrogenation plant to be commissioned in Q2FY24. It’s a state of the art facility, includes 9 reactors and will handle high pressure hydrogenation reactions
• Expansion at Vapi: Adding a new block which will have reactors with capacities of 3kL to 28 kL. To start in Q1 of FY25. Will help in establishing manufacturing processes/pilot which we can scale up further (likely in Atali facility)
• Atali: 350 Cr investment in Atali is not for CDMO/CMO alone. It’s for both intermediates and CDMO/CMO
• Atali: Current phase 1 investment in infra development (warehouses etc.). Pre-spending more funds. So revenue to capex will remain little bit low. In future, with new blocks coming in, it will improve. New blocks will be in the same facility. Phase-1 will include 56 reactors with ability to handle 30kg to 1000kg, total capacity of 400 m3. Construction in progress in full pace. Phase-1 to finish by FY25.
• Atali: Another advantage is that we won’t have to change sites for regulatory reasons, will be able to cater to customers for 10 years without changing sites. That’s why we have opted for a large manufacturing site
• Answer to “why would innovators want to work with you vs large firms like Lonza, Wuxi:” Aarti’s expertise is in developing commercially viable process/commercialization
• Pretty confident that this is a very growth area

3. APIs:

• Focus on R&D and early stage development
• Backward integrated for most APIs
• Didn’t face much price erosion, dedicated blocks for oncology and steroids
• Target of developing 40 new products every year
• Plan to aggressively build capacities

R&D/Chemistry skills

• R&D spend was ~40 Cr last year. This year will spend ~50 Cr
• Chemistry work: We are able to offer very difficult reaction capabilities to customers: Boron, lithium, carbohydrate, hydrogenation, cryogenic reactions

Others

• We don’t discharge even a single litre of water
• Plan to continue using green chemistry to improve ecological products; intend to develop eco processes without compromising on quality
• Have changed to enzymatic routes from synthetic for some of the reactions
• 30-40% energy requirements will come from new solar project they have set up
• Long-term EBITDA growth target 12-17%. Focus is on bottom line not revenues
• Ganesh Polychem: produces complex polymers, end usage for dialysis… Another product… Have kept this business due to pharma end-usage. Have a captive manufacturing plant, also give some RMs to them. Have undertaken a project to debottleneck and optimize costs, will take 18 months

Disclaimer:

• Some of it is from memory and not verbatim. Please correct/add if I missed something
• I am invested and biased