Ladies and gentlemen, good day, and welcome to Alkem Laboratories Q2 FY 2024 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 touchtone phone. Please note that this conference is being recorded.
I now hand the conference over to Mr. Tushar from Motilal Oswal Financial Services. Thank you, and over to you, sir.
Yeah. Thank you, Sheena. Welcome to Q2 FY 2024 earnings call at Alkem Laboratories. From management side, we have Mr. Sandeep Singh, Managing Director, Dr. Vikas Gupta, CEO, Mr. Rajesh Dubey, Chief Financial Officer, Mr. Amit Ghare, President, International Business, and Amit Khandelia , VP Finance. Over to you, Amit.
Thank you, Tushar. Good evening, everyone, and thank you for joining us today for Alkem Laboratories Q2 FY 2024 earnings call. Earlier during the day, we have released our financial results and investor presentation, and the same are also posted on our website. Hope you have had a chance to look at it. To discuss the business performance and outlook going forward, we have on this call the senior management team of Alkem. Before I proceed with this call, I'd like to remind everyone that this call is being recorded, and the call transcript will be made available on our website as well. I would also like to add that today's discussion may include forward-looking statements, and the same must be viewed in conjunction with the risks that our business faces.
After the end of this call, if any of your queries remain unanswered, please feel free to get in touch with me. With this, I'd like to hand over the call to Mr. Sandeep Singh to present the key highlights of the quarter gone by and strategy going forward.
Over to you, Sandeep.
Thank you, Amit. Good evening, everyone. As many of you are aware, we recently announced the appointment of Dr. Vikas Gupta as the Chief Executive Officer. Dr. Vikas Gupta has over two decades of experience in pharmaceutical industry, and his leadership and vision will play a pivotal role in our future growth and strategy. We are excited to have him on board. I formally welcome Dr. Vikas Gupta on his first analyst interaction.
Thank you.
We are pleased to report strong operational performance in the quarter, supported by significant gross margin improvements and operating leverage. We have observed a favorable trend in raw material costs softening, which has positively impacted our cost structure. Price erosion in the U.S. market has slowed down from high teens in last year. I am confident that our ongoing cost optimization efforts will persist in driving improved performance. In this quarter, it proved to be a good quarter for the company, featuring a year-on-year revenue growth of approximately 12%. Our EBITDA margin stood at 21.7%, while net profit after tax for the quarter is around INR 620 crores.
During the quarter, we generated approximately INR 470 crores in cash, reinforcing our balance sheet to establish a sustained substantial net cash position of around INR 2,900 crores as of September 30, 2023. Coming to our domestic business, we experienced a lackluster quarter one, and this trend continued in this quarter two due to sporadic and delayed monsoons. However, there was a noticeable improvement towards the end of quarter two, with a particularly positive upturn in the month of September. We are eager to capitalize on this momentum and anticipate stronger performance in the upcoming periods. Our growth during the chronic therapeutics segment continued to surpass market performance. During the quarter, we advanced by two ranks in antidiabetic and one rank in neuro CNS and cardiac therapy segments.
Our trade generic franchise remains a key driver in our growth journey within India. Moving to international business, for the second consecutive quarter, our international business has demonstrated its strength by surpassing INR 1,000 crore for the quarter. The performance of U.S. business was driven by volume growth in our core operations. Other international market growth was led by good performance in Chile, Europe, and Kazakhstan, and even Philippines to a certain extent. During the quarter, we have received four ANDA approvals, including one tentative approval. All our manufacturing facilities supplying to the U.S. are having an EIR as on date. We aim to sustain and carry forward this performance momentum into the remaining part of the year with a determination to surpass our earlier EBITDA guidance of 16% for 2024.
With this, I would like to open the floor for Q&A. Thank you for being here.
Thank you very much, sir. We will now begin with the question and answer session. Anyone who wishes to ask a question may press Star and One on their touchtone telephone. If you wish to remove yourself from the question queue, you may press Star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We take the first question from the line of Saion Mukherjee from Nomura Securities. Please go ahead, sir.
Yeah. Hi, good evening. So just a question on the U.S. We have seen, you know, a good increase quarter-on-quarter. If you can elaborate, you mentioned about volume growth, but are there any seasonal factors and how should we think about the, you know, next two quarters? And also from a slightly, you know, medium-term perspective, how should we think about U.S., in the backdrop of we have seen, you know, some reduction in R&D costs, just one ANDA filing in the first half, because earlier there was a bit of conservativeness, with respect to the U.S. So, you know, beyond the next two quarters, how should we, think about US, moving up in the, in FY 2025, 2026?
Sure. Amit, Mr. Amit, you can take that question, please.
Thank you, Sandeep. The first part of the question, there has been small, you know, seasonal effect in the quarter two numbers, towards the end of September. And honestly, the season never actually ended this year. The growth for anti-infectives has been strong since the last season started. Other than that, there has been nothing, you know, one time or nothing, you know, substantial that contributed, so it's kind of overall business that contributed. For the next two quarters, obviously, our base is now higher, so, repeating this kind of growth obviously is going to be a challenge, year-on-year, that is. But we are obviously looking at overall full year FY 2024. Over FY 2023, we are looking at a high single-digit growth in dollar terms, you know, that's where we stand.
On the R&D side, I'll hand it back to Sandeep and Dr. Gupta.
So, on the R&D side, I think you, you know, H1 is not an indication of predicting how many INDs we'll file for the year, so they'll be backended, but we'll be filing close to 89 ANDAs. And secondly, yes, in small molecules, we have cut back some R&D. I mean, you all are aware that we are doing clinical trials for Denosumab for U.S. market. So it's not that we are kind of really cutting back or getting very negative on U.S. We have just decided to allocate slightly less money and also change the color of our spending from small molecules to, let's say, hopefully more complex things.
Okay. And just one more question on the tax rate. You had guided for, I think, higher tax rate earlier, around 18%. So where do we stand? If that guidance holds for this year and next year?
Yes, Sam, yes, our earlier guidance was somewhere close to 18%, but we reviewed our revenue generating from eligible unit, that is Sikkim, and some bottleneck we planned out, and we revised our guidance from 18% to 12%-15% for this year.
So, this will hold for next year as well?
Next year we'll come back to you during our third quarter results, but I think we'll be somewhat closer to it.
Okay. And when does this Sikkim benefit last and when do we see a step up in the tax rate?
March 2026 is last. So from April 2026 onwards, we don't have fixed benefit over there.
Okay, got it. Thank you. I done that.
Thank you, sir. We take the next question from the line of Kunal Dhamesha from Macquarie. Please go ahead, sir.
Thank you for the opportunity, sir. Just continuing on the tax rate, so we are now guiding for 12%-15%, and H1 is around 9%. So does that mean that we are more or less would be at 18% for the next couple of quarters?
On an annualized basis, we work out our tax. But in this half year, there are some element towards catch-up. That's the reason it is on lower side. But on annualized basis, our estimate is 12%-15% when you go up.
Yeah. So that means second half would be 18%, right? Like, close to 18%.
Not 18%. So around 16%, kind of 15%-16%.
Okay. Okay. And, secondly, on the U.S. business, you said that the price erosion has kind of reduced, but any number that you would, or range that you would like to put out? So earlier you alluded it was into like low double digits. I mean, where are we now, and what has kind of changed, and how long do you see that continue?
Mr. Ghare?
Currently, the pricing deflation is in the mid-single digit numbers, around 5%-6%. That's where it is. Future, we hope it remains in those levels, but future is future.
Have we supplied any shortage product in this quarter which would have helped us?
No one-time opportunities per se, significant one-time opportunities. That's the answer to your question.
Okay. Sure. And the last question on the India business. So we were in the process of expanding our field force by around 10%. So are we kind of more or less done there? What is the update?
Yeah. So, on India business expansion, I think we are more or less done. So we are not planning any big expansion in India business. The focus will be on increasing productivity now. And whatever people we have added in the recent years, we are just planning to, you know, now create the operating leverage and get the productivity up, you know, for our people in the business. That remains our topmost focus.
Sure, and what would be the MRs number as of now and the line manager?
We have around 12,000, you know, the first line, and then proportionately, you know, you can take the number of managers.
Sure. Thank you. I have more questions. I'll join back with you.
Sure. Thank you.
Thank you. We'll take the next question from the line of Rashmi Shetty from Dolat Capital. Please go ahead.
Yeah, thanks for the opportunity. On the softening of the raw material costs, have you seen correction in penicillin and cephalosporin prices?
Yeah. So the softening of API prices, we can feel, but, few anti-infectives, I think still it has not come back to pre-COVID level, and particularly product where Pen G comes into play. So Pen G, still it is going on at $30 level. So I think pre-COVID it was somewhere close to $8-$10, and now I think it is $28-$30. So you can understand, still, still it is good there. But rest of the major APIs we feel, more or less, it got softened. And, we hope, going forward for a few months at least, we'll be able to have a similar kind of situation for API.
Okay. And so with the improvement in the India business and, you know, the base improving in the, I mean, awaiting price situation in the U.S. business, do we upgrade our gross margin guidance, you know, from currently, I mean, whatever you had guided earlier, 59% to around 60%-61% now for this year?
Yeah. Gross margin improvement is of course, yes, and that is good thing. And, if you recollect, in our last earnings call, we issued guidance of 59%-59.5% on annualized basis. I think we are going to remain. Of course, you rightly said, besides API, a better product mix, and particularly in U.S., business, we got better on gross margin there. So I think, things are going as per our estimate only. And, API prices, better product mix, and all these, things are helping us. And we are hopeful, guidance we have given, we are going to remain, there only and not below that.
Okay. Sir, on your India business, you know, if you can give what was the trade generic business contribution, and what kind of growth have you seen in that business?
Sorry. So, around 17%-18% is what, you know, our trade generic recent contribution. Trade generic. So that's chronic or trade generic? Trade, trade generic.
Trade generic.
That's, that's around 25%, yeah, kind of— 20%-21% kind of, you know, contribution, and the growth has been around 6%-7%. Yes. So that has been the trade generic.
Okay. First, are you maintaining our high single-digit growth guidance in the domestic business?
Yes, pretty much. You know, and that is what—where we are trending with the, you know, single digit, but we are expecting it to be higher single digit, you know, the on an annualized basis.
Okay. My last question is related to the Enzene Biosciences. You know, what was the sales contribution which has come in from that? How do we see the profitability also in this quarter?
Sales contribution, you asked, ma'am?
Yeah. From the CDMO and biotechnology products from the Enzene Biosciences.
I think the quarter was around INR 88 crores. In the quarter two.
Okay.
Question was on profitability?
Yeah, on the margin front.
It's, I mean, slightly negative, but close to breakeven. But I think next year we will be closer to breakeven. I think this is very early stage for biotech, so honestly, for the next three-four years, we really should not expect it to, like, generate a lot of profit, even though, even if we break even. But I think its growth is a priority. Yeah.
So on the sales front for Enzene Bioscience, we have seen sharp jump from quarter-on-quarter. So we have done any new launches during the quarter?
I think plenty of new launches. Enzene also does a B2B business, too, with other pharma companies in India. So yes, they have given a lot of partnership. We have launched six products already, I guess. The seventh one is approved. It is the generic of Lucentis. It is Ranibizumab. So Enzene will have a-- It's, it's getting to take off now.
Okay. All right. Thank you, sir. That's it from my side, and have a good day.
Thank you. We take the next question from the line of Bino from Elara Capital. Please go ahead.
Hi. Good afternoon, and congrats on a great set of numbers. Just to explore a bit further on the margins. So, you have said that these are broadly sustainable, but still, you know, just to dive a little deeper, you know, this quarter margin has come exceptionally higher, with both, gross margin and as well as other expenses being lower. In the light of this, you know, you think this level is sustainable going forward at these levels? Or, you know, we should think about it, like somewhere in between where it was and this quarter?
I think we, if I forget the quarter, quarter is great, but this is not sustainable on an annual basis. I think we will be close to 16.5% for this year, year ending.
Oh, so this quarter in that sense is a bit tough on margins. Okay. And second, any guidance on any update on launch of Dabigatran and in the U.S. and Suprep in the U.S.?
Amit, you can take that, but knowing Amit, we don't give guidance, but Amit, you can take it. Sorry.
Yeah, we don't, we don't talk at product level, but Dabigatran we obviously launched. We are the only one of the two generics which are approved, and we continue to face supply chain challenges.
Okay. And any, any indication of resolution of those supply chain challenges?
We are always working towards, you know, resolving them sooner, but then there are, you know, few things required at FDA end as well. You know, because we are adding a secondary source of API, I think we had discussed that earlier, and we are sort of depending on that, and that obviously needs approval from FDA. The primary source obviously continues, but we don't really get, supplies from there, so that's been a supply chain challenge for us.
Okay, and you don't want to guide on, Suprep?
No, Suprep, we haven't launched. We haven't been approved and haven't launched as yet.
Okay. Thank you.
Thank you. We take the next question from the line of Bansi from J.P. Morgan. Please go ahead.
Your voice is too low.
We take the next question from the line of Bansi from J.P. Morgan. Please go ahead.
Yeah, hi, thanks for the opportunity. Just probing on margins once again. So, you know, at this, so in this quarter, we are at 61%, and this is despite Pen G prices, you know, remaining elevated. If you were to just take a, you know, medium-term view, you know, and assuming that, you know, Pen G prices do ease off, with, you know, production capacity coming on stream, next year, from Aurobindo, what is the upside that one could expect, you know, on the gross margin front?
See, Bansi, our estimate, it says our gross margin is going to be remains somewhere close to 59%-60%. Of course, we have considered Pen G price, what is going on today. So nobody knows if price comes, comes back to, say, $9, then accordingly, there, there will be upside, but--
If you get passed on, you never know, so.
Yeah. So, but, we are realistic in our estimate, and we feel on an annualized basis, we are going to remain somewhere close to our guidance.
Even Aurobindo, when they come on stream, doesn't mean get it cheaper. I mean--
We don't know.
We don't know yet.
We'll face it as it comes.
But even if they were to say, you know, sell at the market price, is there any savings, you know, from forex perspective or from, you know, logistics, cost savings perspective?
Yeah, savings are going on. Therefore, you see those numbers.
What's she saying on Pen G?
No, Pen G, there is no saving. How can there? No.
Bansi, I think it is hypothetical as on date. You know, we will have more clarity on it once, you know, that hits the market. Before that, anything would be only speculative.
Okay, got it. Secondly, my question is on employee cost. That has reduced sequentially and year over year as well. Any specific reason for that?
Yeah, we've run internally, you know, various, cost saving projects, and the cost is lesser because we have, you know, optimized our, manpower costs in plants and R&D especially. So that is sustainable, and that is something, you know, that has really resulted into it. Of course, we don't see it sequentially continuing to fall, but I guess, you know, the, the initiatives that were taken, that have, sort of resulted in this kind of, you know, savings on the manpower.
So basically, assuming normalized growth on this base from here on onwards?
Yes.
Okay. Lastly, my question is on, you know, our strategy for the chronic business of ours. So if I were to take a longer term, you know, historical trend, you know, Alkem market share, you know, has remained, you know, somewhere around 1.8%, 1.9% in the chronic segment. You know, we've been in the business for, you know, some years now. You know, on a small base, you know, the growth rates have been good, but, you know, how do you make, you know, meaningful gains from here on, and how do you increase the productivity of MR in this particular segment from here on?
Yeah, absolutely. So chronic, we have a clear strategy that we have in place, and that's one of the most important areas and levers of growth for domestic business in India. Even now, you know, we continue to outperform in one or two segments in chronic, especially if you will look at the antidiabetics. You know, the recent launches have done pretty well, and there we have much higher market share than as compared to the overall market share in chronic business. As you said, you know, we are focusing on improving the productivity and getting our top line growth as well as a profitable top line growth in especially in the chronic segment. So I guess, our journey of growth in chronic, you know, would continue.
We would continue to beat the market in chronic, especially on the diabetic, antidiabetic side and, and cardiology, and CNS. You know, these are the areas where we are making good inroads, especially with the key products, you know, that are going to be big brands for the future. So in the coming quarters, you know, you will see, you know, good growth coming, continuing to come out of the chronic disease.
And the investments pertaining to MR, here, you know, are all done with?
Yeah. So as I mentioned, there are no expansion plans, so to say. You know, of course, there will be minor additions here and there, which we may continue to do as and when the business needs it. But the game plan over there is more on increasing the productivity, and that's the prime focus. And chronic, whatever, you know, manpower allocation also had to be done, that is done, that is in place. Now, the whole game is about increasing the productivity and, you know, gaining market share.
Understood. Thank you.
Thank you.
Thank you. Before we take the next question, a reminder to all the participants. If you wish to ask a question, you may press star and one on your touchtone telephone. We take the next question from the line of Hussain from Carnelian Asset Advisors. Please go ahead, sir.
Yes, am I audible?
Yeah, please.
Yeah. Just wanted to understand, on the chronic side, how are we planning to ramp up and increase our share in the chronic side, in the overall, share of our revenue? That is number, number, question number one. And secondly, on the U.S. side, as we see most of the pharma companies are saying that the pricing pressure has eroded, has eased, and, now most of the companies who has, who base business has started to improve. So how do we see our base business improving, and, how do we see things moving forward?
And since we are now conscious on filing the ANDAs and capital allocation, so since the U.S. business has started to improve, so how are we strategizing our growth in the U.S. space, and how do we see the U.S. as a share of the total revenue increasing going forward?
So I'll take it. You know, first, on your question of chronic, I think I already answered, you know, when Bansi was asking this. Chronic is a very important area and important lever of growth for us at domestic. Our key focus areas over there, which are cardiac, diabetic and CNS, you know, so in all these businesses are growing strong double digits. You know, so that is how I'll put across in terms of, you know, the growth numbers. The growth will be largely. You know, it is not a manpower-led, expansion-led growth. You know, it is now going to concentrate on few brands that we are going to build for the future, and that's what is going to drive the growth, you know. That's on the chronic side.
We are improving our profitability of that business with every passing quarter, you know, that's the other piece in terms of the chronic business. With regards to the U.S., like Amit also already answered, you know, the price erosion that was seen earlier, you know, in the U.S. market has eased out, you know, this year. And same is the trend that we have also seen in our business. So, you know, our business also has not seen that kind of price erosion that we were seeing earlier, so we are pretty much in line with the market.
Now, in future, whether the prices again, you know, begin to deflate, you know, only time will tell. But our expectation is that that should not be the case, you know, because we are assuming in many segments, you know, the prices have sort of, you know, bottomed out, or, or they will continue to erode at a mid-single-digit, you know, kind of, degrowth, you know, that we would see on the pricing. With regards to NDA, I think we've already answered that we are targeting around eight-nine filings even for this year. So going forward, we are picking up those products and those markets, you know, where the payback of entry to the market is much more profitable than, than what it is, and which, which are less likely to see that kind of price erosion.
But, you know, in U.S. market, how it plays out, it's only, you know, after the entry of the product to the market that we will get to realize, you know, that we'll get to see.
Got it. Got it. And just, just one question on the anti-infectives. So our growth has been 3.7% in the first half of FY 2024, which was lesser than the IPM growth of 5.7%. So any specific reason, where we lacked, in terms of the anti-infectives?
So I guess we are pretty much in line, I would say more or less, little bit here and there, as compared to the overall market growth. But that's largely on account of our higher dependence on certain geographies, you know, which saw much sluggish growth even in terms of market. So weighted average for us, you know, has come into play. So I think it's. But that's not too much of a, you know, concern. We are, I would say on an H1 basis, we are more or less, you know, a little bit here there, in line with the market growth.
Got it. Got it. And just one last question, so the new CEO, Mr. Vikas Gupta, has joined in. So any specific mandate?
Yeah. Just to let you know, this is Vikas this side who was answering your question, but yeah.
Oh, sorry. So just one last thing. So just wanted to understand, sir, any specific mandate that has been given to you in terms of the company's growth, in terms of how to streamline or how to ramp up the overall growth and taking the company to the next level? Just wanted to understand from you.
Yeah. So no different from what the guidance has been given to the market, you know, in every quarterly call. So I guess it's pretty much the same mandate that I have, and, you know, I will make sure and make my best efforts to, to, you know, meet up all the expectations, you know, that have been laid out.
Got it. Okay. That was the only question. Thank you so much.
Thank you, sir. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we request you to rejoin the question queue.... We take the next question from the line of Chirag Dagli from DSP Asset Managers. Please go ahead, sir.
Yes, good evening. Thank you for the opportunity. Sir, has the full benefit of cost-saving initiatives in the U.S. played out in the second quarter, or more of that is expected as we go along?
Cost control, is this what he asked?
Yes, sir.
More or less, but, I think it's ongoing, but yeah, more or less. We can't keep cutting it to the bone, so I think we have done that more or less.
Understood, sir. And the U.S. prices still, still seem to be eroding, a bit at a lesser extent, but that should not have helped our gross margin improvement, correct? Because prices still continue to erode unless, raw material prices have actually, fallen even more than
In fact, I was talking on a mix, our sales mix. So, product having better margin, they contributed more in the sales. So that was my little,
U.S. margins, U.S. gross margins, how would they have behaved, sir?
So if better margin product we sell more, then definitely we are going to have better gross margin also.
The mix in the U.S. is also better, is what you're indicating.
No, I'm talking primarily for U.S. only.
We are talking about mix in U.S.
Primarily, yes.
Understood. And just the last question, if I could squeeze, sir. How has October been for the India business?
Yeah, it's been fairly in line with the market, so it has been a good month. Yeah.
Okay. Thank you.
Thank you, sir. The next question is from the line of Nithya from Bernstein. Please go ahead.
What's the gross margin expansion?
Nithya, you are not clearly audible.
Is it any better? I've just come closer to the mic.
Slightly better, but we'll try our best. Go on.
So on the gross margin expansion, what I'm trying to understand is, even though you've achieved a substantial expansion in this quarter, you're still guiding to a fairly subdued number by the end of the year. So if you can help us understand what were the contributors, at least if you can rank order the different contributors, raw material prices improvement, you know, U.S. pricing improvements, mix improvement, so that we understand what is possibly one-off and what is possibly likely to sustain in the future.
So there is nothing one-off in this quarter, Nithya, and our guidance is for annualized.
Cost margin, yes.
So, in fact, guidance we have given earlier, I think nothing significant change is going to happen. In this call only, earlier, analyst, he asked about what is going to happen when API prices, it is going to get further reduced. So all those are future, and we do not want to comment. Our estimate and understanding, business projection we have, we are confident we'll be matching 59.5% guidance we have given, and this I'm talking on annualized basis. Q2 is not, in all respect, indicator for annual. So 59.5%, I think, we'll be able to achieve.
So just to add, to it, Nithya, the mix that we have in U.S., you know, we are not sure whether the same mix would continue in the coming quarters as well. So that you may still, you know, if you want to qualify as a one-off, you may look at that. So the, whatever has been the addition on account of mix in U.S., you know, may not, we may not see. But whatever has been on account of, the raw material pricing easing out, we expect it to remain, you know, that way. You know, if not, if not become better.
Thank you for the clarification, Vikas, and good to see you on the other side of the table.
Thank you.
I have just one more question on Denosumab. What are your thoughts on how you plan to commercialize the product in the U.S.? Will that be in-house? Will you find a partner?
Denosumab, yeah. So I think we can do it in-house, but we're also open to, like, find a partner. See, we are still in the early days of switchability and all that in U.S. So 2026 is what we think we could do, late 2026. So I think we will reach that stage soon. But as of now, I think we could do it on our own.
All right. Thank you, and all the best.
Thank you. We'll take the next question from the line of Gagan Thareja from ASK Investment Managers. Please go ahead, sir.
Yes, good evening. Am I audible?
Yes, you are.
Yeah. So the first question pertains to the cost-cutting program. In the start of the year, you had indicated that for U.S. specifically, you had a INR 250 crore cost-cutting program. Has the, like, that's the annualized number. Are we trending at the INR 250 crore annualized savings?
So I don't think INR 250 crore, it was alone for U.S. I think, we never quantified any amount, or outlined any amount, on account of cost cutting. Yes, we do have a bit of margin improvement drive, and, to a certain extent, on a larger extent, that has started contributing to our profitability. And that, that's the reason, we started having better EBITDA margin also. So it is combination of USA, it is, it is, combination of R&D. D omestic plants also serving to USA and even plants serving to domestic business also. So it is all across.
So I understand that, sir, with the number I'm simply quoting from it with reference to your past conference call. So I--
Yeah, yeah. So that was also, there was overall corporate. That's all we are saying.
Okay.
We are not saying the number quoted was wrong, because not for U.S. That's all we are saying. That includes India spend a lot of stuff also, R&D.
Yeah, but have you been able to achieve that target, or you feel there's room?
Close to it. I think from the numbers you can see that we are doing well, so we are obviously achieving it.
And I mean, you indicated that India growth in the chronic therapy is now the focus is more on profitable growth. You know, you're looking at improving sales productivity. In principle, that is another margin lever. If you are able to execute what you intend to, which is to improve productivity, theoretically speaking, your margin should see further room for growth, even with gross margins being where they are. And in any case, gross margins improve as chronic grows at a higher pace than acute because it comes with higher gross margin. Is that line of thinking logical and correct?
It is absolutely logical, but we gave you guidance of this year. Doesn't mean that we all have not improved. So obviously, logic is correct. I don't know what we're gonna get at, but yeah. And that's what we intend to do.
Thanks. The final one, sir, any thoughts on capital allocation, given that very strong cash position that you have currently?
I think same as I said last time, but we'll be slightly more open to M&A opportunities going forward. But, one should not read too much into it. We'll take our time to understand, but we are more open than last, like, last few quarters, what I've been telling. So we will scout for some M&A opportunities in the chronic segment, and things like that. However, don't expect anything to play out in the next, like, few months or something like that.
Right. And one, ROW, you've had a good year this year so far. Could you elaborate and delve into, you know, why we are seeing that strong leg up? And, you know, can we think of a higher growth, so as being sustainable in the ROW markets for you from there on?
Yeah, I think it's sustainable. Amit, maybe you can take that, Amit. I'm sorry, but yeah.
No, no, no, you were answering there, right? I mean, yes, it's very much sustainable. We have gone to only a few geographies that we've targeted, and we are obviously trying to grow business in those geographies. At the same time, obviously, every year we try and add one or two markets to enter. So the growth that we witness is a combination of all of that, and it is very much sustainable.
Thanks. I'll get back in with you. Thank you.
Thank you, sir. The next question is from the line of Madhav Marda from Fidelity Investments. Please go ahead.
Yeah, good evening. Thank you so much for your time. Joined the call a little late. I just wanted to check that the U.S. sales, which you have said that mix tailwind might not last. Just wanted to understand what happened here. Like, it is a one-off opportunity or what exactly played out, and then why it doesn't continue. Could you help us understand?
Amit, you can take that tough question, please.
Sure. No one-off, so there were no one-offs, but a combination of a few things. First and foremost, obviously, lower price deflation compared to previous years. Second is the first half for last year was a low base, so growth here obviously looks better. And some new product launches and overall product mix has, you know, kind of helped us. Some seasonality effect, the season for the flu season and, you know, the overall season never really ended from last year, so the summer months also had good growth on the anti-infectives. So a combination of all that has led us to these numbers.
Okay. You said that tailwind, did I hear it right, that it may not continue in the coming quarter, so it will continue? Sorry, I missed that part.
So it was. It wasn't about tailwind. You know, what we said was the mix that we have got, you know, in this quarter may not exactly be the same in the coming quarters, you know? So there are-- The product mix might change, which might change the gross margin in the U.S. business, just to clarify.
Okay. Thank you. Okay, all right. Thank you.
Thank you. A reminder to all the participants, if you wish to ask a question, you may press star and one on your touchtone telephone. Take the next question from the line of Kunal Dhamesha from Macquarie. Please go ahead, sir.
Thank you for the opportunity, everyone, sir. One on the Denosumab, what is the expected R&D spend on this product?
Yeah, it'll be like between $30 million-$40 million for particular party.
$30 million.
This is a clinical trial cost, so this is a CT cost. R&D cost you could add up few million dollars.
Okay, and this is right now in the R&D phase, not in the clinical phase?
Clinical stage, I mean.
It's in clinical stage.
Absolutely. Yeah, yeah, yeah.
Okay.
We are doing phase I, phase III.
Okay. And, and this $30 million-$40 million, is it somehow baked into current R&D numbers, some form or--
Yeah, yeah, in every form, as in the right form. It's there.
How many quarters it's going to be there?
I think it is going from the few quarters, last few quarters, maybe for more years going on. On the lumpiness, I'm not sure. It will, it will go on for the next six months, I think. six -nine months.
Okay. The reason I'm asking is that R&D is, like, down almost 10% on a first half basis on a, you know, in first half on a year-on-year basis. So, I'm just, you know--
Yeah, as I said, you know, it's not like a mathematically H1 is equal to H 2, so even we have five lesser R&D. So H2 , you'll see a lot more R&Ds and things like that. So yes, we have cut some, at least on a small molecule, I said earlier, but we continue to spend on R&D.
Okay, sure. And second, on the, you know, trade-friendly business, we said it's grown at around 6%-7% year-on-year in this quarter. So is it primarily because of the, you know, acute season, or is there any competition?
No, no, it's absolute. It's more to do with seasonality because on the generic side as well, we have, you know, big in, infective, you know, products. So they have seen sluggish growth. Otherwise, there's no major reason for that.
Okay, perfect. You know, last couple of question on the U.S. business. So one on the Dabigatran. Would we have supplied some generic filing quantity in this quarter?
Mr. Ghare, you can take that.
No sales on Dabigatran in this quarter.
I think we earlier said we launched the product in this quarter.
No, we did not say this quarter. Amit just said he has launched it. He did not mention a launch in this quarter. Amit, you can.
Yes, yes, we launched in 2022, last year. June 2022 or June, July 2022.
Okay. And till then, we are facing the supply issues on and off.
We've done maybe small feeds after that or some sales after that as well, but certainly not this quarter.
Okay, perfect. Last one on Suprep. Is there anything pending from our side, or is it largely pending with the U.S. FDA side?
I think it's still with FDA, like I said. So, sorry, sorry, Sandeep.
No, Amit, I was just saying to take the question. Nothing, sir. Please continue.
All right. No, so it's pending with FDA, and then obviously the launch is pending. So, we are not forecasting it in immediate future.
Okay, perfect. Thank you and all the best.
Thank you, sir. The next question is from the line of Yash Tanna from ithoughtPMS . Please go ahead, sir.
Thank you for the opportunity, and congratulations on a very good set of numbers. So you spoke about productivity improvement. So, can you firstly give the breakup of productivity between acute and chronic and company overall, and what sort of a productivity improvement are we targeting, going forward, probably in this year and the next?
Yeah, Vikas.
Currently, we are at around overall basis, open six, like, activity that we have,
This is for chronic, right?
No, this is overall.
This is overall. Of course, acute is much higher and chronic is, you know, much lesser because we have lesser business over, you know, over there. We, as I mentioned, that we are targeting a strong double-digit growth as far as chronic business is concerned. So, you know, that will even bump up our overall productivity. And, of course, the increase in productivity would be much higher in chronic than as compared to, you know, acute, which is already at a higher productivity of close to around INR 7 lakhs.
Sure, right. And, any numbers that we are trying to target, for the year or the next year?
So, as I mentioned, you know, you can see a strong double-digit growth, you know, on that. So I guess that is what we are targeting.
Yeah, yeah. Great. And, sir, you mentioned, Sandeep sir mentioned about, being slightly more open to M&A opportunities. So which areas, we'll be looking at, and what is the size that we'll be looking at? I mean, would we be willing on, to take some debt for the same or, will it be from the cash that we have?
I think we have enough cash. We're not going to take debt and do a billion-dollar acquisition, anywhere close to that. So I think chronic segment is what we are looking at, but we'll come back more, granularly as we kind of evaluate. But chronic could be a good segment. OTC, consumer could be a segment too, but I think chronic would be the most highest priority.
Sure, sir. Got it. Congratulations, Dr. Gupta, on the new role, and best of luck to the team. Thank you. Thank you so much.
Thank you, sir. We'll take the next question from the line of Gagan Thareja from ASK Investment Managers. Please go ahead.
Yeah, so based on your guidance, I mean, for this year, 16.5% possible in the second half, if you back it out, comes to around 15%-odd, if I have my calculation, you know, correct ballpark. Last year, second half was around 15%-15.5%. You know, I'm wondering if you have the benefit of the cost-cutting programs, and some tailwinds and raw materials, shouldn't it be, you know, reasonable to assume that second half should also be better year-over-year in margin terms, where the guidance is saying that it won't be so?
I think it comes back to Vikas' answer also. See, the mix was good this quarter. If it remains, we could beat that. But in all reasonableness, we know that this year also a very sluggish year, so-- And quarter four always is weak. So quarter four in a sluggish year could be weaker. So I would not anticipate, like, a huge positive thing. And your calculation is very right. I think we'll be around close to that.
Okay. But don't you think that, you know, the secular base there is the cost that you control, and if that is the case, you know, ceteris paribus, in principle, even with the same sort of sales--
That's counted, sir. See, last year, quarter three, I think Vikas was 19.7%, if I am right. You mentioned some other number. Quarter four was 12.2%.
Yeah, I'm saying last second half it's 15.5%, not this one.
Yeah, so we'll be close to that.
Okay. All right. Thank you. I'll get back if required.
Thank you, sir. As there are no further questions, I would now like to hand the conference over to the management for closing comments.
Thank you everyone for attending the call. If any of your queries are unanswered, please feel free to get in touch with me. Wishing you all a very Happy Diwali. See you next year.
Thank you.
Thank you.
Thank you. On behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.