Ladies and gentlemen, good day. Welcome to the Sun Pharmaceutical Industries Limited Q2 FY 2021 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. 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 touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nimish Desai from Sun Pharmaceutical Industries Limited. Thank you. Over to you, sir.
Thank you. Good evening, and a warm welcome to our Q2 FY 2021 Earnings Call. I'm Nimish from the Sun Pharma investor relations team. We hope you received the Q2 financials and the press release that was sent out earlier in the day. These are now also available on our website. We have with us Mr. Dilip Shanghvi, Managing Director, Mr. C.S. Muralidharan, CFO, Mr. Abhay Gandhi, CEO, North America, and Mr. Kirti Ganorkar, Head of India Business. Today, the team will discuss performance highlights, update on strategies, and respond to any questions that you may have. As is usual, for ease of discussion, we will look at consolidated financials.
Just as a reminder, this call is also being recorded, and a replay will be available for the next few days. Call transcript will also be put up on our website shortly. The discussion today might include certain forward-looking statements, and this must be viewed in conjunction with the risk that our business faces. You are requested to ask two questions in the initial round. If you have more questions, you are requested to rejoin the queue. I also request all of you to kindly send in your questions that may remain unanswered too. I will now hand over the call to Mr. Shanghvi.
Thank you, Nimish. Welcome, and thank you for joining us for this earnings call after the announcement of financial results for the Q2 of FY 2021. I hope you and your family are safe and healthy. Let me discuss some of the key highlights. Consolidated sales for the quarter were at INR 8,459 crores, recording a growth of 6% year-on-year and 13% quarter-on-quarter. Our Q2 performance reflects our focus on business improvement, which has enabled a gradual recovery in all our businesses compared to Q1, despite market conditions that have not fully normalized. We continue to focus on growing our top line, gaining market share, control costs, and ensure business continuity.
We will continue to serve our patients and customers while ensuring safety of our employees. Let me now update you on our global specialty business. For Q2, our global specialty revenues was approximately $108 million across all markets. Specialty R&D accounted for 37% of our total R&D spend for the quarter. We have recently launched ILUMYA in Japan for treatment of plaque psoriasis and have received a good initial response from the market. Abhay will give you more details on our specialty business later. I will now hand over the call to Mr. Murali for discussions of the Q2 financial performance.
Thank you, Mr. Shanghvi. Good evening, everyone, and welcome to all of you. Our Q2 financials are already with you. As usual, we will look at key consolidated financials. Q2 sales are at INR 8,459 crores, up by 6% over Q2 last year. This is the highest ever quarterly sales that the company has recorded. Material cost as a percentage of sales was 25.4%, lower than Q2 last year due to product mix as well as optimization of cost. Other expenditure was at 28.3% of sales, lower than Q2 of last year, mainly due to reduced marketing, selling and distribution, and traveling expenses across markets. EBITDA for Q2 was at INR 2,099 crores, up by 30% year-on-year, with resulting EBITDA margin at 24.8%.
Reported net profit for the quarter was at INR 1,813 crore, up 70% over net profit of Q2 last year. The reported EPS for the quarter was INR 7.56. Adjusted net profit for Q2 was INR 1,590 crore, up by 49% over Q2 last year, with resulting net profit margin of 18.8%. Let me now discuss the key movements versus Q1 FY 2021. Our consolidated sales are up by 13.3% quarter-on-quarter and reflects recovery in sales post gradual lifting of lockdown restrictions across markets. We have added almost INR 1,000 crore of incremental sales for Q1. Material cost at 25.4% of sales are lower than Q1 due to product mix, cost optimization measures, and higher sales of specialty product in the U.S.
Other expenses at 28.3% of sales are marginally higher than Q1, mainly due to increase in R&D spend. We had a Forex loss of INR 116 crores for Q2 as against Forex gain of INR 17 crores in Q1, leading to an impact of INR 195 crores. EBITDA for Q2 at INR 2,099 crores was higher by 22% compared to Q1, despite the adverse impact of this Forex loss. Adjusted net profit for Q2 at INR 1,590 crores was higher than the adjusted net profit of Q1 by about 39%. Now we will discuss the half-year performance. For the first half, net sales were at INR 15,926 crores, a degrowth of 1.7% over first half last year.
As indicated in the past, the first half of last year included contribution from a non-recurring special business in the U.S. Hence, the year-on-year sales numbers are not strictly comparable. Material cost for H1 as a percentage of the sales was 25.8%, which was lower than H1 last year, mainly due to product mix. Other expenses were at 28.2% of sales, lower than H1 last year, driven mainly by reduced marketing, selling and distribution, and traveling expenses across markets. As a result of the above, the EBITDA for the first half was at INR 3,824 crores, a growth of 9% over the first half last year, with resulting EBITDA margin of 24%. Excluding the exceptional items, adjusted net profit for H1 FY 2021 was at INR 2,736 crores, up 12% year-on-year, with resulting net profit margin at 17.2%.
Reported net profit for H1 FY 2021 was at INR 157 crores. The company has repaid debt of over $300 billion in H1 of the current fiscal. Let me now briefly discuss Taro's performance. Taro posted Q2 FY 2021 sales of $142.8 million, a net profit of $45.1 million, which represents a growth of 21% and 55% respectively over Q1 FY 2021. On a year-on-year basis, sales for Q2 FY 2021 were lower by 11%, while the net profit was lower by 20%. I will now hand over to Mr. Kirti Ganorkar, who will share the performance of our India business.
Thank you, Murali. Let me take you through the performance of our India business. For Q2, the sales of branded formulation in India were INR 2,531 crore, a growth of 1% over Q2 last year and 6% on quarter-on-quarter basis. India business accounted for 30% of consolidated sales for Q2. Our growth for Q2 was in line with overall market growth, led mainly by chronic portfolio, which grew in high single digit. The growth in semi-chronic portfolio has started recovering while the acute segment has recorded a decline, although compared to Q1, the degrowth in acute segment is much lower. For both Q1 and Q2, the chronic segment has continued its growth trajectory. The acute segment still is facing some challenges due to lower incidence of infections and less patient footfall at doctor's clinic.
Our medical representatives have started work across the territories, barring those areas that has been designated as a containment zone by the respective authorities. The doctor call rates have improved significantly compared to Q1. Our expansion of the field force in India is complete, and it will help us in long run to enhance our geographical and doctor reach. For Q2, we launched 22 new products in Indian market. Sun Pharma is the largest pharmaceutical company in India and holds approximately 8.1% market share in over INR 1,42,000 crore pharmaceutical market as per September 2020 AIOCD AWACS MAT report. We also continue to remain the partner of choice for in-licensing given our strong number one position in many therapy areas. I will now hand over call to Abhay.
Thank you, Kirti. I will briefly discuss the performance highlights of our U.S. businesses. For Q2, our overall sales in the U.S. were flat over quarter two of last year at $335 million, but recorded a good recovery sequentially by over $50 million, driven by both the specialty and generic businesses. U.S. accounted for about 30% of consolidated sales for the quarter. Our specialty revenues in U.S. have increased over Q1, and for products like ILUMYA, CEQUA, and ODOMZO, sales are at pre-COVID levels. LEVULAN sales are yet to recover fully for the obvious reason that patient visits for treatment at dermatology clinics have not yet reached pre-COVID levels.
Given our unwavering focus on the specialty business, for most products, we have gained market share despite the challenging market conditions during the last six months. Doctors' clinics have been gradually opening up during the quarter, although patient flow and access to industry is yet to fully normalize. Let me now update you on our U.S. generic business. As all of you have seen, the U.S. generic business continues to be competitive. The Sun Generics business has stabilized and has shown growth year on year. I will now hand over the call to Mr. Shanghvi.
Thank you, Abhay. I will briefly discuss the performance highlights of our other businesses as well as give you an update on our R&D initiatives. Our sales in emerging markets were at $210 million for Q2, u p by 4% year-on-year and by 21% over Q1 FY 2021. On a year-on-year basis, the underlying growth in constant currency terms was higher at about 9%. Emerging markets accounted for about 18% of total sales for Q2. Formulation sales in rest of the world markets, excluding U.S. and emerging markets, were US$178 million in Q2 FY 2021, up by 10% over last year and 31% over Q1 FY 2021.
This was mainly driven by all-round growth in multiple markets like Japan, Europe, coupled with growth in Taro's rest of the world business. Rest of the world markets accounted for approximately 16% of Q2 revenues. We've also done well in our API business, with Q2 sales at INR 510 crore, up 9% over Q2 last year. We continue to invest in R&D for enhancing our specialty and differentiated generic pipeline. Consolidated R&D investments for Q2 is INR 613 crore, accounting for 7.2% of sales. Our current generic pipeline for the U.S. market includes 92 ANDAs and six NDAs awaiting approval with the U.S. FDA. With this, I would like to leave the floor open for questions. Thank you.
Thank you. The first question is on the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah. Hi, good evening. Thanks for the opportunity. Sir, first question on the India business. If you could help us give us the split of chronic, subchronic, and acute. As I understand, 1% growth is just above the industry growth, and we have seen peers doing much better. A, the breakup and if you could highlight. You said subchronic is recovery, acute is still decline. If you could give some granular detail, that would be also helpful. Thank you.
Sure. Yeah. As I said, compared to Q1, Q2, most of our businesses are doing well. We have divided this into chronic, subchronic, and acute business. Chronic business both in Q1 and Q2 has shown good growth, and it is a high single-digit growth. Subchronic, they suffered in the Q1, but they are recovering very fast in Q2, and they are also showing low single-digit growth. The most affected business is acute, where we see some recovery compared to Q1, but Q2 still, it is showing a negative growth, though it is better than Q1. Overall, there is a recovery in the business from Q1 to Q2, and as the lockdown is opening up, more number of doctors coming to clinic and footfall of the patient is improving, and our call average also is going up. We see that Q3, we will even have better growth numbers.
The breakups of chronic, subchronic, acute?
Generally, we don't provide the breakup for chronic, subchronic, and acute business. Yeah.
Roughly ballpark, Sir?
Roughly, as I said, we don't provide. There's no point in just roughly giving you the numbers.
Okay. Secondly, on Halol facility status, have we heard anything in terms of inspection and also an update on the CAPA plan?
I think last time also I updated that We've completed all our, what you call, responses, and also all the deficiencies have been completed. We are awaiting any further response from agency. As you are aware, agency is still not visiting international facilities. We are requesting them in case if based on, what you call, desk audit, they can approve. I don't think agency currently has a process by which they can approve a facility. I think it continues to be a work in process.
Okay, great. Thanks. I'll join back the queue. Thank you.
Yeah. Thank you.
Thank you. The next question is on the line of Neha Manpuria from JP Morgan. Please go ahead.
Thank you for taking my question, sir. Sir, just correct me if I'm wrong, did you mention that specialty revenue for ILUMYA, CEQUA, and YONSA are back to pre-COVID levels, or did you indicate prescription?
You heard it right, Neha. The revenues are back to pre-COVID levels.
Okay. Sir, in case of CEQUA, hypothetically, if we do see a generic entry for a competitor product, could you highlight some thoughts on, would this mean a slowdown in our prescription momentum or would it be actually loss of prescription share? Some thoughts there.
I mean, it could probably also grow the market. Sure, it will have some challenges in terms of access, because you will probably then have to go through a step through, a generic maybe first recommended. It may also lead to an expansion of market. We remain positive and the experience of doctors who have used the product is quite good. They have experienced a good product, and we are hopeful a lot of them will continue to prescribe, which would help us.
Understood. My second question is on the ILUMYA launch in Japan. How should we look at ramp-up in Japan? If you could give us some color on how exactly it works there.
Japan as a market, I think as you are aware, is a 100% reimbursement market. It's state-funded. We have a price approval. We need to kind of go to the next stage of getting our product in various formularies in different hospitals, because biologics in Japan are used only in hospitals. Looking at our early response, we are quite optimistic about the acceptance and potential success of the product. However, we need to keep this in perspective, that the biologics for psoriasis is only $500 million in Japan, unlike a $10 billion market in the U.S., but it's growing very rapidly. I think in excess of 20%-25% annual growth. We hope, and we have great expectations about this product. Our acquisition of Pola and our familiarity with dermatologists will help us further, even though the field force that is promoting ILUMYA is a totally independent and a separate field force.
This entire process of getting it to various formularies in hospitals, is this like a multi-month process or does it take longer?
No, it's a multi-month process.
Okay. Understood. Thank you so much.
Thank you. The next question is from the line of Kunal Dhamesha from Emkay Global. Please go ahead.
Good evening. Thanks for taking my question. First question is on the ILUMYA, especially on the European psoriasis market. After the launch of ENBREL and HUMIRA biosimilar, have we seen any early trends in terms of how the market will pan out, whether it increases the market size or it kind of increases obstacle for the targeted biologics in terms of both. Any early trends that you have seen? Second question on the selling and promotional expense for the specialty business in U.S. I think that has reduced significantly in quarter one and quarter two. Will there be some structural saving there going forward, or will it come back to normalized level? Thank you.
Abhay, will you take the question for Europe?
The first question was on Europe, so I'm not very sure of the current trends.
Okay. No. Yeah.
I think as part of our steering committee, I think in the next one or two months, we will have more granular details of how they look at the business. Probably this question we should come back to you.
My understanding is that even when we launched the product, I think biosimilars were already there in the market. I think in any case, looking at the safety and the overall effectiveness and response rate, and we've recently announced our five-year safety and efficacy data. I think it's clearly a significantly different product compared to the older biologics. The number of non-responders to older biologics will always be moved to this. However, as you estimated, maybe initially patients will be used and put on biologics, as they are also put on other biologics in the U.S. We expect all the IL-17, IL-23 towards increasing future penetration and increasing market share in all the markets, including Europe.
Okay.
Answering the second part of your question. I think in Q3, definitely some of the savings which you have seen in sales and marketing will continue. Q4, even I am not so sure, to be honest, as of this moment, because in the U.S., the number of cases of COVID have gone up significantly in the past one month or so. How Q4 will pan out, difficult to estimate. I would not look at it as a structural saving. Given the choice, some of that we would like to do i f the situation normalizes, I think the spending should come back to decline levels. In Q3, I think some of that spending will get carried forward.
Okay. Thank you.
Thank you. We'll move on to the next question. That is from the line of Krish Mehta from Enam Holdings. Please go ahead.
Hi. Thank you for taking my question. I had two questions. The first was that, historically, when you look at our financials, we used to be at a much higher EBITDA margin profile in excess of 35%. Now as we see Specialty finally picking up, and we know we're making cost and making profits on it in the future, do you think we can scale back to those historic margin levels?
No, unfortunately we don't give out long-term forecast of both profitability as well as top-line. I think philosophically, we would always like to grow faster and improve profitability. That would be the effort. How successful we will be and what will be the opportunity, we will not know. You need to also keep this in perspective, that in investment in R&D, as we continue to grow our specialty business, we will always continue to invest in that business with a view to create a much bigger future for us in future. We've just started the clinical studies on S1P agonists, and these are phase II studies, and they will go on to become phase III studies. There will be, while profitability and turnover and contribution for specialty business will grow, the expenses will also continue to grow till we become a meaningfully sized specialty business.
Okay. Thank you. My second question was, can you provide the actual gross and net debt numbers for the quarter ex Taro?
Murali, maybe you can brief.
Okay. Ex Taro number. One second. We have got net debt as of end of September of over INR 400 billion ex Taro.
Okay. Thank you. That's net debt, right?
Net debt. Correct.
Okay, great. Thank you so much.
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Hi. Thank you, good evening, everyone. Just thinking about your global specialty business, how do you plan to expand the product portfolio, that innovation portfolio going forward?
Sameer, I think you're aware that we're doing additional studies on ILUMYA for psoriatic arthritis in the same way like that we're also working on the S1P agonist, and that has potential usage in multiple other indications. We are also looking at if there is an opportunity for us to develop a much better product out of ILUMYA for gastroenterology indications. I think the idea would be to kind of, looking at our existing portfolio, create a, what you call, a base business which can then justify and sustain and support our future investments.
Yeah. Thanks for this. Are you looking at another late phase II, phase III type of in-licensing acquisition deal of $500 million plus, minus? Is this a way you think you can grow this portfolio?
We always remain opportunistic about potential acquisition opportunity. However, every acquisition needs to kind of justify itself, both in terms of strategic compatibility as well as value for future that we can create. Our belief is that with CEQUA as well as ILUMYA, we have one major product in both the therapy areas which we can build on. ODOMZO and what you call LEVULAN give us a potential success in onco-dermatology. I think there is an existing portfolio that we can build on, but we will remain opportunistic. I don't think we have any currently investment that we are investigating or seriously looking at, but we will remain opportunistic.
Great. Thanks. My second question is on the U.S. generic side of the business. Any thoughts on the pricing environment over there, and our expectation of volume gains and new launches, sir?
Abhay, would you like to respond?
I mean, pricing, in every call, I'm repeating the same thing. We haven't seen the pricing environment softening, so to say. Within the current environment, we try and look for opportunities where we can get our share of the business.
Sir, anything on new launches that you can share?
I think in every quarter, we are able to launch two to three products which incrementally add to our business. We had the same in quarter two as well. I'll be hoping that in quarter three we will have another two, three launches coming up.
Okay. Thanks, sir. Just one, with your permission, one clarification. Did you say net debt is $400 million? I thought it was $415 by end of Q1, and you have further de-leveraged $100, so it should actually be $315 or so.
No, Sameer. The net debt at the end of the 30th September, ex Taro, is around $400 plus million. You listened correctly. Yeah.
No, I think what he's asking is that at the end of first quarter, the number was the same. If you've repaid what you've repaid, then how the number hasn't changed, that's his question.
Sir, end of first quarter number was different, sir. I will take it offline with him.
Okay. Yeah, you should take it up offline with him.
Okay. No worries. Thank you.
This time, of course, we will be, what you call, also publishing partial balance sheet numbers. That will become
Yes, sure, will do. Thanks.
Thank you.
Thank you. The next question is on the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah, thanks for this opportunity, sir, and congrats to the upset of numbers. Sir, just first question on the specialty business. Just recently, what we have announced about the five-year sustained efficacy and safety data. What significance it adds to the ILUMYA's progress, although we have seen a kind of strong sequential as it is, year-over-year growth for ILUMYA's prescription count in U.S.
I think essentially it gives the doctors the confidence that when they start putting a patient on ILUMYA, it not only works but works for a long period of time. I think five years data is significant, where a lot of patients actually on biologics may or may not be able to sustain results for that period of time. I think skin clearance up to a 90-plus PASI level for five years is very significant from a customer perspective. When I say customer, it's both doctor as well as patients.
Any commercial sense out of it, sir? Is it possible?
I mean, the data is hardly a week or 10 days. We haven't done any modeling on how this particular data will impact your commercial sales. Obviously, when your team members are able to use this and speak about this data to doctors, we definitely hope commercially it will benefit the product and give it one more fillip to grow the business.
Okay. just to extend some of these questions, sir. In fact, for the overall specialty business, how should one really look at the progress of.
Your voice is breaking up for you.
Yeah. Just a second.
Yeah, sure.
Is it fine, sir?
You're much better. Thank you.
I am thinking, sir, how should one really look at the specialty business, let's say over three to five-year period in terms of sales progress or profitability or in terms of the core IRR of the business? We could be seeing a depressed earnings at this current moment because of the promotional spend on selective projects, which can gradually see a kind of a better improvement with the penetration and all that. Subsequently, we can add up couple more projects there, which can further bring in some kind of weakness in the overall earning efficiency of the specialty project.
In fact, if you can provide some clarity, let's say over three to five-year period, what business groups one should really anticipate for the specialty business? Also if you search, this is a global practice also, that for any lead molecule, if you can provide at least competitive positioning progress and all that, at least quarterly for your lead molecules on the specialty side, that can really help in evaluating and valuing the company better.
I couldn't understand what part of it was the question?
My question was that, over five-year period, if we just try to evaluate or see what kind of a business progress the specialty effort can see and what IRR kind of a target that you'll be having or that you are anticipating for this business, sir.
I'm speaking from a U.S. perspective, but the specialty business is something we are also trying to reach a global market, not just the U.S. Which, of course, will be a significant part of it. The idea which we have been saying on calls, and Mr. Shanghvi has been saying this, is to create this into a meaningful business for the organization, which can both bring in top line reasonable profitability and enable us to keep investing in the business. Having said that, IRR numbers, I don't think we are giving out on calls.
Each part of the business is different. For example, let me take an example. The LEVULAN business will already be a profitable business because it's a legacy business which was acquired. There are certain parts of the business, like ILUMYA, which we are in the investment phase and are likely to continue to invest for the next maybe a couple of years. Different parts of the business are in different stages of its own life cycle. At an aggregate level, we hope that sooner rather than later, we start generating returns from the business.
Okay. Just a similar question, sir. On the domestic formulation side, what I think that, obviously, the domestic formulation business, obviously, this is an undisputed leadership position that we are having in most of the therapies where we have a kind of a meaningful presence. I believe it is just like a kind of a FMCG kind of a business, because the brands are ever rising and consistently gaining momentum, expansion and all that, and no greater investment and all that.
Obviously this is a kind of a business which ideally should be valued at significant multiples and just like any FMCG company, like for example, similar size of the business of India, some domestic business, if you consider the company like, let's say, Nestlé, who is having a similar revenue base, but it is valued like possibly a few times of the equity value for the domestic business, what we are currently having. I think, if we can possibly aggregate our business and report the segmental performance.
Let's say into the four broad categories or whatever the broad category, like U.S. specialty, U.S. generic, branded business, it could be including domestic as well as the ROW market, and separately API. That also can provide a kind of a better understanding about the progress of each segment and hence the proper valuation of the company like Sun Pharma, which I believe it is really undervalued.
No, I agree with you. Generally, when you tell any entrepreneur that your business is undervalued, you will see very little resistance. That part I think is clear. My suggestion to you is that we have challenge in terms of segmental revenue sharing because it will potentially create some future challenges for us and operating challenges for us. If you wish to look at our India business. Even though SPLL, which is 100% subsidiary of Sun Pharma, and we give separate annual report of SPLL, even though it's not a complete India business, but it still represents a significant part of our India business.
You will get comprehensive information about growth, profitability, cost, where it is going. Hopefully that will help you understand and value the business differently if you think that is useful. We will continue to internally debate that whether we want to or we should, at this point of time, give segmental revenue.
Sure. That would be really helpful. Many thanks for your call.
Yeah. Thank you.
Yes. Thank you.
Thank you. The next question is on the line of Shatayu Mehta from Tata Investment. Please go ahead.
Good evening, everyone. I just wanted one question. Accounting your subsidiary, Sun Pharma Global FZE. It had made a loss of around INR 3,000 crore in FY 2020. If you can just help me out, how the performance has been in first half, please?
Murali, maybe you can respond.
Yeah. Sun Pharma FZE is a pass-through entity.
Yes.
That's not a reflection of the number what you're stating. You also see in the notes that entities under merger with us. We are going to merge with the Indian SPIL. In the first half, there is no concern as such.
Okay. Can you just share what kind of number it is?
For the subsidiaries in the integrating period, we don't disclose the numbers separately. However, in the annual reports, all the subsidiaries, as Shangvi pointed out recently, will be available for you.
Correct. Whether it has been turned around or whether it is?
No, it's a pass-through entity, so we don't.
Okay.
What loss you see there is not actually a business loss, I think.
Okay. Thank you.
Thank you. The next question is on the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Hi. Thank you for taking my question, and good evening to all.
Sorry to interrupt, Mr. Srinivasan. Sir, your voice is sounding very soft. Can you speak a bit louder?
Okay. Yeah, sure. Is it better now?
Much better. Thank you.
Thank you. Good evening all. Thank you for taking my question. On the U.S. elections, last day of polling today. Both candidates have actually talked about drug price control and if the polls were to be believed, I think Democrats if they were to come. Any thoughts on, now that you have a U.S. specialty business, what are your thoughts on drug pricing? How do you ensure that payers, patients paying them get the best value for money? If you could share your thoughts around that. Now that ILUMYA has been 2 years in the U.S., if you could share something in terms of what are the net price increases that you have taken on that product.
Abhay, you can talk of the price changes for ILUMYA.
Yeah.
Yeah.
The 5% is the price change we have taken this year to give you a clearer answer.
I think if I see the various announcements which President Trump has made and also what I see as a, what you call manifesto and poll or election promises of both the candidates, both of them want to find a way to effectively control drug prices. There are some potential directions coming out of their answers, say like they want to negotiate Medicare prices because as on today, the government doesn't negotiate. Like that, they're talking about a few things. We have to finally see how it turns out and then assess what is the final impact of that on the business.
However, if I look at the valuation of the major pharma companies, I don't see any significant negative impact of this pronouncement on their valuation. I have no clue as to finally what is going to be implemented because that's an idea and execution have big challenges in the U.S. system because it needs to get approved by Senate, it needs to get approved by Even if the president wants to do few things. Abhay, you have something to add or maybe I said something which is not correct.
No. I think we are only as wise as what we read today.
Yeah.
Both the presidents, the incumbent and the challengers have made different pronouncements. What actually will get implemented and in what form, I think we have to wait and see.
Abhay, on the net price increases for ILUMYA.
I said we have taken a 5% increase this year.
Okay. Got it. Thank you. My last question is on the gross margins. Taro's gross margins have been coming down. If I just strip that out and just look Sun ex-Taro, gross margins have actually been going up. In fact, this quarter number was some 77%-78%. Just want to understand from a non-Taro perspective, some of the drivers of that margin going up, if you could help us understand qualitatively.
Murali.
Yeah.
You can respond.
Yes. Shyam, as I said in my readout, the margin expansion in terms of gross margin is contributed both by the product mix and the various cost optimization measures, and of course, the higher specialty revenues in the current quarter. This has been a continuous effort to improve overall the margins for us through various cost optimization measures.
Yeah. Murali, just if you could rank order, I'm not looking quantitatively because the numbers seem to be almost like one way. I'm just trying to Curious, is it specialty where the realization is now starting to improve? What could be the bigger drivers, if you were to rank them? That's what I'm looking for.
No. In the quarter, we have said that higher specialty sales in the current quarter did, of course, one of the components. In the readout I did mention that. That's one of the. We are seeing continuous focus on cost and improvement measures also is a major contributing factor.
Got it. Thank you and all the best.
Yeah. Thank you.
Thank you. We'll move on to the next question. That is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Yeah. Hi, sir. Good evening. One question, Abhay, on CEQUA. Just trying to understand, could you just give a sense that out of the total patients that you're serving today on CEQUA, majority would have been new patients to the therapy, or those patients would have tried either Xiidra or RESTASIS and would have come to CEQUA? Just as a rough, which will be bigger segment?
In the initial phase, and CEQUA is now almost a year-old product. We launched somewhere in November of last year. In the initial phase of the first, let's say, four-six months, there were a lot of warehouse patients, which we were able to move to the product. I think today, there are two segments, and I think the larger segment is new prescriptions. We still get patients who have failed on either of the two competitors onto the product. My sense is that the larger component would be newer patients.
Okay. That's helpful. Second is, what are your thoughts on DTC campaign for CEQUA? I know last six months have not been a right period to look at it, but at some point of time, would you look at it?
We are initiating the DTC from this month actually. Of course, having said that, it is not going to be television advertising like we did for ILUMYA. It will be using other channels to reach out to consumers and customers both.
Okay. That's helpful. Second question was on ABSORICA and the ABSORICA low dosage version. We are almost two months away from possible generic entry in this product. Because of situation in the U.S., I think we have been only able to share about 20% of the market with it. Is there any other defense that we have that we can save a larger franchise of ABSORICA getting impacted from potential generic entry over there?
You're right. I mean, we have been able to take a 20% share from ABSORICA onto the AD formulation. As you know, because of the COVID environment, we have lost valuable time. Trying to do the best we can, if there is a generic which comes in December, that could have an impact on the business.
There's no other defense that still available with us, which can just save us at the last moment?
Not from a product perspective, but there are other strategies we are toying with. Obviously, on the call, I will not be able to spell out some of those strategies.
Sure, Abhay. Thank you very much.
Thanks.
Thank you. The next question is from the line of Ritesh Rathod from Nippon India Mutual Fund. Please go ahead.
Yes, sir. Post the strong five-year data of the ILUMYA, would there be any change in DTC strategy for the ILUMYA?
Not much from the DTC. I think the first objective will be to use this data to communicate with the doctors. I think that is where the medical reps and the MSLs and even the FRMs who will speak to the payers would be more important. I think the focus will be on communicating with the healthcare professionals. I think this will be the key.
Okay, thanks. That's all, ma'am.
Thank you. The next question is from the line of Nimish Mehta from Research Delta Advisors. Please go ahead.
Yeah, thanks for the question. Following up on the previous question, now that we have the strong five-year data, is there any idea as to which other company would have done the similar trial? If yes, how does our data compare with other companies' trial data?
In the IL-23 space, I haven't seen five-year data from the competitors.
Abhay, we announced also at the press release that this is the first IL-23 five-year data.
Within the IL space.
Yeah, I said that they would also be working on that kind of data and at some point in time, they may be able to present it. I think being first to market with this data is a huge positive from our perspective, and we'll try and use that time to the best of our advantage.
I think, Abhay, if you see qualitatively the data reflects that over time, actually, the percentage of passing 90 and passing 100 increases.
It improves. Yeah.
Yeah, sure. No, the data looks very strong. I'm just trying to see if there is any comparable data. Even in IL-17, if you know of any company which would have undertaken such trials, then some perspective on how does it compare with any other. Not IL-23, we are the first one, but within IL-17, how does it compare?
My sense is everybody will have a five-year data, because these are regulatory requirements for you to do five-year safety studies.
How many would have published it so far?
Everybody would have. I think if you can see Cosentyx and all of them came before us, so their five-year data should be available.
I see. Do we have any idea as to how does our data compare with their data? Obviously, we can look up, but your perspective will be very useful.
I think generally doctors who use both IL-17 and IL-23, their feedback has been that IL-17 produces faster response, but IL-23 produce durable response. Within IL-23, we believe that ILUMYA has done even better, both in terms of durability as well as in terms of improvement.
I see. That's very interesting. Yeah, thanks. The second thing I just wanted to know about the generic business. I mean, we have had some time since we had a low competition launch. Any idea or is it kind of contingent upon our halo status? If not, when are we likely to see any important launch where we might be the first or second one to launch, let's say, in the market? That perspective will be helpful. Thank you.
I think unfortunately, we've not given any data about growth for this year. Whatever information that we share about potential annualized growth will factor our expectation of approval of these products.
That I understand, sir. I'm just trying to understand the launches of important complex generic product. I don't want the number of launches.
I think you have to understand that for difficult-to-make products for which no generic exists, FDA on last day can also ask you a question that can potentially delay your approval by one year. I don't think that it's fair for me to give you any date unless and until we have an approval.
I see. Okay, I understand. Thank you.
We have a peptide product in which now FDA has asked us that you compare your impurity level at different stages in your shelf life compared to the innovator product.
Oh, thank you.
I have to then do stability study for both my and innovator product for two years before I can respond.
Oh, I see. Okay. Following up on that, with your permission, is there a policy likely coming from FDA related to complex generics? We have been hearing about it some time back as to whether they will help generic companies expedite complex generic approval now that they also have.
No, I think there is an existing policy where people who have filed or who wish to file FDA consults. FDA will not help you make the product.
Right.
They will tell you what you are supposed to do, and they will talk more frequently to you than otherwise.
Right. Okay, understood. Thank you very much.
Yeah, thank you.
Thank you. The next question is from the line of Sanjay Shah from Alphaline Wealth Advisors. Please go ahead.
Yeah, thank you for the opportunity, sir, and pardon me for any pronunciation mistake if I do. Sir, as regards to the ILUMETRI, we have different dosage, that is of 200 mg ILUMETRI. What we have got approval from EU, correct me if I'm wrong. What is the potential of that going ahead?
Abhay, you will respond?
I don't think I've understood the question because in the U.S. we have only.
He says that 200 mg, what will be the difference?
ILUMETRI we have 200.
In Europe, Abhay, we have both 100 and 200.
Yeah. INR 100.
In U.S. Yeah. What he's saying is, what is the potential for 200?
In Europe, you're asking or in U.S.?
In Europe.
In Europe, I think the product is designed and marketed as a self-injectable product, where I think they have a value for both the strengths. The data that we had submitted in the U.S. and the permission for which we have is only for the 100 milligram. And the product is designed to be a medical benefit product. In Europe, I think ILUMETRI, they have both the strengths, but even there, I think my sense is, and I don't have updated data, maybe we will try and get that, but I think 100 milligram in Europe still sells more than 200. I could stand corrected.
No.
We will verify that.
Abhay, you're right, because 200 mg is only for obese patient above a certain weight class.
Right.
Right. My second question is regarding API. What opportunity do you see in that API? Do you have any plan to.
Sir, Abhay, your voice is breaking up. Would you be able to.
Yeah. Can you hear me now?
Speak louder or closer to your microphone?
Yeah. Can you hear me now? Hello.
A little better.
Yeah. It was saying that API
Actually, it's gotten worse.
Sorry to interrupt, sir. We're not able to hear you. Hello?
Can you hear me now?
Yes, sir.
Sorry. Sir, it was regarding API business I was talking. What opportunity do you see on that side, and do we have any plan to grow that business?
We clearly look at API as an important component of our business, primarily with a view to strengthen our dosage form business. However, looking at the diversity of products that we make, many of these products have significant potential to sell. That is the reason why we are focusing on it. Now that we are focusing on it, I think it's growing quite decently. We will continue to grow that business.
Right. We have not planned any massive CapEx for that or increasing that, ramping up the business on a bigger, larger scale.
We are all the time investing in that business because today our API turnover is almost twice the turnover of what it was three years or four years back.
Right.
What you see is the external turnover. What you don't see is what it is supplying to Sun Pharma.
Okay.
If I look at the total volume produced by API business, it's more or less doubled in four years.
Right. Thank you, sir. Thanks very much for your time.
Thank you. Ladies and gentlemen, that was our last question. I now hand the conference over to Mr. Nimish Desai for his closing comments.
Thank you. Thank you everybody for taking time out and joining this call. If any of your questions have remained unanswered, please do send them across and we will have them answered. Thank you and have a good day.
Thank you.
Thank you.
Ladies and gentlemen.
Thank you.
Thank you. Ladies and gentlemen. On behalf of Sun Pharmaceutical Industries Limited, that concludes this conference call. Thank you for joining us. You may now disconnect your lines. Thank you.