Good afternoon, ladies and gentlemen. Welcome to our post results teleconference for the quarter ended September 30, 2022. For today's call, we have with us Dr. Sharvil Patel, Managing Director, Mr. Nitin Parekh, Chief Financial Officer, Mr. Arvind Bothra, Senior Vice President, Investor Relations, and Mr. Alok Garg, Senior Vice President from the Managing Director's Office. I hope you would have gone through the quarterly results, investor presentation, and the press release, which are available on our website and also filed with the stock exchanges. First, let me quickly run you through the Q2 FY23 consolidated financial performance. We registered revenues of INR 41.3 billion, up 10% year-on-year. Excluding COVID-related revenues, the growth was 15% on a year-on-year basis, driven by our key markets, namely India and the U.S., both of which grew in double digits during the quarter.
Reported EBITDA for the quarter was INR 8.2 billion, down 9% year-on-year. However, adjusting for the COVID-related inventory provision during the current quarter, the EBITDA margin stood at 22.6%, which is an improvement of 210 basis points on a sequential basis. Profit after tax for the quarter was INR 5.2 billion. Excluding the impact of COVID-related inventory provision, as mentioned above, exceptional items and profits from the discontinued operations, PAT for the quarter stood at INR 6.1 billion, up 15% on a sequential basis, led by improved EBITDA margins. We remain confident on our ability to achieve 20%+ EBITDA margins for the current fiscal, backed by growth visibility across our key businesses, coupled with various cost optimization initiatives.
With this, let me take you through the operating highlights for the second quarter of FY 2023 for each of our business segments. Our India geography, which comprises of Formulations and Consumer Wellness business, accounted for 43% of the total revenues during the quarter and grew 11% year-on-year, adjusted for COVID-related revenues in the Formulations business last year. Coming to the Formulations business in the India geography, the business registered an improvement in growth during the quarter as it grew by 11% year-on-year, excluding revenues from COVID-related products and divested brands. H1 FY 2023 growth for the business was 11% as well, excluding revenues from COVID-related products and divested brands. We gained market share and improved ranking in our core therapies, namely cardiovascular, vascular, gynecology, respiratory, and gastrointestinal during the quarter on a year-on-year basis.
Overall, we grew faster than the market during the quarter on account of higher growth in therapeutic areas mentioned above. Notably, our first new chemical entity, Lipaglyn, consolidated its position in the market further and is now ranked as the 56th largest brand in the Indian pharmaceutical market during Q2 FY 2023, a gain of 10 positions versus the first quarter FY 2023. Our Consumer Wellness business recorded revenues of INR 4.2 billion, up 12% year-on-year. Growth during the quarter was led by Glucon-D, Nycil, and Everyuth brands. While the business continued to deliver double-digit growth, gross margins were under pressure during the quarter on account of pricing pressure in key inputs. We continue to implement price hikes at a portfolio level to mitigate pressure on margins, which is likely to recover over the coming quarters.
Now let me take you through the performance of our U.S. Formulations business. The business accounted for 43% of the consolidated revenues during the quarter, with sales of INR 17.1 billion and grew by 10% on a sequential basis. We launched 10 new products during the quarter, including the generic Revlimid, which is lenalidomide, which aided the growth momentum. We received 15 new product approvals, including two tentative approvals during the quarter. On the emerging markets front, the business continues to maintain its high growth momentum as it posted revenues of INR 3.3 billion, up 24% year-on-year, excluding revenues from COVID-related products. The growth was broad-based across most of the geographies. The business grew during the quarter despite the challenging political and economic scenario in some of the emerging market countries.
This concludes the business review. I would now request Dr. Sharvil Patel to take you through the key drivers across businesses and initiatives in our innovation program. Thank you.
Thank you, Dr. Nayak. Good afternoon, ladies and gentlemen. It is a pleasure to have you all today on the call. We continue to direct our efforts and resources towards the focused execution in two of our largest geographies, India and U.S., with an aim of sustained value creation for all stakeholders. All our key businesses sustained the growth momentum and delivered a robust performance during the quarter. Our Formulations business in India continued to steadily improve on growth metrics, registering a steady double-digit growth ex-COVID revenues in line with the market. While this has been our near-term target, we intend to outperform the industry growth sustainably in the medium to long term.
We will continue to leverage our innovation pipeline, including the IP-protected novel molecules and biosimilars, to focus on volume expansion through strategically directed marketing efforts, brand building and improved distribution, including the new age channels. With the impact of COVID-related disruptions behind us, the consumer wellness business maintained the strong growth momentum and posted a double-digit growth during the quarter. However, there were challenges in the form of higher input costs and slower pickup in rural demand, which impacted profitability. We continue to expand our distribution network and broaden our product offerings to drive additional growth going forward. We are pleased to see the fruits of our continued R&D efforts aiding steady growth in the U.S. formulations business, supported by new launches, including generic Revlimid during the quarter.
Also, monetization of our internal pipeline, along with our BD&L efforts, will be the key drivers of our U.S. generics business. Our specialty portfolio is likely to scale up over the medium term and become a niche and sustainable growth pillar as well. It is heartening to see the impact of our innovation products on patient health outcomes, which have enabled affordable treatment options with easy access through our comprehensive distribution network. This has enabled commercial supply success of our innovation products. Notably, Lipaglyn sustains its momentum and is continuing to add newer patients and has improved its rank in the IPM every quarter. Bilypsa, which is the only available treatment for NASH indication, continues to display robust growth consistently since launch. On the biologics front, we launched Ujvira, which is our first ADC, antibody drug conjugate biosimilar of Kadcyla last year.
The molecule has gained significant traction in the first year of launch itself and is one of the leading brands of our formidable oncology franchise. With this, let me talk to you about some material developments on our innovation efforts. On the NCE front, during the quarter, we submitted the results for the hepatic impairment study of saroglitazar magnesium in NASH and PBC patients to the U.S. FDA. The hepatic impairment studies of the molecule in cirrhotic cholestatic patients is ongoing and which is likely to be completed by end of FY 2023. We achieved a positive proof of concept in our phase II trial for our NCE ZYIL1, an NLRP3 inhibitor in patients with cryopyrin-associated periodic syndrome, which is called CAPS, which is a rare lifelong autoinflammatory condition.
The study demonstrated rapid clinical improvement and remission within days when CAPS patients with flare-ups were treated with ZYIL1. We received regulatory approvals in India to initiate phase II clinical trials for our anti-malarial drug candidate ZY19489. We also commenced a phase IV clinical trial of Desidustat in patients in India with chronic kidney disease-induced anemia. The trial will enroll 1,000+ patients, half of them being dialysis-dependent and the remaining half being dialysis-independent. On the specialty front, our wholly-owned subsidiary, Sentynl Therapeutics, Inc., received marketing authorization in the E.U. for Nulibry for the treatment of molybdenum cofactor deficiency type A. It is the first and only treatment in Europe to treat patients with the MoCD type A, and we are looking forward to successful commercial partners to launch Nulibry in the E.U..
On the regulatory compliance front, I am very pleased to share that earlier this week, the U.S. FDA issued us an EIR with a voluntary status, a VAI status for our Moraiya formulations manufacturing facility, which was earlier in a warning letter. The inspection now stands successfully closed. The U.S. FDA has also inspected our new animal health formulations facility located in Ahmedabad SEZ between September 23rd to September 29th, 2022, which concluded with two Form 483 observations. We submitted the responses to the FDA in the month of October. We are proud of our manufacturing quality teams for their proactive approach to sustain quality excellence. We remain committed to invest in the requisite resources to build a strong corporate quality culture. This will strengthen our position as a reliable supplier of products that conform to the highest standards in the world and other markets. Thank you.
Now we'll move over to the Q&A session. Over to the coordinator for the Q&A.
Thank you. We will now begin question and answer session. Anyone who wishes to ask questions may raise your hand from the Participant tab on your screen. Participants are requested to use headphone or earphone while asking a question. We will wait for a moment while the question queue assembles. First question is from Prakash Agarwal.
Yeah, hi. Good afternoon. Thanks for the opportunity. First question is on Moraiya. Congrats on the approval. How do we see this approval? Have we been able to transfer most of the important files or does this give opportunity to launch a new set of products? We've talked about couple of niches also coming out from this facility. If you could update, how should we look at the outlook?
We still have some important launches that are still from Moraiya. Obviously, the whole transdermal franchise is gonna be important in terms of the commercialization of that. Also there are some small molecules like softgel and others which were filed out of Moraiya, which will see some positive traction going forward. All in all, I think the re-resolution of that will only help us add to the overall business mix of the U.S. going forward.
I mean, does this change your approvals/launch guidance of 20-30 products every year or how should we look at it?
Yes, if we get through approvals. Moraiya has, I think, close to 30 pending approvals. Yeah, we would see an uptick in the number of approvals.
Okay, fair enough. Secondly, on U.S. sales and linking it to gross margins. I mean, so one on the U.S. sales, if you see the Q-on-Q movement versus other peers, it has been little softer. Is it like well spread out in terms of Revlimid opportunity or how should we think about it? I mean, it doesn't seem to be up-fronted like other place.
Yeah, it is not up-fronted. We have a well spread out plan for Revlimid, and currently it is better than our estimates in terms of what we have been able to do on the product.
What I understand is this quarter and the next quarter are the two big quarters where most of the companies would be booking because Natco would have the double-digit market share starting March. Would that be fair understanding or it is even spread out even further, also the March quarter?
I think for us it'll be spread out beyond the March quarter also.
Okay. Fair enough. Lastly, on gross margins and EBITDA margins. Adjusted for this Forex as well as your, you know, COVID-led inventory, EBITDA margins are flattish despite Revlimid. Have we started to look at some costs coming down, both in terms of import and other operating expenses or inflation still is at elevated levels? Some color will help.
See, I think we have maintained that we believe that we will comfortably be about 20% EBITDA margins and with the kind of product launches we can see some improvement there. On the cost and other front, we continue to obviously look at various opportunities. Maybe on the inflation thing, maybe Nitin bhai if he wants to add something he can.
Prakash, while we have calculated Forex gain and shown that on income side, you can understand there are certain expenses also including imports and other expenses. Where also there is a negative impact which currently we have not separately computed and made available. The gain is to be, you know, considered on a net basis. That is one. Plus there are certain input costs which have started easing out and the result of that you will see in the ensuing quarters.
Okay. Okay, perfect. Thanks and all the best.
Thank you. The next question is from Vino.
Okay. Hello? Can you hear me?
Yes.
Okay, great. Sharvil, if I just follow up on Revlimid. You know, when you say it is well spread out, in the last quarter which is reported, you had less than the amount of sales. If I roughly assume that, coming quarter will have three times of whatever sales you booked in last quarter, is that an okay assumption or is it far away?
No, I think because there is a limited market share, we have divided the market share. It is not monthly market share, but we just divided the overall market share that we have received.
Into quarters.
Yeah.
Okay. Continuing with U.S., you know, there is this product, Trokendi XR, in which I believe there is a settlement to launch sometime soon. Can you give some timeline?
We are planning to launch the Trokendi XR in quarter four of FY 2023, and which will be an important launch for us.
Right. One product, Myrbetriq, in which you got a final approval recently. Any timelines regarding the launch of the same?
The timelines are yet not finalized.
Finalized. Okay. Or just one if I could add, regarding this, hepatic impairment study that you talked about. What sort of study is that? Is it a safety study or any efficacy study?
It's a safety study. It is to improve the label claim, when we finally look for a PBC NASH approval. There are challenges with some molecules with this. We believe our product is much superior to that. These studies are there to demonstrate that there are no safety concerns for this molecule or products in this class.
Understood. Thank you. I'll join back.
Thank you. The next question is from Kunal Randeria.
Hi, good afternoon. Sir, your R&D is quite diversified across, you know, NCEs biosimilars besides the normal 30-35 ANDA filings that you do. Of this around INR 1,100 crore R&D budget, is it possible for you to split how much, you know, you would be spending across these different R&D verticals?
I think broadly we have said, right, about 2/3 of R&D investment.
In generics.
is in generics, biosimilars, and all those put together. About 1/3 of this is in the current NC programs that we're running. I think going forward, we will see a maybe a mix which is more driven towards NCs, but that's the current mix.
Sure. On an absolute basis, how do we see R&D in the next three years? Because, I mean, saroglitazar and all the other products should be entering into late-stage clinical trials.
Yeah. I think there will be definitely growth in our overall R&D expenses. Currently we are comfortably in that 7%-8% as a percentage to R&D as a percentage to sales level. Maybe in the next three years we'll review, but surely it'll go up, but maybe we'll still be in the around the 8%+ range.
Sure. Just one more from my side. I guess you would be launching, what, 25-30 products annually. Maybe if you can give some granularity in terms of how many injectables you expect in less than FY 2024, how many transdermals, and how many, you know, normal oral solid products.
You know, it's a very fluid situation, so it's very difficult to give dosage-wise. I've always stated that with the kind of portfolio that we have, including all of the three that you stated, we would see robust number of products launched in the U.S. and which will also, we believe, add to significant growth for the U.S. business.
Got it. Thank you, and all the best.
Thank you. We'll now wait for the queue to assemble. The next question is from Neha Manpuria.
Yeah, thanks for taking my question. Sir, just to understand the U.S. business, given we have launched 10 products in the quarter, did the base business erode higher than what we have seen, you know, in the last few? Because Asacol does not seem to be showing any erosion, so any color there on the base business?
No, I don't think we have seen any critical base business erosion in the U.S. in the last quarter, in this quarter.
Has it been a high single digit like we've seen or?
To mid-single digit.
Sorry, sir, I missed that.
Mid-single-digit.
Okay. Got it. My second question is on the R&D that you mentioned. Did I hear correctly that the R&D spend for the next year could be 8%+?
Yes. Yeah.
Okay. In that context, you know, I know our U.S. run rate will improve going forward. How should we look at the margins from the, you know, 20%+ that we would do this year?
I think we will see a good improvement on that.
I think by when we have the close of this particular year, we would have better visibility in terms of the products to be launched next year and should be in a position to give more accurate guidance.
Understood. Thank you.
Next question is from Biraj.
Hi. Hi. Thanks for the follow-up. Shall I just follow up on the animal health business? I am not quite understanding how it's happening there. We sold the animal health business which we had, and now we again have an animal health facility where the U.S. FDA had a recent approval. What are we trying to do with the animal health side of the business?
This business is our export, I mean, the business targeted towards U.S. We have filed a lot of ANDAs, as they call them, as the regulatory submission. Our facility that was built for those has been inspected, and now we are looking forward to a closure of that inspection and, then launch, commercial launch of these products.
Okay. The earlier animal business which we sold had no sales in the U.S., right?
No, just for your clarification, what we sold did not have any business in U.S. We are starting new animal business in U.S. with our dedicated facility, which was inspected recently.
It's a new business.
It's a new business.
Understood. Thank you.
Next question is from Nitin Agarwal.
Thank you for taking my question. Sharvil, on the Moraiya plant, you know, by when do you see the approvals begin to come through from this facility, and how many of these approvals do you expect over the next 12 months?
Approvals, I believe generally, after it, we have seen that in two-three months we start seeing approvals. That's what we hope. It could be anywhere from 20-35. I can't exactly say how many number, but 20+ approvals are possible.
On the transdermals, I mean, transdermals approvals are just right now a function of the approval process getting started, or there's something else which can hold back the approvals from your end?
Largely it is for the facility cGMP, and there are a few queries that have also been answered in the latest round. Majority of them are for facility clearance.
If you can just refresh your memory, how many transdermals have you filed from the site?
Five.
Okay. From a market perspective, in terms of, you know, because it did file, like, long back, how many of them are where the market is still interesting to you from a site perspective, of this site?
We will be launching immediately four, and then we're doing one site transfer. Overall all will be launched.
Okay. Secondly, on Asacol HD, how have the dynamics been in the market and what are you now penciling in for competition?
Currently, as I keep on adding, our best estimate is we don't see any immediate competition over the next three to six months, is our best estimate as of now.
Okay. Thank you.
Thank you. The next question is from Vibha.
Hi, Sharvil. Vibha here.
Hi.
I just wanted to know in case, you know, I just joined the call a bit late, so please excuse me if I'm repeating our question. I just wanted to know, what are the COVID-related, you know, product-related write-offs and, you know, is this vaccine related and how much is it?
There are materials related to COVID vaccine which we wanted to, you know, earlier use. Now since the vaccines are not required, we thought certain materials may not be utilized and therefore we would write off. Also some other products which we were selling during COVID times, their inventory, we now took a call that this will not be sellable since there is no demand and therefore we have made a provision for them.
Right. What's the, in case I missed it, what's the amount of the provision?
Total INR 120 crore in this quarter. Earlier we entered INR 40 crore in the previous quarter.
Okay. Thank you.
No questions again.
Hi.
Next question is from Harit Hemad.
Hi. Good afternoon. Thanks for the opportunity. I hope I'm audible.
Yes.
One of your competitors recently received approval for another modified-release mesalamine product, which is Pentasa. Is that an opportunity for us as well? Do we have a filing-
We have already launched. Oh, Pentasa you're talking? No, no.
Yeah. Yeah.
We are also working on Pentasa.
On the vaccines front, can you give some color, you know, the ex-COVID vaccine part of the vaccines business? You know, what's the current size of the business and how should we think of scale-up in this business over the next two or three years?
Currently on our vaccines business, currently our current business is only limited to private market vaccines, which we are selling, which is the VaxiFlu vaccine and the typhoid conjugate vaccine. Going forward, I think that, as I said, the important vaccines will be us participating in the pre-qualification of three vaccines. One is rabies, followed by MR and typhoid conjugate. These three vaccines will become part of the global vaccines, which the tenders are not before 2024, 2025, 2026. They are some time away, and before that we have to get pre-qualified also for this. I think the major uptick for this is 2025. When we come to 2024, 2025, where we'll see an uptick on the volumes and business.
Till then obviously we are going to participate in the private market and the India public market through our MR and typhoid conjugate vaccine and the rabies vaccine.
All right. Last one on saroglitazar. Can you refresh us on the timelines for both the PBC and NASH indications in terms of filings and the hepatic impairment study that you talked about? Does that change any of the timelines in any way?
No. The hepatic impairment studies don't change any timelines. They are only. We are doing those studies to have a better superior label claim, is what we hope for. Our current estimate for finishing the trial and submission is calendar year 2025 for PBC indication. The NASH indication is a much longer drawn out trial. That is 2027 kind of submission. 2027, 2028, not before that.
Related question on saroglitazar again. How's been the response to our launch for NASH indication in the India market? I see that we have a separate brand for the NASH indication. How is that shaping up?
The momentum on the brand is very good for both, the indications. Ideally, the largest now indication going forward will be the NAFLD indication. We are seeing very strong market share I mean, gains in that particular sub-therapy. Overall the brand is performing extremely well. As I always said that we aspire to make it into the top 25 brands of India very soon. That is gonna be our endeavor in the short term. This definitely will become the top selling, one of the top selling brands for the company as well in India.
Understood. That's all from my side. Thanks for taking my questions.
Thank you. The next question is from Rashmi.
I think she'll have to unmute.
Yeah. Am I audible now?
Yes.
Sir, on Nulibry, you know, I think the commercial shipment has already commenced. How was the response during the quarter? If you can give update on the market opportunity for this particular product, the addressable market size and all.
Nulibry is a rare disease orphan product. There had already been existing patients who were taking this in Europe. That will, with this marketing authorization, we'll be able to continue and look for new patients as we are able to find partners. In the U.S. also we are sourcing for new patients. This is an extremely rare disorder and the patient numbers are gonna be in the single- to double-digit kind of numbers, you know, but the value proposition is there. That is the current plan. Yeah, I think it's gonna be a steady build-up, but it's gonna be a very sustainable sticky business.
More importantly, I think we would have brought a solution for one of the rare diseases where there are no current lines of treatment.
Sir, when you say that, you know, you have seen a mid-single digit price erosion in the quarter in the U.S. business, was that on quarter-on-quarter basis?
Annualized it is that.
Okay. If
Quarter-on-quarter 5% would be a big disaster.
Quarter-over-quarter. Sorry, I didn't get it.
No, it's not. It is annualized, not quarter-on-quarter.
Can you update on quarter-on-quarter price erosion?
We don't.
Sir, no single digit.
Ex Revlimid, you know, with the help of launches and all, you know, you might have offset the price erosion. ex Revlimid, can we consider that the base business was more or less flattish on quarter-on-quarter basis, excluding Revlimid sales?
Slight. It was slightly softer, and then more to do with timing.
Okay. All right, sir. Thank you. That's it from my side.
Thank you. The next question is from Avnish Khara.
Hello, am I audible?
Yes.
Yeah. I just wanted to pick up from the question of an earlier participant regarding the COVID provisions that you made. It was INR 140 last quarter and INR 120 this quarter. Is this the total inventory been written off, or is it possible that we'll take some more provisions in the future quarters?
First to correct, it was INR 40 crore, not INR 140 last quarter. One twenty in September quarter. Together it is INR 160.
There won't be any provision in the future quarters, right? It's completely been written off.
Yes. Yes. Whatever was to be written off, it is written off.
Okay, great. Also on the transdermal pipeline that we have, I just wanted to understand, you know, is there any difference in the pricing erosion dynamics of that segment of the business? You know, can you throw some light on if there is going to be any difference on how we are marketing those products or something?
No, it's the same channel of marketing, so there's no new channel. The same teams and the same network is there. Currently, as I said, for those all products, the margins are still attractive.
Okay, great. That's it from my side. Thank you.
Thank you. The next question is from Dhruv Mehta.
Am I audible?
Yes.
My question was related to Revlimid. We have missed our sales, like there's a slow ramp-up. What is the indications for the whole year, and do we see any fresh competition during the year? That's my question.
Two things. One is we haven't missed any estimate on Revlimid. Whatever we have estimated, I think we would do better than that estimate and go on for a couple of more quarters. It's not a one-off business.
Sir, what about any fresh competition during the year?
No, it's a very limited quantity launch. It's, there's. The competitive scenario is not relevant for the moment.
Okay. Thank you.
It's 3:40 P.M. Next question is from Vibha.
Hi. There's some confusion, not confusion, maybe there's not so much clarity on the direction of pricing in the U.S., not for you in particular, but I just want to get a general idea of how the market is expected to behave. You know, there was some expectation during the last quarter that from this quarter onwards it would be better. Do you see that? How does it look going forward? Second, has or have the logistics costs come down post-COVID and after all the Ukraine crisis, et cetera, the geopolitical upheavals that happened? Are the logistics costs for... I'm talking about overall, not for Zydus in particular, but do you see that is kind of normalized now or it's still pretty high?
The logistics cost, to answer to your second question, have come down across as an industry for pharmaceuticals. That's happened. With respect to price erosion, I think, we always I mean, there will always be a very competitive intensity in the U.S., so we believe that, single-digit price erosions is something that we all build for in terms of our future planning.
Okay. Thank you.
As there are no further questions from the participants, I now hand the conference over to the management for the closing remarks.
Thank you very much. I wish all of you a merry Christmas and a very happy New Year, and look forward to interacting with you again during our next quarterly results in the month of February. Thank you, and have a nice evening.