Ladies and gentlemen, good day and welcome to the Cadila Healthcare Limited Q2 FY 2022 post-results 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, please signal an operator by pressing star and then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ganesh Nayak, Executive Director, Cadila Healthcare. Thank you, and over to you, sir.
Good evening, ladies and gentlemen. Welcome to our post results teleconference for the quarter ending September 30, 2021. I do wish that you and your family members are keeping safe and well. For today's call, we have with us Dr. Sharvil Patel, Managing Director, Mr. Nitin Parekh, Chief Financial Officer, and Mr. Vishal Gor, Senior Vice President, Corporate Finance. I'm sure you would have gone through the quarterly results investor presentation, which we have posted on our website and filed with the stock exchanges. The quarter gone by was a promising one for our India geography as it continued to build on the momentum and recorded a double-digit growth during the quarter. In fact, both human formulations business and consumer wellness business in the India geography grew in double digits during the quarter.
On the human formulations front, amidst the receding impact of the pandemic, the growth was driven by key existing brands and new products which were launched during the last few quarters. On the back of improving consumption, the consumer wellness business grew during the quarter and continued to unlock the operational efficiency with strong on-ground execution despite challenging economic conditions. Overall, the India geography, which contributed 43% to the consolidated revenues during the quarter, posted a growth of 12% on a year-on-year basis and registered sales of INR 15.9 billion. With that, let me take you through the financial numbers for the quarter gone by. During the quarter, we posted a consolidated revenue of INR 37.8 billion, up 3% year-on-year. Consolidated EBITDA improved during the quarter and stood at INR 8.6 billion, up 6% year-on-year.
Reported EBITDA margins for the quarter stood at 22.7%, which is an improvement of 50 basis points on a year-on-year basis. We made a one-time inventory provision for COVID-related products during the quarter. Excluding the impact of this provision, EBITDA margins for the quarter were at 23.8%. EBITDA margins improved despite a year-on-year decline in the U.S. revenues as business in India and the emerging markets performed well, and in turn drove the overall margin improvement. Adjusted for certain exceptional items and a one-off gain on the account of sale of our animal health business, the consolidated PAT for the quarter stood at INR 6 million, up 6% on a year-on-year basis. Our net debt as on the 30th of September 2021 came down to INR 4 billion from INR 35 billion as on the March 31, 2021.
As a result, our net debt to EBITDA ratio also came down to 0.12x as on the September 30, 2021 from 1.1x as on the March 31, 2021. Now let me take you through the operating highlights for the second quarter of FY 2022 for each of our business lines. Starting with our human health business in the India geography, the overall our human health formulations business recorded sales of INR 12.1 billion during Q2 FY 2022, up 12% on a year-on-year basis. Excluding the institutional sales of COVID products, the growth actually was 17%, which was driven by strong volume growth and new product launches. We gained market share in our core therapies of antidiabetic and cardiovascular therapeutic areas during the quarter on a YoY basis.
In the digital space, we have made significant investments towards the adoption and implementation of digital tools and practices to reach out and connect with our doctor community and patients, and we have better equipped our field people in their daily working. Going forward, with the recovery in the pharma market and normalization of the healthcare delivery infrastructure, growth will be driven by focus on key brands identified to fuel future growth. As mentioned earlier, our consumer wellness business, despite challenging economic environment, also registered a double-digit growth during the quarter. Overall, the business posted revenues of INR 3.8 billion with a growth of 13% during the quarter. On the brand front, Complan, Everyuth, and Nutralite registered a double-digit growth during the quarter. Nycil and Glucon-D also performed well and continued to lead in their respective categories despite a low season and high channel inventories.
Now let me take you through the performance of our U.S. formulations business. The U.S. geography, comprising of generics and the specialty portfolio, posted sales of INR 15 billion during the quarter, up 3% quarter-on-quarter. The business saw a growth in revenues over the preceding quarter despite heightened competition and a tough pricing scenario. Overall, volumes grew during the quarter despite reduction in the volumes of our mesalamine products as there was a gain in the volume of other existing products and new launches. We launched three new products during the quarter, including a complex injectable, namely enoxaparin sodium injection, which is an in-licensed product. This is the first generic launch of this product by an Indian player, which reinforces that our efforts of in-licensing of complex products have started yielding results. Enoxaparin sodium injection is the second in-licensed complex injectable product after fondaparinux.
Though supply issues in the U.S. have dwindled, leaving limited one-time opportunities, we will continue to prioritize products and maintain safety stock of key products to be able to take advantage of opportunities arising in the market. On the emerging market front, our business witnessed a strong growth of 48% on a year-on-year basis and posted sales of INR 3.5 billion. On a sequential basis, the business grew by 26% during the quarter. As mentioned during the last quarter's earnings call, we have undertaken many initiatives aimed at enhancing operational efficiencies to drive improvement in operating margins. One such initiative is the zero-based budgeting approach for human health formulations business in India. As part of this initiative, we have identified multiple levers across the entire value chain of the business, which are in the process of getting implemented.
We expect the benefits of this to accrue from the next calendar year. Another such initiative is being implemented in the manufacturing operations, which aims at using advanced digital and analytics tools to enhance compliance and efficiency through simplification. Potential areas for improvement are being identified across work streams, SOPs are being simplified, and various digital tools are being designed for digital performance management. The implementation of this initiative will be spread over the course of the next year. All these initiatives put together are expected to improve our overall operating margins by 80-100 basis points. This concludes the business review. I would now request Dr. Sharvil Patel to take you through the progress and initiatives in our innovation program. Thank you.
Thank you, Dr. Naik, and good evening, ladies and gentlemen. As you all know, we have received the emergency use authorization from the Drugs Controller General of India for COVID-19 vaccine candidate ZyCoV-D during the quarter. It is the first ever plasmid DNA vaccine for human use approved anywhere in the world. The plug and play technology being offered by DNA-based platforms will help in rapidly adapting the vaccine in case of any future mutations to the virus. In fact, we have already developed the DNA vaccine candidates for the Alpha, Beta, Kappa, Delta Plus and Lambda variants, and established processes for the same as well in a very short period of time. This will provide a flexibility in programmatic implementation to switch to newer vaccine candidates based on new variants, and thereby will provide faster control over the pandemic.
This will be difficult in case of other vector-based vaccines due to anti-vector immunity, and also in case of inactivated viral vaccines. As the subjects for the phase III clinical trials also included adolescents in the age group of 12 to 18, ZyCoV-D is also the first approved vaccine for adolescents in this age group in India. The results of the phase I clinical trial for ZyCoV-D have been published in the EClinicalMedicine journal of The Lancet, and we have already submitted the phase III clinical trial data for ZyCoV-D for publication. Recently, in the month of September, we have entered into an agreement with Shilpa Medicare Limited for production and supply of drug substance of ZyCoV-D vaccine from its manufacturing facility.
Production volumes of the vaccine from this facility will be mutually agreed upon by both parties, and this will augment the capacities for the vaccine. In order to offer therapeutic solution for COVID-19, we have developed a novel biotherapeutic cocktail of monoclonal antibodies targeted at treating COVID-19 patients having mild symptoms. The phase I clinical trial of these molecules was initiated during the quarter. On the NCE front, we have initiated enrollment of patients for the EVIDENCES-X, a global pivotal phase IIb clinical trial of saroglitazar magnesium to evaluate the efficacy and safety of the molecule in subjects with non-alcoholic steatohepatitis and fibrosis indication. Recently, in the month of October, the first patient was randomized into the phase IIb prospective, multicenter randomized double-blind placebo-controlled clinical trial. 40 sites have been identified in the U.S. and 10 sites have been identified in Argentina for the study.
The positive results for the phase IIa global clinical trial evaluating saroglitazar magnesium in patients with NASH were published in October 2021 issue of a peer-reviewed journal, Journal of Hepatology, with a very high impact factor. The study of saroglitazar for post-transplant metabolic syndrome, which is PTMS, in the U.S. has reached the targeted number of 15 patients, out of which 10 patients have completed the study. The interim results of the study have demonstrated significant reduction in lipid levels and no effect on immunosuppressive drugs and the serum creatinine in these patients. This paves the way forward for saroglitazar for additional indications as we build the molecule. For our anti-malarial compound, ZY-19489, The Lancet has accepted our single ascending dose study, which was conducted in Australia. In India, the DCGI has approved the single ascending dose study and the multiple ascending dose study of the molecule.
The first cohort of the single ascending dose study has already been completed. With regards to our efforts on the biosimilars, we have submitted one application to DCGI to initiate phase III clinical trial for one more monoclonal antibody treatment during the quarter. On the global development front, we initiated development of two biosimilars during the quarter. Talking about our 505(b)(2) and specialty initiatives, recently in the month of October, our wholly owned subsidiary company, Cyprium Therapeutics, and its licensing partner, Sentynl Therapeutics, announced positive results from an efficacy and safety analysis of data integrated from two complete pivotal studies in patients with Menkes disease treated with copper histidinate CUTX-101. In both pre-specified primary and secondary efficacy analysis, the treatment with CUTX-101 demonstrated a significantly greater median overall survival compared to untreated historical control patients.
The rolling submission of NDA for CUTX-101 is expected to begin from the current quarter. Coming to the pipeline of the 505(b)(2) products, we received a tentative approval from the U.S. FDA for a new drug application for sitagliptin-based tablets. Tentative approval was granted upon completion of the first cycle's review by the U.S. FDA. We have also submitted an IND application for a pain management product during the quarter, and the NDA for this product is expected to be filed by the end of the current financial year. Thank you, and we'll now start the Q&A session. Over to the coordinator for the Q&A.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on your 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. Anyone who has a question may press star and one. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Harith Ahamed from Spark Capital. Please go ahead.
Good afternoon. Thanks for taking my questions. The first one is on the profit of over INR 100 crore that we've booked for the quarter related to sale of brands by one of our subsidiaries, Zydus Healthcare. How much is the sales from these divested brands? Will you be able to provide some more color on the rationale for this divestment?
The rationale for the divestment is these were OTC brands, and they were not prescription-oriented brands in our current portfolio. We had in terms of a priority of coverage of the molecule, this was not in the top five, so we looked at divesting it at an appropriate time and found a suitable partner who wanted to take this product ahead for further development.
These were contributing how much to our domestic formulations business?
INR 30 crore.
INR 35 crores.
INR 30 crore-INR 35 crore.
Okay, got it. On CUTX-101, we've announced results from the pivotal trials. Based on the positive data, when can we expect our rolling submission to commence?
The rolling sub-
So-
Right.
If you can provide some color on the opportunity size here in Menkes disease for this product?
The rolling submission will begin in this quarter, as we said. This has been designated as an orphan drug and has got a priority review. We believe that there is a possibility that by the end of calendar year CY 2022, we can see the approval or otherwise latest by first quarter of calendar year 2023. This is a unique product where you know we are talking about increasing the life expectancy for children who suffer from this disease. The opportunity is very good from a business case point of view, where we can see a strong EBITDA margin starting almost from the first year and breakeven also in the first year.
Thank you very much. Last one from my side. On Saroglitazar, the phase IIb trials which you recently commenced for NASH indication. Just trying to understand the timelines around this. Given that, you know, this appears to be a fairly large trial, will we be able to go into a submission to the FDA with the phase IIb data, or will it require a larger phase III trials before we get into a filing stage?
There are two trials related to saroglitazar which are in advanced stages. One is for PBC indication, which we are starting, and that we believe we can see filing by 2023 calendar year end of middle or end of 2023. For the NASH indication, it is a longer trial. It's an adaptive phase IIb/III trial, and that we are looking at 2026, 2027 kind of filing and launch.
Got it. That's all from my side. Thank you very much.
Thank you. We'll take our next question from the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah, thank you for this opportunity. Just on the vaccine side, wanted some clarity. The delay within the vaccination or supply of the COVID vaccine, how should we see this? Whether it is the price negotiation only which is getting delayed or it is a debate over inoculating children or not?
Related to the ZyCoV-D vaccine, as I said, we have commenced our scaled-up manufacturing from a new facility from the month of October. With regard to the approval, we already have an approval for by the DCGI as an emergency use for ages 12 and above. For the government immunization program, it has to go through the committee for immunization approval, so that is in progress. Also the pricing has been a discussion point which is come closer to an alignment. We hope that in the next few weeks we can see that clarity coming, which we will immediately update everyone as soon as it comes. We are hopeful and positive that we should see some clarity in the next 1- 2 weeks.
Okay. It is not the debate over whether to start the vaccination of the children, that is not the case, right, sir? The reason for that.
No, it's not. For an immunization program in the government, they need to go through the approval beyond the regulators also.
Okay.
They need to decide on which cohort of, you know, adolescent population will be given the vaccine, and they need to prioritize it. As you know, the quantities for adolescents also need to be worked out like it was done for adults. First they will look at the vulnerable population and then open it up for the larger population. All those deliberations are ongoing.
Okay. Two related question on this, again. You just mentioned that your tie-up with Shilpa Medicare is for the drug substances only. Is that right? And what is the thought process here? Do you have a kind of a greater capacity so far as fill-finish is there? That is why just we are kind of monetizing better.
We have enough fill finish capacity.
Okay. In terms of the export potential there, I think soon the export of vaccines to outside India is allowed, will be allowed. Is there any progress for your product that you have seen in terms of getting the product approved by other countries or arranging some kind of alliance with other agencies, international agencies like that? Some clarity on that would be helpful.
With regards to ZyCoV-D vaccine, we already have expression of interest from many international, I mean, from many countries. We have also had discussions there. Obviously, the first phase for us till we scale up to very large quantities is to supply to the Indian immunization program. Once that is sufficiently catered to, then we will also get export permission for the vaccine. I think in the near term it is more driven towards making sure we can supply the quantities for India and then later on also look at export. We are also looking at partnering with one CMO outside of India who also has drug substance manufacturing capability, and that will further boost our manufacturing and supply for international markets.
Okay. Sir, next question is on the other expenses side and something on the margin side. We have seen the other expenses. There is a sequential improvement that we have witnessed. You have also talked about the digital adoption, expenditure on the digital adoption and potential saving because of those initiatives. Also there was a point that in the previous year there was a saving because of the saving in terms of distribution and the promotional side. Considering all these three things, still we have seen a kind of improvement. Means the saving of last year would have come if we are seeing that there is a normalization in the trade.
You have done incremental spend on the digital side, and that would have also to some extent helped you in saving this. How should we see this, all this? You mentioned that in the opening remarks there is an 8-100 basis point in the kind of improvement in the margin. What margin and for which period that you are guiding, trying to give this information?
With regards to expenses, one, when you look at quarter-over-quarter, we need to factor in the difference in expenses with respect to the wellness business. As you know, the quarter four and quarter one are the large expenditure months, with the larger revenue also. Quarter two and quarter three have lower expenditure. One of the reduction is on account of reduction in wellness on the marketing side. The other is what you say is right, we have reduction in R&D expenses, which is also a little bit of timing issue. But we have been able to sufficiently manage our R&D expenses over many years, so we continue to believe that we will efficiently do that spend.
With regards to other things, while we had a higher increase in the digital and other side, we also had savings which we talked about. We are running at least 3-4 initiatives, and we have talked about saving, you know, improving margins by 100 basis points because of the savings that we are accruing on zero-based budgeting on the other manufacturing and other areas. That is all helping us. On a normalized basis going forward, we can see around INR 950 crore around other expenses kind of number.
Sure, sir. Just one question, if you allow. It is on your injectable initiatives. See, obviously, the Doxil and Enoxaparin have been the kind of recent key launches in the U.S. You have also indicated that the injectable portfolio is likely to do great, going ahead. On that front, what is the progress and what is the run rate now we have achieved and, where we are looking this initiative to contribute?
I think we're just building upon. We had a very, very small base on the injectable side. With the launch of, you know, the liposomal doxorubicin, enoxaparin, the doxorubicin and others, we have seen good traction of niche launches, and we're seeing a good buildup on this. As I said, if you take a 3-year view, 3-4 years, we are looking at building at least a $250 million+ dollar franchise on the injectables front, with filing of many complex injectables, and also partnering for many of the complex injectables. That's our current plan. Obviously the current scale-up is very large because the base was very small in terms of growth. You will see substantial contribution coming in from 2023, calendar year 2023.
Perfect. Wish you all the best, sir. Thank you. Thank you.
Thank you. We'll take our next question from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.
Hi, sir, actually just taking this previous question again. Even excluding R&D and wellness, our other expenses were still down INR 63 crore in this quarter. I'm talking versus the June quarter-on-quarter. Just can you throw some light on that all the initiatives that you're talking about will accrue from quarter three onwards. What led to such a sharp decline in other expenses in this quarter?
Versus the last quarter, it is just we have better lower marketing and manufacturing expenses. As I said, lower R&D expenses and lower quarter-on-quarter wellness expenses. Those are the three contributing factors. On a consistent level, next quarter onward we see around INR 950 crore other expenses.
Okay. Can you call out roughly how much is the COVID sales in the quarter? On your top line about INR 3,800 crore. What is it? Will it be like INR 250 crore, INR 300 crore, or INR 200 crore? Can you just give some range on the COVID sales?
COVID sales?
Yeah.
COVID sales, we have not seen any major growth because last year also was a very high base. Actually we have a degrowth this quarter.
No, you have a very strong emerging market as well. I don't know whether that's more driven by sales of COVID products or what has led to such a sharp growth in the emerging markets.
On the emerging markets, we have not sold COVID. In fact, I made a mention in my opening talk that domestic business, which has grown at 12%, if you take out this COVID factor, the growth actually is 17%.
Agree.
On the emerging markets front, we have only exports towards institutional sales that we have done for COVID products.
To institutions and to COVID, yeah.
That growth, removing that, I don't have for EEMD, emerging markets, but I will ask Vishal to give it to you.
Okay. Happy. Couple of questions from the U.S. market. One is on mesalamine. Your current volumes versus last year when the product was normal, what percentage of volumes are down? Are we down 20%-30% on this, in terms of what volumes we were doing at that time? Can you give some indication?
Yes, we are down on both mesalamine, on Lialda as well as Asacol. Asacol on Lialda is because of obviously more competition, but still we continue to hold significant share. On Asacol also because of the volume of the prescriptions coming down. Also last year there was shortage, so that has obviously got cleared also. On account of both of that, we have seen a degrowth in volume and value and which, if you look at our numbers, has been compensated mostly by the existing and new products.
Can you just help on Asacol, sir? What kind of volume decline are we talking about? Are we talking about 20%- 30% higher or lower than that?
It's maybe 10%. I mean, I don't have the exact number, but it is on the volume side. I think it will be around 10%, but because the volumes are not very large, so it'll be around 10%, I would say.
Sure. Lastly, on the outlook for the U.S. business, this quarter we have done about $202 million. In your previous comments, you mentioned that the second half, can we do a run rate of about $230 million each?
No. Currently, looking at the pricing pressures and obviously assuming there will be some competition on Asacol, which we are not very clear on yet. We are looking at least the next quarter, we believe we can have the same base as this quarter. Quarter four is a little difficult to predict, but our view will be to make all efforts to make sure that we maintain our base. We could see reduction in quarter four, depending on how intense the competition is on Asacol.
Okay. Thanks, Sir.
Thank you. We'll take the next question from the line of Kunal Dhamesha from Emkay. Please go ahead.
Thank you for the opportunity. First question, we are targeting a lot of growth on injectables and, you know, we'll be using in-house R&D and partnering as a tool. On both of this part, you know, once we start putting money in terms of R&D, our R&D is it going to increase drastically? Because we also have a lot of costs coming in from the Saroglitazar trial in U.S. Secondly, if you are going for a partnering route, does the margin in that route make sense? Will it be accretive to current EBITDA margin?
When you're talking partnering, are you talking about the injectables franchise or both?
Injectables, sir. The likes of enoxaparin or Manap.
In relation to the Saroglitazar and the R&D investment. You know, in this last couple of years also, we have had continuing studies on Saroglitazar, on vaccine and other fronts also. We believe currently with our revenue growth as expectations, we believe we can be around 8% of spend on R&D as a percentage of sales. But if on a year-on-year, maybe there will be one year 9% and lower, but around 8% is a figure that we can look at in terms of our R&D expenses, assuming all of the costs that we are looking at. Because the trials are done over a period of 3-4 years, it's not everything that is spent over one year.
We do manage all of the Saroglitazar trials internally in a majority of the manner, which is allowing us to recruit better and manage our costs also. That is to do with that. With respect to the injectables business, yes, if you look at it from doing it on your own versus in-licensing, the margins are shared. If you look at it in terms of return on the investment, it is significantly better than doing it on your own because the fixed investments are significantly lower. When we are looking at doing licensing for complex injectables, all of them require dedicated facilities, either on the API side or on the formulation side. When we are able to in-license, we are removing many of these fixed costs.
On that point of view, the profitability would be far better in terms of the investments that we make, and it will also de-risk us because we believe this is a better model in terms of de-risking from the regulatory side also. I think it's a mixed part, but on the overall side, the profitability with these products will be very good because they are all complex and they would drive better profitability than the current profitability. Even if it's shared.
Sure. Secondly, again coming back to vaccine, how your view on the potential of the vaccine would have changed over the last 3-4 months?
So, uh-
Given the vaccination levels where we are currently.
If you look at current position of the vaccine, we are currently the only vaccine that is approved for adolescents between the 12-18 years age group. We believe that, I mean, that's the population there is about almost 40 crore when you look at children. If you take any, even assuming two doses or three doses, you're talking about 80 crore-120 crore doses required. From our point of view, from the capacity that we have built for and the advantages that we offer for the vaccine, we believe that it will still be a very, I mean, still a very good opportunity for us, because there will be limited competition and there are significant benefits to this vaccine. That will help us build for this.
We believe that the government will actively be involved in acquiring the vaccine for the immunization program. We also see, at least currently, a very good private market that we can participate in. We would definitely get 25% of our volumes to be supplied to the private market, which will also be good in terms of building up the traction for the vaccine. I also suggested that internationally, we are looking at partnering with one more CMO for making the vaccine available for the international markets.
Mm-hmm. You don't see a lot of competition impact with the Bharat Biotech approval, the potential remaining the same for the adolescent market. Additionally, the follow-up would be, are we also conducting the trial on mix and match study?
We are doing the trial now for the ages of five and above. That will be the additional age group that will get included once we complete that trial. With respect to competition, I mean, you can look at the overall supply of some of the other vaccines, and it's not been anything very significant. I think from the overall opportunity side, which is I told you about 80-120 crore doses. There is plenty of opportunity for a player like us, which is talking about currently 1-2 crore doses a month, on a monthly basis on a steady state. For us, I think that will. It doesn't seem to be a concern, and I think we should be doing well in India and further capacities to be able to use for export.
Sure. Are you conducting any mix and match trials for your vaccine?
Yeah, the discussions are underway, and we are still under discussion for the mix and match trial.
Sure. Thank you.
Thank you. Our next question is from the line of Keshav Mishra, an individual investor. Please go ahead.
Thank you, sir. My question is on Saroglitazar. In domestic market in India, we already have the approvals. How has been the growth like, sir, over last two years, say?
The growth, I mean, with the additional indications, we believe the main scale-up of the Saroglitazar you will get to see in the next two years. The growth in the last three years has been obviously significantly better than our overall business, and it has become one of the top 20-25 products of the company.
Okay. Sir, related to the trials that we are having, especially for PBC in U.S., how is the competition? I mean, what is your view about the, you know, competition doing in terms of trials for similar indication and at what stage they will be? Can you just give a flavor on that?
With our current understanding on the PBC indication, we believe we can be amongst the first wave of launches, assuming there are a few more companies. We definitely believe we'll be in the first wave. Either we are first or we are on the first wave, but very strongly we can be there. With respect to NASH, it's an ongoing effort. You know, a lot of trials have failed. A lot of molecules have failed with studies done on NASH. Assuming that we are, you know, coming to market in 2027, we believe we can be in the first wave or close to the first wave of launches.
Okay. Thank you, sir. That's it from me.
Thank you. Our next question is from the line of Saion Mukherjee from Nomura. Please go ahead.
Yes, thanks for taking my question. Dr. Sharvil Patel, if you can really help us, you know, understand the contribution from Asacol and Lialda at this point in your U.S. revenues, because, you know, we are going to see competition. If you can guide us that, it will be really helpful.
As I said, you know, we don't give individual product-related volume value. I did mention that on Lialda and Asacol we have seen degrowth in this quarter in the U.S., and assuming that we will see some competition in next quarter, we still believe we can maintain our base of quarter two. Quarter four, we can see some erosion depending on how intense the competition is. I think, as I told you, the Lialda, we have now enough competition on that. Asacol is something that we still have exclusivity on. After exclusivity, we still believe we will see very good margin profile on this business. To give individual absolute value will not be possible.
Yeah. You know, I mean, IMS actually shows very high number for both the products. You know, more than INR 200 million, if I'm not wrong. You know, I mean, if you can give some sense like, you know, top five products or something like that, you know, how much contribution is there so that it's easier for us to model it.
Saion, you are asking me one way or the other, but IMS obviously, you know, is always a little inflated. IMS will not be the full reflection of sales of it. That is not the way to look at. As I said, our current guidance is that, assuming competition at least in this quarter, we still believe we can maintain our base. Going forward, we do believe that the base of Lialda is already there is erosion. On Asacol, once the erosion is seen, we believe that, going forward from calendar year 2023 onwards, we can more than compensate for the gap that is created in the coming year.
The second one is on your specialty. You mentioned about, you know, CUTX, which possibly will be launched in the 2023 calendar year. What is the kind of investment in terms of commercial front-end that you need to make? You also mentioned sort of it's kind of going to break even on year one. If I take a slightly longer term view, given the PBC trial on Saroglitazar, what's your overall plan in terms of commercial, you know, expansion for the specialty business in the U.S.?
On the CUTX-101 in the next coming calendar year 2022, we have started to recruit people in the field. This is an orphan indication, so we are talking about not a very large team, but a team considering between 10-15 front-end team that we are trying to recruit for to be prepared for launch, either by end of next calendar year or early part of 2023. As I said, the current business model that we have built is we can see break even in the first year, full year of commercialization. Then it will obviously significantly add to the profitability of the company as we move forward. We have obviously IP and patent for it.
It's a very attractive model from the investment that we have made so far. We can see this being a very lucrative investment with at least less than a three-year payback from what we have done in terms of once we launch it commercially. Also from Saroglitazar point of view, you know, we have looked at the market potential on PBC. We have fast-track and priority review designation on this. We, if we are achieving closer to first wave launch and with the current assumption, it is definitely a very, very large opportunity, anywhere between $350-$600+ million on a peak sales revenue on a conservative side. Obviously there are things that we need to look at in terms of upside and downside.
If you look at all the additional work we are doing related to work related to transplant, related to the other indication, I believe this molecule is fit to have at least 2-3 indications on the label, which will make it very sizable. NASH is obviously a significantly large opportunity, and we are looking at reduction in fibrosis score beyond just improvement in NASH NAS score. That is going to be a significant achievement if we're able to show that, which we believe the molecule has the potential to do.
If all of those things go well, if we get the right indications and all of that, this is potentially obviously a very large specialty business that we are creating on the back of Saroglitazar, followed by some of the other orphan drugs that we want to add. The commercialization phase for Saroglitazar is still maybe late 2023 or not for at least calendar year 2022.
Sir, how large would be that team for Saroglitazar, at least in the initial stage?
It can be anywhere between 60-90 size full team in terms of what we need to do for-
Okay.
PBC indication.
Okay. Sir, if I can ask one last question before I join back. On, you know, these injectable partnered products, I think you mentioned there were two products where you may have sole exclusivity. Can you give some indication about the timeline and the size or the market size for these molecules?
Yeah. I think the opportunity is very large. We can set up some other time to give you that detail because I don't carry it. I think what we will make an effort on is to make a detailed presentation on the injectable side in terms of where we are looking. At least what we have currently been able to do, we can talk about it, and something that is under discussion, we can't talk yet. As soon as we are able to file some of these products, we can obviously discuss it further. I will definitely give us overall scope on the injectable, complex injectable as to what type of products we are filing for.
Okay. Thank you.
Thank you. Our next question is from the line of Charulata Gaidhani from Dalal & Broacha. Please go ahead.
Yeah. My question pertains to U.S. FY 2023, what type of a growth would you anticipate in terms of internal estimates?
FY 2023 current, our current best guess estimate is about around a 5% kind of growth for the year. That is our best estimate right now. It's a moving figure. That's what we are building for right now.
Okay. In that, how many launches would you expect other than the orphan drug?
When I talk about it, I'm talking about the generics business, not the branded business. Our pipeline talks about we have a potential to launch 50 new products in FY 2023. If all regulatory things go well, if pre-approval inspections go well, if Moraiya clearances are done, which we are hoping will happen, then we can at least see we can achieve closer to that 50 number.
Yeah. Okay. Because, currently you have quite a few quality approvals. Many of them are tentative also.
Our current expectation is that if Moraiya clears, we are looking at 50+ new launches.
Okay. Do you have any expectation for the inspection?
As I had communicated, we have completed our corrective actions and we are now scheduled for an audit, at least from our completion point of view. Looking at the current scenario where audits have started in India, we believe that we will potentially have our audit, I believe, we hope in the next one to two quarters. That's our current best estimate.
Yeah. Okay. Why have the interest costs gone up in the quarter?
During this quarter, we have increased the proportion of rupee borrowing. On the apparent basis, you find that the costs are going up because the coupon rate on rupee loan would be certainly higher than the foreign currency loan. At the same time, we have entered into certain forward contracts. On net-net basis, we are the gainer.
Okay. What is your average cost of debt?
It's about 2%.
Okay. Fine. How much CapEx do you expect to incur in FY 2022 and 2023?
It'll be about INR 800-INR 900 crore in the current year. FY 2023 it can be lower.
Okay. Right. Thank you. All the best.
Thank you.
Thank you. Our next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah. Hi, good afternoon, and thanks for the opportunity. A question on the U.S. business. You know, very few companies have been able to grow Q-o-Q. While I hear you are talking about, you know, pressure on volumes on your large products, you also spoke about some new products being launched. Can you give some color? Is it the new launches primarily which led to the incremental growth, or there has been some volume increase in your base portfolio also?
Yeah, it's related to new products. Volume is a mixed bag. Because of significant pricing challenges, I mean, we have to wait and see how it builds up. Currently it's mostly driven by some of the new products that have been launched.
How you're seeing the flu season? I mean, is it already started to bake in your numbers or how you're seeing the flu season?
We really don't have any numbers really on the flu.
Okay. These are entirely new set of product launches that you have done.
Yeah, the earlier launches which are also scaled up, right? We had 21 launches. We have some 22 launches. Those scale-ups have also happened.
Okay, perfect. The outlook you're giving is kind of flattish for the second half of the year?
For the next quarter it's flattish. For quarter four we may see a dip, but it's again, we are only assuming, depending on the competition and asset calls. If the current best estimate is that competition is very steep, we can see some degrowth in quarter four. That's our current best estimate.
Okay. For 23 you're talking about, you know, in the last calls you have talked about some complex injectables and some complex generic products, but that too more so from second half of FY 2023, is what I understood.
I think if you look at our business, second half will be very critical on three factors. One is the complex launches that will come up. The second is the clearance that we expect for our Moraiya and which will allow us then to commercialize our transdermal portfolio also, and some other important products also. If both of those triggers go well, we would see a much better second half of FY 2023. As I said, if we are successful in all of these things, we can aspire to launch 50+ new products.
Okay, perfect. This is very helpful. Secondly, on gross margins, you have called out 110 basis points for COVID-related inventory provision, but there is more to it, right? I mean, have you seen raw material price, or what is the other 100-200 basis point kind of movement?
Going forward, the raw material prices are definitely gonna be a challenge for the industry, both related to China and the disruptions that have happened in China and obviously other costs that have gone up for commodities and other things. The good thing for the organization is that we generally see this much early on, so we did plan an initiative to cover up inventory for 3-4 months and take that cash kind of investment in it. That will allow us to tide over certain aspects of it. With the current understanding what we see, we believe that there will be increases in material costs as we move forward, which can only be offset by better efficiencies and better cost reduction initiatives, which the company is geared to do.
There is gonna be a challenge in terms of cost pressures, actually for all markets. The first pressures come to India and then there, it trickles down to the U.S. business later on.
The inventory provision for COVID-related products is largely done.
We have provided for majority of the from our best visibility point of view.
Perfect. Lastly, on other expenses, you've talked about three reasons, but in general, what we hear from the street is, you know, the freight costs, et cetera, the activities on the field and branded generic business all are back. What is, I mean, what is really that you have, you know, done for the cost savings? One you said wellness business. The second is, you know, some of the cost initiative you talked about. If we see-
You know, if you look at our cost initiatives that we are running, if I talk about a zero-based budgeting, we are talking about significant, triple the 100+ crores of kind of savings that we are trying to target there. If you look at our SLIM and PRISM, we are looking at upwards of 150 crores of savings. When we do our other programs like, efficiency improvement, which is again another 55-60 crores for two plans. A significant amount of cost programs, I mean, or efficiency programs more importantly, are being run in the organization. Also, you know, while things were back to normal, all the spends, our marketing spends have been lower, both for the Wellness market because of sequentially it being lower and also for the India business.
I think all of that has led to a better other costs in terms of lower other costs. A one-time lower R&D. Not one time, but a lower R&D expense this quarter.
Apart from R&D, which you said will come back, are the other cost savings all sustainable?
Our best estimate right now is looking at all of those things. We are looking at around INR 950+ crore number for the next quarter.
Okay, which is coming back quite a bit.
Not quite a bit, but by 7%-8% more than the current situation.
Okay, perfect. You're all set. Okay, thank you so much. All the best.
Thank you. Our next question is from the line of Saion Mukherjee from Nomura. Please go ahead.
Sorry. Thanks for the follow-up. Just on Saroglitazar in India, how has the response been, you know, to the fatty liver approval that you got? What's your expectation here in terms of the brand size that you see over the next few years?
We have two important products. One is Saroglitazar where we believe it is definitely going to be at least INR 200 crore+ product, and it will be among the top 10 products for the organization in the next 2-3 years. We have a follow-on molecule, which is Desidustat, which is for the treatment for CKD patients on dialysis and not on dialysis, where the trial is just concluding and we hope we can also commercialize this in the coming year, which also has a potential to be INR 150 crore-INR 200 crore molecule. Both of these IP-driven molecules will significantly be among the top 10 molecules for the organization.
When you expect Desidustat in India launch?
If everything goes well, we can look at a quarter one of next financial year.
Okay. Sir, in terms of IP protection for both Saroglitazar and Desidustat, how long is that? Is it a risk of competition?
No, we do have a significantly long runway for IP until 2036 for Saroglitazar, and also for Desidustat we have a good amount of it likely left.
Okay. Thank you.
Thank you. Our next question is from the line of Ranvir Singh from Sunidhi Securities. Please go ahead.
Yeah, thanks for taking my question. For FY 2022, how much products we have planned to launch? How much we have already launched in U.S. in first half, and what remains to be launched in second half?
In FY, you're talking about U.S. business?
U.S. business, yeah.
As I said, this year, we will look at launching close to 20 products in this financial year. Next year, assuming certain aspects, we can target. Our market target is about 50+ launches, provided we are able to resolve our current ones right now.
Yes, in this context, because earlier we guided some 30-35 product launches in FY 2022, and that's why I just wanted to understand that whether we have curtailed our launch aim for any reason or if you could give more detail on it.
There are two aspects to that. Your point is right. One is, we, because of the market conditions, a few molecules we have chose not to launch because the pricing is not very progressive. The second part is that, we have, as you know, PAIs need to be completed and for some of the molecules we require a pre-approval inspection, so that has led to some of the delay. Between these two things, are the delay and some are getting pushed out to quarter one because of, I mean, the approvals came late, so the launches also get staggered late because of the response letter and the goal date.
Yeah. Even for 2023 also, the number of launches seems very low despite we are assuming that Moraiya facility would be clear.
23, I'm talking about 50 launches. 50.
Yeah, second question was related to the ZyCoV-D vaccine. I just wanted to understand because the opportunity size has already shrunk, whether we will get a fair return on the investment given the situation or the return would be in line with the company's average return?
On ZyCoV-D, our view, I think first and foremost, what we wish to do was to make sure that we can work on the research efforts, that we can make ourself self-reliant to be able to invest via R&D and invent or bring a new platform technology to the country. I think I'm very happy to say that on that front, definitely we have succeeded and we are the world's first DNA plasmid vaccine. It's not only a great thing for us, but a great thing for India because this is being recognized globally everywhere in the world for this aspect. Now, it's second to the commercial potential, as I'll explain one more time. Our current capacities are around one crore doses monthly, which we are trying to produce.
Going forward, we look to enhance that capacity. If you look at the target segment of only children, we are talking about requirements of 100-120 crore doses, and we are talking about producing 1 crore doses a month. From our opportunity side, we have enough opportunity to cater to. Actually, the expectation would be higher than we could produce more, but obviously, we are just building on this new technology and trying to scale it up. From our commercial potential, we are still on track to, you know, be able to fulfill the overall demand in terms of our expectation, which is to produce one crore doses and sell one crore doses.
Of that one crore doses, 25% we will have opportunity.
Yes.
To launch in the private market.
Yes.
My, yeah. My question was in that context only, because in private market still we have a competition, then we will have some, you know, agreed price from the for government supplies and then another opportunity for an export. Given a different price scenario and that I wanted to understand that the kind of investment we have done for that one crore vaccine in terms of building capacity or R&D. Whether we will get a fair return on that investment given the current scenario?
Yes. Yes. We will get much better than other businesses.
Okay. Okay. That's it from my side. Thank you.
Mm-hmm.
Thank you. Any participant who has a question may press star and one. Our next question is from the line of Keshav Mishra in Individual Investors. Please go ahead.
Yeah. Sir, one question on the vaccine portfolio that Cadila already has. Since we have now developed ZyCoV-D, can you just give a flavor of how what strategy and what kind of growth we can see from the entire vaccine portfolio that we have developed, apart from ZyCoV-D? Thank you.
I think ZyCoV-D is obviously something that we have done this year. If you look at our current vaccine portfolio, we have very important vaccines. As I said, we have three vaccines, which are gonna be part of the India public market as well as the WHO supplies. One is the typhoid conjugate vaccine. The other is a MR vaccine and obviously our rabies vaccine, which is WHO pre-qualified. Those are important vaccines for us, and they have different launch plans in the next coming years, and they'll become sizable part of it, and that's where the investment is also being made.
We have niche vaccines like the varicella vaccine, which, where we are the one of the only companies to do so in India, and that is gonna be a very attractive but not a very large business, but a very profitable and very attractive business for us when it comes to varicella. There are all these private market vaccines like the flu, HPV. Flu we already have. We have a quadrivalent flu vaccine. We are working on the HPV vaccines and the whole hepatitis A, B, and E range of vaccines. All of these are gonna be significant for us. You know, our aspiration is to build at least a $250 million franchise out of the vaccines by 2025-2026, including being part of the WHO qualified programs.
We are well on track to do that in terms of building our portfolio. For them from the current point of view, we also are working on malaria, chikungunya, and other pentavalent and hexavalent vaccines, which are on other various stages of development. We also have a monoclonal therapy, which is again the world's first, which is our Twinrab, which also has the potential to become a very important product with the treatment for the vaccinations related to using rabies vaccine, as well as treatment option using Twinrab.
Okay. Sir, when you say you want to build a $250 million franchise in FY 2025, what is the current base looking like? I mean, what is the current size that you're already doing?
We are about $10 million-$12 million dollar base right now.
Okay. Yeah. Thank you, sir. That's it. Thank you.
Thank you. Our next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah, thanks for the opportunity again. I just need your comment on the opportunity for exports on the vaccine front. Currently you are waiting for government approval. No approval is there, but for the launch, the pricing, et cetera. What is the opportunity in the ROW markets?
I think from what we produce currently in India and the requirement that is there in India, I think largely the Indian manufacturing will be on the immediate basis only supplied for the India market. We are also looking to partner with international CMO contract manufacturing company which has large capacities on COVID vaccine, on DNA. If all of that goes through well, that capacity we can use for selling in the international market.
When you say international, this is ROW markets?
Yes.
Okay. ex-U.S., ex-Europe.
Ex-U.S., ex-Europe. Yes. We already have a lot of expression of interest, and we have agreement in place to do that. Once we're able to produce sufficiently, then we will be able to do some of these contracts.
How this works in terms of approvals, given that you already have approval in India now. Are these approvals can be replicated or you need a WHO-
Yes, we can.
Some other regulatory approval?
We will go through a three-phase approach. One is that with Indian approval, we'll be able to directly give the vaccines in many countries without registration or a quick supply which is under emergency use. Second, we will be filing dossiers in some of the markets for a registration of the vaccine. Third is go for a WHO qualification for the vaccine, and which will obviously be the third phase of what we need to do.
Okay. Okay, great. Thank you so much, and all the best.
Thank you.
As there are no further questions, I would now like to hand the floor back to Mr. Ganesh Nayak for closing comments. Over to you, sir.
Thank you very much. Wish all of you a very happy Diwali, a very happy Christmas, a very happy New Year, and look forward to interacting with you again on the third quarter results in the month of February. Have a good evening.
Thank you. On behalf of Zydus Lifesciences Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.