Alembic Pharmaceuticals Limited (APLLTD) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the discussion on the company's Q2 H1 FY '22 financial results of Alembic Pharmaceuticals Limited. Joining us on this call today are Mr. Pranav Amin, Managing Director; Mr. Shaunak Amin, Managing Director; Mr. RK Baheti, Director Finance and CFO; Mr. Mitanshu Shah, Head Finance; and Mr. Ajay Kumar Desai, Senior VP Finance. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. RK Baheti, Director Finance and CFO. Thank you, and over to you, Mr. Baheti.

Thank you. Good evening, everyone. Thank you all for joining the second quarter results conference call. I'm sure you would have received the results by now. However, let me briefly take you through the highlights for the quarter/half year ended 30th of September 2021 financial. All of you are aware that H1 of last year, particularly Q2 of last year was exceptionally good for our US generic business. Steep price erosion in US market since then has affected the business adversely. The adverse impact got compounded by the fact that with effect from 1st of September 2020, the government redo its [indiscernible] incentives for the pharma sector. And also the Indian rupee was trading higher than dollar throughout April to September 2021 period, vis-a-vis H1 of last year. However, good part is that we have been able to arrest the fall of the [indiscernible] Q-on-Q basis. We did almost 98% of sales. And PVT and PAT are 5% and 3% higher than preceding Q1. During the quarter, our revenue was down by 11% to INR 1,292 crores. This is in context of previous corresponding quarter, that is September 2020. Our revenue was down by 11% to INR 1,292 crore. EBITDA is INR 268 crores, which is 21% of sales. Profit before tax and profit after tax was INR 209 crores and INR 169 crores, respectively. EPS for the quarter is INR 8.61 per share versus INR 17.24 in the corresponding quarter in the previous year. Coming to actual numbers. Our total revenue are down by 6% to INR 2,618 crores. EBITDA down by 40% to INR 522 crores, which is 20% of sales. EBITDA for the current H1 is 20% of sales. Profit before tax and profit after tax are down by 47% to INR 408 crores and INR 334 crores, respectively. Earnings per share for H1 is INR 16.98 per share versus INR 33.25 in corresponding H1 of previous year. CapEx. CapEx for the quarter is INR 133 crore, H1 is INR 257 crores. Cumulative CapEx for ongoing projects under CWIP, including the pre-operatives is INR 1,981 crores tons. Financial assistance to Aleor JV for H1 is INR 55 crores. Borrowing. The gross borrowing at consolidated level is INR 850 crores versus INR 500 crores in June 2021. The company has INR 329 crores as cash on hand, June was INR 273 crores. So as net debt level we are at similar levels. Net debt equally stands at 0.10. I will now hand over the discussion to Pranav for his presentation on international business.

Thank you, Mr. Baheti. As you all know, the U.S. business continues to remain challenging on account of the price erosion. And I don't think we've batted more because the last 3 years have been quite phenomenal in terms of the pricing and the opportunities that we had in this market. As we move forward, we look forward to launching new products as well as picking up share in existing products. We remain positioned in the U.S. market in the future and the years to come. R&D expense was 13% of sales at INR 168 crores for the quarter. We've had 3 ANDAs during the quarter. We also received 5 approvals, including one tentative. We cumulatively have 150 ANDA approvals, including 18 tentative approvals. We launched 4 products during the quarter, and we plan to launch around 8 to 10 in the second half. Just minutes back, the FDA concluded a re-inspection at our injectable facility F3 located at Karkhadi. As you know, the F3 facility had received the EIR about a month back. However, the FDA came for a re-inspection on 28th of October till today, just up until half an hour back. And they've concluded the inspection with 10 observations. None of the observations are related to data integrity, and the management believes that they are all addressable. The inspection also covered 2 additional products apart from the one which they had come for earlier. Hopefully, we'll get the compliance in place and send their responses shortly as well. Coming to the financials, the U.S. generics was at INR 348 crores for the quarter, which was down about 40% compared to the last year, which was a phenomenal quarter for us. During the half year it was INR 716 crores. The ex-U.S. generics remained flat at INR 197 crores for the quarter, whereas it grew 6% on the half year to INR 394 crores for the first half. As you know, the ex-U.S. generics had a high base of last year where we had, again, a phenomenal growth. The API business de-grew by 9% to INR 239 crores, and it was down 2% to INR 519 crore for the first half. The API business also, while it continues to do well, it was a little clumpish last year because we had a lot of azithromycin API sales, which were used in COVID. So net of that, rest of the business has grown as well. Now I'll request Shaunak to take you through the India branded business.

Good afternoon, everybody. For the quarter, the India formulations business grew pretty much in line with our expectations with the robust contribution from all our key therapy areas, along with all the key product segments. If I could say, this was a key landmark to this quarter's numbers. Very briefly, the areas that were critical to Q2 numbers was based on consistent improvements in a couple of areas. Just key ones of these were, I think on-ground execution and operational efficiencies of the entire sales team have improved tremendously over the last 2 years. This complemented with a more evolved approach to how we engage with customer relationships, something that we were in the process of implementing over the last 2 years, I think, enabled us to kind of increase both the quantity of customers we could engaged with, along with a more robust quality of engagement with these customers and what people have done in the past. Coming to the numbers, the India business grew by 23% to INR 509 crores for the quarter and it grew by 37% to INR 989 crores for H1 on a Y-on-Y basis. To break this performance down, I think the acute segment recorded a primary growth numbers of 27%. As you guys are aware, last year was abnormal sales period for azithromycin oral solid, which had a robust growth in 2021. If I were to take ex of that number -- ex of oral solid, the acute business grew by 79%. On the specialty side, we had a 20% growth. Majority of it was driven in all the therapeutic areas. We had 16% growth in gastroenterology, 22% in gynecology, diabetic was 29%, and orthopedic was 34%. Along with that, our animal health care business continues, it's one of great performance now. It recorded 24% growth over Q2 last year. And as you guys are aware, Q2 last year for animal health care was a great quarter also. We are quite positive about this business going forward. As we see it today, there are multiple operational levers that we are working on to keep this momentum going. Also, along with that, there's a large scope to resource this business adequately, whereas in the past we have been extremely conservative and cautious on the resourcing of this business. Along with this, I think, continued optimism about the overall [ IPM ] growth, which we've been seeing for a few quarters now, hopefully, should add further momentum to these numbers. I will throw the floor open to questions now. Thank you.

[Operator Instructions] The first question is from the line of Damayanti Kerai from HSBC Securities and Capital Markets.

Sir, my question is on FDA inspection for the injectable plant. So what has triggered FDA inspection in such as short interval since you received EIR sometime back?

Good question. To be honest, I don't know. I think -- but they had mentioned that they will come physically to re-verify everything. And apart from the one product, Ketorolac, which we had -- which the inspection was earlier, they came for 2 additional products as well.

Okay. So it was product-specific as well as the normal GMP re-inspection by the FDA?

Yes. Well, see, because it's not a commercial facility, it is always product-specific to get the product approved. So apart from the first quarter, they came for 2 others, and they wanted to come and physically verify some of the others as well.

Okay. And you mentioned you received 10 observations, which are addressable as per you in, I'll say, reasonable timeframe?

Yes, I believe that's all addressable.

Okay. And my second question is, again, on the U.S. business. So due to this short-term challenges, do you think the opportunities from the CapEx, which we had invested in last couple of years, the upside is now pushed behind significantly from what we had anticipated earlier?

So we continue to remain bullish on the U.S. market. I still think it's a very interesting market. As you know, in the last few years, we've had a much higher return in the U.S. market. And then at a corporate level, much higher EBITDA because of the shortages in the market, we charge much higher prices, right? So that's what's corrected itself now, which we expected it to happen. Of course, it lasted longer than it, so we're happy about it. I expect that the disruptions will restart in the U.S. business in the next 6 months or so, that will give us more opportunities. As regards the CapEx, it depends which parts of the CapEx. If you see the Aleor CapEx that we are -- it's a JV that's already started contributing and it's already commercialized products. F3 will move back a little bit because of this approval until we get this compliance. F2, the oral solid is already approved, but there, as you know, it's not what pushed back, it's just that patent expiries are later and we wanted to lock in the [indiscernible]. So that is on track. F2 injectable, we have filed the first of our 2 products, so that should also trigger an inspection. So by and large, this all should be on track as far as we are concerned, except F3, which has got pushed back due to this FDA observation.

Okay. And my final question is, when do you expect bottom for the U.S. business for us because we have been seeing struggle for last few quarters. And we understand vaccine situation still remains challenging in the U.S. So according to you, when you'll be reaching bottom, and we should see recovery from there on?

The bottom is when someone stop reducing the prices. Having said that, compared to last year to what we've seen in Q1 and compared to last year, what we've seen in Q2 year-on-year. I think this is where the base or so far what we think is the new base is at right now. It's a fairly steady product mix. That's where we are.

Okay. So this 45 million to 50 million a quarter is [indiscernible] as per you?

At Q2, what we have in Q2, that's the -- Q1, Q2 similar numbers, that's what we expect, somewhere around that.

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Sir, just, again on this company inspection. Just would like to understand [indiscernible].

Tushar, we can't hear you. Can you just repeat or if you're on a speaker, just pick up the line. We can't hear you.

Just again on Karkhadi inspection, I would like to understand, out of these 10 observations, are there anything which were similar or more or less same as the one which were issued recently in the February inspection?

It's, Tushar, it just got over. So we -- I've not gone into the details. I know there's no data integrity. And I believe they're all addressable. I haven't gone through all the observations that's ended. We just got over the audit.

And just to clarify, so this got, again, triggered by a product-specific inspection. So this was for 3 products or for 2 products.

So they came to verify our compliance, is number one. And number 2, while they were here, they also came for 2 additional products, so total 3.

The next question is from the line of Vineet Gala from Monarch Networth Capital.

I have 2 questions on the F3 plant. So sir, as per your initial comments, we have been audited for 3 products altogether now. So if you can throw some light in terms of the commercialization timeline, competition and tell us broadly about the market size of these plants for us to guess the potential?

Vineet, we don't declare that. We don't disclose the name of the products or the market size because it'll be misleading. So I would like to refrain from that.

So it's fair enough. So sir, like what would be the commercialization time lines, like by when do you expect the remediation to that order?

Commercialization is, we just -- literally just got the -- completed the audit. So we will send our responses. And then it depends what the FDA feels. So it's tough to say. I can't really give a time line on that because there may be a back and forth with the FDA. They may recommend some other corrective actions, but it's tough to say.

Fair enough. Sir, last question on the cost rationalization initiatives that we discussed during our last call. So if I check, most of the expense line items, they are sort of in line on a Q-on-Q basis with respect to the employee cost or the R&D expenses. So what are the cost elements that you are looking at rationalizing purchase?

It's a good point. Yes. So we have done a lot of rationalization of the employee cost. You will not see it now. You will only see it Q3, Q4 onwards because of the time frame and then the notice [ pay ] that we have. So it's still reflected in our book. So moving forward, you will see that. Second thing that happened is in terms of cost, while we have done cost rationalization in terms of employees as well as consumables, efficiency improvements. They've kind of blunted out a little bit because we've seen much higher freight costs during the period as well as the supply chain disruptions that we've seen, the shipping costs that have gone up. So these have led to some higher costs. We also shipped a lot more by air. I mentioned that we've picked up a lot of accounts. Again, you will see the increase in business in Q3. And so had to airlift a lot of those products, which was a little higher in the last quarter. So that kind of blunted out a little bit of the cost reduction initiatives and the profit as a matter of fact.

So sir, like on the R&D -- sorry, my next question is on the R&D side and on the gross margin. So can Q2 be considered as a sustainable bit going forward?

I think so, yes.

[Operator Instructions] The next question is from the line of Rashmi Sancheti from InCred Capital.

So sir, to understand the reason for the sequential improvement in the gross margin, does the product mix or company has some inventory gain benefits? Or what exactly it was? As Q1 FY '22 also had higher COVID sales, and that's why the margins were impacted, and this is something which is going to be a new base, what is shown Q2 despite higher API prices, we are seeing a pretty good improvement in the gross margins?

So I do not know what you are referring to because margins are -- all margins are flat as far as Q1 is concerned. And now as far as Q2 of last year is concerned.

What I meant is basically the raw material cost is pretty low compared to Q1 FY '22? The previous quarter.

Yes. Rashmi, the reason is that, again, product mix actually, and you will see this fluctuation, but demand is very small. Demand would remain between 2% to 5% eventually. Essentially, in Q2, it is a little lower on account of [indiscernible] little higher, on account of products.

So also because the domestic business has done much better. So this is consolidation and domestic business has done much better that the margins are flat.

Okay. And my next question is that, excluding Azithral, what is the growth in the domestic business on a Y-o-Y basis?

Ajay, you want to respond to this?

Yes. So except azithromycin, it is 35%.

35% during the quarter, right?

Yes, yes.

Okay. And my last question is that, have the operating cost started coming in from the new facilities?

No. I think we're just doing the filings and the batches. We cannot commercialize it until we get the final approval from the U.S. FDA.

The next question is from the line of Anmol Ganjoo from JM Financial.

My question [indiscernible]. So if you look at the domestic business, I think really impressive, especially when you look at -- in the context of the ex Azithral number, 6% sequential growth. And also given the fact that given this is a business which has been all waiting to kind of rebound, how do you want us to think about drivers for this quarter which led to this big beat? And on a full year basis, how should we think about the domestic number -- these domestic numbers? Even if you look at the therapy wise performance, while the growth for Alembic is faster than the representative market, but obviously, that's not enough to explain such a big outperformance.

Yes. So let me answer it, Anmol, as best as I can and maybe Ajay can chip in with some data-driven also numbers. Yes. Okay. So like I said, I think some of the stuff we've done operationally, and we've been talking about it for some time. I think the impact that we're seeing is not unfolding in one product segment. I think we're seeing some of these operational efficiencies unfolding across the organization. So if I could put it, it is not limited to acute gastroenterology or gynecology or anti-diabetic. I think it's happening across the board. I think we're seeing pretty much every segment has seen a strong growth for us. Including the ones that are even very tiny for a [ soft ]. So for example, derma and ophthalmology that was quite small, but those also have seen a good growth. And animal health care, which is actually a totally unrelated business. But a lot of these operational realignments have happened in that part of the business also. So that's how we see the growth going forward. I mean, where are the opportunities for growth to increase? I think that certain key areas, I think gastroenterology there's definitely scope to increase those numbers. I think cardiovascular there is some scope. I think anti-diabetic there's definitely a lot of scope for us to grow numbers. So I think going forward, I think we see this kind of -- so I won't put it on an absolute basis per se. What I'm expecting because as you're aware, I think market numbers determine our growth numbers also to some -- to a fair degree. But I think what I can say is that if there's any delta between the market numbers and the internal numbers, taking in factor of all base effects and things like that, I think we expect a good outperformance versus RPM to happen going forward. I don't know if that answers it.

Yes, that answers the question largely and thanks for that. But anything more granular that you want to call out for in terms of either lead indicators or products that we should be watching to kind of monitor whether this new impressive number is really sustainable.

So I think the way I would look at it is that I think we can send you guys a list of products that is key within each of these therapeutic areas and if you were to see at each product level. I think pretty much in every product we've done well, so just to give you. I think it's not just say azithromycin that has -- sorry, not azithromycin, it's the wrong example. But for example, it's not just the lead product, which is done well, it's #1, #2, #3, #4 product. All the 4 products have done well and we've been able to kind of find space for all of them to grow and figure out how to do it in a way that suits us. So -- but we can send you at a granular level, at a product wise, from IMS what you guys can track as a lead indicator for this measure.

That helps, Shaunak. My next question to Pranav. This quarter, did we see the full impact of incremental competition in theophylline?

I think we -- yes, if you ask me, this is a steady state, I think the market shares are steady and we've seen the full impact of theophylline in this quarter.

To that extent, assuming that current run rate of approvals, even assuming that we don't get injectable approvals. Would it be fair to assume that it's always hard to pinpoint the exact number, but somewhere around close to the bottom as far as the U.S. quarterly run rate is concerned? Or are you seeing even further adverse headwinds with respect to the U.S. prices?

So -- it's a good question. I think, Anmol, the way I think about the business as compared to last year, where we had unusually high prices. Compared to that, I think this is a new base. And you might -- we may see erosion, we're not going to see the massive chunk that we saw on the [ starting ] that happened in last year to this year. There may be a little bit, but it will be marginal. And I think this is the new base, at least I think of it as a new base. And how do we now grow onto this with new product launches and capturing new opportunities.

That's helpful. I know it's been very early since you guys have received the U.S. FDA communication. But anything in particular you want to call out or you think will be a time that we get incremental update on this because of you feeling very -- feeling really excited that the facility has finally got an EIR and…

Yes. No, us as well, and we were actually hoping that they'll come. But I think it's a learning curve. It's a new area for us, and I'm pretty sure that we will get through this. There's nothing particular I can talk about right now because I've to really study it before giving any input. But I believe they're all addressable. And it's a learning curve, and I believe as we have other facilities reaching compliance. I think this will also get there. I think it's going to take some time and there's a little bit of learning curve on it.

The next question is from the line of Mehul Sheth from Axis Capital.

Sir, first question on your cost rationalization that you have talked about. Even you say employee -- you have rationalized the employees. So it is for India part or the -- across the business or the U.S.-specific, whether you have actually rationalized these employees?

So this is part of the international business, which is U.S. and API, the international business, not the India business.

And also even this gross margin is largely led by domestic business, better domestic business. So same scenario was there in Q1 as well. So what was the thing that is brought in our favor in this Q2 to see that improvement in the gross margin?

I think it's not directly correlatable, while domestic did do well. But it's a combination of factors. I think the product, the product mixes in both the divisions and where is other opportunities. I think it's just too minor in the whole scheme of things.

Okay. And one question on India business. So you have reported a very strong H1 growth. But when I see the AIOCD data for the October month, for a single month, your growth is almost like a flattish 0% growth. So how do you see the -- such trend going forward from here?

I can't comment on AIOCD numbers. We don't subscribe to that data, so I can't -- unfortunately I can't comment on that.

Just to -- can you give a monthly trend -- or the trend that you are seeing from, say, October, November month, growth is picking up or the normalized growth? What kind of growth you're seeing on a month -- we can say, in the October, November month?

So I think, I mean, if I could put it, I think growth continues the way it was. I think we don't see any change in that. I think the market growth numbers have come down a touch, but I think maybe that's more seasonal in nature, but we expect this to continue, so.

Still we can expect like more than 20% kind of growth in FY '22 in domestic?

Look I can't predict. I think there's still quite a few months left between now and end of the year. I think for a 20% kind of growth, I think the market would have to continue with that, with the kind of growth numbers that it's been showing so far. Maybe there might be some easing up for that, but yes, so.

Yes. And one last question, if I may, on the U.S. front. So we're seeing this quarterly run rate of around $48 million, $49 million. So -- and annual from this will imply more of like a $200 million sales over that, there will be some contribution from the new launches and all. So largely we can see that it can be just $200-plus million kind of sales that we can assume for the FY '22?

We refrain from giving guidance [indiscernible] already said that we see the last quarter of the income, almost the bottom, we saw the bottom. But there may be some more erosion in prices, but we expect to set it up against new launches and pickup in market share. And I think that's all we can say at this point.

The next question is from the line of Cyndrella Thomas from Centrum Broking Limited.

Again, on the U.S. market, if I look at the current base of 47, as you are saying, this could be more new base. But if you look at the EIR or the upcoming activity from U.S. FDA, how should we look at it from a 12 to 18 month perspective? What kind of new product basket do we expect over 12 to 18 months, specifically from the injectable side? And what kind of cushion it can provide to this base? If you could help us understand, a bit more color on it.

So I would not like to segregate injectables per se, and I think we haven't done that. But our filing continues to remain at about 20, 25 odd ANDAs per year, closer to 25. And that includes injectables, ophthalmics, everything, it's a mix bag. In terms of launches, as I've said, this year we launched about 15 odd products, and we'll continue launching about 15, 20 products. And some of those in the future, as and when EIR will come, will be from the injectable facility as well.

So do you see any incremental cushion coming over next 12 to 18 months timeframe?

Yes. I mean, absolutely. As we see more launches happening, that will keep adding to the base business as we move along. It maybe the injectables or OSD, both.

Okay. And this quarter, we saw only 3 ANDA filings. So this should pick up as we go ahead?

Yes. As I mentioned, for the year, we -- our intention is to do about 20 to 25 ANDA filings.

Okay. And just on the API business, if you could help us understand some more color and outlook, how things are? Because is the channel inventory normalizing, how are we seeing things in terms of demand as well as the overall market for our API segment?

Yes. So the API business continues to do pretty well. I think it's an interesting opportunity as well as an interesting part of the business. It continues to do well. I think we're growing across the board on all the APIs. It has shown a de-growth because last year was a very high base of azithromycin, which is used for COVID. So you take that part out, apart from that, the rest of the portfolio is all growing -- it has done well.

The next question is from the line of Ranvir Singh from Sunidhi Securities.

My question is on the India business. The growth in ophthalmology and dermatology was due to [indiscernible] for low base last year or we have launched new products during this quarter?

Both these 2 segments are very low, small contributions for us. I think there've been no new launches. There's been one new launch in dermatology, but it's nothing -- not a big launch. But yes, I mean, that's it. There have been no significant launches in either of these 2 product segments.

Okay. So how many new products we have launched in India in this quarter in all?

In this quarter, Ajay, you have exact number?

Yes, yes. It's 10 products, 10 SKUs.

Ten SKUs, not products.

Ten SKUs.

And what was the number in Q1?

So Q1 5 SKUs, so all put together 15 SKUs. Okay.

Okay. And I think you alluded within U.S. business, in second half, 10-odd products we are going to launch. So this run rate is going to increase in second half? I mean, any of these products are meaningful in nature?

No, I think roughly, I think, as I mentioned, we launched 15-odd products during the year, and that will remain as it is. It may be a little lumped in one quarter or the other. But roughly we should look at about 15 odd launches.

Okay. And I think the last one, what is here that raw material prices have gone up for some basic materials and that is percolating into your APIs also. So do you see this volatility in raw material is going to impact the DPM in subsequent quarters?

So yes, you're right. I mean as far as the industry is concerned, there is an increase in raw material prices all across the board. As far as we are concerned, we haven't seen the impact of that. We do carry a little higher inventories to protect for this kind of a thing. We haven't seen that as yet, but we are moving forward we will see it because not just see raw material prices, even with the higher fuel prices, we've seen solvent prices go up. But we are okay as of now.

And this cost to rationalization, in which part of cost structure? Is it on logistics side or supply chain side or just in the employee rationalization you're doing?

So yes, so it's across the board, to be honest, we are looking at cost reduction across the board. So we've seen it firstly in terms of the employees. Secondly, in terms of the operating cost. Thirdly, in terms of CapEx, consumables. And fourthly is in terms of R&D as well.

Okay. So despite our ANDA run rate remains same, the R&D would be lower in terms of percentage of sales?

Yes. I think what will happen is the filing rate because there's a time lag, right? So I think where you'll feel the impact of this is after a year, 1.5 years where we may see the lower filing rate. But till then, immediately, the filings which are already in place will continue.

The next question is from the line of Ritika from Value Quest.

If I heard you correctly, you mentioned to one of the earlier participant that you expect some disruption to happen in the U.S. market in the next 6 months and to gain from it. Could you highlight more on this opportunity?

It was said by one of the participants. We didn't say that.

No, I said that I expect this kind of market situation to continue for another 6 months of erosion and everything else. Will disruption happen? I don't know. I think if everyone knew about it, then it wouldn't be a discussion. But I think right now, what I'm saying is for the next 6 months to 8 months, 12 months, I don't know, the supply situation, where there's excessive supply in the market, I think that will still continue, that's what I'm meant to say.

Right. Okay, sir. Also, we are seeing currently recourse and disruption on new kind of impurity in other [ traffic ] of products. Could you explain if Alembic has exposure into that? And yes, the disruption seen in that part of the market currently?

So yes, I think we saw with some of the companies, there were some disruptions. I think we have not heard anything clearly from FDA as yet. But let's see what happens. As you know, that's what I was saying, that the market, the U.S. market is a big market with large volumes, and sometimes you may see these disruptions. And if it is, we'd like to capture those opportunities. But yes, we're seeing it, but we haven't heard anything concrete from the FDA as yet.

The next question is from the line of [ Gagan Thareja ] from ASK Investment Managers.

Sir, just 2 questions. One, given TG Therapeutics' guidance around UKONIQ scaling up to 50 million next year and also the PDUFA date for the CLL indication. Would it be fair to infer that your income from the rise in JV could scale up significantly over the next 2 years?

Yes, I think it's really, I agree to that because as I mentioned, Rhizen gets high single-digit royalty on worldwide net sales as well as some milestones on each indication. So let's see how TG scales that up, I think, with the new indication once we get that. So that should be exciting. I think it's been a little slow start, I think, till they get the new indication. So that should be interesting moving forward at the Rhizen level.

I mean, would it have a material sort of an impact on profit growth starting next year in your opinion?

And as I mentioned, Rhizen has a high single digit royalty. So it really is a function of how quickly TG ramps up UKONIQ and what level they get to. I mean they're competing with the additions, with the new indication, CLL, is a massive space. So it really is a function of how well we do.

Okay. And you also have a manufacturing contract for UKONIQ?

Yes, we do have a manufacturing contract, Rhizen has a manufacturing contract and Alembic is doing it for Rhizen. So we do have the manufacturing for that product as well. And as the volumes pick up, there could be a material impact there as well.

Right. And second question on the Aleor JV. I mean, it's not scaled up to a level where, I mean, there has been some delay in scaling up that because of the contradiction in the derma space. How are you thinking on Aleor, are there any cost levers? Or do you see an inflection point in the Aleor business as well?

Yes. So you're right. I think as with all other businesses, the derm business has also seen a lot of competition, and that's why it's become a little competitive. Having said that, Aleor is a very low-cost operation. Having said that, we have also reduced, done some cost rationalization at Aleor well. It's just a matter of getting more products and getting the facility running fuller, which should happen in the due course, which is going through a little patiently, just getting filings in place. And that should help us in the future.

And lastly, sir, how much of the preoperative expenses are still on the balance sheet? And by when would we be seeing the entire and the full-blown OpEx for the company are coming through?

So that will be dependent on how -- when do I make -- when do I start using the facility commercially and that I can do only after I did FDA inspection cleared and then the product approvals. So difficult to give a timeline probably.

Sir, just a clarification on that, hypothetically, if the facility starts on a given date, would all the costs pertaining to the facility be running through the P&L? Or would it be sort of limited to the product lines which are operational within the given time?

I think we intend to charge the entire expense once the plant start producing commercially.

The next question is from the line of [ Arit Ahmed ] from [ Spark Capital Advisors ].

My first question is on the CapEx for the first half. So we've disclosed around INR 270 crores in 1H FY '22. So just trying to understand how much of this is capitalized costs, both the operational cost and interest, which get capitalized? How much of this INR 270 crores is that component?

So INR 270 million includes like -- of which the INR 130 odd crores is preoperative actually. This is the other CapEx. And index we have a very small burden actually, only INR 500 crores of borrowing, which is attributable to group tax.

So given, at some point, this additional 130 odd crores on a half yearly basis will be hitting on P&L. And given we are having a higher level of R&D spend. So when the additional costs hit the P&L and at that point, we take on some kind of margin pressure, we face some sort of margin pressures. Would we look at our R&D spends as a lever, which we can use to kind of offset the impact of these additional costs whenever it happens? In terms of lowering the R&D spend from the current run rate of around INR 600 crores to INR 700 crores spends annually.

So you are making observational statements [indiscernible]. Yes.

Okay. So yes, last one, our better days has increased versus March level, but it's still on the lower side. So I was wondering if the normal course of business, the factor receivables or anything specific that's leading to the lower receivables that we have?

So it's more efficiency of business than nothing [indiscernible], but I think our working capital works together, datas and inventory together is in line with the industry. We are slightly smarter in receivable management and we carry a slightly higher inventory, more in the conscious comp.

All through the mix matters, I mean, domestic, we would have lower data days actually. And we -- if you see the same mix we'll have higher domestic business, that has ended, actually.

The next question is from the line of Charulata Gaidhani from Dalal & Broacha.

Yes. My question pertains to the domestic business. Could you give a breakup in volume by brand new products?

Ajay, you can go ahead with this.

Sorry, what you said, can you be…

Breakup between volume growth, price growth and new products.

So breakup basically between and business for the quarter?

Yes.

Yes, I will give it to you separately, yes.

It was broadly in line with industry. So volume growth, a small price increase in [ animal ] products, all together. Breakups [indiscernible].

Right. Okay. And secondly, in terms of the specialty business, do you think this is the new base?

You're talking about branded India business?

You're talking chronic.

Yes, India.

Could you repeat the question?

So India business is growing quarter after quarter after quarter, it will continue to grow. And as Shaunak explained, it will be -- I mean, we expect it to be better than market.

Okay. Right. And is it that the major growth is coming from only azithromycin? And maybe be Wikoryl?

We don't get into product wise, I mean, the IMS strategies are all available.

Okay. And acute also this should continue?

Yes. Acute is more given this market, yes. We should be doing -- we should be out performing in the market. Sorry, Shaunak, you were saying something?

No, I said, we will outperform the acute also.

Okay. And in terms of U.S., of the 15 launches that we are planning, are there any exclusive or first-to-file?

We don't disclose that.

Okay. Fine.

I think, Ajay, we're running out of time. If you have any question, we can take one last one. Then we can respond to others offline.

The next question is from the line of Bharat Celly from Equirus.

Baheti, sir, actually, in the previous quarter, you had mentioned that gross margins will be in the range of 70%, 71% and this quarter we see is around 74%. Obviously, there is a component which is largely because of the domestic business, which would have helped. But going forward in second half, usually, our domestic business is on our softer end. So how do you see gross margins panning out to the consulting even there is a raw material price [indiscernible] prices, which are going to also increase?

So Pranav already responded to this to a couple of other participants questions. See, these are 2 small micro details because it depends on at what time you bought the purchase. I mean you did the purchases of materials, inventories that are carrying at what cost. So 2% or 3% on quarter-on-quarter basis is a difficult tracking to do and difficult explanation to do. Broadly, I said the range is now set.

Okay. And Baheti, sir, actually one more question on the rationalization part. So obviously you are doing rationalization from U.S. SLS API business. So exactly which are departments where we are doing this rationalization? And is it something to do with R&D division as well?

Actually, it is not department wise or function wise. It is on a need base. Whenever we said that with the growth, we had no time to really reflect on costs and other things, and we were just focusing on capturing business opportunities. Some flat would have built in the system. And we are now trying to cut that flat. So it is across.

Right. And the last one for my side. And sir, how -- what exactly is the -- what exactly, how big is the room for us to cut down this cost? Do you see that it can be -- it can further be brought down other expenses have nothing to do, obviously the employee?

Like Pranav said, we'll start seeing the impact from Q3 and Q4.

That was definitely for the employee expenses. But for the other expenses, to what extent we can see the savings?

It's not just -- okay. One it's a consolidated balance sheet. So it's also a domestic business. Now you would continue to invest in domestic business, both in our marketing, promo, field and all of that. So [indiscernible] though we shouldn't celebrate as we go on. Whereas in the ideal level, some reduction in costs in manufacturing operations and R&D will be visible. So altogether as an ending, the rationalization will be done where it is needed.

Understood. So largely, in a way we are trying to say that the large part of the savings will be reflected in the employee expenses rather than in other expenses, am I correct?

Yes.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. RK Baheti, Director, Finance and CFO, for closing comments.

Yes. Thank you very much, and wish you all a very happy New Year in our Gujarati tradition. We had new [indiscernible] starting and hopefully the New Year would bring lot more stability and prosperity to our business. And thank you for keeping faith in us and supporting us all along. Look forward to see you again next quarter. Thank you.

Thank you. Ladies and gentlemen, on behalf of Alembic Pharmaceuticals Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.