Dishman Carbogen Amcis Limited (DCAL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Dishman Carbogen Amcis Limited Q1 FY '21 Earnings Conference Call. We have with us today from the management, Mr. Arpit Vyas, Global Managing Director; Mr. Harshil Dalal, Global CFO; Mr. Mark Griffiths, Global CEO; and Mr. Sanjay Majmudar, Open Director. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Arpit Vyas, Global Managing Director of Dishman Carbogen Amcis Limited. Thank you, and over to you, sir.

Thank you very much, moderator. Dear all, current and potential shareholders and analysts, thank you for being on the call today. This has been a challenging year for the company, and we have accepted the challenges with nothing but open arms and excitement. The first challenge, as mentioned previously, was the negative EDQM and Swissmedic audit. I'm happy to inform you that the company, as of last week, has submitted a 50-page corrective and preventive action plan, which has been acknowledged by the EDQM. Apart from this, the company was asked to do a risk assessment of all the APIs and marketable molecules made and sold over the previous years to give assurance to our customers that no products were negatively affected. We are glad to inform you that we have completed the detailed risk assessment of more than 90% of the products and further glad to inform you that there have been no negative outcome of any of the products. Further, the customers have been extremely pleased with the support that the company has provided them to not allow their business to be affected. This exercise was crucial for us to not only maintain the trust and the faith but even increase it further with our customers. The second challenge was to analyze the reason for the unsuccessful audit. The conclusion was the inefficient and lack of capability of people, including some of the management. For that reason, the company has gone under a complete restructure of its people. From the weakness of 1,600 people, we have been going down to the strength of 600 to 700 people. Currently, we are down to about 850 people. Paolo Armanino who headed our highly potent unit, Unit 9, who is an expat Italian, who has been with us for more than 12 years and believes in the company more than anyone we have seen, we are glad to inform you that the company has appointed him as the CEO of India Operations, and he has accepted this challenge. Paolo, along with Martin Schneider, who is our global -- Global Quality Officer have worked together day and night along with the teams, which also include competent consultants such as REFINE U.K. and Lachman U.S.A. to help create a more -- to help and create, and more importantly, implement a successful corrective action -- a corrective and preventive action plan. These are some of the major internal activities that the company has been working on and implementing, which has taken much of time of the first and second quarter, as you can imagine. COVID further added to the challenge in terms of time taken, but we are more than confident and confident as ever to be stronger than ever. These challenges have been seen as an opportunity for us to be united at a global level to truly become a singular organization. Our mission of serving the patient through our customers, but not just through our customers is now going to be our vision and goal to be accepted and followed globally. We thank you all for believing in us and supporting us in the thick and thin. And as mentioned, as always, we will not let your trust and faith and support go in vain. With that, I would like to hand over the call to our beloved global CEO, Mark Griffiths, to elaborate further, adding his inputs. Thank you.

Thanks, Arpit. Good afternoon, everybody, and thanks for taking your time to join the call. We'll get into the presentation information. What you'll see today is a slightly more focused, more targeted series of discussions based predominantly on the number of questions and the type of questions that we've received over the last year or 2. We've taken the opportunity to consolidate that data, present that to you factually in written format. And those we hope will precipitate good effective discussions. So what we'd like to do is to -- I'll hand over very briefly to Mr. Harshil Dalal, who's our CFO. And Harshil will give you a very, very quick update, and then we'd like to get into the presentations. So Harshil, would you like to take the floor briefly?

Sure. Thank you very much, Mark, and thank you, Arpit for the introductory remarks. Hello, everybody. Hope everybody is having a good evening. I'm sure all of you would have had a chance to go over the results. As you can see in the presentation that we have given on the stock exchange and uploaded on our website, this quarter, that is the quarter ended June 30, 2020, is sort of uncomparable to the previous quarter and the last year same quarter, largely because of the adverse impact of 2 events: one, the observations of the EDQM audit that we received in the last quarter and the COVID-19 impact. However, on a turnover basis, there was a good amount of contribution by all the subsidiaries, especially Carbogen Amcis AG and our Dutch entity because of which we achieved a revenue of about INR 474 crores as compared to INR 522 crores in the comparable quarter last year. One of the things that we include as part of the total revenue is the operating income. So in the last year first quarter, we had an operating income of about INR 3.9 crores, which was a positive realized foreign exchange gain. As compared to that, this year, we had a loss of INR 8.2 crores. So there was an impact because of the realized loss that we had. And what we classify as part of the operating income are the gains or losses on account of the hedges that we undertake on a rolling basis to cover our exports as exports from India as well as the cross-currency fluctuations that we have across the globe. Since there was a significant depreciation of the rupee in the first quarter and part of the second quarter as well, we had to book these losses in the first quarter. But we believe that the rupee should appreciate going forward. And since we have our hedges on a rolling basis, we should see some amount of profits coming in, in the remainder part of the year. As far as our COGS are concerned, we saw an increase in the COGS from about 21% to about 31%. And that was largely on account of the India operations. The India operations since the production was not up to the mark because of the EDQM observations, the risk analysis that we were performing and also because of the COVID, we had to expense out most of the expenses, the fixed expenses that were being incurred out of the India operations. And hence, these expenses could not be capitalized as part of the inventory. As far as our employee expenses are concerned, as compared to last year same quarter, there is an increase. This increase of about INR 13 crores -- of about INR 20 crores, sorry, was largely on account of 2 factors. One, because of increase in the employee strength at Carbogen Amcis, number one. And number two, because of the ForEx fluctuation, where the average exchange rate they fluctuated by almost 11% to 12% in the first quarter as compared to the comparable quarter last year. The other expenses, they were more or less similar to what -- well, actually they declined a bit as compared to comparable quarter last year. The other expenses in the first quarter also included a foreign exchange loss. So that was to the tune of about INR 6.7 crores as compared to a loss of about INR 3.4 crores in the comparable quarter last year. Whatever are the mark-to-market losses on the borrowings that we have related to working capital, that gets classified as part of the other expenses. And there was the foreign exchange loss, which is part of the other expenses. The EBITDA for the quarter was about 9%, so at INR 43 crores, which includes, obviously, INR 15 crores of the ForEx loss as compared to INR 119 crores, which was the EBITDA, which we had in the comparable quarter of last year. The finance cost was more or less in line with what we had last year. So it was at about INR 11.5 crores as compared to INR 13.8 crores in the comparable quarter. And hence because of -- I mean, largely because of the India operations not being up to the mark, overall, on a consolidated basis, we reported a loss of about INR 21 crores. Having said that, on a cash basis, we had a cash profit for the quarter, which was about INR 43 crores as compared to INR 96 crores in the comparable quarter last year. And as we move forward, we expect the cash profit to increase especially because of the improvement in the operations in the third and the fourth quarter. As far as our subsidiaries are concerned -- the performance of our subsidiaries is concerned, the Swiss entity, the revenue grew by almost 18% as compared to the comparable quarter. So we reported a revenue of about INR 309 crores as compared to INR 263 crores. CRAMS UK was at about INR 25 crores, but business is obviously nonlinear because it just manufactures the intermediates and the starting materials. Carbogen Amcis BV, which is the entity which manufactures the cholesterol and the vitamin D analogs, the revenue was flattish as compared to the comparable quarter last year. However, compared to Q4, the revenue increased by about INR 8 crores. And the Marketable Molecules are those which includes our disinfectant business, the quaternary compounds, specialty chemicals, generic APIs that was at about INR 53 crores as compared to INR 51 crores in the comparable quarter. On the margins front, CRAMS India reported a loss for the quarter, again, because of the reasons that we had cited. CRAMS Switzerland, France and China, all together reported an EBITDA of about 16% as compared to 18% in the last year same quarter. This decrease in the margin was largely on account of more share of the revenue being contributed by the Phase I, preclinical Phase II molecule, where typically the margins are lower as compared to Phase III and commercial. So we expect that the margins would improve in the remainder part of the year as we have more revenue contribution from the Phase III and commercial. CRAMS UK, the margins were at about 15%. Carbogen Amcis BV showed, again, a healthy margin of about 32%. So as you remember, in the last year Q4, the margins had come down to about 27%, which was largely on account of more share of revenue being contributed by the cholesterol sales as compared to analogs. Again, in this quarter, we saw more contribution of the analog sales, and hence the margins are higher. The other margins on -- the margins were at about 13% as compared to about 10% in the last year same quarter. The net debt for -- the net debt as on 30th June was at about INR 99 million, pretty much similar to what we had at 31st of March 2020, which was at about INR 100 million. We expect that the net debt -- because of the CapEx program that we are going to undertake, in fact, in Switzerland and France, that the net debt more or less over a period of next 3 years with the amount of cash generation that we expect should not increase substantially. We expect the net debt-to-EBITDA to remain at anywhere between 1.25 to 1.5x. So that's more or less the financial highlights for the quarter. With that, I would like to hand over the call to Mr. Sanjay Majmudar, our Independent Director.

Good afternoon, good evening to everyone. Of course, Harshil has briefed the key numbers. But from a broader perspective, obviously, the stand-alone negative performance because Bavla significantly or practically not in operation largely due to EDQM and then the initial phase of the quarter also partially, very partially, due to COVID, and therefore, the entire burden was shared or tried to be pulled around by the Naroda facility. However, as Arpit explained, and as we have been indicating also -- we had indicated earlier also, we believe that with most of the other Europe customers nearing the completion of the risk assessment, we believe that from third quarter, sales from Bavla should recommence. And I think by fourth quarter, they should become reasonably normal. I'm not talking about the specific product for which the EDQM, that procedure will take a little longer. But -- so overall, I think from an India standpoint, the second half should be much, much better than the first half. And therefore, whatever aberration you've seen in the form of losses, contribution at the operating level by India stand-alone should be significantly mitigated in the second half. And from a global perspective also, coincidently, Q1 Carbogen Amcis saw a lot of sales coming from the developmental products where historically, and as we have said, as compared to commercial, the developmental product share of -- although the sales have shown a positive trend of 17%, 18% growth, the problem is that the margins at their developmental level are a little low. So therefore, even -- while all our subsidiaries have collectively shown a profit, the profit was relatively lower because of this typical business mix that we saw coming from Carbogen Amcis Switzerland operations. And therefore, on a -- even on a consolidated basis, as an exceptional thing, we will see the loss. But if you look at the broader picture, I think I will now request -- so as I explained, the second half should look much, much better. The Dishman will be back absolutely on growth track. And I would request Mark, if Mark can just highlight a few important key developments from a medium- to long-term perspective, both in terms of pipeline and the expansion that is being planned in France and Switzerland and just to give a broader view of next 2 to 3 years, that should be really helpful. So over to you, Mark. Before -- just 4, 5 minutes, and then we can go on for Q&A.

Okay. Yes, yes. No problem. So the pipeline remains very strong, indeed, especially the preclinical Phase I, Phase II, which obviously is very important. We're working at the moment on a significant number of late-phase projects. And those are heading slowly, but surely towards launch with our customers. So there are 18 in the pipeline right now. We expect at least 2 to go forward within the next 6 to 8 months. We're getting very interesting noises on a couple of compounds that the customers have filed with the relevant agencies. So it's important for us to continue to feed our pipeline and feed the funnel with our early phase work as well because otherwise, the pipeline will dry up on the late phase. So we need to maintain a focus on keeping a good balance between preclinical Phase I, Phase II and then the Phase III validation and launch into commercial. If we get out of balance there, then what happens is that we have some very good years or a good month or 2, and then, of course, the pipeline starts to dry up. So we need to continue to prioritize early in the mid-phase. Because the pipeline is so strong and because of the -- we've essentially reached a limit with the facilities that we have in Europe today to significantly move the needle forward on a top line and on bottom line growth. We have finally clarified what we're going to do both in drug products and drug substance. So you would have seen in the press, and we have been talking about this review, but we have announced that we will be doing an expansion of our API capabilities, the manufacture of synthetic API in Switzerland, the land has been acquired, and the project is under detailed design right now. And we've also announced that we are going to significantly enhance our capability to manufacture finished dosage form in France. You may remember, we purchased that facility 10 years ago at a very low price to learn about the formulation business. We have been very successful in growing that business to a point now where it is absolutely full, and we can take it no further. Strategically, we had a very simple decision to take. Either we invest in the facility going forward and then in the business and go forward or we divest. We took the decision to continue to invest in that facility. We believed that there is a market opportunity for Carbogen Amcis, specifically as a subsidiary, but Dishman is a wider group with our own products, especially things like vitamin D analogs, which will come to, I'm sure, in the discussion. So we are expanding that business significantly. We've acquired some land on the Science Park about 5 kilometers from the existing site (the existing site is not big enough to take an expansion of the scale that we want to do). And we are going to be focusing on niche sterile liquids and solid formulations, okay, focusing on highly potent products, focusing on very difficult and challenging molecules, vitamin D analogs, non-live virus, et cetera. The sort of business where we've been very, very successful in France to this date. So those 2 expansions have been announced now. The funding has been put in place by Harshil and his team. And we believe that now we will set Carbogen Amcis in Europe forward in significant amount of additional capacity, where we see the market still having a very high appetite for the services we have been providing for the last 30 years. Okay. And so that's a pretty decent picture of where we are. Maybe a word on COVID. I mentioned that last time we spoke, we still from an operational perspective, don't see a massive impact on the business with COVID. Certainly, it's not impacting our customer per se. I think the biggest concern with customers at the moment is securing partner and securing supply chain, which plays to us, of course. We're quite happy that they're doing that. We are still maintaining a fairly large proportion of office-based staff outside of the company on a day-to-day basis working remotely. That is starting to have some minor inefficiency issues, but we're working through those. As you may know, Europe is seeing the predicted second wave of infections. So we are maintaining our watchfulness in that area. But it's not having a significant material impact on our capacity at this stage and our capabilities. But we are watching that, of course. So with that, I think, moderator, we can probably open up the conference for questions.

[Operator Instructions] The first question is from the line of Nitin Agarwal from IDFC Securities.

Mark, you mentioned about restructuring in the India business. And if you -- so I mean if I heard you guys right, you mentioned something about 1,600 people being reduced to 800-odd. So a, just to reconfirm those numbers. And two, I mean, from a near to medium term, what does this restructuring really mean for the business? I mean how does the business really change the restructuring that you really talked about. It would be helpful if we can throw some light on it because in our business, while the subsidiaries have continued to do well, it's the India part of the business, which has essentially been a bit of a drag in the recent years.

Yes. I think, as Arpit mentioned about the restructuring, what we've done with the restructuring, the focus is to maintain some focus. We have a management team now rather than what we had in the past. That management team has a very nice complementary set of capabilities, which means as a singular group, they are very, very motivated and forward-looking group. So that's the first thing. Second thing is that we want to make sure that we're a bit leaner and a bit more focused. So we're restarting production in this coming month. And we're restarting production on a number of CRAMS projects with our supporting customers right now. And we're taking appropriate steps with a smaller team and a more focused team. So that's basically why we've done it. And Paolo has been with us, as Arpit said, an awful long time. He knows the business very well. He's a scientist by nature, but a production guy also. Supported by Harshil, those 2 guys are the leadership team for our India operations now under the guidance and support of Arpit and myself when they need it. So it mirrors basically what we have in the rest of the world from an operational perspective, which means that we can liaise, we can consolidate, we can communicate much more effectively because the lines of communication are open and uncluttered so to say.

And Nitin, the main idea behind the restructuring is that we would like to take control in terms of the science driving the business rather than business driving the science. What we have seen in India and what we have faced in India, as you mentioned it as a drag, is that people are inefficient is because of the unwillingness to pay higher salaries, that is not just in our company, it's in many of the companies, which is related to science and otherwise. And you see that the majority of the talent, which comes out of India is accepted predominantly in the western countries. It is only because they are not being paid of what they actually deserve. The idea behind the restructuring is to reduce the manpower and to increase the efficiency of the people and to hire the people and paying them what they deserve. So essentially 1 person -- 4 people who were doing a job of 1 person and to change that scenario of 1 person being capable of doing the job of 4.

And Mark, from a business perspective -- apart from the efficiency part of it, from a business perspective, how does -- do you think it could have changed things? Does it translate into more contract wins? Or how should one sort of look at this in going forward from an impact perspective?

Well, I don't think -- it's not going to substantially change the strategy, Nitin, that we've been talking about in terms of our focus. What it's going to do is it's going to substantially increase our ability to work across the platform globally, cut out some of the internal competition that existed and get everybody's minds focused on what we're trying to do here, which is to help patients ultimately. And along the way to have a successful and sustainable business. So that's really -- the output immediately is going to occur that way. Paolo is very, very familiar and very, very integrated into the Carbogen Amcis Group over in Europe. He knows all the key people there. He's been working with them for many years. There's no competition per se between the group, it's all about complementary capabilities. And with, as Arpit said, the addition of a fewer number of better quality people within the India operations, we're going to basically lift the entire organization forward. So that's the goal behind it, is less people, but more effective people.

Also Nitin, what we are doing is that we are investing a lot on the systems, on the technologies, which is also going to help us not require those many people as well or replace those people with more talented people who can actually be more efficient and use the systems in the right manner. So that is another step that we are taking in India and eventually globally.

If I can squeeze in last one, India -- before I join the queue. You've talked about the fact that India production is going to start some time this month. So effectively, we would have lost 2 quarters on the domestic -- on India CRAM sales. I mean, how much do you think we'll be able to make up for this lost sales in the second half of the year?

So I think in the second half of the year, I mean, obviously, it's going to be much stronger than the first half. In terms of making up, so we have orders on hand from the customers. So we should be able to cater to most of those orders between the third and the fourth quarter. So overall, if you see last year, India CRAMS was in excess of INR 300 crores, which could see possibly a drop of about, I would say, 10% to 15%.

[Operator Instructions] The next question is from the line of Deepan Shankar from Trustline PMS.

Just wanted to check, currently, the vitamin D3 500 crisis has been upswing over the Q2 period. So are we seeing any upside from our sales perspective also? And what has been our pricing policy to our customers? So when do we actually see the real impact of price thing?

Okay. So vitamin D production is starting again this month. In accordance with that, we're also talking to the authorities right now about an accelerated approval of a drug product to enable us to address the potential that vitamin D has in strengthening the immune system to fight COVID. But in conjunction with that, we're already in a clinical trial in the Middle East, studying the effects of calcifediol on the immune system, and we're hoping that, that is going to give us some nice information fairly shortly.

And apart from that, we -- you're right, Deepan, that we have been -- a lot of customers have approached us asking for the cholecalciferol, which is the D3 500 that you speak about. And we have a lot of orders in hand regarding that as well as a part of the orders in hand that Harshil just mentioned some time back. We should be, as Mark mentioned, starting the production of D3 this month, and we will be taking those orders. The pricing is very, very decent and comes with a very decent margin for the group.

Okay. And this will form part of Marketable Molecules, Carbogen Amcis BV, vitamin D?

The cholecalciferol will be -- whatever is coming out of India will be a part of the Indian Marketable Molecules. And whatever is coming out of Netherlands, even if serviced by India, will be coming as a part of -- which is sold in Europe and elsewhere, will be coming as a part of Marketable Molecules of Carbogen Amcis BV.

[Operator Instructions] The next question is from the line of Dipan Mehta from Elixir Equity.

I just wanted to confirm the statement which you made about the EDQM-related issue. So what exactly is the present position? And why it would take one more quarter for the revenues to start from the Indian operation on this count?

So first of all, we have to submit a corrective action plan -- a detailed corrective action plan, which, as Arpit said, we did. The EDQM have acknowledged they've received that. Now we have to deliver those action plans. And that's a mix of organizational structure. That's a mix of physical modifications. And also a large number of changes in procedures. So that sort of work is ongoing now. We're not waiting for the EDQM to come back and comment on the document, of course, they will. But we're moving forward with our plans with the task force. So that's why it's going to take some time because there's quite a bit of work to do, very frankly. We're starting production in a limited number of buildings right now because we prioritize those products, both for the customer and the patient and also for the business. So starting materials that support sales in Europe are obviously prioritized, and there's a couple of other CRAMS projects, which are important CRAMS projects for clients that we want to start up. So it will take time because the resolution of some of the challenges that the EDQM identified are not straightforward simple things to fix.

Okay. Sir, second question is relating to the EBITDA margin for CRAMS Switzerland, France and China, which has declined from 20.8% to 16.2% despite a handsome increase in the revenues. Normally, one would expect operating leverages to benefit, but I think the opposite has happened over here.

No, it's a mix between the types of projects. We make a lot more money on commercial than the phased projects. But you can't just prioritize those because to get those, you need to work on the early-phase stuff, which doesn't have quite the same margin. So what we're doing is we're filling pipeline again. So what we're doing is we're replenishing our pipeline. So I have a reasonable proportion of people working on late-phase projects, a couple of which are -- we are now waiting for commercial approvals or the customers awaiting for commercial approvals. And in the meantime, the rest of my development staff are working on filling the pipeline with preclinical Phase I and Phase II projects, which don't carry the same margin. There's more competition at the earlier phase. And to be successful there, you have to play around with the margins. As simple as that. It's very -- it's not linear. That's the thing about the business. It's not linear. The more successful we are in Phase III and near late-phase commercial, the more we have to replenish the pipeline of early phase so that in 2 or 3 years' time, those projects come into the late phase.

And sir, one last question. Because of this COVID-19 pandemic, on a medium to long term, do you expect that the overall business environment would improve for the company because many more new molecules may be taken up for research and development and then taking it to the commercial, is there any perceptible change in the mood and the environment?

No, there's no significant perceptible change in the introduction of more new chemical entities per se. We're not in antiviral. So that's not our business. So we're not into biologics and antivirals. So if we were in the antivirals, I think the answer would be very firm, yes, but we're not. We're a synthetic chemist, basically. However, there is a short-term opportunity, which Arpit and I are actively pursuing, which is on the disinfectant side, driven by COVID. So products that are in our Marketable Molecules portfolio such as cetrimide and BKC, products like that, we're seeing quite a lot of activity. We're seeing increased orders, and we're seeing opportunity to increase price. And that is what is happening with those products. They're what we would call legacy products, but they are having some efficacy in disinfection. So short term, we see opportunity there. And hopefully, we might start to see some of that fructify for our Naroda facilities in the next sort of, I would say, the next quarter or so, we'll start to see that impact coming through a little bit. So short-term is that I think this interesting stuff on vitamin D and the mechanism of action with vitamin D, there's been a lot in the press about that, and we're doing the trial anyway in the Middle East, as I mentioned. And we started that trial, I think, Arpit, 2 months ago, 3 months ago?

That's right.

Yes. Not because we felt that there was anything potentially that could be strong with COVID. But we're doing a clinical trial. We're extending the clinical trial in the U.S. for the other indication for our vitamin D analogs, and we started another one in the Middle East on a different indication, and actually, it's showing some efficacy. And I think it's because it's strengthening the immune system, which enables patients to fight the disease or fight the virus more effectively. So yes, I think, short term, the disinfectants, we're going to see an uplift. We are already seeing an uplift. Longer term, I think the impact is more on the public awareness of the pharmaceutical industry per se. And I think that's where we see the benefit, is drugs curing disease -- curing -- trying to cure this disease is being brought to the forefront. It's in the press everywhere. And I think that's raising awareness of the pharmaceutical industry. And I think everybody who's in the pharma industry is ultimately going to take some benefit from that additional awareness. That's where I see the biggest impact to be perfectly honest.

And sir, one last question, if I can squeeze in. Any progress on the income tax-related issues, any demands have come? Or has the matter been closed? If you could just brief us on that?

Sure, Dipan. So on the income tax front, there has not been any kind of notices that have been received by us. So we have provided all the necessary required information to the tax department. And what we believe is that the assessment of the income tax returns for the previous years should commence pretty shortly. And if there is any sort of update, we shall let you know. But as of now, no new notice which has been received by us.

The next question is from the line of Satish Bhatt from Anvil Stock Broking.

Mark, this is a question regarding your next phase of vitamin analogs. So you're filing 2 patent applications for Phase I and II trial for obesity. Can you just throw some light on what exactly this project is and what type of cost we may have to incur?

Okay. Well, it's -- this is specific to a certain subset of patients. So our strategy in looking at the vitamin D analogs was not to go for the biggest indication in the world and then hit that because, obviously, the cost of doing that without demonstrating the technology effectively could be quite a risk. So we looked at various subsets with our advisers at Boston University, and we found a subset of patients where there was good indication that the vitamin D analog could have a significant positive impact on those patients. So that's where we performed the first trial with 20-odd patients. That showed very good efficacy in that subset. So the next phase now is to go to a patient population, we're going to a larger study. And that's only just recently kicked off within the last few weeks. And again, what we're looking at is to be able to do a launch for that particular subset of patients on the back of an orphan indication, which shouldn't be too difficult to do from a financial perspective. The wider one with COVID, I suspect, if there is real proven efficacy, and again, I don't believe everything I read in the press. But if there is proven efficacy, that could be an accelerated approval from a number of territories, especially in countries like North America and India, where the infection appears to be -- the infection rate appears to be out of control now. So you may actually end up having to bypass a number of clinical trials on a product, which is reasonably well known. So you may not actually have to spend an awful lot of money to get access to the market. So we are on budget for both of those indications at the moment. We're not particularly concerned that we're going to have to spend any more money than we budgeted for.

Mark, but what -- forget the COVID, I don't know whether it clicks, but what about the obesity? You said the Phase I trials -- so what type of market we have for an orphan category status for obesity? What's the market size you can capture?

Well, the market size isn't -- it's not huge. It's not going to be $100 million or $500 million. What it's going to be is a relatively small subset, which allows us to have a commercial product. Once we've got a commercial product, we can extend the use. That's the strategy behind it. So the target isn't obesity. We want to solve the obesity problem for gastric bypass patients who can't absorb vitamin D properly. But if -- when we do this, we prove that works, and we have a small commercial product, which brings in some nice revenue, but not huge. We then are using that as the vehicle to enable us to widen the label use of the product, which is already a commercial. Do you see? That's the strategy behind it.

So maybe the market may be small, $40 million, $50 million?

Yes, yes. It's that. It's that. Yes. But that's not the focus of it. As I said before, the focus isn't just to say we've got an obesity drug and sit back. The focus is the obesity drug is a vehicle to enable us to widen the label range to open up bigger markets. So that's the strategy. That's why we did it that way.

The next question is from the line of Nishid Shah from Ambika Fincap.

First of all, congratulations on a good annual report. My question is to Mark. On -- in your comments, in the annual report, you have mentioned that there are almost 18 products closer to commercialization. Can you give some color on these 18 products? How many of them are already filed with FDA under the validation process? How many of them are in cancer? Or how many of them are ADC products?

Okay. Have you got a pen ready?

Yes.

Okay. So there are 2 right now that have been filed. All the final submissions have been made, all the clinical studies have been submitted. And we anticipate approval for those 2 products, okay? Those 2 products, one is in breast cancer and the other is in -- let me just have a look a second -- for a second, and I can give you the particular. So the other one is in cardiovascular, okay? And we are anticipating that if the customers are successful with those filings, and again, I say, we are not doing the filings, we're just giving the information to the customer and the customer is making his own filings. But we believe that certainly one of them is almost a surefire hit because the product itself has been approved, and we're just finalizing our validation process. So one of them is an absolute surefire unless something really weird happens with that one. And the other one is a pretty good shot as well. So we anticipate those are going -- we're going to get commercial notification of those in the next 6 months, okay? So that's the first 2. Then we've got one in vasospasm, so cardiovascular again. We've got -- 1, 2, 3, 4, 5 in oncology and various forms of oncology ranging from leukemia to soft cell carcinoma. We have 1 -- 2 ADCs, they're not full drug conjugates. There, we make a linker in the payloads of the synthetic parts. And 2 of those are ADCs and they're both targeting cancer, of course. We have another one, which is targeting hyperglycemia. We have one in celiac disease. And we have a couple of anti-infectives. So these are synthetic antibiotics, smaller volumes, but targeted in certain types of biological infections, the synthetic materials. So this spread -- and that spread, I kind of believe that's always been the kind of mix. The majority are in oncology because we have an expertise now, a well-established expertise in oncological drugs, and then cardiovascular, central nervous system, et cetera. So yes, that kind of represents what we would expect to see as our spread to be perfectly honest. And then on top of that, we've got our 2 vitamin D analogs, calcifediol and calcitriol. And we're also starting to look now at other analogs. So we're also looking at vitamin D2 as well. Because we may have a very interesting route to the starting material there, which might give us some advantage. But that's an early-phase development project. So a part of it is for the CRAMS business, we're continuing to invest in the way we always have, which is kiss frogs to find the prince. And Arpit reminded me, we need to go back to that analogy because that's the one that everybody can latch on to very quickly. So what we have to do is we have to kiss. Obviously, if we don't kiss any frogs, we're not going to find the prince. The frogs don't earn us as much money as the princes do, but if we don't kiss frogs, we won't find princes. It's very straightforward. And one of the previous managements of Carbogen back before I came back to the business, just wanted to focus on Phase III work. And if you don't kiss frogs, you don't find princes. It's very simple. So we have to kiss frogs in the CRAMS business. On our product side, we are -- Arpit and I are taking a much more proactive view on investment, internal investment of time and effort on developing our own pipeline of Marketed Molecules and potentially even new drugs. So the vitamin D analogs, something which Mr. Vyas, Sr., kicked off a number of years ago, it was the acquisition of Carbogen Amcis Netherlands from Solvay. Those are starting to fructify little bit. So as you know, with the calcifediol and calcitriol. But Arpit and I are now looking at other opportunities within that technology to also develop our own products and our own routes to existing products to gain competitive advantage. And there's a number of those programs, which we're kind of not prepared to talk about too much in open forum because, obviously, we've got competitors, and this is all public knowledge. So there may be the opportunity to have face-to-face discussions with various people who are interested at a later date. But in an open forum, we want to keep our powder dry on those. But that's a different strategy than we've kind of looked at before, it's really focusing on investing a little bit in R&D to grow our own pipeline when it comes to products.

Okay. So my next question is on vitamin D formulation plant that you have put up in Bavla, now when onwards you expect that to start formulating the analogs of vitamin D? Will it start contributing in FY '21? Or will it start in FY '22?

There will be a few small contributions this year. They're manufacturing some batches for the clinical trials. But if this COVID indication takes off, and that formulation facility if the COVID immunobuild comes through, and we're talking to the authorities at the moment, if that comes through, then that plant is going to be very busy very quickly, I already said, within the next 6 to 8 months.

So that's good news. And on the commercial products, last year, you had 4 commercial products which went commercial. And can you give some color on that without specifically naming the product, what areas, what therapeutic groups and what kind of potential do you see there?

Well, 2 are oncology, 1 is CNS and 1 is cardiovascular. We've manufactured some launch batches. Basically, the validation batches have been used for launch. These are slow built. So one of them is moving quite nicely. That's for a U.S.-based company. That's moving quite nicely. So it looks as though with our -- with the investment that we talked about, or I mentioned, in Switzerland for more API, that's one of the projects which is driving that because we know that we are going to need additional volumes. There's another project, which I mentioned, which is the one that's already been approved, it's an oncology drug. And we're just going through the final formalities of finalizing our validation. That's another project, which is driving that additional investment because we're full. And when these start to go, and there's normally a year or so between approval to really ramping up production. We're going to need that capacity. So we're looking at the pipeline. The pipeline continues to strengthen, and that's what's driving the additional investment that's required in Switzerland to expand our capacity there at niche scale. It's not a massive -- it's not going to be many millions of liters of capacity. It's very similar to what we've got a small-scale complex chemistry. But we know we need the capacity. Otherwise, we're not going to be able to meet market demand.

So on the ADC, 2 years back, in your annual report, you had mentioned that you have leading -- you're a leading technology player in ADC. And I see a lot of companies in NASDAQ, we trade at 10 and 15x on turnover in ADC. And you have 5 or 6 molecules based on the pie chart you gave in the annual report, I could make out that you have 5 or 6 molecules in ADC and 1 molecule has already gone commercial. And we have seen in the press that a lot of money has been paid to license in products from Daiichi by AstraZeneca on the ADC side. So on your own ADC pipeline, would you like to give some color? And how do you see it going forward for us?

The pipeline is still reasonably strong. And bear in mind, we don't -- apart from one product where we're doing everything, apart from making the antibody, our skill set is in manufacturing the linkers and payloads, okay? And that's where we have a real skill set. That linker payload business continues to strengthen, okay? It's complex work. And compared to the price of the antibody, it's not expensive work for the customer. It's synthetic chemistry, okay? And we have a skill set in manufacturing -- developing and manufacturing those molecules. So the product you mentioned, yes, that's an ADC. We don't do the A bit. We do the DC, okay? And we have a number of those programs working through. So there are 2 in late phase right now, plus the one I spoke about, which is in cancer, in oncology, for a customer. And that's the one that's been approved, and we're just finalizing our validation. So that will be a commercial product. That one is driving the -- one of the drivers for the new investments. So drug conjugate still is a big opportunity for us.

Yes. Indeed, this is a big opportunity. And the other excitement that I wanted to ask you on was on the manufacturing line on formulation injectables that you are putting up in France. These would be slowly transiting you from an API manufacturer to a contract formulation manufacturer on the line of Lonza?

Yes, on the line of Lonza, but not copying Lonza. We're not going for capacity. We're going for technology and complexity. So this isn't going to make a million vials a batch. That's not where we are. There's a number of customers out there or players out there who can do that business. We don't want to go and me too that. But we know that there is a significant gap in the market between clinical trial supply at Phase I, II, small-scale niche commercial of very complex molecules. We absolutely know there's a market there. And that's what we're addressing. And there are very few players who can offer that. We'd be happy to make 1 vial. And we do that in France at the moment, and we make some money out of it in relative terms. That business was losing money 10 years ago. And that business has contributed consistently for the last 5 years, and we are now full. We can't do anymore, and we know the markets there. So that's one part of it from a contract manufacturing perspective, but we should not ignore the fact that we also have our vitamin D analogs. We also have, as we've mentioned before, our contrast imaging agents, our dyes, low volumes, complex-to-make solutions. So this facility with the 2 lines, 1 solid sterile line and 1 liquid sterile line is also targeted to be able to take a proportion of this capacity to support internal projects. And by that, I mean our own products, which again is part of the longer-term strategy, not to become a product company, but to be a little bit more of a product company, given our skill sets and our knowledge. So it plays on both sides.

Yes. I understand that. But that's a very exciting area where you are trying to transit onto. And my next question is to Arpit -- Harshil. On the India CRAMS business, Harshil?

Yes.

If we look at the first quarter, against INR 91 crores of India CRAMS business last year, you did about INR 30-odd crores, INR 15 crores rather. So if I have understood you correctly what -- based on what guidance you guys gave, that you might see in India CRAMS business about 10% de-growth overall. That would translate into a 20% year-on-year growth from second quarter onwards till the fourth quarter. Is that correct?

Yes. So we expect -- since there was no or hardly any sales of the CRAMS products in the first quarter, obviously, the orders that we have on hand, we would expect to service those orders in the second half of the year, which would mean that the second half would show a good amount of growth over the first half. Yes. So your understanding is correct that we should see a good amount of growth as far as the India CRAMS is concerned in the second half.

And Nishid bhai, what we should -- we could also foresee is that due to the lag that has been created of this first half quarter, which will not be completed in the second half, of course, but it should come at an uptick in the next fiscal year to fill the backlog of this lag, which has been created for our customers.

Yes. Yes. Actually, Arpit, you mentioned in the last call that your entire effort is to create one of the best pharma companies from India. And after reading the annual report and what -- listening to Mark, I think you guys are on a journey towards that.

Thank you. Thank you for the positivity, Nishid bhai. Thank you very much.

The next question is from the line of [ Arun Luharuka ] from [ MH Capital. ]

My question has been answered. So you can take me off the queue.

[Operator Instructions] The next question is from the line of [ Dhiral Bhansali, ] an individual investor.

Yes. My question is regarding niraparib. Glaxo conducted some trial, which was completed in the month of April, where they found the efficacy of niraparib as a first-line treatment and which had a progression-free survival of 22 months. So are we seeing any traction on that front in niraparib?

No, we're not seeing any traction at all.

A problem, [ Dhiral bhai, ] is -- with niraparib is that after the Glaxo takeover, it was previously with a company called Tesaro. The issue there was that Tesaro had built up a significant quantity than the actual usage. From our analysis of the numbers that we saw, they had procured more than 6 or 8 metric tonnes of the material and not used more than 200 kilos of the material. So as Glaxo took over the company, there will be significant amount of stock. It is great news that it has become a first-line -- approved for first-line therapy or it's going to be approved for a first-line therapy, but still they sit on significant quantities, which will not see any noise in the coming years is what we expect -- understand.

And also, like Glaxo gave a guidance that they are expecting $1 billion of sales from niraparib by 2023. So if that happens, are we in a position to get more business?

I think that $1 billion of sales will still -- this quantity will still cater to the $1 billion of sales.

[Operator Instructions] The next question is from the line of [ Charu Mehta ] from Dalal & Broacha.

Yes. My question pertains to the EDQM observations. They are for 4 molecules. So what is the rate at which the molecules will get resolved? And what is the opportunity of the molecules in terms of time lines and the market size?

[ Charuji, ] the issue of the EDQM is not of the molecules per se. About 7 or 8 molecules have been affected, but the overall revenue of the 7 or 8 molecules for the company was not more than $5 million -- $4 million to $5 million, if at all. The major issue of the observation is related to the quality assurance aspect of it and the quality assurance oversight, which was coming as a critical observation, which is impacting not just the generic molecule, the niche generics that we make, but the overall CRAMS molecule as well, which is putting the customer on a back foot, can we finish the submission of the CAPA, which we have successfully done 2 weeks ago, which has been acknowledged by the EDQM as well. So now we are, again, in talks with the customers to restart the CRAMS side of business. And that is going to be -- going -- that is going -- that is positive -- the conversations are positively ongoing. And hence, we mentioned that in the second half of the year, which should be substantially better than the first half of the year. And the backlog which has been created due to this 6 months lag will be completed in the next year, which again should see a substantial increase in the overall CRAMS segment.

Okay. And if you could repeat the revenue from this 7 to 8 molecules?

About $4 million to $5 million on a higher side.

Okay. Right. Okay. And in terms of the product pipeline for commercialization, how many molecules would you expect in the next 2 years?

Well, as I said earlier, I think there's a very strong likelihood that 2 will get approved in the next 6 months. And then I would expect to see 1.5 per year going forward. That's about the average rate that we tend to see if we have somewhere between 15 and 20 in late phase. So somewhere around that sort of number, 15 to 20 late-phase molecules, 1 to 1.5 per year. Sometimes, we get a spike and then we get nothing for a while. But on average, over a 5- to 10-year period, it's about 1.5 per year if we have 15 to 20 in late phase.

Okay. Right. And how much would be the additional spend on R&D and also the remedial measures?

I think for our own products, because most of our R&D resources are deployed on customer projects, so fee-for-service work. But for our own projects, I think I see a modest increase in R&D spend, 5% to 10%, I think, and Arpit, would not be unreasonable over the next 2 years.

Not at all.

Yes. So about 5% to 10% increase. Yes, 5% to 10% increase in R&D cost as we start to deliver more products and more concepts into our own portfolio.

Okay. Okay. And for the remedial measures, what would be the additional spend?

Sorry, I missed the question.

She is asking what will you spend in India for the remedial measures...

For the remedial measures, [ Charuji, ] what is good for us is that the company was anyways going to be going in a major upgradation program of its facilities, which included technological aspect of it as well, where we will be going more towards focusing on science and the data generation of it and analysis of the data and different strategies of it. So this was all, and fortunately, for us, the program -- the upgradation program that we made should be catering to 90% of the action plan of the -- 90% of the corrective action plan of the EDQM and the Swissmedic. So the spend had already been allocated, which should be coming in the tune of anywhere between $10 million to $15 million over the next 3- to 4-year period.

The next question is from the line of [ Dhiral Bhansali ], an individual investor.

If you could just share as to what is the total value of niraparib -- the API we sold for niraparib till now?

The total would be about, I think, not less than 20 million for all the years put together. If you just ask for the last year, it was about 3.5 million.

Okay. 3.5 million. Okay. Okay, fine. And what would be the API component of any new chemical entity that is approved once it goes for commercialization, what could be the API component, I mean, value-wise?

I think we need a very long call for that one. ADCs, for example, let me tell you the ADCs, in terms of the volume -- physical volume of the content in the final drug form is parts per billion. But the cost of an ADC, not the synthetic piece, but the cost of the entire antibody drug conjugate would be many, many millions for a normal synthetic drug. So let's take a heart pill of some sort. The API content, the bit we do might be 5% or 10% of the total cost, okay? But again, it depends how many pills they sell. If it's a huge product like, I don't know, Paracetamol, then the price of the API is rupees per kilo almost. So it's really -- that's a really brutal question for anybody to answer. If you wanted to narrow down the question and shoot that -- and shoot an e-mail to Harshil, we can give you a specific answer about a specific type of indication. But it's such a wide question. It's almost how long is the piece of rope. It depends how long we cut it.

And then, [ Dhiral bhai, ] it's all dependent on what is the final pricing of the customer, which we do not -- which we are no part of it -- which we are no part of actually. So for example, eprosartan, we are made to believe that it is coming at 24% cost is of the API, which is in the brand name of Teveten, which is extremely high. And the size of the pill is also very big. And -- but what we have seen in the product that we have developed, which has gone commercial and which has failed the range because of eprosartan, for us is anywhere between -- the cost of the API is anywhere between 0.5% to 24%.

Yes. So that's a very broad piece and difficult to come to a point.

Exactly.

It's impossible. Unless you say, what is the component of ADCs and not constrict that down. But I can tell you, that the biggest per single cost in the manufacture of an ADC is the antibody. Not the synthetic chemistry. We charge a lot of money for that, but it pales into insignificance with the antibody.

Thank you. As there are no further questions, I now hand the conference over to the management for closing comments.

Thank you, everybody, for the wonderful pieces of questions. These were the best line of questions that we as a team have faced in terms of the con call. And I would like to be very honest regarding that. Thank you for giving us these energetic questions to pick our brains and answer them as effectively and as honestly as possible. It gives us the confidence that, yes, that the trust is not lost and the positive comments by you gives us, to be honest, goosebumps that people are now actually seeing us going in the right direction and have faith in us that we will achieve what we said. So thank you again for all of us -- for all of you and your continued trust and belief. And as always, we will not let you down.

Thank you very much.

Thanks, everyone.

Thank you, everybody.

Ladies and gentlemen, on behalf of Dishman Carbogen Amcis Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.