Eris Lifesciences Limited (ERIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Earnings Conference Call of Eris Lifesciences. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. V. Krishnakumar, Chief Operating Officer and Executive Director of the company. Thank you, and over to you, sir.

Thank you. Good afternoon, and welcome to our first quarter conference call. I'm Krishnakumar, and I'm happy to share the highlights of this quarter with you. As per AIOCD, the Indian pharma market growth for the quarter was 34% excluding COVID molecules. This growth was led by acute therapies, which have grown at 54% overall and at 44% -- 47% excluding COVID molecules largely on account of the low base of acute in quarter 1 of last year. I'm happy to share that Eris continues to rank among the top 10 fastest-growing companies based on June MAT data. In fact, Eris is the only company on this list to have a single-digit contribution from acute therapy. All other companies on the fastest growing list have acute therapy contributions ranging from 35% to 70%. The chronic and subchronic segments of the IPM have grown by 20% and 33%, respectively, in quarter 1. Eris' year-on-year growth for quarter 1 was 30%. We have outperformed the market in chronic and subchronic segments, which accounted for 92% of our revenue in the quarter. Likewise, we have outperformed the market in our top 3 therapies, which accounted for 88% of our revenue in the quarter. In the cardiometabolic segment, which is 58% of our revenue, we have grown by 21.6% while the IPM has grown by 17.6%. In our VMN segment, which constitutes 23% of our revenue, we have grown by 63% vis-a-vis the market growth of 49%. Our consolidated operating revenue for the quarter was at INR 349 crores, which represents a growth of 19.1% over quarter 1 of last year. Consolidated EBITDA for the quarter stood at INR 126.5 crores, and this represents a growth of 21.6% over the quarter 1 of last year. Consolidated net profit for the quarter stands at INR 106.7 crores, which represents a growth of 19.8% over quarter 1 of last year. Consolidated gross margin at 80.3% has remained at similar levels as quarter 1 of last year. The stand-alone gross margin has increased to 84.8% in quarter 1 of FY '22, up from 83.1% in the quarter 1 of last year and 80.5% in quarter 4 of last year. This increase is along the lines of what we had projected last quarter and is largely an outcome of Guwahati manufacturing accounting for 81% of products sold in quarter 1 of FY '22. The corresponding number was 60% in quarter 4 of last year. Consolidated other expenses for the quarter at 25.3% of revenue have remained at similar levels as Q1 of last year. Stand-alone other expenses for the quarter at 25.8% of revenue have increased by 97 basis points compared to Q1 of last year. This was led by partial normalization of promotion activities in this quarter. Consolidated operating EBITDA for the quarter was INR 126.5 crores, representing a margin of 36.2% of revenue. This is an expansion of 74 basis points over quarter 1 of last year. Stand-alone EBITDA margin stood at 40%, up 176 basis points from 38.3% in quarter 1 of last year. Consolidated taxes for the quarter stood at 8.9% of PBT compared to around 6% in Q1 of last year largely on account of reversal of deferred tax liability. Consolidated net profit for the quarter was INR 106.7 crores, representing a growth of 19.8% from Q1 of last year. The Q1 net profit margin is 30.5%, which is maintained at the same level as Q1 of last year. Our stand-alone debtor days at the end of the quarter stood at 36 days. We remain highly cash-generating. And our operating cash flows for the quarter were at 88% of EBITDA, and free cash flows for the quarter were at 81% of EBITDA. Our treasury balance as on 30th June amounted to INR 520 crores. The Board has approved an interim dividend of INR 6.01 per share. We continue to enjoy significant tailwinds in our power brand portfolio. As of the end of quarter 1, 10 out of our top 15 mother brands were ranked in the top 5 in their respective segments. In our line -- in line with our plan to launch 10-odd new products in FY '22, we have launched 3 products in the first quarter. Zomelis SG is a combination of vildagliptin and remogliflozin, which we have in-licensed from Glenmark. Remylin DX is our new offering in the vitamin D plus methylcobalamin combination, and ZAC DAY is a lower-dose once-a-day version of our previous offering, Zac D. Our latest-generation diabetes products, Zomelis and Gluxit, continue to maintain their #1 market position among other generic brands in their respective segments. They ranked #3 including innovator brands. Gluxit, which was among the first generic brands of dapagliflozin to be launched in October 2020, is run rating at INR 2.7 crores of sales as of June 2021. Zomelis, our offering in the vildagliptin space, is run rating at INR 4.8 crores of sales in June 2021 after having clocked INR 44 crores of sales in FY '21. During the quarter, the management has reassessed the useful life of brands after taking into consideration prevalent industry practices. Based on the said reassessment, the useful life of brands and trademarks in intangible assets has been revised to 20 years from the previous 50 years. During the quarter, the management has also reassessed the method of providing depreciation on tangible assets after taking into consideration past experience and expected usage. Based on the said reassessment, the method of depreciation has been changed to a straight-line method from written-down value method in case of property, plant and equipment and right-of-use assets. The company has accounted for these changes in estimate of useful life and depreciation method prospectively. And consequently, the depreciation and amortization for quarter 1 of FY '22 is higher by INR 18.50 million at the stand-alone level. At the consolidated level, the depreciation and amortization expense for quarter 1 of FY '22 is higher by INR 38.83 million. We have shared during our FY '21 year-end update that the prescription tablets block at our Guwahati facility is operating at a capacity utilization of nearly 60% and that the Guwahati facility will hold us in good stead for the next 3 years, by which time the capacity utilization will hit 80%. We believe that this is the right time to start planning our longer-term manufacturing strategy. Maximizing of in-house manufacturing continues to remain our core strategy as it gives us best control over quality, supply security and manufacturing costs. Accordingly, we proposed to commission a new formulation manufacturing facility in Gujarat before the end of financial year FY '23. This will be a greenfield project with a land area of 10 to 12x of the Guwahati facility and will be operated parallel to the existing Guwahati facility. This will enable us to build redundancy in our manufacturing footprint and help mitigate the risks associated with a single-location operation. In addition to oral solid dose, the new facility will have the ability to manufacture dosage forms like sterile injectables and oral liquids. We also plan to expand our capability in pharmaceutical research and development. Accordingly, the new manufacturing facility will house a pharma R&D unit with laboratories for formulation, analytical and microbiology. The new manufacturing facility will be built and operated to WHO GMP standards. We expect the capital outlay in the first phase to be INR 120 crores to INR 130 crores, of which we expect to deploy 70% to 75%, that is INR 90 crores to INR 100 crores, in the remainder of FY '22. All capital requirements for the new project will be funded through internal accruals. This new footprint will give us the ability to build out our manufacturing capacity for the longer term in tandem with our growth requirements as they evolve. These were the highlights of the quarter. We are now open up for Q&A.

[Operator Instructions] The first question is from the line of Prakash from Axis Capital.

Yes. First question on the facility itself. So you mentioned it is a Gujarat-based facility with some sterile injectable, WHO-approved. So what is the thought process here? And would it have tax breaks like Guwahati? And initial spend, you're talking about INR 100 crores. Does that include the plant -- fully done-up plant? Or what is the total outlay planned over the next 2, 3 years?

So Prakash, the underlying thought process, I've already explained to you. Why a second facility and why now, I have already articulated that. I think when we chose to put up a new facility, we have 2 choices. We can put it up in the same company or we can put it up in a different company that is a subsidiary. And we know that the government of India is -- has put up this incentive for setting up of new facilities as part of the Make in India initiative. So under Section 115BAB, right, we plan to do this in a fully owned subsidiary, and that will make the facility eligible for a 15% tax rate.

15%?

Yes, 1-5.

Okay. And this is largely for domestic markets. You put an angle of WHO approval. So do you plan to export stuff?

This is -- our Guwahati facility also operates to WHO GMP standards. So that is the standard that we follow for our domestic market business. As far as the business strategy is concerned, we have discussed this on multiple occasions. We plan to remain focused on the domestic market. So this facility is meant to, again, power our domestic business as we go forward.

Perfect. That is very helpful. And one more question on the facility itself, like having sterile injectables and oral liquids, which therapy area we are looking at apart from our chronic portfolio?

So we already have some products in these dosage forms, like Renerve injection is an important product for us, which we presently outsource because we don't have the capability in Guwahati. We have some pediatric products in oral liquids, which we, again, outsource. So since we believe in in-house manufacturing as a strategy, obviously, we want to do more of it. We don't -- we have articulated our therapy focus that cardiometabolic VMN will continue to be our mainstay. Additional therapies that we look at are derma, women's health and neuro. So there is no great change envisaged in the overall therapy focus. But these are missing gaps that we've identified in our manufacturing capability, and we are closing those gaps.

Okay. That is perfect. And last one, on the pipeline side, you spoke about 10-plus launches, 3 already done. These remaining 7, which -- what kind of products, which kind of therapies we should expect?

So they will be from our existing therapies, and you can expect them to be evenly distributed through the year.

Okay. So this 15%, 20% growth is now the new normal for us?

We have guided to 15% growth for the year, and that is what we are targeting to get to. I don't -- unable to comment on anything further at this point.

The next question is from the line of Surajit Pal from PL India.

Could you please tell me your capital outlay? I mean I just -- maybe if you can detail on that.

Yes. So the new facility that we have planned, in terms of land area, it will be 10 to 12x of our existing plant at Guwahati. So it is something that will hold us in good stead for a very long time in terms of manufacturing capacity. But the Phase 1 capital outlay that we have decided is going to be INR 120 crores to INR 130 crores of CapEx. All of that will be funded through internal accruals. And about 75% of that, which is about INR 90 crores to INR 100 crores, will be deployed in the remainder of this financial year. The remaining 25% to 30% will be deployed in fiscal year '23, and we expect to commence commercial production from this new facility before the end of financial year '23.

Okay. So altogether, it will be FY '24 kind of production will come in -- by the time you lose...

Oh, FY '23. I said we will commence production before the end of FY '23.

Right, right. So initially, it will be 10%, 20%. And so that means that by the time you will lose the tax benefit opportunity in Guwahati or come to an end, your -- the new tax benefit will start from here, right?

Yes. The Guwahati tax exemption is available until the end of FY '24, and we expect to commence this facility before FY '23.

Okay, okay. And WHO GMP, as you said, does it also precursor for you going into selective export market going forward?

That is no longer on the -- I mean that is not on the horizon. But our Guwahati facility is also operated to WHO GMP standards. So that is the standard that we've been following for so many years for the domestic market also. So that -- it is like a foregone conclusion for us that the new facility will also operate to those standards. But there is no plan to get into exports. I think there is so much to be done in India, and we will have our hands full with that.

Okay. And your -- this Q1 dividend is the first of -- first time? Or it is going to be a trend? Or does it precursor that you might not be able to get some suitable target for your inorganic growth, so that's why you decided some part of it to be shared with the shareholders?

We have declared an interim dividend in the first quarter of last year as well, so this is not a first-time feature. I'm surprised why you're asking that question.

I just thought it could be a trend or you might be sharing with the shareholders. Okay.

Oh, no, we've -- I think we have formalized our dividend policy that we will endeavor to maintain a minimum DPR of 20% going forward. And we declared a dividend of 21% last year. So this quarter -- I think first quarter, we have reasonable clarity that we can declare this amount of interim dividend. So that is the reason why we have done it.

Okay, okay. Well, lastly, if you can give me a bit of details about the rest of the other 7-plus kind of probable launches this year.

Yes. So I am unable to talk about specifics. But suffice to say that we have chosen some very strong therapies to be in right at inception because I think cardiometabolic and vitamins, nutritional supplements, these 3 seem to be the choices of markets for everybody now. And having been in this market for the considerable period of time and having an established position, I think these 3 will continue to be the core biggest recipients of investment from our side. And we have also clarified that we will -- we are investing in other 3 therapies: women's health, dermatology and neuropsychiatry. So this will be the footprint really. It is -- there can always be exceptions. But I think largely, you will see that bulk of our actions will be focused on these 3 therapies.

The next question is from the line of Abdul Puranwala from Anand Rathi.

Yes. So just wanted to understand, how would the market share in Zomelis would have -- would be there in Q1 or if we compare it sequentially?

So we had reported an exit market share of around 4.8% in the molecule in the month of March. So there hasn't been any -- and we had reported an exit run rate of, I think, INR 4.4 crores to INR 4.5 crores. So that is trending towards the INR 5 crores now because our run rate in June was INR 4.8 crores. As far as market share is concerned, I don't think there has been any major change. If anything, it has only improved slightly. From INR 4.8 crores, it has gone to INR 5.1 crores. But we don't measure these impacts on a quarter-by-quarter basis. I think it's important to have a longer length of time before we start benchmarking these parameters.

Sure. And secondly, I wanted to understand the outlook for EHPL segment. So I understand there would be some benefit on the top line for this segment because of COVID. But exo-COVID, how should we see the segment panning out in the next 9 months of the fiscal?

Sorry, which segment are you talking about?

EHPL.

EHPL.

Yes. So you're right. Throughout this year, the focus would be on top line. We do not envisage a considerable or a significant amount of bottom line in this year, too. That should start coming in, in the next year. So this year, our focus will be on the top line. And COVID or no COVID, the portfolio now actually has shunned off all the COVID product earlier itself. So there has been no positive or negative impact of COVID on the EHPL portfolio.

[Operator Instructions] The next question is from the line of [ Sanket Beshnu ] from [ ABR Advisors ].

So my question is towards the other income. Looking at this quarter, there is quite an increase in that particular part. So can you please highlight on why there is an increase in the other income?

Yes, Sachin here. The increase in other income is basically because of 2 reasons. One is that treasury last quarter was around INR 180 crores, which is around INR 520 crores this time as of end of June. And also the return on investment last year was 3%, which is 5.2% this time. So it's a double impact: increase in the treasury amount and also the increase in ROI. That's why you see the increase in other income.

All right. Understood, sir. And my other question is on the sales. So what has been the impact of COVID on sales basically?

I think it's very difficult to put a precise number. I think I try to answer that qualitatively because definitely, there have been disturbances in quarter 1. The only change in flavor was that unlike a national lockdown last time, this time, there were regional lockdowns. So we have had several weeks of disruption at the ground level, and our people were not able to meet with the doctors. I think the calls -- physical calls that were coming back, they had -- they went back to virtual calls. A lot of time our people were working from home, even the field staff. So there have been disturbances, right? There's no doubt about it. I think the challenge is ascribing our typical number to it. So if you ask me, if there had not been these disturbances, what would your growth have been, I don't think I'll be able to answer that, right? But definitely, there have been disturbances. I think the part where I think there has been a lot of learning curve is the supply chain. So unlike quarter 1 of last year, this time, I think not just us, but I think pretty much that holds for the industry. We learned from the past, and we took enough measures in advance to make sure that there were no supply disruptions and products were being supplied to every corner of the country. There were no stockouts. So I think that part was taken care of this time. But I think at the front end, there were disruptions.

And if I could add, too, what happened in the first quarter was quite unprecedented. We have generally been seeing that it will be acute which has been lagging behind the chronic growth. Because of COVID and related problems, when the patient gets hospitalized, it is bacterial drugs which are used, therefore, you see the acute growing at 50% partly because of a low base but also significantly because of a lot of infections, which were during the COVID. So we feel the chronic market was a little subdued in the first quarter. And we feel that in the coming quarters, the trend is again going to be normalized. A normal trend typically for our market for the last decade or more has been a higher growth in the chronic and a lower growth in acute. I think we will come there in coming quarters.

All right, all right. Understood, sir. And my another question revolves around the Aprica brand. So the Aprica brand sales has been quite strong. And so is there any particular reason for the same? And what's the outlook going forward with it?

So it is -- at this point of time, it is good to look at what has happened last year. So because Aprica performed much worse than the main business, that is the reason the comeback has been strong. So that's one reason. But this -- Aprica in the last year got 2 good products. One is SGLT2, and one is dapa. And both of them are actually shaping up. Therefore, we expect this trend to continue in this entire year, and we see Aprica at the same level what they are in the first quarter. So it will be a significant growth in this year for Aprica.

Okay, okay, sir. Understood. And my last question, if I can squeeze in, so can you please elaborate some bit on the strategy of product launches? And how is it going to impact our revenue growth going forward?

So we expect the fourth quarter to be a little robust on the new launches. Otherwise, as we have mentioned in the presentation, we've already had a couple of them being launched. The more significant would be coming in the fourth quarter. And then very significant would be coming first quarter onwards for the next year. That's the time when a lot of expiration on the LOE would happen. So that's the time really significant diabetes and heart -- cardiovascular things would be coming down. But going in this year, we expect fourth quarter to be quite robust from a new product point of view.

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

My first question is, have we taken the full advantage of the Strides portfolio, what we had taken over?

Yes, definitely. I think we have realized significant value from the portfolio in multiple ways. I think we took a portfolio with a top line of INR 180 crores, and we focused our attention on the top 5 brands, which at that point had a top line of INR 140 crores, so INR 40 crores of brand we just stopped promoting because that was tail end. We -- I think at that time, when the -- so this INR 140 crores, top 5 brands, it has grown at a CAGR of 11% since acquisition. The largest brand, Renerve, has grown at a CAGR of 18% since acquisition. And these growth rates are after absorbing a 7% hit because of the GST rollout. And so that's as far as the top line is concerned. As far as field force is concerned, this product was -- these products were being promoted by a field force of almost 1,100 people at the time of acquisition. So we took about 600, 650 people on roles, and we have expanded the field force productivity by more than 2.5x since we've acquired. And last but not the least, on the manufacturing front, all these products were manufactured by third parties at the time of acquisition. So the cost of goods sold of the portfolio was 35%. I think barring Renerve injection, which -- as I already said, we don't make injectables at this point. Barring that, we have taken most of the production in-house. So the COGS has fallen to 22%, which is much closer to our corporate average. So it has been a very, very value-creating acquisition for us on multiple fronts. And I mean not to mention that it gave us an entry into neuropsychiatry, we got 2 divisions which have reached to neurologists. So it has worked well on multiple fronts.

Okay, sir. Next, what is your plan on the inorganic growth? Because you have about INR 500 crores' worth of cash with you. So what are your plans to utilize that?

I wish I could plan inorganic growth. That would be a dream come true for anybody. But I think the best you can do on the inorganic front is to have the cash ready to make sure that you have your thoughts clear on what is it that we want to do and what we don't want to do. And then I think only time will tell on what hits the sweet spot. So I think suffice to say that we have our therapies defined very clearly on where we want to do inorganic deals. We are very clear about the kind of products we want or what kind of prescription profile it has to have. Anything that comes with less than 65%, 70% gross margin will struggle to find a place in our system. So I think -- and then obviously, we are a metro Tier 1 operation, right? So I think the kind of acquisitions we make, the businesses will have to have that -- those kind of profiles. So these things are fairly clear. But you can't plan for it, right? I think we are confident that we are making all the right efforts, and we are seeing all the right kind of deals. But I think only time will tell in terms of what hits the sweet spot.

Yes, sir. But are we looking at opportunities? That's what I'm just...

Yes, we are. Yes, we are.

Okay, okay. Then the other question is, Eris is basically on Tier 1 metros only. Are we planning to go into Tier 2, Tier 3 cities? Any plans on that?

So I think the choice of Tier 1 metro is very closely linked to our choice of doctor specialty. And we have said on previous occasions also that since inception, we have been focused on specialists and consulting physicians. We don't focus on general physicians. So I think the moment you have decided that you're going to have a super specialty focus, metro Tier 1 accounts for 75% to 80% of the super specialty business. So that is basically where we are playing. And I think for the foreseeable future, we have also outlined in our strategy that one of the legs of expansion will be to expand physician coverage but still remaining with specialists and consulting physicians. So we don't foresee the need to go beyond metro Tier 1 for a considerable period of time.

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

With the revenue growth now improving and the OpEx is also more or less normalized and as of now, we are thinking about adding MRs maybe by end of the year, so then that should logically help in better margins in the coming quarters. Is that the right understanding? Or am I missing something?

See, when you look at our business from a 5-year perspective, we have a stand-alone EBITDA margin. It was 40% this quarter. I think for the whole of last year, we were at 38%, 39%. So I mean there will be quarterly fluctuations, but 38% to 40% is the EBITDA margin profile of our base business. And what we believe is that we have the liberty to let go of 200 to 300 basis points at the EBITDA margin level as we look to scale up in terms of a growth perspective. So a 38% to 40% EBITDA margin business can become a 35% to 36% EBITDA margin business at a significantly higher scale. And this is a fairly sensible strategy going forward based on our perspective. I think adding people is something that is a considered call, which we will do year-on-year. And the trigger for that will be, as I said, typically introduction of big new products where we need to create a new division to give the product adequate focus. That will be the trigger for adding people. And adding people will depress the profit in the short term because the first year of induction, we will not see our divisions giving huge profit margins. But it is an investment that we make at an overall level and which will generate returns going forward. It has already been seen in the case of Zomelis. So we added a division for Zomelis in the financial year '20, and the results of that were evident in financial year '21. So basically, what happens is the [ yields go month per month ], that scales up year-on-year in a new division, and that is what drives the profitability of a new division.

Got it, sir. Got it. And secondly, on, let's say, the inorganic side, like what kind of multiples or other valuations are we comfortable with or what kind of valuation assets are available, maybe at a bank level or maybe at a portfolio level? Because...

Did you ask what kind of valuations we are comfortable with?

Yes.

Okay.

I mean both the sides, what kind of valuation you are comfortable and what kind of valuation assets are available...

Yes. So if you see the last 5 or 6 significant deals that have happened in the domestic branded space, all the deals have happened at an EBITDA multiple range of 12x to 14x, which we believe are reasonable multiples if the assets have big brands, strong gross margin and good growth profile. I think the market is quite disciplined now because the biggest buyers for branded formulations assets are either private equity or large Indian pharmaceutical companies. And we have seen that over the last 3 to 4 years, there is a great deal of discipline that has come into the market in terms of the multiples that people are actually paying.

Got you. But in fact, I mean at least on the listed side itself, there are good amount of -- good number of companies having good -- healthy cash and willing to pay for the inorganic growth, so -- and categorically for the domestic formulation business per se.

And yet we don't find people destroying the market, right, by paying crazy multiples. So that's actually a good situation for a buyer to be in.

The next question is from the line of Kunal Dhamesha from Emkay Global.

So what I wanted to know is how our doctor coverage would have moved over the last 3, 4 years? And where do we see it over the next 4, 5 years?

Yes. So I think our coverages would have grown by about 70% to 80% in the last 4-odd years. And the effort going forward will be that in the next 4 to 5 years, I guess we would look forward to at least grow by a similar rate. It's on a much higher base, but that is the kind of growth that -- or growth or expansion or reach or whatever you call it, that is what we would aim for.

Sure. And then typically, how much conversion you see, let's say, 70%, 80% or almost double your -- doctor reach has now doubled over the last 5 years. But then these -- from new doctors, how much -- how many of them on an average write the product? Any indication on that in terms of how much penetration you make?

So I think the answer is very clear when we -- when you look at our choice of strategy, right, because we have chosen -- the total number of, I think, active physicians in India is more than 10 lakhs. This is [ NPPAs ] and above, right? And the specialist, CP population is about 2 lakhs, 2.5 lakhs, and the rest of them are GPs. So we have chosen the smallest universe out here. So we don't have the luxury of -- and we only have 2,000 MRs, as you know. So we don't have the luxury of spreading ourselves very thin, which means that our strategy in terms of physician coverage is a depth strategy. Our call averages typically tend to be 8 a day. That's a very solid number for us. So we spend more time with a fewer number of doctors, and that is the way our business has been working, right? So we don't have the luxury of targeting too many doctors and playing a hit-and-run kind of a strategy. That doesn't work for the specialty business.

Sure. And secondly, now if I look at, let's say, diabetic franchise, we have molecules across different classes. And typically in -- a diabetic patient in India at least is given like 2 or 3 medications, right? So do we see a lot of significant synergy benefits also coming, the doctor who was maybe writing the sulfonylureas is also now writing our DPP-4. I mean -- and has that kind of materialized? Or do we see that to materialize in coming years?

Yes. That's an interesting one. So I'll tell you what is the -- how is the disease profile and what is the control profile. So historically, what we have seen is even today with so many drugs coming in -- it is true for U.S. and the other Western countries also. Our HbA1c, which is a measure of how controlled diabetes is, is around 9%, and we need to bring it down to 7%. That is the reason, in diabetes, because it's a progressive disorder, we see one product not replacing the other products. Of course, the growth slows down over a bit of time. And you are absolutely right, in each prescription, we see at a specialist level, we see around 3.1 products for diabetes in one prescription. And this is steadily going up because the nature of the disease has been progressive. And that is the reason a company like us has been able to sell sulfonylureas and combination DPP-4 and combination SGLT2 and combination -- and even other drugs, which are out of these [ clot-like butazones ], so on and so forth. So going forward, as and when more of these drugs are available when they are hitting their LOE, these markets expand tremendously. So vildagliptin market after 10 years, it grew by 100% on a unit level when it was genericalized. So that is the place which is available for anti-diabetes drugs in our country. And with so much of [ ballyhoo ], we still have only 18% people who are somewhere in good control. So that's the irony of the entire industry.

[Operator Instructions] The next question is from the line of Kenil Mehta from Omkara Capital.

Sir, what will be the total CapEx -- overall CapEx after the Phase 1 gets over?

So I think that remains to be seen because we want to expand in a modular fashion as the business requires it. So Phase I has been clearly chalked out. We will create a footprint that is slightly larger than Guwahati in Phase 1. So tablets, capsules, sterile injectables, oral liquids and pharmaceutical R&D capabilities. That's part of Phase 1. I think beyond that, we haven't really detailed the numbers. But suffice to say that I think over a 5-, 6-year period, if you have to build this out to the full potential, then you can look at a potential deployment of, let's say, up to INR 250 crores.

Okay. And what will the asset turn at peak capacity, 2x?

So the present asset turn on Guwahati is nearly 10x. And I think by the time Guwahati maxes out, we will be achieving a fixed asset turn of almost 15x.

Okay.

So there is no reason to believe that for the new facility, it will be any different.

Okay. I wanted to hear your view for next 3 to 4 years. Are we going to expand in the export market? Or are we going to enter into API or something?

We will be completely focused on domestic branded formulations. That's our core strategy. We don't have any export plans on the horizon. I think whatever evidence we see, everything continues to point in the direction of the Indian [ dom form ] market being the best market to be, and we continue to be there.

So any plan for backward integration into API?

Not on the horizon. I think the logic for backward integration comes in 2 ways. One is that you're dealing in some products where the API is so rare that it becomes strategically important to secure the supply. That is one reason to back-integrate or you find that you get a massive cost advantage by making the API yourself. Now whatever products that we are in so far, I don't find either of these problems to be there. So we are fairly comfortable with the position we are in as far as APIs are concerned.

The next question is from the line of Prakash from Axis Capital.

Just a quick one, bookkeeping. So what is the cash balance now? And so the dividend amount would be substantial, right? So what would be the cash balance now and after dividend?

So the treasury balance as of June 30 was INR 520 crores, and the interim dividend amounted INR 82 crores.

Okay. And we are at least doing a INR 80 crore kind of free cash flow, so we will have a sufficient cash pile despite doing this INR 100 crore CapEx?

Yes.

The next question is from the line of Hardick Bora from Union Mutual Fund.

Congratulations on a healthy quarter. So I'm not sure if this was answered earlier. In terms of the marketing activities and traveling costs that typically our business would incur, how -- what level of normalization have they reached during the quarter?

So definitely not full normalization but definitely better than Q1 of last year. So there has -- there were pockets that were closed at some point, but they were also open at other points. I think the whole conferences and CMEs, they have not migrated to the physical format in Q1. They continue to be webinars and digital format. But at the same time, I think as far as the on-the-ground field activities was concerned, there was partial normalization, which is why at a stand-alone level, you see that other expenses have expanded by nearly 100 basis points for us.

Yes. Okay. And in general, I mean I know that there has been the second -- the first quarter actually coincided with the second wave and some restrictions in region-specific cases. But can you just give some sort of a forward-looking view as for -- as the next quarter has started broadly, how is the activity -- is it increased again? Is it further in line with expectation? Or what's happening on that, sir?

So we are still coming up there. So what we look at -- what we understand from the market is that especially in the chronic disease, patients do take time to come back and do come back when they feel it is safer for them. So the footfalls haven't really come back to what it used to being pre-COVID levels. I think with the July exit, we are at around 80%, 85% of that. So -- but we are -- but it has increased significantly in the last month. So going forward, we believe that it will come close to 100%, but it is still not there as it used to be in the pre-COVID era.

The next question is from the line of Surajit Pal from PL India.

How many people you were planning to add in your MR stream? Because currently, you say that you have 2,000 people.

Yes. So we have to see how the rest of the year plays out. If there is no more disturbance at the field level because of external factors, then I think we have the ability to add one division in the later part of the year. And one division for us is typically 200 reps.

One division equal to 100 people?

I said one division is typically 200 reps.

Okay, 200. Okay. And that is in FY '20 to '22 put together, these 2 divisions?

We -- one division in FY '22, we have a clarity on. FY '23, we haven't thought that far ahead. But I think looking at the -- Amit made a point about the kind of patent expiry opportunities that are available in FY '23. So I just -- I think it will be reasonable to expect that we can add a division in FY '23 as well.

Correct.

Yes. That's, say, Q4 and Q1 of FY '23, right? And what is the current productivity? And how it will fare assuming what Amit is expecting is coming true? And what it should be...

So I think the -- we reported growth in productivity FY '21 year-end was about 4.25 lakhs. And we definitely expect an improvement on that this year. I think it's a little too early to predict where we will lag. Obviously, once we add a division, the denominator increases, right, to 20 to 100 reps. So on that overall basis, you might see a decline. But as far as the existing base of reps is concerned, we definitely expect a good growth this year.

I think our first quarter YTM has been 5 lakhs. Am I right?

Yes.

Okay. And what kind of choice of investment instruments you are looking for, Sachin? As you say, I know you have got a higher ROI for other income purpose.

Yes. Predominantly, we invest in AAA-rated debt funds only. Yes.

The next question is from the line of [ Shivani Yen ] from [ Bosch Capital ].

So sorry, I missed the question on the disruptions that were caused. But just following up on that, given COVID and the second wave, do we see any disruption continuing in the second half? And what would be the outlook on the margin, sir?

So from a COVID point of view, things like -- things look like far better. The vaccination in the metro and Tier 1 towns have been good and will continue to be good. So we feel, sitting where we are, that we might not see much disruption going ahead, but that's the best-case scenario. We never know how the beast has behaved in the past. Second, margin. Take it.

Yes. As far as margin is concerned, whenever there are new product launches, whenever there are new people being added, obviously, margins do get suppressed in the short term. And then as the new products scale up, as the new divisions scale up, margins come back to the overall level. So there is a short-term, medium-term kind of a trade-off. And these are investments that need to be made for the growth of the business. I think the long -- our long-term view on margins is something that I've already articulated, that we are at such a good starting point that we do have the ability to let go of a bit of margin as we accelerate our growth trajectory.

Got it. And this is on my last question, again, coming back to the COVID and seeing that this was a more severe wave. Are we seeing -- what is the outlook on the VMN section and the segment that we have? I mean would it be like a long-term growth opportunity for us?

Yes. So VMN, as you've seen in the presentation, is our third biggest categories.

Right.

And we believe that COVID has led to a structural change in the way people thought about VMN. It's both from a doctor's perspective and also from the patient perspective. Certainly, not all is going to stick. You've seen the way it has fallen from May onwards, but it will be 15% -- 12% to 15% growth range, which have been maintained for -- I think, for a couple of years. So that's an indirect fallout of COVID.

The next question is from the line of Agraj Shah from Tata AIA Life Insurance Company.

On the R&D side, sir, you mentioned that the new capacity that we'll be putting up in Gujarat, it will be -- have an R&D unit. So can you just give more details around that as in based on our -- whatever the existing R&D setup is, what will -- how will that augment to this -- the existing one? And what are the plans for the future? And in that light, as you say that in the next financial year, you will be having a lot of products going off patent and will become patentless. So in the past, we've seen that with like Zomelis, we preferred the acquisition route. For the new opportunities, would we be also looking at inorganic route or we'll be developing them inside? What would be the strategy around that?

Yes. So there are 2 questions there. I'll take them one by one. So as far as R&D is concerned, pharmaceutical research and development is really about developing new formulations. So these formulations could be plain vanilla oral solid dose formulation of products that have gone off patent or it could be combination products or they could be incorporating some new drug delivery systems, like an extended-release, once-a-day kind of products. So our R&D efforts will be -- have been and will be focused around formulation development. When we say R&D, we don't mean drug discovery or basic research or API synthesis. We are not talking about any of those. As of today, we work with a lot of third-party partners who have been long term working with us and who partner us in terms of developing and launching new products. I think over the next 2, 3 years, just as we believe in manufacturing majority of products in-house, we have decided to take the formulation development activity in-house as well. So that is what you will see over the next 2 to 3 years.

Okay. So in terms of R&D team, in terms of hiring, do we have an existing team? Will we be adding more people around that? And since you're also getting into injectables and other oral liquids, et cetera, or...

We will be building up a team, so that is the plan.

Okay. And then the second part of the question around the LOE product mix, the strategy around that.

Yes. So I think Zomelis is something which was available, we acquired it, and it has turned out fantastically well. I think INR 12 crores in the first year followed by INR 40-plus crores in the second year. And I think we -- it's going at a healthy trajectory. And on the back of that, we launched Gluxit, which was an organic, internally homegrown product. Both are #1 in their molecules. So both strategies have worked for us. I think going forward, the most important thing is that Zomelis and Gluxit have given us the confidence that in all the future LOEs that come up, right, we have the ability to play for a #1, #2 market rank in whatever products come up because the Eris franchise in diabetes has been built up to such an extent that when we launch a new product in this franchise, we don't have to, again, bend backwards and start from scratch. I think the reputation and the credentials are already there. And this basically means that Eris is one of the 5, 6 companies which the specialist has in his mind space, and the prescriptions will come. So that kind of confidence we have derived from Zomelis and Gluxit experience. So we are totally good to organically play in the future opportunities. I think having said that, if some good inorganic opportunity comes at the right price, we are open to it.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. V. Krishnakumar for closing comments.

Thank you. Thank you, everyone, for taking the time out to participate in the call. By way of summary, Eris delivered a consolidated revenue growth of 19.1%, EBITDA growth of 21.6% and PAT growth of 19.8% this quarter. We continue to feature among the top 10 fastest-growing companies on the IPM. And we have outperformed the market in chronic and subchronic therapies, which account for 92% of our revenue. We have a robust power brands portfolio, with 10 out of our top 15 brands being ranked among the top 5 in their respective segments. We've launched 3 new products in quarter 1. We expect our organic growth to be driven by our power brands portfolio, new product pipeline, expansion of specialists and CP coverage and our foray into other specialties. We expect to execute along this strategy with a continued focus on high returns and robust cash flow generation. Thank you. Have a good day, and stay safe.

Thank you. On behalf of Eris Lifesciences, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.