Gland Pharma Limited (GLAND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Gland Pharma Q3 FY '21 earnings call hosted by Kotak Securities Limited. [Operator Instructions] I now hand the conference over to Mr. Kumar Gaurav from Kotak Securities Limited. Thank you, and over to you, sir.

Good evening, everyone. On behalf of Kotak, I thank the Gland Pharma management team for giving us the opportunity to host their first-ever earnings conference call. From Gland, we have with us Mr. Srinivas Sadu, MD and CEO; Mr. Ravi Mitra, CFO; and Mr. Sumanta Bajpayee from the Investor Relations team. I now hand over the call to the management team for their opening remarks. Over to you, sir.

Thank you, Gaurav. Good evening, everyone. Very happy new year to all the participants. This being the first earnings call after listing, I would like to start the call, giving you a brief overview of the business and strategy before diving into the performance for the quarter and 9 months FY '21. As many of you might be aware, we are pure-play injectable company with over 4 decades of experience in manufacturing of sterile products. As injectables are directly injected into the blood stream, we have stringent regulatory requirements to manufacture these products. Our products sell in over 60 countries globally and our manufacturing ranks are accredited by global regulatory agencies. While we have been focusing primarily in the U.S. market for many years, we started to increase our presence in the emerging markets in the recent past. As on December 20, we have 282 ANDA filings in the U.S. and about 1,478 product registrations globally. We predominantly operate through a B2B business model, varying our partners, handle marketing and sales of the products with the end customer. We have long-term relationships with the leading pharma companies globally, and this has helped us improve internal processes, including quality as well as maintain strong market share for products. We also have B2C presence in Indian market. And in terms of our business strategy, we remain committed to continue investing in business and development to build a robust product portfolio that helps us achieve long-term sustainable growth. We have identified that the niche capabilities that needs to be built on both the development and manufacturing front, towards which we are adding resources internally as well as evaluating external targets. We leverage the strength of our parent, Fosun Pharma, to penetrate the Chinese market as well. For the China market, we have already made 6 product filings and continue to add to the portfolio. We focus on life cycle management of products on a continued basis, the change of lines, optimizing back sizes, alternate raw material supplies or competence, and that helps us to maintain a cost advantage for us. It also helps us increasing market share for existing products over time. Coming to the performance, we had a good quarter and 9 months FY '21 and continue to progress well on our defined strategy. We have shown year-on-year growth of 33% in revenue for the quarter Q3 FY '21 and 29% for 9 months FY '21. We saw a year-on-year growth impact of 32% for the quarter Q3 FY '21 and 27% for the 9 months FY '21. We have generated INR 4,056 million of cash flow from operations, despite inventory development on account of COVID-19. In spite of several challenges and costs related to COVID and external factors like removal of any [ ISP ], our business managed to deliver strong results on account of the resilience of our product portfolio and our unique business model. Let me take you through the business highlights across various geographies. In line with our strategy of geographic expansion into emerging markets, we have put in place efforts which have started showing good results. Our emerging market business is grown rapidly and has accounted for 16% of our 9 months FY '21 revenue. We have seen 161% year-on-year growth in revenues for the quarter and 119% growth in revenues for the 9-month period. We entered new markets like Singapore, Israel, Armenia and Saudi Arabia through new partners during this period. Our ability to respond to a changing market demand during COVID also helped us achieve this phenomenal growth in the 9-month period. If you look at our key markets, mainly U.S., Canada, Europe and Australia, which has accounted for 68% of revenue during 9 months FY '21. We have seen 24% year-on-year growth in revenues for the quarter and 20% growth in revenues for the 9-month period. The growth was on account of launch of new products and volume growth in existing products with ramping up capacities. New launches include large products like micro funding and differentiated products like [indiscernible] format as well as [indiscernible] ophthalmic product in branded market. We launched 6 molecules in the last quarter. We filed 19 ANDAs and received 24 approvals during the 9-month period. We also filed 5 DMFs during the same period. Our domestic market accounts for 17% of our 9 months FY '21 revenue, and we are seeing 25% year-on-year growth in revenues for the quarter and 20% growth in revenues for the 9-month period. Demand for products in our core portfolio continues to remain strong in the domestic market. We have commissioned new pre-filled syringe at our new Pashamylaram facility, which helped increase volumes for the domestic segment. Our focus on efficient supply chain management, including qualifying additional lines, adding alternate raw material sources, optimizing back prices, among others, have not only helped in having healthy margins but help meet orders in short lead terms. On the quality and relative front, other front -- plants continue to remain through the [indiscernible], given the restrictions on travel on account of COVID-19, customers are conducting audits virtually during this period. I'm confident on the preparedness of our teams for any audit virtually or in person. Within active discussions with companies to manufacture COVID-19 vaccine for both Indian and global markets. While initial plan is to offer manufacture of nearly 40 million vial of finished products annually, we are planning to add more capacities to support this initiative, both in finished as well as drug substance manufacturing. I'm glad to see a cultural shift in the organization to adapt to changing requirements with the onset of COVID. Together, we have weathered this storm of score it and found out ways and means of delivering what we promised to the stakeholders. Our success is predicated by our ability to deliver products without compromise and quality, safety and customer satisfaction. In the post-COVID environment, we are even more outcome focused and are working towards actionable work streams on 4 broad pillars: regrouping and consolidation by transferring and sharing of resources, expertise and assets within our various manufacturing locations and also with enforcing group of companies, which will enable us to keep a lean, flexible and effective organization. Diversification of product portfolio, streamlining of our human capital, effective and efficient manufacturing. We are working towards improving differential organization, such as parameters, apart from financial strength and hope to deliver strong dividend for all our stakeholders. Our growth plans includes creating infrastructure for complex injectables, both in development and manufacturing front and M&A plans that could add value to our business in various fronts, acquiring new technologies, increasing profitability include strengthening with an integrated strategy and also help company grow by way of geographic expansion. I now hand over the call to our CFO, Mr. Ravi Mitra, who will share some more insights about our financial performance for the quarter and year till date. Thank you very much.

Thank you, Mr. Sadu. Good evening, ladies and gentlemen. Thank you very much for attending our first earnings call post listing. I hope you have received our presentation, which was uploaded on the website. Let me begin with sharing the financials of third quarter and 9 months period of the current financial year. The revenue from operations for the 9 months of fiscal '21 stood at INR 25,751 million, a year-on-year increase of 29%. For the third quarter, we have reported revenue of INR 8,594 million, which is a 33% growth year-on-year basis. The key drivers for this growth were increasing volume of existing portfolio, new product launches and geographic expansion. We have achieved a good growth across all markets. Other income for the third quarter was INR 351 million and for 9 months were INR 876 million, which includes largely interest and fixed deposit and foreign exchange gains on operations. The gross contribution margin for 9 months was at 57.3%, almost same as for the corresponding period of previous financial year, which was at 57.6%. We have reported an EBITDA of INR 2,994 million in quarter 3 FY '21, compared to INR 2,371 million, which is an increase of 26% compared to same period last financial year. EBITDA margin for quarter 3 FY '21 stood at 33.5% as compared to 35.3% of the same period of previous financial year. EBITDA for the 9 months ended December 2020 was at INR 10,621 million compared to INR 8,086 million for the same period last year, a growth of 31%. We have reported EBITDA margin for 9 months FY '21 at 39.9%, which is an improvement of 122 basis points as compared to same period last financial year. Our net profit for the third quarter was INR 2,041 million, a growth of 32% compared with quarter 3 FY '20. During the first 9-month period of the current financial year, our PAT was INR 7,366 million, which is an increase of 27% as compared to last year. We have reported PAT margin of 9 months FY '21 at 27.7% against 27.6% in 9 months FY '20. Our efforts to keep the PAT margin impact on an overall basis with better operational leverage are fruitful. The total R&D expense for the 9-month period were INR 916 million compared to INR 749 million during the same period of previous financial year. It stands at 3.6% of the revenue and is in line with our target. R&D expenses for the quarter was at 5% of revenue in both this year and previous financial year. Our effective tax rate remains at about 25% in the quarter and 9 months period of the fiscal year. In the 9 months of previous year, the ETR is lower due to onetime reversal of deferred tax liability of INR 324 million on reduction of corporate tax rate. Cash flow from operation during 9 months period was INR 4,056 million. EBITDA to cash flow from operations conversion has come down during this period due to higher inventory levels as a result of restocking of raw material from March '20, when inventory level went down due to supply disruption. Cash conversion cycle stood at 217 days for the 9 months ending December '20, as compared to 200 days as of last financial year. We have improved our receivable and payable days compared to previous year. But as I just explained, the increased inventory in the cash conversion cycle has increased slightly. Total CapEx incurred during the year till December 2020 was INR 1,826 million. We continue to spend our planned CapEx and increasing capacity by adding new lines at our Pashamylaram facility. We are also increasing our Vizag API plant capacity by adding new blocks. We are also adding capacity on oncology facility at Vizag to take care of the planned launches for the coming years. Our ROCE on ex cash basis was at 34% on an annualized basis for the 9-month period of this fiscal year, an improvement of 240 basis points over the same period of last year. Our fix assets turnover also increased from 2.5x to 2.8 as we increase the capacity utilization. As on December 2020, we had total INR 28,169 million of cash, which we intend to utilize for CapEx and to fund our organic and inorganic growth strategies. With this, I would request the moderator to open the lines for questions. Thank you.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Saion Mukherjee from Nomura.

Yes. Sir, if I -- can you give some color on the revenue line for 9 months and for the quarter in terms of how much is, let's say, milestone licensing income, the profit share and normal manufacturing? I would understand that this number can be quite volatile from quarter-to-quarter. Just to understand if you can help us.

The milestone side, 9 months, it's about 5.2% of revenue, and -- which was about 6% FY '20. And last year, it is about close to 6%, 9 months FY '20. And in terms of -- what is the breakup you need?

So can you share the profit share number, which you have for your partnership, which is -- which will be part of the revenue from operations, right?

Yes. So profit share is about INR 282 crores is FY '21 9 months, and as against INR 229 crores of last year 9 months, effectively 9 months. And the balance is -- the CP revenue is about [ INR 2,055 crores ] FY '21 and 1,720 crores, 9 months FY '20.

Okay. That's helpful. Also, I mean, we understand that there is an impact of COVID-related opportunities that has come. So how should we think about the numbers for this quarter and for the 9 months? How much is related to COVID? And just to understand how -- what is a sustainable base that you're looking at?

So I -- in my [ previous call, also I told ], right, and COVID opportunity was there, but it was there, I would say, for a short time in the first quarter. And we have a broad portfolio, which covers most of the therapeutic areas. So whatever the surplus, what we -- if you look at the end impact the market has down a bit in the first quarter, which kind of moved on and it's kind of settling down from the second quarter. So more enterprise meant -- got sold in the first quarter, which was new because a lot more hospitalities has happened and a lot more patients got a [ IV ] setup. So that portfolio got sold in the first quarter. But then it started that becoming more normal now. So it's moving towards [indiscernible]. I will say it's a product ship for us, more than anything else in the quarter, and it's even normal on the overall across the years as well, right? I mean, depending on the seasonal things, we have these changes. But we have such a broad portfolio, which can cover our quarter from that and has also helped during this. So there's no significant difference for us in that way, just a shift of products what we sold from quarter-to-quarter.

The next question is from the line of Sudarshan Padmanabhan from Sundaram Mutual Funds.

Congrats on good set of numbers. Sir, my question is, while the top line is very good, the emerging markets have done well for us. We are seeing a drop in the gross margin quite considerably on a Q-on-Q basis asset on a year-on-year basis. Any specific reason to it? Or is it primarily because we have a higher sales in ROW, which gives volumes, but the mix leads to a different kind of optical gross margin, if you can give some color on that.

I think you answered in your own question a little bit because I think it depends on the product mix, which we sell on a quarter-on-quarter basis. If you look at 9 months average, it's almost a [ different ] gross margin at the 9-month revenue. So it depends on the deliveries and what we do. If you look at last quarter, we have done a lot of ROW sales. And we have our basically model, so most of the time, we have the supply chain well, have big cushion in the U.S. market. So there are substantial orders we want to supply to other markets. We do that. And the third quarter -- third quarter seen that, and that's where the [indiscernible]. But overall, we also manage because ROW, the volumes are higher, but we also have the operation leverage kicking in once we do larger volumes. And that was -- that's what helps us in keeping our margins at the company level, in fact. So while the units might be lower for the U.S., volumes are higher, but other markets when the volumes are higher, that's when operation leverage kicks in. And we tend to keep the margins intact at the company level and over the year as well. So it's more a question of which market and what's the product mix we do. And there's also, if you look at the last year to now, there's also one component, it's the [ MIS ], which has a small impact on margin. But otherwise, I see it's more to do with the geography and the product mix.

If I understand right, I mean, which means that it can be a little volatile between quarters. But if I take a longer-term period, it should kind of normalize, if I probably look at FY '20 and FY '21 over a period of time, it means, probably it will normalize. Is that the right understanding?

Yes, yes, absolutely.

And sir, on the presentation, you talked about this INR 40 million opportunity in terms of the vaccine, I mean, in terms of manufacturing, which you can offer. Can you throw a little bit more color on this? I mean, are we in discussion with specific players? I mean, what is the kind of opportunity are we looking at? Something on that side?

Yes. Like I mentioned, we are in active discussions with the 2 different vaccine companies. And we also are the first -- because we have ready available capacity to offer the INR 40 million, and that's what we offered and now we want to invest in additional capacity to the get to this opportune as well. But we will enter the market once something solid happens. Once we enter an agreement, then we will enter the market.

And one final question from my side is on the inventory. I mean, the working capital has kind of shot up largely on account of inventory. I mean, I assume this would be primarily because of COVID, which would normalize going forward. So we should be back to where we were probably in FY '20. Is that the right understanding?

I would say FY '20 because of COVID actually got reduced, I think it's about 170 days of inventory days we got down to. We always wanted to have a little bit more inventory than probably other company, but it is norm for a B2B company. Because we are injectable space, a lot of times, the opportunities come to us at a short time we need to supply, whether it could be drug shortage, it could be volume that we carry. So to cater to that need and being a B2B model to support our customers, we tend to keep a bit of high inventory. FY '20 is a little abnormal because of surprise and disruptions, we use more of our inventories and incoming material is not coming. So it's a little aberration, but if you look at FY '19, it's about 200-odd days, and that will be in line moving forward as well.

The next question is from the line of [ Ashish Thalkar ] from Motilal Oswal Asset Management Company.

[indiscernible]

Hello, Ashish, you're not able to...

Sir, your voice is not audible.

I'm audible now?

Yes, sir.

Yes. So just trying to figure out over the longer term, over the next 2 to 3 years, if you could help us understand how should we look at our base business revenue growth and the new launches?

So we cannot give a guidance. But what you could say is if you look at our last 3 years, our new launches is helping us grow, I think, adding about 10% growth to our revenue and the rest is about 15%. And that's what that's been -- we are doing, and that's what we internal take care as well. So 1, 2 percentile this way that way, but that's what we're thinking about. Normally, the new products gives our growth about 8% to 10%, and then older products is growing around 15%, 16%.

[indiscernible]

[ Mr. Thalkar ], your voice is not audible. Sir, I would request you to come closer to the phone and speak.

[indiscernible]

It's not audible.

Sir, I would request you to move to a better reception area. Your question is answered, sir. So shall we move on to the next question?

I think I'll come back to the queue since I'm not audible.

Okay, sir. The next question is from the line of Nithya Balasubramanian from Bernstein.

And of course, congratulations on a good set of numbers. So can you throw a little bit of light on your China strategy? You have mentioned in the presentation about 1 dexrazoxane filing, which is still under process. But broadly, I think Fosun has also talked about 5 or 6 more filings from Gland. Can you advise us on what is the progress? And when do you see revenues materializing from China?

Good evening, Nithya. Yes. So we have 5,6 products, one of that is dexrazoxane. The estimated time end of this year or the first half of next year. That's what we're estimating the first launches. First years and probably first 2 years, it cannot be meaningful in terms of the size of business, but that's just startup. And then we are planning to find other well products in next 12 months. And we'll take it come there. So it's more an entry to China market end of this year or early, I would say.

I'm so sorry, I didn't quite catch it. You were expecting the first launch to happen the next fiscal year?

Yes, end of this year. Okay.

Understood. So my next question was actually on the progress on the various complex injectable formulations that you're working on, if you can update us on where you are on the suspensions, peptide, some of the other pens, cartridges, presentations as well.

So from the development perspective, the suspensions are at the, I would say, at the scale-up level. We have already installed lines on the production perspective. And on the peptide, I think it's more on the casual relation state right now. And they have already installed lines for pens and cartridges from the manufacturing perspective. So we're also looking at cutting down the time of taking the product to market because we're currently working on 2 or 3 products, but we want to increase that scale because the lines are in place and under validation. So to -- operationally to get that leverage, we are looking at more products to get to the line quickly. So we're looking at external opportunities as well, and that's part of the M&A strategy also.

Understood. So if you can throw some color on -- I know I'm asking you a broader question. But largely, the industry's struggle to get filings of suspension products and microsphere injection products. So what is the complexity and why does Gland feel confident that you can get over the line and get these ANDA filings in?

Yes. So yes, you, I think, hit it on the nail. The issue is, I think, getting the right [ particle side ] for the drug substance. And we started work on this almost 2 years ago, and we have created our own sterile API plant. And if you look at a lot of companies, they source the substance and they work on the formulation, where we have actually gone back and started working from the material itself. So once you got the right material, [ particle side ] and all that, that's when we got into the formulation side. I think I can't comment on other companies, but I think we took enough time to get the right materials to get the suspension in place. But yes, work in progress, I would say.

Got it. I'm going to squeeze one quick one in. There was a Class 1 recall of a product which DRL had announced last year, which we understand is that being manufactured by Gland. So where are we in terms of progress on that front? And does it have larger ramifications for the facility and the compliance?

Can you specify the product name?

I think it's [indiscernible].

We'll get back to you, Nithya, on that. It's more a contract-manufactured product. So if the development is done by Dr. Reddy's, so I think it's related to that. So I will come back to you on that.

Maybe a generic question then. So in case there is a Class 1 product recall and you're a CMO, are there any wider implications in terms of [indiscernible]?

Because it's -- the product is related to a GMP issue or pertaining to quality of the -- quality systems of the plant, that's when you feel the ramifications. But if anything to do with the development, it's more on the R&D side, and there's a few more products. So we don't see any serious ramification on that.

[Operator Instructions] The next question is from the line of Sameer Baisiwala from Morgan Stanley.

Sir, what's your take on the competitive intensity in injectables? And what it was 3 to 4 years back, which I think was pretty weak. But now and going forward, I think many Indian companies are setting up or have already set up, done a lot of filings for injectables. So how do you expect this road map for, say, 3 years ahead for yourself?

Sameer, I just want to answer to the previous question, what Nithya raised on the recall. So Nithya recalled, just check -- see, that's more to do with the [ MPU ] product, what you mentioned. And specifically, the [ MPUs ], when you cut an [ MPU ], the particles tend to break, and need to have a right [ MPU ]. And in this case, that reproduct is developed by Dr. Reddy's and the competence are also developed by -- are chosen by the other companies. So it's nothing to do with the company at our side because it's a CMO business what we did. Yes. Now taking on the, Sameer, your question on the competitive nature of the injectable space. Yes. I mean, it's not now, right? I mean it's been the last couple of years, the space have become a little crowded. People are entering to the space. I mean, if you look at 4, 5 years ago, probably, there were only 3 or 4 players, major players, but now is a bit crowded. But you look at the number of products we have filed in the U.S., the number of facilities we have, the infrastructure, what we've built over here. So a little bit more complex than normal dosage form, right? I mean, even today, as we speak, we are not into all delivery formats to be dealing with the injectable format. We are there in many of that. And the companies who are entered in recent times have entered just in liquid formats in [indiscernible] is a limited delivery format. So to get that technology in place for a lot of delivery formats, if it's competitive in that, it takes a few years to get there. And also, the business was, you need to have a broad breadth of portfolio to dominate the space, and it took us so many years to get there. And it's a basket approach, which the market look at. People coming with 10 products, 15 products cannot dominate that space. So I would say we are a little ahead on that because we are processing that to -- almost 40 years we are here. We have created that breadth of portfolio across all therapeutic areas. And that's one of the reasons our growth has been very consistent than across the years. And we are entering new formats almost every year, right? And as we speak, I was saying, we already got in the pens and cartridges, which not many companies got in. And it takes that much time to get expertise in that. So all that's becoming a little compact. But again, once the scale is getting increased, there's also complexity of the quality systems in place. And that's one of the reason you see so many issues happening at various sites. So injectables, it's a space where you need to have the technology in place. You need to have that expertise in space, and the quality systems have to be there when your throughput has gone up in the plant. And unless you have these large throughputs, you can't really dominate in terms of its cost advantage you get. So I think we are in a better place than most of other players, I would say.

And that's useful. Sir, what happens in the oral solids, et cetera? Is -- the moment a new player gets it's ANDA approved, he may not get a market share, but he gets the pricing down for everyone, and that's a sort of a bidding game that starts. So while your competitive advantages may stay, I'm sure it will stay. But the moment there are new approvals for your categories of product, does it have any instantaneous pricing action for the incumbents such as yourself?

So we look at the portfolio, what you choose every year, right? I mean we are filing about, say, 20, 24 [ ADS ] on an ongoing basis. And part of the portfolio is the new product launches, where everyone tries to launch on the first day of patent expiry so that you can get into those GPO bids. And there -- those are where you can get more volumes. But products which are already [ gem-sized ], that's when people can try and break those contracts so that we can offer a better pricing. Now there are instances where people come in, new entrants come in and break that. But ultimately, I know it's decided a few months later. If you see a lot of injectable products now, you see 8 or 9 players. But we can say active suppliers, again, it remains to the 4 or 5 because people come in, disrupt and then get out, and then there's this shortage situation. So more and more GPOs are also now coming out with these requirements of history of supplies. We have a clear regulatory history. So there are several things we are looking at, not just at price. So it's not like as solid orals. I think we'll be different in the injectables space.

Sir, with your permission, one final one from my side, just the extension of this. For your mature portfolio, what's the sort of price Y-o-Y? Does it remain stable? Does it roll down mid-single digit? Or how does your pricing for your mature portfolio behave?

So if you see our matured product portfolio, the gross margins are around 50%, 50% and 55% and between that. 50%, I would say, which is in line with the rest of the whole market. But when you launch a product, that portfolio gets around 65%, 70% and probably settle down after 2 years around 50%, 55% in between. So that's the margin profile.

The next question is from the line of Amey Chalke from Haitong Securities.

So first question I have is wanted to understand any seasonality in the business because now the 9 months numbers are out. And it looks like typically, we have reported good margins in the first and the fourth quarter. So is there a change in product mix during the time of this year? And also, the second question is also on the margins, the other expenditure has gone up sharply during this quarter from INR 60 crores kind of a run rate to more than INR 80 crore, INR 90 crores. So is it means -- does it include the IPO-related costs? And what would be the sustainable run rate going ahead?

Yes. So on the expense question first, Amey, is that this quarter had higher expenses on the R&D side also because of more filing happening in this quarter compared to similar quarter last year or even the immediately preceding quarter because of COVID, mostly it got -- it's linked to the filing. So that's higher by about 19 crores in this quarter. And also, our consumption of stores and stores, et cetera, went up with -- along with the volume. And also with COVID, we had certain additional expenses to take care of that employee-related distance maintaining and certain precautions we have to take. So that's around INR 3 crores, INR 4 crores additionally in this quarter. That's largely the reason. Nothing -- there's nothing -- no expense related to IPO here.

Okay. So do we expect to come in fourth quarter?

No IPO expenses is as per accounting, it's adjusted with the issue proceeds. And since you are aware that there's a OFS part also, so those expenses have been taken care by -- or absorbed by those shareholders. Company's expenses are only restricted to the fresh issue side and which -- if you see our results, we have mentioned that where it has been adjusted.

Then on the business side, the seasonality was, yes, there is some seasonality in terms of specialty anti-infectives probably it's normally at the end of the year. But it all depends on the product mix, where we are selling more. Normally, second, third quarter, we sell more in rest of the world markets, being the B2B also C, in the end of the year, the holiday season in the U.S. So there's fewer dispatches happening at end of the year being the Christmas time. So more and more goes to ROW, and that's why the margin looks like that. But overall, at the annual level, it [ turns with ] each impact.

The second question is on the global [indiscernible] opportunity in these big products with the limited players who are producing it. So we have already entered in the U.S. and one of the ROW market. So any thoughts on entering into regions like Europe? Or how is the price realization over there?

Yes. So [indiscernible] is a huge market, but it's a volume product than the margin product, right? So we have entered markets and selling in markets where the restrictions are there in terms of some countries is considering the biology products like Brazil. We are big in Brazil because the clinical trials are required, so not many players are there. So we have done, we have entered that market early 2000s, and we have done the clinical at that time. So that's kind of a solid. So we always look at the bottom line as well not just the top line. And other markets, there are several markets where the Chinese have entered directly where the margins are very low. So we are not too keen on compromising on the margins there. If you look at Europe, it's completely different ball game in terms of -- it's considered a low market heparin. Most of the tenders come as low market heparin, and there's several low market heparin to me, just one. And we have to go and compete with other heparins as well. So it's a low-priced product in Europe. It's not -- and also it needs clinical in Europe, which is very expensive. So Europe is not a very focused area for us, for now at least. And other markets wherever is good pricing, we are trying to enter those markets. And U.S. also, we are focusing on clients where they're willing to pay that price. And so it's more a pricing thing we are looking at than the volume game because most of the markets Chinese have entered, and they are completely back to integrated, right, because most of the heparin comes from China. And a lot of Chinese companies who have heparin, they're also dominating enoxa. And although we make enoxa, but we still need to buy heparin from other countries. So I would say we're choosing where we want to enter, where we could get some price benefit. That's where we are focusing on.

So just last question, if I can squeeze it. We have received 24 approvals in -- during the 9 months. And how much of these approvals we have already launched? And any good opportunities and highlights from them?

Yes. I think around 17. I don't say. So in 9 months, across U.S., Europe, Canada, we have launched almost 31 SKUs. But molecule level, we have launched about 13 and the rest will be launched in next quarter or so.

Okay. Any good opportunities you can highlight in the U.S. market during this 9 months, which you have introduced?

Yes, there are a few, I mean what we have launched last year, like I said, [ micro funds ], was the large product, and we have the large market share for that as well. And we also got a new GPO contract recently. So that's a good opportunity, which we have opened up last year, and that will continue. And the launches what we're having, there are some bag products, so that bag, we are not yet dominating that space. But I think this approval, what we got in bag, that should give us a good amount of revenue.

The next question is from the line of Nikhil Mathur from AMBIT Capital.

I have a fundamental question then a larger picture question attached to it. So in FY '20, Gland reported USD 250 million of sales in the U.S. Now can you please help me understand at the B2C level at the customer level what this number translates into? Any ballpark number would also suffice?

You mean the front end level -- the approximate value, you're saying?

Yes.

It's about $450 million, $500 million, I would say.

Okay. Okay. So my larger picture question tied to this would be. Now whenever Gland achieves a scale of, say, $750 million, $800 million at the customer level or at the front end level, what we have seen with many larger generic players operating in the U.S. in the past is that when $900 billion of sales, that is kind of reached in the U.S. market, the growth becomes the salaries. Now I'm aware that there have been difficult challenges for many larger players operating in the U.S. But from Gland's perspective, we aim to grow beyond $800 million, $850 million of front end level sales in the U.S. Does it become a challenge at some point in time?

Well, our model is a little different than other players, right? To all this says, actually, we are one of the suppliers. If you look at all the billion dollar players, we probably support them with some products. And once they reach a every stage, one is, of course, you're talking about scale, the pricing also becomes a key thing for them, where they're manufacturing it. And that's where we play a role. If you look at our growth trajectory in the last few years, even our older products, volumes are growing, not just out on product, but people come to us to transfer their products to us. So in fact, the company, which is currently selling the $1 billion having to, say, a $20 million product, and it may not be worth for them to invest in a new facility, new capacity to make the $20 million product because the margins are not there. So those kind of products actually come to people like us or a B2B player. And that's what actually increasing the volumes of our older products. So if you look at our -- it's not just the pricing growth we're having, they're also having the volume growth. And the volume growth is coming from some from our own product, but more from the companies who are actually transferring the product. So that where we play a little different game compared to other players who are mostly B2C players. And that's one reason we don't have a say a peer, right? In industry, we are the only ones who offer this kind of a model and that's kind of an advantage for us. So it's not a -- in a way, it's an advantage for us. Companies who are growing to a certain extent to get that cost leverage to the contours, and that's how we are growing in terms of volumes.

Okay. Let me one, if I may squeeze here. What is the typical market share that you internally target in molecules? I know that there might not be a clear answer to this. If you can kind of break it down, say, in certain [indiscernible] molecules, you might be looking for x percentage of share or in certain large size molecules, you might be looking for x percentage of share, expected market share. So any bulk of number that you can help us understand here?

Yes. So because of the model, right, we not only do our own NDA development, but we also do with -- take turns of model. So across the models, if you see most of the products what we are selling, it kind of captures about 30%, 35% of market share because we cater to 3 or 4 players who are selling the particular product. So let's -- who gets that contract, we're still able to get that volume share. So I would say, most of the products, what we are selling, I think it ticked around 30%, 35% and sometimes around 25% of the market share.

Sure. And just one final question. So over the next 3 to 5 years, are there decent enough molecules which have probably more than $400 million, $500 million of sales currently before the trade-in expiry? And can you give some color on this one?

There will be several lines, especially in oncology, there are several big products. But I would say everybody actually goes after these big products. And you ultimately end up with 15 players and each individual getting very little volume share. So our always focus has been pick those products, of course, the first one is you have to there on the first day of index, right, and the rest depends on how you leverage your capacity is better, what capacities, you have items so that you can use those facilities better. So that we can get your cost down. So we do that, the portfolio mix where we just not go after these few big molecules like the other player does -- other players do. But what we do is have this mix where especially when you're -- especially adding the capacities, you need to be leveraged well so that your costs will come down. And if you see some of our -- if you think our gross lines have gone down for a quarter, but you have a better operational leverage because that's what we do. We do that mix and nice thing so that we have those margins intact, and that's what we've been doing. So it's not just the large molecules we go after. I would say, there are several products in our portfolio today, which actually gives us more profitability than the large products, [indiscernible] these kind of products. So it's just not the top line we are looking at.

Sure. and then just a final question, if I may squeeze in. So can you give some color on what are the current capacity utilization levels at a blended level for the company. And over the next 2, 3 years, would there be incrementally more CapEx capital put pressure on the inflation level going up? Or do we believe that the inflation levels over the next 50 years can materially go up?

Nikhil, can you please repeat your question again?

Can you give some understanding on what is the current capacity utilization levels across your plant? And over the next 2, 3 years, would this inflation level go up or there will be incremental CapEx due to which there will obviously be surplus capacity and hence mutation levels might stay put where they are currently.

Yes. So capacity utilization, we can't really talk about that plant level because each delivery comment has a different demand and capacities we have. So if you look at line-wise, if you look at the dosage, the scale wise is a little different. If you look at liquid-wise, we are running around 75%, 80% of capacity utilization. [indiscernible], they have already utilized over 85%. We have already invested into new expansions. The new line is already online in terms of operations. So that is already added. So we have already invested the CapEx, which will take care of next 3 years of growth plan, what is in place. We don't need additional CapEx for that. Of course, any new opportunities will come in a different area. It's not related to our next 3-year plan, we need to invest. But as per our forecast for -- based on our launch plan, what we have for the next 3 years, we have already invested into capacity, and the CapEx has already been incurred.

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

Just to like to understand in terms of the usage of funds, what are we targeting at in terms of the products or technology or facility?

Yes. So it's the usage of funds, like we have filed, 2 or 3 areas to look at. One is the API, we have a vertical integration strategy. So we have expanding the API facilities. Because if you see -- if you look at our current portfolio, over 25% of our revenue comes from backward-integrated products. So last year, if you look at it today, it's about 30%, and we want to increase that, so that the dependence on external API sources should go down for several reasons. One is the quality issues. The other is people are getting it more expensive now to API. And in injectable space, because the quantities required are low, so people tend to exit that. So protect that. We want to be working integrated. And of course, the cost advantage we get for many products is integrational. Some investment, some money is going into that. The other is the CapEx in terms of our facility where we have invested in the suspension and suspension line, where we're working on the long-acting injectables as well. Yes. So Tushar, we'll be spending about 250 crores this year and next year, which will take care of explaining on the next 3 years growth plan. And that's one of the uses also. And M&A is other one.

Yes. So I was actually asking on the M&A side, not on the organic side. And so on M&A side, what are we targeting?

So on the M&A side, like I said, one is the fermentation side, where, like I said, we don't have the in-house capabilities to work on fermentation-based APIs. And we are very strong in anti-infectives almost 30% to 32% of our revenue comes from anti-infectives. So we are looking at assets which can make those recommendation ANDAs. And also peptides, we're investing into pens and cartridges and we want peptide companies. We are -- there is a hormone, so we're investing in the hormonal pinch product manufacturing. So that's kind of an area we're looking at. And assets in the U.S., right? I mean, there are several repetitions for some products, especially control substances, which you can't enter that market from outside the U.S. They look at assets in the U.S., which we can fulfill that need as well. So there's different things we're looking at, peptides, hormones, fermentation side and also long-acting injectables, like I said, we need to get to the market quickly. So they're in development companies, which have only worked on this. We're also looking at that area.

So given the complexity associated with such kind of product, I presume the compliance requirement would also be very high? Is my understanding right?

From the regulatory side?

Regulatory point of view, correct.

Yes. So yes, that's one of the reasons we'll be careful when we do an M&A. It meets all the requirements in terms of quality and regulatory fund as well. Yes.

Because, I mean, historically, we have grown organically. How comfortable are we when it comes to an inorganic front and then a lot of quality systems, it's more to do with the culture rather than just the infrastructure.

Absolutely. So that's why we have to be careful. I mean, we're not jumping into any acquisition without waiting. And that's why we're taking time. So many opportunities are coming, but we are very -- we are making sure that it has to fit into our quality culture, it has to meet the quality standards. And easily, we don't want to get into M&A just because of -- for the sake of making an M&A. So yes, we're very clear on our strategy and M&A has to fit in our strategy and the culture and the quality standards here.

Got it. Sir, secondly, on this converting or creating this vaccination plant, how easy or difficult it is from existing sterile injectable plant?

No. So we need to dedicate a line suit for that. Our new plan actually is that designed each line has a dedicated suit and different dedicated air handling unit. That's what is required for a vaccine manufacturing plant. And we have -- but the plant is designed such that we can dedicate one line. So that way, it's not a big thing in making the finished product for vaccine.

And just lastly, how much investment you have targeted for vaccine manufacturing?

So currently started under discussion. So it'd be more than the -- like I said in my call, we have enough capacity like INR 40 million to -- can be given. But if the demand is more and if we get -- if we are entering a contract, which we have to supply more than that, probably we have to go and add one more line or something so that the investment is required for that. So some of the proceeds or the cash that we have can be used for that as well. Yes.

And just lastly, in terms of the clarity, in terms of the margins. So while the quarterly profitability could be lumpy. But on a 12-month basis or a full year basis, how much EBITDA margin can be considered as a base case?

So we cannot give a guidance on that, but if you see our 9 months, so we have been consistent across that.

[Operator Instructions] The next question is from the line of Deepak Mittal from Edelweiss.

Congratulations again on a very good set of numbers. I had a few basic -- why the tax rate last year, in 9 months FY '20 is effectively about 20%, and this year, it's 25%, which I understand, but why it was particularly low last year?

Yes. So as you know that last year in around September, government of India announced tax rate, which is about 25% from the earlier tax rate of 34.94%. So basis of that, there was a reversal of deferred tax liability, which was existing on last year. And that impact is about INR 324 million. That is why there is a lower tax rate in 9 months FY '20.

Understood. Understood. And I actually back-calculated the numbers for quarter 2 in terms of more revenue PAT, PBT, everything. And what I see is that while the revenue, there was a revenue growth in quarter 2 by 22%, 23%, the PAT actually declined this year versus last year for quarter 2. Would you help us understand why would that happen?

Right. It's just so as I told about deferred tax, there was a similar INR 247 million of current tax also of the first quarter's higher tax rate, which we provided for, but reversed in Q2. So overall, the tax impact, if you see quarter level, it was INR 571 million. So if you normalize that, we will leave at a PAT growth of also about 20%.

The next question is from the line of Ritesh Rathore from Nippon India.

Yes, sir, can you help us understand in terms of in the U.S. business, how much volume share you would have aggregate injectable market since you've mentioned $450 million to $500 million is the revenue at a customer level. So what kind of volume market share would that have at the aggregate level in the U.S. market?

Well, I mean, if you look at injectables space is huge, right? I mean, we're not even there in many of the formats, whether we called it general bags and several other formats are not there. So on a product basis, on an average, we have 25%, 20%, 25% of market share, I would say, in terms of volumes. But at the entire industry level, I can't be telling because it's a wrong number because the several for example, I just mentioned about control substances, you're not even there in that. They are not into -- the [indiscernible], they're not into Penicillin. So we can't really compare. We can only sell the volume share in our own products. That's all we could comment.

So how many million units or issues you would have supplied in FY '20, which would have lended to U.S. directly or indirectly?

About 95 million, 90 million, 95 million units into the U.S., I would say.

The next question is from the line of Dheeresh Pathak from Goldman Sachs.

Yes. Maybe you answered this in the earlier call. The gross margin for the 9 months is similar to 9 months last year, but Q1, Q2, Q3 are very different gross margin. There's a declining gross margin trend. So is there something which is at the new normal gross margin? Or this is just like a mix in quarter specification?

No. So it's -- if you look at even the -- historically, the quarter-wise, there is a change quarter-on-quarter. It all depends on what you sell in that particular quarter. So if you look at these last 2 quarters, we saw a lot of residual markets, we have grown. Internally, we're also looking at how to grow geographically also so that we can derisk your business. And also, it also helps in leveraging your facilities better. So after a certain point, the volumes also plays a key road, right? Otherwise, it's going to impact your margins at the -- for the U.S. products as well because you have expanded. So you have to expand that business also. So by -- although your gross lines will go down for the rest of the world business, but still because you're leveraging better your capacity, so you are able to maintain those levels at the company level. So it's a balance we have to do, how much you want to do for rest of the world market because we also need those volumes to leverage better. Otherwise, it could impact other shareholders also. So it's more a product mix and what you sell more in the portable product, that's what it's dictating, but you have to see an average basis -- on an annual basis, how much your margins are, and that's what we've been showing. Even historically, it's a little bit different for each quarter. But on an annual basis, we have maintained consistently that margin around 55%, 57%.

Okay. And for the vaccine, this line that you will add, this is like a fill-in finish line, which is fungible across various vaccine platforms or this will be dedicated to one kind of a platform? And once the vaccine business is not there, can this be then used for other injectable fill-in finish? Can you just explain that fact?

Yes. So once -- so one is, can we get into vaccine and continue to do it because we are studying this seriously because for a product like a flu vaccine. There's an area, again, where if you look at the regulated markets, there are very few players who are focusing in those markets, most of the players are focusing on rest of the world markets, supplying to the [indiscernible] of the world. So that can open up with our history in quality and regulated compliance to the related markets that could open up. That's the area we're looking at. And this opportunity probably will continue for a few more years. And -- but if it was down the line, the opportunity cost -- still this can be used to fill biosimilar products because some of the vaccines are mRNA-based. It can be used for biosimilar space that also opens up because we're also having discussions with -- because our own parent company has a biosimilar company. We're having discussions with them, whether we can do some feeding for the biosimilars as well. That also opens up that. But if we decide not to get out of the vaccine business tomorrow, yes, we can go back and -- because these are -- once we change those vessels and dedicated components, we can always use the line for the regular products.

And the line that you're making right now, this is for an mRNA platform vaccine? Or this is -- can be used across platforms, whether it is DNA, RNA, viral vector in activity?

Yes, absolutely. So currently, we want to focus on this vaccine, the COVID vaccine and then moving forward we'll see because we're not experts in vaccines yet, to be honest. We just want to do the filling. And once this opportunity comes, then, we'll see if it's really -- we want to expand to vaccine business or get into biosimilar feeling because then the land can be used easily to do that filling as well. But we can always go back and start filling our regular injectables once this opportunity grows a little.

The next question is from the line of Tarang from Oldbridge Capital.

Congratulation for great set of numbers. Two questions from my side. One, of your 2 26 ANDAs that are approved on December 31, how many would be for unique molecules? How many unique molecules would they address? And the second, for instance, if a molecule for your partner, which is already approved, right, in the U.S., and then there's a second person who wants to maybe get that molecule manufactured through you while owning the NDA. Because the molecule is already approved for one of the players, does it actually speed up the approval process for the latter player given that the manufacturing facility is the same?

No. Actually, each individual ANDA is different, so it will take given time. But the approval process is definitely is faster now than before. So probably you're getting approvals in 12 months, 14 months mostly. And coming back to a question of 2 26 approved ANDA, it's molecule level is about 123 molecules. And we launched about 93 molecules. There are also tentatively approved products in that. So we had to wait for the dated expiry or settlement date whatever we have for that.

The next question is from the line of Ravi Srikant from Muthoot Family Office.

So I just had a couple of questions. One was you mentioned that anti-infective is 30% of the revenue. Can -- is it possible to give the breakup for the other therapies as well? I mean, therapy-wise revenue split?

And if you look at 9 months, FY '21, like I was telling at the beginning of this call, the anti-infectives have gone down a bit this year because of COVID and most of the anticoagulants have gone up. So if you look at last year, 9 months, plus 32% of anti-infectives in these 9 months was up 27%, but it's kind of going back to normal levels in this quarter. If you look at cardiac, it is about 25% in 9 months, revenue-wise. And then pain and pain management is about 11% and the anticoagulants and blood systems are about 10%. These are the major terrific areas right now. But we, as a company, we don't focus on therapeutic areas just. We go -- the -- like I said, the portfolio is a mix of first launches and volume builders, these kind of products we look at. So we don't go by therapy. It just happens to be that this year, it's anti-infective, but it might change once we started launching more products from other therapeutic areas.

Okay. Sir, my second question was actually on the sort of medium- to long-term strategy for your sort of -- I mean, promoter, which is Fosun. So I mean, what is their thought process regarding their investment in land? I mean, would it be possible for you to give your opinion on this?

Well, although we can't comment on their long-term plans on the company, but at least for now, they intend to continue to -- they make a company as a platform for the global injectable format. They -- while most of the -- all the subsidies are between the U.S. or within the China. And we -- they make us -- any acquisition that do or anything related to injectable, they kind of run through us. So basically, they think we are like the leaders for them for injectable platforms, and they want to continue to invest into the company. And with them being there, it's a big advantage for us in several areas. One is on the API front, we have several subsidiaries, which make APIs, which could help as in back row that integration. Getting into China market is so difficult, so we're getting help from there. So there are several advantages of being there. But from their perspective, as of now, they continue to invest in the company, and they want to continue to grow this company as well.

Sir, and if I may, just squeeze in one more question. So I understand that you have a batch manufacturing process. I mean it's a very basic question, but I mean, generally, is there any such metric, I mean, how often do you run these batches? Or I mean, how often does the customer sort of pick up these batches?

You mean the bag batches?

I mean, so whenever you sort of -- I mean, manufacture a molecule or whenever you manufacture, so I assume that you do it in a batch manufacturing sort of a process. So I mean, is it like once a year you run a batch for a particular molecule and then the customer, I mean, sells that over a course of...

No, no, no. It's always order to make. So because being a B2B, we get orders and then we have lead times. We have agreed lead times, and they place orders based on the contracts they have, we get a annual forecast. And they have firm forecast for 6 months and for many players, and we have annual rolling forecast on a monthly basis. And that's how it's done. And it's on a batch basis. They buy batches. So it's made to order.

So I mean if it's flexible, I mean, there is no hard and fast rule that it is limit 3 months or 6 months. So depending on the order side, it can change?

Yes, yes, correct. And see, most of the injectables, once they have contracts in place, they exactly know how much they need for the year. And based on our lead times, they kind of spread out the delivery times.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Sumanta Bajpayee from Gland Pharma for closing comments.

Thank you. Thank you, everyone, for joining us today for our first con call after our listing. If any of you [indiscernible], please free to reach out to us. [indiscernible]. The earning call record as well as the transcript will be made available on our website shortly. Thank you, again, for our first earnings conference call. Thank you.

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