Gland Pharma Limited (GLAND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gland Pharma Q2 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumanta Bajpayee from Gland Pharma. Thank you, and over to you, sir.

Thank you, Mari. Good evening, everyone. And warm welcome to Gland Pharma's Earnings Conference Call for Second Quarter of Financial Year '21/'22. I have with me Mr. Srinivas Sadu, Managing Director and Chief Executive Officer; Mr. Ravi Shekhar Mitra, our Chief Financial Officer, to discuss the business performance and to answer queries during the call. We will begin the call with opening remarks from management followed by Q&A session. Before we proceed with the call, please note some of the statements made in today's discussion may be forward-looking and this must be viewed in conjunction with the risks and uncertainties involved in our business. The safe harbor language contained in our press release also pertains to this conference call. This call is being recorded, and the playback shall be made available on our website shortly after the call. The transcript of this call will be submitted to the stock exchanges and made available on our website as well. I will now hand over the call to Mr. Sadu for his opening remarks. Thank you, and over to you, Mr. Sadu.

Thank you, Sumanta. Good evening, everyone. Welcome to our earnings call for the second quarter of fiscal '22, Wishing you and your family good health. After nearly 18 months, life finally seems to be getting back to normalcy. We had stable manpower availability during the quarter. Some of our equipment vendors were able to travel into the country, and that helped us complete the installation of new lines. Our capacity expansion is coming along in a timely manner to support our future growth. The surge in consumer demand across industries was unanticipated and resulted in shortage of power in certain sections. While we saw power shortage resulting in power cuts in China, in India, the supply of power remained relatively stable, but the industry saw a rise in prices of power and transportation. We may face delay in supply of certain raw materials from China, if there remains a prolonged shortage of power. However, we maintained sufficient level of inventory of raw materials. On the R&D front as well, we made good progress as we completed planned submission batches for complex injectables to be filed in this financial year. We are on track to make 4 complex injectable filings in this financial year. The other development projects are also running in line with the plan. We delivered a strong performance this quarter, Q2 FY '22, with a revenue of INR 10,805 million. That is a year-on-year revenue growth of 30% for the quarter Q2 FY '22, resulting in also a growth of 30% for the 6-month period, first half of FY '22 over H1 FY '21. With a PAT of INR 3,021 million, we saw a year-on-year PAT growth of 38% for the quarter Q2 FY '22, resulting in also a growth of 23% for the 6-month period of H1 FY '22 over H1 FY '21. We have generated INR 2,355 million of cash flow from operations for the 6 months FY '22 despite external stress on supply chain. We continue to focus on revenue diversification across geographies, which is helping us further improve our manufacturing efficiencies because of benefits from scale, as well as de-risking the business. We are ensuring that we absorb any decline in gross margins by benefits from scale on the operational front, thereby maintaining healthy profitability. We have entered into technology transfer agreement for Sputnik Light as well and also completed 3 submission batches. For Sputnik V, we have completed submission batches for the first component Ad26 and technical batches from second component Ad5 with improved deals. As soon as manufacturing license is received and export restrictions are removed, we will initiate manufacturing. We opened our new R&D center and expanded our R&D team, having capabilities in development of complex APIs. Our R&D expenditure for Q2 FY '22 was INR 578 million, which is nearly 5.3% of our revenue from operations. Upon excluding capital R&D expenditure, the R&D expenditure stands at 3.3% of our revenue for the quarter, which is in line with our historical trend. As of 30th September 2021, we, along with our partners, have 291 ANDA filings in the U.S. and 1,518 product registrations globally. Let me take you through the business highlights across various geographies. Our rest of the world markets business continue to show strong demand for our core portfolio. This business accounted for 21% of our Q2 FY '22 revenue as against 18% of our Q2 FY '21 revenue. We have seen [indiscernible] growth in revenues for the quarter. This has been driven by new product registrations and increased penetration of existing portfolio, especially for markets such as Brazil, Saudi Arabia and Thailand. Our existing portfolio has seen strong demand from new partnerships entered into during the year. Our key markets, namely U.S., Canada, Europe and Australia, accounted for 62% of our revenue during Q2 FY '22 as against 64% during Q2 FY '21. We have seen 25% year-on-year growth in revenues for the quarter, with is a function of both healthy rate of new launches and volume growth in core portfolio. On including India sales for our core markets, the year-on-year growth is at 27%. With declining COVID-19 hospitalizations, we observed a shift in product mix. Our wide therapeutic portfolio helped us to sustain growth despite changing market demand. Our rich R&D pipeline is helping us maintain strong momentum of new product launches. We launched 12 molecules in the last quarter. We filed 5 ANDAs and received 5 ANDA approvals during the current quarter. We also filed 3 DMFs during the same period. India market accounts for 17% of our Q2 FY '22 revenue, out of which 9% accounts for domestic market share and 8% accounts for Indian sales for export markets. We have seen 19% year-on-year growth in revenues for the quarter on account of volume growth of existing products, like enoxaparin sodium and heparin sodium injection. With COVID hospitalizations coming down, demand for our regular critical care products is on the rise. While this portfolio has not gone back to the pre-COVID levels, but it's looking positive. Our near-term focus remains on establishing a strong portfolio of complex injectables for which while we are having an internal program, we're also looking at acquisition opportunities to help expedite the development process. Installation of new lines, catering to suspensions and hormonal products has been completed. Biosimilar CDMO is the next long-term growth driver we are working towards. While our experience with vaccine collaboration has helped us gain the know-how and accelerated creating facility and technical team, we're also looking at opportunities to collaborate on the biosimilar front to build a pathway to cement our position in the future. On the quality and regulatory front, all our plans continue to remain approved the U.S. FDA. Our customers are conducting audits regularly and our team continues to remain prepared for any audit. We try to continue delivering strong results for all our stakeholders. I once again wish everyone with health. 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 thank you very much.

Thank you, Mr. Sadu. Good evening, ladies and gentlemen. Thank you very much for attending our second quarter earnings call. Our earnings presentation has been submitted to the stock exchanges and is also available on our website. Let me begin with sharing the financial performance of second quarter and first half of financial year '21/'22. Revenue from operations for the Q2 FY '22 stood at INR 10,805 million, a year-on-year increase of 30%. We achieved a robust growth across all markets with our core markets, U.S., Canada, Europe and Australia registering 25% year-on-year growth and ROW market continued to demonstrate a healthy 59% growth. The growth in revenue was driven by a mix of new products and growth in existing products. Revenue from operations for the first 6 months of fiscal '22 stood at INR 22,344 million, a year-on-year increase of 30%. Other income for the second quarter was INR 512 million, which includes interest on fixed deposit of INR 352 million and foreign exchange gains in operations of INR 158 million. For the H1 FY '22, the other income was INR 1,130 million, of which interest on fixed deposit was INR 691 million and foreign exchange gains on operation of INR 435 million. We have reported an EBITDA of INR 4,278 million in Q2 FY '22 compared to INR 3,181 million, which is an increase of 35% compared to same period last financial year. EBITDA margin for Q2 FY '22 stood at 38% as compared to 37% for the same period of previous financial year. We have managed to improve the EBITDA margin in spite of increase in operating expenses, such as power and logistics, primarily due to higher operating leverage achieved on increased capacity utilization. EBITDA for the 6 months ended September 2021 was INR 9,259 million compared to INR 7,628 million for the same period last year, a growth of 21%. We have reported EBITDA margin for H1 FY '22 at 39%. Our net profit for second quarter was INR 3,021 million, a growth of 38% compared to Q2 FY '21. During the quarter, we have recorded PAT margin of 27%, which is an improvement of 100 bps compared to same quarter previous financial year. During the 6-month period of the current financial year, our PAT was INR 6,527 million, which is an increase of 23% as compared to last year. To further expand R&D capabilities, we have commissioned our new R&D facility during this quarter, which is located at Pashamylaram. The total R&D expenses for second quarter were INR 578 million, including the cost of this new R&D center of INR 211 million and stands at 5.3% of revenue. Excluding this cost of new R&D center, our R&D expense remained at 3.3%, which is in line with our plan. The total R&D expense for the 6 months period were INR 1,015 million compared to INR 482 million during the same period of the previous financial year. Our effective tax rate remains at about 25% in second quarter and for the first half of the current fiscal year. Cash flow from operations during 6 months period was INR 2,355 million. Cash flow from operation has come down during this period due to higher receivables and inventory levels. Working capital increased and stood at INR 20,334 million as on 30th September 2021, as compared to INR 16,054 million as on 31st March 2021, driven by growth in our business. Average cash conversion cycle stood at 198 days for the 6 months ending September 21 as compared to 180 days of same period last financial year. We have maintained similar range for receivable and payable days compared to previous year. But due to increased inventory, our overall cash conversion cycle has increased. All our planned CapEx plans are progressing well. Total CapEx incurred during 6 months of 2021 was INR 3,286 million, used for increasing capacity at our Pashamylaram and Vizag API facility, our new R&D center at Pashamylaram, our biosimilar and vaccine manufacturing facilities in Hyderabad and for routine maintenance CapEx. Our ROCE on ex-cash basis was at 35% on an annualized basis for the 6-month period of this fiscal year. Our fixed assets turnover stood at 3.4x for H1 FY '22, increased from 3.0x for the same period last full year due to increased capacity utilization. As on September 2021, we had total INR 29,822 million of cash which we intend to utilize for the CapEx plan and to fund our inorganic growth strategies. With this, I would request the moderator to open the line for questions. Thank you.

[Operator Instructions] The first question is from the line of [ Kunal from MK Global. ]

So my first question is on the profit share components. So we are aware that it was somewhere around 8% in FY '21. But can you provide some more details in terms of how historically that segment has moved for us for the last 3 to 4 years?

Kunal, come again?

So our profit share component was around 8% of revenue in FY '21. But historically, let's say, in FY '19, FY '20, how that has moved? What was the proportion?

Yes, it's within the range of 8% to 10%, I would say.

Okay. Historically...

And it all depends on how many products gets launched in that particular year, normally. And how many are new products which are launched [indiscernible] but normally falls between 8% to 10%.

Sure. And is it fair to assume that majority of that gets generated from U.S. and North America?

That's correct.

Sure. And the last one on that. So as you alluded, that 8% to 10% is kind of fluctuates with the new product launches, so is it again fair to assume that generally a good portion of that 8% to 10% comes from the new product launches?

No, even for the new -- old products also, the profit share component is already clear, right? So for the older products, the profits share must go down over the years because of the -- once product gets more competition [indiscernible]. But it kind of gets covered by the new launches that we do where the profit share component is normally high.

The next question is from the line of Shrey Jain from Iroha Investment Management.

And congratulations to the management for a great set of numbers. I had 2 questions. The first one was, I wanted to understand -- the ROW market has been growing fantastically for the company. Just wanted to hear from you on what is your steady-state view in terms of geographical spread? So earlier, we had started at about 65%, 70% of U.S., now we are about 54%. Likewise, for ROW, we were somewhere in the range of 15% to 20%, now we are over 30%. So how do you see that in the next 2, 3 years going forward?

Because of the lower base, you are seeing, I think, the growth rates on a higher percentage. But overall basis, still -- our core market is contributing about 61%. And the ROW is contributing about 21%, which is higher than the 18% for the last -- when we compare it with last quarter of the last year. So overall, I think it will stabilize over a certain period of time once the base hits normalcy. And the reason why it's growing fast is, of course, historically, we didn't have enough capacities to cater to other markets while we had registrations across the globe. We are focusing more our capacities to the U.S. market and the regulated markets. Now with the new facilities adding up and new lines coming online, we are also expanding our portfolio to other markets. So while we're leveraging the old registrations, we're also -- the products what we are registering in the U.S., the newer ones have great opportunities in other markets where the margin profile is really better than the older products. And that's one of the reasons why also it's helping the products to grow in other markets.

Got it. So it's fair to assume that this 59% kind of ROW growth will not continue over a period of time? Any particular range where this would end up stabilizing at?

So still -- the total as a company revenue, we are looking at ROW to stabilize around 40%. We are still at 21%, right? So still there's -- still a long way to go. At what rate depends on how many products we are able to move from the U.S., what are getting registered there. But I think our own -- internally we're getting -- in the next 4, 5 years, we should get to the level where it should reach [ 35%, 40% ]. So the growth might vary from quarter-to-quarter depending on the approvals of certain products in this market.

Got it. That's clear. My second question was on the movement in working capital. I saw that there was some increase in trade receivable. Is that just a period-end adjustment? Or is there -- if you could give us any color because last year, I think the number was around INR 46 crores, now it's around INR 375 crores.

Yes. It's more to do with the timing of the sales, I would say. If you see the preliminary part of this quarter, the logistics were a little difficult. So the sales happened in the second half of the year -- most of the sales happened in the second half of the quarter one, both the availability of the containers and [indiscernible]. Also, it was more expensive. So we are waiting for that to settle down from the pricing perspective so that it's not impacting margins. So most of the receivables are not due yet, but it will stabilize, I think, in the next quarter because of the delay, I think the late sales that happened, we're seeing this.

The next question is from the line of Tarang Agrawal from Old Bridge Capital.

Just wanted to check, sir, is there an element of seasonality in your core markets business?

Not much, I would say, of course, it depends on the portfolio whether it's concentrated and it's a certain set of portfolio, you will see that seasonality. But we have a breadth of portfolio. So while some of the products sell more during October to December, this time frame, maybe more [ impactive. ] But otherwise, it's spread across the year.

Because I was just wondering, on a sequential basis, the sales in the core markets have been softer. And I noticed this in the last -- Q1 to Q2 last year as well.

So I mean, as you see the larger products are anti-infective, right? whether it's Micafungin, daptomycin, these are the larger products compared to the other products. And these add larger revenues in the revenue percentage. That's why you see this. So a few products are adding to that number increase. But otherwise, overall, it's okay. But I think some of the products which are contributing more -- sells more during October to December and Jan to March, that kind of thing, that's why you see that jump a little bit.

The next question is from the line of Achal Phade from Investec India.

First question was on the...

Achal, I would request you to [indiscernible] your audio is not clear.

Yes, is this better?

There's a lot of background noise, sir. You can mute yourself while the management gives the answer.

Yes. My question was on the complex injectable portfolio. So as it is an area of focus for us. So we would want to understand more on what sort of complexity are we talking of here, like -- that's going to be the target? Is it going to be the complex API or the formulation or the complexity around the device? So if you can throw -- give some color on this.

If you look at the total basket, the complexity varies from product to product. Some products, the APIs are difficult. Some are formulations. So it's a -- some are dosage form itself. And some are [indiscernible] clinical. So it's a combination of everything. So if you look at our 17 products which we have taken in the first phase, I would say, it falls into 3 or 4 different categories. What we're filing now with complex in APIs and also in characterization and their products in substantial mode, where we also need a bio study, so it's not like 1 product, 1 complexity for all the products, but it's a mix of everything.

Okay. Sir, just to follow up on this, is it time bound? Like, is the strategy more about time-to-market here or would be the second, third, fourth year here, but given the shortage or we are planning to [ comp ] on the costing side? What would be the strategy here behind the complex portfolio?

I'm sorry, could you repeat that? There's a lot of disturbance.

So as other companies are also targeting some of these complex products, wanted to understand is time to market a strategy here or would cost or -- cost would be a focus here being the low-cost manufacturer, unveiling market share?

Of course, it all depends on the capabilities of what every company is looking at. While there's of course -- there's also complexity in manufacturing, there's a complexity in development and the cost as well. So we're also working on internally on certain APIs, which are complex. So that kind of gives you an advantage. And we are creating an infrastructure and these are the products where not too much volumes you could see. So not everybody will go and put up a plan to do this. Since we are in the CDMO space and we are a reputable business, we are investing into that. So this also adds up more business from other partners who are only developing products but going outside to get that manufacturing done. So this is just not for our own products but by creating the infrastructure to develop our own products, we're also creating the space for other companies to leverage our capabilities to develop and launch their products.

Okay. Sir. And one last on the ROW market. So we have expanded our footprint into 2, 3 new markets, which has driven growth. So are we looking to target more newer markets or the growth for the next couple of years is to come from deeper penetration into the existing markets?

It's a combination of both. Now that we got entry into these markets, we'll expand our portfolio more into this like we have done historically, some of the markets we are very strong. We started off with 3 or 4 products, but you see 15 products selling in some of these markets. So the same strategy will add up because once you get your plant approved by certain regulatory agents from a country, it's all the more easy to get more products into that country. So -- and then we are also looking at getting into countries like Mexico, where there are certain products where there's a lot of opportunity left. So we see there is opportunity in other markets also, but we are identifying those markets as well.

So would these be equally competitive as U.S. market is? Or could you give some comparison in pricing competition compared to the U.S. market for these bunch of ROW markets?

So you see, most of the products, what we're selling in other markets, products, which are -- which have lesser competition and lesser players, which are a little bit more complex than other products, that's where we are focusing on in ROW market, so that we are not compromising with the margins.

The next question is from the line of Nithya Balasubramanian from Bernstein Research.

First question is on Sputnik. So did we hear you say that both for Ad26 and for Ad5, you've actually reached validation scale?

That's correct. Yes.

What would be the steps from here to commercializing the product?

So initial idea is to do focus on Sputnik Light that's where the demand is coming now, especially outside India. So first few months, we're trying to manufacture Sputnik Light. And post that, we'll shift to this, Sputnik V. But the 2 limitations, one is, of course, the export embargo still existing. They are giving the special permission for NOC once you apply. One of the companies received it. But they're also challenging on the regulatory front, still the [indiscernible] is not approved in India. The [indiscernible] is doing clinical trial now, and they're expected to finish up this month end. So hopefully, by November, both in terms of export embargo and clearance on the license usage should be cleared. So we are estimating November as the month which might give a clearance for exports. That's when we'll start manufacturing.

Understood. So if Sputnik Light is what is going to manufacture first, does the deal still remain the 250 million doses or are you likely to go beyond that?

No, the deal still is a combination of Sputnik V and Sputnik Light number of dose [indiscernible].

Understood. The second one is on the biosimilar or the biologics CDMO opportunity that you were talking about. What sort of capacities do you have in mind? What kind of capacity are you going to create? And if you can tell us a little bit about what do you think is Gland's right to win in the segment?

As of now we're creating capacity of -- particularly, capacity has been created at the substance side, which we have actually created for the vaccine and then it's getting expanded to the CDMO for the biosimilar space. And that we'll start with. And while we are discussing with companies -- and it has enough -- the size of the plant is enough to see the need, we can actually expand more. But that's where we're going to start with. And from the deal perspective, we are talking to companies within the [ sourcing ] framework and trying to start up with them to initially launch some of these substances from the Indian side. And then in parallel, work with other players because we are in more -- we are seeing the interest coming from a lot of generics as well as other companies trying to -- creating the portfolio and extending the biosimilar portfolio and trying to get into companies like us for the clinical batches, for the trial batches and activity leading to the commercial batches.

Got it. Is there a kiloliter or a liter number that you can share in terms of capacities?

So the capacity -- what we're creating is about 60 [ kilo ] liter, [indiscernible], is that the question?

Yes. No, that's helpful. So I was wondering if there are plans to expand it, but that's where -- I'm assuming that's where you start and then expand later.

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

Sir, on the core market side, for the past 6 months, we have launched almost 24 molecules. But on a quarter-on-quarter basis, we do see some reduction in the sales, if you could throw some light there?

So it all depends on the size of the molecules what we have launched. If you see last year, the big product got launched. So you're comparing with a product like micafungin and daptomycin are the big products, which are one of the leading products for us. We got launched that last year and previous year. So you're comparing with those whereas the products that we launch now are the smaller versions. That's one. Second, we can't really go with last -- this [ '21 ] and now because of complete different way the portfolio has worked. So once the company shift happens, still 100% -- the post-COVID, I don't think has happened 100%. We shifted the therapeutic portfolio. So once that happens, then we'll see a difference in terms of the revenue breakup between the molecules.

So you're still seeing some traction on account of COVID, which probably may -- assuming that now that the cases reduces to die down in the coming quarter?

Yes, we're already seeing that. So it's moving -- next quarter, we're seeing actually most of the products which we are selling pre-COVID are coming back. And the COVID-related drugs, which we saw -- sold in the first quarter, especially in the respiratory market, it's not coming out. In the U.S., it's gone away. So I would say we are at 70% level in terms of most of the portfolio. Currently, what we're seeing the coming quarters as compared to the last 2 quarters.

Got it. Sir, just secondly, on this, any update on U.S. FDA inspection? Given that we do have a good number of products in the pipeline, which are under shortage, so that kind of should have triggered U.S. FDA inspection.

We have not heard anything from them yet. Our inspection was in September of '19. What we are seeing they are visiting the sites. What we also hear is there has been sites where they have earlier issues or under warning letter or those sites where they have a PAI. So since our sites are already approved and most of the lines are already approved, maybe you've not heard something, but it's part of life, right? And I mean, so as being the approved plant. So we geared up for that, and whenever we hear, we have to face it.

Okay. And just lastly, if you could just explain this R&D capitalization for the quarter?

Yes. So just to clarify, Tushar, that we don't capitalize any revenue expense. What -- in this quarter, we have opened a new R&D center. And post commissioning with the building and equipment, everything which is sitting in CWIP, has now moved into fixed effect. And that is the amount, INR 211 million. But other than that, our R&D expense on the revenue is similar to what our plan in earlier quarter, which is around 3.5% to 4%.

So this again -- so which effectively means this is more also kind of a onetime impact?

Yes, this is one time. Once the -- now the equipment and R&D building, the new center has been capitalized, it will not be again coming.

The next question is from the line of Fiona Chan from Buena Vista Fund Management.

And my first question is -- I think last quarter, you mentioned many of your U.S. customers were facing high inventory levels due to stockpiling and lower elective procedures. I wanted to check how are your customers' inventory levels now? And have there been changes in customer ordering pattern since COVID?

Yes, we are seeing that. And in fact, some of the products that are getting the drug sort of situation where we did hear from FDA on certain products. Also, some customers coming up with some emergency orders because whatever stockpiling happened in U.S., one, either sold off, or got into that expiry mode. So there is a shift. And yes, there is a change in the way the ordering is happening now compared to the last quarter.

I see. And would that translate into lower margins fee, detail urgency shipping and higher logistics costs?

No, not really because the logistic costs are only get -- you could see last quarter also the costs are on the higher side on the logistics side. So it's already in-built in the product supply.

I see. And earlier, you mentioned there were some logistics issues and delays. Are these related to shipping to the U.S.? Or are they also related to sourcing from China?

Mostly shipping out, especially the initial part of this quarter, now it's kind of stabilized. I think -- I would say, almost July, almost time frame. There was -- availability of containers was a problem, but it got resolved I think at the end of August.

I see. And to follow up earlier on the Sputnik vaccine, so am I correct in understanding that the production of Sputnik Light also satisfies your requirements with the RFID on the take-or-pay contract? So you could produce either one and you would satisfy the terms?

Yes. The quantity what we have agreed with them includes this as well.

Okay. And do you have any updates on opportunities in China?

So we have filed 1 more product this quarter. So 7 products have been filed now, and hopefully, we should get -- we're estimating approvals, 1 or 2 products either this quarter or the first quarter of next year.

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

Sir, I wanted to know some clarity on the margins going ahead. What would be the trajectory? And what would be the key drivers that will help margins to either move up or if it is expected to remain at the similar levels going ahead? And the second question I have is the competitive intensity in the injectable space is likely to go up considering a lot of Indian players are entering in this market. So how do we plan to protect our existing business from such competition? Are we looking to do more long-term tariffs with hospital, et cetera, or the backward integration is the key?

So I think one is on the competition side. We see that as an advantage for us because we can actually license our products to the new companies as well. The only company who are entering, they not have a larger portfolio like what we have. And being a B2B player, every new player come in here, actually it creates 1 more opportunity for license products to them. So unlike a front-end player or -- being our model is little different, it kind of helps us in spreading our portfolio across more companies. And in terms of margins, we still estimate to be around 37%, 38% of EBITDA. I think it's able to manage that. In spite of the logistic cost increase and the power and other expenses increase, we're still able to absorb this cost because of the operational leverage we have selling more units. And if you look at our business model itself, it is spread across different zones, right, whether it is likely to [indiscernible] from other companies to us or whether being a contract manufacturing. So -- and aggressively every quarter. So while there could be a pressure on margin, which -- as a B2B company, we absorb a little pressure on that because it is mostly taken by a front-end partner. But whatever number it hits us, we are able to compensate that by doing more volumes because we supply products to different partners across the globe.

The next question is from the line of Sonal Gupta from L&T Mutual Funds.

So just on India, I just wanted to understand that is this -- I, mean the quarterly run rate that we've done quarter, does that still have some contribution from COVID and -- or do we see this as a sort of a sustainable run rate?

No, there's no -- actually there's no COVID sale at all in the Indian business. If you see our Indian business, really the combination of our own sales to the [indiscernible] business in India. And it also has a component, what goes to the U.S. through Indian partners. So if you specifically look at the Indian business, what we're selling Indian market, is kind of setting down to the previous growth rates.

Got it. Got it. So ideally, you're saying that the 8%, I think, should be actually counted as a part of U.S. sales, right?

Yes, correct. That's correct.

Okay. And just again, on ROW, I mean, like there was -- you did mention last call also there some contribution from COVID-related products as well, but we're seeing that the sales are sustaining at that level. So should we assume that this is sort of -- that COVID should not really negatively impact this going forward?

No. Even in the other markets, like I said, while during COVID, we started supplying some COVID-related products. The ministries have actually opened our product portfolio. They listed other products as well. And actually, we started supplying other products which are just really normal course of time. So in that way, it also helped us to pushing some of our products into the markets where we never sold any product.

Got it. And just on -- like last quarter, you mentioned about the parent contracts in the U.S. So have those started and have those ramped up in this quarter? Or do you see further ramp up?

You'll be seeing from October to December, the major ramp up happening from for the next quarter.

So this quarter it's not being -- I mean, like that meaningful? I am just trying to wonder.

No. Not that meaningful.

Okay. And just lastly, I mean, your comment on gross margin, I mean, like you mentioned that you're offsetting it with operating leverage. But just trying to understand -- so this gross margin pressure is -- and the raw material cost pressure is more a function of product mix or it's -- I mean, across markets? Or is it a function of increased raw material costs? Or I mean, I'm just trying to understand what is the reason for gross margins -- I mean, the raw material costs going up further?

So our gross margin cost is a little different than other companies, right? Because if you see our gross margin, it's a combination of our own product sales, it's a combination of contract manufacturing, and a combination of the tech transfer. And if you see my gross margin on a quarter-to-quarter basis, it changes depending on the mix I sell. If I sell more of contract manufacturing -- if I do more of contract manufacturing business, it's 100% gross margin because we don't build the materials. So there's more that [indiscernible] gross margin looks very high. And then tech transfer, again, some are pass-through, and some are not pass-through. So it all depends on the mix of that and also mix of market by [indiscernible] products. So it's not a like-to-like situation like other companies where they're selling their own products directly in the market where the gross margin is excluding the materials. For us, because of our business model, it's not a right indicator of the price pressure and the cost involved in it. But there is an increase in domestic cost [indiscernible] contribute to -- and now it's all about the EBITDA level, probably around 1% net debt better off if the logistic cost is now as high as here in the last quarter. So there is an impact of 1% at the EBITDA level because of the logistic costs. But for the [indiscernible] material, we need too much difference. You see, if you look at some of our purchases, especially from the API front, only 30% of our materials are imported -- 30%, 40%. And there's no big difference on the cost of those materials. So from a material perspective, there's not much impact, which only impact works in logistics and power and the diesel because that sort of contribute to impact, and that's about 0.8% to 1% at the EBITDA level.

The next question is from the line of Susmit Patodia from Motilal Oswal AMC.

My first question, while you alluded to it at the beginning, your operating cash flow conversion is about 35% for the first half and the historical average has been about 70%. So would we reach to 70% by the end of the year as well? Or is this year going to be a little different?

Yes. So a couple of factors for that. One is that what we were discussing that there were [indiscernible] in the first half of this quarter, which kind of pushed down the sale to later months of this quarter. That's why this [indiscernible] have got increased. There's no overdue or anything, but it's just the timing of it. The other is the inventory where we have been restocking considering the planned launches we have and as well as the new announced contract. So once that starts inventory shift to the customers, that is expected to go down. And by the end of the year, we expect that to come back to a normal operating level of working capital. And to switch that I can see in a fast-growing company, where they're growing at 30%, where we also need to catch up with inventory, right? So when you are calculating inventory, it is based on the history, but you are gearing up for the next growth for the next quarter. So your inventory is always the 30% higher than previous. So I know that's a delta, and that's a problem with the growing companies, right?

Yes. Yes, absolutely. The second question is what would be the risk of the Sputnik contract not getting fulfilled? I mean, what are the risks that one should be mindful of?

See, I mean -- I believe even if you supply 20 million vials or 15 million vials, we get all the investments that we made on the infrastructure and the materials that we bought. So that way, I don't see a big risk, and that's one. Second, the whole idea of getting into this is working towards the biosimilar CDMO space. So the plant is there, and we are creating the infrastructure, keeping in mind the long-term growth in this space. So this is more a getting into the space, and we took this opportunity so that really fasten our entry into that. What we wanted to do with 2 years down the line, we did it now because there's an opportunity to earn cash from the vaccine opportunity. So I don't see that as the loss for us. It's an investment we made, one, looking towards long-term growth; second, learning to what we get from doing the technology transfer happening for the vaccine project and creating a team who has these capabilities and the experience we are getting from it. Second is some investments on this -- specifically for this project is very limited, I would say. And I know we have been confident that whenever it starts, even if you do half of what we have signed up for, everyway would be very well off.

And just to -- sorry, on this point, there is no take-or-pay penalty on RFID, right? I mean...

No. No. No, there's no penalty on it.

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

Yes. Am I audible?

Yes.

Yes. So the first question is around your U.S. business. You have 244 approved. And could you first clarify as to whether all of these are in the market? Have you commercialized all of these? Or to what proportion have you think commercialized?

If you actually break it down into molecules, that's easier to study out of 244 ANDAs, I think the certain molecules if you see we're about 153, right? And we have launched about 106. And there are tentative approved products, about 11. And what we have not launched, once approved, which will happen in next quarter, is around 14 products. And -- but there are also some tech transfer projects. And there are -- So I would say out of this, what are launched, out of 153 molecules, 106. And there are [indiscernible] approved at this level. So 170 has gone there. And then there are a few more products we had to launch in next few quarters.

Okay. And the 37 pending approvals would, in molecule terms, also be equivalent portion or a different figure?

From a molecule level, it's around 22 molecules.

22. Right. I mean, so for a layman like me, if I do a very simplistic sort of an exercise, 47 pending on a base of INR 244 -- you've already clarified that there are some delays in pending numbers. If I were to assume that the revenue potential is somewhat better given that there might be complex findings there? It would still -- look like the pending number is around 20% of the base of approved. And while it might be wrong on my part to look at it at in such a simplistic format, could you give some ideas to what sort of growth potential is for 47 pending numbers could give you for the next 3 years, maybe? I presume their approval cycle is 3 years.

So the filed and approved products is to the market size about $4 billion. And what we have approved already for $11 billion. So that should give you an idea. So $11 billion is approved products and around $4 billion is filed and waiting for approved products.

Okay. And would it also be reasonable to assume that these products have -- from a competitive standpoint because they have relatively more complex market formation, would be more in your favor and revenue potential for [indiscernible] would be better?

Yes. So see around $11 billion, what we have approved, out of which about $3.5 billion is still tentative to approve from other [indiscernible] waiting for either the product accessories and have -- or a particular product launch date or waiting for the payment expiry. So I can't really comment on how difficult are these and how many players will be there because someone was seeing so many players have come into the space. So I can't say a little who has filed what. But again, these products, we have a breadth of portfolio and we've been in this for long. So hopefully, we should continue the growth and [indiscernible].

So the right way to look at it is that actually, you've commercialized $7.5 billion worth of total addressable market, and you have another $7.5 billion, that is $4 billion plus $3.5 billion, left to commercialize, right? Am I correct in that summary? And this could happen over what time frame?

Probably 3, 4 years. Probably.

Okay. 3 to 4 years, right. All right. And...

If you see the approval time line currently, it's faster, if you see a year ago, look at our 20 years, it was very high. And they're getting really fast approvals in 9 months to 1 year. As we speak, we got 1 yesterday. So it could be faster also because of -- so now we are doing a catch-up to file those products. And that said, our efforts are gone when you're saying we have created the additional R&D center and creating additional team is to even catch up with approval in speed with which they are getting now. So historically, we will be looking at 22, 24 filings. Now we're seeing how to increase this 40%, 50%, so that we'll get more approvals in a quicker time.

Okay. Okay. And secondly, on -- the ROW business is -- in the receivables and inventory profile, similar to your regulated for U.S. market business? Or is it very different? And if it is, could you give some idea to what extent?

So the receivable time is little longer than the U.S. I think it is around 120 days.

It is around 120 days, yes.

[indiscernible] compared to 60 to 80 of the related market. But in terms of the payment receipts and all that, the companies whom we are entering the contracts are mostly [indiscernible] of products in some countries, [indiscernible] sales in some countries. So we're looking at extending those relationships to other markets. So that -- one is, relationship with those companies will grow, other is the business is more standard than one-off thing. And secondly, of course, we're getting into contracts with the companies who are leaders in those markets. Because not every product can be sold to everyone. So we're not trying to sell all these generic products, looking at the margin. And some are like -- most of the countries have retail market and where the prescription also helps. So we are entering contracts with those companies that have a solid financial background.

And the fixed asset turnover, which you indicated is now at 3.6 for you, what could be the peak that you could see on your current gross block for that?

So this will further increase when we start commissioning the existing -- additional lines, which we are putting up in Pashamylaram. So there is hormonal suspension line, which is coming up, and there are Lyo vial services currently being installed. And there is also a PFS line, which is coming up. So all put together, I think in next year, it should go up further as we utilize further on this capacity.

Anything, any ballpark number to understand your utilization levels currently?

Utilization, I know it all depends on which line and which product we're doing, right? So if you look at our pre-filled syringes, it's only around 50%, 60%. That's utilization. If you look at our -- some of our vials and [indiscernible] but we also have this added new liquid lines. So overall, I would say, around 60% to 65% capacity utilization. So we still have enough capacity to grow in the next couple of years.

Right. And say, if one were to look out 5 years from now, you've given a fair bit of idea of how the U.S. market will evolve and how the ROW will evolve. If you could give some idea of your aspirations around biologics in China, both China from your filings and also possibilities from the Fosun Group, for us to get some understanding of the prospective size of that opportunity in a 5-year time frame?

You mean the China market?

Yes. China plus biosimilars, both.

Biosimilars, see we are not developing products and -- so unlike companies who are working on development of products and marketing, we're only dealing on the CDMO side. So it's too early to comment on how large that business will be, but there is almost like -- the market size is around $30 billion, $40 billion, the biosimilar CDMO. Sorry, $12 billion to $13 billion is a CDMO biosimilar business opportunity. So that's where we are entering in. We are not into developing products and licensing those products yet. So we want to work with companies who are looking at leveraging our substance and finished capabilities. But from China angle, I think, we continue to come with the portfolio, and we targeted in 4 to 5 years, we want to have at least 10% of our revenue coming from that market.

Right. In China, the business economics would be quite comparable to what you currently have...

For the selection of products is that way. We are looking at company products, which are completely innovative kind of products in those markets, not the normal products. So the selection is happening like that, and the margin profile is far better than any other market.

Okay. And biosimilars capacity you indicated is around 60 kiloliters, I understand everything is down to product selection and your contracts on CDMO. But could you give us some sort of a very baseline understanding of what that translates into from a possible revenue potential? I'm not asking for a fixed number, but maybe a band within which we could understand at optimal utilization where -- what sort of potential that 60-kiloliter capacity has?

Again, it's very difficult to tell. It all depends on which customer, which product and how much utilization they take. I know it's completely -- what -- any number I say is not real. So why say a number?

So if I flip the question and say, if you could give me the idea of what's the investment that's gone in, in and what sort of -- is a fixed asset turn on that investment going to be very different from what you have or materially different or comparable to what you have?

No, I can answer in this way is that the investments which we are making in this biosimilar CDMO with ourselves as well as with the licensing partner, but that would ensure that we look at an IRR of at least 20%, and that's how we make an investment plan.

And what is the investment size here?

I will let you know all these answers once we go further down this journey.

[Operator Instructions] The next question is from the line of Saion Mukherjee from Nomura.

First on -- you mentioned about ROW market going to around 40% over a period of time. Can you give some color as to what would drive it? I mean, how much would there be from new markets like China? And how much would be from your existing markets? And the second question is if you can also share the contribution from new launches in the first half of this fiscal year?

Yes. So China, we're looking at 10% of the revenue contribution in the coming years and then the rest 30% from the other markets. So I had to give a breakup, that's what we're looking at. And in terms of contribution of launches, it's around 9%.

9% of your H1...

7% of the revenue came from new launches in first half.

Okay. Sir, just 1 more question. You mentioned the 8% to 10% is the profit share. I mean, firstly, like is it the same number for this half -- I mean, the first half also? And is there any concentration risk there like half of the profit share coming from one product or something like that, if you want to call that out?

No. So it's spread across different products. It's not 1 or 2 products, different customers and different products. And it's around -- percentage-wise, this quarter, it's around 8%.

8%, okay. And sir, how much is the total investments we have made on the vaccine biosimilar so far, if you can just share this number?

Yes. So, so far, the plan is to invest INR 300 crores, and we have made up to now about INR 230 crores, balance is -- up to September. Balance is being made in this month.

The next question is from the line of Vishal Manchanda from Nirmal Bang Institutional Equities.

With respect to the complex investable filings that you intend to do for hormonal products and a complex peptide, could you share whether these products are patent expired and whether -- and if yes, if there is existing players which have approval for the same products?

You're referring to the 4 products we are filing?

Yes, sir. The 3 hormonal products and 1 complex peptide, which cumulatively represent a market of USD 983 million.

Yes. So I think 1 product is on the patent and the 3 products are open. And there are 2 products, they have, I think, 1 generic.

Pardon, sir, the 3 products?

No, there are 3 products, 2 have genericized. So I think 1 player is there for these 3 products.

Ladies and gentlemen, due to time constraints, that was the last question for today. On behalf of Gland Pharma that concludes this conference. Thank you for joining us, and you may now disconnect your lines.