Gland Pharma Limited (GLAND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gland Pharma Limited Q4 FY 2021/22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumanta Bajpayee, Finance and Investor Relations, Gland Pharma Limited. Thank you, and over to you, Mr. Bajpayee.

Thank you. A warm welcome to Gland Pharma's Earnings Conference Call for Fourth Quarter and Financial Year Ended March 31, 2022. I have with me Mr. Srinivas Sadu, Managing Director and CEO; and Mr. Ravi Shekhar Mitra, our CFO, to discuss business performance and to answer queries during the call. We will begin the call with business highlights and overview by Mr. Srinivas Sadu, followed by financial results by Mr. Ravi Shekhar Mitra. After opening remarks from the management, operator will open the bridge for 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 based on management estimates. 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 in our website shortly after the call. The transcript of the 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 all. Over to you Mr. Sadu.

Thank you, Sumanta. Good evening, everyone. Thank you for joining our earnings call for fourth quarter full year 2022. My best wishes to all our shareholders, analysts and their families. The industry continues to face heightened supply chain disruptions, not just the API supplies, but also primary packaging components. There was a considerable escalation of freight costs, utility costs and several input material costs. Efforts were made to minimize the impact of these disruptions by qualifying new suppliers as well as optimizing our production planning. We remain committed to maintain our business residuals in these challenging times. Despite the ongoing disruptions, our business performance continues to remain strong. We closed this quarter Q4 FY '22 with a revenue of INR 11,030 million, that is an year-on-year revenue growth of 24% for the quarter Q4 FY '22. Our full year FY '22 revenue stood at INR 44,007 million, which is a growth of 27% over FY '21. Our PAT stood at INR 2,859 million for the quarter. This is an year-on-year PAT growth of 10% for the quarter. Our full year FY '22 PAT stood at INR 12,117 million, a growth of 22% for the full year FY '22 over FY '21. We have generated INR 7,908 million of cash flow from operations in FY '22. Our broad portfolio, differentiated business model and strong execution capabilities have helped us deliver strong business performance during the year. I laid down 4 focus areas for the company at the beginning of this fiscal year. The regrouping and consolidation with limited physical audits within the opportunity this year to complete extensive knowledge sharing across our manufacturing sites and strengthen the centralized quality function. We are very well prepared to handle any upcoming regulatory audit at any of our sites. Diversification of product portfolio, we made further investments in our R&D and were able to make 29 ANDA filings during FY '22 as compared to 20 ANDA filings during FY '21. Important to note that we initiated filings for our complex portfolio during the year. We made 3 hormonal filings and one complex prepared filing during the year, which have a market size of $1 billion. We also focused on ensuring timely new launches in the market. To highlight a few, we commercialized our Penem portfolio during the year, we launched ertapenem and doripenem. We also launched other key products, including Foscarnet, norepinephrine and launched a total of 44 product SKUs in our core markets during the year. In FY '22, upon excluding capital R&D expenditure, the R&D expenses stands at 4.4% of our revenue for the period, in line with our historical trends. As on March 31, 2022, we, along with our partners, have 311 ANDA filings in the U.S. and 1,557 product registrations globally. Our human capital was further strengthened this year. We have focused on filling any gaps in skill set and also ensuring learnings from experience are well distributed across the organization. In terms of our manufacturing infrastructure, we have not just increased more capacity, ensuring debottlenecking of critical areas but have also worked on improving yields for products on existing lines. The new lines commissioned will support our complex injectables development pipeline for suspensions, hormones and emulsions-based products. We, hence, ensure our manufacturing cost per unit is among the lowest in the industry despite maintaining high-quality standards. All our plants continue to remain approved by U.S. FDA. Not taking much of your time, let me quickly run you through our business highlights across various geographies. Our rest of the world markets accounted for 17% of our Q4 FY '22 revenue, and we have seen 32% year-on-year growth in revenues for the quarter. Our full year FY '22 revenue for these markets stood at INR 8,481 million, a growth of 55% over FY '21. Our key markets continue to remain MENA, LATAM and APAC. We registered our products, Dexmedetomidine, Ertapenem and Tigecycline in new geographies during the quarter. Enoxaparin Sodium was a key contributor to growth for the rest of the world markets during the year. Our core markets, namely U.S., Canada, Europe and Australia remained strong during the year despite market challenges. Our core markets accounted for 64% of our revenue during Q4 FY '22 as against 74% during Q4 FY '21. We have seen 8% year-on-year growth in revenues for the quarter. Our full year FY '22 revenue for our key markets stood at INR 29,248 million, a growth of 16% over FY '21. U.S. market continues to surprise us with high price pressure on one side, and at the same time, encountering several drug shortages. While our U.S. business grew by 13% in FY '22 over FY '21, the launch pipeline remains robust for the coming year. The key products helping us achieve this growth include Micafungin, Ketorolac Tromethamine, Heparin Sodium, Ziprasidone and Dexmedetomidine. India market accounts for 18% of our Q4 FY '22 revenue. Our full year FY '22 for India stood at INR 6,278 million, a growth of 60% over FY '21, primarily on account of volume growth of existing products. Our key launches include Caspofungin Acetate and Enoxaparin Sodium Multi-Dose Cartridge with pen device during the year. We faced setback on the vaccine front, initially the delay lifting of embargo and vaccine exports and later, the geopolitical situation in Ukraine didn't help our cause. As updated over the last call, we have received export NOC and have also validated the commercial scale batches of Sputnik Light. Meanwhile, we have initiated work towards repurposing this facility to initiate biosimilar CDMO work. We are aggressively pursuing collaboration opportunities with established biologic players with some of the site visits already scheduled. We are working towards complementing our business -- existing business with new growth avenues, and we are hopeful to maintain business resilience in this challenging environment. I once again wish everyone good health. I would like to now hand over the call to our CFO, Mr. Ravi Mitra, who will share details about our financial performance for the quarter. Thank you.

Thank you, Mr. Sadu. Good evening, ladies and gentlemen. Thank you very much for attending our fourth quarter and financial year ending 2022 earnings call. Our earnings presentation has been uploaded on the website. Let me begin with sharing the financial performance for fourth quarter and financial year '21/'22. For the fourth quarter, we have reported revenue of INR 11,030 million, which is a 24% growth year-on-year basis. Revenue from operations for the fiscal '22 stood at INR 44,007 million, a year-on-year increase of 27%. The key drivers for this growth were increase in volume of existing portfolio and new product launches. In terms of bifurcation of revenue during the FY '22 as per market, core markets comprising of the U.S., Europe, Canada and Australia has contributed 67%, followed by ROW markets adding 19% of revenue. India contributed balance 14% of their revenue from operations. Our core markets have seen a growth of 8% during fourth quarter of FY '22 as compared to same period of last financial year. It has registered 16% growth during the financial year. ROW markets managed to maintain robust historical growth momentum and registered a 32% growth for Q4 FY '22 and 55% growth on a full year basis. India market grew by 137% for Q4 FY '22 and 60% for FY '22. In domestic markets, we have managed to grow both in our B2C and B2B business. Other income includes foreign exchange gains on operations of INR 272 million for the fourth quarter and INR 792 million for the full year ended March 2022. We have reported an EBITDA of INR 4,136 million in Q4 FY '22 compared to INR 3,749 million, which is an increase of 10% compared to the same period last financial year. EBITDA margin for Q4 FY '22 stood at 35% as compared to 40% for the same period of previous financial year. EBITDA for the full year ended March 22 was INR 17,341 billion compared to INR 14,370 million for the previous financial year, a growth of 21%. We have reported EBITDA margin for FY '22 at 37% as compared to 40% of the previous financial year. We have managed to curtail the full impact of reduction in gross margin and increase in some of the expenses due to higher operating leverage. Power and fuel cost has gone up by 30% in Q4 FY '22 and 27% in full year FY '22 due to increase in power tariffs and oil and gas prices. Additionally, during Q4 and FY '22, we have incurred a one-time legal and professional fee for our ongoing acquisition evaluation amounting to about INR 55 million for Q4 and INR 70 million for the full year FY '22. The total R&D revenue expense for the financial year '22 was INR 1,932 million, compared to INR 1,199 million of the previous financial year, which is an increase of 61%. The increase in R&D spend will help us to maintain strong future pipeline and strengthen capabilities. It stands at 4.4% of the revenue for the full year FY '22. Revenue, R&D expense for the fourth quarter was INR 443 million, which is a 4% of revenue compared to INR 302 million in the previous financial year. The increase in R&D revenue expense is due to higher number of ANDA and DMF filings and increased expenditure on complex products. We have commissioned our new R&D facility during financial year '22, expanding our R&D capabilities. Our net profit for fourth quarter was INR 2,859 million, a growth of 10% compared to Q4 FY '21. During the financial year '22, our PAT was INR 12,117 million, which is an increase of 22% as compared to last year. We have reported PAT margin of 24% for Q4 FY '22 and 26% for FY '22. Our effective tax rate remains at about 25% in fourth quarter and for the fiscal year 2022. Cash conversion cycle stood at 187 days for the financial year '22 as compared to 192 days as of last financial year-end. The improvement was due to reduced inventory level. It has also helped us achieve better cash flow from operations. Total CapEx incurred during the financial year ended March 31, 2022, was INR 5,221 million used for increasing API and formulation capacities. During the year, we have installed 3 liquid wirelines and 4 lyophilizers and one prefilled syringe line in our Pashamylaram facility. New lines will support our complex injectables development pipeline in areas of suspension, hormones and emulsions. One more API block was completed in our Vizag plant. We are building sufficient production capacity to support our next organic growth demand. Our ROCE on ex cash basis as on March 31, 2022, stood at 33% and fixed asset turnover remained stable at 2.8x for FY '22. As of March 22, we had total INR 34,483 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.

[Operator Instructions] The first question is from the line of Sudarshan Padmanabhan from JM Financial.

Sir, my question is to -- we heard a lot about needle shortages and across other companies as well some of the consignments getting pushed to the first quarter because of that. I just wanted to know in the fourth quarter, I mean, has that impacted any kind of products for us? And can you quantify if it all there has been any kind of a shipment delays in the first quarter because of this?

Yes, it did. I did mention last quarter as well, there is a shortage of syringes supplies. And if you look at our U.S. sales in last quarter, the growth is lesser compared to the normal run rate. That's primarily because of the syringe shortages, which we couldn't export because of the shortages. What we did was we got some alternate source synergies, but we can't really change for the U.S. market. So we utilize these syringes for domestic market and other markets. That's one of the reasons you see we have larger third-party sales in the domestic market where we have utilized syringes from other suppliers where actually we can supply to the local market. So there was an impact, but the end market won't suffer because of our model, the companies do have the pipeline, but it did impact in terms of export last quarter. And indirectly, it's also impacting the cost because we are airlifting the syringes to beat the demand. And that's one of the reasons why at the gross margin level, there's an impact of that as well because the logistic cost has gone up when we're importing this by air.

And sir, what could be the impact of that? I mean if you can quantify it and whether this issue has been resolved because it's been running for the last 2 quarters.

I would say -- I can't put a number to it yet, but it will -- we are catching up, I think, this quarter, next quarter. There is a backlog of orders what we need to supply still in order stage where the platform is right for our partners. So -- but there's a backlog of orders for us. So this quarter, there was still shortage of about 3 million to 4 million syringes, but -- but I think by next quarter, everything will be on track in terms of the syringes we have promised to deliver.

And sir, on the cost front, I mean you talked about the gross cost as well as the cost impacting on the power and fuel and other expenses. But if I'm looking at consistently, I mean, our gross margins have been coming down from 55% to 50% and so has the EBITDA margin. So going forward, I mean, are we going to see an improvement from the current levels or given that fourth quarter was a consortium of several issues, including shortage of syringes and cost escalation? I mean, can we expect some kind of reprieve in terms of some kind of price increase and some kind of normalization and basically margins increasing going forward?

Yes. So in my previous calls also, I said, our gross margin, the way you look at it is a little different than a front-end company and also because of the business model, a quarter where we have a larger portion of contract manufacturing, your gross margins looks better. That's one. If you look at our business last quarter, there's lesser contract manufacturing business. Second, the U.S. portion of the business is lower because of the impact where the margins are higher for us. But if you look at just the U.S. business itself in fact, our gross margins have increased over previous when you look from the material point of view. The other key thing is our gross margin, there's also like a component of logistic costs because when we build the revenue, it includes the transfer price less the profit share. Now profit share element includes the cost of logistics that deduct that and the distribution cost and then they share the profit. And that is actually built as revenue. So unlike other companies where everything is growing at the bottom line, not in the gross margin level for us, the distribution costs and also the logistics costs what our partner is importing that also gets into the gross margin level at least what we share, right? I mean, 50% or 60%, depending on our profit on model, that also sharing, that's deducted and then the profit should be shared with us. That way, there's an impact on the gross margin. So the way we look at gross margin should be different for Gland just because of the model we adopt. And the margin, there's a pressure because of the logistic cost, which is actually lying for all the U.S. market, it's also lying as part of gross margin. So it should come back to normalized margins as well as EBITDA once I think the external environment becomes a little better.

And this environment, I mean on the sales you did mention it going on you are looking at 20 to 25 kind of percent sales. And I mean are we looking at any kind of a margin guidance that you would like to give -- from FY '22 base?

Internally, we always keep the margins around the gross margin. Like I said, that's not a criteria for us. But at the EBITDA margin level, we always look at 35%, 37% levels of EBITDA margins and at the PAT level around 25%. That's how internally we always stick towards them.

And we are confident of deriving a 25% growth. That pipeline should be there.

It all depends on the mix. So I can't really give a growth guidance yet. But we try to grow like historically what we've been doing on average, we try to do that.

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

On the vaccine, you mentioned that there's a repurpose of the facility that has been planned. I wanted to ask 2 questions on this. One, was there any kind of write-off on the vaccine business given that we had some commission benefit or it is not time to even talk about?

So we have not done any fill and finish batch other than the validation batches. So that will be very small quantities. So as of now, there's no write-off quantities yet. Whatever we bought are in terms of bags a lot of that which can be used for the biosimilar production as well. So as now, there's no write-off on that.

Got it. And my second question on the vaccine front was on the time line or rather the -- as well as the cost for repurposing these facilities, does that entail some time then or would that be immediately swappable? Just wanted to visualize that.

So when we say repurposing, whatever lines we have installed because they're not gone for commercial production. So there's nothing much involved in terms of trading of one line easy to clean up because they have taken validation batches. So that doesn't include -- doesn't involve too much of expense. So already, we have started discussing with some of our partners and a couple of these have already been done. So hopefully, pretty soon we should start some work at least the premier work which is starting soon.

Got it. And these will be repurposed to biologics. That's the right understanding that? Biosimilar?

Yes, biosimilar, biologics.

My other question was on the China NMPA inspections. You mentioned in the last quarter, there would be some sort of update you would be able to give us on exports. Is there something that you could talk about?

Still because of the shutdown, we are not getting any dates from them yet, but we have continued to develop products for that, and we're going to file as planned. But on the inspection perspective, still because it's not open yet. We don't have a date actually.

And my last question from -- again, from the China front as well. On biosimilar, any kind of headway in terms of discussion between parent entity or any other entity to kick start biosimilar in FY '24 like you had guided for?

Yes. So that's been ongoing. And I think we'll also -- we'll be doing some kind of work a subsidiary of the parent. So while we are working with external companies to collaborate, we're also working in internal subsidiaries.

And the next question is from the line of Kartik Mehta from Klay Capital.

Just on the part that you mentioned at the start of the call about the shortages, which you see. I'm just curious to understand the reason which you're aware now in the U.S. is it the supply of raw material or is it due to the renewed FDA actions across inspection start? That's the first part of the question. And how much percentage of your portfolio now, if you can probably help us is under that -- the list as per the U.S. FDA?

So the shortages, what I talked about has nothing to do with the FDA. Mostly, it's the manufacturing sites in the U.S., there are various reasons some -- for example, I was talking about components, whether it's wires or stoppers and some of the process materials like tubing filters. So most of the suppliers are going towards vaccine manufacturing and so it got diverted to that. So that's one of the reasons. So there's a lot of backlog for them to supply to the regular injector manufacturers. So the lead times have really gone bad for most of these components. So that's one of the reasons we are quickly planning to identify other manufacturers who can do it. Some it's easier to change the supplier, but some is difficult, depending on the technicality of the item what we're using for a particular product. The reason -- this is one of the reasons, but there are also reasons around the manufacturing issues happening at sites in U.S., whether it's labor shortage or reduced manufacturing pace. So post-COVID there have been some disruption in that. So the capacity is actually their output have come down drastically. So I think last 3 quarters, we believe that. So we've been now holding off pretty good last, I would say, 5 to 6 months where the lead times are also high because we were having inventories at the start to impact a few of our products, especially this is mostly from the U.S. manufacturers, I would say.

And just that while we are on this, is this nature can you explain that it would take a quarter or so for this to resolve. But in this case, are there options in your contract where pricing can be renegotiated in terms of this? And what is the overall outlook? I'm just trying to understand from your experience in manufacturing especially in injectables if FDA inspections across the world do start full throttle and assuming we are able to maintain our track record, do shortages increase across on manufacturing, largely on injectables. Is it the right way to look at this?

Well, I've not seen a case where the prices have gone up in recent times. It's always -- in spite of the shortages, still the prices are kind of normal, but at least it will not go down for sure. But the volumes are increasing for certain products, which we never thought it will increase because of the shortages. So although the competition has gone up in injectables like always said, people are exiting these -- some of these products. And while I'm on the material shortages in fact, FDA is aware of this. In fact, they have sent e-mail a few weeks ago, what are the components which are having an impact on supplies and because they want to discuss with the suppliers as well. So they're actively pursuing that because they are seeing more and more products getting in a shorter situation. We are seeing, at least in some areas, we are seeing some development happening. It's just going to add some costs because we can't wait for them to be shipped by sea and do per time. So we are air lifting most of that, which we are earlier bringing by sea. So the margin pressure is there on that. But at least we should cater to the market and at least capture that demand when it's there. And some of these contracts where other companies are not able to meet the demand and those contracts are getting converted to the companies who are supplying. So we got a couple of contracts like that as well. So it's an opportunity to do that while the price pace is -- the cost pace is there.

My last question, if I may. What is the CapEx plan for the next 3 years? And in terms of if you could specify which lines you will be investing in?

So we plan to spend INR 300 crores next year and about INR 250 crores a year after that. So we are currently spending.

Sir, you said INR 300 crores is FY '23, right? FY '23 and INR 250 crores, okay?

So this -- currently, the project which is online in Pashamylaram is our suite for complex injectables and expansion of a warehouse capability and few more lines, including that lines, including -- addition in penem. So these are basically the immediate CapEx plan. And in the API side also, we are expanding for increasing the capacity of enoxaparin production. So this will take care of our near 2 years CapEx plan.

So if you see we have added almost 4 lines in the current year. We have increased from 24 to 28 lines. But we are still not able to meet demand of tenants. So we have a shortage of that, so we're trying to invest into that. Also bags, we are 100% capacity utilized and we're not able to cater to the entire demand. So we are planning to invest into that as well. From the API perspective, if you see about a year ago, internal APIs were about 25%, 25% was internal. Now they've gone about 32%, 35% of the revenue is coming from internal APIs. And we continue to invest into that because at least the risk of the supply is not supplying will go away so substantial investments are going into that as well.

The next question is from the line of Kunal Dhamesha from Macquarie Capital.

So the first one, you earlier alluded that probably during COVID times our product mix shifted towards COVID products like enoxaparin, rocuronium and our other products such as -- which are used in elective surgeries took a hit. So now with COVID normalizing, are you seeing that mix shift again back going to the elective surgery portfolios like penems and antibiotics and all?

So I would say the COVID portfolio has gone away about 2 quarters ago other than on to products. But otherwise, rest of it is coming back slowly. Some of the products are not caught up like before. But I think the portfolio mix is getting back to the earlier days.

And is it fair to assume that those products typically have better margins than before products like Enoxaparin?

Well, I think if you see the margin wise, all the new products will give a better margin. So whatever the launches, I think that's the key thing, which will give us better margins than the old products coming back because the competition also increased. So I won't say that those margins will go up. So whatever the margins they were there to pre-COVID that will continue. But I think products that we are launching recent times, if you look at our growth, the 9% to 10% comes from these new products and volumes and certain volume growth, right? I mean if you look at last year, 21% growth came from that, whereas the price actually has gone on by 2% or so. So the price is still, I would say similar or 2% lower, but I think the volume growth and new product launches, that's the key for us.

Sure. And just one logistic question. What was the profit share contribution this quarter?

About 10%.

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

First question is related to staff cost. I don't know whether you have addressed this in the opening remarks, but it has gone up sequentially by around INR 15-odd-crore to INR 94 crores, INR 95 crores. Any reason for this or is it related to the plant expansion we have done or is it the new base if you can explain?

Yes, I think it's a combination of both. One is the additional lines coming in. So recruitment has happened in those lines. The other is January is a time where we get the raise. So the increment impact is also there and the incentive quarter. So that's the impact you're seeing.

So we should assume this as a new base, right?

Some incentives won't there every quarter. So that will be -- will go away.

So, the annualized basis, if you see the increment is normal as for the -- what we have been seeing. And as Mr. Sadu said, there's a headcount increase. So yearly basis that can be the rate.

The second question is related to Enoxaparin. During the year, we have seen one of our partners losing a lot of market share in U.S. And if you can highlight any reason for this? And also, we have added one more partner in the U.S. at the end of the year. So should we see a good growth coming in, in FY '23?

So the -- both partners were already there, but because of the margin profile, the partner and the market shares they were getting, so it didn't make sense to continue with the below volumes. So that's why they kind of hold off the margins improve. But the other contracts, we have a GPO contract, which I have mentioned. So the ramping up is happening, and they're still selling of the product what they got from the innovative earlier. And you see from this quarter, we were also a bit slow because of the shortage of syringes. We don't want to take all SKUs immediately. So we kind of are limited what we can supply. And from this quarter, we are seeing a ramping up and probably more ramping up will happen from June, July.

Also a supplementary question to this for the global supply, which we are going for in enoxaparin, how far we have reached in terms of getting approvals in other markets? And are we still expecting some more approvals for new territories or you think we have already achieved the geographic expansion in terms of supplying enoxaparin?

No, there are several other markets still -- there's opportunity where we are looking at because the competition for these molecules compared to low compare. In fact, there are several markets where the competition is lower than the U.S. So we are still there only the -- on the area where the geography where we're not looking at this in Europe because of the price pressure there and also the complexity of the external products. Rather than Europe, we are looking at any other country, every other country.

Just last question on the U.S. market, we have talked about the launches, which are coming in, in FY '23. So if you can highlight any color on the same in terms of the business opportunity in terms of the complexity, anything if you can provide?

In terms of value, I think it's about $3 billion -- next 3 quarters, we have launches planned, which is worth about $3 billion. And products about 20, 24, 25 molecules launches are planned for the next 2 quarters.

So in terms of trends, should we expect higher growth or similar growth in the U.S. in FY '23? Or it would be too early to call out?

It's too early, but because of the base is high, so the percentage growth will not be the same. But if you look at globally, we're trying to get at least a 10% growth at a company level, launching more products in other rest world markets also. But if you look at specifically for U.S., it cannot meet the same percentage like earlier because the base is high. But at the company level, we're still looking at 10%, 11% of growth coming from the new products.

The next question is from the line of Ankush Agrawal from Surge Capital.

So firstly, on the growth slowdown in the core markets, you highlighted one of the specific reason around syringes right? So any other reason that you want to highlight qualitatively that has affected the performance. And on -- similarly on the margin front as well. So is it a suffice to -- safe to assume that the reduction in margin is primarily because of the lower share of developed markets in this quarter and the logistics in syringes that you highlighted.

Yes. So one is, of course -- if you look at launches on an annualized basis, you should see launches, it might go up and down in a quarter. So launches were fewer in the last quarter. And also some products, we didn't launch actually because we have inventory for the launch batches, but then the follow-up batches we can't make the market dry. So we're waiting for the components to come in so that we can supply on a continuous basis. So some of the launches which we actually planned last quarter will go this quarter, end of this quarter.

And then the margins front, is that because of the market mix and logistics in is primarily?

Yes, absolutely. So one is, if you look at the percentage for the year and for the quarter, U.S. percentage has come down. That's one. And then the logistic cost. And if you look at the plants where our plants are located Vizag, there was a issue of power supply. So we've been running on diesel for almost 40, 45 days. So that become expensive. So on an annual basis, there was a big impact on power, diesel, utilities costs and of course, the input and logistic costs.

Sir, in your opening comments, you mentioned something about an inorganic acquisition that some costs have spend. So can you highlight something on what front it is, like is it development assets or asset something, what would the potential size?

See, we cannot comment on the target we are currently evaluating, but.

Not the name, but just the focus area.

Yes. So focus area, like we also said earlier is in line with our strategic target. So one is that, of course, the backward API capability fermentation where we don't have. Second is on products and complex injectable side.

Focus areas are clear. I was wondering if there's any specific area attached to this inorganic acquisition or is that multiple acquisition?

Yes, we cannot comment right now.

Lastly, sir, on the vaccine. So since you're repurposing the plant, is it safe to assume that the vaccine project in itself is out of the box for Gland at the moment?

I won't say out of the box because that is one line we're keeping it like that. And the other line, like I said, where we have not produced any vaccine that block, we are trying to work with the bio space. Still -- the other line is still going to keep it for a few more months because the discussion is still on. So we don't want to shut it if there's any opportunity you want to get it in that.

So sir, anything that will salvage from this in case the vaccine project doesn't go on, like earlier at the time of contract, we had mentioned that it's a take-or-pay kind of contract. So will we be getting anything out of this?

I can't comment on it. It's an ongoing discussion, because I think nobody said that's a problem. But it actually it's our biosimilars opportunity because we have been commenting that we will wait for the vaccine to end by end of 2022 and then Q1 of 2023 will start, but this accelerates that, right?

Yes, yes. So that's why we have already initiated that and some of the companies have started limiting it because we thought why keep data plan as well, we can start working on one line while the other can be used for this.

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

So FY '23 seems to be a larger LOE as there are more number of injectable brands losing exclusivity. So is it fair to assume that on a relative basis compared to, let's say, FY '22, your share of new launch contribution will be higher and therefore profit share will be higher. Is that a fair characterization?

At least the second half of FY '23 should look like that, Nithya.

A quick tactical one. By when do you expect the partner's volumes in enoxaparin to entirely shift to you, what timeframe?

We are looking from June-July.

By June-July, all of the market share would have shifted to Gland? Correct?

Yes, correct, correct.

Understood. And just a related question to what another gentleman was asking you've been talking about M&A for the last year, year-and-a-half years. If you can just update us on where you are? And are we likely to see more traction in the coming months?

Yes. Hopefully, we should give something, Nithya because last year, it's more like the valuations are all over the place. Now there's some sanity around the valuation. So we are working actively on a couple of things. So hopefully, we should give something in next few months, yes.

Is there a priority between the 3 areas that you had mentioned, which is controlled substances, fermentation API or complex injectables?

Priority, I would say, complex injectables, advanced stage assets. I think that's a priority for us. While we have around 5x for the next 3 years, which covers over $10 billion, there are several other products where we think we can expedite using cash on books. So that's our main priority. And then second, of course, the fermentation.

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

First, considering this partner's volume as well for Enoxaparin overall, globally, what would be the market share of Gland for this product?

Globally, I can't tell because Europe also is a huge market. So China is a huge market where we don't have a business. Globally, probably 10% because volumes was huge in other markets also. So probably 10% could be my wide guess here.

And you have highlighted that Europe is not a geography to look for at least for this product. So China would be the key market to look in terms of significant expansion for the product.

Yes, China and also in other markets, they're still there, where -- see, if you look at the Chinese manufacturer they're big in Europe, they're big in China, and they're big in the U.S. but other markets still they don't have presence because of the complexity of registration in different markets. So if you look from the margin perspective and the opportunity perspective, there's still a lot of value depth in other markets as well. So we are focusing that also. If you see our growth of enoxaparin as a molecule coming is mostly from rest of the world markets. Now with the U.S. contract coming in, you see substantial growth in U.S. also. But China is an area also, but I would say that there is a presence of China, Chinese players in that. So we had to go and fight with them where they're backward integrated.

Yes. In fact, I was just about to ask that given that the key raw material lines in China. So there, what would be the right to win the business for this product in China market.

So the good thing is we are backward integrated until Heparin levels. So now the current procurement of Heparin, we are getting from different sources. And there are also sources available, which are cheaper than China today. So that's where we are trying to source for our ROW and India business. So once that the supply chain is secured so our priority is first how to increase margins in the U.S. So we are trying to use whatever crude Heparin we are getting from different sources and get approved for our ANDA in the U.S. Once we have enough supplies for that, then we'll start looking at other markets. So I think currently, our focus being to increase the margins for the U.S., whatever we are going to supply the next few years for this contract.

Just on the R&D spend, annually, the amount has been increasing considerably like this year, it's almost INR 227 crores to INR 122 crores in FY '21. And given that we have complex filings coming up over the next 2 to 3 years. So could you just quantify like what kind of R&D spend we have in FY '23, '24?

So if you specifically look at this year, we have to look at the CapEx. We have CapEx, R&D, right? I mean, because we have built this new R&D center and equipment so -- so that's like a onetime item. So if you remove that, the increase is about 0.6% increase, which is not substantial. But on an absolute number, it will increase, but I always said you should always look at 4% to 5% of the revenue as the R&D spend; with complex injectables coming a number of -- the percentage of complex injectable is going up. So that absolute number will increase, but percentage-wise, it would be 4% to 5% of revenue.

And just thirdly, there have been multiple inspections at the peer side, probably the drug shortage triggering the inspection -- and in fact, Gland does have existing products or the products in the pipeline there, which are part of the drug shortage list of FDA? So any inspection on the near-term side or that is not yet triggered?

So most of the instructions are working these days. So we should be ready for any day. So we here every second day, FDA walking into some site. So we're all prepared for that. And we think even tomorrow, somebody can walk in the near for side. So that's how we -- unlike earlier, at least some, they were coming announced in species, now mostly they're unannounced. So we have just go by day by day here.

The next question is from the line of Kunal Dhamesha from Macquarie Capital.

So slightly longer-term question. In a sense, would you ever look at consolidating the ROW product portfolio into the separate facility in less in year or medium term? Because I believe the compliance costs related to U.S. FDA, which is much higher vis-a-vis less ROW market. And now that way you can improve the margin of the RW portfolio.

I mean there is a debate always on this, but I think we want to keep the quality standard across the sites similar. We don't want to dilute that because in the long run that helps because from the corporate quality perspective, we want to have a common quality systems across sites, so that there's no confusion and different qualities at different sites. Maybe there will be some margin pressure in ROW, but that helps to keep your regulated market business going up and having a clean quality record with the authorities.

And secondly, as we said that we have increased our backward integration into API from roughly around 28% to 24%. Would increasing further, can you give more to our gross margin? And if you ask what could be the extent of that positive impact on the gross margin?

Well, I can't quantify, but for sure, that -- one is, of course, eliminate the risk, the other is increasing the gross margins. That's primary reason why they're expanding into this. Yes, for sure, there will be a positive impact on the gross margin.

And will you have some products in the pipeline that you are actively looking to backward integrate?

They're ongoing, I mean, every year, if you look at last year, we filed about 11 DMS. Historically, we were doing like 5 to 6, but this year, we did DMS. And the rates have increased. So some of the R&D spend is also going into this, right? So it is a continuous process we are identifying APIs so that you can -- your margin profile is better.

The next question is from the line of Ankush Agrawal from Surge Capital.

Sir, just one clarity. Like from last couple of quarters, we have seen our business wherein exports from -- exports to U.S. from India is growing because the partners from -- the Indian partners have grown. So I wanted to understand is the profitability on this business similar to say export to a U.S. partner?

It's similar. There's no difference in that. The products, what these companies have, they started launching more products. And also new partners, we have added Piramal as a new partner. So some of the partners in India who are selling -- Sun Pharma is also one of our partners who's selling products, more products now in the U.S. So we have more Indian partners are selling. So the volumes have increased that way.

So I mean a couple of years you expect share of Indian partners increasing, is that?

Yes, because more products to more players who have front end in the U.S., the share has also increased. So that's an increasing number. That's what you see increasing number.

[Operator Instructions] As there are no further questions, I will now hand the conference over to Mr. Sumanta Bajpayee for closing comments.

Thank you. Thank you, everyone, for joining us today for our fourth quarter earnings call. If any of the questions remain unanswered, please feel free to get in touch with us. Thank you, and good night.

Thank you very much. On behalf of Gland Pharma Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.