Indoco Remedies Limited (INDOCO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Indoco Remedies Limited Q3 FY '20 Earnings Conference Call hosted by Nirmal Bang Equities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vishal Manchanda. Thank you, and over to you, sir.

Hi. Good afternoon, everyone. Welcome to the Indoco Remedies Q3 FY '20 Earnings Call. We thank the Indoco management for giving us an opportunity to host the call. Today, we have with us the senior management of the company represented by Ms. Aditi Panandikar, Managing Director; Mr. Sundeep Bambolkar, Joint Managing Director. Mr. Mandar Borkar, Chief Financial Officer; and Mr. Vilas Nagare, President, Corporate Affairs and M&A. I now hand over the call to the Indoco management.

Dear participants, a very good evening to all of you. Let me begin with the business highlights. Revenues for the quarter grew by 14.3% at INR 283 crores as against INR 248 crores, and year-to-date revenues grew by 17.2% at INR 816 crores against INR 696 crores. The EBIDTA for the quarter is 12.4% at INR 35.1 crores as against 10% at INR 24.8 crores. And the year-to-date EBIDTA is 11% at INR 90 crores as against 6.9% at INR 48.2 crores. On the Domestic formulations business front, revenues for the quarter grew by 16.9% at INR 178 crore as against INR 152 crores. And for the year-to-date, the revenues grew by 14.1% at INR 526 crore as against INR 461 crore. During the quarter, the company launched 5 new products in Chronic segment. The total number of new product launches in the year-to-date stands at 8, that is 7 in Chronic and 1 in Sub-Chronic. The company has recently launched 2 new promising products, details of which are as under. Aloja -- Indoco Focus, a division of Indoco, launched a bioequivalent, antidiabetic product, namely Alogliptin, which is indigenously developed at the company's R&D facility and manufactured at the USFDA-approved site. The product offers once-a-day dosage, which facilitates better dosage compliance for diabetic patients with high pill burden. The launch of Aloja marks the intention of Indoco to become a competitive player in the diabetic therapy market in India. Second, Apixabid. Indoco CND, a cardiac specialty division of Indoco, launched Apixabid in December 2019 after expiry of a product patent for Apixaban in India. This generic equivalent of the brand Eliquis is also indigenously developed at the company's R&D facility and manufactured at the USFDA-approved site. It is one of the safe and highly effective novel oral anti-coagulants with worldwide sales of Eliquis touching USD 12.5 billion up to 2019 as per Newport data. Currently, the launch activities for Apixabid are on hold as Indoco is contesting a patent infringement case filed against it in Delhi High Court in December 2019 by the innovator company. Although the outcome of the patent infringement case cannot be ascertained with certainty, Indoco is strongly defending the case filed against it. As per AWACS, Indoco jumped one rank and is placed at 29th in the IPM, with market share of 0.67% as per December '19 MAT data. As per SMSRC, Indoco ranks 23rd with prescription share of 0.85% as per November-December '19 MAT data. On the International formulations business front, during the quarter, revenues from International formulations business grew by 21.5% at INR 83 crore against INR 68 crore. As for the year-to-date, revenues grew by 33.1% at INR 217 crore against INR 163 crore. U.S. revenues during the quarter were at INR 16 crore as against INR 3 crore. And for the year-to-date, the revenues were at INR 30 crore as against INR 14 crore. Indoco has secured an ANDA approval for Febuxostat Tablets, 40 milligram and 80 milligram. Febuxostat is used for the treatment of gout caused by excessive levels of uric acid in the blood. Company has also secured another ANDA approval for Glycopyrrolate Injection 0.2 mg/ml filed from its Goa Plant-II on behalf of its partner in the U.S. Glycopyrrolate is indicated for use as a preoperative antimuscarinic to reduce salivary, tracheobronchial and pharyngeal secretions, to reduce the volume and free acidity of gastric secretions. An NDA approval for tranexemic acid injection filed from its Goa Plant-II has also been received on behalf of its partner in the U.S. tranexemic acid belongs to a class of drugs known as antifibrinolytics. Tranexemic acid works by slowing the breakdown of blood clots, which helps to prevent prolonged bleeding during menstrual period. During the quarter, revenues from Europe business grew by 44.9% at INR 45 crore compared to INR 31 crore. And for year-to-date, revenues grew by 55.6% at INR 122 crore against INR 79 crore. Revenues from emerging markets for the quarter were flat at INR 20 crore. For the year-to-date, revenues grew by 21% at INR 59 crore as against INR 49 crore. On the regulatory front, Goa Plant-I. U.S. consultants are on board for remedial actions to resolve the concerns raised in the warning letter issued by the USFDA on 18th July 2019 for Goa Plant-I. Periodic compliance updates are being timely submitted to the FDA. Inspections have been conducted by the Australian health regulators in quarter 3 2019, and inspection outcome is awaited from the agency, TGA. The outcome for reinspections conducted by SAHPRA, that's the South African agency, in Plant-I is awaited from the health authority as well. Goa Plant-II and III. The sterile manufacturing facility Plant-II at Verna, Goa, received European GMP certification from the U.K. health regulator in December 2019. This is an outcome from the last successful inspection conducted by UK MHRA in September 2019. Goa Plant-II facility received EIR from the U.S. regulators in November 2019 on successful conclusion of the inspection conducted by USFDA in October 2019. This is the second successful PAI, that is Pre-Approval Inspection, of this site in less than 6 months. The site continues to maintain its Voluntary Action Indicated VAI status. Inspections have been conducted by the Australian health regulators in Q3 2019 in Plant-II, and inspection outcome is awaited from TGA. The outcome for the reinspections conducted by SAHPRA in Plant-II and III, that is the South African agency, is awaited from the health authority as well. On the API business front, revenues for API business for the quarter were at INR 19 crore compared to INR 22 crore. And for the year-to-date, revenues grew by 15% at INR 66 crore as against INR 57 crore. Diversion of capacity for internal consumption has resulted in API division's muted growth during the quarter. However, the capacity from new facility will be used and growth will resume gradually as we complete regulatory work of registering the new API site for Customer's Dossiers and ANDAs. That is all about the business highlights for the quarter. And I now request the participants to put up their questions. Thank you.

[Operator Instructions] The first question is from the line of Aditya Khemka from DSP Mutual Fund.

Sir, if you could explain, in your remarks, you said API sales were impacted due to higher internal consumption. Which of the operating segments in -- which of the geographies are reselling -- internally consuming more API? Is it the domestic market or any export market?

No, no. It's the international market that is mainly right now Europe and then U.S. also will follow.

So right now, basically, in the European sales, you're using our own API?

Yes, yes, absolutely.

Okay. And you said the new capacity will come online and then the ramp-up will happen. So any time line you would like to share as to how much time it will take to get the API registered in the dossiers of the customers? And by then can we see the ramp-up in APIs?

Yes, yes. It will be at least 2 to 3 quarters.

Okay. And on the gross margin side, our gross margins sort of picked up to 71%, I think, in this quarter versus our historical range of 66%, 67%. Anything specifically you would like to call out? And how sustainable do you think the 71% gross margin is for us?

Yes. The business mix of the company has improved. That's the first point. Second point, the pricing of the raw material has been under continuous control. So these are the 2 salient features, which have got the business under tight control, and material cost is limited to 29%.

Also captive consumption, no?

Yes, captive consumption also.

Yes, fair enough. So this -- so both these factors, whether be it the external raw material price deflation or be it higher dependence on internal raw material, both these, to me, seem to be more of a structural change. And therefore, would it be fair to assume that this 70%, 71% gross margin is the new normal?

Some part of it, like Sundeep said, is because of kind of business mix we have been able to get for this quarter. We -- while every attempt will be made as U.S. sales contribution increases, I think we should be able to sustain this kind of margin going forward.

So Aditi, when you say U.S. sales contribution goes up, so wouldn't U.S. sales be diluted to our gross margin as the U.S. sales mix goes up?

Can you repeat that?

Yes, please repeat.

Yes, yes. So the question I'm asking is if our U.S. sales, let's say, were to go up threefold in the next year, the incremental revenue in U.S., wouldn't that be gross margin dilutive? Wouldn't the gross margins for the U.S. be lower than the 71% we are currently doing?

Lower?

No. Why would it be lower?

No. Just asking. I'm not sure whether it will be lower or higher. I'm just asking whether it will be lower or --

No, It will be not.

No, no, no.

It would not be.

[Operator Instructions] The next question is from the line of Anand Bhavnani from Unifi Capital.

With regards to the Apixaban launch, you mentioned there's a court case by the innovator. Given that the patent has expired, so what is this court case about? And how long can it take to resolve?

Currently, this is in court. There's not much I can tell you except that I think it's in public domain already that we -- there were 2 patents from the innovator. The first one was a broad patent as we understand it, and the second one is a specific patent they claim. We claim the second one is not valid. So we have put a product in the market, and there are some other players also like us. They have got an injunction. We have gone into appeal to vacate that state.

Okay. And this product is only for the India market? Or are you planning to sell this in U.S.?

It has been developed with U.S. in mind. But at this stage, we are launching it in India.

Okay. And with regards to the product pipeline, can you give us a sense of what's the plan for calendar year '20? What's the plan for ANDA filings, and any plans for launching newer products in India?

Yes.

We talk about it separately, the U.S. and India business.

Yes, yes. Yes. We will be filing about 5 ANDAs in the financial year 2021. That was your question, right?

Yes, correct.

Regarding which of these or which products per se will come to India, let me just give you some gist of this. The India business up to now used to not have much overlap with the product pipeline we developed for U.S. markets. However, going forward, we intend to bring in at least those products which are in the cardio-diabeto segments into India as well as and when the opportunities exist. So in the solid oral pipeline for U.S., for Indoco as a company, there are several products in the cardio-diabeto space. And we shall look at launching them in India at present time as and when the opportunity arises.

Sure. I had a broad question with regards to our strategy. If I were to see, we have small business in all the geographies of all kinds, where in India, we have some European business, some U.S. So what's the broad thought process like? I mean, would we be -- continue to be doing the business same we're trying to grow each of these? Or is there a focus on any particular of the segments? What's the thought process? And how do we kind of overcome the disadvantages of subscale in each of these businesses?

So we have always looked at each of these businesses separately within the organization also. Therefore, we do not think it's a defocus, first and foremost. Broadly, for us, the India business is the main business, which contributes 60% of the top line or more as in this quarter. And in the international business, the broad markets are Europe and U.S., U.S., which is yet to actually find foothold and grow. So going ahead if you ask me very -- to answer your question, it could be the growth we are going to get in U.S. markets going forward, maintenance of the European market business and steadily to grow it. And in India, we have a branded business. So we are -- we got 8 marketing divisions. If you were to hear that, you'll find it further defocused. But that's not how we work. So we have planned very clearly in India. The basket is divided into acute, sub-chronic and chronic therapies. And there are clear strategies to grow products in each of these. With chronic, as Sundeep read out to you, we believe it is our strength in our product portfolio which will help us make our dent and allow us to get into the super-specialty segment. When it comes to sub-chronic, we already have a very good position with the [ MAT ] specialist, so whether it is the dentist, the ophthalmologist, the ENT surgeon, the gynecologist, the pediatrician. And with these doctor specialties we grow our sub-chronic business. The acute business is the age-old business of the company. Here, we have the top legacy product of the company, and they continue to grow very well even now. And here, we're focused on the general practitioner and the consultant position. So there are different strategies for different therapies in India. There are also different strategies for different geographies worldwide, but each is a very important one, right? We continue to pursue all of them.

So in terms of capital, given the -- internally the capital that would be generated, how do you decide how much to deploy in each of these? I mean is there a ratio that --

So the India business is not really capital-intensive from that perspective. It's more revolves around the return per man or the number of people you deploy and their effectiveness or efficiency to give return. The international business, on the other hand, is far more dependent on the installed capacities of manufacturing. And if you've been following us carefully in our development, we were doing very well on that front until a couple of years ago when we got our regulatory hurdles on -- because of compliance issues. Those are now almost resolved. So we now have all the capacity available to grow our International business. So I do not see too much capital deployment, therefore, by way of any new CapEx, which would be required to grow the international business from here on. I also do not see too much investment in man going forward in the India business. Much of the investment going forward, yes, is going to continue by way of sustaining the research and development pipeline, whatever is underway as well as the new ones we develop. So that's broadly how you are to understand it.

Last question. What would be our MR strength in India at the end of quarter?

2,300 people.

2,300.

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

Ma'am, my question is on the earlier participant, when you talked about CapEx and manpower cost. That would basically be benign going forward. One is, when -- you can talk a bit more about -- currently when you're running at around, say, INR 1,100 crores -- at about INR 1,100 crores to INR 1,200 crores of sales, to what extent your current capacity can take you through? And second, I mean even on the cost side, if I look at our gross margins we are at around 70%. I mean specifically, we are running at around 11% to 12% kind of EBIDTA margin. So there is a lot of negative operating leverage that is playing because of our facilities or the capacity is not being optimally utilized. So if you can dwell a bit more on what is the kind of margins which we can reach on a steady-state business as things unwind.

As you say correctly, it is a capacity utilization, which has not happened effectively over the last couple of years, which has actually caused a lot of burden to us. I expect these margins to go up to at least 14% in the coming year. And coming to -- what was the first part of your question?

To what extent are current capacity --

Yes, yes, yes. So as I said, we are not really going to deploy any more people in the India business. Of the 2,300 people, half of them are deployed into the acute space and actually enjoy a far greater per man return for us. We enjoy a greater per man return from them. It is the other half, which is around another 1,100-odd people, who are doing the sub-chronic and chronic sales where actually we deserve far greater per man returns, but where the brands are being built today that is going to be our future. So in this business, therefore, we can suitably expect -- currently, we have a per man return of around INR 2.4 lakhs. I think we can easily go up to INR 4 lakhs with the current manpower, okay? Coming to the international business, at the height, we had done close to INR 400 crore.

INR 425 crore.

INR 425 crore from the 2 facilities in Goa and one in Baddi, after which we added a facility and we had our regulatory woes. Today, we, therefore, have much higher capacity. I see that we'll be able to do -- easily go up to INR 600 crore to INR 700 crore without -- or more without any further CapEx deployment.

Sure, ma'am. I mean then with respect to the cash that probably would be generated over the next couple of years as the margins improve. I mean one is, where would we be deploying cash? Would we be looking at any inorganic growth opportunities? Or could we be looking at deploying more towards our R&D to strengthen the U.S. business?

Yes. See, first of all, the endeavor would be to repay the long-term debt, around INR 160 crore right now. That is being repaid, and that will be the first priority. And as more cash gets generated, inorganic growth in India would be the top priority, along with R&D pipeline development.

As might have been obvious from the earlier responses and the question, there are several opportunities in India where we need to focus to get returns. We have specific strength in the acute therapies because of which our legacy brands, which have been developed over 5 decades, continue to give us excellent growth. But in the sub-chronic therapies, in particular, as well as in chronic, there is a lot to be done. We also have a pipeline. If you are aware, we are ranked #1 with the dentists in the stomatological space. And there are several products where we can look at our [ OTX ] kind of a future. All these endeavors will need a lot of support, and we expect to need cash to be put there. In addition to that, of course, we have taken 4 steps back 2 years ago in research with regard to the pace with which we were looking at the pipeline. So we will, again, start deploying more money in research.

Sure. Ma'am, one final question from my side. I mean while we have filed some products and some of the interesting products are there in the U.S., like brinzolamide. When can we see some of these interesting products coming through in terms of actual benefit in terms of launches?

Yes. So a couple of launches are planned in the coming quarter. They are just small launches. I really think that by end of Q1 next year or closer to Q2, we are likely to see good volumes coming out of supplies to U.S. I think that was the question, right?

Yes. And differentiated products, I mean like brinzo. I mean do we see the launch happening next year?

Yes. The brinzo launch should happen next year.

The next question is from the line of Anupam Agarwal from Lucky Investment.

My question was continuous from the first participant on how your U.S. gross margins are higher than the peer side? Incrementally, going forward, how do we make a higher-than-reported company-level gross margin in the U.S.?

We can look -- we cannot just talk of margin to U.S. per se. It is across several products and several -- it may not be the same across. So possibly, we can take this offline another time. But quite simply, when we talk of margin overall, that's because a lot of the top line to red markets today comes from contract manufacturing kind of revenues to Europe. Their margins are really very low. So when we say the U.S. margins will be better, that is because the contribution -- there is going to be a profit share contribution coming to the U.S. business also, not just manufacturing for others or our own products as they get sold. I hope I'm answering your question.

So the -- incrementally the pipeline that we have is that -- are those products having a higher gross margin than the company?

Yes and no. Like I said, some of them are contract manufacturing product for others, where there is a profit element which will come back to the company. Others are own filings, which will be sold by partners in U.S., where definitely the margins will be better.

Okay. Okay, ma'am. Just a second.

Ma'am, this is [ Ashish Rathi, ] a colleague of Anupam. Wanted to check. How many products in the U.S. are there already launched from us and how many are approved and yet to be launched?

We already have 2 products in the market in the U.S. currently. That is Allopurinol and Glimepiride. And another 3 to 4 products are slated to be launched shortly in the next 3, 4 months.

So I believe we have one which is approved and yet to be launched, is it?

Yes.

Yes.

Yes.

And we expect in the next 2, 3 months 2 to 3 more to be approved and launched?

Yes.

And FY '21, what is the expectation in terms of number of approvals?

About 4 per year, I think.

4 per year. Ma'am, also if you could tell me in Europe what is driving the growth? We've seen some stupendous growth in the first 9 months. And what is driving this growth? And what do you think we should build as a sustainable growth rate for this geography?

Yes. So the growth is largely coming on a muted base, to be honest. If you know, last year -- last to last year we had issues in Plant-I from UK MHRA, post which it had taken us some time to resolve, correct, file data and for the business to pick up. Post MHRA withdrawing that status on the plant, we have been able to manufacture from Plant-I. Otherwise, the capacity available to manufacture to Europe was very small and -- which is why the growth -- the levels were low. So the growth is largely on -- back of a low base. But going forward, we expect this kind of ramp-up to continue.

So we can build a 30%, 35% growth rate for a '21 sustainable number?

Yes, yes, certainly.

Okay. And then how much is the R&D spend for this quarter and how much is expensed?

R&D spend is 4% to 4.5%.

And the last thing, how much is expensed out of it?

That 4.5% is entirely expensed. Around 2% is not expensed out.

Sorry. I didn't understand, sir.

The 2% is not expensed, 4.5% is expensed.

Okay. So total 6.5%?

Yes.

Okay. And on Goa Plant-I, what are the hearing from the U.S.? Has there been a response from their side?

No. We have given them a clear outline on how we intend to respond the remediation issues, how the data is going to be submitted to them. 2 updates have also gone with the information. The last update is expected to go in the month of Feb. We see if we'll be able to send it a little earlier also, probably by next week. So after that, I think, from our side, most of the information FDA expects will be done and given with. Thereafter, we expect them to respond in a couple of months at the latest. There is likely to be an audit, I think.

There is likely to be audit?

Should be. Typically, in an OAI case, they would come back.

Okay. Ma'am, last question, if I may, with your permission. The India piece of our company had a northwards of 20% margins, if I -- if I'm not wrong, earlier. But with the slowdown in everything you had indicated 3, 4 quarters back that it had fallen to around 18-odd percent, the EBIDTA margin. Now with the growth coming back and MR productivity improvement, we expect that number to come back to northwards of 20%?

Yes, yes, we do.

The next question is from the line of Sachin Kasera from SVAN INVESTMENTS.

My first question is regarding the EBIDTA. If I remember it well, in the last quarter, we had mentioned that there were certain one-off expenses, because of the EBIDTA -- reported EBIDTA was lower by around INR 7 crores to INR 8 crores.

Yes, yes.

So is it that those one-off -- because if we see compared to September quarter, the EBIDTA is higher by INR 3 crores.

Correct.

So if we take INR 7 crores, INR 8 crores in the last quarter's one-off, is it some of the one-offs have continued? Or how should we look at that?

Yes, some of them actually. Some, of course, that [indiscernible] with remediation in U.S. has spilled over in this quarter also. But more than that, in this quarter, we have taken the impact of increments, increments to staff and the arrear, in addition to which there have been some additional expenses in sales promotion, legal and professional in India also, largely associated with the 2 product launches. So there were other one-offs, if I may say so.

Okay. So will this continue in Q4 also or, madam, shall we --

No, no, no. I mean let's keep our fingers crossed for no other one-offs. We don't expect either of these to continue much. There is going to be some amount of remediation costs, which will continue, but not of this nature.

Okay. Secondly, ma'am, a question linked to this only. As you mentioned that you're incurring a lot of costs, and we are not getting the revenues. And one of the things that we are looking is as the plants come back to normal and we see the sales ramp up, the cost associated will not increase. But -- and you also mentioned that we will not be increasing MR. But if we still see the employee cost ease up by around 11%, 12%, other expenses are up by some 16%, 17% for the 9 months. So is it mainly because of this one-off that you are talking? Or is it like...

Yes, yes. See, we took increments for the whole year with arrears associated with the increments all in this quarter. So that is there. And of -- we employ 6,000 people today, of whom only 2,300 are in the fields. The others are in the plants actually.

So how should we look at the employee inflation next 2, 3 years? Is 8%, 10% number a good number to work?

Yes. So as I said, when we say capacity of plants is not utilized, it also means capacity of the people who work there is not utilized. So I don't expect the number to go up from here as the manufacturing or the number of units manufactured go up, to be honest. What -- while your employee cost probably -- what is expected to go up is whatever rise in salaries we give them year-on-year.

Okay. Okay. Madam, my second question was related to the API numbers. So last quarter, we had indicated that we are looking at a very substantial growth in API numbers. And while you continue to maintain the bullish outlook you're saying that at least in the next 2, 3 quarters, it may not see a big ramp-up because of this approval.

Yes. See, from a new block, the batches that have been -- products that are being validated, we have to do filings with the regulators. And on the key products, one of them actually we've already got the approval, post which now they are being put into the dossiers. So we were supplying this product from one block. Now from the other block, we have to sort of get it into the dossier of our clients. After which, we will see a real ramp-up, but some amount of growth will come what we can supply to some geographies where these kind of regulatory requirements are not very stringent, possibly we'll be able to supply. This quarter, in particular, because we had to prepare for some launches of our own for the next quarter in the reg market, we've had to give internal consumption. So we could not sell those products outside.

But the medium-term 2- to 3-year target of INR 200 crores -- INR 2 crores, INR 3 crores API sales versus API growth in FY '19, that more or less we're on track?

INR 200 crores, certainly.

Sure. One question on the U.S. numbers. Is there any milestone income? Or these are normal numbers for the quarter that you attributed, INR 16 crores revenue from U.S.?

The U.S. business is divided into typically CRAMS business which is manufacturing income and dossier business, which is related to some amount of milestone. So there has been milestone because otherwise we are not hardly supplying product yet. So the numbers you see right now, that is what Mr. Sundeep meant when he said that there is a business mix element also, which has resulted in the cost.

So when we see INR 16 crores in December versus INR 12 crores, this INR 4 crores increase is mainly because of licensing income, madam?

Yes.

Okay. So how we are seeing, madam? Now that you've mentioned that you should fully start getting the approvals in the U.S., how do we see the U.S. numbers improving in FY '21 over FY '20?

U.S. will do about INR 100 crores in '21 -- year ended '21. And this year, it would be INR 50 crores, 5-0.

Sure. And just one last question regarding this Australia, New Zealand. There, the revenues are only INR 1 crore versus INR 14 crores. So is there some change in strategies or something? Or...

Yes. We had an audit from the Australian regulator, which is also there in the MDA. We're waiting for the report to come in, post which product we can supply again. There was a bit of a pause there. Also, in South Africa, there were some issues with that regulatory agency not moving at all on certain approvals because we could not supply. So both of these are largely on -- at back of regulatory issues at sites.

The next question is from the line of Aditya Khemka from DSP Mutual Fund.

Ma'am, so on the Australia and New Zealand business, which facility do we supply these products from?

Plant-I and Plant-II both, largely Plant-I.

And the plant...

What happens is after there is like the USFDA OAI came in and the WF came in, then the regulators want to come in and check themselves before they also give you a go-ahead. That kind of thing has happened there. We expect to get that resolved quickly.

Okay. Any time lines when you say quickly? I mean are we looking at a quarter, 2?

Let's -- we're still positive on that.

Okay. Okay. And on the other expenses line item, just to sort of see the cost management that we are going through. So last year, if I recall correctly, our other references line item in FY '19 over FY '18 was largely flat. And one of the reasons could have been lower promotion expenses, et cetera, as you have disclosed in the past. And this year, the run rate at which we are seeing is -- actually your other expenses has been flat for the past 3 years, just [ INR 288 crores ] for all 3 years, '17, '18 and '19. And then in FY '20, we seem to be closing in on a run rate of INR 330 crores, INR 340 crores. On the basis of what we have done in 9 months, full year would be around INR 330 crores, INR 340 crores. So this jump of like 18% in other expense seems to be on the higher side. And as you said, there are a number of one-offs in there. But I mean when we sort of try to look up to FY '21 or '22, just like you said in employee expense, there would be like a 8%, 9% increment -- would be there. Would other expenses be on a similar growth trajectory? Or could it be higher because we'll be doing more revenue, so we pay out more incentives there, do more promotion? How would it look like?

See, there is an element of remediation costs, which have come in these other expenses. And considering Plant-II, we have done with most of the remediation cost associated with that site. And Plant-I also with the updates to FDA being over, we expect there to be a bare minimum going ahead. So on that one head at least, there will be definitely...

Respite.

Respite. As you said, yes, employee cost to the extent of 8% to 9% growth will come in year-on-year. Promotional expenses, per se, as percentage of sales will stay controlled. Incentives, yes, as the field does well, like they're doing this year, they will earn incentives. But pretty much in proportion to the sales growth, it will stay controlled.

Okay. So -- because what will happen, ma'am, is that over the next 2 years, your FY '20 and '21, you will see -- FY '21, even FY '22, you will see a pretty high sales growth because you're coming off a very poor base in some of the --

Correct, correct, correct.

But if your other expenses sort of stays as a percentage same with your revenue...

No, no.

They will not.

That's what I meant when I say that the fact that as the sales grow, other expense as percentage of sales will come down.

Will come down, okay. And could you care to quantify how much remediation cost has been incurred for the 9-month FY '20 and third quarter of FY '20?

You want for the 9 months for the current year?

And third quarter. Yes, 9 month and the third quarter, if possible both.

I think the third quarter close to INR 4 crores --

INR 4 crores, yes.

INR 4 crores has been, which was the jump actually. We were doing close to INR 2 crores per quarter, I think. Yes.

Okay. And so for the 9 months, would it be like INR 8 crores or...

Yes, yes.

[Operator Instructions] The next question is from the line of Sachin Kasera from SVAN INVESTMENTS.

Yes, madam. On the domestic business, the release mentions that we are going to focus a lot now on the east and the northern market. At the same point of time you mention that we are not looking at adding MR. So...

Yes, yes, yes.

Exactly how will this happen?

Yes, yes. So that growth need not come from adding MRs. Our productivity per man is poorest in the north actually and followed by east, yes. So when we say we get more sales in south and west, that's not really just because we have more people there. The return per man is also very poor in north and east -- in north in particular. And that is where the effectiveness has to happen.

So what exactly have we done to change that because it must be historically there for a long time?

Yes. It has historically been a weakness. We had actually gone into north first and last into east. But whereas we've been able to ramp up in east comparatively, and I see east growing much faster from here on. In north, we've -- there have been several issues from certain field issues in Punjab, Haryana to effectively being able to manage the Uttar Pradesh belt. But there are some strategic initiatives that have been taken up this year to change that. We will -- I would like to talk about it more when it actually happens.

Sure. And madam, this year, partly the India business has been helped because we had a strong anti-infective season. So do you think that the type of growth we've shown this year in domestic is sustainable? Is 15% -- 14%, 15%? Or it should come down to say 10%, 11% as you move ahead?

We have grown across several therapy areas, not just anti-infectives and anti-cold. Last year, we had a poor anti-cold season. FEBREX PLUS had done very badly last year. That product is doing well this year. But otherwise -- and anti -- so basically, season comes every year for the company. So let's really hope we get the season next year also. But even otherwise, it is not just anti-infectives and anti-cold. We have done well on the other segments as well. So I believe domestic growth we can sustain at double digits.

Sure. And on emerging markets, ma'am, this quarter, the number is flattish. The first half was very strong. So I mean just 1 quarter of finish should be back to growth? Or...

Yes, yes. It's just a question of this particular quarter. But otherwise, the business should return back to normal next quarter.

And one last question on CapEx, madam. How do we see the CapEx for FY '20 and '21 each?

It would be just normal maintenance CapEx, nothing extraordinary. Because we already said on the call that capacity is enough for the next 3 years.

So maybe INR 40 crores, INR 50 crores a year?

Yes, yes. Roughly INR 50 crores.

The next question is from the line of [ Ranbir Singh from Sunita Securities. ]

Related to U.S. business, the 2 product you mentioned and you had in note, glycopyrrolate and tranexemic acid, could you give some more detail how is the market size? How many players are there?

Glycopyrrolate is $120 million, and there are 5, 6 players already in the market. Tranexemic acid the market size is -- I'll give you the market size. But that also is a generic product already, and there are also 3, 4 players already in the market. So those are small product really, per se.

Yes. And these products would be, again like -- will be distributed through partners. So we'll be manufacturing like a contract manufacturing?

That's true.

And who are the partners?

So far we have not thought of disclose that.

Okay, okay. Fine. And you -- just for clarity, you said the 4 product approvals you're expecting every year going forward, right?

Average, yes.

Okay. This is -- yes. And this is independent of your Goa I facility getting cleared, right?

Absolutely. Yes, yes.

Okay, okay. Fine. And for the remedial cost for last 2 quarters only has been discussed as being included in other expenses or this was also there in Q1 also?

Always included. It sharply went up as a quantum this quarter.

And tranexemic acid, the market size is $20 million.

Okay. Fine. And just on South Africa business, that is -- that business is though a small one, but what is happening actually there? We are not seeing any traction in this market.

Yes. We were reinspected as was the case with all the regulators. And the result of that reinspection is yet to come.

The next question is from the line of Anupam Agarwal from Lucky Investments.

Yes. This is [ Ashish Rathi ] here again. Ma'am, just wanted to understand the company from a more India/non-India kind of a piece. We have done like INR 90 crores EBIDTA in the first 9 months on a total sales of INR 835 crores. Out of an India sales is around INR 525 crores, right? And like I just discussed earlier, like your 18% kind of India business margin, what you had indicated, let's assume it's at the lower levels only. Then almost practically the full EBIDTA for the company for 9 months has come from India business. So what I want to try and understand is what kind of losses are there in the other parts of the business? And when do we actually see that number coming into positive, at what run rate of say the U.S. sales, so that we can get some color on this question?

Well, as I said, all the CapEx, we -- I mean all the plants are running to-date deserve to actually manufacture and sell to U.S. and Europe only. We had brought in capacity to fill our capacity in some India business. So frankly, that is where the margin drain-out is happening because until those capacities are actually free to manufacture for U.S. and Europe, we are not covering the plant cost effectively and which is why you are seeing the kind of [indiscernible]. Your next question was at what levels of international business we can breakeven on those, I think. Is that right?

Yes, ma'am.

See, presently, if you see the business mix, as explained in the previous questions, the major driver is Europe. So particularly, the Europe business is giving a reasonable margin to cover our fixed cost and definitely some contribution. But as you move, starting from the next year, the U.S. -- once we get into the larger U.S. business, I think as we've projected about INR 100 crores, at that level, we will be definitely kind of breakeven. So currently, if we say it's more of a -- still, we are in the investment phase. Because regulatory expenses, I will say, it's still litigation costs. And so technically bifurcating this profitability in domestic India will not give you a right perspective.

Fair point. So basically, what the objective was to look at it like as if you are indicating mid-teen growth of 15% kind of growth in India business next year. On a base of INR 700 crores this year, we'll do around INR 800-plus crores next year. You said actually we'll be making 20% EBIDTA margin in the India business. That would be like a INR 160 crores of EBIDTA coming for the company from India business itself. And if Europe is breaking even for all the fixed costs today, then at INR 100 crores of U.S. business, when you're indicating the incremental margins to be 70% gross margins in that piece, that should be able to generate us around INR 50-odd crores of EBIDTA from that business itself. So northwards of INR 220 crores, INR 230 crores is the EBIDTA that we should be ideally looking at next year. Would that be a fair kind of analysis?

That is a little too high. It is -- we are definitely planning to be somewhere between INR 180 crores and INR 200 crores, but the number that you have projected is a little bit high.

Okay. And Sundeep, sir, the INR 100 crore number for U.S. is excluding as of time I would assume, right, for next year?

Yes.

The next question is from the line of Sachin Kasera from SVAN INVESTMENTS.

Yes. Just 1 question on the interest on balance sheet charges, ma'am. So this increase you're seeing in the 9 months is because of some element of ForEx loss? Or has the debt levels gone up in the current year?

There is an element of ForEx loss, which is about INR 9 crores. But if you see the interest cost, it's -- largely remains static.

What would be the current net debt on the company's book, sir, including working capital?

On long term, we are INR 160 crores and short term is INR 101 crores. So overall around INR 261 crores. So on quarter-on-quarter, if you see, if you compare December '18, we have lowered our overall debt by almost INR 50 crores. Compared to the sequential quarter, we are lower by about INR 12 crores.

Okay. That's good.

And the other factor which happened is, as you're aware, we capitalized our major project, which is our Patalganga API facility. So to that extent, overall cash flow on account of interest has been same, but it has moved from capital revenue added to the P&L. So that has to some extent impacted.

[Operator Instructions] The next question is from the line of Anupam Agarwal from Lucky Investment.

[ Ashish ] here, ma'am. Is there a CRL or a tag that we have on AZOPT already?

CRL on AZOPT?

Yes. Is there a target or something that we have been working with some fixed time.

Yes, yes, yes.

Is there target action date --

Target action date.

Yes. target action date. What -- so -- sorry, I didn't get you, ma'am. What is the target action date?

You want to know? Considering that it's with a partner, I'm not feeling free to talk about it yet. But I think somewhere in second -- Q2 next year.

Q2 of next calendar year?

Financial.

Financial year, okay.

The next question is from the line of Jigar Valia from Ohm Group.

Congratulations on the steady improvements. Just one clarification. The INR 100 crore guidance for the U.S. for next year. Does it assume anything on the continuity of VAI or --

Yes. It is on steady state. We -- maximum of our filings are from Plant-II and III. There are very few flat filings from Plant-I. And those 2 are not very urgent in nature, as in they are for the future. So we don't see much impact on generic approval time lines because of the VAI on Plant-I actually.

Got it. And none of the critical products are dependent on the changes in --

None of the clinical products in short term are dependent on Plant-I.

Okay. Not on Plant-I, on Plant-II, Plant-III as well.

Yes.

But generally, they won't be --

See, we expect them to keep coming down for prior approval. Depending on the kind of product somewhere in between they had asked us to send to them details of filings from every different manufacturing line and the nature of product. As in is it a tier solution? Is it a suspension? Is it a thick preparation? Is it an injectable, kind of, and from which lines? I believe they would have made a metrics and accordingly they're approving the product. So they would come down every time there is a new kind of approval, not necessarily every time there is a new approval. I hope you understood.

If you all are expecting 4 plus 4 and about 8 products, in terms of the frequency is not an issue?

No, no.

The next question is from the line of [ Hiten Bahecha from Sequent Invest. ]

Ma'am, what is free cash flow we have generated for the 9 months FY '19?

Just give us a minute.

Hello?

Any other questions till then?

Yes, ma'am. You mentioned earlier that we can go to 14%, 13% kind of margin, right?

Right.

So when are we targeting this kind of margin, like, FY '21 or '22? Next financial year?

Coming 2021.

2021, okay, okay. Yes.

Just a minute. I'll give you the numbers.

Hello? Ma'am, and one more question, if may I ask. Like what kind of revenue growth we are looking for, let's say, next 3 years?

The revenue growth for the next 3 years, between 15% and 20%.

15% to 20% kind of growth we are looking.

Yes, yes.

Yes. Just coming back to your question, post repayment of long-term loans we'll generate a free cash flow of around INR 45 crores for these 9 months.

The next question is from the line of Surajit Pal from Prabhudas Lilladher.

As you say, the growth in gross profit margin is mainly from your product mix and a bit of license income, which I [indiscernible]. But license income doesn't give much of the needle to move, which means that your product mix in domestic market could be the major contributor of significant rise in your gross margin. Could you throw some light?

Are you asking for this quarter?

Yes.

Ah. No, there has been both. There has been increase in dossier income in U.S. as well as a much better product mix in India. Both have happened simultaneously.

Exactly. So I think domestic is a major, major contributor in that?

Yes. You can say that in quantum especially.

So could you throw some light? What kind of mix you are talking actually?

Yes. See, like I said, we are operating now on a per man return of INR 2.5 lakhs, close to INR 2.5 lakhs per man per month. And going ahead, we expect this to inch up as we are able to sell better in the sub-chronic and chronic space. So that is what actually contributes and comes directly into margin for India business. So I'm expecting for the next year to target something like 2.8. -- INR 2.7 lakhs to INR 2.8 lakhs per man. Yes?

Okay. And as far as your Asia expenditure is concerned, which has taken a jump from Q1 to Q2 and --

Which expense?

Your SGA expenses.

Ah. Okay. Yes, yes.

So which I believe is mainly because of your launch of products in --

Right. That's right. That's right.

So which means that going forward we should expect INR 90 crores to INR 100 crores of SGA expenses or other expenditure to continue given --

No. Some -- it depends. Some of it is also on account of incentives paid out and sales promotions, and it doesn't flow very uniformly quarter-on-quarter, to be honest. So this is probably a pileup. Q4, for instance, generally, things are not so high. First quarter and fourth quarter, you see these on the lower side. And I think that's the pattern we've exhibited for some years now. And generally, Q2 and Q3, you see them on the higher side.

Q2, Q3 is traditionally stronger quarters.

Correct.

And how about your European sales guidance? Earlier, I think this year, you might be going for INR 150 crores.

In Europe, we expect to grow by around 30% next year.

So roughly around INR 200 crores you are targeting?

Yes.

The next question is from the line of Cyndrella from Centrum Broking.

Cyndrella this side. So ma'am, good numbers. And overall, we are seeing good guidance on the U.S. side, Europe side. So just want to take your view in terms of how should we think us in next year will be more of getting everything put together? So beyond that, do you intend to tell us something? How you're looking at the business on the -- in domestic and international side?

Yes. Cyndrella, I have partly answered that earlier, but I can tell you that, in India, in particular, there is a lot to be done, especially the sub-chronic and chronic space for us. Acute will continue to grow on its own just on account of efficiency, effectiveness in the field. But the other 2 businesses need a lot of support, strategy and probably a differentiated strategy for us as we go ahead. So a lot of work being done right now at a grassroot level there, which I expect in a couple of years to start showing us dividend. On the international front, also, there are a lot of very interesting filings we had done, which have these approval dates of 2023-odd kind of. So there is lot of upside to be looked at around that time. And those -- there -- those are all products we own IP of. So our dependence on clients, they are -- we'll use our decisions to continue/discontinue. We become less and less dependent on that going ahead. So in couple of years, we, therefore, become much more in control of our international business. The mix for the international business is more of our own IP, more U.S. centered. At the same time, European business also going up in efficiency because of the captive consumption of API, which we're trying to do for it. And the India business able to grow faster. This is very broadly what I can tell you.

And specifically on India business plan, if we -- whatever growth we have seen this year as of the year what should we see going ahead for India as a market as well as for you within it?

See, the India business, if you've seen, is roughly doing a 10% growth. Although in 1 month it would be less, another month high for the Diwali theme. Otherwise, roughly, it has been doing 10%, and we have been doing 14% to 15%. I expect a similar trajectory to continue for some time.

So you are saying that we will continue at 14%, 15%?

Yes, yes.

And overall industry should remain at around 10%, 11%-ish?

I cannot say much about the industry. But I believe, fundamentally, all the ups and downs and the unpredictable trends of last 2 years seem to be settling now. And we track primary and secondary. So we had not seen much swing in secondaries in this entire period. It was only the primary purchasing which was very unpredictable, which seems to be settling now.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Thank you, everybody, for your participation. Have a nice evening. Thank you.

Thank you. On behalf of Nirmal Bang Equities Pvt. Ltd., that concludes this conference.