Indoco Remedies Limited (INDOCO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Indoco Remedies Limited Q2 -- sorry, Q4 FY '20 Earnings Conference Call hosted by Nirmal Bang Equities Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vishal Manchanda from Nirmal Bang Equity. Thank you, and over to you, sir.

Thank you, Nirav. Good afternoon, everyone. Welcome to the Q4 FY '20 Earnings Call of Indoco Remedies Limited. 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; Mr. Vilas Nagare, President, Corporate Affairs and M&A. I now hand over the call to the company management for their opening comments.

Thank you, Vishal. Good afternoon, all the participants. Hope you and your family members are all safe and healthy. We never anticipated that the novel coronavirus would grip the entire world so rapidly. The kind of disruption it has created to the economy and the agony to mankind has never been witnessed before. We still do not know the consequences this pandemic will have and have no clue with regards to time, resources and efforts that would be required to come back to normalcy. We have been quick in complying with the government directives and are taking special care in protecting our employees even though we are facing challenges in keeping our production facilities running. Indocoites across India rose to the occasion and are braving the risk and hardships in traveling, reporting on duty to keep the continuity in production and field activities going. Teams looking after supply chain and support staff have been working tirelessly to facilitate movement of raw material and finished products throughout India and abroad. In the fight against coronavirus outbreak, the management and staff of Indoco contributed INR 1 crores to the Honorable Prime Minister's Citizen Assistance and Relief in Emergency Situations Fund, PM Cares Fund. In the wake of COVID-19, our company's domestic and international sales during the last week of March got impacted due to supply chain issues and ban on exports, especially that of paracetamol. Let me begin with the business highlights. Net revenues for the quarter were at INR 263 crores as against INR 245 crores. The net revenues were at INR 1,079 crores as against INR 941 crores. EBITDA to net sales for the quarter is 12.7% at INR 33.3 crores compared to 11.7% at INR 28.5 crores. And for the year, the EBITDA is 11.4% at INR 123.3 crores compared to 8.1% at INR 76.07 crores. Profit after tax for the quarter is INR 5.4 crores as against INR 11.6 crores. And for the year, the PAT is INR 24.2 crores as against a loss of INR 2.8 crores last year. Now on to the Domestic formulations business. Revenues from Domestic formulations grew by 10.3% for the quarter at INR 160 crores as against INR 145 crores. And for the year, the revenues grew by 13.2% at INR 686 crores as against INR 606 crores. During the year, 8 new products, 5 in cardiac segment, 2 in antidiabetic segment and 1 in dermatology segment were launched. In the case of Apixabid, which was launched in December '19 and withdrawn subsequently, the court hearing in the injection matter is delayed due to the ongoing COVID-19 crisis. Although the outcome of this case cannot be ascertained at this stage, Indoco is positive about its defense strategy. As per Avax, Indoco ranks 29th in the IPM with market share of 0.66% as on March '20. For the quarter -- for the fourth quarter FY '20, the Indian pharma industry has grown at 9.7%. In terms of prescription generation, Indoco ranks 23rd with market share of 0.88% as per SMSRC report for the period November '19 to February '20. Prescription growth of Indoco Corporate is driven by growth recorded in specialties like ENTs, dentists and GPs. Now on the International formulations business front. During the quarter, revenues from International formulations business grew by 12.5% at INR 79 crores as against INR 71 crores. And for the year, the net revenues grew by 26.9% at INR 296 crores as against INR 233 crores. During the quarter, the U.S. revenues were at INR 27 crores as against INR 11 crores for the -- and for the year, the net revenues were at INR 56 crores as against INR 25 crores. In February '20, the USFDA approved the first-to-file ANDA with paragraph IV certification for olopatadine hydrochloride ophthalmic solution USP 0.7% developed at Indoco's R&D center. The ANDA has been filed from Goa Plant-II on behalf of our U.S. partner and has been approved by the FDA with 100 days -- 180 days generic drug exclusivity. The product will be launched by Indoco's partner as per the agreed settlement date. The consignment of allopurinol tablets and rasagiline tablets launch quantity were dispatched to U.S. from Goa Plant-III in April 2020. The first consignment of glycopyrrolate injection was also dispatched from Goa Plant-II for launch in the U.S. in April '20. The company received approval for its own ANDA for succinylcholine chloride injection, USP 200 mg per 10 ml, 20 mg per ml multi-dose vial therapeutically equivalent to the RLD, that is the reference listed drug quelicin injection of Hospira. This approval was received in the month of May '20 in a record time of just 4 months from the date of filing the ANDA. During the quarter, the Europe revenues were at INR 31 crores as against INR 28 crores. And for the year, the net revenues were at INR 154 crores as against INR 106 crores. Indoco has been a part of the initiative by the Indian and British government to supply paracetamol tablets to the U.K. in its fight against COVID-19. The first shipment of paracetamol tablets to the U.K. was airlifted on 12th April 2020 from Goa airport. Indoco was the only company to whom the permission was granted by the Indian government for shipment of paracetamol tablets at that time. The restriction, however, is now completely withdrawn. Revenues from South Africa, Australia and New Zealand for the quarter were at INR 2 crores against INR 8 crores for the year. The net revenues at INR 7 crores as against INR 29 crores. Revenues for the emerging market for the quarter were INR 20 crores as against INR 24 crores. And for the year, the net revenues were at INR 79 crores as against INR 73 crores. In March '20, the month-end shipments due to lockdown suffered a setback, resulting in a drop in the sales for the quarter. Now on the regulatory update, on Goa Plant-I. U.S. consultants continue to be on board for remedial actions to resolve the concerns raised in the warning letter issued by the FDA on 18th July 2019. Periodic compliance updates are being timely submitted to the FDA. On to the API business, revenues from API business were at INR 20 crores as against INR 25 crores for the year. And for the year, the revenue -- net revenues were at INR 86 crores as against INR 82 crores. The new API facility at Patalganga received the certificate of suitability, CEP for allopurinol API from European Directorate of Quality of Medicine, EDQM, paving the way to commence supplies to European markets. CRO and analytical services. During the quarter, revenues from CRO and analytical services business were at INR 3 crores as against INR 4 crores. And for the year, the net revenues were at INR 11 crores as against INR 19 crores. Indoco, CRO AnaCipher Hyderabad received the WHO approval through a desk assessment review process held in March '20 by the prequalification inspection unit of the World Health Organization. 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 Sudarshan Padmanabhan from Sundaram Mutual Fund.

Sir, my question is, so if I go through the presentation, you did mention about disruptions, specifically both in domestic and export business, I mean, because of COVID, and also shipment delay. If you can quantify the amount basically for the domestic and export and also tell -- give some clarity with respect to whether this shipment delay would actually result in better sales in the first quarter?

Yes. On the international front, the total disruption was to the tune of INR 9.5 crores. And on the domestic front, it was about INR 6 crores. That was the disruption. Now business uncertainty still persist. So we wouldn't like to comment about the first quarter so soon.

But this -- the shipment should basically get executed, right? It's not a lost in order...

Yes, yes. Means have got executed. I think what Mr. Sundeep meant to say, and this we understand as time goes by more and more. Is for the last 2 weeks of March, major challenges were of goods movement, whether from the ready goods from the plant to the port and from the ports onwards or from our manufacturing sites to the various CFAs, and from there on for billing. While those have eased, the challenges in the first quarter this year are largely with regard to how much can be manufactured at the manufacturing sites. Because in the period ending March, we had 2.5 months in those 3 months of regular attendance. In the first quarter this year, whereas March end attendance was very thin, gradually, most of our sites are now operating at 70% to 80% attendance. So that's what we meant when we said there's likely to be challenges for a short time period.

Yes. Ma'am, if I actually look at the cost, I mean gross margins have certainly been on an improvement trajectory. And the other costs and R&D, R&D this quarter is marginally higher, number one. And other expenses, the broad belief was that with you coming out of regulatory issues across plan. The other expenses as a percentage of sales will start coming down with better volumes. Apart from the U.S. business, I'm not able to see a very visible improvement even in Europe. I mean the numbers are slightly weak-ish in this quarter. So any thoughts on that?

So when you say weak-ish, you're talking in terms of top line growth?

Yes, yes, Europe, the top line growth.

That's what Mr. Sundeep said, close to around INR 9 crores to INR 10 crores of business to international markets could not be executed, which was to be done in the last week of March. Other than that, let me come back to your cost discussion. The GCs are definitely on the higher side, you must have seen that. This is largely attributed to a better business mix. Coming to other expenditures. This time, there are other expenditures, which were not there in the same period last year, same quarter. And largely got to do with incentive payments to -- and promotional expenses for the India business. The India business has done very well this year, grown by close to 14% on an annual basis. And therefore, incentive outgo to field has come in this quarter, which has come in the other expenses. But rightly, as you mentioned, as the top line sales grow, the percentage of other expenses to top line will come under control.

Yes. Just 1 and a small question from my side, and I'll move back to the queue is on the FTF. So you had mentioned that the moment your partner is ready and the settlement has done, the launch will happen. Any idea -- I mean, I'm not asking for an exact date, but when one should expect and what would be the size of it?

At this stage, they have not conveyed to us that is going to happen in any reasonable immediate future.

Sure. And anything development on Brinzo?

Yes. It's underway. We had to, as I mentioned in the last call, make some -- generate some more data towards response on CR. That work is underway. And we seem to be okay as of now, for -- to be able to launch at the minute we get the approval.

And any time lines that you have or any target action date that we have for this?

We would -- at this stage, we are ready to look at it sometime after August.

[Operator Instructions] Next question is from the line of Suraj from CGS-CIMB.

Regarding the export of paracetamol, which you have done in April. So how many tablets were supplied so far? And how much have you realized from the opportunity?

Paracetamol exports to U.K. is a regular feature. So it is not that how many tablets were supplied. Regularly, the product is being exported to U.K.

Okay. And like approximately how much percentage of the exports would be from this product?

So we have many products now going to the U.K., Germany, Spain, Eastern Europe, at least 15 products.

Okay. And how much percentage of exports will be from...

Likely around 25% to 30% is attributed to paracetamol.

Yes, roughly.

Okay. Okay. And regarding the domestic business, what was the main reason behind low growth, especially from FY '16 to '19? And how do we see it going forward?

Okay. So if you're asking about domestic business over 4 years, that's a very long story. But just coming to this year, in particular, you must have seen that we have done quite well. And done higher than market growth in every quarter. No doubt, our growth in the second and third quarter were much higher. Fourth quarter, we got impacted largely in the month of March, more than any other. When -- for the -- as a responsible pharmaceutical company from the 17th of March, we had asked our field staff to stop working because they would be meeting doctors and going into the field. And that would make them susceptible to catching the virus. So field has stopped working from the 17th of the month itself. So for the last 2 weeks, typically, what you saw post initial days of lockdown, where there was a lot of restrictions on who could go and buy what or meet doctors, doctors are not having practice. So we have seen that the kind of product which needs to be sold against prescription. That is where we have sort of lost. Also in that period, because some of our India business comes from sourcing from outside organizations, like third-party manufacturer. And these people found it very challenging to start in the lockdown period. So although our factories managed to pull up within 2 to 3 days, the third parties guys had a lot of challenges, and we had some constraints, therefore, to get material in that period. Both these things are responsible for a muted March sale for domestic business.

Okay. And last time, you had mentioned about increasing focus in the north and the eastern region so that we could improve the MR productivity. So what will be the exact strategy be like so that we could improve our revenues from these regions?

See, basically, we get very little contribution from north and east compared to what we get from south and west. So the strategy, therefore, is to focus on these areas. Because there is a lot of opportunity to be leveraged here for our legacy products itself, let alone the new products. The strategy to do this naturally would be to concentrate on controlling attrition in the north. And also to -- in the East, where attrition is not so much an issue, actually, it is about taking opportunity of all of the potential that exists. So we feel very confident that -- and if you look at PHY, that is a per head yield in north and east for some of our major divisions, then those regions are coming to par almost. So it is mostly the smaller divisions which need to catch up. And we feel confident that in a couple of years, we'll be able to show good change there itself.

[Operator Instructions] Next question is from the line of Rahul Veera from Abakkus Asset Management.

Just wanted to understand if paracetamol, sir, are we backward integrated? I mean, do we -- or we import pap from the other countries?

No, no. We are not backward integrated on para. Para is 1 API where you need economies of scale. So para we purchase. Yes?

Okay. Okay. Because we are getting to more than the price of raw materials from, especially from China, including pap has -- share gone up very...

Yes. There have been ups and downs, but I think it is slowly coming under control now.

The next question is from the line of Rahul Sharma from Karvy Stock Broking.

Just one of the query. Majority of our markets expect U.S. have been -- growth has not come in, in this quarter?

Can you repeat? We can't hear you.

We can't hear you.

Growth is not forthcoming in this quarter in majority of the markets, except U.S. So can you please give more clarity on it?

Yes. I think we just explained, Rahul, but I'll repeat again. U.S. growth you're seeing largely because the base was very small last year. And coming to emerging and other reg markets, like Sundeep explained, it is largely the second half of March, where we could not export. There was a ban on para of course and the ports itself were jammed and not functioning. So exactly when most of the goods get shipped, that time, we had to take a set back. So that's what we explained. Coming to India business, this quarter, generally, for us, fourth quarter is not very big, not as compared to second or third. In addition to that month of March, and I don't know how familiar you are with branded ethical promoted products, but typically, the kind of cycles we have of purchase supply and sales, much of the sales does come in the last 2 weeks of the month. So that is the reason you are able to -- we are not able to show the kind of growth which we did show in the third quarter.

Okay. What about Europe, particularly in API also has been the new plant coming in...

Yes, yes. So API, what has happened is that the international business has caught up. India formulations is getting revived. More and more capacity at this stage was diverted towards supplying for the International formulations business. So which is why API sales got impacted marginally, but it is nothing to be worried about.

Okay. And Europe was also due to logistic issues or -- and paracetamol?

Yes, yes, absolutely.

Okay. But think that's streamlined, now we'll be back on track.

Yes.

[Operator Instructions] Next question is from the line of Cyndrella C from Centrum Broking.

Ma'am, if you could help us understand the current scenario or the demand scenario in the domestic market as well as some color on the export market, specifically U.S. and Europe?

Yes. So...

Mid-may onwards till now, how is the improvement? And what are the emerging trends that we are seeing?

Okay. So your question is to understand the demand trend for -- in the India market. Is that right, for our products?

Yes. Yes, ma'am.

Yes. Okay. Okay. Chandrika (sic) [ Cyndrella ] if you know the last -- whole of last year, we were -- the India business -- India pharma market was doing close to 10% growth. And we had a major dip. If you've seen the Avax or IMF numbers for the first 2 months, which was also expected because people actually -- since there were no doctors practicing and ethical branded pharmaceutical market is the kind of market that if you have established brands and products, people will go and do a repeat purchase on the counter, but the prescription is always the place where the business demand starts. So certainly, in the whole of April and part of May, there was no work happening in the field by our reps because we ask them not to. And also doctors were not practicing to that extent. In this period, what we saw was there was a high demand for anti-cold, cough and cold like products, products like Karvol Plus, which we have or ATM, which is an Azithromycin brand, or some such products. But otherwise, there was not too much of prescription generation happening. Now after mid-May, our people have started moving out in the field, at least in the green and orange zones. And we expect soon the kind of demand creation we typically do through prescription generation for that to get aligned. It is actually a matter of great pride for us that despite these challenges, the kind of sales we are able to clock is thanks to -- in this period, is thanks to the demand that exists for the legacy products of the company, which are already established. I hope, I'm answering your question. In our sub-chronic therapies, we have got a stake in ophthalmology as well as dental. And both these fields are the ones where doctors are least -- last likely to go and start practice because both involve surgical intervention. And their own medical associations are now advising them how and when to start. So therefore, there are parts of our business which are going to take a bit of a hit in this quarter. And we are ready for that because we understand the difference between a primary sale, a secondary demand and eventual consumption. So we shall have to wait and see how much this first quarter turbulence and disturbance is likely to impact the whole year sale, but there will be a kind of a dip, which we are already seeing in the industry numbers. I hope that answers your question.

Yes. And just like, I was trying to understand the emerging or a demand coming back scenario in month of June. Are we seeing any early signs of that that is where we see...

Yes. See, if you look at April, where I think, if I'm not mistaken, Avax had showed a minus 11%. From there, already, now it is in a lower single-digit negative. And I expect come June this month, it is likely to get a little bit better and come into positive. So although first quarter on a whole for the industry will still be negative quarter-on-quarter, I think you will see the trend improvement. And quite honestly, I expect by second quarter some amount of semblance to come for demand versus supply kind of, right?

And a similar scenario in terms of export market, specifically U.S. and Europe in this time period, like 1Q specifically? As we see, some revival...

Yes. So for U.S. and Europe, demand is not going to be such a problem as much as probably some amount of efficiency because of attendance-related issues in the factories. So if the plant was running at an x capacity, then because you are still not able to get everyone to work to that extent, there is likely to be a marginal dip. But otherwise, I don't expect any concern from supply side or demand -- or meeting demand. In fact, we have -- for us, this period, although in lockdown was one of the most successful periods for U.S. business, where we got so many product approvals, ours as well as through customer. And in fact, it is very -- it was a nice thing that our plants, which were functioning in Goa, were able to dispatch for the first time our 3 products to U.S. market. So that way, we don't see much concern for the international business.

Any guidance or any -- that we are looking for U.S...

No, as I said, it is too early to give any guidance. Chandrika (sic) [ Cyndrella ] you know that our base was very small last year. So growth is not going to be a concern in these markets.

No, I understand that completely. No problem on that. I'm just trying to understand any number, are we indicating any particular number for the full year from here?

Yes. So 150 is achievable.

Okay. That's helpful. And Ma'am, any commentary on the domestic inventory levels at present?

Yes. So the inventories have been going up and down. At some point in April, there was very high inventory being carried both by us as well as the stockists and low inventories at the retail level. Then eventually, you saw that inventory gets converted to retail counters. And now again, it is coming under control. I think the latest update, the weekly update we get from Avax now shows that the inventory levels are beginning to slip down again, yes?

Any improvement you expect, any improvement as we go ahead there?

Improvement, as in, you want an increase? I think the industry has become efficient, in fact. And from 45, 50 days inventory, it had gone down to 30, 33 days. In this mess, it went back to close to 55, 60, and it's again coming back. I think once efficiency comes in, it is difficult to go back. So I don't expect it -- and inventory levels should not bother us too much. It just will create a small sort of a spike in primary sales, nothing else.

[Operator Instructions] Next question is from the line of Sachin Kasera from Svan Investment Managers.

2, 3 questions from my side. One was regarding the operating leverage. From what I understand, you were mentioning that as far as the domestic market is concerned, we have not had any major trend. So -- and if you see major part of the growth has come this year other than only for the domestic market, despite let's say, the staff cost is up 10%, 11%. Similarly, on the other expenditure, our costs are overall almost 20%, 25%. So this is a little lower. Because what we understand is that a few quarters ahead, you had guided this year, the cost will be contained, and we'll see some operating risks coming in, which we haven't seen. So if you could comment a little bit on that?

Yes. So I'll first come to employee cost. We have not added any additional people in India business. That's correct. The kind of employee cost hike you've seen this quarter has largely come on account of YoY, if you compare, it is because of increments done and also because of certain number of people added in the -- for example, Patalganga and entire block has gone operational, a new block. Also, as orders from U.S., there is a better visibility of orders from U.S. The plant supplying to U.S. have also ramped up employment. These 2 factors are largely responsible for that. And coming to your question on the leverage aspects, then as the top line increases, because the fixed costs and the plants are still going to be quite high until we are able to get the business to a size, which I...

Yes, Madam, but if we see the other expenditure, it has gone up from INR 290 crores to INR 346 crores. And we already were at -- we -- you had mention that we are incurring a lot of fixed costs say last year and the plants were not operational, which in our commission. But despite that, with only 10%, 12% increase in top line, we have seen a 20% increase in other expenditure.

Correct, correct. So I explained this earlier, but I'll repeat again. A large part of the other expenses, which have increased is because of increased incentives and commissions to domestic. Also partly remediation costs continue. It's not that they're over yet. They are lower than before, but they continue. I do feel that as the top line comes in, you will see that commensurate to top line, other expenditures will not increase further.

No. Madam, if you see the quarter 3, when you had reported INR 90 crores of other expenditure, and it was mentioned on the call that there were certain one-offs because of which it was higher.

Correct.

And this quarter, while the top line has in fact, been lower by around INR 20 crores, the fixed other expenses have not come down. Ideally there are one-offs in the Q3 quarter. Q4 should have been much lower, Madam?

Yes. Yes. I think Mandar may give you a greater insight on exactly what is there in Q4.

See typically, in domestic markets -- am I audible?

Yes, sir, you're audible.

See, one of the major drivers for this other expenditures increase, particularly in Q4, is on account of some of the initiatives in domestic market. One is some special advertisement and promotion related expenditures. And second is the field incentive and commission. Like some of -- as the achievement you would have seen throughout the year and particularly for the whole year, it's in the range of 14.7%. So those incentives payout and the announcement happened at the last quarter, that is one of the important items, which increased our Q4 cost base. To some extent, the impact of the factory overheads, which also continued, that was there. And regulatory spend, particularly in Q4, towards the regulatory cost, that also was substantially higher. Although on an overall basis, we maintained the earlier forecast, but it was skewed towards end of fourth quarter.

So sir, just as a sort of -- some sort of outlook for FY '21. So we are totally employee and SG&A cost is roughly around INR 600 crores this year. How should we look at that? Should it go by 10%? Or it will again grow at 15%, 20% next year, this both cost combined of INR 600 crores?

Not more than 10%.

10%, Madam?

No additions. I think we are not planning any addition...

No, no, no.

No more additions. Yes.

Are we quite confident on this retaining at -- running at 10%, Madam for FY' 21?

Yes, yes.

Yes.

Okay. My second question was on the API business. Madam, last time you had mentioned that while you had added capacities, there were certain delays in approvals because of which, in FY '21, what we had initially anticipated, the growth did not come in the API business. So can you just tell us what is the progress on that front? And what is the sort of outlook there? Because I believe you mentioned that the API business from INR 80 crores, INR 90 crores can be like INR 200 crores, INR 250 crores business because we'd almost tripled our capacities.

That's true. That is the real potential, and it is very much possible regarding all the regulatory pathways, which have to be explored to be able to supply from the larger capacity API, that is all underway, not a problem. In addition to that, internal customer supply to Indoco international -- Indoco's international foray, especially in the ophthal space as well as the solid oral. On that part also, there will be -- there is a lot of support. And this is going to particularly help us because dependency on outside API source will be less. We'll be able to control. It will help cash flow in the longer run also. Coming to API own sales, partly this quarter, API had a lot of challenges. A, of course, it had to divert capacity for international formulation -- our own international formulation. In addition to that, the COVID issues that happened in China, December, Jan, had impacted to a certain extent, material availability, if you remember. So those also cumulated. But as such, from next quarter, API is coming under control. We are also looking at this whole China situation and the Indian government's promotion for API. We are actually looking at how we can use that capacity in a much better manner going forward.

So are we seeing any growth looking at any growth this year in API business Madam? Or this year will be...

Yes, yes. Of course, we will do it. Close to 20%, you can expect.

Okay. Last question on Europe, Madam. You had mentioned that with -- now all the clearances now on our way, we should see a very significant ramp-up in the European business. And you've been mentioned that the potential is between INR 90 crores to INR 100 crores a quarter. So sitting today, what is the type of visibility? Which quarter do you think, maybe 2 quarters, 4 quarters, 6 quarters, as when we can hit that potential?

I think there's been some misunderstanding. INR 90 crores to INR 100 crores per quarter, we have never said. Europe business went to a sort of down curve when we had the problems with the regulatory. Now that it has come out, we are envisaging somewhere around INR 225 crores total for the year. For the year.

For the year. And at the peak, it had done INR 200 crores, INR 180 crores to INR 200 crores.

Yes, absolutely. That was year ended '17.

Okay. So that is in the short-term interval INR 200 crores to INR 225 crores is a peak that the Europe business can achieve?

Correct.

Yes. This year, year ended '21, we will do very close to INR 225 crores.

See, you must understand one thing. For us, Europe business, it's not just about the challenge of scale up or anything like that. We also have solid oral supply to U.S., which is likely to happen in the second half of the year. And for us, it is very clear that the CMO kind of business which we do largely in Europe compared to that, the supply business for U.S. will definitely be better. So Europe business, one should not keep looking at it from a size perspective only. But we had our own regulatory hurdles, and we have come out of it. It is now slowly catching up.

Next question is from the line of Deepan Shankar from Trustline.

Ma'am, just wanted to understand, any update we have got from our U.S. partner for marketing of our ophthalmic ANDA portfolio?

I'm sorry, I didn't get the question.

Yes. Any update from our U.S. partner for marketing of our ophthalmic ANDA portfolio? Last time, we have discussed that they will be taking some of the portfolio for marketing, and some of them, they will leave. Yes.

Correct. Correct. So it is under negotiation stage.

Under negotiation. Yes.

Okay. Okay.

This portfolio is under negotiation right now. We have been approached by at least 3 companies, and it's going on. Yes.

Okay. Okay. And this newly approved olopatadine hydrochloride ophthalmic solution, so what is the kind of opportunity we are expecting from this, market opportunity and...

It is far away right now. The date is not clear. So I think after 2 quarters or so we'll be able to give you more clarity.

Okay. So currently, can we say that the branded company or how much annual sales they are doing?

About close to 200 million.

200 million. Okay. Okay.

Yes.

[Operator Instructions] Next question is from the line of Jacky Upadhya, an Individual Investor. Seems no response. We'll move to the next participant. Next question is from the line of Aditya Khemka from DSP Mutual Fund.

Just a couple of questions on the balance sheet, NPA and the cash flow. So this year has -- year of perfect storm for Indoco right? I mean came out of a couple of regulatory hurdles that our businesses saw multiple road blocks and multiple geography and the one bright spot was, obviously, your India business, which did extremely well. I just want to understand on the cash flow side. So while we generated out free cash flow of -- from what I can see, roughly about INR 70 crores, less than INR 70 crores. A majority of this cash flow, we actually used to repay debt and to service our interest cost and a small amount of dividend as well. Going forward, our CapEx this year, while it was about INR 58-odd crores. So going forward, would your CapEx remain in that INR 50 crores to INR 60 crores range, one? Number two, as we...

Yes. We have come -- we have said that we have completed all the CapEx which is worth mentioning about. And going ahead, it will be only in the range of around INR 55 crores to INR 60 crores per year.

Right. Right. That's helpful. And second, Sundeep, sir, on this. So assuming that your business grows from here, and we are seeing momentum according to your comment in the U.S. business, in the European business, API business all of it effected to scale up. So if the cash flow grows from this point, what would the priority be, we still have about INR 200 crores odd debt on our book, roughly. So for the priority...

Yes. So our first priority is to repay the long term loans, which are right now at around INR 155 crores and short-term borrowing is swinging between INR 105 crores to INR 120 crores. So INR 155 crores, definitely, we have to repay. That's the top most priority, which is the long-term debt. And thereafter, we'll see -- I mean, there's -- nothing is envisage right now. We also repaid INR 34 crores of debt during the year.

INR 34 crores, you said, right?

Yes, yes.

INR 34 crores. Yes. Let's see that. Okay. Also on your domestic business, Aditi ma'am, are we sort of evolving the way we promote our product will be position? I'm sorry, I joined the call a bit late, so in case you have answered this, my apologies. But...

So can you repeat -- can you -- what did you say?

Yes. The question I'm asking is, is there a way that we are -- that our promotion strategy in the domestic business is evolving given the COVID situation. And the...

Yes, yes, yes. Good. I'm glad you asked this question. No, I've not answered it in this fashion. I will ask a question on demand and what is demand and how much it is, but not on the strategy like that, and I'm happy to share that the COVID period actually has been a kind of a real shakeout period for the India business, from an execution -- strategy execution and operations perspective, because I don't think people had ever imagined the time when field force will not be working. Because that is the sense of prescription generation and demand creation when you ethically market your product. So we had this entire -- out of the 3 months plus, we've had at least 1.5 to 2 months where hardly any work could happen in the field. In this period, however, we saw field staff being able to garner and collect orders from the stockists, be it from their homes. We also saw an entire emphasis come in on digital marketing. So whether it is the core customers of every division, I'm connecting with them over media, whether it is webinars-related to products we have or related to COVID and its treatment, whether it is related to restarting their clinics or sometimes lighter topics entirely of a different kind, also the doctors wanted to hear. I can assure you that 2,300 people sitting at home were engaged all times in L&OD, learning and OD activities, where their skills were being sharpened. In addition to that, they were in connect with all their core customers. So it has been, in a manner, a period where the organization has had time to pause and concentrate on the customer per se. Of course, returns from that will come now when the doctors go back and start practicing. So in a manner, there has been a big shift in the way we have handled. So typically, our business comprises of 3 categories -- 3 types of products. We have acute, we have sub-chronic and we have chronic. So in this period, in the acute basket, we have a lot of legacy products. And those products, we were able to sell well despite people having -- finding it difficult to go out and meet doctors. In the chronic space, also, we have a very small base. And here, we have some established products, which patients are using. So repeat purchase was happening. I think the area which has suffered probably more for us is sub-chronic therapy areas like gynecology and ophthal, which is also picking up now. But there definitely has been a totally different manner in which we have reached out to the customers. Not only that, the company has also been made a lot of inroads in reaching out to retail. So there have been various strategies, which were put in place to reach doctors, to reach retailers. And of course, the supply chain, that is the stockists. All in all, it has been a very good time to strategize to do stuff differently. I think like most people in the industry, I also believe that for an -- right up to March 2021, 100% working in field is not going to be possible to the extent that they were doing before. And it will be very much required that their efforts are supplemented with digital marketing, which Indoco is getting into in a major way now.

Right, Ma'am. So how does the strategy therefore, influence your cost on the domestic side? So there was physical promotion, travel convince costs were obviously higher, there were also promotional costs in terms of visual aid, printing and logistic costs, et cetera. How does it impact your...

Yes. So actually, what you said is correct. A large element of expenditure towards field goes into what is called TE or travel, which has not been there in the first quarter, for sure, to a great extent. Also when they can travel, we have restricted them to only move into headquarters or echoes where they don't have to take any kind of public transport. In addition to that, other promotion expenses also on the lower side, expenses on visual aid, et cetera, will come down, but will be compensated by expenses towards digital marketing. Now digital marketing has a lot of positives, like you can reach a larger audience at one go, but it can never replace the one-on-one you have when the boy meets the doctor. So one can compare this from a cost versus benefit advantage to say that over a period of time, therefore, one can see and expect a lot of efficiency in the India business going forward. But from an effectiveness perspective, we are yet to experience and qualify whether it compensates the rep meeting the doctor kind of thing. I hope, I'm clear?

Yes, you are. Which basically, in a sense, means what you're telling us is that as soon as it is possible, the business model would transition back to the traditional model of the rep walking into the doctor's office to take...

To a great extent. To a great extent, but complemented with digital wherever they cannot.

Right. So in that point ma'am -- sorry, just to elaborate on that point then. So as I understand Indoco's domestic business, we were largely constrained by our reach in the northern and eastern regions of India. And with this use of more digital, would you say that your reach in the northern and eastern region may just expand slightly quickly because of the digital initiative? Or do you think that the initiative will be largely limited to the south and the west where we were already...

No, no, no. Digital initiative is pan-India. So certainly, the areas where we are lagging, those areas will get maximum benefit, no doubt. But as they say, in digital marketing, how many people you are able to bring to the table is one thing and how many get connected and converted is another. So to that extent, I still expect the strength in the south and west to be able to generate greater turnaround from digital marketing. But I agree with you, it is an excellent tool for us to use in the north and east to make greater headway.

Right. Sorry for one more question on the same business, ma'am. So what we have been seeing in some of the second prescription audit data, is that some of the larger brands, the larger pharma companies, they're gaining market share and some of the smaller pharma companies are losing market share. Would you say that's a statement, number one? Number two, which site table does Indoco fit in?

When there are 5,000 small and large companies, modestly, I would say, I am medium. But compared to many others, I would be large. Now your question about bigger brand getting bigger. Yes, that's true. Typically, Indian ethical sales are generated out of prescription generation. I said this before, I'll repeat it. That ensures that marketing strategies drive growth. But root of this whole thing has got to be the field being able to work and meet doctors. So in the last 3 months, that has not happened. Effectively, therefore, much of the decision-making on what to buy, how to buy, whom to buy from has been delineated from the doctor and has gone to the rest of the supply chain. You therefore see these patterns where people have wanted to hold existing old brands, which they were habitually taking and wanted to have a stock at home. They've gone and purchase. Or if they are on a chronic therapy, they are on a prescription, they've gone and bought more of it kind of but -- and yes, even for us, we have seen that our larger brands have done better than our smaller brands because the smaller brands will have a lot more work to be done in the field to -- for them to get established, right? So they are likely to lag behind this whole year, I agree. So companies would look at that very closely when they are driving business. In the shorter term, we would expect more to come from the larger brands this year.

Got you. Sundeep sir, a couple of questions for you as well. Firstly, on the...

Sir, sorry to interrupt you. May I request you to come back in the question queue for a follow up question. Next question is from the line of Chirag Dagli from HDFC Asset Management.

Sir, is there a U.S. guidance that you want to share with us for FY '21?

Yes, yes, we already said it around INR 150 crores.

INR 150 crores for FY '21, sir?

Yes, yes.

Okay. And that, along with INR 225 crores in the European?

Europe, yes.

Understood. And when you think of the U.S. business, you used to be about $18 million, $19 million back in 2017. Since then, we've made significant investment. How should we think about beyond FY '21, how should the U.S. business progress?

Yes. In rupee terms, in 2017, we did the highest, which was INR 125 crores, okay? So this year, definitely, we are beating that figure. And what was your question?

I'm saying beyond FY '21...

[Foreign Language] beyond FY '21. Okay. Okay.

We have -- my point, sir, is that in FY '17, we were already at this number. We may see this number in FY '21. But since then meaningful investments have been made.

I got your question. We are getting one after the other many approvals now. So easily, it can grow at about 35% to 40%.

On the FY '21?

Yes, yes, exactly.

What is more important for you to understand, which I said maybe in 1 earlier call, but I'll repeat that. The quality and nature of that INR 120 crores or INR 125 crores of U.S. business in '17 versus the quality and nature of the INR 150 crores now is a sea change. I mean, it's a totally different business. And I think that is where you should look at. Going forward, much of the sale -- those days we used to have contract manufacturing of ophthalmic products. This is none of that. The only kind of contract manufacturing you are likely to see is that a supply to a partner Teva on ophthal and a bit in the injectable space. But otherwise, there is a whole lot of solid oral of our own. And the nature of products, which will constitute this we'll make the business far more qualitatively as well as better on the margin front.

I understand. Okay. And just on the -- on one of your earlier comments, you said there could still be a 10% increase in the fixed cost. It just seems very high, given that we've already invested so much on the operating expenses as well. 10%, is it all...

Not 10% increase in fixed cost. 10% increase in employee cost, we said, over the year.

Just the employee line item.

Yes, yes, yes. That's because...

And this is all inflation.

Yes, we had to cover. This is a -- Indoco is by far a company, which is -- takes care of its employees.

I understand. And this -- the fact that one of the large ophthalmic majors is filed for bankruptcy. Is that helping us in any way when you look at this business shorter term, say next 12 months?

I'm sure, it's going to help our front-end partner in U.S. They are anyways moving to pave that market share. Yes.

Are you seeing signs of that? But you are seeing signs of that already?

It is too early. We are like one of the major blockbusters we are both going to put into the market is likely to happen in the third quarter for us. So we shall look at it at that time. Till then, it is just mere supply. The products Sundeep already explained to you, this month, we restarted launch and sent launch quantities of one injectable and couple of solid oral products. So the ophthal have not yet even started.

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

Sundeep sir, so the question I was asking you was about the gross margin. So we have seen a significant jump in gross margins in this trend throughout this year. Am I correct to state that some of this gross margin uptick is purely because of the U.S. milestones updates that we are getting?

Yes, yes.

Okay. And so therefore, as an organization under a steady state, could you tell us what steady state gross margin should we expect from Indoco as an organization?

Steady state, it should be 30%.

70%.

30% cost of raw materials, 70% gross?

Yes, yes.

Okay. And same question on EBITDA, Sundeep sir. So we have seen...

On?

EBITDA.

EBITDA. Yes, yes, yes. Go ahead, go ahead.

EBITDA. So on a steady state, once our European business sort of ramps up to a decent scale, once the API ramps up to a decent scale, the U.S. business gets going, what is the steady state margin for the business model that we are running?

This year, we can expect an EBITDA of 14%.

14%, okay?

Purely because first 2 months, we could have done better if COVID was not there. But still, we will try to do more, but 14% is definite.

So that's probably your guidance towards FY '21. My question is more like a 3-year, 5-year out question. Once everything normalizes...

It was 3 years or 5 years, okay. In 3 years, we should go above 18%.

Above 18%, is what you're saying?

Yes, yes.

Sir, we were doing above 18% sometimes 2015 or...

Yes. We had touched 20%, Aditya.

See 19.7% we had touched that's the highest we have done.

Right. And at that time also, we were investing in the U.S. while we didn't have significant numbers from there.

Right, right, right.

Yes, yes.

Okay. I get that. On the R&D side, INR 50-odd crores of R&D FY '20, would the forgoing expectations be similar?

Similar, similar. We'll stick to around this much only right now, at least for the next 1 or 2 years.

Understood. Any potential -- so CRO is a business that most of the pharma companies are talking very highly about. As a content approach. We do have a small presence there. Any thoughts on looking to leverage that platform or expand that platform given the demand most of the pharma companies are telling us we're seeing?

Yes. So the CRO, Aditya, has really helped us, especially in the year where we could file for FTF. Because at that time, it was very difficult to get dates from other CROs, and there was also a lot of risk from ethics or other regulatory practices. So it has helped the company stay in control of that side of the business, no doubt we can grow it further. For the last 2 years, it was pretty much occupied with the internal customer, which is us, and we have not really done too much of external business. But going forward, yes, we will be leveraging that, certainly. Plants to expand. The capacities are pretty decent right now. We have 3 wings, and we can do right up to 98 patients. So I think they are all right on capacity at this stage.

Madam, what would be the capacity utilization today in CRO? Any number?

About 50%.

5-0?

Yes.

Understood. Sorry, one more on the semi-regulated market business. So obviously, a business which has done well for us historically speaking, we have been going pretty consistently there. How does the currency of the emerging markets impact us? Do we hedge ourselves? Or do we invoice in dollars? How does it work?

Yes. Yes. Currency wise, we are only in dollars and euros. The entire ROW except FWA, French West Africa is in dollars. And French West Africa itself is in euros and parts of CIS is also in euros. So we are steady as far as the currency is concerned.

But Sundeep, in times like these where the...

Sir, sorry to interrupt you. I'll request you to come back in the question queue for a follow up question. Next question is from the line of Anupam Agarwal from Lucky Investment.

My 2 questions, first is on the balance sheet and the interest cost. We have reduced our debt by INR 35 crores this year. Still our finance cost has increased even in the quarter and as a full year?

Yes.

Any comments, please?

The finance cost, comprises of interest paid to the banks and the financial institutions as well as ForEx loss, so both put together. But it's absolutely under control.

See, one of -- Mandar, this side. One of the factor, which caused about INR 1.5 crores increases in last year, there was a dedicated facility for this new plant, Patalganga plant. So the interest was getting capitalized. In the current year plan got commissioned. So that impact of that interest is now hitting the P&L is there. That is the...

As we have an update even then, right? So going forward do we see finance cost reducing as our debt plans are to be done?

Yes, it should go down.

Okay. And sir, second question is on the R&D again. We are seeing a massive growth and outlook on the U.S. business. So R&D, you have -- how much are we capitalizing right now? And how much of the expansion?

See, U.S. business, we already have quite a number of ANDAs, which are not yet approved. And those approvals will come now speedily, as it has already happened in the last 2 to 3 months. And going forward, R&D spend will be around INR 14 crores to INR 15 crores per quarter. We'll stick to those levels.

Are we capitalizing any R&D, sir. Is the question?

Yes, as a policy, historically and still now, we do capitalize it as intangible, and which is the written off over 3 years. At every quarter end, we do evaluate the impairment in terms of its future launch probabilities and cash flow. So that call is taken every year.

So what is the quantum of that?

You need to know the quantum for the quarter, then it is 896 -- INR 8,96,00,000, that is what we have capitalized.

Okay, okay. Okay, sir. How many ANDAs do we have approved? And how many do we plan to file in FY '21 and '22?

We have 12 ANDAs which are approved.

We're planning to file about...

And planning to file about 7 for the next year, I mean, '21.

Ladies and gentlemen, due to time constraint, that was the last question for today.

Okay. We didn't see the time.

I will now hand the conference over to Mr. Vishal for closing comments.

1 hour, 15 minutes. Thanks everyone, for taking time out and attending the conference call. Thank you, everyone.

Yes. From the management side, I would like to thank all the participants for your very active participation and enthusiasm. Thank you very much.

Stay safe and stay healthy.

All the best to you and your families. Thank you.

Thank you.

Thank you.

Thank you very much. On behalf of Nirmal Bang Equities, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.