Indoco Remedies Limited (INDOCO) Earnings Call Transcript & Summary

Good afternoon, everyone. Let's begin. So a very warm welcome to you, everybody. My name is Anuj Sonpal, CEO of Vallum Advisors. We represent the Investor Relations of Indoco Remedies Limited. On behalf of the company, let me thank you all for participating in this event. Let me also take this opportunity to thank the management of Indoco Remedies Limited for giving us this opportunity to host them for the Vallum CXO meet. As you may already know, the Vallum CXO meet is the first of its kind virtual analyst meet events. And our intention with these virtual CXO meets is to take advantage of technology platforms like this by reaching out to a wider audience and to create a better understanding and bring awareness about our client company's fundamental business, provide insights into their specific industry, financials and future growth strategies. The format of this analyst meet will be primarily in a Q&A interview format, where I will start off by asking the management some broad-level questions and then move on to questions from the participants. Please note that if you have any questions to ask the management, you can use the Q&A button at the bottom of your screen to post your questions, which I will ask on your behalf to the management. Now before we begin, let me mention a short cautionary statement. Some of the statements made in today's meeting may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. Let me now introduce you to the management participating with us in today's meeting. We firstly have with us Ms. Aditi Panandikar, the Managing Director at Indoco, she is the third-generation entrepreneur with strong business acumen and techno-commercial skills. She hold Bachelor Degree in Pharmacy and Master's Degree in Pharmaceutical Administration from the Ohio State University of USA. Patent laws and practices is another area in which she has pursued an in-depth study. We also have with us Mr. Sundeep Bambolkar, who is the Joint Managing Director. He's a seasoned financial professional with over 30 years of experience in the pharmaceutical industry. He has a diverse education background, including Bachelor's Degree in Science, a post graduate degree -- post graduate diploma in entrepreneurship management and a Master's in Administrative Management. We also have with us Mr. Pramod Ghorpade, Chief Financial Officer; Mr. Pramod is a qualified chartered accountant and Commerce graduate from Mumbai University. He is an experienced financial professional with more than 37 years of post-qualification experience, across various roles, including corporate, regional, manufacturing and business with extensive knowledge and experience focused on operational and strategic planning, forecasting, financial accounts and audits. Now without any further delay, let's begin.

So my first question for today is for Aditi, ma'am. Let's start with you, ma'am. So ma'am Indoco Remedies has had an illustrious career of 75 -- more than 75 years. Could you please start by giving a brief idea about the company to some of our audience who probably are looking at the company for the first time and maybe take us through the journey of the company so far. Over to you.

Thanks, Anuj. 75 plus, 77 to be exact. So there are very few other pharma companies who probably post of such a long history and at Indoco, it's a very interesting story of how the first-generation founders got into this business. Basically, our founder, Mr. Govind Ramnath Kare, was in the business of wholesale and retail or pharmaceuticals in Goa, which was then under the Portuguese rule and he was asked by one of the European companies from whom he used to import medicines to take up agency for Western India, but the clause was to come to Mumbai and set up office. He came here and started a firm called Indo Continental Trading Company, which eventually became Indoco Remedies. And Indoco Remedies, in fact, has an establishment date of 23rd August, that is exactly 7 days after independence. When he decided to move from a training firm into and switch into manufacturing. So quite a romantic history that way. Our -- the second-generation founders of the family, my father and current nonexecutive Chairman, he joined the company when he was barely 24-year old and steered from a sick unit, to a very prestigious company, which then came into the top 50 in the pharma industry in India. And it took us from a company which was bed-ridden, small and having sort of sales only in cough and cold and acute in half India, a few states into a very -- into an all-India company and one with aspirations to go international. Generally, if you look at the history of the company, then you will see that right up to 2003, Indoco was a company which was largely present only in India with the brands. In 2003, we started making small forays into international business started with being contract manufacturers or generic products to U.K. eventually started owning our own IP that is -- and then licensing them out to front-end partners and finally, owning our own [ ME's ]. So that has been a journey in the international. In 2005, we got our first USMD approval for a sterile facility. We are one of the few Indian pharma companies where probably the first FDA approval came in for sterile, which is such a challenging area of operation. On the India front, we moved from being a pure acute company with sales of cough/cold products to MBBS and no-MBBS GPs to then become a sort of multi-therapy organization. Today, we have around 40% coming from pure acute, another 40% coming from multi specialty segments like gynecology, ophthalmology, dental and many others. So that has been the journey. Over this period, we built some fascinating brands. Also from a value-add perspective, at each stage at Indoco, we have endeavored to kind of go up the value chain. So the research, R&D, for example, is something I started in 1993 in a 10 by 10 square feet, small room and probably hired the first infirm to start research. Today, we have our R&D center spread over 200,000 square feet, employing 250 scientists. And we do everything end-to-end from non-infringing process on KPIs that is CRD, right up to filing the finished ANDA with the ANDA or CBD with the regulators. We also have our own clinical research arm CRo at Hyderabad. We also have an analytical services division. So Indoco today does everything from research, manufacturing, sales and over the last couple of years, we have put a significant foot forward by creating front-end presence when we did a substantial acquisition in a company called FPP in U.S. to create a front-end there and just a few months ago, we strategically partnered with another company in U.K. to create a front-end. So this has been a journey. The journey of a company, which has endeavored to just stay valuable through the life cycle. Pharma industry, there are many players in the pharma industry, which show this kind of resilience because the Indian pharma industry has been through various phases. And there have been huge challenges, environmental, regulatory and opportunities also. We are just one of the other companies which has tried to grab every opportunity that has come our way.

In taking cue from that, if I could move my next question to our Joint Managing Director, Mr. Sundeep Bambolkar. Sir, if you could broadly take us to the international business segment of the company and also the product profile of this segment that for our viewers, that would be great.

Thanks Anuj for this question. The international business of Indoco is divided into 2 parts, mainly. First is the regulated markets of U.S., U.K., Germany, South Africa, Australia and New Zealand. And second is the emerging markets where we actually promote our brands, the markets of French West Africa, Kenya, Tanzania, Zambia, Malaysia, Singapore, Sri Lanka, Myanmar, and more of these. So in the regulated market space, like Aditi mentioned, our first approval for tablets came in 2003 from U.K. Our U.K. MHRA precisely on 13, 14 January, 2003 was the inspection. And ever since we have been shipping products to U.K. We started as a contract manufacturer for company called Galpharm then, which was acquired by Perrigo later and then moved on and a we have 8 to 10 very active partners in U.K. Then we moved on to Germany, and we have been winning large tenders in Germany, particularly for our Allopurinol tablets, which is already in public domain, and we are backward integrated on Allopurinol. And similarly, we have very active partners in South Africa, New Zealand, Australia. And coming to the product profile, thereafter, we have really moved on. We started selling injectables, ophthalmics in the U.S. suspension ophthalmics, complex injectables. And in U.K. graduated to higher level of products like those for epilepsy, cardiac, diabetes. Also now we are targeting more molecules in Germany where volumes are very huge. Coming to these emerging markets, we are marketing our own brands, as I said, and the portfolio is more likely matching Indian markets. And we have the same brands here like for example, ABZ tablet suspension, [ Visive gel ], [ Usic ], Cyclopam, Cital, all these brands. We have 150 medical reps in -- all put together in African countries. In Sri Lanka also, we have medical reps and so do we have in Myanmar. So this is the way the business has been going on, on the international front.

Aditi ma'am, would you like to -- can you please take up the domestic business segments and maybe explain to us the different brands as well as therapeutic segments, et cetera, that we do on the domestic front. Also, we've -- in the last year or so, we've also made initiatives to work for direct consumer products. If you could talk about them as well as the growth opportunities for the same.

Yes. Sure. So India business or the branded value-added generics as we prefer to call them that we sell in India is still around 55% of the top line of the company. It is the legacy business of the company, but it has really evolved with the times. So today, the top 4 therapy segments for the company, top 5 rather are we have stomatologicals, we have anti-infectives. We have GI, we have respiratory and then we have vitamins and nutraceuticals. So in GI, for example, we have the largest brand of the company that is Cyclopam. Cyclopam is today ranked in the top 200 brands of the company -- of the country across the entire IPM and ranks very high in the top 30 brands that are prescribed in the GI segment. We are -- our stomatological is our largest segment really. And a presence in Stoma was created through an acquisition of a company called Warren Labs in the year 1999. A very interesting journey it has been taking sales from INR 12 crore odd of Warren then into close to INR 250 crores today for the entire basket of stoma. So for Stomatroologicals, we have three divisions in the company. We have two ethical divisions, Warren Ace, Warren NextGen. And as you rightly said, we also have the direct-to-consumer division that is Warren. So what happened in the dentist space is it aspires now to be a key player in the entire oral health segment. And we realized that our key competitors -- some of our key competitors are really growing the other than ethical business. So after over 50 years of growing stomatological products in the ethical segment, we moved a couple of products gradually into OTX and then trying OTC segment. A couple of things happen when you do this. A, you -- since the product is a cosmetic and not a drug product, you are able to sell through various channels beyond the chemist retailers. So you can then be available in the grocers, you can then be there in the modern trade. And the last leg eventually would be the palm. So we have made -- we have just begun our journey. It has been a great learning as we've gone ahead. For the first time, we have Indoco products being advertised on television, being promoted on radio. You see the flyers on bus stops, et cetera. So direct-to-consumer and our learning in this journey has been great because these are brands which dentists have trusted for over 4 decades. So that is the strength that we brought to the table. And as we go forward, there will be more new launches in direct-to-consumer also. The third very important therapy area for Indoco is anti-infectives. We have some very exciting products here. Oxipod, which is a Cefpodoxime brand is ranked in the top 5 in the Cefpodoxime molecule category. We also have ATM, which is an Azithromycin brand, which did exceedingly well during COVID when Azithromycin was the anti-infective of choice because of its antiviral properties also. Today as well, ATM features in the top 5 in the Azithromycin brands. Another interesting area for us is we have a couple of brands like Cital and Cital UTI. Together, they contribute again in excess of INR 100 crores to the company. Cital is an age old brand, which is a urinary alkalizer. And Cital UTI was later launched in the urinary tract infection space, and they are doing very well. But I would like to also talk at this point about another area of success we have achieved in the India business of late, and that is in the launch of new products. So for several decades, while the legacy products at Indoco did well, we used to lag very badly when it came to the performance of our new launches. Happy to share that as of now, if you look at the total sales that Indoco gets in the India market from products launched in the last 2 years, contributes in excess of 5% of total top line in India. And this is way above the 2.5% or 3% that industry gets. So I fully believe we are creating robust brands of the future. And again in India, there have been a lot of sort of advantages. There have also been a lot of challenges. And I look forward to probably answering a lot of questions where I could address some of the great opportunities that await us in India.

Thank you, ma'am, for that. Another question -- last question for you, ma'am, is that -- so obviously, you talked a little bit about these brands and products. Apart from these new product launches over the last 4, 5 years, I've also seen that the company has made a lot of investments in the plant infrastructure, R&D on acquisitions, as you mentioned, also on people and processes. So could you enlighten our viewers today on these -- we've obviously spent significant amount of money over the last 4, 5 years on all these aspects. Also, if you could touch upon -- and also tell us when do you feel that the benefits of these will start flowing into the company. Additionally, if you could -- I assume there will be a lot of questions today for that. If you could touch upon the U.S. FDA observations that we have had in the last year as well as the one today and the remediation progress on the same as well.

Sure. So that's a lot of questions bundled up in one. I'll try to do justice to it. So Anuj, as you rightly noticed, there has been a lot of change happening in the company over the last decade and last 5 years in particular. And this is largely driven by the aspiration of the company to grow faster in the years to come. And also, as I said, to grow in the value-added spaces. So I mean, we could very well have remained just an India player or we could have sort of outsourced manufacturing. But at Indoco, we aspire to find excellence in various areas. A, it helps us to derisk the various market segments, the challenging challenges and the risks that are there. It also -- as a company, we take great pressure in excelling in whatever we do. So -- and at Indoco, we've always wanted to be -- for our organization to be a little bit ahead from the OD perspective as an organization development perspective to what it delivers. So quite frankly, today, we have created an organization which deserves to have top line, which is at least twice the size of what it has, if not more. Today, we have created infrastructure, which needs to at least have 3x the sales or revenues that it gives us. So let me come to the infrastructure first. Yes, we have three plants in Goa, two in Himachal Baddi, two in Ahmedabad and two in Navi Mumbai. So that's quite a spread. We have 5 locations which are U.S. FDA approved. We often talk of only 1 unit, which is having a lot of challenges, as you mentioned today. But Indoco's journey with USDA is not new. It is not recent also. We have faced at least 10 to 15 USFDA audits across all our sites, many of which especially for the FDA sites as well as for the CRO have been 0483. So there are -- there is a solid roller site in Goa, which is U.S. FDA approved. There is a sterile site in Goa, which we call plant 2 and plant 3, which is currently having certain challenges. So yes, there are challenges and this unit has had challenges in the past, we have improved. And this is a continuous journey if you want to supply products to a market like the U.S., where everyday the benchmarks and expectations on product delivery, product quality are increasing every day. In the sterile space, in particular, there have been several new expectations. And while post our audit in July, we had around 7 observations, which our team have responded, we felt, adequately. We now understand with the warning letter, that there are possibly some gaps, and there are certain areas where we still have concerns. So over the next 15 days, we will again put together a response outlining what we feel we need to do additionally to satisfy the agency and then work with them to resolve it. And I look forward to answering any questions I can on this topic later, especially given the fact that we actually came in at 2 AM India time and we were able to start looking into it only to working as today. So it is still very fresh. We are dealing with it. We understand a very -- in a very rough sketch manner what the agency expects but we have to dig deeper still to this time around, be far more foolproof into conveying to them what we will be doing so that we get satisfied their expectation. But across -- you talk of infrastructure, I would also like to talk of the people infrastructure, which is soft. Over the last 5 years, if you look at the top level of management that reports to Sundeep and me, I think there would be 3 or 4 people you can count on your fingers who probably have been with the company for over 15 years. So almost everyone else has come in, in the last decade coming from great organizations where they have -- they are leading in great contributions in systems in -- on sales strategies, implementation strategies. And I'm quite confident that we are at the cusp of when truly we will get that kind of upside with the infrastructure will deliver more than it should and the people team -- the team of people should also deliver a lot more than we are doing today.

I think that's a very elaborate answer, and thank you for comprising all of that. Let me ask one last question before I move to the questions from the participants. This question for Pramod ji. Pramod ji my next question is on the financial performance of the company. So over the last 3, 5 years, 3 to 5 years, we've seen a decent growth rate of about 15% CAGR. Our margins, unfortunately, have come down a little bit and our debt has also increased. So could you explain? I know a lot of this, what the Aditi already said, have gone in investments. But could you explain the reasoning for the same to our viewers and also the outlook over the next 2, 3 years on the financial performance.

Sure. Thank you, Anuj. So your first question about the margins over the last 3 to 5 years. So I'll take this into two buckets. So financial year '20, '21 and '21, '22 and then next 2 years separately. '20, '21, '21, '22, we got certain benefit, maybe 100 basis points, I would say, because of COVID, where we got certain additional sales in a couple of products, while our field staff and cost associated to field staff, particularly about travel was on a very low side because of restrictions on travel and all this. So we got that benefit of higher sales versus the reduced cost. So about a percentage point, I would say, attributed to -- above the normal range attributable to these aspects. So second aspect about year '22, '23 and '23, '24. '23 -- '22, '23 we started looking at our front end for U.S. So we have changed strategy about the U.S. going on your own rather than -- of course, we are continuing with our partnership. But we got a little less amount of dossier plus profit share in that particular year. That has impacted our bottom line to some extent. But of course, this is like a kind of investment for the future, a strategic change for better future. Last year, that is '23, '24, certain additional spend on the remediation, which is factored in our P&L. That is one. And certain initiatives on digital spend, that is also additional charge, which came in last year. So that has impacted our margins for last year. This year, first half, which we have already declared, little challenges on the supply side, which we discussed in detail in the last call, but we can take further question on this also. Certain supply constraint to regulated market has impacted margin by about a percentage. So these are 2 or 3 broad reasons which has got impacted our overall margins for last couple of years. But again, as Madam and sir also explained about investing for the future for our aspirational growth. So this is kind of a short-term kind of a gap, which is there for the better future. That is on the margins. Your next question was about the increase in debt, short term as well as long-term debt has increased during last 2 years. Again, here, this is primarily on account of the investment in CapEx. So we have invested close to about INR 350 crores to INR 400 crores in overall CapEx during the last 2 years. One is close to about INR 200-odd crores in Indoco. As we are working on master manufacturing plan, we have been investing on replacement of certain old machineries, enhancing batch sizes, automation, certain energy saving initiatives. So we have invested and revamped almost each and every site now with this investment. That is one. Secondly, major investment is in our subsidiary company called Warren Remedies. That is our new initiatives for D2C business and the API intermediates. So there, we have already invested close to about INR 190 crores to INR 200 crores in CapEx. And both the sites are now commissioned, started production and dispatches. So these are the two major reasons for the CapEx investment. And we feel that this is the investment for next, let's say, a reasonable time, 4 to 5 years' time. So we don't expect major CapEx investment, except maintenance CapEx for next 3 to 4 years' time. So we are prepared for our next big growth for next about 5 years' time or so. So this is the major reason for the increase in debt. What are numbers and results, we are still incurring close to about 5% to 5.5% on R&D spend. So we are continuing investing in R&D activities. Again, that is for the future investment. Your last question is about the margins and how we look at it for next 2 to 5 -- 2 to 3 years' time. So all this investment will start giving returns and results. That is what our expectation is. In terms of margin improvement, we have taken a lot of initiatives. One is about this master manufacturing plant. We'll expect a lot of better productivity, better batch sizes. With automation, we expect more production, more produce -- units to be produced with less amount of resources. We are also working constantly on the alternate vendors, alternate sources to bring in material costs down. We are working on product rationalization to focus more on products, which gives us more value per unit enhancement in the field productivity efficiency, increase in PHY is another area which we have taken it as a strategic plan. New product launches with better value per unit is -- will contribute more towards margin. These are primarily major areas which we are working. We have CFTs, cross-functional teams working on all these areas. And we expect better margins going forward as compared to what we have today. As regards to debt reduction, we have a specific plan to repayment. And with the internal accruals and less amount of CapEx for next, let's say, 2 to 3 years, we are certainly confident of making debt repayment as per the schedule. So Anuj, I hope I answered your question.

Pramod ji, that was very good. I already see a lot of questions from the participants. So let's move on to now some of the questions from the participants. [Operator Instructions] Let's take the first question from Gautam Rajesh. His first question is, what is the status of our plant line upgrades in the Goa plant, which lines are operational and by when will all the lines be operational?

So as you know, we have 4 lines in Goa plant 2. I think I'm assuming he's talking about that. And as of now, line 1 is up and validated, media fills done everything, and production has just started on that line. Line 2 is also running, but it is not yet approved by U.S. FDA because it was set up after their -- there was no products filed from that line. Line 3, we expect it to go completely online somewhere in January -- in early January and line 4 by January. So by Feb, clearly, all the lines would start being able to make product. I hope that answers your question.

The next, his follow-up question is the recent partnership we have announced in Europe, what sort of scale can it give us over the next 2 to 3 years in Europe? And what's the overall scale of Europe business, which we can achieve with this partnership?

Europe, we have been recording sales around INR 300 crores per annum. As Pramod explained, major plants of Indoco went through a huge upheaval we brought in much, much larger scale machines and all that will settle down by mid to end of January. So from there on, it will be a full-scale production. The back sizes have undergone significant scale up. The yields will be far better. Automation is installed in it. And the cost per unit as a result would be far, far better. So all that should settle down by 15th to 20th of Jan in Baddi and Goa 1 and we should be well on the way.

I think if I can also add on the market potential. So U.K. is a very, very interesting market. And we had the pleasure of being -- participating in it indirectly over the last 20 years. So we have watched very closely since our first approval and when we started making Vanilla Paracetamol, right up to where we made very complex products for our partners. And the journey, what it shows is that it is a great market with a lot of potential. Provided you are able to sort of work around your logistics properly so that the product is there when it is required and having had all this learning, Indoco then decided that while we continue to have a B2B relationships with our existing partners on the new molecules and products that we file for our own and as now, we would prefer to be present with the Indoco sort of logo on the back. Quite honestly, if you go to a Tesco or a Boots even today and pick up a paracetamol or a Cetirizine it's made in Indoco mostly. Mostly, but you would see a manufacturing license number, no name, no logo. So -- and we felt now that we can participate because that is why we were probably just -- the goods were just getting picked up from our gate, to now where we will actually accrue revenue when we sell in U.K. So that is some inch forward. It is a good, steady standard kind of a business, which we have already established scale on. So that is what gives me a lot of confidence going forward that we will be able to excel in this.

So we have announced already that we have launched 4 SKUs in this partnership, which we launched last month. And going forward, we have said in the announcement that within 18 months, we will scale up the 4 SKUs to 20 SKUs. So that is the near-term future.

Next question it's, Madhur Rathi, he has a bunch of questions, so I'll just try to read it one by one. First question is on the margin front. What is the steady state of margins that we can expect going forward on a consol level?

So steady state is a good question. And when is also a good question. As Pramod mentioned, pre-COVID, we used to do around 17% to 18% in EBITDA. And then we had the spike during COVID and again, it settled down. But thereafter, we've had challenges of two kinds, obviously, the U.S. supply side with the issues at plant 2 and the remediation that we've had to do. But more importantly, also because we've had to, again, like Pramod said, invest close to INR 300 crores across our facilities to bring them to a level where we can be better prepared for efficiency going forward. See, the whole generic space, if you look at it closely, especially if you want to do volumes in solid only, you have cost of goods going up and you have price per unit at point of earning is slowly coming down. So the only way to keep it as profitable as before or increase the profits is to work on efficiencies of production. And that has needed us to reinvest. Some of these plants were very old. So we have made these investments, which we believe -- so it's like first getting the volume and then making the investments so that, that volume becomes profitable. As a result of that, we've had to take a hit in EBITDAs because obviously, these plants, they have their own running costs. You don't utilize them completely fully on day 0 and then the catch-up happens. So as of now, we are reeling this year YTD, I think I believe close to 14%, 13% to 14%. And largely, that is on account of international business suffering because of nonsupply, not because of orders. So I would be happy to speak about next year. given that we are already into -- almost into the second half of this year. I feel we would quickly be able to get back to close to 16% in a couple of years now and then a steady state 17% for sure. I hope that answers.

Yes. His follow-up question is, what is the capacity of our API and intermediate plants and the peak revenue potential from these?

Right. So good question. Indoco got into the API business simply when we were very clear of our U.S. strategy because as such, we -- I have always believed that there is excess capacity of API in our country for every other market because there are many seasoned players who offer age old molecules. We also had the purchase from China and imports, et cetera. So we got into this business very late. We are one of the very few players which backward integrate. So I would like to talk from the perspective of backward integration. Today, our capacities are enough that after consuming product internally, we are able to easily forecast a revenue of close to INR 200 crores from this business only on external sales. And going forward, I feel very confident we'll be able to grow this at a -- from next year onwards at 20% plus. Good question on the KSM or the starting material capacities. Today, much of the starting materials that we need when the molecule gets formed, the key starting material, we obviously make in-house in one of our other units. And going forward, we have set up at the [ orix ] site in Aurangabad where we have set up facilities for making consumer licensed toothpaste. We also have set up additional capacities so that going forward, we don't have any deficiency in the starting material for API. So we are well poised because what we are doing is the Patalganga unit, which has all the approvals for the finished API. We are trying to use as much capacity in it as possible for churning out the finished API and getting the starting material, the intermediates and the KSMs done outside from reliable partners and also in other sites. But we can [ easily ] add 50% more to our API sales through all the investments we have done till now.

His follow-up question is, we've received the FDA Para IV certification for Olopatadine hydrochloric solution in 2020. Have we been able to sell this product or due to the OAI at plant 2 opportunity, the opportunity has gone away?

No. So okay...

The opportunity has not gone because we have the ADA, which is the first one we can market the product. So we'll see what best way we can do it. And the opportunity is that the second player can come in only 6 months after us. So that is the thing. So we'll see how to go about it as quickly as possible.

His follow-up is how many ANDAs are pending and how many would be classified as Para IV?

I think I will let Pramod come back to the exact numbers. But my understanding is close to 15 to 16 ANDAs, more than that, 20 ANDAs are pending with FDA. And at least 3 to 4 would be Para IV.

And his follow up is, we have certain ANDAs which are pending due to the OAI status on our plants. How has competition shaped since OAI? And how do we pursue this going forward?

Yes. So that's a good question. And yes, OAI status on morning letter as it is now from today, it does mean that your files move very slowly inside FDA and don't move at all sometimes. So there will be certain delays. But fortunately, many of the products we have filed, especially the Para IV kind, they are for the distant future. So I'm very sure that despite whatever challenges we have with FDA now, we should be able to get out of this soon enough to not lose out on that advantage. Yes, on certain products, we -- there is more competition building up. And does this make the product not viable? We are making sales strategies in such a manner. And that was essentially the reason to get into front-end in U.S. because obviously, there will be many products which would not be commercially viable for Teva, but still make a lot of sense for Indoco because of the size and scale of operations and et cetera. So I don't think there is any product that we have got approval for, frankly, which will become out of fashion for us because of the delay. What we have to do is just strategize on what percentage of the market we want to go after and therefore, with what kind of pitch.

Next question is from Nigel Mascarenhas. What are the observations in the warning letter from U.S. FDA and how does this change our time line for coming back fully in U.S.A.?

So as we said in the release today, the status between our OAI and warning letter does not really change anything for commercial operations. It simply means that the FDA wants you to take this really seriously and feel that you might have -- if we had responded on 7 observations earlier, they would have come back on at least 3 to 4. I'm saying very sketchily because I've looked at it in a very broad way, where they feel there is an area of improvement further desired than what we might have committed or if we are committed to do an XYZ thing, they are saying that do it, but don't do it the way you have said it, we wanted to do it this way or commit to doing this way. So that is how we are looking at it. And I feel very confident that we'll be able to sail through this, of course, with a lot of effort and working together with the agency.

Next question from Aditya Khemka is that given that our therapy areas in domestic business has been experiencing subdued growth, how are we pushing for midterm growth in the domestic businesses?

So thank you for that. As you know, Indoco's India business is very skewed. Around 65% of our revenues come from west and south. And it is not as if in the north we are not present. But the manner in which we have a presence and the potential, how we harness it, although we have tried for several years to sort of get the return we desire, I'm very confident now because of certain strategies we have implemented in the North. It was really amazing for me to understand that the state of UP, Uttarakhand, Rajasthan and Punjab, Haryana put together is the fourth most populated country in the world. just the 4 states. So I just came back and told Sundeep, we should forget about the tiny countries we aspire to go to and probably look at this additional country. So there is a lot happening on the India business front to actually address this opportunity. And I feel that this very underleveraged space for us. I mean just to give you some very rough numbers, North contributes 27% to IPM and only 13% to Indoco. And in the North, where acute -- pure acute is close to 50% of that portfolio, whereas all India, it is 30% -- and so in the market where we are supposed to do the best, we are probably most underleveraged. And a lot of things happening here strategically through people selection, recruitment, organogram corrections and restructuring of divisions. But I would like to wait and show performance here rather than speak more about this. So that is a little bit in India there. Also in India, another thing we have realized is you must have heard of a lot of companies which want to go rural or extra urban. I don't know whether it's a good or bad thing, but Indoco really is an extra urban company. So we get 60% of our revenues from tier 2 town and off late industry growth because of the shift of population to urban areas, et cetera, we are seeing the consumption and the growth coming more from the urban areas. So this is another strategic shift that the company is making. So a couple of our divisions, we have specifically strategized so that there is a metro-centric approach in our growth. So I believe some of these levers -- many of these levers will help us take advantage of this. Coming to Aditya's question on the molecules, actually, other than the fact that we do not have a very big presence in diabeto cardio specifically, otherwise, we are pretty derisked from the molecule front. So today, if you look at acute and pure chronic, then yes, there are highs and lows and acute in particular, has its highs and lows and chronic is a little bit more uniform. But largely, if you see end of the year, the growth patterns and the percentage growth are same. So there is a lot to be done. I agree our aspiration to grow in the chronic space, it is far more challenging to do than speak, but we continue to do that.

His follow-up question is, the U.S. business noncompliance has been a long-standing issue and continues to depress our overall margins and ROE. Does this make you rethink your capital allocation going forward?

So good question, Aditya, I'm happy to say that going forward, there is very little capital going anyway. So maybe if you asked me 3 years ago because how the allocation was done and dusted. I was told by somebody once about the nature of the sterile business for U.S. where you struggle right up to the 95% and then the last 5% brings you the desired revenues. And I feel very confident that we are in that very hot zone of 5% right now. So we really need to push further to show commitment and I agree that the margins have got depressed because the larger base was in sterile. But like I said earlier, there is no reason for the company to lose heart regarding U.S. business because at the same time where there's been a warning letter, the same year there have been two 0483 inspections. So it's important to understand that these are all issue-based things, plant-based and also depend on the complexity of the product and the product mix that comes out of the plant. We are also working strategically on that front going forward to ease some of these things. So it doesn't make us rethink, but definitely, now that we are re-investing a lot in the India business. Going forward, there will not be as much investment that will happen on U.S. infra. But largely because we already have the capacity.

Next question is from Deepan Narayanan. This is also related to the U.S. FDA issues. His question is, what will be the impact on existing business and new products approvals? How much business is contributed by Goa plant 2 and 3? What will be the kind of remediation costs and time line required for completion of the whole remediation of these plants?

Well, like I said, we are less than -- we are about 12 hours into getting the warning letter in our hand. And it would be very early and improper of me to speak in detail of our what this means or doesn't mean. As of now, the way we understand it is that we have to respond in 15 days. And then based on how FDA would look at our responses, we will figure our way forward. And possibly in 2 weeks time or 3, I would be in a much better position to answer this question. But typically, what I said is from a regulatory status point of view, nothing really changes between OAI and warning letter, except the -- if it takes you much longer to come out of this than an OAI. Then your new approvals will get further delayed. From a cost remediation perspective, we were anyway spending on remediation right up to now. In fact, we have spent a lot more on area upgrade also. So most of our area upgrades are over. Regarding remediation, obviously, we have a warning letter meaning some remediation costs will continue. Regarding the major scale and absolute numbers, it's too early for me to comment.

Next question is from Dhwanil Desai. This is regarding the ANDAs that we talked about earlier. So he's asking, can you talk to us more about how the U.S. ANDAs, the 22 in our name have been commercialized so far by FPP and what is the road map for the same. Also, 7 ANDAs, which we have filed with partners how and when will the transition happen to FPP?

So I'll answer the second question first. So the ones filed through partners, like I clearly said, the B2B relationship stays. So there's not going to be much of a transition of those at all. Regarding the first part, the business buildup of the product. Most of these 20 are sterile and for reasons best known of what is happening in the plant. While we were ready with FPP, the plant issues have not allowed us to sufficiently sort of supply to U.S. on sterile. Having said that, the solid oral site, which is Plant 1 in Goa is at the fag end of its master manufacturing correction. And it has started giving us product. But going forward, I see lot more coming from there. So you will see this year and in this year. So I just go back to Pramod to probably check the real contribution. Last year for the U.S. other than the milestones and just conversion, how much would have come from the sterile unit.

Sterile unit would be about 60 in the overall year.

That is 200. So around INR 120 crores would have come from sterile last year. And of this, also, there will be certain upfront payments and milestones. So my rough calculation is close to INR 80 crores to INR 90 crores would be something that comes out of sterile? And this business is not going anywhere. It has not gone anywhere. It has got delayed.

His follow-up question is can you talk about the product basket in the Europe market, both in U.K. and Germany. And how is the product concentration in these markets. With our recent partnership with Clarity Pharma to commercialize 20 new products over 18 months, how will the product basket look like? And can you name some of the products that we intend to work with Clarity.

No, we have not named any products, but like Aditi and myself said earlier, we are getting into more and more difficult to manufacture sustained release type of molecules, complex molecules, other dosage forms.

And I think at this stage, you will understand strategically, it may not be the right thing to do. But let us show performance and then we will tell you which products are selling.

His follow-up is that in India, we have done very well in a niche market like ophthal and that has been a strength, but some of our larger brands outside ophthal. Brands like Cyclopam, Cital, Oxipod, what more can we do to create larger and stronger brands in the ophthal space?

In the ophthal, okay, fine. So ophthal in India and ophthal, our journey in U.S. are actually 2 very different things. Because with U.S. markets, we have always gone for Para IV futuristic molecules and products. And we were already in ophthalmology in India even when the product patent was not in place. So many of our ophthal brands and people might be familiar with some of them like Homide or [indiscernible], they do very well actually. And recently, this year, we launched the second ophthal which is India, specifically to get into the space of glaucoma. So while we were always in ophthalmology in India, we were absent in half of the ophthal market from a market coverage perspective. So we have launched a couple of molecules in the glaucoma space. And going forward, we feel confident that we'll be able to grow this.

Next question is from Harsha. The company has spent over INR 1,000 crores since FY '21. How much of it would have gone towards CapEx and how much towards compliances?

Sorry Anuj?

Since FY '21.

That would include R&D not just CapEx, I was a bit worried.

He wants a breakup across how this was spent, so if you can break it up for him.

Yes, INR 250 crores would have gone into CapEx, clearly out of probably INR 600 crores and what is other?

Compliances.

Compliances is not much. We have -- I think we have never exceeded in excess of INR 10 crores any given year. So that is another INR 20 crores, INR 30 crores. R&D investments have been very high. Especially in the last couple of years when because of FPP, the entire investment was being borne by Indoco and we were not collecting any milestones from Teva et cetera, et cetera. So in the last couple of years, there will be very high R&D investments. And I believe we are creating great assets for the future.

Next question is by [ Kunal ]. I think you already touched upon this, but his question is, should we anticipate that the European market will begin to grow in high double digits as paracetamol prices have also stabilized, inventories being cleared, more product approvals across EU would lead to more launches of products.

Yes. We don't depend only on paracetamol. There are a wide number of molecules. And definitely, you'll see double-digit growth.

He would also like to know what kind of asset turnover we would anticipate on the present gross block of around INR 1,700 or INR 1,800 crores.

So present gross block is if you see our September number is overall INR 1,294 crores, not INR 1,700 crores. Out of INR 1,294 crores, formulation plant is about INR 750 crores. API is about INR 180 crores and our -- rest is R&D and HO. So we expect our internal assessment, and we have -- in fact, we're talking about this and as a target to our executive management team is to at least reach up to 2x in near future. But definitely we expect more than that in the long run.

Okay. Next question is from [ Aman Jain ]. What other products are in pipeline for the D2C segment at Warren Remedies? By when do we expect meaningful contribution from Warren Remedies in terms of profitability?

Yes. So I think there are 2 very different questions. One is which products we are launching. Again, for strategy's sake, I would not like to name it but I will say that what we are trying to do is to be known -- rather than be known as a sensitivity market player, we want to be known as a complete oral care. So you will see beyond paste. Many other forms of products that are used for oral hygiene. And again, as I said, we continue to be in D2C and ethical. So there are several products getting launched in the ethical space also going forward. So a lot going on there. And the second part, what was the second part? Profitability. So as -- since we had to shift because of the direct-to-consumer, we realized that 1 of our key competitors only gets around 35% from the ethical sales and more than 65% of the topline comes from beyond ethical. So you have to go to the grocers. You have to go to the modern trade, you have to sort of move out. And to do that, you cannot have a drug classification because these guys would not go and get the storage licenses, et cetera, et cetera. So for ease of distribution availability, we had to reclassify our products and get them even from an organoleptic perspective, make them more consumer acceptable. So we've gone into cosmetic licenses. These products then cannot be made in the same facility where they were made earlier as drugs. So the entire Aurangabad site was developed for manufacturing. So while the Warren Remedies sales will soon start showing pick up because of our investments in capital expenditure and Warren Remedies, that is what is impacting our profitability there. And I think it will take us at least a year more to breakeven there.

His follow-up is, what is our strategy? You already touched upon the ophthalmic part, but what is our strategy to expand sterile injectables and ophthalmic. We have planned to add 2 new lines. So by when do we expect them to come on board?

So I think mid '26 is when both the lines will be in and by end of 2026, there will be further capacity created. And there are many, many promising products both in injectable and ophthal space, which we have filed with FDA. So by the time we get approvals, we feel, the plan will be way out of all its struggle with regulators, continue to have challenges, but will be in a much better place than it is to date.

Next question is from [ Miten Lathia ]. How is the sales performance thus far upon shift to OTC?

So we've had a very challenging year for OTC simply because some of these products were earlier sold through the ethical channel at Indoco Remedies. So there has been a channel shift as well. And as it happens when such a channel shift, if you have to allow the market to balance a little bit. So as of now, we are showing a growth of close to 18% on the 2 SKUs that have gone OTC. But we have to remember that there's a drug product in the market from before which also has got consumed. So because in pharma, whether ethical or OTC, we like to talk of secondaries, which is 1 of the real demand. So I don't have any concerns for the demand creation, but on the primary sales or selling out there has been a growth of 15% to 20%.

And this follow-up is of the 20 pending ANDAs, how many are from plant 2, does the warning letter impact this?

I think Plant 2 are about 10.

10 out of the 20 are from Plant 2.

Next question is from [ Nisar Pathek ]. What is the formulation revenue potential at full?

Formulation plants, you mean?

Yes.

So this is a very difficult question to answer because the same plant, when it makes 1,000 milligram metformin tablet, you suddenly have very few units coming out. And when you make a 20 milligrams Cetirizine tablet you have many more units coming out. So that would not be a right way of looking at it. If this question is for what kind of capacity utilization you are running at and how we expect to. So 1 of the reasons we have to invest in CapEx is to be ready for this kind of a thing. If you recall about 5 years ago, most of our reg market revenues came out of the plants in Goa only, and we had a very small plant in Himachal in Baddi and thereafter it was an acquisition of a second unit and then ramping it up. So much of the European business has been moved there to Baddi to free the Goa plants for U.S. and U.S. revenues are just beginning to happen, especially in the solid oral space. And we have further invested in the master manufacturing plan in order to see that we will have this kind of a flexibility of supply from more than 1 site, if there is that kind of demand. So I don't think we need to be concerned on capacity going forward for at least 4 to 5 years.

And his follow-up on that is what's the margin -- what are the margins for domestic formulations? And what would be the outlook for domestic business for FY '26?

So we don't really give segmental margins out, but forecast for 2026 we always try to -- I said this several times that I want to grow faster than market. I think on a YTD basis, if you look at our data in IQVIA, we are doing better than our covered market and we have a bit of a problem there because they do not capture the B2C sales effectively. So that doesn't get -- so for the coming year, certainly close to 10% to 12%, India should aspire to.

Next question is from Amar. His question is for AnaCipher CRO business, which I think is service business. So I want to know how do you cater in this business for which clients and are these long-term contracts or short-term contracts because in your revenue share, it's very volatile every single year.

The volatility is largely because of how much of the capacity we have to keep for us. So again, like API, we acquired the AnaCipher CRO from Nicholas in a year where we realized that if we don't do this, we will never be able to file -- first to file because then you never get the timing right then and neither you get the slots. And then there's always the added risk of regulatory action on the CRO if they are not ethically doing the right thing. So there were 2 reasons why we acquired the AnaCipher CRO. So today around, if I'm not mistaken, 60% capacity still gets consumed by us internally where we do our biostudies for the products which we file in U.S. and Europe and other places over the world. Now with increasing expectations, the Indian FDA also expects us to do many studies. So those are also getting done there. So our external partners, yes, there are no long-term contracts, but there are relationships where we work with certain key players, and they give us business on a continuous basis.

Next question is from [ Abhishek Kohli ]. Are the products of sterile that we plan to launch in USA will be also launched in Europe, Germany and U.K. to understand if R&D expenses is distributed across geographies.

As of now, the R&D expenses on sterile are very much on U.S. only. Yes, eventually, we will. But the character and nature of these products in many of these markets is very different. You do not get a single market which is large enough and ophthal are niche. So there are certain exciting molecules, which we will launch going forward.

In that line, Swati asks, do we have plans to file from multiple sites? Or are the ANDAs facility-specific products?

Right now, facility specific, we have only 1 site for sterile. Going forward, there are strategies in place to derisk it, but that does not involve CapEx.

[ Abhishek Kohli's ] follow-up is Lofexidine, the anti-opioid drug that we have exclusivity on for 180 days. How is the market share doing out there?

It is a small market, around 15 million, if I'm not mistaken. And there is an authorized generic, which takes 50%. So that leaves around 7.5 million market for us to go after. And we are doing well. The initial supplies have gone. We feel that they are sufficient. I don't have the exact number, but we are doing well. We will -- it is very early days, so we'll talk about it when we get substantial sales.

The 180 exclusivity is up to February end. So we still have time to do better.

And his follow-up is, how are our toothpastes doing in the consumer market? Is there any survey done from Nielsen or anything helpful for that front.

Yes, we -- more than survey we subscribe to Nielsen. So we get to know exactly how our product vis-a-vis our competitors is doing not just geographically but across the various kind of -- whether it is chemists, retailers, grocers, et cetera, et cetera. We also get a very detailed analysis of how much gets sold in metros, how much in urban, extra urban, et cetera. So there is a term in FMCG called weighted distribution and numerical distribution. So on numerical distribution, that is a measure of how many retail outlets they are available at. Happy to share that from 2 years ago, where it was available at 1 lakh, 100,000 retailers, chemists alone. Today, we are present in 300,000 chemists so we have been able to get the numerical distribution. The weighted, that is the amount you sell at each counter. That is where the sales and other strategies that we are driving now to directly reach consumer should help us get their. So every day, we check for numerical and weighted distribution increases and decreases, and that is how we know an outside view on how the places are doing.

We're running out of time, but I'll take a few last questions from [ Madhurath ] here. What is the area of our CRO facility and optimum revenue potential here? And how do we compare with Vimta Labs?

Difficult question for me to answer because I have to study Vimta Labs first. But I can tell you that a couple of years ago, we doubled the capacity at the CRO. So we used to operate with 98 beds. We now have 50% more. I think close to 150 beds now. And happy to say that because we earn from that site in addition to it being part of our R&D expenses. So -- and the site has had 8 straight 0483 FDA audits and is one of the most respected players, and we plan to stay that way.

His follow-up is what is the current portion of revenue coming from the sterile and injectables. Where can the segment be going forward as Goa plant 2 and 3 regulatory issues subside.

So 70% of our filings are in the sterile space. So that should give you some idea about how much revenue and eventually for U.S. And in 1 year when all 12 months, we were able to supply products and things were okay with the site. We did close to INR 120 crores -- INR 200 crores on sterile. So that is only the beginning. Sort of tip of the iceberg we were able to touch. Of course, that had some revenues from milestones. So I would say INR 150 crores was a based we had created. So last time around, we had a warning letter, it was 70. We totally we got to 150. Now we have another warning letter this time around. I don't expect loss of sales, probably some time to get it back. And after that, if you're asking numbers, then I guess when you're under warning letter, you should be very cautious about talking of when and how much and what. So let's wait a little bit to talk about that.

I think that's all the questions we have for today. Again, thank you, participants for great questions. And thank you to the management as well for answering all of them patiently. I think this has been a very enlightening session for me as well as I'm sure the viewers. Any closing comments from your side, Aditi ma'am or Sundeep Jee?

Thank you for the very, very -- for this opportunity and very interesting questions. I have to thank the members who have logged in and for very intelligent questions. And I think through their questions, we've been able to elaborate a lot of our strategy, our thought process. And I would just like to say on a day when we got a warning letter that as management, we stay very bullish on where we are headed. We have clear visibility on what needs to be done. And there are several strategies in place beyond the warning letter where the company is looking to help change its trajectory.

Yes, I would like to thank all the participants for their very active participation. And this will really help us and motivate us to do far better in the near future. Thank you.

Thank you, ma'am. Thank you Sundeep Jee, and thank you, Pramod Jee, and thank you, everybody, for joining us. Have a great day.

Thanks.

Thank you.