Lupin Limited (500257) Earnings Call Transcript & Summary

Welcome to Lupin Limited Quarter 3 FY '21/'22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the management. Thank you, and over to you.

Thank you. Greetings friends. It's a pleasure for me to welcome you to this Q3 earnings call. As you would have seen by now, overall, another difficult quarter for the company despite some good developments like the sales growth in the U.S. However, I do believe that with some sound earnings and substantial strengthening and a number of optimization initiatives underway, we are going to see much better times in the coming quarters. And we're all looking forward to that. And I'm sure you too are looking forward to that. With that brief introduction. I would now hand you over to our CFO, Mr. Ramesh Swaminathan, for detailed analysis. Thank you, over to you, Ramesh.

Thank you, Dr. Sharma, and good evening, friends. I trust you and your family are keeping good in these troubled times. Revenue for Lupin grew 2% quarter-on-quarter, driven primarily by U.S. growth of 10.4%, driven by again strong growth of albuterol, where we now have a 20% market share. Year-on-year, we registered 4.3% growth, driven by majority of our markets, U.S. 9%; India region 12%; around with India Others, which was actually 8%, APAC, 17.7%. Gross margins grew 1.7% quarter-on-quarter, while the gross margin was down 0.9%, primarily due to increased input material costs, sales mix and higher U.S. sales. Employee cost is down 2% quarter-on-quarter at 18.2% of net sales, primarily due to the savings realized from specialty restructuring in the U.S. This, despite providing for additional sales incentives in India, linked to performance. Manufacturing and other expenses are higher 18.3% in quarter-on-quarter primarily due to the onetime charge of about $26 million or INR 193 crores. We reviewed U.S. provisions and determined that there was a need to further increase the same to properly reflect the impact of some onetime items that we experienced over the last -- past 2 years. That is the unusual high volume returns from a 2020 patient level recall of Metformin and slow-moving flu medications at wholesalers' warehouses. Other income was down 53%, primarily due to interest on tax refund earned in quarter 2. And this is obviously not there in quarter 3. EBITDA adjusted for the onetime charge of $26 million or INR 193 was INR 564 crores, flat quarter-on-quarter. The adjusted EBITDA of 13.7% versus 14.1% sequentially. Given the exceptional items taken on the Lupin stand-alone accounts, the bottom line for the first 9 months comes up negative, warranting a write-back to the taxes provided till date. The ETR for the full year for the company should be about 30% to 32%, given the tax being paid in certain geographies despite the lower PBT on a consolidated basis. In the next 2 to 3 quarters, we see margins slowly moving up to the 14% levels. The next couple of quarters, EBITDA improvement will come largely from the optimization efforts. And we have several initiatives in advanced stages, including tight management of FTS, our returns, write-offs, freight charges and plant idle costs. Some of the near-term drivers of growth are going to be DCSF -- being DCSF, trade to OPM, and growth in India and other geographies. We see meaningful uptick in H2 FY '23. And then FY '24, we see the real growth drivers kicking in. The full impact of our inhalations portfolio, injectables portfolio and biosimilars, which will deliver higher numbers and commensurate gain to the margins and EBITDA levels to move up to about 20% plus. Hence, we would also be happy to note that we have completed our acquisition of a bolt-on in Australia for Southern Cross, and further add to the numbers going forward. I'll tell you the full story and other issues. I would open the floor for discussions.

[Operator Instructions] First question is from Anubhav.

This is Anubhav from Credit Suisse. Just 1 question on the next 2 years. So just for the timing, if you assume that you're not going to launch your tiotropium Spiriva, and I'm talking about next 2 years. And if I classify the rest of the business as base business, can you just talk about how would the gross margin and the EBITDA margin pan out for this part of the business over the next 2 years?

Ramesh, you want to take it or you want me to take it?

You could take it first and I could add, Vinita.

Yes. So Anubhav, we see -- your question is the baseline business versus new product launches, what will it contribute? We expect our baseline business margin also to improve over the next couple of quarters. Even if you assume fiscal year '23, just the baseline products, with the optimization efforts that we have already executed as well as the ones that are on the anvil for implementation, we see the potential of improving our gross margins, offsetting some price erosion as well with the plans that we have.

Just some clarity on that. Where will the gross margin improvement come from? Because if one is regional gross margin improvement, second is product level launches. So we have a very good product coming in. But on -- except this tiotropium Spiriva, I'm not aware of very high-value other product which is helping it. And so that's why I was asking that one, your efforts on reducing costs can help an EBITDA margin on the operating leverage side. But I'm not able to understand where will the gross margin improvement will come from.

Yes. Go ahead, Ramesh.

There are a couple of things. So you can bring -- the course of the year, we have taken some exceptional items as an account getting, not from sales itself, which includes some parts of returns and for sure, provisioning and the like. And these see what recognize are not something which will actually occur in the long term in the future as well. And to that extent, we certainly see a bit of coming up insofar as the gross margins are concerned. In terms of other costs, we have identified several pockets where there have been -- we invested ahead of the curve in the past as in capacities in terms of SG&A and the like. And we would like to, over the next few quarters, work on all of that and address it. I meaningful movement up would actually come from those as well. So to that extent, the confidence levels for taking the EBITDA margins up is actually coming from there.

So Ramesh, if I can just add here. So I think the question is on the gross margin line, right? So on the gross margin line, and above, it's the business mix. Right now, obviously, the U.S. has grown, India has actually de-grown in the relative. So as that mix changes again in Q1, Q2, you will see gross margin improving as well. Obviously, there's also a story around operating leverage and the like there. But on the gross margin, I think it will be primarily driven by the business mix.

Okay. Second question is just a clarity on the U.S. So roughly annualized level of $800 million, very ballpark number. What percentage of our U.S. revenues would be contributed by partner and AG products? Very rough number will do. I'm just trying to understand why our gross margin is so low. So can I understand [indiscernible].

Roughly 20%.

20%. Okay. That's helpful. And just last question on the Tiotropium. So can you just indicate where are -- where is the application with the FDA? When did you replied back to FDA? How long it's been sitting with FDA now? And when you expect approval?

We just sent a CRL response, full response last quarter. And our TAT date August of this year.

Next question is from Neha Manpuria.

Ramesh, if I were to just look at operating costs in this quarter, given that we had onetime impact from restructuring in the last quarter, if I adjust for that, operating costs haven't really changed quarter-on-quarter despite -- you mentioned optimization efforts that we have taken and the restructuring in specialty, so could you give some color on when we will start seeing that improvement? And despite the restructuring effort, we haven't seen it in this quarter, what gives you the confidence of improvement going forward?

This quarter, we had, in fact, a higher quantum of R&D. So for the next -- and that's been captured out here. And going forward, that bit will not be out there. We also spoke about the fact that if you speak about manufacturing other expenses, we are looking at, in fact, that NCE spinoff itself. And that we are fairly confident it will certainly happen over the next few quarters. That will be the other bit. And of course, as I said, other initiatives that we are really taking.

[ Zameer ], sorry, just to understand the NCE spin-off, would it be -- I mean, that would be an R&D saving largely, right? Besides that, would there -- and would it materially change your EBITDA margin besides the R&D savings?

There would be -- so we are spending close to between INR 150 crores, INR 200 crores on NCE. So if when the spinoff actions, that would actually be off at least EBITDA.

Okay. Understood. And second, on the U.S. business, from the current $800 million base, given the price erosion that we've seen in the launch pipeline, from a 2- to 3-year perspective, what is your comfort on what this number could look like based on the pipeline that we have, especially since you're mentioning a very large inflection in FY '24? And also just to follow up on that on biosimilar, besides pegfilgrastim, if you could just give an update on Etanercept our second biosimilar?

Yes. So in terms of the new product launch, really second half of next year, as we mentioned, Suprep, Tiotropium, and hopefully, pegfilgrastim as well. And a partial year impact, obviously, in fiscal year '23. But a full year impact we see in fiscal year '24, which gives us the confidence of really growing the U.S. revenues in a material manner and a commensurate increase in gross margins and contribution to EBITDA margins as well.

On the ranibizumab -- yes, go ahead. Go ahead.

I was saying that, yes, on the biosimilars front, of course, pegfilgrastim is our lead into the U.S. market. Etanercept is growing. I mean Mylan is launching in -- has a launch plan across all of the different geographies. Most recently, they launched in France. And ranibizumab is progressing. I mean, clinical trials, Phase III trial in India is progressing well. There were some delays from a COVID perspective, but we're still making progress on the trial.

Sorry, when would be the filing of this -- like, filing for ranibizumab?

In the upcoming fiscal.

Sorry, Vinita, I cut you. Sorry. Please go ahead.

We're saying the same thing.

In the upcoming fiscal.

Next question is from Surya Patra.

So look, first, see, if you can tell me what is the kind of a progress that we have witnessed in case of Fostair in Europe?

Sure, Surya. I mean we've had really good progress in terms of contracting with the physicians, the CCGs, that are important to drive utilization of the product. We have seen some uptick, but not to the level that we had expected due to the COVID surge, the omicron surge in U.K. Majority of the CCGs are focused on treating COVID at this point. So we expect the utilization to ramp up over the quarters to come, especially now that also U.K. has opened up quite a bit and relaxed their restrictions quite a bit as well. But we've had really good success in contracting, both with the writers, the physicians, as well as the retailers.

Okay. Based on the contracting, is there -- and can you share what are the kind of market share now practically that you are witnessing for that, let's say, over the next 12-month period?

I wouldn't be able to -- maybe we can get that to you offline.

Okay. Sure. Now my second question is on the margins again, ma'am. Practically, this -- we have seen a kind of a good ramp-up in the albuterol. Obviously, some contribution would be coming from the even Fostair and all. So despite that, the margin scenario remains very weak and we are possibly guiding again a lower margin. So this is the third time that consecutively -- that we are indicating a lower margin scenario. So from the 17%, 18% level, we have brought down to 16% for H2. And now 14%, that kind of number that we are indicating. So what is that is really driving down, whether it's pricing scenario, what we have added for albuterol, that is much lower what we have been anticipating. And if these other products are not contributing to the overall profitable growth, then this would ideally be witnessing or waiting only for the Spiriva to really contribute.

Yes. So actually, to your point, albuterol is actually contributing very nicely to growth in revenues as well as in margin, offsetting actually a lot of the other price erosions that one is witnessing, which is part of the baseline business. We had actually expected even higher revenues, both in the U.S. as well as in the API business, which suffered due to the seasonal products. So when you look at the seasonal products, Tamiflu as well as the cephalosporins, we were expecting at least some flu season like -- but I haven't seen any whatsoever. It's been -- and because of protection, people are masking up, which is protecting, but it also have an impact on the flu season and flu products. So that's why if you -- from a business perspective, revenue perspective, we would have been even higher in the U.S. if you had had the flu season as we were anticipating in this past couple of months.

Just last question ma'am on, let's say, slightly futuristic. See, given the kind of a pricing erosion scenario that we are witnessing in U.S., which is the largest market -- which has been the largest market for us. So have you really bothered about it that, means the overall growth for the business would be impacted, whether the larger business, which is facing challenges? And let's say, 3 years down the line, what share of revenue that you would be really looking from U.S. or your efforts from the other markets, non-U.S. market would be rising significantly and possibly would be supporting the overall growth for you.

Yes. So thank you for the question, because I think when you start looking at it from a 3-year perspective, one can also take a look at all of the results of the efforts that we have put in over the last many years. And on the one hand, while we're going through the inflection from the simplest generics to complex generics, right now with albuterol and inhalation portfolio -- and seeing the business kind of stabilize right now. We would like to be able to deliver a higher level of revenues and margin growth. But just given that we have just albuterol and Brovana and small first aiders still not a contributor. But as we see this transitioning over the next couple of years, as we see the full impact of our inhalation pipeline, as we see the full impact of -- well, we haven't seen much impact of our injectables portfolio but have really great filings at this point with products like glucagon, ganirelix and the like, and more coming. And products like Travoprost and that we hope to launch in fiscal year '23 and have a full year impact on fiscal year '24. I would not be -- as an organization, we are not nervous about increasing the U.S. revenues. I mean we have the potential of growing in the U.S., outpacing other markets and with products that are going to be more profitable than our baseline products. Already, we are seeing that the albuterol margins are -- inhalation product margins are higher than obviously the oral solid margins. And as that component of the business changes, and revenues grow, we should be able to grow both the company top line with the contribution of the U.S. as well as margins. I'd say that the revenue mix should roughly be the same. There shouldn't be a material shift. We have, I mean, very solid growth, double-digit growth in India on a consistent basis. We expect to continue that in the years to come. And the U.S. will start with in the next fiscal year, half year impact, so a lower growth level but a higher growth level in fiscal year '24 and '25, but roughly the same level, same mix of the major businesses. The other businesses also, there are other markets. We are working on growing scale and operating leverage in the most prudent manner. So -- but they are smaller at this point relative to the U.S. and India.

Next question is from Vishal Manchanda.

On gross margin, can you break it up as to what is raw material inflation impact and what is the business mix impact?

Ramesh?

Yes. So the overall impact is essentially, you could say, about a 0.5 percentage point is essentially because of inflation. And the balance is essentially because of the sales mix itself.

And yes, another 0.3% is the sales mix.

Yes.

Okay. And on the R&D NCE spend, INR 150 crores to INR 200 crores is the quarterly number, is that right?

That's the annual number?

That's the annual number. Okay. Okay. And just one final question. In India, what percentage of revenue would be from in-licensed innovator brands?

About 15% to 16%.

Next question is from [ Prathik Kotary ].

A couple of questions on the U.S. One, on the base -- I mean, are we still seeing those high single-digit pricing pressure? And second, our expectation was once we process $200 million there, we should see some massive operating leverage come in, but we haven't seen that. So just your comments on the same?

Yes. So the pricing pressure is here to stay. I mean it's become part of life in the generics business. And we really see it changing materially when the business transitions more towards complex generics. The oral solids, unfortunately, have too many competitors. So one has to constantly be working on trying to gain share wherever it's logical to gain share and reducing cost on older products while growing the business with new products. What was the second part of your question?

Second part -- once we process $200 million of quarterly revenue, we should see some massive operating leverage in the U.S., but we haven't seen a lot. So your comments on the same.

Yes. So I think the operating leverage is going to come from some of the efforts that we have underway that we are talking about. I mean, we have, from optimization standpoint, worked on multiple areas so far in the -- on the rightsizing the U.S. team as well as looking at any other areas of revenue or profit leakage, whether it's FTS or returns and write-offs. A big part of operating leverage is also going to come from our plants, which right now are due to all of the challenges that we've had in the last couple of years with OAIs. And the fact that new product launches have struggled. We see that the idle cost in the plants have gone up significantly and has really burdened the P&L quite a bit. But with the efforts that we have underway on the optimization and idle cost as well as continued increase in volumes from the products that we are now -- with Goa having cleared the FDA this last quarter, we expect 7 launches out of Goa. Not big launches, not like Suprep and Spiriva but still contributing to revenues and reducing our idle cost on top of our optimization efforts on plant overheads and idle cost. So you're going to see more of that operating leverage coming both from the optimization efforts as well as continued increase in volumes of new product launches.

Fair enough. And given that we are pushing our 20% plus EBITDA margin guidance by another year, so where do we stand when it comes to FY '23?

So FY '23, we see, like Ramesh mentioned, in the next couple of quarters, really more of a margin contribution out of optimization efforts. It's really second half of the year where we have Suprep, Tiotropium and hopefully Levetiracetam, FDA inspection permitting, coming in, that will allow us to ramp it up.

[Operator Instructions] Next question is from Kunal.

Vinita, when you say you have 20 exclusive FTFs, can you provide a bit more color on how the launches are paced out? And are any of these currently being held back because of regulatory issues at your plant?

I'll take the second question. Yes, some are being held back, but we are actively transferring them into other sites so that the risk mitigate there to be able to unleash them in time. Their FTFs are actually, if you start looking at fiscal year '23, you have 2 big ones, both Tiotropium as well as Suprep where we exclusive first to file. And then in the years to come, those are the 2 big that come to mind in the next fiscal year. And we have other products like Tolvaptan, that's a material oral solid first to file, it's out. I think it's fiscal year '25, not '24. So it is spread out over the next -- fiscal year '23, '24 '25.

So all these 20 will be in the next 3 or 4 years?

No. No. No, I wouldn't say that. We can try to get you the actual spread over the next 3 years, the next 5 years and beyond.

That would be great. Secondly, Vinita, actually, you had mentioned, I think you submitted Dulera, I think almost 18 months back. Could you share where you are on this product now? Because I think you mentioned FY '22 launch earlier. So are you sort of still confident of that launch?

No, not FY '22, obviously, because we're finishing FY '22. It's -- we've had a CRL. We've the CRL from the agency that was fairly intense. We have put together a response, which is going, I believe, in the next couple of months and hope that we can get approval in the next fiscal year. It's going to -- we are going to wait to see what -- how the agency responds to the -- our CRL response.

Right. And any kind of -- what kind of competitive intensity do you see when you eventually launch the product?

So far we haven't seen any material competitive actions. We haven't seen PD studies, all the niche studies that we track. So we still think that it's a very nice niche product for North America.

Sure. And just 1 more. Are you close to settling on development?

With the -- we settled, we settled.

So you have already settled. Okay. So can we expect a sort of a Q4 FY '23 kind of a launch?

No. No, we wouldn't. We actually saw a lot of risk there.

Next question is from Anubhav Aggarwal.

Two, three questions. First, on the India business, any material move planned by you guys to boost growth in the India business? For example, increasing sales force or looking to aggressively develop some new therapies? Because if U.S. is -- it is what it is, right? So I'm just trying to say that what are we trying to derisk our business and grow the most predictable part of the business.

Sure. I can take that. First of all, I do want to say this on the U.S., so I think while we need a little bit of a breather, we feel pretty good about some of the growth drivers that we're putting in place in the U.S. And while we're over the $200 million number right now, that's coming from -- some of it is coming from these partner products and the like. Obviously, the margin profile there is different from our own portfolio. So as the in-line portfolio picks up, as the steps pick up, as more of Goa and other products come to market, that -- I would expect that the U.S. margin profile would improve. On India, I think that's our second biggest market. Obviously, a market we bank on. A market which we're in #6, obviously, there is significant headroom to grow. Anubhav, we -- our focus has been on the chronic side. The market is 2/3 acute, 1/3 chronic. We're the opposite by design. And we have 2 therapies over INR 1,000 crores. We have another therapy over INR 500 crores, and so much headroom to grow. On the chronic side, we're #4. While overall, we're #6. We had -- we opened up 1 new division last year. There is a programmed -- a few hundred representatives that we'll keep adding each year. So next will be an additional respiratory division and other divisions as well. I think we're still under indexed in multiple therapy areas like dermatology, for example, or even in the CNS space there is room to grow. So lots of room to grow. As you know, we are -- I think we're starting a little bit on acquisitions in India as well. So -- we talked about Anglo French, obviously, we hope to close that soon. So a lot of headroom to grow, and we're obviously pushing to grow. We're also exploring as you know, adjacencies like diagnostics early days right now. But I would say that I think on the U.S. complex generics, that's where we press the accelerator on optimization. We press the accelerator as well. And on India region, we obviously press the accelerator as well. So all 3 are going strong.

That's great. Just a couple of more clarities on the U.S. business. One, on the injectable portfolio, how many filings have we already made so far?

We have made 10 filings, Ramesh?

Yes, I think it was 7 or 8. But yes, thereabout. I think we are also on track to file 6-odd products from India, which are, I would say, about medium complexity kind of products. And hopefully, we'll file the first of phenomenal products in the upcoming fiscal as well.

So without those long-acting injectables, for example, if we just keep them out, the other injectables -- or, let's say, if we take a period of 3, 4 years, how big this portfolio you think on a conservative basis that can be cut?

So at least 6-plus products filing every year. And I think the first product that we launch will be in the products that will come under that products like glucagon, products like liraglutide and the like. So that's why I said medium complexity. I think these will all be great products from us from a launch perspective.

Okay. And on -- generic question of Restasis, I think you guys were working on some years back. Have you been able to file the promptive version or you're there in this budget not?

Yes. No, we've not got approval for the product as of yet.

But are you following that actively?

We are.

Okay. And Ramesh, just a couple of clarities. The other operating income was pretty high this quarter as well. And so the usual run rate is about INR 35 crores a quarter, you're doing about INR 74 crores, INR 75 crores. What is the level that we should assume in the next 2, 3 quarters?

That's essentially coming in from settlements. So to the extent it is sporadic in that sense. It's difficult to actually predict.

But should we keep building the base at INR 35 crores?

Yes, that's for sure.

And for the next quarter, will there be extra pressure from the increase of raw material costs in the quarter 4?

Yes, there has been considerable pressure in recent times, as you would recognize across industries and for sure, this sector as well. So yes, you could bill in a 0.5 percentage point at least.

And so would quarter 4 margin there would be lower than what we had or your other savings could largely dependent?

In the vicinity of where we are today, I would say.

Next question is from Sameer Baisiwala.

Just a quick question on the margins. If I'm not wrong, in the previous quarter, you had guided for 17% to 18% EBITDA margin for second half fiscal '22. So why does -- what has changed within the quarter, 2, 3 months that our expectations come down so much?

Yes, Sameer, I'll take the question. So we had, indeed -- I said that the second half would be better than the first half. And we could look at around 16%. Well, sequentially, U.S. has indeed improved, but we had higher-than-expected competition commented in lower sales in Blumox than expected and the like. We're also expecting some flu season, which would have resulted in higher sales of Oseltamivir, that's not the case. There's a change in business in our lower sales in India by -- and it is impacted. And of course, the inflationary pressure, which has actually come in. For those reasons, there has been some impact.

Sure. Just a very broad question. Most of the companies your size in the sector have margins anywhere from 20% to 25% or maybe even higher percent. And we have been sub-15% for pretty long now. Is this something structurally that is out of place that we are not able to get it back even to 18%, 20%? And it's a been a -- it's a big effort. Your sales mix is pretty much the same as others. So I'm just wondering what's the impediment to get the margins to more normalized levels?

Sameer, I kind of said that, right? I said there are some inefficiencies that have kept the system over time. We have also invested ahead of the curve in terms of at least capacities, leading to quite some idle time and the like inefficiencies in the form of FTFs for sure. We also had issues in terms of returns. Then, of course, freight -- add freighting and stuff like that. All of these things that we are addressing, especially when it comes to manpower, it's not an easy question to solve. It could take time. And that's one of the reasons why we said for the next couple of quarters, next 3 quarters, you could expect lackluster results. And things will certainly look up at after the -- towards the third or fourth quarter of next year.

If I can add to that, Sameer, structurally, what is different is I think our investment on the R&D front is higher than our peers. I think we invested -- we have invested in more platforms that have yet to deliver. I mean that is -- I mean, so inhalation has started too, injectables has yet to, biosimilars has yet to in a material manner. Speciality, obviously, we optimized. NCE, we want to spin out. But right now, the investment is -- the number is within our R&D spend. So I'd say higher R&D spend. And as Ramesh said, also higher investments in facilities, some of which, again, for these products for the future, but some idle costs that has gathered over time that -- due to product -- new product launches, not happening due to our OAIV and letter status. So I mean -- so that portion, we are correcting, of course. But as we continue to really launch our products from the new platforms and our optimization efforts, when we look at fiscal year '24 example, when we have albuterol, Tiotropium, Levetiracetam, a few products, not just 1 or 2, but 3, 4 products, 5 products on the complex front in the market. We really see both from a revenue and gross margin pricing standpoint, the upside as well as capacity utilization standpoint operating leverage.

Just a couple of product-related questions. So one is on Tiotropium. So for our comparable device, HandiHaler, what do you think you see addressable market, the net brand sales? Is it like roughly $800 million?

[ $84 ] billion.

Okay. And if you are the only generic there, what sort of a market share expectation is -- I mean any reason, is it 20, 30? Is it 50, 60? If you can help with that?

Sameer, you know, our typical market share in products where we are if any exclusive along with the AG is 50% at least.

Okay. Great. And the second question on Revlimid. So are you saying that it's not going to happen in fiscal '23, it's beyond that. Is it?

That's right. We saw this in launching unlimited quantity authorized generic.

So sorry.

We saw risk in potential launch in the near term.

Okay. So is it like middle of fiscal '24, something or...

I think it's fiscal year [ '24 ].

Next question is from Prakash.

Am I audible?

Yes.

Question to Nilesh for the Goa plant, so congrats, cleared it finally. But what is our learning there A, B? What is our discussion for the Pithampur and the other facilities, which are still having? Because Goa also had out of specification issues and you had similar issues in the other plant. So what is the dialogue which is on? And when we expect the next level of inspections for other facilities?

Thank you for that question, Prakash. So we obviously feel very good about the change in status of the Goa site. I think we -- our warning letter was started with Goa. So it's only fair that they should stop -- it should end with Goa. Holding that, I think the year has true fit, I think the issues that were at Goa were similar to what has been cycled in the past as well. And I think I'm very glad that the agency seems to have noted the steps that we have taken. And I don't think we're done with that. I think you'll see that we're clearly on the right path, especially as far as investigations are concerned. And that is the same system that they would see at any of our other sites as well. Obviously, each inspection is different. It's a different set of investigators who would come. We already know that it's not going to be remote ordered. So I think Omicron has played a little bit of pulse spot on the inspections. So I think it's possibly a few months before which you can expect predictably inspection starting again. And -- but we're ready as far as Pithampur is concerned or Tarapur is concerned. We're ready. It's the same system in those. Obviously, we remediated on the other items that were highlighted in the past. So -- yes, I feel much more confident. The confidence that I get from our team is much more. I think our team needed to win. Clearly, Goa points that we are moving in the right direction. And now we would want to get even better at things like investigations than what we already are. So I think we're moving in the right direction. We have a stated goal in the next 18 months to clear all our sites. And I hope that we're going to be able to deliver on that.

Okay. And from your journey from today to the 20% margin that you're talking about, so where you're building this in terms of resolution of your larger facility, Pithampur, I mean, 18 months is a pretty long time, right?

I think that the one good thing is that the real growth drivers, they've all been protected. They've all been inspected separately and all those inspections have gone through fine. So if you see inhalation, for example, or even smaller platforms like, for example, biosimilar of course needs to get inspected as just injectables, but these problems that we had on the oral solids at sites like Pithampur or Goa or even on API and Tarapur, didn't translate into disrupting that kind of growth. So I think the bigger products are protected anyway, and it's a question of time to be able to deliver them. Like Vinita said, from Suprep will be sooner, Tiotropium will be a little later, but it's all coming together in H2. You do see that increase happening. There's some 20-odd products that will get launched from Goa over time. About 7 or 10 of them are ones which were really stuck only for site-related issues, the others have some more things as well. So those will come. Like Vinita said, they're not going to be big products, but I think it's every -- it's a couple of million dollars that you get from each of these products that helps to grow the business. We've had pitiful launch story, and I think that's where we vacated the nature of the generic business in the U.S. and it's high time that we get that back on track. The backlog in Pithampur Unit 2 is even more than what Goa had. So we're looking forward to that clearing and then starting getting more approvals from there as well.

My second question is on your thought process on building -- rebuilding the specialty portfolio. So currently, we are margin this thing. So what are we thinking about investing for the next phase of building specialty in the U.S?

So a couple of areas that we were looking at. One, we have really derisked our P&L for the health, right, from a commercial perspective. And have partnered Solosec with a really good women's health company, Exeltis, that has 120 people sales force. That's what we had at peak when in the first year, Solosec was tracking at $10-plus million in revenue. So we are very hopeful that with the kind of strength that they bring to Solosec, we'll be able to do justice to the product and build a decent level of revenues and profitability. Obviously, to be shared with them for the fact that they are putting the promotional effort behind it. So one is that on the commercial front. Second, we have built capabilities on the R&D front, on the technology front in IDs and implants and rings. And have 3 products in development right now that we'll continue to pursue. And they'll take time because each of them the devices and the drug device combinations and plant rings require clinical studies. So -- it takes a little bit of time. It will take 2 years. But we see the potential of getting these products to market within a 4-year time frame. So that is one on the women's health front. Second, we are looking at our other platforms. We have our neurology product, NaMuscula in Europe. We're looking at the potential of bringing it into the U.S. market. Third, looking at respiratory, which has now become the largest part of our business in the U.S. with albuterol and Brovana, to look at areas of unmet need where we can bring in our own products from organic R&D standpoint. And fourth, on the injectable front, where there is a tremendous opportunity that companies like Eagle and others have capitalized with the capabilities that we have now developed around injectables and peptides and colloids and long-acting injectables, we expect to bring in some innovative products. In fact, we have partnered with a company on NDA for posaconazole, which is going to be our first 505(b)(2) injectable product we expect to launch. Not in fiscal year '23, I think it will be transferring in fiscal year '23, but in fiscal year '24. So we're looking at multiple areas and we'll continue to be both opportunistic as well as proactive in evolving the pipeline.

Okay. And with your permission, one clarification. So -- I mean all the questions are routing through the gross margin thing and the guidance of EBITDA margin of 16%, so the reasons you gave on lower Glumetza, lower flu, et cetera famotidine, so these are all known variable. So what has really changed going down 200 basis points, if you pretty help us understand that?

Yes. So the material variable really was through products, as I mentioned. Not as much -- and then we were expecting a reasonable season, which we haven't seen any. And also the increase in input cost material. That is the -- the pressure has been higher than we expected.

Next question is from Aditya Khemka.

Any timeline you guys would like to share on the spinoff of the innovation in the business? And would the structure be that every shareholder of Lupin will get 1 share of the innovation entity as we have seen some of your other companies?

Yes. So we are actively working on it right now, hopefully, in the next couple of quarters. And we are in active dialogue with firms to see how we can bring in third-party investors into the entity. Right now, it is a 100% subsidiary of Lupin, so full value and the full -- is within Lupin. And our plan would be to continue to maintain Lupin's shareholdering into the entity. So we don't expect to split it off. Ramesh, correct me if I'm mistaken?

That's true.

The value to our shareholders is really going to be through Lupin, and Lupin shareholding in the entity.

Got it. That helps. Secondly, on the CapEx side. So since we have a lot of spare capacity and we are lacking product approvals, what is it that we are increasingly spending the CapEx on and what is our CapEx budget for '22 and '23 fiscals?

A chunk of it actually go into maintenance. And of course, there is, of course, something to lease for biosimilars and [ as and when the ] wave 2. And essentially, that really. Not too many new capacity has been built at this stage.

And was it, Ramesh, for FY '22 and '23?

It will be in the ballpark of INR 500 crores, INR 600 crores max, everything put together.

Got it. And I missed maybe if you talked about the India acquisition and your recent foray in to diagnostic. So Nilesh, would love to hear your view on what is the quantum of sales that we acquired, how much have we acquired it for. What is the type of synergy you expect? And if you can talk about the diagnostic foray as well.

Sure. So AngloFrench is roughly about INR 95 crores sales. I think we talked about the fact that it's approximately INR 325 crores. It cost -- it will be accretive from day 1. Basically, it's 2 big products that really helps us build and the vitamins, minerals supplement segment beplex and another product, Nitrowet. In the VMS segment, it will take us from #18 to #11. So obviously, a nice move. And we're hoping that by March, we should be able to close it. Diagnosis, I think early days to talk. And we just launched the business in December. We've got 3 or 4 labs right now, another 3 or 4 labs that we are managing. Q4, we'll see a major ramp-up. We'll see another 8 labs coming up. They are already a couple of hundred collection centers up. I think the next year will be a defining year for the business. We're seeing nice traction at this point in time, but very small in the Lupin scheme of things. I think 12 months from now, we'll be a great time to talk more about diagnostics.

Next question is from Tushar Manudhane. Yes, Tushar. Go ahead. Next question is from Krishnendu Saha.

First on the diagnostic business. Does your margin improvement take into account all the expenses which you will incur for the business. And just to know, how do you think your Goa plant will start getting approval with VAI? So when do we think that? And the third question is how much the idle cost is being saved if things come into place with time? So a couple of more questions about the turnaround time, if you can give me these numbers.

Sure. Your first question was on, Krishnendu?

How much expense is...

Yes. So we've taken the diagnostic business spend in the overall India region plan as well, and we still expect to deliver on the EBITDA improvement. The burn is not that high. There will be a burn increase, but there'll be more than commensurate increase in the India region profitability that would happen anyway. On Goa, we already had 1 approval as you know, and that product is getting launched shortly. There's another 6, 7 products that we would expect to get approved in the upcoming fiscal, and those will get launched as well. And then I think there's approximately about 20 products that are still pending from Goa. On the idle costs, I think as we pick up -- I think the idle cost is -- first of all, idle cost is never going to be zero. It's obviously going to be -- it needs to be optimized. I think what has happened right now is demand is significantly down for multiple product categories, the steps, for example, both API and finished products, for some of the other products as well. And I think that is executing the idle cost right now. Obviously, the other part is some of the capacities that we've created for new growth drivers, which have not kicked in. So injectables, for example, which is still not inspected, biotech, where it's still not adequately utilized. So they would add to the idle costs as well. And part of our optimization is going to be increase in revenue of some products to optimally utilize our capacities. But the other is actually one of the workforce planning around some of the plants as well where we don't see a meaningful uptick over time. And that is something that we're expecting to close in the next 3 to 4 months after which you will start seeing benefits of that.

Sure. But is there any number you can share with us? And would you -- in the future, would you be separating the diagnostic business, the numbers, and the pharma numbers separately?

So even now, the diagnostic business number is reported separately because it is a wholly owned subsidiary of Lupin. We will be cutting it out.

The last question is from Vishal Manchanda. Okay. I think Vishal is not here. I now hand...

I think Tushar has a question as well. You can take that.

Some build the world with respect to this surprise inspections, I mean all inspections going in a surprise way rather than scheduled. Do you see this as a risk? And if so then how do we able to visit them?

So I think that's a stated intent in that bill. We'll see what happens on that count down. In any case, pre-COVID, there was really no notice period that was given other than for PAI annual inspections for new facilities. Regulator surveillance inspections for a while. Although the pilot in India, but quite a while, these inspections were happening. I don't think it makes a difference whether you [Technical Difficulty] notice period or no notice period or 1 month notice period, there isn't much that you can do because everything is data. Everything is record which are available now.

Secondly, on this API business, we have seen a good amount of desperation now for 4 quarters. So very specific structurally things not going however or how do we look at sales project going forward?

I think the API business has been very challenged at this point of time with the lack of demand in cephalosporin coupled with the increase in [ F&G ] prices, there's margin pressure. But really, there is no demand for cephalosporins at this point of time. We obviously see that normalizing. And with that will come a meaningful increase in API sales as well. Right now, my feeling is that, that is really Q2 and beyond. I don't think we see it in the next 3, 4 months as a meaningful uptick.

Got it, sir. And just lastly, on other expenses, excluding famotidine, while we have been working on the cost optimization results, but on an absolute basis, other expenses excluding R&D and employee costs still continue to rise, even sequentially it's higher at about [ included ] cost, even after adjusting for the onetime expense related to Levetiracetam and the other products. And given that we would have these marketing expenses on the domestic formulation on this inorganic part as well as ramp-up of diagnostic activities, so how do we see on an absolute basis these other expenses reducing by what percent?

It's actually several line items that have been combined in there. So you're right about the fact that there is diagnostics and other expenses also. So the direction, we need to really look at each item. We can take that offline for sure, but we are working on a number of initiatives to address that.

Sure, sir. But any ballpark number like by what percent are you looking to reduce this...

It's ultimately -- all feature, ultimately, in the EBITDA improvement, right? So irrespective of what is the absolute number itself, we've taken the [indiscernible] deck and that, and saying that the EBITDA improvement will take place in the time period that we indicated.

Today, the last question from Mr. Vishal Manchanda.

Yes. Am I audible now?

Yes.

Yes. So sir, just wanted to check whether Levothyroxine is still an important product for you in the U.S.?

It is. We have about 17%, 18% share of the market.

Okay. And it's like a meaningful percentage of your overall sales in the U.S.?

Our largest product is albuterol. It's smaller than it was in the past because of the competition we have seen in the last 12 to 18 months, but still a material volume product.

That was the last question. I now hand the conference over to management for the closing comments.

Well, thank you, everyone, for your active participation. Very useful some of the questions that you raised. And look forward to seeing you in the next quarter. Thank you once again, and take care of yourselves and your families. Thank you.

Thank you, sir. On behalf of Lupin Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines and exit the webinar.