Torrent Pharmaceuticals Limited (500420) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. And welcome to the Torrent Pharmaceuticals Limited Q4 FY '20 Earnings Conference Call. We have with us today Mr. Sanjay Gupta, Executive Director, International Business; Mr. Sudhir Menon, Chief Financial Officer; and Mr. Aman Mehta, Chief Marketing Officer, India Business. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay Gupta. Thank you, and over to you, sir.

Thank you. Good evening, everyone. And welcome to the Q4 FY '20 earnings call. We hope you and your families are keeping safe and healthy. At the onset, I would like to brief you as to how Torrent, as an organization, is responding to this crisis. We have 3 priorities as we deal with the COVID situation: firstly, it's the people; secondly, it's supply; and thirdly, it's on the demand side. On the people front, safeguarding our employees' health has been our foremost priority. Wherever possible, our employees have been working from home, and we are monitoring the health status of our employees and any exposure to the virus constantly. We've implemented social distancing and changed our work practices throughout our organization. For supply, we consider that to be a critical priority as patients rely on our medicines. Our plants have been working throughout this crisis, albeit in a different way and at a lower level of productivity. The number of people present at any one shift is lower than before. There was disruption and delays seen across the supply chain caused mainly due to restriction on the movement of goods, closure of borders, et cetera. The situation is gradually expected to improve in the coming months. On the demand side, in branded markets, new prescription generation has been impacted due to lockdowns. However, owing to the higher chronic and sub chronic contribution in our portfolio, the impact is expected to be relatively lower than our peers. Our sales reps have switched to digital selling and organizing medical events online. In generic markets, while there was an initial increase in demand from our customers, things have mostly returned to normal. I will now take you through the key highlights for Q4 and the full year. We start with the financial results, followed by comments on our key markets. Q4 revenues were INR 1,946 crores, up by 5% on a year-on-year basis. EBITDA margins were at 29%, and EBITDA stood at INR 562 crores, up by 16% on a year-on-year basis. We continued to witness steady EBITDA improvement, driven by synergies from the integration of Unichem portfolio, productivity improvements and cost control. FY '21 (sic) [ FY '20 ] ended with revenues of INR 7,939 crores, up by 5% and an EBITDA of 29% at INR 2,284 crores, up by 13%. Moving on to our key geographies. India business revenues were at INR 840 crores in Q4, up by 11% on a year-on-year basis. Adjusted for COVID-related supply delays, the growth would be 15%. FY '20 revenues were at INR 3,517 crores, up by 9%. Adjusted for the base impact of discontinued products and COVID-19-related supply delays, the adjusted growth was 12%. AIOCD growth for the quarter and the full year stands at 16% and 12.5%, respectively, against an IPM growth rate of 10%. Torrent is ranked 8th as per AIOCD MAT March '20 data set whereas the ranking in the specialty prescribed basis stands at 6 as per SMSRC. On the brand building front, Torrent had 17 brands in the top 500 brands of the Indian pharma market, 10 brands have annual revenues more than INR 100 crores. This was 8 a year ago. Rozucor and Veloz are the new entrants. During the fiscal year, Chymoral and Nexpro crossed INR 200 crore revenues, whereas Shelcal has now crossed the INR 450-crore mark. H2 '19/'20 witnessed the launch of high potential products: vildagliptin, ticagrelor, Remogliflozin and a novel [indiscernible] all of them have shown encouraging launch traction. India business continues to be specialty driven, with 73% of prescriptions coming from specialists. Torrent continues to be amongst the top 5 players in 6 key specialties. These are cardiologists, nephrologists, psychiatrists, gastroenterologists, neurologists and gynecologists. On the productivity front, I'm pleased to report that our PCPM now stands at 7.3 lakhs on a full year basis, against 6.2 lakhs for fiscal year '18/'19. Moving on to the U.S. market. Our U.S. sales were $51.7 million compared to $51.5 million in Q4 last year. Financial year ended with sales of $207 million. Despite no major launches, we are able to sustain the base of $200 million plus, mainly due to market share gains in existing molecules. During the year, we filed 12 ANDAs. And on March 31, we had 48 ANDAs pending approval and 6 tentative approvals. I take this opportunity to provide a brief update on our manufacturing facilities. For Dahej, we have completed all the CAPAs and submitted to the FDA. Due to COVID, FDA may choose to do a desktop inspection only, and we are waiting for their feedback. For Indrad, we plan to complete all the CAPAs and submit the closure report sometime in Q2. For the Levittown facility in the U.S., we expect to start production in Q3 of fiscal year '21 with prior notification to the FDA. For the Brazilian market, Q4 sales were BRL 119 million, up by 11% on a year-on-year basis. Fiscal year '20 sales were BRL 409 million, up by 12% on a year-on-year basis. As per close-up data on an MAT basis, Torrent grew at 14.7% versus a covered market growth of 10.2%. Growth was complemented by market share gains and new launches, and we continue to reduce our focus on the tender business. For Germany, our sales were at EUR 27 million, down by 9%. Sales continued to be impacted by the temporary product release difficulties, resolution of which is taking more time than expected. Fundamentally, there is no change in our strength in the German market. Q4 R&D spend at Torrent was at INR 118 crores versus INR 139 crores of last year. On the dividend side, company declared an interim dividend of INR 32 per equity share, including INR 15 per equity share as special dividend. To conclude, fiscal year '20 continued to witness steady and sustained improvement in profitability with our focus -- strategy to focus on 4 key markets. We can now move to Q&A. Stephen?

[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.

The first question is, if you could just give some outlook on the domestic business. I understand the lockdown situation and the patients not able to go for the doctor visits, OPDs or elective surgeries. So ballpark industry growth and how you expect yourself that would be really helpful? And especially, if you could comment on your therapeutic, like you said, some of them are chronic, it's not affecting, but what about the vitamin portfolio and others?

Sure. So if we recall the COVID impact, again, probably towards the end of March, around March 16, March 17. So in April, if we look at the numbers of AIOCD because March was not such a big impact, April would be the more indicative number. April AIOCD number shows IPM was a degrowth at minus 10%, and our numbers are pretty similar. So overall, if we see our chronic contribution of almost 75% will ensure that our full year numbers will be a few points above the market growth because chronic growth should be able to sustain, whereas there will be some impact in the acute and subchronic. In terms of footfalls, over the last few weeks, there has been some improvement in the number of consultations by doctors. So as and when the lockdown improves across all states, there should be a gradual increase, but it shouldn't be very different from what we're seeing right now. It will be a very gradual increase through the rest of the year.

Okay. So you're saying better than market, but how would market grow, that is obviously not certain, as we go by, we'll get to know?

Yes, absolutely. Still a bit early to comment on that. But we expect that the market should probably improve by a few percentage points next quarter or at least by Q3.

Understood. And my second question is on the cost side. So understand growth can be softer. But how do we see the margins shaping up? What are the cost measures you are taking so that we can at least sustain these margins? Or we can see plus/minus 1 or 2 percentage here and there. How should we look at it?

No, I think, Prakash, it's too early to comment on the full year picture. But what I can tell you is, quarter 1, I think most of the marketing spend, you find a reduction, which will happen because, typically, there's no promotion happening physically in the doctor's chamber, right? And most of the field force is working from home. So to that extent, some amount of cost containment would happen. And certain fixed expenses, like, let's say, traveling expenses or admin-related expenses, all those costs would also get controlled. So I think quarter 1, I don't know, I mean, we'll have to wait for 1 more month to go as to how things are picking up. But yes, I mean, logically, you're right. There would be some control, which will happen as far as the fixed cost is concerned. So I wouldn't say there would be a major impact in terms of margin logically in quarter 1. But as we go forward, for the full year, we'll have to wait and see.

Okay. And the last one for Sanjay. On Dahej facility, as you said, this CAPA has been completed. So when was this completed? Did we send the online CAPA completion? Or it was done before the lockdown? And are we already in discussion for desktop inspection, as you just mentioned? If you could just give more detail, that would be helpful.

So it was completed in the last 2 months, and then we are in discussions with the FDA about the desktop audit, but we are waiting for a decision from their side.

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

So just on the Brazil side would like to understand the portfolio, how much is the chronic and acute? And outlook there given that COVID scenario is intense even there?

So Brazil, the portfolio is almost 100% chronic. So we operate only in the CNS, cardio and diabetes spaces. And essentially, so we are only in the chronic space. The situation in Brazil is, I would say, currently, doctors have seen a footfall reduction of 90%. So there's -- essentially, there were no patients. In Brazil is, today, at its peak, right, in terms of number of COVID cases. So it has the second highest number of cases in the world at about 350,000 cases, with about 23,000 deaths. So the situation is, I would say, quite severe. And Brazil also did not have a telemedicine system approved. So unlike in the U.S., where patients are consulting doctors on iPads or iPhones and things like that. In Brazil, it just got approved in middle of April. So you're going to see a dramatic reduction in the size of the market in post-COVID times. So what we are seeing for this current year? So we are seeing initial reduction in market sizes. But I would just like to cite IMS study which initially expected the Brazilian market to grow at 10%. And currently, they are forecasting Brazil to grow at sub-2%, between 1% and 2% for this current year 2020. So that is the -- about 8.5% reduction in market growth for the current year.

And so accordingly, the way you highlighted compared to India market industry, a few basis points. Accordingly, how do we take for the Brazil market?

So we are fairly confident that we will be doing better than the market. And we have done this year also on the branded generic market growth of about 10.5%, we have grown at 14.7%. So we expect a similar kind of over-delivery. Now where the market would be is, if you go by IMS, that would be at plus -- between 1% to 2%.

Yes, just to add -- Tushar, just to add with what Sanjay has said, just to keep in mind, in Brazil, we are totally into chronic segment, it's only cardio, diabeto and CNS. So there are no subchronic or acute segments. So that's something which we believe is positive from an overall market perspective.

Okay. Okay. And sir, just on the MR posts both in Brazil as well as Indian, how many MR you intend to add for Indian market?

Sorry, could you repeat the question, please?

Number of MRs In Brazil and how many MRs you intend to add for the Indian?

We will not be adding any MRs this year in India.

So we have about 300 MRs in Brazil, and we will not be adding any either.

Got it. And just lastly, how many products have we -- or ANDAs commercialized in U.S. out of approved ANDAs?

We have 93 approved ANDAs. And currently, we are commercializing close to 70.

And any scope to commercialize remaining? Or they are not economically viable?

Actually, the market has changed quite dramatically in this COVID times, and we've been getting solicitations from customers to start some of these ANDAs. So -- and some of them have been discontinued for several years. So it's not that obvious to set up a new supply chain in these COVID times, but we are looking into it. So we're working on -- actively on a few projects to re-bring products to the market because of supply problems with our -- with other companies. But I don't know if it will have an impact in -- it will take some time. Let's say, it'll take at least 4 to 6 months to bring some of these products back.

The next question is from the line of Rashmi Sancheti from CGS-CIMB.

Sir, I would like to know on debt. Are we seeing -- I mean, we have around INR 4,400 crores long-term and short-term borrowings put together. How are we placed? Are we going to see any reduction in FY '21 and years after that? Or it will remain at the same level?

No, absolutely. I think in terms of the repayment schedule, it's pretty clear. Most of the repayments are happening in next 2 years.

Okay. And can you quantify how much it would be?

It should be around INR 1,000 crores, I would say, for the next year.

For FY '21?

That's right, yes.

Okay. And sir, what about tax rate guidance for the full year?

I think it should be around 22%, 23% for the full year.

Okay. And sir, how much CapEx have you spent in this year? And going forward, what are you guiding for FY '21? And where exactly you will be catering?

Yes. So I think going forward, at least for next couple of years, the CapEx should be around INR 200 crores to INR 250 crores is what we believe will be maintenance CapEx, no expansion CapEx happening. And for '19/'20, I think the total CapEx, which we incurred this year is close to INR 250 crores.

Okay. And this INR 200 crores to INR 250 crores, which you are saying, it would be all maintenance CapEx only? Or...

Absolutely, absolutely, absolutely.

Okay. And sir, finally, just want to know in India business, if you can give the sales of Ampoxin as well as losartan and 1 more, Shelcal during FY '20, the annual sales?

Yes, sure. So I have the growth numbers. Ampoxin growth for the full year was 27% in AIOCD. Losar for the full year was minus 1% as losar group and Shelcal was 12%.

Shelcal was -- sir, Ampoxin, you said 27%. Any reason behind this strong growth during the year?

It's more of a promotional mix restructuring that we've done for the past 2 years that is now starting to yield results.

The next question is from the line of Neha Manpuria from JPMorgan.

If I were to look at our working capital number, that seemed to have increased quite a bit from last March or even if I look at it from June. So -- but if I were to do like-for-like, is there any specific reason for the increase, particularly on the inventory and -- actually, in all fronts. And second, is it net debt increase that we saw in the second half primarily because of working capital because I thought we're supposed to reduce debt further in the second half?

No. Absolutely, you're bang on target. So I think March 2020, we saw the working capital blockages going up, primarily driven by the lockdown, right? I mean, so at least for the last 10 days, we didn't see dispatches happening because of whatever confusion was existing in the market and lack of transportation, which was not there. So a lot of inventory buildup, you would see. And plus receivables were also impacted because suddenly, there was no means of collecting money from the customers, right? I mean, because of the courier agencies or the bank agents not being able to go and collect the money that is impacted. So yes, I mean, because of this whole COVID thing happening in March, there is an increase in the blockage of working capital.

And then lack of repayment in the second half is -- would be...

So 2 things happened. No, Neha, 2 things happened. So one is the working capital to the tune of, I would say, INR 300 crores to INR 350 crores, which happened in March across all our geographies put together. The other thing which happened is, if you remember, Germany, quarter 3, we had this upgradation of quality management system, right, I mean, which we spoke about. And because of that, there was a lower amount of primary sales, both in quarter 3 and quarter 4, and that's what the result shows, right? And we have been saying that for it to get to a normal level, at least it will take, let's say, June or maybe quarter 2. So what actually happened in Germany is there's a depletion in cash balances which happened compared to the normal level of cash balance, which remains in Germany essentially because you get a float on the insurance claims, which come from the insurance companies, right? And since the primary sales got impacted, which is always at a gross -- on a gross basis, the insurance claims started coming steadily because it was pertaining to the previous months, right, because there's a time lag of 6 to 7 months. So those depletions happened on a continuous basis and at the same time, since the gross sales was not happening for almost 6 months, there was a cash depletion which happened. So we believe these are short term. And I think, quickly, we should be able to rebound by quarter 2 on both the cases.

Okay. And if I got the number correctly, Sudhir, you said that INR 1,000 crores reduction in FY '21, is what we're expecting?

That's right, around that number, yes.

Okay. Understood. And just one more point on the working capital. Is it fair to assume that the receivable challenges particularly have eased in India in the last few weeks?

Absolutely right.

No, no, absolutely. So I think we were up on the job right from 1st week of April, and I think by mid of April, we were clearly in a very normal situation.

The next question is from the line of Damayanti Kerai from HSBC.

Coming back to Germany, as you mentioned, since last quarter, we have been doing the system upgrade and all, and that has impacted our reported numbers. So -- though you mentioned like there are no fundamental changes, but how long -- like how soon we can get back to normal level of operations? And what should be the growth outlook we should be looking at?

So we would expect to be, I would say, completely normal by the end of second quarter. So let's say, starting 1st of October, we should have a normal level of sales. And in regular times, excluding COVID, that would essentially mean a high single-digit or a double-digit growth rate. But in the current COVID context, where we're seeing doctor visits fall, hospital admissions fall dramatically, and we are seeing, I would say, a mid-teens reduction in level of prescriptions in April, so it's hard to give a forecast. So I would say that our internal issues would be resolved, but the macro market, where it is going and how that impacts the overall level of prescription and demand is something that it's too early to speculate for this current fiscal year.

Sure. And have we seen a normalized level of supplies now across through geographies. Like India, you mentioned we are broadly back to normal level. But what about regions -- other regions?

So for the -- the issues essentially are linked to a few, let's say, on the ground realities. The first reality is that, currently, cargo out of India is operated by only 4 airlines. So it's Etihad, Emirates, Qatar and Turkish Airlines, which are operating cargo. So the capacity is fairly limited, and international passenger flights used to carry a lot of the cargo, and that is not happening. So there is an inherent constraint to export of goods from India. And the freight charges -- so availability is low, cost is 3 to 4x higher. So that's our issue number one that we are facing for exports. The second issue continues to be is that there was an acute shortage of lorry drivers in India. So lorry drivers both to bring packaging material and APIs to our plant as well as to take finished goods to the ports. Thirdly, even for sea shipment, containers were being quarantined or are being quarantined for 14 days. So there's a backlog at the port, which prevent goods from being shipped by sea in, I would say, as efficient manner as before. So I would say that things are not where they should be or where they were. We noticed week-on-week improvements. But it will be a few months before it becomes normalized. What has helped us is our traditionally higher levels of inventory. So as we have maintained a good level of working capital investments, we generally keep finished product inventory 3 to 6 months, and we keep API inventory in our plant. So that has helped us absorb the shock. And in the meantime, we are hoping the situation will improve, but we are not where we should be in terms of our output or deliveries to our international markets.

Okay. And right now, like how much of our outbound logistics is going through airplanes and how much is through sea route?

So it's -- I would say, normal proportion would be, say, 70%, 75% by sea and 25% by air. Right now, it's probably the reverse.

Okay. Also second question from my side will be like next year, you mentioned INR 100 crores of CapEx and all for maintenance basically. But how we are looking for broader capital allocation, say, for next 2 to 3 years? If you can give some insight there.

No. I think the major chunk of the capital allocation out of the cash flow, which will get -- which will be generated will go towards the financing activities. When I say financing activities, basically, the interest payments as well as the repayments which are going to happen. The additional thing, as I said, the maintenance CapEx would be to the tune of maybe INR 200 crores to INR 250 crores for a couple of months. Other than that, I think the other major payment is, of course, the dividend payment, which is based on the performance of the company. So I would say 75% to 80% of my cash flow generation would be assigned for my financing activities.

Sure. And last question from my side. I think U.S., obviously, it will take some time for us to see the new launches again. But despite no new launches, we have broadly maintained our base performance. So should we expect similar level of performance for FY '21 also broadly if we look?

Broadly speaking, I would say no, because without new launches, it's very hard to sustain a U.S. business. Inherently, the business is a price decline business and a fairly competitive business. We've been able to maintain it by, I would say, relying on older products and gaining shares. But we've still not ramped up our sartans. And generally, I would not -- it's going to be very hard to maintain the $200 million level this year.

Okay. So until and unless we get some clearance from the FDA and we launch new products, it's difficult to sustain on just the existing portfolio?

Correct. Yes.

The next question is from the line of [ Vinit Marang ] from [ Vito Capital. ]

Yes. This question is regarding the Indian business. So most of the growth of Torrent has come from price growth, like, especially in the last 2 years. So like how sustainable is this and for how many years is this going to be followed?

So overall this year, volume growth has been about 2.6%, price roughly 8%. I think it's hard to comment on how long this can be sustained, but as we mentioned in the previous calls as well we aren't out of range of our competitive products. So I think we'll have to take it product by product and see every year on how do we look at price. But it's not something it's going to be a one-off case this time. Maybe something in this range would be possible going forward.

The next question is from the line of Ranvir Singh from Sunidhi Securities.

Sir, on other expenses, if we -- sorry, on employee expenses, we see gradual reduction in costs for last 3 quarters. So what may be the reason in absolute number, I see?

No, absolutely. I think the major part of reduction, which you see is basically because of certain capitalization of expenses on this -- the U.S. manufacturing upgradation, which is happening. Some part of the salary expenses are getting capitalized. So this -- the major part of that is pertaining to the facility under upgradation and this would continue for, I would say, next 2 quarters more.

You say that base will continue for 2 quarters more or the pace of reduction will be like this in the next 2 quarters?

The reduction that you see between quarter 3 and quarter 4, what I'm trying to say is that the major part is contributed to certain expenses, which are getting capitalized because there is a project which is running, right? So based on the project that's accounting, those expenses are getting capitalized. So around, I would say, INR 10 crores to INR 11 crores of the total reduction is basically pertaining to that. And since this facility will come up by the end of quarter 2, the indication which I'm giving is for quarter 1 and quarter 2 also, this reduction will continue to that extent.

Okay. Fine. And what was the R&D expenses in this quarter and full year, if you would say?

Sanjay, you have the number? So this quarter, it is INR 118 crores.

Correct.

And for the full year, Sanjay, do you have the number?

No, I don't have it in front of me.

Okay.

Okay. So as a percentage of sales, would be in similar range or going forward...

No. So I think on a full year basis, there is 1% reduction compared to the previous year.

Okay. Okay, fine. And just to confirm, you said that maintenance CapEx for next year would be around INR 250 crores, right?

INR 200 crores to INR 250 crores, that's the max, which we think.

And this year, what was the expense?

This year, the total CapEx was around INR 250 crores.

INR 230 crores? Okay.

INR 250 crores, INR 250 crores. So the full year R&D spent is INR 494 crores, so around INR 500 crores.

The next question is from the line of Nikhil Mathur from AMBIT Capital.

In your prepared remarks -- just one clarification, in your prepared remarks, you had mentioned that adjusting for the COVID and discontinued products, the growth in 4Q would have been 15%. Is that the right number I'm looking at?

Yes. For the Indian market, the adjusted growth was 15%.

Okay. And had the trend continued even in 4Q, the pricing contribution in this growth would have been in the range 7% to 8%, like it has been in preceding quarters?

Sorry, I lost you there. The contribution for which part...

From the pricing improvement, has it been in the range 7%, 8% even in 4Q like it has been in the preceding quarters?

Yes, pricing has been pretty much similar throughout the year, price growth. Just for everyone's clarity, I can just mention the breakup. So Q4, the AIOCD growth for price is 8.2%, and NI is 2.6%.

Okay. And with regards to the discontinued products, I believe that, that commenced sometime in 4Q FY '19. So would 1Q now would be the normalized quarter in terms of like-for-like growth?

Yes. So this quarter itself, there has been practically 0 discontinued impact. It was supposed to be neutralized by Q3. So that's where we see that now the growth is really starting to show the non discontinued product really picking up.

Okay, okay. And one final question. It's just a bit on the broader outlook. I know it's a bit difficult to give the exact color of FY '21 because there are so many unknown variables that are currently playing out. So if I were to break down the growth argument over FY '21-'22 into 3 broad segments, that's basically -- I mean, the risk potentially can be that there might be some bit of down trading by the patients because the broader income levels might be weak, the new prescription generation or new patient additions might be somewhat of an issue in FY '21. And a culmination of these factors could be that the pricing leeway might not be there in FY '21 and possibly spilling into FY '22. So do you think that quite a few of these risks are unfounded? Or are there some merit in a couple of these risks? So how should one look at the broader weakness in the economy and how things are likely to shake up from the chronic side over the next 2 years?

I think the bigger concern for the IPM this year would be more on the volume side. If we anticipate surgeries to pick up and other procedures to pick up, there would be a gradual increase in volumes. But that will all depend on how the lockdown situation opens up over the next few months and quarters. So the main concern for the market would be, how do we really see the volume growth in acute and the subchronic space. So that's where all the effort should be at. So that's where availability also plays a major role in this time.

Okay. But do you think that the 7% to 8% kind of a pricing growth, that kind of environment can sustain despite volume growth might not be that strong in FY '21?

Yes. I don't think that should be an immediate concern.

Okay. And just extending that question again. Any risk from potential down trading by patients to lower value products? Does that really happen in the Indian market? And is there a risk from this side as well?

So that risk which is already there in the form of Janaushadhi and trade generics has been fairly muted, as we have seen for the last few years. That may slightly increase this year, but not -- again, nothing meaningful or substantial to affect the branded generic volumes.

Yes. Just clarifying on the previous question. So the full year R&D spend works out to INR 494 crores.

The next question is from the line of Anubhav Aggarwal from Crédit Suisse.

Question for Sanjay sir. Some of the global peers have talked about production realignment where they want to realign because of the social distancing norms output of the factory is lesser. So just a question that when you talked about that without launching new products difficult to maintain $200 million run rate, why are you not taking in -- getting more market share of the existing products? Until the time facilities don't clear, wouldn't that be the best option for you? Or are you not entering any contracts there?

No, no, no, you're absolutely right. And that's what we've been doing, Anubhav, since the last, I would say, 12, 18 months, but essentially, there's a limit to how much you can push market shares for your existing products. For most of the products, we are now in the top 3, 4 players. And so we are actually also seeing a lot of customers come to us as they experience supply difficulties from other suppliers. But right now, I'm a bit hesitant to take up new business also because of lack of visibility on supplies. So let's say, I take maybe 2 out of 10 opportunities that come my way because I'm not sure how my future supplies would be. If it was normal times, I would probably take a lot more of these because we have a pretty robust supply chain. But in these COVID times, I don't feel like it's appropriate for us to increase the failure to supply risk for Torrent unless I'm 100% sure that the supply chain connectivity would be there. And the supply chain connectivity is a little complex for many of our products, right? So for example, for some products, we import European material, we import some polymers from the U.S. or we import some Chinese products. So -- and imports have been impacted because of the port situation. So because of which, I would say, it's more challenging to pick up incremental business today and to risk opening up to failure to supply penalties.

Yes. Right. It's quite a fair point. I agree with that. One more question I had, you mentioned about desktop audit for Dahej facility. Just wanted to get 2, 3 sub questions on this. Has FDA done this for any other facilities so far? Earlier when I thought FDA, you were talking about time lines, so is there an updated time line from FDA that they may not inspect Indian facility for certain more period of time, maybe you can...

Sorry, Anubhav, there's nothing defined from them. So we are in constant contact, and we know that theoretically, it is possible for them to do a desktop audit. But in practice, the road that they will choose is not clear to us. And so we are actually, unfortunately, not able to give you visibility or neither do we have visibility on when will they do a desktop or a physical audit and it's something which is in their purview, and they've not made a decision or at least not announced a decision on this topic.

Okay. That's helpful. One more clarity. On Levittown, are you thinking about upgrading it to orals as well? Or will it continue to be liquid facility?

No. So Levittown makes liquids and suppositories, and it will continue for the foreseeable future to focus on these 2 dosage forms.

At some of point, would you think about having a plant in the U.S. for oral side also?

There is a lot of talk about domestic manufacturing and so what incentives can be provided. Currently, we've seen the government take one initiative whereby they've allocated a big chunk of money to a local entrepreneur to set up domestic manufacturing. But as you probably know, right, the U.S. does not have a domestic API industry. So essentially, you would be substituting reliance on imported finished goods and replacing it with reliance on imported APIs. So I don't think it's going to be straightforward to set up domestic supply chain from KSM to API to finished product in the U.S. anytime soon. So we are watching the situation. I mean, I'm monitoring it carefully. Setting up a OFC facility in the U.S. will, in my opinion, not resolve the concerns that we have about domestic sourcing of pharmaceutical products. So as of today, no plans, but we are monitoring.

The next question is from the line of Nirmal Gopi from IDFC Securities.

Nitin here. On Levittown, once the staff -- I mean, how meaningful a development is it from a U.S. sales perspective?

I'm sorry, I didn't capture the question. Can you just repeat, sir?

For the U.S. business, can you just...

Can you speak closer to the handset, please?

Is it better?

Yes.

Hello?

Yes, yes, yes, we can hear you.

Yes. Yes. So I'm saying the U.S. facility once it starts up by the second half of the year, how meaningful would it be for U.S. business revenue perspective in your assessment?

So what I would guide you towards is what was the revenues before we shutdown the facility. So the revenues of the facility were in the $12 million to $13 million range before we shutdown, and bulk of those revenues were coming from OTC contract manufacturing. So essentially, what we had procured was an OTC manufacturer that was making product for store brands for chains. So we were transitioning it towards a Rx business model. So we have discontinued the OTC business. So we would -- going forward, we would do only the Rx business. So I would say that it would take us some time before we reach the $10 million, $15 million mark.

Got it. And secondly, from a U.S. business perspective, in the past, you've talked about third-party supply -- third-party outsourced partnerships for certain products. So are there any such products which will come through for this -- looking at coming through this year?

Yes. So we would expect to get at least 2 products this year. So those would be -- so this current fiscal year, we are not sure what will happen to Dahej and Indrad, but we would be getting products from our third parties and as well as from our derma plant. So you would expect a low single-digit number of launches, at least from what we call external partners as well as our derma plant.

And second on the ROW markets, with the currency volatility that's been there, I mean how much of an impact has it had on the business? And how are you looking at this business now given where this whole currency situation is?

Sudhir, you want to take that?

Yes, yes, yes. So Nitin, so I think from a currency impact perspective, it's only Brazil where we've seen a heavy depreciation happening post March, right? As far as ROW markets are concerned, it's very straightforward, billing being done in dollars. And I think for '19, '20, the depreciation was around -- average depreciation was around 3%. So if at all anything is happening on that side, it will be positive for the P&L. But Brazil, yes, I mean, the depreciation has been quite heavy in terms of BRL to USD. So that's something which we are watching out.

And Sudhir, on -- is there a way for us to assess this Brazil depreciation, how does it translate into a lower dollar profitability for us?

Sorry, come again?

This Brazilian depreciation, from an economic impact for us, it's just lower dollar and U.S. -- lower profitability in absolute Indian terms -- in Indian rupee terms for us.

So the only thing I would say, Nitin, is that Brazil contributes to only 8% of my total revenues, right? So considering that the same amount of contribution may come from the EBITDA as well in terms of contribution by Brazil, the impact would not be that severe, I would say, from an overall performance perspective. It should be less than 0.4, 0.3, I would say.

Got it. And one last one. On the India business, I mean, we obviously did launch these 3 or 4 products you mentioned in the second half of the year, new products, and I think the relaunches happened after a while for us. Now if we take a next 2- to 3-year view, how relevant or how important, rather, is this new product launch engine for us from a growth perspective?

So the 3 products that were launched in H2 with ticagrelor, Remogliflozin and vildagliptin, those 3 would certainly be very important for us in the cardio, diabetes space. And looking at the current trends, in terms of volume share and ranking, we anticipate this market share to continue, if not slightly increase going forward. In terms of the market size, I think with the COVID situation, it's a bit difficult to estimate right now.

But are we -- in terms of new launches -- I mean, do we have any numbers or any such meaningful large sort of launches for the next couple of years? Any broad sense on that?

So not in number of products, but in terms of overall growth driver breakup, if you see the quarterly trends, Q4 has the highest contribution of new products to the overall growth of 2.6% and the plan was to obviously have a much higher contribution in this financial year overall. But how large that will be, again, with this demand situation, it will be hard to say. But over the medium term, that should definitely be in the space of probably 3% to 4%.

The next question is from the line of Hari Belawat from Techfin.

This is regarding pledging of share. You had already clarified to the exchanges that this is because of the covenants -- certain covenants in the loan agreement. Any possibility of getting it removed over a period of time, I mean, 1, 2 years? Or it will continue as long as, I mean, the loans continue?

No, it's already removed. Why don't you have a look at the BSE Stock Exchange and NSE.

So what we've done is, we've gone back to the bank and removed those covenants. So we've already intimated to the stock exchange. So this issue is resolved as on date.

Okay. I think that's a good development, one. Second thing is, sir, was there any recall of valsartan and losartan during this FY? Last year, there were certain recalls in U.S. particularly. This year in FY '20, was there any recall of these 2?

No. The valsartan recalls were in 2018. And the losartan recall, last one was -- Sudhir, I don't recall if this was in this fiscal year or last fiscal year, but...

Which one?

Losartan, the last one...

It was in '18, '19. Yes, it was in '18, '19.

Okay, okay. So there were no recalls. And sir, just one more query. This [indiscernible] we are having around 4,000 number. Now in view of the social distancing and all these things, is there any different plan for marketing? I mean, digital marketing or some other type of marketing through e-pharmacy or all this, are we looking into that aspect of marketing our products?

Yes. We're certainly looking at digital as an important avenue of marketing. So currently, it's in a very nascent environment for customers and for us. So it's going to evolve slowly over time, but no real change in the field force structure. I think it will be too early to comment on that at this stage.

Okay. I think then we will continue with this at least in FY '21 or so?

That's what we anticipate, yes.

The next question is from the line of Krishnendu Saha from Quantum Mutual Fund.

Sir, most of the questions have been answered. Just a couple of understanding. For the broad industry, the [indiscernible] coming, so do you think the next 1 month will the acute season will be missed by us or we will be up and running where we have stopped. So do you think that we will miss the acute season? Or do you think that we are in time for meeting the acute season demand, that's one.

Sorry, your voice was a bit unclear. Could you please repeat the question?

Do you think we'll be missing the acute season by a loss? Or we would be in time to meet the acute season demand, the industry as a whole. I'm talking about the -- that comment. And number two, if you could -- are you looking for any acquisitions as you said that a lot of capital is being given on manufacturing in the U.S. So are you looking for any acquisitions in the U.S., some of them have filed for bankruptcy and so on and so forth?

Yes. So just to clarify, I think the first question was, will there be an impact on the acute season for the Indian market? So acute is definitely impacted as of now. In the IPM, I think it's one of the highest impacted segments. So wouldn't be surprising if the season would be much lower this year. And I think the primary reason is that there would be less people getting infected or ill because of social distancing and staying at home in terms of anti-infective indications. But for us, the contribution is quite small, so it doesn't have any meaningful difference.

On the second part of the question, I think this is -- I mean, currently, we're not looking at any acquisition in the U.S.

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

Sir, if we have, let's say, INR 100 of sales in acute and INR 100 of sales in chronic, in whatever experience you have had so far in April and May, would the chronic go from INR 100 to INR 90 [indiscernible] the AIOCD data shows a 10% decline in the market and similar for you. And therefore, would acute -- and your previous -- answer to your previous question, you said that the acute will suffer meaningfully. So would INR 100 acute go to, say, INR 20 in this environment?

So chronic would remain quite stagnant because it all depends on how the clinics open up and the surgeries and procedures pick up. So it would be best to assume that it would be stagnant for the next few quarters. In terms of acute, this is our estimation based on the current April numbers. So yes, again, I wouldn't be surprised if it remains at this level or reduces, unless obviously, it's winter and usually Q2, Q3 is the slightly higher acute season pick up.

Right. But sir, even within chronic, one, there is repeat purchases in existing chronic and two, there is new diagnosis of chronic patients. So the new diagnosis certainly isn't happening because the [Technical Difficulty] are closed, the doctors aren't attending clinics, the existing patients would probably be buying. So you don't see any loss of compliance in existing patients and therefore, decline in chronic. The chronic consumption is going on as it is supposed to go on within existing patients?

No, because there's only so long that you can delay an elective surgery or a procedure. So you can probably delay it for a month or 2 months, but beyond that, especially for senior citizens, at some point, they have to go through with it. So that demand is getting deferred by a few months in our view. And it's not permanently lost for the chronic segment.

Interesting. And if you say -- so if you lost, let's say, INR 10 of growth in April and May because of a loss of -- because of the lockdown. So that INR 10 you believe would be pent-up demand and, therefore, come in the future quarters?

So the full INR 10 may not be recovered, but a good portion of it would be recovered.

Understood. And in terms of the margins, Sudhir sir, you made a comment. So I just want to understand in our corporate...

Hello?

Hello?

I'm losing you. Your voice is breaking, Aditya.

Sorry. Even now Sudhir sir? Any better?

Now it's better.

Okay. Sorry. I was asking that in your cost structure, the comment on margins, I just want to understand the cost structure. What percentage of our operating costs are fixed, percentages variable in nature, including raw material?

Yes. So I think the gross margin is around 73%, right, for us. So that takes away 27% of COGS, which is completely variable, right? The other costs which are there is basically the employee cost, which I think is typically 18%, right, of the overall cost structure. And assuming, let's say, the EBITDA is 27%. So 27% and 27% variable of COGS is 54%. So balance, we are talking about 45%, of which 18% is employee cost and the remaining, I would say, 27% is other expenses, right? Out of these expenses, there are few expenses which pertain to manufacturing expenses and selling and distribution expenses. So I think broadly, I don't have the correct number, but I would say maybe 50-50, which can be fixed and which can be really variable or semi-variable, which can be controlled, I would say, yes.

Right. So a quarter where your sales hasn't grown, and obviously, your fixed will grow by inflation, at least. Do you foresee a 1% or 2% sort of margin dip? There was a previous comment, so I'm just trying to reconcile that.

No, that's possible. The only attempt would be, Aditya, to see what additional cost containment can be done so that we don't have this vast gap of 2%, which you are saying. So that would be something additional, which we would be monitoring every quarter based on what is the overall performance and what kind of measures should be taken even to control certain fixed costs, right?

Fair enough, fair enough. Just one question on the MRs thing. So when the MRs get incentive, you recognize it in employee cost, right?

Sorry, come again?

When the MRs [ get ] incentive, do you recognize it in employee cost -- under employee cost?

No, no, absolutely. It's all on accrual basis. So month-on-month basis, yes.

So this year, especially maybe on the April, May MRs must not have made their incentives, they must not have met their targets. I mean, correct me if I'm wrong. And in such case, how do you ensure your force motivation stays up there, attrition remains low and the team remains intact and motive.

No, so absolutely. It's basically a marketing sequence, right, and not to be discussed on phone [Foreign Language]

Okay. That's right. That's right. Okay. Sorry. So that brings me to one more question. On your U.S. business, I think [Technical Difficulty] mentioned that you guys obviously won't grow unless you get new products on the line. And you are at the same time discussing the stock possibility from the U.S. FDA [indiscernible] So would the comment imply that you don't expect a positive outcome at least for the next 1 year?

No. It's common to imply that we don't know when the FDA would do the audit and start giving us new product approvals.

Right. So that statement is [Technical Difficulty] there is no positive outcome in the next 1 year. The possibility of a positive outcome in the next 1 year is still there though?

Yes, yes, yes, absolutely. It can be tomorrow. As far as I'm concerned, it just depends upon the regulators, I would say, prioritization of such desktop audit. And -- as -- so -- and we have no prior experience, and this is something unprecedented because of this COVID that they are not doing any audits. Even in the U.S., they're not doing any audits. So it's not just an international situation, on the U.S. side, it's the same, domestic front is the same thing. Because of safety of FDA inspectors, they're not stepping out. So we don't know how they will -- how quickly they would be able to get our plant reviewed and cleared.

That's fair. Just a follow-up. So while the U.S. may do a desktop audit, if they agree to that, would you -- a clearance following such a desktop audit, would it be like a permanent 2-year sort of a clearance that we historically had? Or would that be like subject to physical verification? That I mean -- I'm just trying to understand the level of discussion you're having with them.

No. So without revealing anything, a clearance from the FDA is like clearance from the FDA. So if we get the IRR, we would get the IRR and that would be the end of this round of inspection. But of course, the FDA is always -- has the right to come and inspect our facilities whenever they want. And I guess there will be subsequent inspections. But at least for this round of inspections, if you get an IRR, the topic would be closed.

And on the domestic business front, are you guys seeing any higher mortality [indiscernible] propaganda and regional companies in environment like COVID must be difficult for these smaller regional companies to survive given the weakness in the supply chain and lack of scale. So it'd be fair to say that going ahead, given [ mortality in such companies, ] there will be a consolidation of market share in the domestic industry?

So that would be a bit premature to comment on because it's just been a few -- 2 months. But what definitely is turning out to be the case is that the larger brands with more reach are going to benefit from this situation. So especially, the brands, let's say, which are above INR 75 crores, INR 100 crores plus. So those brands would continue to gain much more than the relatively smaller brands.

But on this front, so most of propaganda regional companies have largely post their sales from Tier 2, Tier 3, Tier -- correct me again if my perception is incorrect. The lack of our reach into such segment is what sort of also given them [indiscernible] in that geography. Even if they were to die a natural death, how far are we planning to reach into their pocket and get market there?

So for chronic, the reach in these areas doesn't really make any difference because there is a large spillover that comes from the larger cities to the Tier 2 towns and beyond. So from that standpoint, coverage won't really have any added value, additional coverage.

No, could you clarify I didn't understand that.

This prescription spillover from specialists gets carried on beyond the cities of metros and tier 2. So that's where we believe that the additional coverage at this stage won't really have any added value. For acute and subchronic, it's probably a different thing, but I'm referring more to the chronic segment.

Understood. So what's in the subchronic side?

I'm sorry, we are pretty much out of time. So you can continue the discussion. If you feel free, call [ Sapan ] who's our Investor Relations Officer, and we can have off-line discussion instead of in this large group. I think that we would like to stop here because we're pretty much out of time. I would just like to thank everybody for their participation. And we remain available for follow-up questions through our Investor Relations group. So I think we can stop here. Sudhir, Aman, anything else you guys would like to add?

No.

No.

Okay. Great. Thanks, everyone. Bye-bye.

Thank you. Ladies and gentlemen, on behalf of Torrent Pharmaceuticals Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.