Zydus Lifesciences Limited (ZYDUSLIFE) Earnings Call Transcript & Summary

Ladies and gentleman, good day and welcome to the Cadila Healthcare Limited, Q2 FY '22 Post Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ganesh Nayak, Executive Director, Cadila Healthcare. Thank you, and over to you, sir.

Good evening, ladies and gentlemen. Welcome to our post results teleconference for the quarter ended September 30, '21. I do wish that you and your family members are keeping safe and well. For today's call, we have with us Dr. Sharvil Patel, Managing Director; Mr. Nitin Parekh, Chief Financial Officer; and Mr. Vishal Gor, Senior Vice President, Corporate Finance. I'm sure you would have gone through the quarterly results investor presentation, which we have posted on our website and filled with the stock exchanges. The quarter gone by was a promising one for our India geography, as it continued to build on the momentum and recorded a double-digit growth during the quarter. In fact, this human formulation business and consumer wellness business in the India geography grew in double digits during the quarter. On the human formulation front omits the receiving impact of the pandemic, the growth was driven by key existing brands and new products, which were launched during the last few quarters. On the back of improving consumption, the consumer wellness business grew during the quarter and continued to unlock the operational efficiency with strong on ground execution, despite challenging economic conditions. Overall, the India geography which contributed 43% to the consolidated revenues during the quarter posted a growth of 12% on a year-on-year basis and registered sales of INR 15.9 billion. With that, let me take you through the financial numbers for the quarter gone by. During the quarter, we posted a consolidated revenue of INR 37.8 billion up 3% year-on-year. Consolidated EBITDA improved during the quarter and stood at INR 8.6 billion up 6% year-on-year. Reported EBITDA margins for the quarter stood at 22.7%, which is an improvement of 50 basis points on a year-on-year basis. We made a onetime inventory provision for COVID-related products during the quarter. Excluding the impact of this provision, EBITDA margins for the quarter were at 23.8%. EBITDA margins improved despite a year-on-year decline in the U.S. revenues as business in India and the emerging markets performed well and in turn drove the overall margin improvement. Adjusted for certain exceptional items and a one-off gain on the account of sale of our Animal Health business, the consolidated PAT for the quarter stood at INR 6 billion, up 6% on a year-on-year basis. Our net debt as on the 30th of September '21, came down to INR 4 billion from INR 35 billion as on the 31st of March 2021. And as a result, our net debt-to-EBITDA ratio also came down to 0.12x as on the 30th of September '21 from 1.1x as on the 31st of March 2021. Now let me take you through the operating highlights for the second quarter of FY '22 for each of our business lines. Starting with our Human Health business in the India geography. Overall, our Human Health Formulations business recorded sales of INR 12.1 billion during Q2 FY '22, up 12% on a year-on-year basis. Excluding the institutional sales of COVID products, the growth actually was 17%, which was driven by strong volume growth and new product launches. We gained market share in our core therapies of antidiabetic and cardiovascular therapeutic areas during the quarter on a Y-on-Y basis. In the digital space, we have made significant investments towards the adoption and implementation of digital tools and practices to reach out and connect with our doctor communities and patients and we have better equipped our field people in their daily working. Going forward, with the recovery in the pharma market and normalization of the health care delivery infrastructure, growth will be driven by focus on key brands identified to fuel future growth. As mentioned earlier, our consumer wellness business despite challenging economic environment, also registered a double-digit growth during the quarter. Overall, the business posted revenues of INR 3.8 billion with a growth of 13% during the quarter. On the brand front, Complan, EverYuth and Nutralite registered a double-digit growth during the quarter. Nycil and Glucon-D also performed well and continued to lead in their respective categories despite low season and high channel inventories. Now let me take you through the performance of our U.S. formulations business. The U.S. geography, comprising of generics and the specialty portfolio posted sales of INR 15 billion during the quarter, up 3% quarter-on-quarter. The business saw a growth in revenues over the preceding quarter despite heightened competition and a tough pricing scenario. Overall, volumes grew during the quarter despite reduction in the volumes of our methylene products as there was a gain in the volume of other existing products and new launches. We launched 3 new products during the quarter including a complex injectable namely Enoxaparin Sodium injection, which is an in-licensed product. This is the first generic launch of this product by an Indian player, which reinforces that our efforts of in-licensing of complex products have started yielding results. Enoxaparin Sodium injection is the second in-licensed complex indictable product after Fondaparinux. Though supply issues in the U.S. have dwindled leaving limited onetime opportunities, we will continue to prioritize products and maintain safety stock of key products to be able to take advantage of opportunities arising in the market. On the emerging markets front, our business witnessed a strong growth of 48% on a year-on-year basis and posted sales of INR 3.5 billion. On a sequential basis, the business grew by 26% during the quarter. As mentioned during the last quarter earnings call, we have undertaken many initiatives team that announcing operational efficiencies to drive improvement in operating margins. One such initiative is the zero-based budgeting approach for Human Health Formulations business in India. As part of this initiative, we have identified multiple levers according the entire value chain of the business, which are in the process of getting implemented. We expect the benefits of this to accrue from the next calendar year. Another such initiative is being implemented in the manufacturing operations, which aims at using advanced digital and analytics tools to enhance compliance and efficiency through simplification. Potential areas for improvement are being identified across work streams, SOPs are being simplified and various digital tools are being designed for digital performance management. The implementation of this initiative will be spread over the course of the next year. Both these initiatives put together are expected to improve our overall operating margins by of 80 to 100 basis points. This concludes the business review. I would now request Dr. Sharvil Patel to take you to the progress and initiatives in our innovation program. Thank you.

Thank you, Dr. Nayak, and good evening, ladies and gentlemen. As you all know, we have received emergency use authorization from the Drug Control General of India for COVID-19 vaccine candidate ZyCoV-D during the quarter. It is the first ever plasma DNA vaccine for human use approved anywhere in the world. The plug-and-play technology being offered by DNA-based platforms will help in rapidly adapting the vaccine in case of any future mutations to providers. In fact, we have already developed the DNA vaccine candidate for the alpha, beta, kappa, delta, delta plus and lambda variant and established process for the same as well in a very short period of time, which will provide a flexibility in programmatic implementation to switch to newer vaccine candidates based on new variants and thereby will provide faster control over the pandemic. This will be difficult in case of other vector-based vaccines due to anti-vector immunity and also in case of inactivated viral vaccine. As the subject of -- for the Phase III clinical trials also included adulations in the group of 12 to 18. ZyCoV-D is also the first approved vaccine for adolescence in this age group in India. The results of the Phase I clinical trial for ZyCov-D have been published in the E-Clinical Medicine Journal of Lancet, and we have already submitted for Phase III clinical trial data for the ZyCov-D for publication. Recently, in the month of September, we have entered into an agreement with Shilpa Medicare Limited for production and supply of drug substance of ZyCov-D vaccine from its manufacturing facility. Production volumes of the vaccine from this facility will be mutually agreed upon by both parties, and this will augment the capacities for the vaccine. In order to offer therapeutic solution for COVID-19, we have developed a novel biotherapeutic cocktail of monoclonal antibodies targeted at treating COVID-19 patients having mild symptoms. The Phase I/II clinical trial of these molecules were initiated during the quarter. On the NCE front, we have initiated enrollment of patients for the evidence in a global pivotal Phase IIb clinical trial of saroglitazar magnesium to evaluate the efficacy and safety of the molecule and subjects with nonalcoholic steatohepatitis and fibrosis indication. Recently, in the month of October, the first patient was randomized into the Phase IIb prospective multicenter randomized double-blinded placebo-controlled clinical trial. 40 sites have been identified in the U.S. and 10 sites have been identified in Argentina for the study. The positive results for the Phase IIa global clinical trial evaluating saroglitazar magnesium in patients with NASH were published in October 2021 issue of a peer-reviewed journal, Medical Journal of Hepatology, which have very high impact factors. The study of saroglitazar for post translational metabolic syndrome, which is PTMS, in the U.S. reached the targeted number of 15 patients, out of which 10 patients have completed the study. The interim results of the study have demonstrated significant reduction in lipid levels and no effect on immunosuppressive drugs and [indiscernible] creating in these patients. This paves way forward for saroglitazar for additional indications as we build the molecule. For our antimalarial compound, ZY19489, Lancet has accepted our single ascending dose then, which was conducted in Australia. In India, the DCGI has approved the single ascending done study and the multiple ascending dose study of the molecule. The first cohort of the single ascending dose study has already been completed. With regards to our efforts on the biosimilars, we have submitted one an application to DCGI to initiate Phase III clinical trials for one more monoclonal antibody treatment during the quarter. On the global development front, we initiated development of 2 biosimilars during the quarter. Talking about our 505(b)(2) and specialty initiatives recently in the month of October, our fully owned subsidiary company, Sentynl Therapeutics and its licensing partner, Cyprium Therapeutics announced positive results from an efficacy and safety analysis of data integrated from 2 complete pivotal studies in patients with Menkes disease treated with copper histidinate complex, CUTX-101. In both pre-specified primary and secondary efficacy analysis, the treatment with CUTX-101 demonstrated a significantly greater median over survival -- overall survival compared to untreated historical control patients. The rolling submission of an NDA for CUTX-101 is expected to begin from the current quarter. Coming to the pipeline of the 505(b)(2) products, we received a tentative approval from the U.S. FDA for a new drug application for Sitagliptin base tablets. Tentative approval was granted upon completion of the first cycle review by the U.S. FDA. We have also submitted an IND application for a pain management product during the quarter, and the NDA for this product is expected to be filed by the end of the current financial year. Thank you, and we'll now start the Q&A session. Over to the coordinator for the Q&A.

[Operator Instructions] Our first question is from the line of Harith Ahamed from Spark Capital.

The first one is on the profit of over INR 100 crores that we've booked for the quarter related to sale of brands by one of our subsidiaries Zydus Healthcare. So how much is the sales from these divested brands, and will you be able to provide some more color on the rationale for this divestment?

So the rationale for the divestment is these were OPH brands, and they were not prescription-oriented brands in our current portfolio. And we had -- in terms of our priority of coverage of the molecules, this was not in the top 5. So we looked at divesting it at an appropriate time. And we found a suitable partner who wanted to take this product ahead for further developments.

So these were contributing how much to our domestic formulations business?

INR 30 crores. INR 30 crores to INR 35 crores.

Okay. Got it. And on CUTX-101, we've announced result from the pivotal trials and based on the positive data, when can we expect our rolling submission to commence? And so if you can provide some color on the opportunity size here in Menkes disease for this product?

The rolling submission will begin in this quarter, as we said. And this is -- this has been designated as an orphan drug has got a priority review. So we believe that -- there is a possibility that by the calendar year -- end of calendar year CY '22, we can see the approval or otherwise latest by first half -- first quarter of calendar year '23. And this is a unique product where we are talking about increasing the life expectancy for children who suffer from this degree. And the opportunity is very good from a business case point of view, where we can see a strong EBITDA movement starting almost from the first year and breakeven also in the first year.

And last one from my side. On saroglitazar, the Phase IIb trial, which you recently commenced for NASH syndication. Just trying to understand the time lines around this. And given that this appears to be a fairly large trial, will we be able to go into a submission to the FDA with the Phase IIb data? Or will it require a larger Phase 3 trials before we get into a filing stage?

So there are 2 trials where it is saroglitazar, which are in advanced stages. One is for PBC indication, which we are starting. And that, we believe we can see a filing by '23 calendar year end of -- middle or end of '23. And for the NASH indication, it is a longer trial. It's an adaptive Phase IIb/III trial, and that we are looking at '26, '27 kind of filing and launch.

We'll take our next question from the line of Surya Patra from Philip Capital.

Sir just on the vaccine side, wanted some clarity. See the delay hopes in the vaccination or supply of the COVID vaccine, how should we see this, whether it is the price negotiation only which is getting delayed, or it is a debate over inoculating children or not?

So related to the ZyCov-D vaccine. As I said, we have commenced our scaled-up manufacturing from a new facility from the month of October. With related to the approval, we already have an approval for -- by the DCGI as an emergency use for the ages of 12 to ahead. But for the government immunization program, it has to go through the committee for immunization approval. So that is in progress. And also the pricing has been a discussion point, which is come closer to an alignment, and we hope that in the next few weeks, we can see that clarity coming, which we will immediately update everyone as soon as it comes. But we are hopeful and positive that we should see some clarity in the next 1 to 2 weeks.

Okay. But it is not the debate over whether to start the vaccination of the children, that is not the case, right sir? The reason for the delay?

No, it's not. For an immunization program in the government, they need to go through the approval beyond the regulators also. And they need to decide on which cohort of adolescent population will be given the vaccine and they need to prioritize it. As you know, the quantities for adolescent also need to be worked out like it was done for adults also. So first, they will look at the vulnerable population and then open it up for the larger population. So all those deliberations are ongoing.

Okay. Two-related questions on this again sir. You just mentioned that your tie-up with Shilpa Medicare is for the drug substances only. Is that right? And what is the thought process here? Do we have a kind of a greater capacity so far as fill-finish is there? That is why...

Yes.

We're kind of monetizing better.

We have enough fill-finish capacity.

Okay. And in terms of the export potential there, I think soon the export of vaccines to outside India is allowed -- will be allowed. So is there any progress for your product that you have seen in terms of getting the product approved by other countries or wherein some kind of alliance with other international agencies like that. Some clarity on that would be helpful.

So with regards to ZyCoV-D vaccine, we already have expression of interest from many international -- I mean, from many countries. We have also had discussions there. Obviously, the first phase for us until we scale up to very large quantities is to supply to the Indian immunization program. And once that is sufficiently catered to then we will also get export permission for the vaccine. So I think in the near term, it is more driven towards making sure we can supply the quantities to the -- for India and then later on also look at export. We are also looking at partnering with 1 CMO in -- outside of India who also has drug substance manufacturing capability. And that is -- that will further boost our manufacturing and supply for international markets.

Okay. Sir, next question is on the other expenses side, and something on the margin side. So we have seen the other expenses, there is a sequential improvement that we have witnessed. You have also talked about the digital -- expenditure on the digital adoption and potential savings with because of that initiative. And also, there was a point that in the previous year, there was a saving because of the -- saving on -- in front of this -- in terms of this distribution and the promotional on this side. So considering all these 3 things, still we have seen a kind of improvement. I mean, the saving of last year would have come if we are seeing that there is a normalized in the trade. And you have done the incremental spend on the digital side. And that would have also to some extent, it has help you saving it. So how should we see this, all these and you mentioned in the opening remarks, there is 80 to 100 basis points kind of improvement in the margin. So what margin and for which period that you are guiding I'm trying to get this indication?

With regards to expenses. One, when you look at quarter-on-quarter, we need to factor in the difference in expenses with respect to the wellness business. As you know, the quarter 4 and quarter 1 are the large expenditure months with a larger revenue also. And quarter 3 and quarter -- sorry, quarter 2 and quarter 3 have lower expenditures. So one of the reduction is on account of reduction in wellness on the marketing side. The other is what you say is right, we have reduction in R&D expenses, which is also a little bit of a timing issue. But we have been able to sufficiently manage our R&D expenses over many years. So we continue to believe that we will efficiently do that spend. And with regards to other things, while we had a higher increase in the digital and other side, we also had savings which we talked about, we are running at least 3 to 4 initiatives, and we have talked about saving -- improving margins by 100 basis points because of the savings that we are accruing on base budgeting on the other -- manufacturing and other areas. So that is all helping us. But on a normalized basis, going forward, we can see around INR 950 crore around other expenses kind of number.

Sure, sir. Just one question, if you allow. It is on the -- on is your injectable initiatives, see, obviously, the [ doxin ] and oxoferin has been in the kind of retail launches in the U.S. And you have also indicated that the injectable portfolio is likely to do great going ahead. So on that front, what is the progress? And what is the run rate now we have achieved and where we are looking this study to contribute?

I think they're just building up on -- we had a very, very small base on the injectable side, with the launch of like [indiscernible] doxorubicin and oxoferin, the doxorubicin and others. We have seen good traction of niche launches and we're seeing a good build up on this. But as I said, if you take a 3-year view, 3 to 4 years, we are looking at building at least a $250 million-plus franchise on the injectables bottom front with filing of many complex injectables and also partnering for many of the complex injectables. So that's our current plan. Obviously, the current scale-up is very large because the base was very small in terms of growth. But you will see substantial contribution coming in from '23 -- calendar year '23.

We'll take a next question from the line of Anubhav Agarwal from Credit Suisse.

Sir, actually just taking this previous question again, even excluding R&D, even excluding wellness, our other expenses were still down INR 63 crores in this quarter. I'm talking versus the June quarter, quarter-on-quarter. So just can you throw some light that all the initiatives that you're talking about will accrue from the quarter 3 onwards, what led to such a sharp decline in other expenses in this quarter?

So versus the last quarter, it is just we have met lower manufacturing and manufacturing expenses. And as I said, lower R&D expenses and lower one -- in lower quarter-on-quarter wellness expenses. So those are the 3 contributing, sir. On a consistent level next quarter onwards, we see around the INR 950 crores other expenses.

Okay. And can you call out roughly how much is the COVID sales in the quarter on your top line about INR 3,800 crores. What would it be like INR 250 crores, INR 300 crores, about INR 200 crores, can you just give some range on the COVID sales?

COVID sales?

Yes.

COVID sales, we have not seen any major growth because last year also it was a very high base. So actually, we have a degrowth this quarter.

No, but you have a very strong emerging markets as well. So I don't know whether that's more driven by sale of COVID products of what has led to such a sharp growth in the emerging markets?

Emerging markets, we have not sold COVID. In fact, I made a mention in my opening talk that our domestic business, which has grown at 12%, if you take out this COVID factor, the growth actually 17%.

Agree. And sir, but...

I'll take this. Market front, we have only export towards institutional sales that we have done for COVID products.

The institution sales to COVID products.

That growth removing that I don't have for EMV emerging markets, but I will ask Vishal to give it to you.

Okay. And then second question from the U.S. market. One is on mesalamine. Your current volumes versus last year when the product was normal, what percentage of volumes are down? Are we down 20%, 30% on this in terms of what volumes we are doing at that time, can you give some indication?

Yes, we are down on both SLIM on Lialda as well as Apriso, Asacol on Lialda is because of, obviously, more competition, but still we continue to hold significant share. And on Asacol also because of the volume of the prescriptions coming down. And also last year, there was a shortage, so that has obviously got cleared also. So on account of both of that, we have seen a degrowth in volume and value and which to -- if you look at our numbers has been compensated by the existing and new products.

Can you just help on Asacol, sir? What kind of volume decline are we talking about? Are we talking about 20%, 30% higher or lower than that?

Maybe 10%. I mean I don't have the exact number, but it is on the volume side, I think it will be around 10%, but because the volumes are not very large. So it will be around 10%, I would say.

Sure. And lastly, on the outlook for the U.S. business, this quarter, we had done about $202 million. In your previous comments, you mentioned that the second half, can we do a run rate of about $230 million each?

No. Currently, looking at the pricing pressures and obviously, assuming there will be some competition on Asacol, which we are not very clear on yet. We are looking at least the next quarter; we believe we can have the same base as this quarter. And quarter 4 is a little difficult to predict, but our view will be to make all efforts to make sure that we maintain our base, but we could see a reduction in quarter 4 depending on how intense the competition is on Asacol.

We'll take a next question from the line of Kunal Dhamesha from Emkay.

So first question, we are targeting a lot of growth on injectables, and we'll be using in-house R&D and partnering is it to -- so on both of this part, once we start putting money in terms of R&D, our R&D -- is it going to increase drastically because we also have a lot of costs coming in from the saroglitazar trial in U.S.? And secondly, if you are going for a partnering route, does the margin in that route makes sense? Will it be accretive to current EBITDA margin?

And your talking partnering? Are you talking about the injectable franchise?

Injectable, sir. So the likes of oxoferin?

On relation to the saroglitazar in the R&D investment. So in this last couple of years also, we have had continuing studies on saro, on vaccine and other fronts also. So we believe currently, with our revenue growth expectations, we believe we can be around 8% of spend on R&D as a percentage of sales. But on a year-on-year, maybe there will be 1 year, 9% and lower, but around 8% is a figure that we can look at in terms of our R&D expenses, assuming all of the costs that we are looking at. Because the trials are done over a period of 3 to 4 years. So it's not everything that is spent over 1 year. And we do manage all of the saroglitazar trials internally in the majority of the manner, which is allowing us to recruit better and manage our costs also. So that is to do with that. With respect to the injectable business, yes, if you look at it from doing it on your own versus in-licensing, the margins are shared. But if you look at in terms of return on the investment, it is significantly better than doing it on your own because the fixed investments are significantly lower. When we are looking at doing licensing for complex injectables, all of them require dedicated facilities, either on the API side or on the formulation side. So when we are able to in-license, we are removing many of these fixed costs. So on that point of view, the profitability would be far better in terms of the investments that we'll make. And it will also derisk us because we believe this is a better model in terms of derisking from the regulatory side also. So I think it's a mixed part. But on the overall side, the profitability with these products would be very good because they are all complex and they would drive better profitability than the current profitable even if it's shared.

Sure. And secondly, again coming back to vaccine, how your view on the potential of the vaccine will have changed over the, let's say, last 3 to 4 months? Given vaccination levels where we are currently.

So if you look at current position of the vaccine, we are currently the only vaccine that is approved for adolescents between the 12 to 18 years age group. And we believe that -- I mean the population there is about almost 40 crores when you look at children. And if you take any -- even assuming 2 doses or 3 dose, you're talking about 80 crore to 120 crore doses required. So from our point of view, from the capacity that we have built for and the advantages that we offer for the vaccine, we believe that it could -- it will still be a very -- I mean it's still a very good opportunity for us because there will be limited competition, and there are significant benefits to this vaccine. And that will help us build for this. So we believe that the government will actively be involved in acquiring the vaccine for the immunization program. And we also see at least currently a very good private market that we can participate in. And we would definitely get 25% of our volumes to be supplied to the private market, which will be also good in terms of building up the traction for the vaccine. And I also suggested that internationally, we're looking at partnering with [indiscernible] for making the vaccine available for the international market.

So you don't see a lot of competition impacts with the Bharat Biotech approval, the potential remaining the same for this adolescent market? And additionally, the follow-up would be, are you also conducting a trial on mix and match study?

So we are doing this trial now for the ages of 5 and above. So that will be the additional -- additional age group that will get included once we have completed that trial. With respect to competition, I mean, you can look at the overall supply of some of the other vaccines. And it's not been anything very significant. So I think from the overall opportunity size which is I told you about 80 crores to 120 crore doses, there is plenty of opportunity for a player like us, which is talking about currently 1 to 2 crore doses month on a month basis on a steady state. For us, I think that will -- it doesn't seem to be a concern. And I think we should be doing well in India. And further capacities, we'll be able to use for export.

Sure. And are you conducting any mix and match trials for your vaccine for approve...

Yes, discussions are underway, and we are still under discussion for the mix and match trial.

Our next question is from the line of Keshav Mishra, an individual investor.

So my question is on saroglitazar. In domestic market in India, we already have the approvals. How has been the growth, like, sir, over the last 2 years rate?

So the growth -- I mean -- so with the additional indications, we believe the main scale-up of the saroglitazar you will get to see in the next -- in this 2 years. But the growth in the last 3 years has been obviously significantly better than our overall business, and it has become one of the top 20, 25 products of the company.

Okay. And sir, related to the trials that we are having, especially for PBC in U.S. How is the comp -- I mean what is your view about the competition, and the competition doing in terms of trials for similar indication? And at what stage they will be, can you just give us a flavor on that?

So with our current understanding, on the PBC indication, we believe we can be amongst the first wave of launches, assuming there are a few more companies, but we definitely believe we'll be in the first wave, either we are first or we are in the first way, but very strongly, we can be there. With respect to NASH, it's an ongoing effort. A lot of trials have failed, a lot of molecules have failed with studies done on NASH. So if -- assuming that we are coming to market in '27, we believe we will -- we can be in the first wave or close to the first wave of launches.

Our next question is from the line of Saion Mukherjee from Nomura.

Dr. Sharvil, if you can really help us understand the contribution from Asacol and Lialda at this point in your U.S. revenues because we are going to see competition. So if you can guide us that it is really helpful.

So as I said, we don't give individual product related all the value. I did mention that on Lialda and Asacol, we have seen degrowth in this quarter in the U.S. And assuming that we will see some competition in next quarter, we still believe we can maintain our base of quarter 2. And quarter 4, we can see some erosion depending on how intense the competition is. But I think, as I told you, the Lialda we have now enough competition on that, Asacol, is something that we still are exclusivity on. But [indiscernible], we still believe we will see a very good margin profile on this business. But to give you individual absolute value will not be possible.

Yes. But I mean, IMS actually showed a very high number for both the products, more than 200 million, if I'm not wrong. So I mean if you can give some sense like top 5 products or something like that, how much contribution is there, so that it's easier for us to model it?

Saion, you were asking me one way or the other, but IMS, obviously, is always a little inflated. So IMS will not be the full reflection of sales of it. So that is not the way to look. But as I said, our current guidance is that assuming competition, it is in this quarter, we still believe we can maintain our base. And going forward, we do believe that the base of Asacol -- I mean, Lialda already there is erosion, but on Asacol once the erosion is seen, we believe that going forward in -- from calendar year 2030 onwards, we can more than compensate for the gap that is created in the coming year.

Okay. And the second one is on your specialty. You mentioned about CUTX-101, which possibly will be launched in the 2023 calendar year. So what is the kind of investment in terms of commercial front end that you need to make? And you also mentioned sort of its kind of going to break even on year 1. And also if I take a slightly longer-term view given the PBC trial on saroglitazar. So what's your overall plan in terms of commercial expansion for the specialty business in the U.S.?

Right. So on saro -- on the CUTX-101 next coming calendar year '22, we will -- we are starting to recruit people in the field. This is an orphan indication. So we are talking about not a very large team, but a team considering between 10 to 15 front-end team that we are trying to recruit for. To be prepared for launch either by end of next calendar year or early part of '23. As I said, the current business model that we have built is we can see breakeven in the first year -- full year of commercialization. And then it will obviously significantly add to the profitability of the company as we move forward. We have obviously IP and patent for it. So it's a very attractive model from the investment that we've made so far. We can see this being a very lucrative investment with at least less than a 3-year payback from what we have done in terms of once we launch it commercially. Also from the from saroglitazar's point of view, we have looked at the market on PBC. We have fast-track and priority review designation on this. And we -- if we are achieving a closer to first wave launch and with the current assumption, it is definitely a very, very large opportunity anywhere between $350 million to $600-plus million opportunity on a peak sales revenue on a conservative side. Obviously, there are things that we look at in terms of upside and downside. But if you look at all the additional work we are doing with related to work -- related to transplant, related to the other indication. I believe this molecule is fit to have at least 2 to 3 indications on the label, which will make it very sizable. NASH is obviously is a significantly large opportunity and building a reduction in fibrosis score beyond just improvement in NASH and NA core. So that is going to be a significant achievement if we're able to show that, which we believe the molecule has the potential to do. So if all of those things go well, if we get the right indications and all of that, this is potentially obviously a very large specialty business that we are creating on the back of saroglitazar, followed by some of the other orphan drugs that we want to add. The commercialization phase for saro is still maybe late '23 or not for the at least calendar year '22.

So you will -- okay. And sir, how large would be that team for saro, at least in the initial stage?

So it can be anywhere between 60 to 90 size full team in terms of what we need to do for them.

Okay. And sir, if I can ask one last question before I join back. On these injectable partnered products, I think you mentioned there were 2 products where you may have sold exclusivity. Can you give some indication about the time line and the size of the market size for these molecules?

Yes. So I think the opportunity is very large. Can I -- we can set up some other time to give you that detail because I don't carry it. But I think what we will make an effort on is to make a detailed presentation on the injectable side in terms of where we are looking at least what we have only been able to do, we can talk about it and something that is under discussion, we can't talk yet. But as soon as we are able to file some of these products, we can obviously discuss it further. But I will definitely give us overall scope on the injectable -- complex injectable as to what type of products we are filing for.

Our next question is from the line of Charulata Gaidhani from the Dalal & Broacha.

Yes. My question pertains to U.S. So FY '23, what type of growth would you anticipate in terms of internal estimates?

So FY '23 current -- our current best guess estimate is about around a 5% kind of growth for the year, but that is the best estimate right now. It's a moving figure. So that's what we are building for right now.

Okay. And in that, how many launches would you expect other than the orphan drug?

So we are -- when I talk about generics business, not the branded business. And if -- so again, our pipeline talks about we have a potential to launch 50 new products in FY '23. And if all regulatory things go well, if pre-approval inspections go well, if Moraiya clearances are done, which we are hoping will happen, then we can achieve closer to that 50 number.

Yes. Okay. Because currently, you have quite a few quality approvals. Many of them are tentative also?

Yes. So our current expectation is that if Moraiya cleared, we are looking at 50-plus new launches.

Okay. And do you have any expectation for the inspection?

So as I had communicated, so we have completed our corrective actions, and we have -- we are now scheduled for an audit at least from our completion point of view Looking at the current scenario where audits have started in India, we are -- where we believe that we will potentially have on audit, I believe, in the next -- we hope in the next 1 to 2 quarters. So that's our current best estimate.

Okay. And why have the interest costs gone up in the quarter?

So during this quarter, we have increased the proportion of rupee borrowing. So on the -- our current basis, you find that the costs are going up because the coupon rate on rupee loan would be certainly add in the current consider. But at the same time, we have entered into say about certain forward contracts. So on a net-net basis, we are the gainer.

Okay. And what is your average cost of debt?

So it's about 2%.

Okay. Fine. And how much CapEx do you expect to incur in FY '22 and '23?

Would be about INR 800 crores to INR 900 crores in the current year. FY '23, it can be lower.

Our next question is from the line of Prakash Agarwal from Axis Capital.

A question on the U.S. business. So very few companies have been able to grow Q-on-Q. So while I hear you were talking about pressure on volumes on your large products, you also spoke about some new projects -- products being launched. Can you give some color? Is it the new launches primarily which led to the incremental growth? Or there has been some volume increase in your base portfolio also?

So yes, some -- it's related to new products. Volume is a mixed match. So because of significant pricing challenges we are seeing, we have to -- I mean, we have to wait and see how it builds up. But currently, it's mostly driven by some of the new products that have been launched.

And how you're seeing the flu season? I mean, is it already started to bake in your numbers? How you are seeing the flu season?

There is we have no -- we really don't have any numbers really on the flu.

Okay. So these are entirely new set of product launches that you've done?

Yes. And the earlier launches, which are also scaled up, right? We had 21 launches. We have some 22 launches. So those scaled up channels happen.

Okay. Perfect. And the outlook you're giving is kind of flattish for the second half of the year?

So for the next quarter, it's flattish. For quarter 4, we may see a dip, but again, we are only assuming depending on the competition on Asacol. So if -- the current best estimate is -- this competition is very steep, we can see some degrowth in the quarter 4. But -- so that's our current best estimate.

Okay. And for '23, you're talking about in the last calls, you have talked about some complex injectables and some complex generic products, but that to more so from second half of fiscal '23 is what I understood?

Yes. So I think if you look at our business, second half will be very critical on 3 factors. One is the complex launches that will come up. The second is the clearance that we expect for our Moraiya and which will allow us then to commercialize our transdermal portfolio also. And some other important products also. So if both of those triggers do well, we would see a much better second half of FY '23. And as I said, if we are successful in all of these things, we can aspire to launch 50-plus new products.

Okay. Perfect. This is very helpful. Secondly, on gross margins, so you have called out 110 basis points for COVID-related inventory provision, but there is more to it, right? I mean, would you -- have you seen raw material price? Or what is the other 100, 200 basis point kind of movement?

So going forward, the raw material prices are definitely going to be a challenge for the industry, both related to China and the disruptions that have happened in China and obviously, other costs that have gone up for commodities and other things. So the good thing for the organization is that we generally see this much early on. So we did plan an initiative to cover up inventory for 3 to 4 months and take that cash kind of investment in it. So that will allow us to tie over certain aspects of it. But with the current understanding of what we see, we believe that there will be increases in material costs as we move forward, which can only be offset by better efficiencies and better cost reduction initiatives, which the company is geared to do. But there is going to be a challenge in terms of cost pressures both for -- actually for all markets. The first pressures come to India and then it trickles down to the U.S. business later on.

Okay. But the inventory provision for COVID-related products is largely done?

Yes, we have provided for a majority of the -- from our best visibility point of view.

Perfect. And lastly, on other expenses, you've talked about 3 reasons. But in general, what we hear from The Street is the freight costs, et cetera, the activities on the field and branded generic business all are back. So what is -- I mean, what is really that you have done for the cost savings. One, you said wellness business, the second is some of the cost initiatives you talked about. But if you...

So if you look at the cost initiatives that we are running, if I talk about zero-based budgeting, we are talking about significant -- triple the INR 100-plus crores of kind of savings that we are trying to target there. If you look at our SLIM and PRISM, we are looking at upwards of INR 100 crores to INR 150 crores of savings. When we do our other programs like efficiency improvement, which is again another INR 55 crores, INR 60 crores for 2 plants. So a significant amount of cost benefit -- I mean cost programs, our efficiency programs, more importantly have been running the organization. And also, while things are back to normal, all the spends' our marketing spends have been lower, both for the wellness market because of sequentially it being lower and also for the Indian business. So I think all of that has led to a better or other costs -- in terms of lower other costs. And a onetime lower R&D -- not onetime but a lower R&D expense this quarter.

But apart from R&D, which you said will come back, are the other cost savings all sustainable?

So our best estimate right now is looking at all of those things, we are looking at around INR 950-plus crore number for the next quarter.

Okay, which is coming back quite a bit?

Not quite a bit, but by 7%, 8% more than the current pace.

Our next question is from the line of Saion Mukherjee from Nomura.

Yes, sorry. Just on saroglitazar in India, how has been the response to the Fatty Liver approval that you got? And what's your expectation here in terms of the brand size that you see over the next few years?

So for both of -- so we have 2 important products. One is saroglitazar where we believe it is definitely going to be at least a INR 200 crore-plus product, and it will be amongst the top 10 products for the organization in the next 2 to 3 years. We have a follow-on molecule, which is desidustat which is for the treatment for CKD patients on dialysis and not on dialysis where the trial is just concluding. And we hope we can also commercialize this in the coming year, which also has a potential to be a INR 150 crore to INR 200 crore molecule. So both of these IP-driven molecules will significantly be amongst the top 10 molecules for the organization.

And sir, when do you expect desidustat in India launch?

So the -- if everything goes well, we can look at a quarter 1 next financial year.

Okay. And sir, in terms of IP protection for both saro and desidustat? How long is that? Is there a risk of competition?

No. We do have a significantly long runway for IP until 2036 for saro also for desi, we have a good amount of it [indiscernible].

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

Sir, for FY '22, how much products we have planned to launch, how much we have already lost in the U.S. in first half? And what still need to be launched in second half?

So in FY -- you're talking about U.S. business?

U.S. business, yes.

So as I said, this year, we will look at launching close to 20 products this calendar year -- in this financial year. And next year, assuming certain aspects, we can target -- our last year target is about 50-plus launches. Provided we are able to resolve our current model segment.

Yes. So in this context, as earlier, we guided some 30, 35 product launches in FY '22. And that's why -- so I just wanted to understand that whether we have curtailed our launch aim for any reason? Or if you could say more detail on it.

So there are 2 aspects to that. Your point is right. One is we -- because of the market conditions, a few molecules, we have chose not to launch because the pricing is not very progressive. The second part is that we have, as you know, AI needs to be completed. And for some of the molecules we require pre-approval inspection. So that has led to some of the delay. So between these 2 things are the delays, some are getting pushed out to quarter 1 because of -- I mean, the approvals came late, so the launches also get staggered delay because of the response letter and the [indiscernible] date.

Yes. So even for '23 also, the launch -- the number of launches seems very low despite we are assuming that Moraiya facility will be clear.

'23, I'm talking about 50 launches, 5-0.

Okay. Sorry. Sorry. Okay, fine. And yes, second question was related to the ZyCoV-D that vaccine. In this just wanted to understand because the opportunity size has already shrunk. Whether we will get a fair return on the investment given the situation? Or the return would be in line with the company's average return?

So on ZyCoV-D, our view -- see, I think, first and foremost, I think what we wish to do was to make sure that we can work on the research efforts that we can make our self-reliant to be able to invest behind R&D and invent or bring a new platform technology to the country. And I think I'm very happy to say that on that front, definitely, we have succeeded, and we are the world's first DNA plasmid vaccine. And it's not only a great thing for us, but the great thing for India because this is being recognized globally everywhere in the world for this aspect. Now your second to the commercial potential, as I'd explained, and I'll explain one more time. Our current capacities are around 1 crore doses monthly, which we are trying to produce. Going forward, we look to enhance that capacity. If you look at the target segment of only children, we are talking about requirements of 100 crores, 120 crore doses and we are talking about producing 1 crore doses a month. So from an opportunity side, we have enough opportunity to cater to. Actually, the expectation would be higher that we could produce more. But obviously, we are just building on this new technology and trying to scale it up. But from a commercial potential, we are still on track to be able to fulfill the overall demand in terms of our expectation, which is to produce 1 crore doses and sell 1 crore doses.

So of that 1 crore doses, 25%, we will have opportunity to launch in a private market?

Yes.

Yes. So my question was in that context because in private market, still we have a competition, then we will have some agreed price from the -- for government supply. And then another opportunity for an export. So given a different price scenario, and that I wanted to understand that the kind of investment we have done for that 1 crore vaccine in terms of building capacity or R&D. So whether we will get a fair return on that investment given the current scenario?

Yes. Yes. We will get much better than other businesses.

[Operator Instructions] Our next question is from the line of Keshav Mishra, an individual investor.

Yes. So sir, one question on the vaccine portfolio that Cadila already has. Since we have now developed ZyCoV-D, can you give a flavor of how -- what strategy and what kind of growth we can see from the entire vaccine portfolio that we have developed apart from ZyCoV-D?

Yes. So I think ZyCoV-D obviously something that we have done this year. But if you look at our current vaccine portfolio, we have very important vaccines. As I said, we have 3 vaccines which are going to be part of the India public market as well as the WHO supplies. One is the typhoid conjugate vaccine. The other is an MR vaccine and obviously, our rabies vaccine, which is WHO prequalified. So those are important vaccine for us, and they have different launch plans in the next coming years, and they will become sizable part of it, and that's where the investment is also being made. Then we have niche vaccines like the varicella vaccine, which where we are one of the only companies to do so in India, and that is going to be very attractive, but not a very large business, but a very profitable and very attractive business for us and some varicella. And then there are both this private market vaccines like the flu, HPV flu we already have, we have a quarter 2 vaccine. We are working on the HPV vaccines and the whole hepatitis A, B and E range vaccines. And all of these are going to be significant for us. So our aspiration is to build at least $250 million franchise out of the vaccine by '25 -- '25, '26, including being part of the WHO qualified programs. And we are on -- well on track to do that in terms of building our portfolio. From the current point of view, we also are working on malaria, chikungunya and other pentavalent and hexavalent vaccine, which are under various phases of development. We also have a monoclonal therapy, which is, again, the world's first, which is Twinrab, which also has a potential to become a very important product with the treatment for dog bits with the vaccination related to using rabies vaccine as well as treatment option using Twinrab.

Okay. And sir, when you say you want to build a $250 million franchise in FY '25, what is the current base looking like? I mean, what is the current size that we are already doing?

We're about $12 million -- $10 million to $12 million base right now.

Our next question is from the line of Prakash Agarwal from Axis Capital.

Just missed your comment on the opportunity for exports on the vaccine front. So currently, you're awaiting government approval. Approval is there, but for the launch, the pricing, et cetera. But what is the opportunity in the ROW markets?

So I think what we produce currently in India and the requirement that is there in India, I think largely the Indian manufacturing will be on the immediate basis, only supplied for the India market. We are also looking to partner with the international CM contract manufacturing company, which has large capacities on COVID -- on DNA. And if all of that goes through well, then that capacity we can use for selling in the international market.

And when you say international, this is ROW markets?

Yes.

Ex-U.S., ex-Europe?

Ex U.S., ex-Europe. Yes, we have a lot of -- already we have a lot of expression of interest, and we have agreements in place to do that once we're able to produce sufficiently, then we will be able to do some of these contracts.

And how this works in terms of approvals, given that you already have approval in India now? So are these approvals can be replicated or you need a WHO or some other regulatory approval?

So we will go through a 3-phase approach. One is with India approval, we'll be able to directly give the vaccines in many countries without registration or a quick supply, which is under emergency use. Second, we will be filing those just in some of the markets for a registration of the vaccine. And third is go for a WHO qualification for the vaccine, which will obviously be the third phase of what we need to do.

As there are no further questions, I would now like to hand the floor back to Mr. Ganesh Nayak for closing comments. Over to you, sir.

Thank you very much. I wish all of you are very happy Diwali, a very happy Christmas, so very happy new year and look forward to interacting with you again on the third quarter results in the month of February. Have a good evening.

Thank you. On behalf of Cadila Healthcare Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.