Zydus Lifesciences Limited (ZYDUSLIFE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Cadila Healthcare Limited Q3 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 at Cadila Healthcare Limited. Thank you, and over to you, sir.

Thank you. Good evening, ladies and gentlemen. Welcome to our post results teleconference for the quarter ended December 31, 2021. I do wish that you and your families are keeping safe and well. For today's call, we have with us Dr. Sharvil Patel, Managing Director; Mr. Nitin Parekh, Chief Financial Officer; Mr. Vishal Gor, Senior Vice President, Corporate Finance; and Alok Garg, Senior Vice President from the Managing Directors' Office. I'm sure you would have gone through the quarterly results investors' presentation, which we have posted on our website and filed with the stock exchanges. The quarter gone by was yet another quarter of robust performance for our human health formulations business in India. The branded generics portfolio delivered a strong double-digit growth during the quarter. In fact, this is the fourth consecutive quarter of strong growth for our branded formulations business in India. With the reduced need of COVID-related medicines in India during the quarter, COVID-related opportunistic portfolio recorded a decline in the revenues during the quarter, both on a sequential and on a year-on-year basis. The consumer wellness business maintained its leadership positions in 5 out of these 7 brands in their respective categories. Overall, the India geography, which contributed 41% to the consolidated revenue during the quarter posted a growth of 12% on a year-on-year basis, excluding sales of COVID-related products, generics portfolio and divested products. Contribution of the India geography in consolidated revenues has gone up to 41.8% during the April, December 2021 period from 37% during the April, December 2020 period. With that, let me quickly run you through the financial numbers for the quarter gone by. During the quarter, we posted a consolidated revenue of INR 36.55 billion, up 1% year-on-year. Excluding the COVID-related revenues, growth was 5% on a year-on-year basis. Consolidated EBITDA for the quarter was INR 7.5 billion, and the EBITDA margins were at 20.6% vis-à-vis 21.1% recorded during the corresponding quarter of the previous financial year. Despite reduction in the mesalamine revenue in the U.S. and decline in the COVID-related revenues during the quarter, various cost optimization and efficiency enhancement initiatives helped us contain the EBITDA margin decline by only 50 basis points. Consolidated PAT for the quarter stood at INR 5 billion, with a flat growth on a year-on-year basis. This is after adjusting profits from discontinued operations in Q3 FY '21. Now, let me run you through the operating highlights for the third quarter of FY '22 for each of our business lines. Starting with our human health business in the India geography, the human health formulations business recorded sales of INR 10.8 billion during Q3 FY '22. Excluding sales of COVID-related products, generics portfolio and divested products, the branded business growth was 17% on a year-on-year basis. The growth was driven by volume expansion in the existing products and key new product launches made over the last 12 months and improved realizations. We gained market share in our core therapeutic therapies of the antidiabetic, cardiovascular, gynecology and anti-infective therapeutic areas during the quarter on a year-on-year basis. During the quarter, Lipaglyn catapulted to among the top 100 brands and was ranked 92nd in the Indian pharma market. This is a jump of for 183 ranks, that is from 275 to 92 during the current quarter. On the super-specialty front, we continue to retain our leadership position in the nephrology segment. In the oncology space, we are the fastest-growing company in India. Consumer wellness business posted revenues of INR 3.8 billion, with a growth of 2% during the quarter. Lower growth in sales is largely due to 2 reasons: Firstly, due to the high base during the previous year comparable period, which was accentuated by a slowdown in rural growth; secondly, as we are implementing a continuous replenishment process internally as part of the integrated business planning tool, we have reduced inventory both internally as well as in the trade channels. This would help us operate with leaner inventory and better availability of fresh stocks with the consumers. To counter commodity inflammation, the price hike taken in key brands towards the end of Q2 FY '22, helped in protecting the gross margins during the quarter. Now, let me take you through the performance of our U.S. formulations business. The U.S. geography comprising of generics and specialty portfolio posted sales of INR 15 billion during the quarter. The business managed a flat growth, despite continued pricing pressure in the market and decline in sales of mesalamine products. We gained volumes in other existing and new products. We received 9 new product approvals, including 5 tentative approvals and launched 3 new products during the quarter. New approvals and launches for the quarter included Nelarabine injection, for which we are granted 180 days of exclusivity. This product was launched immediately upon approval. We filed 12 ANDAs during the quarter and amongst them is a first drug-device combination product on NCE-1 date. Apart from this, 2 products are single-source products and 2 others are limited competition products. We intend to prioritize products where we plan to gain volumes and also, maintain safety stock of products where we foresee some opportunities to open up in the market. At a consolidated level, the emerging markets business posted sales of INR 2.9 billion, down 1% on a year-on-year basis. Excluding the COVID-related portfolio, the business posted a growth of 7% during the quarter. Due to its presence in diverse geographies, the business managed to overcome challenges, emerging out of political and economic uncertainty in some of its markets, as these were offset by strong growth in some other markets. As shared on previous occasions, we continue to work on various efficiency enhancement initiatives to improve operating margins. To reiterate, the zero-based budgeting approach will lead to margin improvement during the current calendar year. Advanced digital and analytics tools being implemented in manufacturing operations is likely to enhance compliance and efficiency through simplifications. Both these initiatives put together are expected to improve our overall operating margins by 80 to 100 basis points. It was a priority that our employees feel safe and supported during COVID. In addition to implementing work-from-home, we provided teleconsultation and telemedicine facilities so that all our employees, irrespective of their location, could benefit. For employees attending office and at our manufacturing sites, strict protocols were followed for regular sanitization of the premises and limiting human-to-human interaction. We also provided special compensation to families of employees who unfortunately succumbed to the pandemic. I'm pleased to inform you that our group has been selected as the Best Pharma Company to Work For in the large company category for the year 2021 in the Employee Choice Awards by AmbitionBox. Our CSR initiative at Dahod backed the Gold Awarded, the CSR Times Award during the quarter. Our Zydus Medical College and Hospital, Dahod won the Gold Award in the corporate healthcare sector at the CSR Times Award. This was in recognition of the various initiatives in the healthcare support programs carried out in the rural area of Dahod. The criteria for the awards were impact, reach and sustainability. The award for participation from across industries and 138 corporates participated in this. This concludes the business review. I will now request Dr. Sharvil Patel to take you through the progress and initiatives in our innovation program. Thank you.

Thank you, Dr. Nayak, and good evening, everyone. As you know, post the receipt of our emergency use approval from the DCGI for our COVID-19 vaccine, ZyCoV-D, during the previous quarter. We have received an order from the government of India to supply 1 crore doses of the vaccine. As informed by us yesterday, we have already started the supplies of the vaccine to the government of India against their order. As you're also aware, we have entered into an agreement with Shilpa America Limited for production and supply of drug substance of ZyCoV-D, from their manufacturing facility, supply of commercial batches of drug substance from their facility shall begin from the current month, which will help us improve our demand-supply. I'm happy to inform that The Lancet has accepted our submission of interim analysis of the Phase III clinical trial results for ZyCoV-D vaccine publication, which is the largest clinical study done on Indian patients. On the global front, we entered into a manufacturing license and technology transfer agreement for the vaccine with Enzychem Lifesciences of South Korea. The partnership will lead to manufacture of over 80 million doses of the DNA vaccine in the year 2022. These doses will be supplied in South Korea and a number of countries in Latin America and Asia. We have also made good progress on the research NCE front. We have initiated a global pivotal Phase IIb/III adaptive trial, which is the EPICS-III trial of saroglitazar magnesium to evaluate its efficacy and safety in patients with primary biliary cholangitis, which is PBC, for the U.S. market. The trial will be conducted on 192 subjects over a period of 52 weeks. The results of the Phase IIa EPIC trial, which were published in the Journal of Hepatology, a strong peer-reviewed journal, has demonstrated that the molecule holds immense potential based on its safety and efficacy profile. Just to refresh your memory also, saroglitazar has also been given an orphan drug designation and a fast track designation by the U.S. FDA for the indication of PBC. From the month of October, we have also initiated enrollment for patients for the evidence in another global pivotal Phase IIb trial for saroglitazar magnesium to evaluate the efficacy and safety of the molecule in subjects with nonalcoholics' tier 2 hepatitis, which is NASH and the fibrosis indication. So 2 clinical trials are underway in the U.S., 1 for NASH and 1 for PBC. Study of saroglitazar magnesium for PTMS, which is post-transplant metabolic syndrome, the U.S. reached the targeted number of patients, 15. We have -- we shall now be approaching the U.S. FDA for a possible unmet medical need indication post the transplant NAFLD. We have also completed the study for saroglitazar magnesium with respect to hepatic impairment, we shall soon be submitting these results to the U.S. FDA. Coming to other new molecules in our NCE pipeline, we are extremely pleased that we were able to submit the new NDA -- the new drug application to the Drug Controller General of India for desidustat, which is an oral small molecule hypoxia inducible factor prolyl hydroxylase, which is the HIF-PH inhibitor for treatment of anemia in patients with chronic CKD, which is kidney disease, both on dialysis and not on dialysis. This molecule will further consolidate our leadership position in the Indian nephrology market. As per the study conducted by Lancet in 2020, 114 million people in India, another 132 million people in China, 38 million people in the United States, another 21 million in Japan, 41 million in Western Europe are estimated to be living with the chronic CKD illness. This underscores its strong global potential. And as you know, we have already partnered for this drug clinical trial in China as well. For our novel antimalarial compound, ZY19489 which is developed together with the Medicines for Malaria Venture, we have received an orphan drug designation from the U.S. FDA during the quarter. This is active drug -- this is active against all clinical strains of Plasmodium falciparum and Plasmodium vivax, including all the drug-resistant strain. The Phase I study of the molecule has demonstrated a long half-life and a potential for a single-dose cure for malaria. This molecule is a potential single-dose radical cure for malaria for the developing countries, where majority of the malaria cases and deaths are recorded. And we are very excited with the progress of this molecule, which has now entered Phase II. With respect to another molecule ZYIL1, which is a novel oral NLRP3 inflammasome inhibitor, we have received a regulatory permission to initiate Phase IIa clinical trials in patients with Cryopyrin Associated Periodic Syndrome, which is CAPS in Australia. CAPS is a rare lifelong autoinflammatory condition caused by the NLRP activated mutation and is classified under the orphan diseases. This molecule has been found to be safe and well-tolerated in our Phase I trial. And as I said, we'll enter now the Phase II clinical trial. On the biosimilars front, we have successfully completed Phase III clinical trials for 1 monoclonal antibody and have received permission from the DCGI to initiate a clinical trial for 1 more monoclonal therapy in the field of cancer during the quarter. With respect to molecules in early stage of development, we have also submitted applications with -- to the RCGM to conduct preclinical talks for 1 more biosimilar and biologics. On the novel biologics front, for our current lead NBE program, a humanized monoclonal antibody designed to downregulate the alternate complement pathway. We have completed a critical nonhuman primate PK/PD study and established a molecule as significantly good PK/PD and safety profile. With this, we shall be starting our animal tox study soon, and potentially see this as an important molecule, again in the orphan and rare diseases side. On the 505(b)(2) initiatives, as you know, in the month of October, our wholly-owned subsidiary, Sentynl Therapeutics and its licensing partner, Cyprium Therapeutics, announced positive results from an efficacy and safety analysis of data from 2 completed pivotal studies in patients with Menkes disease, treated with our C2X101, a copper histidinate product, making further progress towards the filing an initial module of the NDA of C2X was filed with the U.S. FDA during the quarter. This is a rolling submission, and we are likely to see an approval by end of this calendar year, maintains again an orphan drug indication. Coming to the pipeline of other 505(b)(2) products, we have received a clearance from the U.S. FDA for one of our new IND application, which was filed for pain management. The NDF for this product is accepted, to be filed by the end of the current -- expected to be filed by the end of the current financial year. We concluded a pre-NDA meeting with FDA for 2 more products in the area of metabolic disorder and also submitted a pre-IND request for one more product in the orphan drug space. It is our endeavor that we continue to grow our existing base in India and other markets. We efficiently add more new generic products and leverage our strong R&D infrastructure to create novel assets that will make our future ready. Thank you. And now, we move over to the Q&A session.

[Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal.

Just on the vaccine front, the order with respect to the government of India, will that get completely manufactured in fourth quarter itself? Or it will flow through in the first quarter of FY '23?

It could flow through the first quarter as well.

Okay. And secondly, on this tie-up with Enzychem Lifesciences. So what are the steps here in terms of getting the regulatory approval from those countries and then subsequent commercial manufacturing? That is first. And how will the pricing lay out?

So currently, we are going to help them with the tech transfer of the technology. They already do have capabilities to produce recombinant DNA kind of product. So we will be transferring the technology. Once they have scaled up the technology, and they will be able to use our clinical Phase III data from India and work with the Korean regulators for getting an approval is our current understanding. And they may be required to do some post-marketing data as well or a bridging study. It's still a little early to say all of this, but the part -- responsibility for moving the work ahead is from them.

But considering these milestones still, 18 million doses in 2022 looks visible, is it?

That is their current estimates that they have been able to give us.

Thank you. The next question is from the line of Neha Manpuria from Bank of America.

The first question is on the U.S. business. The flat number quarter-on-quarter, is it fair to assume that this included the seasonal uptick that we usually see because of flu in the U.S.? And just on this one, if you could highlight what the base business erosion was due to Asacol and without Asacol?

So 2 points. One is we have no seasonal business because we don't -- this year, the flu season has not been there in the U.S., and we didn't have any new business on oseltamivir, so there is no seasonal business, which was there earlier but not there this year. Also, with respect to the loss in share on mesalamine, it's on Lialda. Asacol is still without any competition in the U.S.

You'd indicated some loss in volume in Asacol. So that's stabilized, right? You're not seeing any further...

Yes. That has now stabilized because this started almost in quarter 3 of last financial year, so.

Okay. And what was the base business erosion sir, then in that case, the price pressure that you've mentioned?

So we -- I don't have it exactly right now, but the base price erosion is around a single digit right now. This is excluding Lialda. Lialda has had a higher erosion. But on the base business, it's low single digit.

Understood. And my second question, I think you made, in the opening -- in your opening remark, you made a comment about improving margins by about 80 to 100 basis points. I missed what would drive these improvements. If you could give some color on that, please?

So we have 3, 4 initiatives every year, and these are part of the programs that we run. One is something for manufacturing, which is both on the supply side as well as on the manufacturing side, where we run a program known as PRISM and SLIM. We ran a program this year -- we had run a program for zero-based budgeting for our whole India end-to-end business, and we have seen a significant savings created out of that. We are also running productivity-based initiatives across the organization. And so if you -- and 2 more programs on different quality parameters. So putting all of that together, we have been consistently delivering anywhere between INR 150 crores to INR 200 crores of savings. So that continues because the programs get extended and new programs are getting added.

Next question is from the line of Anubhav Aggarwal from Crédit Suisse.

Sir, clarity on this vaccine. So is Shilpa, the drug -- so sir, they're manufacturing, is that being used for the supplying this 10 million vaccines to the government? Or is that separate?

No, that is still not started. Shilpa is going to take their commercial batches this month, go through that audit and clear that audit. So their doses are still not available.

Okay. And you mentioned that this 10 million effectively will be supplied between the current quarter and the next quarter. So all 10 million will be done across these 2 quarters?

Yes.

And where are this bulk of this vaccine used by the government? Are they being -- getting...

This government has given us allocated centers. And as and when the supplies start and we are making sure that we have enough as a person is vaccinated, we are protecting their second and third dose. So looking at all of that, there's a whole supply chain planning done with the government and the centers designated. So one by one, we are rolling out in all of these centers. These are all across India.

But this is for the other vaccination. There's still not being used for 15 to 18 years old, adolescent?

So my current best estimate on this is that adult obviously, we are cleared. We have an approval from this year for children. Our NTAGI meeting has cleared -- has finished for the 12 to 18 also. And I believe that once we start the supplies, we would be seeing a launch in that group as well very soon.

Okay. And do you want to talk about your status of 2-dose vaccine? Is the trial over for that?

Sorry. Status of?

2-dose vaccine.

Yes. So the 2-dose vaccine enrollment is completed. Day 56 has also been completed. So we believe, by end of this month, we will have all the data to file with the regulators.

And this is the -- this is a Phase III trial, which will be done for this...

Yes, Phase III trial done from ages of 12 and above.

Okay. And just last question on the vaccine front is on the South Korean partner. Let's say, all goes well and they start supplying as well. So would you get a royalty on the sales, which is like typically...

We do have a profit share agreement with them.

And will that be standard, like what we have seen normally about high single digit or thereabout. Is there a standard number?

So I can't divulge overall, but I think it's a good profitable business model that has been agreed upon between the 2 partners. It will all depend on pricing. And depending on the pricing, you'll get to know that, right? So it's very difficult one to answer that right now.

Sure. Just one clarity on the numbers. The personnel costs, if I see it x the wellness numbers, the personnel cost declined INR 50 crores quarter-on-quarter. That's quite a substantial drop. So do we have lesser number of people here? Or the provisioning was such that it resulted in one-off decline?

So in the last 1 year plus, we have been working on multiple initiatives on productivity improvement, whether it was India business starting with zero-based budgeting. Then our manufacturing side, we're running a program called [ WISE ], which is again improving productivity. We have also rationalized our footprint in terms of manufacturing assets and all of that is leading to a reduction in people and reduction in costs as well. Beyond that, I think, if Nitin, by -- or somebody would like to add anything?

Yes, sir. Also because of our facilities of [ Issar ] and Hercon, which are now not in operation. So that manpower cost is also a reduction because of that.

And that resulted in no hit to the revenues. You could transfer everything and that result in all cost savings.

Yes.

So there are very few people now. Other people have been retrenched. Obviously, there are no revenues also from those sites and attendant costs are also not there.

Next question is from the line of Ranvir Singh from Sunidhi Securities.

Sir, on ZyCoV-D vaccine, just wanted a clarity on pricing. So we have a pricing for government. For private hospital or private suppliers, can you indicate any pricing you have in your mind?

So currently, I don't think we can give that. I think once we are able to get clearance to launch in the private market, we will immediately apprise you of the pricing. But suffice it to say that the pricing in the private market will definitely be higher than the current government pricing. But we still believe we will be more competitive than the current players.

Okay. And so initially, supply would be from your own manufacturing site or Shilpa would also be contributing also next quarter?

So it'll be our own manufacturing site, and the other side is Shilpa, which will also start contributing.

Okay. And for a global market, getting it registered in different countries, the responsibility of your partner? Or you need to have -- get approval?

Majority of the places where we are partnering the responsibilities of the partner. We will obviously supply the data -- I mean, the clinical data and also, peer-reviewed journal data, which we said we're already in the final stages of publishing in Lancet also this data. So if everything goes well, that data also will be supported.

Okay. Okay. And just the last one on desidustat, what's your progress? So we have submitted with the DCGI. Any time line when we can see it coming to the market in India?

So we are estimating a launch in April this year. So it's very imminently -- I mean, we expect everything is on track. So we should see a launch in April. And this will definitely be one of the, I would say, one of the best launches in Zydus in the current year -- I would say, in the current year.

Okay. So apart from this, any other meaningful product launches in India from biosimilar side, basically?

Yes. So last year, we had launched the Ujvira, which is KADCYLA. You would be happy to know that we have, by, I would say, this quarter, we have crossed the number of prescriptions even by the nearest competitor, which is a brand, and it has been one of the very good launches. I think the next would be scaling up. It's not a new product, but with the enhanced indication for saroglitazar, the Lipaglyn and BILYPSA should see significant momentum in the current year. And then desidustat, definitely, is -- will be a potentially large launch for this year. We also have some products where we are seeing patents of -- products going off patent. So we will be the day 1 -- we will be meeting the day 1 launches. We are also looking in an important launch in the iron area. Also, one critical vaccine, which is Varicella. So there are some important launches planned during the year, and those are some of the ones which I mentioned to you also.

Next question is from the line of Sameer Baisiwala from Morgan Stanley.

Thank you very much, and good evening, everyone. Sharvil-Pi, what's the visibility of ZyCoV-D vaccine order from the government beyond INR 1 crore?

So current, our last discussion was the government wanted us to initiate the supply once we meet a steady base of supply. They did speak to us about further opportunities to add to the vaccine. We believe that this vaccine, there is still a significantly large population of people who, in the 12 to 18 years, who are not vaccinated. So that definitely is one opportunity. And the second is people are looking -- I mean, we are already seeing those -- I mean, booster doses and other applications beyond the single 2 doses that people may have taken. So those would be potential opportunities. So currently, those are the 3 opportunities that we are seeing. The government has spoken that once we comfortably resume our supplies, then we will talk about further discussions on further business. But currently, our order is limited to INR 1 crore.

Okay. Okay. And the fact that government has reduced their vaccine budget by 1/7 for next year from INR 35,000 crores to INR 5,000 crores, if I'm not wrong. Does that mean that the opportunity size is shrinking significantly as you go into next fiscal?

I think, to some extent, definitely, there is uncertainty on what will be the opportunity size. And definitely, it would be much lower than the earlier years, because the majority of the population, at least in the other side, is vaccinated. Having said so, at the capacities that we are talking about, which is about producing close to INR 1 crore doses a month, I think there is still sufficient opportunity to at least do -- I mean, we believe, on the worst case scenario, INR 3 crore to INR 5 crore doses business, and that itself is still a significant amount of value and revenue for us. So assuming even at a small INR 2 crore to INR 3 crore or INR 3 crore to INR 5 crore doses is still very, very significant.

Okay. And Sharvil, the order that you're supplying now, INR 1 crore, is it from your new scaled-up facility or the smaller one?

So the smaller is very little, and the scaled-up facility has just started.

Okay, that's commissioned. You are supplying from the...

Yes. That was already commissioned, yes.

Okay. Excellent. And Sharvil, question on the U.S. business. What's your thought on Asacol HD competitor? When do you think -- what's your best guess, how the market can unfold over the next 3 or 4 quarters?

Did you ask about Asacol?

Yes.

So our best estimate is the -- conservative estimate is that we see competition, maybe, in the July quarter onwards. There are 2 possibilities: one is we see an early prepose-ment to April, which I -- it seems unlikely, but it's always possible. And there is also a scenario that we believe could happen where they could see nobody till the end of the current calendar year.

Okay. That's very good to hear. And for Lialda, Sharvil, how much more room is there? What's causing this pressure? Is it the incumbents competing for market share? I don't think there was a new entrant there.

Yes. So it is 1 incumbent who was competing for market share and they crashed the prices. So obviously, we had to match.

Okay. One final on the U.S. business. So keeping Asacol out, what's your outlook for fiscal '23?

So fiscal '23, I think our best estimate right now is assuming -- we believe we will be probably at par growth. So maybe just 1% or 2% or maybe, less than 5% growth for the for the FY '23. That's our current estimate. This is assuming that we don't see any onetime or big opportunities or onetime buys and all. And we have assumed a 6% to 7% price erosion to the base business so -- and assuming some competition, later part of the year on Asacol.

Okay. And you've also included Revlimid upside on this?

Partial, because Revlimid, we are still not sure what will be the pricing. So depending on that, once we launch it, we can give better flavor on that.

Next question is from the line of Prakash Agarwal from Axis Capital.

My question is on gross margins. So how do we see this gross margin shaping up for the next 12, 24 months? You have said that near-term, U.S. is flattish. India, we are on a high base of some of the COVID products. So how do we see the next 12 months? And in the past, you have said that fiscal -- end of fiscal '23, early fiscal '24, you expect complex injectables, et cetera. So if you could just help us understand the next 12, 24 months, that would be great in terms of gross margins and EBITDA margin trajectory.

So I think on the gross margin side, we would continue to see some pressure in the U.S. on price erosion, which we believe will get compensated by a better geographical mix driven out of India business and consumer wellness. As I said, the India business delivered a 17% growth in the last quarter, which is one of the highest, and we are still seeing a very strong double-digit growth in this current financial year -- coming financial year also, irrespective of remdesivir. So I think that will definitely improve. We have also seen margin improvement on our India formulations business, so that will further aid to the GC. Finally, in the GC, we will be able to, I think, from this quarter 3 and onwards, protect this, and will be in the similar range of around 62%, 63% gross contribution. Going forward, in FY '24, we see a significant -- we believe our estimates right now talk about a very big upscaling in the U.S. generics business for us because of some high-value launches that are planned for that. So our aspiration is that we cross $1 billion in revenue in the next financial year on in U.S., which is possible if everything goes well. And so that's what we are planning and working towards, which will then significantly see an improvement on margins also in the coming -- in the FY '24.

That is very helpful. And secondly, on the R&D side, how should one think about it? I mean, your run rate was much higher in the past. It seems to have come down a bit on an absolute basis. So how do you expect, given that a lot of trials happening in U.S., then you have biosimilar trials which were kicked off. So various projects are ongoing. How do we see your R&D, either in percentage of sales or absolute, if you could guide for the next 2 years?

So with our estimates, we still believe that our current guideline of around 8% of revenue will be our R&D expense is what we are still committing to. That's because many of these expenses that you see, we have already been incurring them. So we did a full Phase II for 2 indications in the U.S. in the current spend. We had done trials on biosimilars, and we continue to add more biosimilars. So I think we are looking at around an 8% average R&D spend to sales over the next 3 years.

Okay. Perfect. And lastly, on the CapEx side. So what are the plans or what are our new CapEx plans? So we did fairly well in terms of diversification post Moraiya. We had SEZ and a couple of others. So do they require to expand? Or you are looking at new sites? What is the CapEx plan for the next 2 years?

So for the next 2 years, we have 2 areas that we are investing behind when it comes to CapEx. One is we are expanding our MR vaccine for WHO prequalification to supply to the WHO markets in '23/'24, which will be a very large volume opportunity. We are expanding -- also potentially expanding for our quarter, 1 billion flu vaccine. We are the only Indian company and one of the 3 or 4 in the world where there's the control for [ the ] vaccine, so we are looking to see the expansion there. We will be having a new SEZ -- a new site for U.S. formulation, which will -- which we are benchmarking to have the -- currently, the lowest benchmark costs that we are planning for -- across all our sites. So that will definitely come up over the next 2, 2.5 years. And potentially, one more, additionally, debottlenecking for our SEZ. site. So those are the current plans on -- for the capital investment.

Next question is from the line of [ Neshat Mishra ], a retail investor.

So sir, my question is for the desidustat, now that we are getting ready for launch, if you can give a flavor of the market size we'll be competing in, in India?

So I don't have the exact market size, but we -- in terms of patients, we are almost targeting a 30%, 35% conversion of new patients and existing patients, not on dialysis and dialysis. So which is a substantial conversion that we are building towards. We believe that this molecule has a potential to be a INR 250 crore plus franchise for the company over the next 3 years. So it is a significantly large opportunity.

Right. And sir, a similar molecule in U.S., I think -- I mean, got some observations from FDA. So are we looking to kind of do some kind of partnership and launch in some years, maybe, in U.S. market as well? I understand we have a partnership in China. Are we looking for similar partnership there?

So on desidustat, our current thinking is that we have seen -- China and India definitely are one of the 2 largest markets, so that's definitely one of the potentials and obviously, which we'll allude to a lot of South Asian countries being covered. The second, in the U.S., we are looking at 1 or 2 new indications for this molecule, which are again, unmet needs and orphan also. As said, our strategy has always been to look at rare and orphan diseases where we can build something. So that is something that is in current evaluation in the U.S.. In terms of clinical programs. We have already spoken about Phase I for patients and -- patients who are on chemotherapy and have -- are anemic and this drug is potentially a good effect there, and we have started a clinical trial on that in the U.S. So there are going to be -- this is molecule, something that we're evaluating for the U.S.. More details whether we can see an active program in more than one indication or so, I can only talk about it maybe in 2 quarters from now. But definitely, we are looking at the developed markets also for desidustat.

Okay. And sir, one last question on Moraiya plant. I mean, now that we have physical inspection started, any timelines for reevaluation by the FDA or audit? Are they...

So 1 point to correct, foreign inspections have not started. The FDA has communicated in there publicly that they are not starting for inspections until February 8, and that's when they'll give the latest update. So one is they have not started. If once they start, we believe that we could see an inspection happen for Moraiya. And originally, we were expecting a Jan-Feb-March inspection. We still believe it is possible to happen in Feb or March, but again, it's still a little too early to say, but we are prepared for it, and we are awaiting and FDA has acknowledged that they will plan for an audit once the opening happens. When that would happen is still unknown and we cannot predict that.

Next question is from the line of Anubhav Agarwal from Crédit Suisse.

Yes. One question on the gross margin this quarter. If I exclude the wellness contribution, because wellness gross margins have been weak, but excluding Zydus Wellness, the gross margin seems to have declined 180 basis points quarter-on-quarter. Just trying to understand, is that weakness largely coming from any particular geographies? Or this was largely driven by raw material mix? What were the dominant factors? Because it's a very steep decline.

I think Vishal can answer. And my immediate answer would be it is because of U.S..

It's largely because of U.S. business.

And that is because of mesalamine, Lialda reduction.

Some cost inflation, but largely because of U.S. business pricing rose.

But just trying to understand, our sales are flattish. Lialda is not that profitable for us anymore, right? It's not like we are running margins equal to Asacol over there. So it's a very steep decline, almost 180 basis points on the total business so I'm...

One point I would like to correct before they add. One is Lialda is definitely not as profitable as Asacol, but definitely very profitable. So I think while the first, second point of what you said is right that it's not as profitable as Asacol, but it's still very profitable. So that is when you see an impact on that. That is one of the impacts. And overall, there have been pricing challenges in the U.S. and commodity inflation that has happened, so that's led to the gross margin fall. If I have missed anything, maybe Vishal or Nitin Parekh can add something.

No, that's all.

Okay. Second question is on the vaccine front. So how -- what are you thinking about the export market? If you want to export at a certain point of time, do you need an approval from WHO? Or do you need approval from some central agency to export? Or you can -- whenever you feel that your [ Class G ] is now fully ramped up and the common India allows, I think there's no more control on export now. When can we see ZyCoV-D starting to be put out?

So still, there is control on export. We -- you have to take permission from the government to export, what quantities and how much and when. The second part is for -- currently, the scale that we produce at, which we are hoping to achieve is INR 1 crore per month over the period of next 3, 4 months. I don't think that, that would be sufficient enough that we'll be able to export a lot. There will be enough, sufficient only for India right now. Having said so, if we have the opportunity to export today, we have already a request from many countries where they would not require a WHO prequalification and an Indian approval would be enough. And -- but we are obviously not going to export till complete our obligations in India and potentially, the private market of India.

Okay. And Anubhav, just one point of clarification, excluding Zydus Wellness numbers, on Q-on-Q basis, the reduction in gross margin is only 0.5%, excluding...

Oh, no, sir. Nitin, I exclude the other operating income, so I was excluding other operating income and then talking about gross margin difference.

Yes, we do that.

So we have those data. We can furnish the data to use. So it was 64.2% in September quarter and now, the 63.7% in December quarter. There's 0.5% reduction after we exclude Zydus Wellness numbers.

And we don't include the other operating income.

Yes. I can -- I'll get in touch. Some of -- second quarter, my sheet shows 65.5%. So I'll get in touch with you. Thank you.

Next question is from the line of Vishal Manchanda from Nirmal Bang.

Could you share an update on biosimilar filings and approvals in emerging markets?

So on the biosimilar side, we are looking forward, as I said, we have -- we did get approvals in Russia for PEG GCSF, and we have started supplies for that. Our critical big approval, we are expecting very soon, is in Latin America for at least 1 and maybe if so, 2 molecules in this next 3 months. So once that happens, we can participate in large Latin American market government contracts as well as institutional contracts. And that will be significant in terms of our expansion in the emerging markets. Besides that, we have a partnership in South Asia for 1 or 2 biosimilars of ours. We are also seeing that post approval in one of the [ Latin America ], Colombia will activate and we can see approvals coming through in Colombia, which will again add to the business that we're trying to build for. So those are the immediate plans on the emerging markets front, where we can see at least 4 biosimilars coming for approval in different markets. In India, we are still on a good track record. We believe now that we are the largest company by revenue in biologics in India and -- specific to biosimilars. And I think that traction will continue with more filings and more launches coming up.

How many biosimilars would we have in India as of now?

We have 12.

12, and do we have enough capacities to execute launches in emerging markets?

Yes. Currently, for the next 2 years to -- maybe, up to 3, we have enough capacity. As we see scale-up happening, we may need to add more capacity in after -- in the next -- for FY '26 and -- FY '25 and beyond.

Okay. And can we see an acceleration in emerging market growth on approval of these biosimilars?

Definitely, our current business plan for export relies on some of these approvals, which we have started to see. And once we see that, we can definitely see immediately starting from a very low base to starting a $30 million, $40 million revenue business.

Okay. And just one final one on vaccine. So WHO prequalification, can you give some color on what it takes to get that WHO prequalification?

So from our perspective, I think the Phase III trial, once it's reported and published, that one part of the exercise, which will be done and we said we have published with a large number of patient population. The second is our new facility will need to go through some capacity in production and continuous production and show some history of number of batches made and all of that, both in drug substance and drug product. Once we are comfortable in doing so, then we will go ahead for WHO prequalification.

The entire process can take 2 to 3 years?

No. WHO -- I mean, it leans in the vaccine side. We believe it is possible to do it in 6 months.

The Phase III trials and the vast...

The Phase III trials are...

That is that they are completed and already done?

Yes, they've already been submitted for publication in Lancet.

Next question is a follow-up from Ranvir Singh from Sunidhi Securities.

Just on biosimilars, the 12 biosimilars currently we have in India. So what would be the contribution of biosimilars in Indian business?

So currently, I think annualized is about INR 600 crores, if I'm not wrong, Vishal?

So annualized will be roughly on the -- it will be about INR 50 crores, INR 40 crores.

Sorry. It is INR 650 crores, you said? Hello? Hello?

It seems we lost the line for Dr. Sharvil Patel. I request you all to please stay connected while we reconnect him. Sir, Nitin, would you like to take the question while we reconnect him?

Yes. So am I audible now? Everybody?

Dr. Patel is now reconnected. Sir, you may proceed.

Hello?

Yes. I think I got disconnected. You -- I assume you had asked for what is the revenue on biosimilars in India. It's about INR 600 crores right now, annualized.

And what would be the export revenue of biosimilars?

I don't have that, but it's not very substantial right now because we just started off in a few countries. But I don't have it offhand with me, but it's not substantial.

Okay. And secondly, on malarial products. So we had orphan designation. So what process remains to get it rolled out and when we can expect...

As I said, it's a very good opportunity. It's a single dose, so 1 pill, and we have seen very good data currently in Phase I. So it will go through the Phase II, Phase III trial now. If we see equally good data in Phase II, then this program will definitely move into the Phase III and move forward. And because we believe this target, the resistant strains of malaria, falciparum and vivax and others, I think it will be a tremendously good opportunity. So I think all we can say right now is that it looks very promising. But as we get more clinical data completed, which the trials will be very fast because they are only single-dose trials. So once we have that data, we can share more in terms of the progress of the molecule.

Okay. So being an orphan drug, can we expect it getting the trials to [ be ] completed in the next 2 years?

Yes. And I think it is an opportunity for a tropical disease voucher also in the U.S. So we are evaluating all options.

Okay, fine. And of that 505(b)(2) pipeline, so we have some progress on product...

Sorry. Yes, on the pipeline [ is it ] you are asking? Hello?

Yes, we lost the line for the participant, sir. So we'll move on to our next question, which is from the line of Saion Mukherjee from Nomura.

Sir, a few questions on this saroglitazar. So if you can just elaborate on what kind of traction you are seeing in India? I mean, I think you mentioned INR 250 crores or so as the kind of expectations you have, but with now expanded indications, what kind of expectation you have on that product? And also, on the export market, any thoughts there?

You're talking about saroglitazar?

Yes, yes. Yes, sir.

So let me give you an overall perspective on saro. Saro, we have launched in India under 2 indications, 1 for dyslipidemia and 1 for NAFLD and NASH. The molecules are tracking very well right now. And as I said, the opportunity is very, very big. It's a new market where diagnosis and other things are important. We have started a very large venture on Fibroscan usage across all centers to be able to diagnose this effectively. So we believe that this is definitely the top -- will be in the top 5 molecules of the organization, this and desidustat. And both of these combined, definitely have the potential to be upwards of INR 600 crores, INR 500 plus crores, INR 600 crores in revenue over the next 3 to 4 years. So significant opportunities there. With respect to the developed market, I think we are -- from our current estimate, we believe we -- for PBC, we would file by calendar year '24 and potentially see a launch in early '25. That is what we are building towards. We're also interestingly working to make sure that our label claim is very good. So beyond the current label claims that are available or people are looking at, which is, obviously, improvement on -- in PBC parameters, we are also looking to see how do we improve for people who have gone through organ transplant and see how they're -- how it is affecting them, people who have been cirrhotic and how it is affecting them in subpopulations. And if we see all of that data and if we get that good quality data, this is potentially a treatment that could be best-in-class in PBC. So that's what we're aiming for. And as I said, the trials have started, which is an adaptive Phase IIb/III trial. On NASH, the trials have also started on Phase IIb. And again, we will be looking at fibrosis score improvement from -- which is an important marker beyond just NASH score improvement. So those are the critical areas that have been looked at for saro. Saro has also got an orphan designation in Europe also now. So I think potentially, we are building towards the launch for calendar year '25 for saro in U.S. in PBC and a '27 -- and the launch for NASH, potentially, in the U.S.

And sir, actually, I was also looking for other markets, other emerging markets, any potential there you see for this molecule?

There is a lot of potential, but I think we are going to focus currently on U.S. And post that, Europe, and then we will look at other countries.

Okay. And sir, this extra additional label that you mentioned about a better label on PBC, how much of an advantage it gives you over other drugs? And I mean, in terms of time line, I understand there are a couple of drugs under development. How are you in terms of time line? When do you expect this particular molecule to come vis-à-vis the other competing ones?

So we believe, currently, there is no treatment. We believe we can potentially be, on the conservative side, the third, to come to market, or potentially the second. So between the second and third in the market for this indication. The indication and the label is all -- I mean, everything depends on that. If you see an enhanced label, you can -- from our best estimate, we can almost double our estimate. So it's a question of the potential and opportunity size to get the differentiated label with a higher barrier to overcome if we are successful. And the potential is that it could become one of the key molecules to drive the PBC program. So that's what it is. But until we have that data or can confirm that, it's still very early to say that.

Okay. And sir, just on desidustat on China, what is the timeline there?

So the trials have started in China. So that's the good part. And I think we believe that the trial can also be wrapped up in the next 15 months.

Okay. So an approval in next 2 years is possible, you think?

Yes.

Okay. And sir, final one question, just clarification. You mentioned about $30 million to $40 million biosimilar business. This is based on the approvals in Latin America and other markets that you will get. So this, you are expecting for next fiscal? Or is it over a period of time you are indicating?

I think on -- to be on the safe side, we think this can be in FY '24.

FY '24. Okay.

Next question is a follow-up from Tushar Manudhane from Motilal Oswal.

Just one clarification on this. It may not -- when this tended to be converted to final? Or was it the key milestone there?

Yes, we are expecting this launch in this calendar year. For the exact date, we cannot give, but it is -- it will come up very soon for long.

Basically, there's nothing from the Cadila then pending to...

No, it has not been held up for any other reason. It is just the dated launch.

Next question is from the line of Kunal Dhamesha from Emkay Global.

So first one, on the clarification that you mentioned the growth for us for the next year would be less than 5%. So is it for the U.S. market or for overall revenue?

For U.S.

Okay. Sure. And...

And on others, we are expecting a double-digit growth.

Okay. And that would be excluding the COVID-related product base or including...

No, including. Including. Including the COVID -- I mean, including the -- not including the vaccine, but including the 12 COVID drugs.

Okay, sure. And secondly, you said that...

So actually there, the growth would be more if we exclude COVID, because COVID had a higher base in this.

Right. And we are not quantifying the COVID contribution in the first 9 months in India to stand around?

So I think, we almost -- the COVID portfolio was definitely significant in the last calendar year. And as I said, the best estimate we can definitely give you that with COVID's high base also for the coming financial, we can see a strong double-digit growth.

Sure. That's great. And in U.S., we are aspiring to achieve $1 billion top-line by FY '24 with some high-value launches. So can you name a few, one I would believe would be revlimid. But apart from that, if you can provide some color on what are the other heightened launches?

So we believe that in this year, we would be able to overcome the -- I mean, clear the Moraiya site also. And we have 2 high potential launches in the U.S. in the coming years. So if both of those things all go well, we are talking about launching for the last ANDAs in the coming year. And then we can definitely see that we can aim for crossing -- I mean achieving a $1 billion revenue milestone for the year. Exact product, I can't give you for competitive reasons.

Thank you. Next question is from the line of Sameer Baisiwala from Morgan Stanley.

Sharvil-Pi, just on products like mesalamine, just wanted to hear your thoughts and how should we think about it. It's a small product. I mean, are the rebates high in this? And how does the pricing go down? So just if you can share your thoughts on this one. It's an exclusive product, therefore, I'm asking.

Yes. So I think it's -- the good part is this is an exclusive product with very limited competition. So it's a -- it's not a very large opportunity in terms of market size. But of where we are, it's definitely a double-digit $10-plus million opportunity for us, which will continue till the exclusivity, and then obviously, as competition comes, it will fall off. So that's, I would say, to do with mesalamine.

So such products also will get competition beyond 180, you think or...

Yes. I mean we are assuming. I mean, for us to assume would be right thing to rather than assume there's no competition. But I'm assuming that there is competition. Obviously, with small volume, these products do fall off.

Okay. That's fine. And Sharvil, one more on Revlimid, let me try. I know it's not disclosed, but what would be your volume share to begin with? Just general qualitatively, is it, like, low single? Mid-single? Or high single digit? If you can just help and give -- any color would be very helpful.

I think after launch, I will give you all we can. But currently, it is not possible to do. You know the competitive landscape and the -- also, there are multiple factors related to it. So I think after launch, it'll become much more clearer.

Next question is from Anubhav Sahu from MC Research.

I heard that on the biosimilars side, you mentioned that we have -- currently the revenue annualized, the size of around INR 600 [ sales ] for India. To bottom that, I remember that it was around INR 350 and so in that context, it looks like we have scaled up really quickly. Wanted to know, understand from you, like, what is the revenue size you're looking in the biosimilar portfolio in the coming year or maybe coming 2 years, both for India and the other geographies?

So this year has been very good. Majority of the products have done exceedingly well and gained #1 rank. Launch of Ujvira has been also significant, almost crossing INR 50 crore mark in the first year, so -- and still scaling up significantly. So we are seeing here molecules which are becoming INR 80 crores to INR 100 crores very fast. So that's the first part of it, and we continue to hold a good strong market share there. Our overall biosimilars general growth plans are, on a CAGR basis, we can still see 40% to -- 40%, 50% growth continuing. And more importantly, I think in 2022, we may not have big launches now, because we already have -- we have a couple of programs in clinic, but in again, '23, we would -- and '24, we would see very big launches in the oncology space, which would significantly add to the revenue. So that's the current plan. So this definitely -- this business will definitely scale up and be one of the large INR 1,000-plus crores businesses for us. Exactly when will it happen, it'll -- I think it's best would be that if you give us a 3-year window, we would see this business doubling for sure.

Okay. Okay, that's quite helpful. And secondly, you mentioned for U.S. milestone, you're looking at this $1 billion, that is for coming fiscal, right? Fiscal '23?

FY '24.

FY '24. Okay. Okay. And which are those 2 high potential launches? Sorry I missed that part.

Sorry?

You mentioned 2 high potential launches. I missed that part.

High potential molecules, but we can't name those ones. So I think if everything falls in order, we get through a good audit with Moraiya and clearance. We have all transdermal franchise launched. We have 1 critical launch if everything goes well and we're able to do that. If everything works in well, we are closer to that $1 billion and stretching for that.

Okay. Okay, that's great. And lastly, I mean, if you can just mention, if you can share some views on your -- based on launch on this antibody-drug conjugate called trastuzumab so...

Sir, trastuzumab emtansine or Ujvira is a brand that has done extremely well in the first year of launch. By this quarter, Jan, Feb, March, we believe we would have crossed the number of patients. Majority of the number of patients who are diagnosed will be on treatment on Ujvira now, so -- where we even crossed the brand, in our view. So this is potentially one of the very good launches, wherein the first year, only we have crossed in terms of market share in terms of number of patients ahead of the brand.

And currently, this for India only, right?

This is only for India right now. This program has also been nominated for global development, and we do believe that in the next 3 months, we would have a face-to-face with the FDA. If we see a good clinical development pipe plan and agreeable with the FDA and EMA, then this program will immediately move into clinics for U.S.

As there are no further questions, I now hand the conference over to Mr. Ganesh Nayak for closing comments. Over to you, sir.

Thank you very much. I look forward to interacting with you again in the month of May for the last quarter and the annual results. Thank you very much. Good night, and have a nice weekend.

Thank you very much, members of management. Ladies and gentlemen, on behalf of Cadila Healthcare Limited, that concludes today's conference. Thank you all for joining us, and you may now disconnect your lines.