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Alkem Laboratories Ltd
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Good day, ladies and gentlemen and a very warm welcome to the Alkem Laboratories Q1 FY '23 Earnings Conference Call, hosted by Motilal Oswal Financial Services Limited. [Operator Instructions]
I now hand the conference over to Mr. Tushar Manudhane from Motilal Oswal Financial Services. Thank you, and over to you, Tushar.
Yes, thanks, Ali. Welcome to 1Q FY '23 Earnings Call of Alkem Laboratories. From the management side, we have Mr. Sandeep Singh, Managing Director; Mr. Rajesh Dubey, Chief Financial Officer; Mr. Amit Ghare, President, International Business; Mr. Yogesh Kaushal, President, Chronic Division and Amit from Investor Relations.
Over to you, Amit, for openings remarks.
Thank you, Tushar. Good evening, everyone and thank you for joining us today for Alkem Laboratories Q1 FY '23 Earnings Call. Earlier during the day, we have released our financial results and investor presentation and the theme are also posted on our website. Hope you have had a chance to look at it. To discuss the business performance and outlook going forward, we have on this call senior management team of Alkem.
Before I proceed with this call, I would like to remind everyone that this call is being recorded and the call transcript will be made available on our website as well. I would also like to add that today's discussion may include forward-looking statements and the same must be viewed in conjunction with the risk that our business faces. After the end of this call, if any of your queries remain unanswered, please feel free to get in touch with me.
With this, I would like to hand over the call to Mr. Sandeep Singh to present the key highlights of the quarter gone by and strategy going forward. Over to you, Sandeep.
Thank you, Amit. Good evening to all of you and thank you for joining us today for our quarter 1 FY '23 earnings call. I would briefly take you through the key operational and financial highlights of the quarter. Total operating revenues for the quarter declined by 5.7% year-on-year, EBITDA margin coming in at 7.9% and net profit after tax at INR 128 crores. We continue to maintain strong net cash position of INR 950 crores. Talking about our India business, which declined 6.7% year-on-year during the quarter, this was due to huge base effect of last year. Adjusted for COVID base impact, the company has delivered reasonably good performance in domestic sales, led by contribution from new product introductions, rising and price improvements.
Our CAGR over the last 3 years is 13.4% for domestic business. We continue to outperform in the domestic market and as per secondary sales data by IQVIA, the company sales remained flat year-on-year compared to a decline of 1.8% for the Indian pharma market. This out performance is driven by our leadership position in acute therapy areas like anti-infectives and gastrointestinal. Our chronic business continues to be significant to continue to -- significantly outperform the market and has been gaining market share and rankings.
Our growth rate in derma and antidiabetic during the quarter is significantly higher than the market. We have gained 4 ranks in antidiabetic and one rank in derma therapy. Now coming to our international business. U.S. business reported a sequential growth of 2.7% with year-on-year decline of 7.9%. The performance in U.S. market continues to be impacted by a higher price erosion. During the quarter, we filed 3 ANDAs with the U.S. FDA and received 4 approvals, including one tentative approval.
Apart from U.S., our other international markets delivered a year-on-year growth of 9.6% with good order and performance from the Australian market. Coming to our progress in the biosimilar segment, we have launched 3 products in domestic market last year and we are seeing very encouraging response on these products. We expect to add a few more products to our basket in the financial year, which makes our biosimilar franchisee very promising in the domestic market.
We have also signed deals in the CDMO space with couple of international companies and few Indian players. In coming years, our biosimilar franchisee will be one of the future growth engine for Alkem. Coming to regulatory inspection conducted by USFDA during the quarter. St. Louis facility was inspected in June 2022 and post the inspection, we received 3 observations. We have already replied to the USFDA with corrective and preventive plan to resolve these observations. Apart from St. Louis, our Indore facility was also inspected by FDA. This was a pre-approval inspection and we received one observation after the inspection, which we have also replied.
Our Taloja Bioequivalence centre was inspected by USFDA in April and the inspection was successfully closed without any observations. All of the manufacturing facilities supplying to the U.S. market have an EIR as on date. To conclude, we have started the year with market beating performance in domestic markets and we continue to outperform the market in our domestic franchisee. Our margin for the quarter was impacted by headwinds from spiking material cost, higher marketing expense and distribution expense and the price erosion in U.S. We would continue to drive operation efficiency through productivity improvements and various streams of cost optimization that we are running in the company.
Thank you very much. With this, I would like to open the floor for question-and-answer. Thank you.
[Operator Instructions] The first question is from the line of Kunal Dhamesha from Macquarie Capital.
First one on the U.S., how many products are we planning to launch in the U.S. for FY '23? And any meaningful product we should be aware of for FY '23, '24?
We are expecting to launch about between 8 to 10 products, probably 10 during the fiscal year. And meaningful, we don't want to take a shot right now in terms of answering that question, but there are some shared exclusivities that we've already launched and we are looking forward to a few others as well. Time will tell how successful we are in those.
Sure. And second question is on the other expenses, what is driving the other expenses on sequential basis? I think it's up by about INR 100 crores?
You are asking from sequential quarter?
Yes, yes, sequential perspective, yes.
Our other expense is around 23% to 24% and this time, it is higher. And in fact, it is somewhere close to 29%...
That are driving it, sir.
And mainly it is on account of some additional marketing expenditure, some additional traveling expenditure because of normalization. Sales and distribution expense also, it was on higher side, particularly for our export rate. And then we have some ForEx loss, which also has gone in.
Can you quantify the -- maybe the kind of one-offs like ForEx loss and maybe higher freight expenses, which might not occur for the coming quarters?
So around INR 50 crores is ForEx loss all put together conversion and all, I think that we can turn this one-off. And then on expense front, somewhere around INR 20 crores, INR 25 crores is the kind of additional in this quarter.
Sure. And if I may just squeeze in one more, this is for the India business. In terms of return on capital, how does trade generics play against the branded generic please?
So on -- we have decent ROCE on trade generic and obviously...
Branded is better, anything specific we'll not -- I mean we can't give a number, but branded generic our scale is better in ROCE versus general.
Okay. And what proportion of trade generic revenue would be like insource versus outsource, if you can share that?
A lot of them is outsourced what we do, yes.
Okay. So majority is outsourced?
Yes, that's true.
[Operator Instructions] The next question is from Kunal Randeria from Edelweiss.
Sandeep, you did mention that you are investing in biosimilars and that's going to be one of your growth engine going forward. So maybe just couple of questions around that. So if you can share the kind of products that you're targeting, has the investments started in hitting the P&L already? And when do you expect to have, let's say, 6 to 8 products starting to contribute meaningfully?
Yes. So your question is, is that expense hitting the P&L?
Yes, Sandeep, it's matching 2 or 3 questions around that, so yes, one of it was this.
Actually one by one. So I think Mr. Dubey is in a better position, but yes, we have already completely expensed out R&D from the very beginning. So it's hitting our P&L, obviously and it's hitting it for the last many years, not for the first time. So yes, revenues have just started, as I mentioned, very recently. And as I mentioned in my opening commentary, we have launched 3 products. Now when you say meaningful, I think meaningful is very subjective. But if your question is like when you have 6 products, I think by end of the year, we'll have 6 products in India. But for it to really contribute, it's going to take 3 to 4 years.
Sure. So in 3 to 4 years maybe you can expect sort of 5%, 6% -- 5%, 7% of your top line or something coming from biosimilars?
What -- let me do my math, 5%, 10% will be how much, it will be INR 500 crores. Yes, maybe 1 or 2 years in there, we can't really be -- until we don't launch something in regulated markets, we're not sure whether it can go that high. 2026 is something I think we'll see an inflection if we manage to do things well, it's possible.
Sure, sure. And in this quarter, so I'll obviously -- your impact at a high base of last year, but considering that 7% year-on-year decline in India revenues, would it be fair to assume that all your verticals declined and branded, acute, branded chronics or even the [indiscernible] is declined or did 1 or 2 really actually grow over last year?
But chronic business clearly had a very healthy double-digit growth, let's say, Yogesh, you could take this question.
No, it's not all verticals acute while all was flat, but I would say that it's high base, even a flat was a reasonably good performance. Generally yes, because of demand, there is little muted growth in generic or negative growth, but chronic sustained a growth of 20% plus. So all 3 verticals have different growth levels. Overall, we could just manage slightly negative as we stated in opening remarks.
Sure. And if I can just squeeze in one more on generic. Sandeep, a lot of your peers have now started to enter into this space. So I'm just wondering, if you can sort of maintain the tempo of your business going ahead? And what would give you the confidence that you can do it with so much -- so many digital entry?
That's a good question. See, we are one of the leaders not just in terms of sales, but we are the pioneers it's guided very early. The relationship we enjoy with the stock eternity is kind of one parallel. So it's -- I think trade generics is also kind of a misnomer because they are brands actually, it's not sold to the doctor's prescription, but they do have a very good brand recall with lot of customers and stockist and retailers. So we enjoy that. So lot of big companies are welcome, but this is a business which is very different from what prescription business is. So I think they'll take -- they'll have their own learning curve. We have a very strong equity and I think we'll outperform. We are very confident about it.
The next question is from the line of Saion Mukherjee from Nomura.
Sir, can you take us through the -- how the gross margin is shaping up? We have a low gross margin this quarter. If you can give some more color, any specific raw material that you're facing pressure? And how are the raw material prices trending? And therefore, how should we think about gross margins going forward?
Yes, Saion, Rajesh here, we can see our gross margin from 60% coming down to 57.5%. Basically, yes, you rightly mentioned also, material cost it has impacted. So impact of material cost is around 2.5%. Obviously, expensive raw material we purchased and it's consumed in this period. So that is one of the reason. Second, you asked how raw material prices now is behaving. So yes, it has started softening. But still I think it has not come back to its original position. So it is in between kind of. But definitely, going forward, we'll start getting benefit of this raw material cost.
Of course, it is going to soften going forward. Second, as we discussed in U.S., price deflation, that is another reason. And that also impacted us somewhere close to 2%. And -- but that is offsetted by favorable mix. So we got better business risk, so that has taken care. And that's the reason 2.5% difference we have.
And just to add to that, you wanted some on specifics, [indiscernible] have been more impacted on price rise and we are the #1 company as you know. So therefore, we were kind of impacted by that, so then continues to be one of the most impacted raw material.
Okay. Sir, this is due to the [ 10 G ] prices? And how are they trending?
They're trending very high, it's historically, I think lifetime high I think, in my memory.
40.
And is it possible to quantify like how much of the impact is? I'm just wondering this raw material, which is used to make these storage, how much in terms of rupees, crore, if you can give where we are versus where we were?
We don't have it right now, but Amit will get back, he will -- he can share with anybody you want.
Okay. And any guidance you can give on gross margin going forward?
I think we have already guided, our gross margin to 59% and we remain with that for the year.
59% for the full year? Okay. And what about EBITDA margins that you had talked about 18% in the previous call. This quarter, it has been very low. And also if you can give some color on other expenses, again, it's on a very high side. How should we think about that as well?
Yes, so Saion, I think we last time we spoke about -- yes, you're right about 18% EBITDA, but the kind of 2 things, which are little bit new this quarter, which we have to see how it goes. One is we have close to INR 48 crores to be precise of currency impact, which we were not very sure last time, so this is out of the glue slightly. And then U.S. price erosion is also slightly more than what we were anticipating. So looks like we could be 100 to 150 basis points lesser than 18% what we thought we will be doing. And Mr. Dubey, second part of the answer maybe...
So other expenses, I think I've already covered that and in other expenses particularly this quarter, there are few expenditure were preponed, it has happened, mainly marketing expense. Then as I said, traveling expense is on higher side, selling and distribution, mainly freight expenses is on higher side and ForEx loss is one-off, which Managing Director just now mentioned of somewhere close to INR 48 crores. So of course, 28.9% other expenses is abnormally on a side. Traditionally, we have other expenses in the range of 23% to 24%. And by year-end, we'll be somewhere closer to that.
So '23, '24 by the end of the year, you're saying? Okay.
Yes, yes.
The next question is from the line of Yash Tanna from ithought Financial Portfolio Management.
Am I audible?
Yes, sir, we can hear you.
Yes. So sir, I want to -- your thought and I was just looking at this one line item called sale of services in the revenue. So that has increased from about INR 7 crores in FY '20 to INR 17 crores in FY '21 and it's around INR 58 crores in FY '22. So what is that exactly pertaining to? And how do you...
What did you say sale of position, can you please repeat? We didn't get it.
So I was saying at this line item, sale of services in revenue, that has gone up from INR 7 crores in FY '20 to INR 58 crores in FY '22.
That is CDMO, that is contract services rate for by, yes.
So that has end up pretty well and so I was just curious to know, could it be like INR 100 crores to INR 200 crores kind of a line item going forward? So has that scaled up pretty to a very small of a portion of revenue scaled up pretty well.
Right. So what you want to hear, sir. I mean, yes, we want to ramp it up, but we really don't know I mean whether it can be done in the next one or 2 years.
Okay. Got it.
That kind of seeing how the business ramps up.
Next question is from the line of Nithya Balasubramanian from Bernstein.
I just have one question on trade generics. Is there any update at all or any more visibility you have on the trade margin gap that the government keeps talking about time and again?
Sorry, what exactly is the question?
So is there any update? Have you heard anything new from the government on trade margin gap? Any plans of implementing it? Any time line, anything you might have picked up in recent times.
No we have pictured everything which everyone picks up on the media news till sharing it. We don't know.
Does that concern you? Is that a real set -- how do you think about it?
So I think, see, it does not concern us too much. Of course, it will be a disruption because those rules would apply to everyone, so now we're going to see advantage and disadvantage. And we being leaders in it will continue to grow and we will grow market share. I think the new players would be severely more impacted. And so it doesn't worry me too much. And anyway, we don't worry about things not in our hand. We have a large portion of prescription business, maybe we have above there as well. So I think we are fine.
The next question is from the line of Neha Manpuria from Bank of America.
Sandeep, if I were to look at your cost numbers in the quarter, there's been an increase in employee cost and in your SG&A even adjusting for all the one-offs, I think which you sort of mentioned is because of sales and promotion. Now if I were to look at the last -- the data that is available for Alkem, our margins have been in the 15% to 17% range and we've been trying to sort of improve it to 18% plus for some time now. But do you think, given the competitive scenario in India and the investment that the business requires, incrementally it's getting difficult for us to improve margins. What gives you confidence in the margin guidance that we are giving for 18-plus percent next year?
I think this year is a anomaly. So this year, of course, we've not hit that. But going forward, we will because we understand the cost structure what we need to care of and we are looking at the expenses very carefully. On international business side, we also have very clear understanding of where we need to cut cost and that's going to take some time. So next year, we think we could implement it.
Also, please understand the chronic business continues to grow very well. Operating leverage will really kick in. We have seen the growth we have in anti-diabetes and things like that. So ultimately, the compounding, this operating leverage of chronic will help domestic business get far more profitable because productivity is very less in chronic and now you are saying growth in the last few months very well.
So we think we can address this in the long term, for sure.
Sandeep, just to follow up on that. Based on the investment that we have on our sales force currently, do you think that's enough to meet the growth that we have forecasted for the next, let's say, 1 or 2 years? Or do you see the need for additional investment in our field force? And similarly, in the sales and promotion cost, I know some amount of it is linked to the sales momentum, but do you see a need for incremental investment in the India business as we go ahead?
No, I think, see, this quarter itself, we have added 300 people compared to last year. So I think we have -- I will not say let's say that we are a bit saturation, but we have added 3,000 people in the last 3 years if I'm correct. So I think we have already kind of maxed out. We don't really want to add too many people because we also realize, that if we can grow only by just adding people that's kind of something not to be proud of.
So I don't see -- to answer you very like clearly, I don't see that we need to add too many people in the next 2 to 3 years to outperform the market. We have been ahead of the curve, we have been aggressive. And I think now is the time to make them productive and kind of see the business without adding too many people.
Similarly in SG&A, I think it will not grow in line with sales. It will grow much lesser than sales. So we -- I feel very confident that profit will go up.
Understood. So from a 2-year perspective, we should see margins improve to the 20% level that we've spoken of in the past?
See, whether '20 or '19 is, I think, something I'll refrain from. But certainly, let's say, you will see it like above what we guided last time of 18%, it should be more than that for sure. This year anomaly kind of lot of reasons.
The next question is from the line of [ Subramanian K ] from Alpha Invesco.
Sir, you have mentioned about 2 deals of CDMO. So can you make us understand for which therapy segment and what are the products you are focusing?
Yes, so these are a lot of things confidential, so I'll not disclose any geographies or in the company name. So these are for clinical trials. So they are in early stage for clinical trial supply. They are in the -- they could be in the chronic space and what 3 areas and all that stuff is -- it could be onco, it could be osteo.
Yes. Okay. Okay, okay. So what kind of competition is there in that -- like in the Indian space for this serum or so like you, you might have spent a lot for this for marketing. So how long can we expect to...
No, we have spent nothing in marketing, sir, this is -- it's not a marketing game. It's a service industry. You don't require a lot of marketing in CDMO, sir.
Okay, okay. Okay, sir. My other question is on this dermatology. So for this quarter we had a solid double-digit growth. So moving forward, what is the strategy to scale-up the revenue in dermatology because I could see the ranking is kind of not as same as in the other segments. So do you have any particular strategy in dermatology?
See, as we do, I mean, one is that we are consolidating our current brands, there are like antifungals, atihistamines, these are something which we are at a very nascent stage. So lot need to be done there. Plus, we are also looking at strengthening our cosmetic portfolio there, particularly face creams and all your sun screen lotion, so these are some very high volume and high used products. We are still very small there.
So one is currently, there are multiple -- some of the therapies where we are reasonably -- we have a good presence and some particularly in cost otology, we were not so big and there we are exploring. So I think these 2 put together, we see reasonably good growth in next 2 to 3 years' time. And beyond that, we look at some of the maps, which are being used in dermatology, we just short listed. So we'll see how we progress there.
But currently, for next 2 to 3 years, we are very clear and there are lot of innovations which can be done in dermatology, we should be working on those directions as well.
The next question is from the line of Sumit Gupta from Motilal Oswal.
Sir, my question is on the U.S. business. So first question is the, U.S. sales has been stable despite price erosion. So any specific reason to highlight on this aspect? And second question is U.S. sales growth, what is the growth in the constant currency basis?
So the first question is [indiscernible] compared to last year, year-on-year. We've not grown and we are not steady. Sequentially, we've grown. The price erosion has been one of the factors which negatively affected, volume has been steady. And of course, new products contributed positively, but we could not offset the loss in price essentially. What was your second question, I'm sorry?
Okay, sir. Sir, sales growth in the constant currency basis?
Sales -- this is all constant -- so what I reported was in dollar terms. So in rupee terms, obviously, you've seen what the whether we announced.
Okay. Okay. And sir, the stable part I was like looking about the sequential only, so that's what.
Oh, you were looking at sequential, okay? So sequential constant currency basis, we are probably flat.
Okay, sir. And sir, and overall investment in Biosimilar, which is expected in FY '23, '24?
'23, '24 next year. Okay. It's within the 6%, right, overall?
Yes, overall R&D, including Biosimilars and small molecules is 6%. You want to know what do you want to know, sir?
Sir, regarding like the overall investment in the biosimilars business, so how -- what kind of investment can we see in the numbers also in the value terms?
Yes, specifically, we can't -- I mean, I'm not sure they can answer. But I can tell you, yes, Biosimilars is less than to be going up compared to this year. But overall, we'll manage in the guidance we have given of 6% R&D of revenue, we'll not be spending more than that.
The next question is from the line of Saion Mukherjee from Nomura.
On the U.S., you, I think you talked about possible growth this year over last year. But with the situation now, do you still think you can deliver growth in the U.S. this year?
Yes, Saion, we've just done one quarter, we have 3 more quarters. So right now, the overall guidance for the year that we had given, at least for now we are sticking to it. And obviously, we are looking forward to delivering that as well.
And I mean, is it more dependent on, of course, on new product, right? So when -- will we see that momentum of growth from next quarter onwards? Or it will be more sort of second half?
No, it will have to be a combination of everything, Saion, to be honest. So we are not going to deliver growth if there is a 20% price deflation, as you very well will understand. So to that extent, if we have to achieve our overall growth, it will have to come from all the 3 pre-such, normal sort of a price deflation, unit growth and, of course, from new products.
Right. And what was the level of price erosion this quarter? And how does that compare to last quarter?
This quarter was 20% in dollar terms. Last quarter, I think it was around 14%, if I remember. I'm not very sure of the last quarter number, but this quarter, it was 20%.
Amit, 20% is a very high number, you're talking about year-on-year 20% decline in prices?
I'm talking year-on-year, 20% price decline for our portfolio, no, no net of new product, price decline on legacy business on the existing business, yes. Yes, we did suffer, Saion, using price deflation this quarter.
And is that very product-specific? Or is it spread across your portfolio? Because this number looks very high.
This is across portfolio, obviously, it is not product specific.
Okay. And how do you think sequentially the pricing momentum should be in your view based on what you're seeing at this point in the market?
Right. We were -- like I said, we were expecting that the price deflation will reduce. But sequentially from 14 we have gone to 20. So over those 2 quarters, so it's gone the other way around than what we had expected. Now obviously, we will hope and expect that it doesn't go beyond this number and in fact, start coming to normal number.
Okay. And a general question on margin. You were talking about margins sort of moving higher in due course. So the question is that, what is that dependent on in the sense that do you have leverage in your India business? Or is this going to depend more on, let's say, the U.S. business stabilizing and growth coming there? And if you compare the margin for the India business, let's say, pre-COVID till now, how is that comparison?
Okay. So Saion, increase in margin is dependent on both, one is domestic leverage, obviously, as we mentioned during the previous question. And even our international business, we have identified some cost rationalization, which could be pretty meaningful, but we are still evaluating that. So we can't really kind of give you a ready guidance on that. But we understand that everybody is restructuring their portfolio, we also know what kind of portfolio we could restructure in international business and that could lead to some cost optimization in terms of some a lot got with manufacturing plant, cost optimization as well late with that.
So we have got some levers there. Now they will take like a year to implement because to do those stuff, it's not that easy. So we have those levers and we are fully committed to increasing margins, not just as a lip service. So we feel very confident that if you forget this year and you take like a bio horizon, we would be increasing your margins.
And on the second question Mr. Dubey, COVID margin compared to now on the domestic side, I think, yes.
Yes, so as far as pre-COVID margin is concerned, so more or less normalization is coming. So this quarter was exception because some of the expenditure, it is preponed. So I think going forward, it will get normalized, that's the reason why I said our other expense, it is going to remain between 23.5% to 24% because our major expenditure that is on marketing, it lies over there and as well as we've started getting some kind of softness in material cost also.
Right. And just, Sandeep, if I can, based on the comment you made about cost initiatives on the international business. So even if you're looking at 18% margin, let's say, when things stabilize, typically the India business margins would be in mid to high 20s, right? So which implies that your -- the international business margins would still be very low, obviously now very low. So how should we think about the steady-state margin for the international business?
I think see international -- the price erosion that you have seen is obviously like very high this quarter. So I think it also lot of depends on how the U.S. market kind of responds in the future. If this kind of erosion remains then obviously, the -- even whether it has margins will be under question. So I'll refrain from really saying that, let's see how the U.S. market functions. Otherwise, any kind of guess on what a profit margin might be just a guess. This quarter was already tough, let's see how it sustains.
The next question is from the line of Aditya Khemka from InCred Portfolio Managers.
Sandeep, sir, from a marketing and sales driven organization to manufacturing and now CDMO and biosimilars, the journey in the last 4, 5 for Alkem has been quite revolutionary in that sense. Can you talk us through -- so these 2 businesses, which is your India business, which is more branding, selling marketing. And then the second part of your business, which is manufacturing, contract research, contract development, capital intensity being high, which direction is Alkem tilting to? And why are we diversifying away from our core competency of marketing, branding and selling?
Right. Great. Aditya, so first of all, let me start with the latter part. We are not tilting or diversifying, I mean we are diversifying, but we are not letting off of core. I would put the question to you. Do you think we are letting for core? Do you see us domestic sales lack, I would say no.
No, that's not what I meant, yes.
No, what I meant is we have not let go for core, Aditya, point number one, this time, that is kind of core and it's critical. So that remains and the aggression cannot at all think of letting go off from the ball on domestic market. Now, see, CDMO is something which we discussed, but they are still very small and we have not put any large CapEx or any marketing or anything of that sort. So that is kind of something which is getting built up, I would not say the whole company is geared towards that.
Now Aditya, you understand, obviously, that the world, including India is changing, biotech and biosimilars will be an important part. So you'll have to ultimately kind of take part in that. So biosimilars, again, is very -- is going to get core of what we are doing in the next few years, yes. And similarly, so you can't win those markets like biosimilars play without manufacturing of biotech. And we have not been like too aggressive on the test like we have not like put like -- we have just put INR 200 crores on the plant of biotech. And we are like measuring it, we are not going all hog in, not like if I can say we are measuring the depth of water with one leg at a time, not at both legs.
So just to reiterate, we're not getting go of a core at all in India.
Sure, sure. No, that's not what I meant, I just wanted to understand the diversification perspective, which is well answered by you, thank you.
More than specification, this has also growth opportunities, I mean, gasification for densification, I'm not a believer of that, but it's also a matter of growth because you see that U.S. market is challenging a small molecule, we need to find other things like biosimilars and we are a very simple company compared to lot of other companies, lot of other companies are doing injectable in relation, everything else, but we are not, we are testing oral solids and now we are saying we are doing biosimilars. So I would say one of the most focused companies now.
Fair enough, Sandeep. Sandeep, you -- I joined the call little late. Did you talk about what kind of price increases on a weighted average basis has been taken so far? And how much of the older price inventory was sold in 1Q and how much of the newer price inventory has been sold in 1Q?
Mr. Dubey?
Yes, as you know, for scheduled, we had opportunity to go with 10.73%, that's wholesale pricing that released this time. I think in most of the cases, we have gone for it. And you rightly mentioned, actually, the impact of that, it has not come fully in this quarter because we had some extra inventory of a real manufacturer or gear batches. So once it is consumed and then we are going to have -- and obviously, in quarter 2, we are going to have entire benefit of price increase. As far as launch schedule is concerned, so wherever depending on our competitor size and all these which is subject to that, but wherever opportunity is there, we have taken increase there as well.
Right, right. I understood. On the raw material side, as we understand from what we are noticing in some of the commodity prices, it seems that there is a bit of cool off, Brent has come down and other commodity prices have also seem to be cooling off. So how much high-priced inventory, when do you agree with the assessment that spot raw material prices from China, et cetera, are lower than what they were, let's say, 3 months back. And if that assessment is correct, how much of the older higher price inventory do we have of raw material? And when do we start seeing the reflection of the newer relatively lower-prices inventory getting consumed in the P&L?
Yes, you are very right, actually prices of API started softening and as far as high-priced raw material consumption is concerned, I think more or less substantial part we have consumed and we'll start getting little bit softer raw material price consumption going forward. So if I have to quantify to certain extent, I think somewhere close to 80%, 85% of extensive LPI is already consumed so far.
Right. One question for Amit. Amit, one of your largest competitors in the U.S. market spoke about product rationalization, letting go of loss-making products and reducing the product offering to the customers because those products are just not generating profits. And you said 20% price erosion on a portfolio level, whereas in the India business, you have been able to take price increases.
I'm sure raw material costs of both businesses have gone up a like. So in that context, how is the Alkem portfolio going to survive given that the companies that I'm talking about are in multiples of the size of your business in the U.S. and yet they are facing the problem of cash flow in that geography and rationalizing portfolio. So how do you look at the outlook of your portfolio in the U.S.? And how do you sort of differentiate yourself versus those larger players?
Differentiation, I won't give answer, Aditya, so the generic business, commodity market, of course, we have our USPs and our strategies. But at the end of the day, competition has the same product, there's very little differentiation per se. Going back to the original question, we do this exercise always. If there are products within our portfolio, which we think are not generating return or investment or margin for that matter, we certainly discontinue or look at reducing them. And in many cases when like we just discussed, there is a 20% price deflation, there will be some products which will start getting into the negative area and we will let go of those businesses. So really, sometimes we get forced out of the market also.
Of course, we can keep that business by making losses, but that's not our philosophy. We don't do that. We simply get out of those products. So we do it actively, sometimes we are bode now as well.
No, that's a fair point, I mean if these are not making money why do the business? So in that context then, in terms of capacity, would you need additional capacity for your small molecule business in the U.S. for the coming 3 years?
No, I think sometime back, we had very clearly guided that we have built the capacity for the next 5 to 7 years. And now with the way little growth happening on the volume terms, we think that 5 to 7 year still remains the same despite 2 years hence.
Right, right. One last question and I think maybe Sandeep can answer. Sir, we are seeing a lot of merger and acquisition activity, I know you get this question every con call. So in terms of deploying capital, you have options, you have an option of putting up a plant or capacity for biosimilar, CDMO, U.S. generics and you have the other option of buying some brands. I know the pricing may not be as per what one would ideally want, but at least there is a positive ROI on that business at a certain stage. So have you reassessed your threshold of considering acquisition in the Indian market? Or would you stick with your original parameters of what you consider as value of buying Indian brands and investing in India?
Yes, Aditya, I think we'll stick to it. So -- but let me kind of build on that little bit because I know from where you're coming from. So you mentioned domestic business, international CDMO, et cetera, but we don't have any CapEx planned for any of them, which is like significant for the next 2 to 3 years. So there's no question of choice among the 3 of it. Obviously -- so first thing is that. And second, see, we continue to grow our domestic business organically, which is, I think is a good thing, we continue to outperform. So I don't think we have changed the stand of acquiring something, but that doesn't never evaluate opportunities. We do look at them, but we kind of when we hear those valuation from bankers, we kind of stay out. So they are still looking at few things, if it makes sense, we'll buy. But if it does not make sense, we'll never do it for vanity. We don't want to be good in the long term.
I really like discipline in the organization, that has been one of your highlights and then really appreciate you sticking with it.
[Operator Instructions] The next question is from the line of Nikhil Mathur from HDFC Mutual Fund.
My question is on the profitability of the domestic business from a slightly longer-term horizon. I'm not looking for answers -- numbers here, I very well understand that there could be some gross margin reversal in the near term because raw material prices cooling. But if I look at the OpEx below gross profit, I can watch it enough reinforce of more than 10,000 down, if I remember correctly from previous con calls, 25% of a churn that the company used to indicate.
With that kind of a churn, is it possible to increase the PCPM structure from where the company is today? I am also aware that chronic is something we test in that with the PCPM end, but at the same time, there would be some function that's happening on the group side. So I'm not too confident or to sure whether the PCPM can improve from there the levels that currently are and add on top of the [indiscernible] build up that needs to be done for the next 3, 4 years. Aren't you looking at some sort of a peak OpEx and sales ratio or similar open to sales ratio going forward in the coming 3, 4 years?
I'll answer your first 2 questions actually, you ask about increase in productivity and then you ask about the OpEx, on current 10,000 field force and then how do we address that, correct? So number one is PCPM, obviously, when we intend to grow at around 10%, 11% on a productivity of around 6 lakhs, which means we are improving our productivity on acute front.
Yes, our chronic productivity is at a mid-level, it's around 3.5% to 3.7%, where we take little aggressive growth of around 23% to 24%.
So our acute therapy continue to outperform the market and thereby increasing the productivity and we intend to grow chronic by at least 2x to 2.5x of market and therefore outperforming not only the market, but increasing the productivity more than what market increases. So that is what is our productivity.
So over a period of time, productivity is bound to increase if we sustain our growth levels because we are not increasing manpower much now. We have done almost 1,000 every year for last 5 years as our MD also spoke just now that we don't intend to do much on expansion front, except for few this year, when it is more consolidation and building productivity. I believe last time we answered the same that we -- our one of the growth lever would be increasing the productivity.
Sir, but with sales force of 10,000 and more, your top performing priced assets for many other companies. So, a, the -- wouldn't we need to retain them, which would involve that you have to raise hardly and if you don't retain the top performing ones, the PCPM hit that you take because the new ones will take some time to ramp up. Why I am asking this question is why this question is more reliant from altering my view, it's because of the MR base that you operate and versus like other companies which are at half or 70% of the MR base that the company has had.
Yes, so that -- see that given challenge across industry, not specific to Alkem. So retaining team will always be issue and we have our inherent bonding with team and we have various HR initiatives where team bonding and retaining the team and we are certified as best place to work for last 3 years. So we keep on continuing to see that we -- our attrition level remains lower than the industry and thereby retaining people and we are known in the industry to be one of the best pre-master in terms of incentives and we are very highly incented driven company and that helps us retaining people. So one is providing the right culture and environment and second is how do we reward them to the best of the incentive structure in the industry, that too help us to retain people.
But yes, nevertheless, this still remains a challenge of retaining people and we are aware about this...
Yes, but very clearly, PCPM will increase. I don't know why you doubt that it has to.
Yes, and the second question...
What is your second question, sir, something, you asked R&D biosimilars. Can you repeat your question?
No, I think this answers I mean, that was just add-on question basically what my focus was on, I think this helps, clear.
The next question is from the line of Shrikant from Asian Market Securities.
My question is on domestic trade generic industry. So if you can talk about how big trade generic industry is, what has been your market share movement for the last 4, 5 years because last couple of years we have done very good business. So if you can comment on the market share? And little bit on the futuristic how we should look at the trade generic industry growth rate in India.
Yes, so a lot of questions there, I'll try to answer them. On trade generics, we cannot really say that because there is no data like you have for prescription business. But we -- I can tell you that we are either #1 or #2 in trade generics, that's point number one. So we have very close number or maybe #1. And the trade generic is really growing now much, it's outperforming the market to a large extent. It's also mentioned in some of the questions we had earlier that lot of other companies are now entering this. So I think you have got tailwinds this industry will outperform the normal pharma industry.
Okay. Anything on the market share movement?
No market share movement, I think has only increased because as I said, we are close #1, if not #1. So -- and there is no secondary data, no validated like third-party data. So I think whatever market share I tell you might be not very accurate.
Okay. Okay. And one small bookkeeping question is on, if you can provide the acute chronic and sales contribution during the quarter?
So acute is 84% and chronic is 16% to the domestic business.
The prescription business.
The prescription business, yes.
Okay. Okay. And thanks and any number for generic?
It's close to 20.
The next question is from the line of [ Vijay Karpe from Shriram Life ].
Sir, 3 questions. The first one is, what is to happen for the price provision in the U.S., that is one. Two, what kind of ROE you enjoy in the U.S. business versus the case generics and branded generics?
There's a lot of echo over there. Can you repeat your question?
Your voice is cracking.
I'll repeat my question. So the first question is, what has to happen for the price erosion in the U.S. to reduce is one? And the second question is, what kind of ROCE do you enjoy in the U.S. business versus the trade generics and branded generics? And the final question is, can you throw some light on the working capital cycle for this quarter and the inventory base as well?
First question, I didn't get on the U.S, go ahead. Price erosion, I said it was 20% for this quarter. It was actually 19% and 1% was volume reduction.
No, my question what has to happen for this price erosion to reduce?
This has to happen for price.
I can't really tell you. One of the key issues has been, of course, customer consolidation, but that's not going to change in this quarter. And the only thing I can say is that at some point of time, there will not be so many offers or people giving so many robots coming through, and therefore, that automatically will come down, some players getting out, manufacturers that is on our side and those kind of things will impact.
Mr. Dubey, other questions are for you, ROCE and...
As far as ROCE on international business is concerned, we have very -- in single digit, but definitely it is positive single digit. And we are in the process of improving ROCE. I think third question, I don't recollect what was your third question?
The working capital cycle, inventory days.
Yes, so working capital cycle for this quarter, it is 110 days. I'm not talking U.S., I'm talking on company level, so 110 days.Is it okay?
The next question is from the line of Prashant Nair from AMBIT Capital.
Just a couple of clarifications because I got disconnected in between. So on your margin guidance, if you could just clarify both on the gross and the EBITDA margin line. Did you mention that on EBITDA margin you expect to be north of 18% from next fiscal, but this fiscal you could be a bit short of that number. Is that what you indicated?
Yes, absolutely.
Right. And on the gross margin line as well, if you could just give us a general sense of how margins could progress over the next 2 to 3, that will be useful.
We have given guidelines of 59% on gross margin front. And yes, obviously, first quarter, it is not there. Going forward, we'll try to improve, but I think in immediate future, we are going to remain somewhere 59%, 60% kind of gross margin.
Okay. And just one last question from me. Can you quantify the expenses you're incurring on the biosimilar dialogic side currently are in the -- any other expenses all put together, what will be underpinned?
Yes, so in biosimilars, we are not -- we don't have a huge pipeline for specific markets and in the revived markets, we have huge city cost. So we just have one product which we are doing currently for global markets, so the costs are not very high. So R&D and OpEx would be close to INR 150 crores, INR 150 for OpEx that is plant and everything, all other administrative costs and pure R&D would be close to INR 100 crores. So it's not significant.
Okay. Cumulatively about INR 250 is what you're saying?
You can say that, yes, yes.
We have the last question in queue from the line of Kunal Dhamesha from Macquarie Capital.
Just couple of basic questions. One, what would be your working capital cycle for the branded India business, just a ballpark number?
So for ethical business, our working capital days, yes, it will be somewhere close to 55, 50.
And would it be fair to say that the trade generic would be slightly higher than this?
Yes.
Okay, okay. And secondly, out of our INR 3,400 crore gross lock, can you just give me a ballpark number of what would be the gross lock which is targeting the U.S. market or...
Actually, I think readily, I'm not having this figure, but generally, we never share our fixed asset utilization on respective business. But Amit will be talking to you separately and try to provide some kind of...
Amit can really add.
Yes, Amit can really add.
That was the last question. I now hand the conference over to the management for their closing comments.
Thank you, everyone, for joining the call. If any of your questions are unanswered, you can get in touch with. Thank you and have a great weekend.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, on behalf of Motilal Oswal Financial Services Limited, that concludes this conference call for today. Thank you for joining us and you may now disconnect your line.