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Alembic Pharmaceuticals Ltd
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Ladies and gentlemen, good day, and welcome to the Alembic Pharmaceuticals Limited Q3 FY '19 Earnings Conference Call. We have with us on the call today Mr. Pranav Amin, Managing Director; Mr. R.K. Baheti, Director of Finance and CFO; Mr. Mitanshu Shah, Head Finance; Mr. Jesal Shah, Head Strategy; and Mr. Ajay Kumar Desai, Senior Vice President Finance. [Operator Instructions] Please note, this conference is being recorded.I now hand the conference over to Mr. R.K. Baheti. Thank you, and over to you, sir.
Thank you very much. Good evening, everyone. Thank you all for joining the third quarter returns conference call. Most of you went on to the release, so I will quickly take you through the numbers.During the quarter, our total revenue grew by 21% to INR 1,018 crores. EBITDA of INR 245 crores is 24% of sales and up by 31% over the previous corresponding quarter. Pre-R&D EBITDA is about 34% of sales, and net profit after tax is up by 25% to INR 162 crores.During the 9-month period, the total revenue grew by 32% to INR 3,000 crores. EBITDA at INR 700 crores is 23% of sales and up by 47% over previous corresponding quarter -- I'm sorry, previous corresponding 9 months period. Pre-R&D EBITDA is 25% of sales. The net profit after tax is up by 47% to INR 467 crores.EPS for the quarter is INR 9.01 per share, which is up from INR 6.93 in the previous year. For this year-to-date, that is for the 9-month period, not M&As, EPS stand at INR 22.42 per share compared to INR 16.91 per share from the previous year.CapEx for the quarter is INR 162 crores. Cumulative, for the year, it's INR 504 crores. Additionally, we invested INR 55 crores in Aleor Dermaceuticals JV. For the year -- JV for the year is INR 165 crores.The gross borrowings stood at INR 1,131 crores. The company had INR 260 crores cash on hand end of 31st of December. The Debt/Equity ratio, considering the gross borrowing, is 0.44, and if you take it on net basis, it is 0.36.I will now hand over the discussion to Pranav for the international business.
Thank you, Mr. Baheti. It was another good quarter for the international generics business. We're benefited by some short-term supply opportunities for a few products in the U.S. market.Coming to operations and compliance, our API plant was audited by the U.S. FDA during the quarter and cleared without any further increase. The formulation plant at Panelav was also audited by the FDA with full observations, was subsequently cleared, has NAI, no action indicated. Our total R&D spend for the quarter was INR 112 crores, which is roughly 11% of sales.We filed 4 ANDAs, 3 of them through Aleor, and one DMF during the quarter. The company has also received 7 ANDA approvals during the quarter.The Aleor JV received its first ANDA approval during the quarter. We now cumulatively have 83 ANDA approvals, including 13 tentative approvals. The company launched 3 new products in the U.S. during the quarter.The international formulations business grew by 44% to INR 448 crores for the quarter. The U.S. generics business grew by 42% to INR 308 crores for the quarter. And the API business grew by 14% to INR 205 crores in the quarter.Coming to the India business. The India formulation business grew by 4% to INR 365 crores for the quarter. And for the YTD period, it's at 11%.As can be seen from our presentation, our growth, as per ORG-IMS, is 15% for the quarter, was 11% for the representative sector. The primary sales is sluggish, probably due to the secondary inventory adjustment.Now I would open the floor for Q&A.
[Operator Instructions] We have the first question from the line of [indiscernible] from [ Sample Securities ].
Yes. Can you please give me the future, what is your focus in this FY '20?
We haven't given any guidance, so it's tough for us to say what our future is. As a company, the 2 big markets that we're focused on are the India business and the U.S. business or international. We also do business in Europe, Australia. We're investing quite a bit on R&D, so you see a lot of growth coming from the U.S. And India, we hope to grow at market or above.
So considering the very fluctuating market in the U.S., so what do you think will be the product pipeline and how will it -- what will be the nature of the product pipeline in the U.S. market?
So product pipeline, as of now, the only products we have are the oral solid dosage with periderm approval and ophthalmic approval. But barring that, we have oral solid dosage. In terms of the future, we are filing injectables on both the -- for Aleor JV and ophthalmic products.
We have next question from the line of Prakash Agarwal from Axis Capital.
Yes. Two quick questions. First one, you mentioned about these short-term supply opportunities. So is this got to do with the sartans issues? Or it is other than the sartans?
No, so last quarter is one where we saw a big ramp-up due to sartan. This is not -- sartan is a bunch of products with existing oral disruptions in the market and, luckily, with the acquisitions, we could capture some of this.
And when you say short term, it's a couple of quarters or it's longer than that?
No, I think it was just a one time back in the quarter. Will it continue? I don't know because I don't have visibility on that. See, one of our strategies, as we've said, is we want to build a nimble supply chain because we see a lot of these shortages in the market at any given point of time. And this was the case -- classic example of one way we could capture it because we have inventory.
And most of it would be pricing. So I can see the gross margin similar to last quarter where you had this, well, sudden opportunity. So the better gross margin is a function of that onetime opportunity, right?
Yes, you are right.
All right, yes, sure.
Okay. And lastly, on the employee cost, that has shot up, is it a function of consolidation of Aleor or as we consolidate or, say, the commercialization of Aleor? Is that the right way? Or how -- why does it increase in amount? Or is it...
Which exactly are you referring, Prakash?
[indiscernible]
Staff costs, sir.
So, staff cost, are you looking at cost correspondence figure or the sequential number?
If I see, Y-o-Y sub 35%, so what has changed Y-o-Y? And if I see Q-on-Q and Q1 over Q2, Q2 over Q3, there is insignificant increase. So what I understood was the new facilities cost will start only when they commercialize both in terms of appreciation, other costs and staff. So what is driving this?
So some of the costs -- okay, so there are 2 part of these costs. Bulk of the cost will get -- will start getting expensed out only when the plant go into commercial production. But many of these administrative expenses is charged after the books in the period in which it is incurred, so some part of it is because of that. We added some headcount in R&D, which we are expensing out. R&D is now part of -- that employee cost portion of R&D is part of employee cost. And then few of the normal increments of their performance gain, et cetera.
Okay, but they're not changing MR as such, in the MR?
No significant change in MR.
Prakash, on cumulative basis, last year, the same quarter, we had 28.5% as our employee cost, which has actually gone down to 18% this year.
[indiscernible]
Yes, I'm talking absolute, 25% up Y-o-Y, because -- the sales have increased because of these onetime opportunities also. So I was just trying to understand that piece.
I hope we extend.
Yes, yes. Just one more. On the sort of Aleor one, with the products commercialized now, that has started to get consolidated as staff cost? Or not yet?
So Aleor, has not started to any approval because we have still not started the commercial production. Once we started, that, then we'll start getting the expense.
Okay. And this number should continue in similar way? I mean...
Which number?
The staff cost, sir?
Yes, so this is in the release.
And this will continue to grow as and when the facilities get commercialized?
Correct. Absolutely.
We have a next question from the line of [ Ayush Mittal ] from [ Mittal and Company ].
Congratulations on a good performance. Sir, when I look at the strategy of the company for last 3, 4 years, we have undertaken a very massive R&D and expansion. And if I just look back at the industry, [indiscernible] was supposed to do very well. But since last year, there's too much of pressure on the pricing. Sir, how do you think about the investment and the strategy that you have taken up?
So we still stand by our strategy. The U.S. is still an attractive market for us. While there has been -- okay. So 2 things, one is for us, the U.S. sales of 100 million -- or maybe 100 million, 150 million, there's still a lot of opportunity for us to grow that business. There's always a low-hanging fruit. That is one of the reasons why we are making these investments in R&D facilities across different capabilities, such as injectables, derm, ophthalmic. And we stand by that. Yes, there has been some erosion, and some of the market consolidation has -- might have reduced some margins in certain areas. But, by and large, it's still a very attractive market and we're still committed to it.
Are you -- you feel that the kind of investments that we have done will be able to justify the returns and the growth in the business in coming times?
Yes.
And any idea that you can give that maybe certain number of ANDA that you would have filed, you would not be commercializing because of the spike of ANDA completion?
I don't have the figure, but, roughly, I think amongst all the approvals that we've got, there would be about less than 5% that we haven't commercialized.
Which you haven't commercialized. And a rough number wherein you feel that we'll make sufficient margins in line with what we have been doing till now. Any number?
It's tough to say. Because, as you see, there's 2 aspects of it. One is we're trying to make products where there is less competition. Secondly, as I mentioned, there's a lot of supply disruptions. You never know where the opportunities are going to come from. So we wait to see wherever it is possible. So we want to minimize this. There will be some products that we don't launch.
Okay, okay. And in the last quarter, if you remember, you mentioned that the base business for us has also grown, you have taken price hikes. And the rest of the world business have grown, and this was kind of a new deal. But in this quarter, despite quarter-on-quarter different numbers, you're saying that this is because of some supply disruption?
Yes. So, you see, last quarter was a high quarter due to the one-off sartan opportunity that we saw, right? This quarter, as the base business has progressed, there were some other, like 3, 4 others products, which we thought we could capture.
What I'd like to ask is that, in the last quarter, you indicated that the base business has grown pretty well despite the one-off thing.
Yes, that continues to happen. As we start -- see, with us, we gradually pick up market share where it's possible, and we've been doing that, we've been holding on market share in certain cases, so it can give us a clear goal. But our supply chain has been pretty good, and we have now grown our market share.
We have next question from the line of Charulata Gaidhani from Dalal & Broacha.
Yes. I wanted to know how much is the growth in the base business in U.S.
So, I mean, I don't think we -- I mean, it's really difficult to say, we don't share those numbers because we don't [ go from end buyers ]. But as Pranav said, U.S. business is also growing, while we keep getting such opportunities just slightly short term.
Okay. Or if I would -- if I could ask, out of the 43 million of U.S. revenue, how much would be one-off?
You are asking the same question, I understand, we don't give the product [ by incomes ].
Okay. And this derma product has not been launched yet?
So the one that has gotten launched is from [indiscernible]. It's not from our facility. It just recently got launched.
Okay. That is the Aleor product?
No, that is a derm product from Alembic. The Aleor product, we haven't commercialized this yet.
So what Pranav mentioned, one, that we got -- Aleor got its first ANDA approval. Now -- yes, in the next few months, we'll go to the market.
Okay, okay. And how much would be the cash?
Our cash on hand is the 200 -- I said the number. It's about INR 260-odd crores.
We have a next question from the line of Nitin Agarwal from IDFC Securities.
Pranav, on the non-U.S. exports, we've had a pretty good last 9 months for the business. Is there anything specific, any particular geography which has driven the business and how should we look at this business going forward?
So this year has been actually a little abnormal year, where we have been caught up on some supplies. Broadly, there's only 3 markets that we supply, Europe, Australia and Canada. They are 3 big, big markets where this growth has come from, and it is the bulk of our ROW sales. Europe, I think we will see a little bit of slowdown moving forward. I think there was a lot of [indiscernible] supplies to partners who market the product. The European market has gone through serialization, so there's been inventory buildup. Australia, too, last year, was really low, so there is some inventory buildup. That's one of the reasons why this market has grown. But I think we'll continue growing gradually as we keep launching more products.
Okay. And, secondly, on the U.S., now when you look through the next, like, year, 1.5 years, I mean, we haven't had too many launches this year, right, in terms of meaningful products. From -- and we've been investing a whole lot in the U.S. business over the last few years. I mean, how should one look at the next 4 to 6 quarters in terms of the U.S. business in terms of the kind of launches you will make? Obviously, opportunity -- it's a shortage opportunity in order to keep coming through in the market, we'll keep benefiting from them. But from a product launch perspective, how should we look at this? I mean, qualitatively, how should we look at the business for us?
So, yes, it's tough to say, and we may give you guidance. But you're right, I think, in terms of U.S., we have to keep launching products. I don't think there's too many of those big ticket opportunities, which we're seeing in the market. As you saw on our portfolio when we started, we said let's start with even mid-sized product, smallest sized products where there's 5, 6 or less people in the market. This makes it easier to pick up market share. And I think that will continue, I mean, I believe we should launch more than 15 products in the U.S. in the next 4 quarters or so. So there should be some growth we should get from there. But, yes, I still stay committed. As I said earlier, I stay committed to this market. It's still a good market. There's still a lot of opportunity if you run a good show.
Also, if you'll -- when you look at 4 to 6 quarters, certainly, the launches we will -- primarily, the ORG which we have filed sometime back out of one facility. The investments, which we are making now, and, yes, we will start filing from this facility, will get launched only over 2- to 3-year period. So when I look at a company at our phase of investment, I think you will have to take a slightly longer view.
Sure. Points well taken. And, Pranav, just following up on that point. See, the conventional sort of wisdom is that there is not much money to be made in the pain-related products anymore. And companies ought to really target the complex products or reasonably less competitive products to really make money. We've been that [ our products ] seem to be a little bit -- very different from what is common understanding, which is there, of the dynamics in the U.S. I mean, how should you -- how do you reconcile both the things?
So, I agree with you. I think one of the reasons why we are making all these investments in injectables, peptides, ophthalmic, derm is to move up the value chain because the maximum competition you're seeing, and bulk of it from India, is on the oral solids, right? So this is the reason why we're making investments in these new areas because we have to go up the value chain and in terms of complexity. Number two, the -- what you saw earlier was the NC-1 opportunities. Those, you're seeing a lot more competition and a lot more variability, and it's -- there's a lot of areas because there's long lead times. So that's what's happening in the current market. So that's why we have some products that's smaller, a little more complex to manufacture, there's 5 or 6 less people that have immediate term launch opportunities. NC-1, you will not be able to launch in another 10 years. And then you have the combination of the new capabilities that we're adding, which will come onstream with filings by the end of this year.
And, sir, I mean, maybe on new plants, I mean, how -- what kind of time frame should we look at for the commercialization cost to hit the P&L for the new invested CapEx that we've done?
I know most of the plants will get into commercial production in 2021.
In FY '21?
Yes, in FY '21. But I think the critical milestones of these facilities will come in '21, '22.
So costs will be coming in '21? And in terms of our revenue contribution, start picking up '22 onwards?
Yes, that's right.
And, sir, what will be a total CapEx, which is on these 5 plants, which will probably get commercialized in FY '21, roughly? A broad number?
So I think it will be about INR 1,200 crores, sometimes [indiscernible].
INR 1,700 crores.
About INR 1,700 crores, including the [indiscernible]. So that will be about INR 1,700 crores. [indiscernible]
About INR 1,700 crores CapEx will get commercialized?
About INR 1,700 crores, sir.
About INR 1,700 crores sometime in FY '21?
Yes.
FY '20 should be much different than what we're doing right now.
[Operator Instructions] We have the next question from the line of Dheeresh Pathak from Goldman Sachs Asset Management.
Yes. Sir, in -- just continuing from the last questions. In FY '21, which will be most likely the first full year of operation of the 5 plants, what will be the likely overhead? Meaning, the other expenses and the employee costs on these 5 plants? Ballpark number?
Yes, early -- safe to say that, roughly, it will add to about INR 200 crores of our expense from the current base.
Okay. So gross profit will need to make at least INR 200 crores of gross profit to be EBITDA neutral on these plants in FY 2020.
Yes, actually.
Okay. And, sir, now, in this quarter or let's say 9 months, you said CapEx was INR 504 crores. Now does it -- what is the amount which is expenses being capitalized in this INR 504 crores?
Out of this...
INR 120 crores.
INR 120 crores is OpEx currently, okay. And after CWIP, what is the -- as of 31st December, what is the CWIP?
INR 1,100 crores.
And of that INR 1,100 crores potential, how much is the capitalized OpEx?
INR 238 crores.
We have next question from the line of Kunal Mehta from Vallum Capital.
Yes. I wanted to understand -- I wanted to have your perspective on the future for the next 2 years in the domestic pharma segment. Would you be -- would you throw some light on the headwinds which you foresee? Because last 2 years, very difficult for the industry as a result of GST and other disruptions.
So, hopefully -- it's very difficult for me to say whichever lightning can hit us from this site. But, hopefully, it should be several years. Next couple of years I don't see major disruptors, and it should be several years.
Sure. Sir, I just wondered -- secondly, I wanted to understand that you have made considerable investment in the dermatologies space. And from what you're analyzing worldwide, it's a valuable niche. A lot of companies, both in India and in the global markets, are entering into the dermatologies segment in the U.S. So can you just give us a perspective of what kind of products and what kind of pipelines would it take to, sir, to make it a profitable venture for us? And what are the key points which will make it -- which -- to differentiate between somebody making money in this segment and somebody who will not do it?
So I will stick to the statement of [indiscernible] I won't be able to respond to that part of that question. Like -- but my dermatological segment is focused on the U.S., the current investments which were made throughout the year is focused to the U.S. and in U.S. [ dermatological ] market. As far as India is concerned, [indiscernible] therapeutic segment where it's entirely different product and different type of CapEx, which we will cater to. So these are -- there is no overlapping. So as of now, we have no plans to introduce products which are being developed for growth in India.
No, sir, I was just talking about the dermatology investment which we have made for the U.S. market. So can you just throw some light on how the revenue from -- how the business will shape up in the next 2, 3 years?
Yes. So actually, the dermatology business, in terms of your -- I think, the broad question was with respect to competition and I think our competitiveness on the competition and [indiscernible], right? So I think, broadly, what we would like to say is that what we find in dermatology is not very different from what you would normally find in other business, though there are some differences. For example, the investments required to actually get some products into the market in filing are slightly larger dermatological because some of them need clinical studies. So investment is slightly larger. We also find that competition is there for a few products, which are bisulfate, mono-sulfate. But I think there are some other products which are more complicated and complex and they carry certain amount of risk where we find that the competition is still not of that order. So we've seen various forms, we find that there are some products, which are complex where you find, even on solids, the competition is not -- it's there, but it's not as much as what you would find in some other. For example, in some areas you will find more than 10 players. In some others, you will find around 4, 5 players. So we do see a lot of opportunities in the dermatology space in the next 3 to 4 years. And we think that we are kind of coming in at almost in on the right time with respect to the new plant coming onstream and the filings that we are now doing. So we still see significant opportunities for us in that space. But the growth from it is just that, like in other various forms given here, that some products you will find more players and some products you will find fewer players, and that's the generic story anyway. And the other factors which will drive profitability would be supply chain, ability to maintain compliance from a plant quality perspective. And all of those factors are something which we continue to focus on. And hopefully, that will continue to differentiate ourselves from the other players in the market.
Sure. Just last question for me. And so we have made -- we have made considerable investments on the oncology injectable side. So can you just give us an understanding of what kind of filings have been made from this plant? And so when -- so are these the traditional oncology molecules which a lot of people are focusing on? Or are these the molecules which are going to be -- also going to go off within the -- post '21, '22?
So it is a combination of both. So far, we have not made any filings as yet because the facility will only come up in the next few months and then the matches and the stability and all that will start. So we haven't done any filing as yet from the onco-injectibles.
We have next question from the line of Bharat Celly from Equirus Securities.
Yes. Sir, just wanted to clarify whether the pricings have regressed to the earlier level, so there is still some sort of cushion which is left to squeeze out?
I think supplies have resumed. I think everyone -- so 2 things have happened. One, is the market has shifted to other sartans. Second is that supplies has resumed and a lot of people are there with products in the market, so just a function of when everyone gets in. I believe the price is still higher than what they were pre-July, August of this year. But they've come down drastically from last quarter.
Understood. And, sir, can you name those products, those other 2, 3 products that you have seen with a shortage in the market?
No, these are one-off opportunities, I'd rather not name them.
Okay. Understood, sir. And, sir, talking about your injectable projects. Sir, just wanted to understand when the filing will start from this project for onco-injectible and other injectable.
Yes. So there are 2 injectable facilities. The general injectable, we'll see the first of its filing happening by the end of this year.
Okay. And on oncology, next year?
Yes, what I mean by this year is by the end of FY '20.
By FY '20? Okay, understood. And from onco-injectable, that will be when?
That will also be -- I mean, in the last quarter of FY '20 as well.
Understood. And, sir, actually, you have been guiding -- coming to the domestic market, you have been guiding that you'll be growing around 13%, 14%, and still, we are lagging in that target. Sir, just wanted to understand what sort of growth -- how it can be achieved. And what exactly is holding us back from hitting the target?
So I think I will try to explain that. I think if I go by the market, so the [ second ] growing at slightly better than the market. But the primary sales is slightly lower, maybe because of traction on inventory. See, last year, where we had this post-GST, we had a restocking by the stockists. So accompanying number Q2 and Q3 has been very difficult. And probably, once that gets stabilized, we should be back to that same 13%, 15% growth that we have been projecting.
We have next question from the line of [indiscernible] from Axis Mutual Fund.
I just wanted to understand the current supply demand situation in the sartans. So if you could just explain the monthly [ rating ] thing.
Yes. So as I answered to the gentleman before you, so what has happened in Rhizen is 2 things. One is when the shortage happened, some volume shifted to the other sartans. And secondly, what has happened is, now I think the market is back in supplying the bigger players, if you can see market share. People have got stock in the markets. There's no shortage of that happening anymore.
Okay. So vaguely, could these suppliers then started [indiscernible] because it really did happen normally in this quarter and this is that everything is going to be in the future as well.
Yes.
Okay. And why we are not disclosing the shortage to the opportunities that came up this time? Could you help us understand the nature of shortage which are happening in the U.S.? And is there any party -- because the opportunity could -- which we are focusing on or which we could benefit from [indiscernible].
Yes. So -- see the nature of shortage is very specific to companies. If someone has a large market share in the product and he has whatever supply constraints, and I don't know what those are. But it's just sometimes we see this coming up. And as it turns out, we were well placed to capture it. So is it a recurring thing? It happens, but it keeps changing, so I can't predict which product or which other competitor may have supplies. That's about it. So it's quite just the way the market is.
And then the collection of products which you had in the previous quarter would be because of the permanent shutdowns. If that's the case, then that's something that [indiscernible]
No, the short-term it's not permanent. Maybe just a one-off supply situation for 1 month to 2 months, something like that.
Understood. Sir, on the API side [indiscernible] chamber [indiscernible] API [indiscernible] which were impacted 2, 3 quarters back. How is it turning now towards your end? Still any price change on API?
So on API, you see the general trend that we see on API is, as the world is moving to a higher compliance level, and we also do like to -- we spend a lot of time and money on our compliance. We want to ensure that we sell at the right price. We're not competing for volumes on API to compete with the lowest cost producers in the world. So what I'm seeing is, right now where the people would prefer better suppliers and better compliance and more reliable suppliers. So I think prices will hold as well on API.
Okay. And are we seeing supplies coming back in China -- in the markets earlier?
It's tough to say. We are not -- as I said, we are not a large volume API supplier. Even the last subsidy, even the sartans are not a big player on sartans. Chinese supply largely depends on which market you look at. For the regulated markets, they are the -- people are a little wary sometimes in certain -- in certain cases. But here there are opportunities to be had.
We have the next question from the line of Ankit Gupta from Bamboo Capital.
Congrats on the good set of numbers. Just wanted to know, it's been more than 2 years since we launched our content. And now going by the 9-month number, it seems that you did some INR 100 crores, INR 1,000 crores revenue from the U.S. market. So if you can just throw some light on how the content marketing team is shaping up? And how are we looking at it from a future perspective since there will be a lot of new segments are being -- which will be added up?
So one thing that happened in the U.S. content, we have about 11 people in the U.S. content market. I don't see this team going up more, because the customers that are there, there's so much consolidation. You're not seeing too many new customers come up that need servicing, while the products and the supply chain and the 3PL will see increase and you'll see some cost. But on the number of people in the U.S. market, I don't see that going up much.
Okay, okay. I mean, beginning on the base business in the U.S. market, like, can -- are we seeing now midteens kind of growth there, or it's higher than that?
Our base business is staying -- it's very tough to say because it's very product-specific. But it's relatively saying in some places we've taken a price hike, some places we've lost some market share. It really is a function of -- it's unpredictable. And it's quite variable because if someone comes into the market, someone wants to take more market share. So it's very tough for me to comment on that.
Okay. And I mean on price which I think is happening in the U.S. markets, can you talk about how is the price eroding? One in the oral solids. And secondly, on the complex products like injectables, oncology and dermal products?
So injectables, oncology and derm is something that we haven't commercialized products as yet. The first of our derm product is just getting launched. It's tough for me to comment on those 3 segments right now. In terms of the oral solids, again I don't think it's -- what we've seen is -- what we've seen over the last 12 months or so, as you've seen the bigger the players exit some of the plain vanilla generics, that has caused the increase in volumes. Have prices gone up? No, I don't think so. Maybe a little bit. But by and large, it's very -- again, very product specific. If a new entrant comes and wants to drop prices to take more market share, you'll see some erosion. Otherwise, I think it's steady.
But I think our general understanding is...
It's very highly unpredictable. We are seeing in certain case it goes out, and it's very product specific.
And in ROW markets, this has been the norm, for the particular growth we are seeing this year. Is it because of the capacity that we have added, that we have been able to certain store in fact had good growth in ROW markets?
So as said earlier I think ROW, the reason for the growth has been two: One, Europe, is we've added some customers and we have seen launches. At the same time, Europe, we supply to our partners in hopes for big customer inventory, because you're always going to see realization, right? So that will have a slowdown on supplies from everyone. That is one. Secondly is Australia. We had a backlog from last year. We had an issue on supplies, which has caught on this year. So those are 2 reasons, predominant reasons why we've launched a very -- how we've grown. And the third is some new products.
We have next question from the line of [ Manish Prasad from Reliance EIS ].
Just wanted to get some thoughts on this U.S. business particularly for FY '20. So this year, I believe that there's couple of one-offs, and actually currency value. So how does U.S. business looks, let's say, for FY '20?
So again, it's -- we haven't given a guidance. What -- all I can say is we will launch, as I said earlier, we will launch between 15 and 20 products in the U.S. in the next 5 -- 5 quarters or so. So that is where we ought to see some growth. Is there any supply shortages or opportunities that's not in our hand? That's something we would like to capture. But it's something that we can't see. But I think we will see growth from these new launches.
Okay. And so what sort of R&D spend are we looking at, let's say, for FY '20? Are we looking at quarterly result, the same limit would go up?
So I think in previous quarter also, we have said that we expected to be stabilized at around INR 500 crores, INR 550 crores level.
Okay. And just from this ANDA issue we are seeing the timeliness due to dispatch. Had this stabilized? Or do you believe that this will develop that quarter also?
I -- honestly, I don't know. I think it is separate because we're still -- restocking last year was done by Q3. So Q4, I expect to be a normal quarter, normal growth.
We have next question from the line of Kunal Randeria from Antique Stockbroking.
So firstly, Pranav, I wanted to get your thoughts on the sartans, especially the [indiscernible] because we are seeing recall spreading to other sartan launch too.
Yes.
And given that we are present in a lot of these sartans, what are some of these opportunities you're alluding to earlier?
So -- okay, so what's happening in the sartans is initially you saw that sartans which somewhat came under the issue of impurities. And we saw some volumes on products sartans. Subsequently, there were some impurities in the other sartans as well. We had some of these sartans, which are there in the short-term opportunities. The rest was just general commercial products that we saw.
Right. But do you expect this kind -- because if you recall that sartans, it's gone to over sartans and then sartans. And I think we have then, almost all. So do you expect an upheaval again?
I don't expect an upheaval. See, again -- see, historically, we have never been a large sartan player. We are not -- we don't have massive capacities for sartans. And we were there in these products, but we are not a big sartan player, to say. So we capture some of these opportunities when we can. We can't capture all of them. We're trying to see whatever we can do. Right now, we've got some market showing about sartan, all the assortment you can see from Bloomberg, and we're trying to keep that up.
Right. And my second question is, what's the capacity utilization at the Panelav plant? Because we're getting around 3 to 4 through each quarter. So do we have enough capacity to launch all the products?
So there's 2 things. Business capacity is an ongoing initiative that we've been constantly debottlenecking the plant, and that is in process right now as well to ensure that the next year or 2 years targets are met. So that is an ongoing that we keep debottlenecking. And secondly is we have launched a new plant, year-old plant, which should come up by the end of FY '20, so we will move some volumes there as well.
We have next question from the line of Nimish Mehta from Research Delta Advisors.
Just one question on the input costs related to the increase in API. How much has been impacting now and when will it all come back?
API increases is something that we may see going forward, because we had sufficient inventory in place actually. And that was the normal cost of last year. Going ahead, we see close to 3% to 4% increase in the API cost. In the overall scheme of things, we do not still feel that would have a significant impact on the financial.
In which -- and that's to be compensated by what?
No, I think that it will, because we -- considering that you have close to 30% raw material component as your cost, and only 3% increase in the prices that we are still on the board, it won't have a significant impact on the financials.
Oh, okay. Does the 3% to 4% increase that you have any charges, they're based on the current prices, or again on the contracted prices?
No, no. This is generally what we have seen from our range of procurement.
Okay. So if you were to kind of procure at the current rate, there will be 3% to 4% increase, that's solely the increase that we are looking at?
Yes, yes.
I see. Okay, okay understood. And Pranav, if you can just throw some more light on the general understanding of the general utilization of the -- I understand there are some packaging-related changes. So how does that impact the industry in general?
Yes. So I think there's -- what is happening in the serialization in Europe is a little more complex than the U.S. U.S. is okay, I think that's going smooth. I think what will happen in the industry, we'll see over the next 3 to 6 months, is how well people have been able to execute it and implement it. And I think it will cause some -- not disruption, it will eat up some capacity.
It will kind of lead to some consolidation?
Yes. There may be some supply issues that people haven't transitioned to it. It will -- you're right, ensure about 10% to 15% of our capacity as well.
I see. So will this mean some kind of -- for most of the [ containment ] to relax?
I don't know. It's -- let's wait till we see. I think we have -- we are very confident we should be okay. What's going to happen in the market? I don't know. I think in the next 3 to 6 months, we'll get a much better perspective.
We have next question from the line of Yogansh Jeswani, individual investor.
Sir, my first question is regarding your U.S. product basket, I think on a near patch also tried to ask this kind of thing. But just a bit more understanding on how your product basket is shaped. I mean in past year, we're told that you are making in more and more products on your own label and not being on the partner side. So how does it look like? I mean, how many products do we have under our own label? And in terms of U.S. business, is the medium-term coming in from our own labeled products?
Yes. So pretty much, I think if you say back to your own numbers, there's only about 4 or 5 products that are there on a partner level. The rest are all-in transition to our own label. In terms of future approvals now, I think everything will be on our own label. I don't think there's anything partnered anymore. That is the way we're going to grow in the future.
Understood. And sir, secondly, what is the export -- absolute export number? Because I think some pick up [ 80 ] or to the exports. So just seeing that the international generic number won't be the exact export number, right? So can you provide me that for the quarter and for the previous quarter as well?
Yes. So INR 308 crores is -- you want for U.S.?
Full export.
Export. Full export.
Full export. So, okay, total exports we have got -- for the quarter is INR 541 crores.
Okay.
Vis-à-vis INR 464 crores, which is 35% growth.
That is [ INR 416 crores ] Q3 of last year, or Q2?
Yes. Q3 of this year versus Q3 of last year.
And what was it in Q2, sir?
Q2 for this year was INR 715 crores.
7-1-5?
Yes.
Understood. Understood. And sir, just to understand bit more on the U.S. business. Like you said, you do see some low-hanging fruits. And we are mostly into oral solid dosages. So can you explain some more about on how are we going about selecting these products? What is our way of looking at it? And now that we have been running our own content for past 2 years and we have been growing the business there. So can you add just some more color in terms of the market dynamics of the U.S? How we are putting up -- taking up new product? Developing new products and all? Just a bit of color on that, some commentary on that.
Yes. So the U.S. partner portfolio is something that we do elaborate exercise and we keep evaluating from time to time as well. There's various aspects on it that we see. We think on the oral solids we look at products where -- and where there's damage as we look at as well if they have announced API, whether it's readily available, is it NC-1, how many big player in the market, when can we launch, what kind of capability is there. And above all, we do in period per product. We do payback per product over that period per into the model, and that's how we select the product.
Understood, sir. And sir, in terms of capacity, now that the new capacities are coming in, in '21 and then be commercialized in '22, and you did mention about doing some debottlenecking towards this period. So basically, we don't expect any capacity constraint for these periods at least?
Yes, I hope so. Yes, I think we've been a little behind the ball in terms of capacity right now in managing, but I think I'd like it to be a little higher. We are constantly debottlenecking. We continue to do that. The teams are working on that. So we should be okay over the next 2, 3 years. And with the general plant coming up on stream, I think we should be fine.
Okay. And sir, lastly, on the API side, I see that in quarter, we have clocked substantially higher number compared to what we have been doing in past 10, 15 quarters. I guess, this is one of the highest quarters. So any comment on that? Is there a one-off in this API business also, or is this new place?
No, regarding those, only 14% growth, and I think it's a regular number.
So [ 200 ] can be maintained.
Yes. Okay, You don't look at it from a quarter-on-quarter basis, because I mean you can have different [ discussions ] with you.
But 9 months is more...
Yes, I think 9 months is a more accurate number.
We have our next question from the line of Chirag Dagli from HDFC Asset Management.
Sir, when you say that these 2, 3, 4 products that you have, they are onetime opportunities, what happens? As in -- so you've already supplied, you've got this market share, you've got supply chain scaled up to supply a particular share. Do prices contract -- I mean what happens, right? What you say on this one?
So in the U.S. what happens, one, is on contracted sales, right? So let's assume you see any of the products that we have a decent market share, that would have been contracted to somebody else, the next certain person, to be sold at a certain price and that's a contract that we're selling at. Now if there's a product, which somebody else has and they have a shortage, and that they cannot supply from 1 month to 2 months. So the buyers need the market share. And that happens in spot pricing, which is just a one time sale. And that could be higher than the contracted rates because of the shortage. That's all that's there.
So you have to -- okay, okay. So it's not that the contracted market share also goes up?
No.
It's a onetime supply?
Yes, yes. Absolutely.
But does this not feed into your next contract when it comes up for renewal or whatever? So you were supplying...
It's up to you. I think what you can or what you can't, in certain cases we pick up contracts where we feel confident that we can supply for a while that fuels the price. In certain case, we may not already get the contract, but we can disclose part sale because we have inventory. So it's just a combination of factors. But yes, it's just a one time. We don't think -- it won't happen again.
And you are seeing this happen more over the last 2, 3 quarters?
I think it's been going on. It's a market phenomenon that is always there. There will be shortages. It just so happens that in the last over the 2, 3 products, where they're a little bit that happened all together. That's all.
And typically your prices are, at least, is there a benchmark in terms of how high prices are versus your current supply?
It's situational markets, how desperate the buyers are or the situation, and then what price -- kind of price you can get. So there's no fixed formula for it.
But once this product supply happens, it's not that the regular supply prices also will go up?
No, no, no.
I'm sorry to intervene. But there are three other questions lined up, so ...
We have next question from the line of Aditya Khemka from DSP BlackRock.
Sir, just one from my side. On the associate income side, so this time we sort of had a loss, the areas to grow, almost a loss to 0 number. Is my understanding correct that the associate income largely comes from Asian pharma? And if so, then what is really happening there to contribute to this loss for the sector?
No, no, no, on this side you are a little bit off [indiscernible]. Correct.
No, I'm talking about the income from associates that is reported in the P&L.
That is -- that thing's worth of pure cancellation results because all these companies they are managing are in currencies. On the particular date where you consolidate, the realization, those were the translation losses. So we think within those channel, it's just that.
Okay. So where do we report Rhizen then? As in, is it -- which line item does Rhizen's activity get reported then?
So here, I think -- so far, most of the way to Rhizen in audit that we have been invested. And when we get the money back, I mean from Rhizen, it shows that Rhizen gets buy and sold of getting that money back, we introduce our investment.
Aditya, you're right onto this item of INR 1.7 crores of loss, right?
Yes.
Okay. So that is on account, purely on account of the Algeria loss actually which we have accounted.
Yes, just trying to...
But it is [indiscernible]
Okay, I get that. I get that. Thanks for that. Secondly, on the India business story, I understand, a lot of your peers or [ generally your friends ] have been talking about this inventory adjustments in the channel, so even GST was like a few quarters back now. What was this adjustment currently still going on in the channel and why is it impacting our primary sales? It's something I am failing to understand.
So yes, I think that we have been, in the industry we also fail to understand a few things. But it is like this, GST got implemented from 1st of July 2017, correct? Now April, June, was the last year there was actually no sales. But the inventory in the market came down significantly. So next quarter, Q2 and Q3 there was reduced stock in the sartans so the sales prices, the sales and profit went down. So I think that now as we entered this year in Q1 almost everybody reported [ numbers ] growth, because the growth last year is low. This year, in Q2, Q3 regular service, I think that the previous quarter of service, the growth was smaller, because the Q2, Q3 of last year had the higher base of available destocking.
No sir, I get that, sir. So I get behind this argument, but that is not the argument you are giving when you answered the question of low single digit growth in India. You said that there's still some channel inventory adjustment. So my question is exactly that.
That's why this sounded like my point in service.
Okay, okay. So you mean the base effect -- there's no longer -- for the taking of the inventory in the channel going on?Okay. So do you mind giving a number to it? I mean what was the inventory pre-GST and what is it today?
At the in general it's difficult to say. But I think at the -- okay. So pre-GST, at first [ we were [ between 55, 60 days ] [indiscernible] it now came down to the first 20 days in, post-GST, we're still down of June episode. And then showing that blended off again. So you can assume that we used to that pre-GST pre-[indiscernible] that number. But today [indiscernible] the inventory [indiscernible] 45 days.
And this is where you see stabilizing from this point on?
I think so.
We have next question from the line of Dheeresh Pathak from Goldman Sachs.
Sir, from the new 5 [indiscernible], how many pending ANDAs are there as of now? Are they any or are there none?
No, there's none, because the filings only happened by the end of this year, by the end of FY '20.
Okay. And just following up on the earlier question that I'll ask, you had said you have those 5 plants would have an annual overhead of INR 200 crores. And if you look at the OpEx capitalized for 9 months, it was ending at an annual run rate of INR 160 crores. So you're already capitalizing to that run rate, right? Closer to that run rate, right?
No. I said that for 9 months, that number is INR 118 crores [indiscernible]
So for a full year, it will be roughly like INR 160 crores, if you do the full year 12 months? But ...
Right. If you see -- today most of the plants are completely active, actually. So incrementally, what's sort of happening only more of exhibit batches which will come, which would have been active by this R&D cost only. So incrementally, if you see, on a sustainable basis, that the number which my colleague gave, 200, is the number that you will strike.
So the way to think about it is right now you're doing a cash expense of INR 160 crores on an annual basis, but you are capitalizing it. Once the plants are fully commercialized FY '21, the cash expense will increase to INR 200 crores and then it will run through the P&L. Is that the way to ...
Yes. Absolutely.
We have next question from the line of Rahul Sharma from KARVY Stock Broking.
Two of your plants have already been -- have started commercialization. But has -- will the depreciation impact come in the next quarter, in Jan to March quarter, or...
Rahul, none of the plants have been commercially explored yet. I mean what we are doing is we are picking key lab batches. Some plants are taking client batches.
Okay. So all of them will come up only in '20 -- FY '20?
'21.
'21. Okay. And another thing was there is the item in the -- by the auditor, there is INR 38 crores of loss for the quarter [ 1 ] on kind of subsidiaries, and INR 48 crores for the 9-month period. So could you clarify on that?
So we got multiple things there actually. The first one is we have -- you are aware we got this operation of RX integrated in our operations. This is a company called RX Laboratories last year. So that has the R&D costs actually, which is close to the INR 20 crores, INR 22 crores. And apart from that, there are certain niche R&D costs which we are doing some of our subsidiaries overseas actually. So it all amounts -- it's not loss, in fact in our investment for future.
Okay. And they will charge it to the...
Yes, P&L.
P&L. And the other mentioned that you have launched 3 products in the U.S. in Q3, and 7 are expected to be launched in Q4. So are there any interesting products which have launched, which shall have launched? And any new products which could be potential revenue drivers in Q4?
Rahul, most of the products are to our expectation, I mean. To that extent, you could definitely say that those are interesting launches. In coming days, they will kind of scale up and they would become interesting. Time is there.
Which are the products which you have launched in Q3?
So there is [indiscernible], Vardenafil -- these are the 2 important ones.
We have next question from the line of Tushar Manudhane from Motilal Oswal Financial Services Limited.
Sir, just coming to U.S. actually it's Q1 to -- given the product rationalization by the bigger players, and so the furthermost group of this product. So typically, of the total product-wise business, how much would be contracted and how much would be now spot? As in rough cut...
It's all contracted. The spot rate, I would say, is very small, in fact it just happens once in a while, however we do sell it's all contracted, not spots.
You don't think of having more of a spot business? And then...
I'd love to, but if everybody else process the supplies. So this only happens when somebody else's not able to supply. And we see it once in a while. It is never so big.
Okay. And on domestic formulation there, if you can just explain growth in terms of price volume and new launches for 9 months ID?
I think we are -- volume, we are in line with the market. So typically, as I understand, 4%, 5% growth is volume, 3%, 4% is price, a couple of percentage on new product introductions. We are more or less on the same line.
Understood. And lastly, the tax rate for full year FY '19?
I think it would probably be around 20%, 21%, marginally.
And so for FY '20 as well?
I think that [indiscernible] let's see what happens with the new budget, new raise, you know? So if it remains unchanged our tax also will remain unchanged.
Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. R.K. Baheti for closing comments. Sir, over to you.
Thank you very much. Thank you, everyone. Thank you, participants for a lively discussion. I think there were a couple of follow-up questions also which I can take on off-line because we are completely out of time. And I look forward to talking to all of you again at the end of Q4. Thank you very much.
Thank you very much, sir. Ladies and gentlemen, on behalf of Alembic Pharmaceuticals Limited, that concludes this conference call. Thank you for joining with us. You may now disconnect your lines.