Eris Lifesciences Ltd

NSE:ERIS

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to Eris Lifesciences Limited Q3 FY '23 Earnings Conference Call. We have with us on the call today, Mr. Amit Bakshi, Chairman and Managing Director; and Mr. V. Krishnakumar, Executive Director and Chief Operating Officer.

[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. V. Krishnakumar, Executive Director and Chief Operating Officer. Thank you, and over to you, sir.

[Krishnakumar Vaidyanathan, executive]

Thank you. I'm Krishnakumar and I wish you all a very Happy New Year. Welcome to our earnings call for the third quarter of financial year '23. We've just announced the acquisition of 9 dermatology brands from Glenmark. This deal is in line with our stated intent of building a strong dermatology franchise. We started this process with the acquisition of Oaknet in May 2002 (sic) [ 2022 ].

The acquisition of the Glenmark brands will help consolidate our position further, especially in the antifungal and anti-psoriasis segments. The top three brands in the Glenmark portfolio, namely Onabet, Halovate, and Sorvate are ranked #1 in their respective segments. Three other brands from the portfolio: Demelan, Dosetil, and Accurate are ranked among the top 3 in their respective segments. So 6 out of 9 brands in the portfolio occupy leadership positions. This portfolio has a revenue base of around INR 85 crores.

The purchase consideration is around INR 340 crores. The deal will be financed through borrowings and we expect the transaction to achieve financial closure very soon. Post deal, the contribution of dermatology therapy to our total revenue will increase from 7.6% to 12.7%. Our market share in the dermatology covered market will increase from 2.8% to 4.6%, and our dermatology market rank will improve from #12 to #6.

The performance of Oaknet continues to reinforce our ability to create value through M&A. The growth momentum continued in quarter 3 with revenues of INR 60 crores and an EBITDA margin of 27%. The 9-month revenue is INR 183 crores, of which INR 160 crores has accrued to Eris. The 9-month EBITDA margin of 24% represents an increase of 1,400 basis points from the pre-deal EBITDA margin of 10%.

As discussed on the last call, we are driving several value creation initiatives, including realignment of divisional focus with specific product portfolios and doctor specialties, expanding the bandwidth of the senior team; digitizing the promotional effort of the entire field force to enhance productivity; and expansion of dermatologist coverage from 60% to 90% in just 3 months post deal. We also continue to drive the investment cycle in the business through the launch of strategic products such as Cosvate-GM++, Photofirst, dydrogesterone, and FCM Injection.

Oaknet is on track to exceed an EBITDA of INR 50 crores in financial year '23, which is one full year ahead of our expectations at the time of the deal announcement. Switching to the quarter 3 numbers as per AWACS, Eris delivered a growth of 14.7% in quarter 3 of this year versus a market growth of 11.6%. For the 9 months of financial year '23, Eris had delivered a growth of 14% versus the market growth of 8.8%.

Our flagship Cardio Metabolic segment accounts for 54% of our revenue. Eris has registered a quarter 3 growth of 15% in this segment versus the market growth of 10%. In the last 6 quarters, our Cardio Metabolic business has grown at a 15% CAGR compared to the market growth of 7%, which is a lead of 800 basis points. I'm happy to share with you that within the antidiabetes segment, the new generation brands in our portfolio, namely the DPP-4 and SGLT2 segment, have registered a CAGR of nearly 50% over the last 3 years.

These therapies will shape the evolution of diabetes treatment in India over the next 10 to 15 years. We have successfully leveraged our Patient Care platform and specialist engagement to build a significant early mover advantage in this segment. In December '22, these therapies accounted for 41% of our oral antidiabetes revenue. This is nearly double of the 21% contribution we had in December 2019.

This growth has been spearheaded, firstly, by Zomelis, our largest Mother Brand in this segment, which has crossed a MAT revenue of INR 92 crores and maintained its #1 rank among the generics. We've just crossed the third anniversary of the acquisition of Zomelis brand, and this brand has scaled up ninefold during this period.

Gluxit, which is another reported brand in this segment, has crossed a MAT revenue of INR 51 crores, and it maintains its #2 rank among the generics.

Our combination products, Zomelis-D and Gluxit S, launched earlier this year have taken out successfully with leadership positions in their respective segments. Secondly, our three emerging therapies: Dermatology, CNS and Women's Health, which collectively account for 21% of our total revenue, have achieved critical mass with combined annual revenue of INR 436 crores as per AWACS.

This portfolio has registered a growth of 15.7% in quarter 3 of this year versus a market growth of 12.2%. Over the last 6 quarters, this portfolio has registered a CAGR of 19.4% versus the market growth of 9.9%. This represents a lead of almost 1,000 basis points. Post the Glenmark brands acquisition, the emerging therapies will have a combined revenue base of INR 560 crores and will account for 25% of our revenue.

We expect that Eris will continue growing ahead of the market by a significant margin on account of several growth drivers, including new launches in Dermatology and Cosmetology; strategic launches and consolidation in Women's Health; expansion of specialist coverage across the board; and current and potential inorganic opportunities. The VMN market, which accounts for 17% of our revenue, seems to have bounced back since quarter 2 with an average growth of 12.6% in the last 2 quarters after a prolonged period of extreme volatility following the first wave of the COVID pandemic in quarter 1 of last financial year.

Eris' VMN portfolio has grown at 19.2% in quarter 3 versus the market growth of 12.6%. We hope that the VMN market will gradually stabilize and return to a secular growth mode. The key new products launched in quarter 3, include Xglar, which is our glargine offering, and Gluxit Trio, which is a combination of vildagliptin, dapagliflozin and metformin. In the derma space, we have launched Cosvate-GM++ and Photofirst, an in-license brand for the treatment of vitiligo.

Now coming to the financials. Our stand-alone operating revenue stood at INR 332 crores for the quarter, which represents a growth of 9% year-on-year. The stand-alone operating revenue for the 9-month period of this financial year grew by 9% to INR 1,016 crores. Our stand-alone gross margin in quarter 3 stood at 82.5% versus 82.8% during quarter 3 of last year.

Our 9-month gross margin for FY '23 stands at 81.5% versus 84% during the 9-month period of last year. So this is the difference of 260 basis points, which is largely due to the impact of new product launches in this financial year. In line with past experience, we expect that the margin profile of new products will improve as the products scale up.

With the addition of 200 MRs at the start of the year, our employee expenses for quarter 3 have grown by 12.7% year-on-year and for the 9-month period by 14.3%. Our stand-alone YPM in quarter 3 was INR 5 lakhs. Stand-alone EBITDA for the quarter stood at INR 126 crores. Our stand-alone EBITDA for the 9 months of this financial year stood at INR 394 crores, which represents an EBITDA margin of 38.7%.

Stand-alone net profit for the quarter stood at INR 99.4 crores. Stand-alone net profit for the 9-month period stood at INR 310 crores, which represents a margin of 30.5%. This includes Oaknet related impact on treasury income and finance cost. Our consolidated operating revenue for the quarter was INR 423 crores, which represents a growth of 27.4% on the back of a 28% growth delivered in last quarter.

The consolidated operating revenue for the 9 months ended December '22, grew by 23.2% to INR 1,282 crores. Consolidated EBITDA for the quarter stood at INR 137 crores, which represents a growth of 12.7%. Consolidated EBITDA for the 9-month period stood at INR 418 crores, which represents an EBITDA margin of 32.6%. This EBITDA margin profile of 32.6% for the 9-month period is in line with our expectations, given that FY '23 is a year of unprecedented investments, including the launch of our insulin business; amalgamation of the Oaknet acquisition; launch of significant new products across therapies; and commissioning of a new manufacturing facility in Gujarat.

We expect our consolidated EBITDA margin to improve from next financial year onwards. Consolidated PAT for the quarter stood at INR 100 crores. Consolidated profit after tax for 9 months stood at INR 313 crores, which represents a margin of 24.4%. This is inclusive of all Oaknet related impact on depreciation, treasury income and finance cost. We are presently running trial batches at our Gujarat facility, and we expect to commence full-fledged commercial operations by March 2023.

We expect to deliver a consolidated revenue growth of 25% to 26% and a consolidated EBITDA growth of 14% to 15% in this financial year. These were the highlights for the quarter. We are now happy to open up for questions.

[Operator]

[Operator Instructions] We have our first question from the line of Kunal Dhamesha from Macquarie.

[Kunal Dhamesha, analyst]

So the first on the revenue growth guidance, I think we were sticking to 30% since quarter 2. And with quarter 3 results, we have kind of lowered our expectations, while the Oaknet is doing better than expected. So what are some of the pain points in our overall underlying base business, which is not performing in line with our earlier expectations?

[Amit Bakshi, executive]

Yes, so look, as we said, there has been a hit of around 250, 300 basis points on the gross margin, that always happens when the product -- when we have a lot of new launches and which over a period of time gets corrected. Second has been 200 people addition in the overall things. So from a revenue point of view, there are only two moving parts. One is we missed on Zayo this year, which was around INR 30 crores last year, because of reasons which are known.

And then last year we had a INR 30 crores sale of Zac D, which was launched during the second wave of COVID, and we did INR 30 crores in the last year, which we then discontinued. So we had a double whammy there. One, not selling that INR 30 crores this year and also getting a lot of stock back. Though we haven't spoken about this earlier, but since you made a point, I just thought I'll tell you, if you remove these two parts, then I think things look far better.

[Kunal Dhamesha, analyst]

Can you just give me what would be the stock return impact till now for us?

[Amit Bakshi, executive]

It's in the range of INR 18 crores to INR 20 crores.

[Kunal Dhamesha, analyst]

INR 18 crores to INR 20 crores, okay. For entire 9 months -- first 9 months?

[Amit Bakshi, executive]

Yes. Correct. And also, this is the return. And last year, you see INR 30 crores had been the sale. So there had been no sale, then there had been a return on top of that. The third -- yes -- let me just complete one thing. It just came to my mind. Look, we were -- a lot of growth was dependent on the new product this year. Couple of [indiscernible] got delayed by 2 to 3 months than what we expected because of the DCGI permission, which could have always happened. So we are still in the midst of a lot of launches in the quarter -- in quarter 4 also, which we thought would be over by quarter 3. So there is some kind of a number which is coming from there. Otherwise, these two things are the major tangible numbers.

[Kunal Dhamesha, analyst]

Sure. So basically, we sold INR 30 crores, but then it didn't sell in the end market, and that is what is coming back to us, right, is the way to understand?

[Amit Bakshi, executive]

What happened here, when we were selling, we actually reached INR 10 crores during the second wave, right? We thought that even if it rains down, we will be able to do INR 4 crores, INR 5 crores. But the positioning of the brand was so hard for COVID that it didn't fly when COVID went. So we made our inventories thinking that at least INR 5 crores of the sale would retain. But we were for a little bit of surprise because of the positioning being so hard on that.

And at that point of time, it just went through the roof. In prescription data, it was unprecedented for a new product to have those many prescriptions. So that was a big letdown. And then looking at what is happening in the market, we thought it is wise to take this hit, because it was going all over the place. And we didn't want the core business to get a little hampered by this. So we took a call on this that one, the positioning got so stuck to COVID, and second, we were finding it little wobbly for the rest of the year. So we said, okay, let's take this call and get it back -- get it off our shoulders.

[Kunal Dhamesha, analyst]

Okay. And secondly, can you provide any update on our insulin franchise, what is the revenue for this quarter and EBITDA burn for this quarter or overall 9 months?

[Amit Bakshi, executive]

So INR 6 crores is the number for this quarter, which is a fair improvement from the last quarter. So this is how it is -- we might end up this year by doing INR 21 crores, INR 23 crores of sale in the insulin franchise, and we will burn INR 20 crores in this year -- INR 20 crore, 22 crores.

[Sachin Shah, executive]

Yes. And Kunal, the EBITDA burn in this quarter has come down to INR 4 crores -- minus INR 4 crores, that is.

[Amit Bakshi, executive]

From INR 6 crores to INR 4 crores.

[Sachin Shah, executive]

So INR 6 crores of top line and minus INR 4 crores of EBITDA.

[Kunal Dhamesha, analyst]

Basically, revenue has gone up, right?

[Sachin Shah, executive]

Revenue has gone up. EBITDA burn has gone down. So that is the trajectory that one had envisaged for the business.

[Amit Bakshi, executive]

Yes, and Kunal what happens, because it is lying in a different sub. That is why probably we'll take it as a new product or a new thing. Otherwise, we feel internally that is a part of the organic growth, because it was started ground down. It's not very important, but just thought to tell you. So insulin is moving well. We did INR 6 crores. We expect between INR 7 crores to INR 8 crores in the last quarter and going in the next year, we think this will be around INR 50 crores of franchise.

[Operator]

[Operator Instructions] We have a question from the line of Tushar Manudhane from Motilal Oswal Financial Services.

[Tushar Manudhane, analyst]

So just on this brand acquisitions, so to start with at least, what would be the growth at which these brands have grown in the past, the ones which are acquired from Glenmark?

[Krishnakumar Vaidyanathan, executive]

Tushar, there has been no growth in the past. In fact, there has been some kind of degrowth, because these were brands that were seen as noncore by them. That is the reason you have that trajectory, but you don't have that kind of trajectory here.

[Amit Bakshi, executive]

Okay. So look, these are brands which in our view are substantially big brands. We are sorry we uploaded the presentation very late because we were just stitching it up in the last moment. But once you go through the presentation, you would find that 6 out of 9 brands which we are acquiring are in the top 3, 4 of that category. So these are very solid brands which have been solidly built, I would say. The largest is Onabet, which is INR 30 crores. And then we have Halovate, which is INR 22 crores.

So you will have to give us some time. I just told you that we just stitched it together, but we are hopeful that the way -- the synergy which we see in Oaknet, plus on the side I must tell you that during the last prescription audit, July, October, Oaknet had a 60% growth in prescription from dermatologists alone, which from Oaknet's point of view was unprecedented. So we think this synergy is going to take this ahead. But to give you some kind of an idea, you have to give us some time to sit on the brands and do that work. So maybe next call we will be able to give you a better picture. But the brand seems to be very impressive as of now.

[Tushar Manudhane, analyst]

Got you, sir. At least this category at the industry level, what would be the growth to consider, maybe Onabet as a category, Halovate as a category if at all, at the industry level, not at a company level?

[Amit Bakshi, executive]

So Tushar, look, we are strengthening our medical dermatology. You remember when Oaknet happened, we told you that we are very fond of medical dermatology because 70% of the patients do go to a dermatologist for medical dermatology, while cosmetology seems to be a lot contemporary and a lot of fun. But the reality is that these two, fungal infections, mixed infection, and psoriasis remain the major medical problems in dermatology. Now if you look at these things, we are now in top 5 in both the fungal infection as well as the steroidal infections, the psoriasis market maybe. So these markets have traditionally grown by 9% to 10% all along. And as usual, when you buy something, you want that you should overgrow that.

[Tushar Manudhane, analyst]

Got it. And how much would be financed through borrowing of INR 340 crores?

[Krishnakumar Vaidyanathan, executive]

So we've picked up the entire number based on borrowings, Tushar. So the entire INR 340 crores is being funded through debt at this point.

[Amit Bakshi, executive]

This is without GST?

[Krishnakumar Vaidyanathan, executive]

Yes.

[Tushar Manudhane, analyst]

And this would be at what rate? Cost of debt?

[Krishnakumar Vaidyanathan, executive]

This is at around 8%.

[Tushar Manudhane, analyst]

And if you could, while -- I don't know if it is too early to ask, but so what kind of profitability or margins one should think about this business in a year or 2?

[Krishnakumar Vaidyanathan, executive]

So I think we need to come back to you as far as the year or 2 perspective is concerned. But what I can tell you is that every time we talk about M&A, we say that when we look at the portfolio, the gross margins are very important to us. So we never look at anything which is less than 70%, 75% gross margin. So this acquisition is also in line with that philosophy.

[Amit Bakshi, executive]

The gross margin, we can tell you actually. The gross margins are upwards of 78%.

[Tushar Manudhane, analyst]

And just one last one. Here the manufacturing aspect and all of it would be all outsourced, right? And that should not be an issue like it has been in case of insulin?

[Amit Bakshi, executive]

Yes, at least that much we have checked, Tushar. So we have done that work. So there's no problem there. And we have bought enough stocks also to keep us going for a reasonable amount of time, and we have checked with everything. That is not going to be a problem.

[Tushar Manudhane, analyst]

And just one last clarification. On a stand-alone basis, there's 9% year-on-year growth. So is it all to do with the Zac D and Zayo? If you could throw some light on how Glimisave has performed?

[Amit Bakshi, executive]

Glimisave, technically I'll have to look at that and Kruti will just help me with the data. But two important points, Tushar. I don't know whether you have seen the presentation, but one point which KK made that the DPP-4, which we were just 21% of that market when the market itself was touching 40%, 43%, we have come a long way. So if you look at our major brands, we have come a long way. There has been these two disruptions, which I spoke to you about.

Beyond that, I don't find a problem. If you go through the market data through and through, the market data looks good. And now we are just looking at the possibilities. If we get Zayo back, which might happen. And if that happens, then there could be some good gains coming from the cardiovascular side also. So that's the [Foreign Language] thing. I can't think of anything which is very important otherwise. We will -- I mean Kruti will come back to you. But...

[Kruti Raval, executive]

Mother Brand level, Glimisave, 15% growth for the quarter.

[Amit Bakshi, executive]

Mother Brand level, 15% growth.

[Operator]

[Operator Instructions] We have our next question from the line of Tarun Shetty.

[Tarun Shetty, analyst]

I believe the...

[Operator]

Sorry to interrupt, can you use your headphones, please?

[Tarun Shetty, analyst]

Can you hear me now?

[Operator]

Yes, please go ahead.

[Tarun Shetty, analyst]

Yes, sorry for that. So I believe this sacubitril/valsartan category has largely genericized and many players have started launching. So will you be launching the same in the near term?

[Amit Bakshi, executive]

Man, you need to give us some time. There's a little bit of a tangle. We have a little bit of a tangle there. So we just need some time. If everything goes well, of course, we will be launching, and we do have -- I mean I'm confident to tell you that we do have a history of the brand doing very well. In fact, if you want to get a little bit of detail, post our launch, almost 70% of the patients which were added to this therapy were added on our brand, so which is a good thing. So our brand presence has been quite good across through and through.

So if we are able to launch it sooner, then I think we should be able to get much of it back and then plan the other task. But you're right, it is generic line, we will see that. But man look, we are used to all this now. Tell me one product that doesn't falls like this? So we are used to 50 people launching in the first week and then climbing our way through. Our track record in diabetes and cardiovascular has been something which you could be confident about. Other than that, time will tell.

[Tarun Shetty, analyst]

And we'll be following the same trajectory where we will be partnering the initial launch and then we'll bring it to our own plan?

[Amit Bakshi, executive]

Yes, yes, yes. That's -- most of the times that's the case.

[Tarun Shetty, analyst]

Okay. And next on the MR side, with the new acquisition, are we looking to add more MRs? Or we'd be around the 3,000 level?

[Amit Bakshi, executive]

It's a little early. From an Eris point of view, we are well done. So we don't think Eris would be adding in the next year incrementally, and that will always happen, but nothing strategic. From Oaknet point of view, we have to take a hard look. Prima facie it looks that we may need to add people, which will happen in the next financial year whenever it happens.

[Tarun Shetty, analyst]

Okay. And just could you help me with the current MR count, if that would be around 3,000?

[Amit Bakshi, executive]

What's the number?

[Kruti Raval, executive]

2,225 is standalone.

[Krishnakumar Vaidyanathan, executive]

So you are talking about the consolidated number?

[Tarun Shetty, analyst]

Yes.

[Krishnakumar Vaidyanathan, executive]

Yes. So consolidated will be in the vicinity of 3,000.

[Tarun Shetty, analyst]

Okay. And standalone is 2,200?

[Krishnakumar Vaidyanathan, executive]

That is right.

[Tarun Shetty, analyst]

Okay. And lastly, just on the tax rate. Could you help me with -- for any projections in current year and next 2 years?

[Krishnakumar Vaidyanathan, executive]

Current year and next year will remain at similar levels, right? Effective tax rate will be at 9% to 10%. For financial year '25, we've already shared our guidance that because Guwahati is coming out of the whole arrangement, and our Gujarat plant will be producing from March, but it will not be substantially scaled up. So financial year '25, we see a blended tax rate of around 27% to 28%. That is a book tax rate. We will still be paying cash tax at MAT. So what will happen is, we will start using the MAT credit. Because by the end of financial year '24, we would have accumulated around INR 340 crores to INR 350 crores of MAT credit. So this will start getting utilized from FY'25 onwards. So we believe that the cash tax rate from FY '25 onwards will continue to be 17% for at least a period of 5 years. So FY '25 to FY '30, we will have a cash tax rate of 17%. The book tax will decline from 27% to around 17%, 18% during that period. So the long-term stable tax rate, as I see it, will be around 17% to 18% once this transition has accomplished.

[Operator]

We have our next question from the line of Prakash Agarwal from Axis Capital.

[Prakash Agarwal, analyst]

Just trying to understand, since we got into insulin and Oaknet, our EBITDA growth is lower than the top line growth and PAT, obviously, much lower. So first question is on the EBITDA growth. So since we are seeing the 3, 4 quarters consolidating and with this Glenmark asset coming in, is it fair to think that EBITDA growth should start showing better growth versus top line? Or it should be in line going forward with the top line growth?

[Krishnakumar Vaidyanathan, executive]

Yes. Prakash, so I think we've been very transparent on this one. This year, the 32% to 33% EBITDA is what we have guided to, and that is where we are ending up. And as far as EBITDA margin is concerned, I think it's fair to say that it's kind of bottomed out, right? So next year onwards, we will see EBITDA margins improving. And that automatically implies that EBITDA growth will be better than top line growth.

[Amit Bakshi, executive]

Yes.

[Prakash Agarwal, analyst]

Can you repeat the last part?

[Krishnakumar Vaidyanathan, executive]

What I said was that at 32.5 kind of percent, EBITDA margins this year have bottomed out. So starting next year, we expect to see the EBITDA margins improve, which means that EBITDA growth will be faster than top line growth.

[Amit Bakshi, executive]

Correct.

[Prakash Agarwal, analyst]

And what would be the levers for this EBITDA margin expansion going to be starting fiscal '24?

[Krishnakumar Vaidyanathan, executive]

Sorry, are you asking me what would be the drivers?

[Prakash Agarwal, analyst]

Yes, sir.

[Krishnakumar Vaidyanathan, executive]

Okay. First and important driver is the insulin EBITDA, which is around minus INR 20 crores this year is what we expect. We expect to get to breakeven next year, right? So that is one important driver. The second important driver is Oaknet EBITDA margin has been consistently climbing over the course of the year as you see. So next year, we are looking at a full year EBITDA margin of Oaknet, which will be very similar to what you see in quarter 3 or quarter 4. So that is the second driver. Third important driver is, obviously, the acquisitions that we are talking about on this call that has come at a very good gross margin. And we'll have to see how much field force we add there. So that math is still pending. We'll have to come back to you on that. But nonetheless, we believe that it will be EBITDA margin accretive.

And last but not the least, in the main business, as Amit mentioned, there are, a, once this year passes by, the whole Zac D effect goes away. Second is, fingers crossed, but there is a reasonable probability that we might start seeing something from Zayo. Third is the new products that are launched this year in Eris Lifesciences, they will scale up. So they will add to the top line. And then once they scale up, we will bring the products in-house, so they will add to the bottom line. So these are the most obvious things on the plate that will drive margin growth next year.

[Amit Bakshi, executive]

Correct.

[Prakash Agarwal, analyst]

Just on the last part. So Eris' key launches as of now, if Zayo relaunched. What are these?

[Amit Bakshi, executive]

Sorry, Prakash, can you come again, please?

[Prakash Agarwal, analyst]

Which are the key brands launched this year, which can be potentially winners for the next couple of years?

[Amit Bakshi, executive]

So Prakash, look, in the first year of launch, there are two parts, one is that the therapy gets adopted slowly, and then it increases the rate. Second is you don't get full year for all the launches, sometimes in 6 months, 8 months, 4 months, right? So top of the mind number which I could say, like we've launched Zomelis D, which this year would be like INR 17 crores, INR 18 crores. But it's like it has built up. It started with INR 20 lakhs a month. And I think the last I saw was INR 1.9 crores. So going forward, all this multiplication will come. So I've seen Gluxit Trio in the same fashion launch in September. Again, launched at INR 20 lakhs a month, now showing INR 1 crores, INR 1.2 crores in the chart. So when you go to the next year, the consolidation happens both from adding up monthly sales and also by a full year effect. So these two things are going to add up.

[Prakash Agarwal, analyst]

Okay. and lastly, do we still see some portfolio therapy gaps or we are largely done to consolidate for the next 12 months?

[Amit Bakshi, executive]

In what sense you're asking, Prakash? I didn't get you.

[Krishnakumar Vaidyanathan, executive]

Which therapy are you referring to, Prakash?

[Prakash Agarwal, analyst]

Yes, I mean across therapies, are we like more or less done from the base business side in terms of acquisitions? Or we see more gaps and more opportunities across therapies, to acquire?

[Amit Bakshi, executive]

So Prakash, look, we've always maintained -- yes, you might hear more from us. So that's -- and that will be something which you will see in a sustainable way over the next years. So we maintain that though in this year we have done Oaknet and we have done this deal now. But are we over? The answer is no.

[Operator]

We have our next question from the line of Kunal Dhamesha from Macquarie Group.

[Kunal Dhamesha, analyst]

So on the sacubitril/valsartan combo, is the matter subjudice or something from that court, et cetera, is pending?

[Amit Bakshi, executive]

So Tushar, lesser you ask, better it is for us. What you said -- Kunal, I'm sorry. Kunal, lesser you ask, better it is for us, because it's little which we can share with you. But I think by the time we meet up again on the call next time, we'll be able to give you complete color on this.

[Kunal Dhamesha, analyst]

Perfect. And in response to the last participant's question, we said that we are looking at Oaknet EBITDA margin, which is currently quarter-to-quarter the margin of Oaknet? Or our overall margin we can achieve in Oaknet as well?

[Krishnakumar Vaidyanathan, executive]

I was talking about the Oaknet EBITDA margin for next year. And what I said is we've seen a quarter-on-quarter progress in terms of how Oaknet margin has progressed. There was a question on what would be the drivers of EBITDA expansion next year. So I listed that out as one of the drivers, because Oaknet EBITDA margin for the next full year will be closer to what you see in quarter 3, quarter 4 for Oaknet.

[Kunal Dhamesha, analyst]

Okay. And what is the quarter 3 margin for Oaknet? I think I missed that in initial remarks, the number?

[Krishnakumar Vaidyanathan, executive]

So the quarter 3 margin for Oaknet has been 27%.

[Kunal Dhamesha, analyst]

Perfect. Perfect. And I think from the Gujarat plant perspective, I think last quarter we said the CapEx we were planning to do INR 180 crores, out of which we had done INR 150 crores. So is that complete now?

[Krishnakumar Vaidyanathan, executive]

Yes, the CapEx cycle is by and large done. So we have started taking trial batches, as I mentioned. And as we near to commercialization, there will be some more CapEx that will be expended. But by and large, the CapEx cycle is complete there. And I don't think you will see us investing in fixed assets for a long time.

[Kunal Dhamesha, analyst]

Okay. Perfect. And the last question on the new acquisition. So what kind of MR sense that this acquisition comes with?

[Krishnakumar Vaidyanathan, executive]

This is a pure brand acquisition. So there is no field force that we are taking from Glenmark, and there is no manufacturing facility or anything of that sort involved. So this is the kind of deal that we like to do, which comes with pure brands, which have a good foundation and which we can take to the next level. As Amit mentioned, Oaknet, which is our vehicle for dermatology, will carry these brands. And what kind of sales force addition we require in Oaknet for this and when do we require to do that, we'll have some color on that when we've been able to spend 2 or 3 months with these brands, right? So by the time we come back to you again, we should be able to give you some color on this.

[Kunal Dhamesha, analyst]

Okay. And what's the inventory that we have got in the INR 340 crores that we are seeing?

[Amit Bakshi, executive]

Yes. Give us some more time. Though I have the answer, but it is a little tentative. So I don't want for you to have egg on the face. So just give us some time. I think we can offline tell you in a couple of days' time.

[Kunal Dhamesha, analyst]

Okay. Perfect. And on the new brands, you said EBITDA accretive. So would you be comfortable telling the time, whether it would be year 1, year 2?

[Amit Bakshi, executive]

No, in the first year itself, next year.

[Kunal Dhamesha, analyst]

Okay. EBITDA margin accretive or EBITDA accretive?

[Krishnakumar Vaidyanathan, executive]

No, no, it is EBITDA accretive, right? Otherwise, why would we go and buy the brands. Because these are brands which have come at high GCs. Amit gave you a number of 78% plus, and then we have not taken field force, and there is no manufacturing, right. So it is obviously EBITDA accretive, and it will also be EBITDA margin accretive.

[Kunal Dhamesha, analyst]

Okay. So EBITDA margin accretive means it would be higher EBITDA margins than our current margin, right?

[Krishnakumar Vaidyanathan, executive]

So our starting point is a consolidated EBITDA margin of 32.6% for this year, right? So it is going to be accretive for increasing that margin.

[Operator]

We have our question from the line of Niharika from Equitas Investments.

[Unknown Analyst]

So my question is regarding Gujarat plant. So what kind of products are you planning to manufacture in the plant? And what kind of top line are we looking for this? Maximum revenue potential?

[Krishnakumar Vaidyanathan, executive]

Okay. I'll take your first question. So this plant can do oral solids and sterile injectables. So the product portfolio for us is predominantly oral solids, as you know. We have some steriles in the portfolio, which will be manufactured by third party, which will come into this plant now. And then the oral solids business that we are used to, that we will continue manufacturing in this plant also. As far as maximum turnover potential is concerned, see, the fixed asset turnover in this business is very high. So for example, our Guwahati facility, the gross block is around INR 75 crores. And currently, we are doing a revenue of around INR 800 crores from this site, right? So that is almost like more than 10x. So that is something that we should definitely be able to do, if not more. So that's why I mentioned that this plant will hold us in good stead for a long time to come.

[Unknown Analyst]

And it would also be adding to your margins because you said that currently you are getting it manufactured from the third party. So if you're manufacturing it in-house, it should also add some 100, 200 or some bps to your EBITDA margin.

[Krishnakumar Vaidyanathan, executive]

It will, but you will not be able to see it in the near term because every new facility will have a concept of capacity utilization building up. So if the capacity utilization of the Gujarat plant builds up to a level where it can start producing that kind of EBITDA margin, you will be in the transition period. But on a dollar-to-dollar basis, what we found is, we are always more efficient in manufacturing in-house than sourcing from third party. So that effect will come in on day 1.

[Unknown Analyst]

Okay. And my second question would be, what is the status of liraglutide and glargines as of now? I think last update was it was in some last stage of trial or something liraglutide. So some color on this.

[Amit Bakshi, executive]

Yes, yes. So that was a good question. So we've got the last patient in for glargine. Last patient in means, three more months of data, then putting all things together and then filing. So we still maintain that July-September kind of a period. And lira, I don't have as good a handle on that. So I don't know the last patient count in. But as of now, what we are given to understand that both of them will be hitting in 3 months' time, in a difference of 3 months. So if this is July, then that is October.

[Unknown Analyst]

So if I understand it correctly, so in another three months you would have all the data and all the things in place and probably next financial year, we can see the numbers coming in or...

[Amit Bakshi, executive]

Yes. So I'll explain it to you. So once the last patient is in, it basically takes 3 months of clinical data, one month for putting the reports together, and then the application piece. The application piece, you know, one is, it's difficult to commend, but generally a couple of months here and there, approval process. So putting all that together, we are looking good for July and August. And at least a couple of months behind that. So just add a couple of months. So that's the idea.

[Unknown Analyst]

Okay. And I think recently this glargine came into NPPA. So would that affect our margins, which we kind of -- numbers in our books earlier?

[Amit Bakshi, executive]

Not really. Not really.

[Unknown Analyst]

And my last question would be what is current YPM of your MRs, because I think that's 3-point something...

[Krishnakumar Vaidyanathan, executive]

It's INR 5 lakhs.

[Unknown Analyst]

Even with the new MR addition?

[Krishnakumar Vaidyanathan, executive]

Yes, yes. This is post MR addition. This is basically been the case for quarter 2 as well as quarter 3, INR 5 lakhs.

[Unknown Analyst]

Okay. And also for this Zac D, you said that there was some INR 20 crores of sales returns. So have we written it off in our books? Or are we carrying it as an inventory?

[Krishnakumar Vaidyanathan, executive]

No, no, we have to write it off. We have to take the hit in terms of sales reversal, which is the reason why you see that 9% stand-alone growth. This is one of the contributing factors.

[Operator]

We have our next question from the line of Gagan Thareja from ASK Investment Managers.

[Gagan Thareja, analyst]

First of all...

[Operator]

You are not audible, can you use your handset, please?

[Gagan Thareja, analyst]

Yes. Is it any better?

[Operator]

But it is not very clear.

[Gagan Thareja, analyst]

Can you hear me now?

[Krishnakumar Vaidyanathan, executive]

Yes, this is fine. Please go ahead.

[Gagan Thareja, analyst]

Yes. Sir, the first question is on the OpEx for the new plant. Can you give us some idea of what the OpEx plus depreciation for the new plant would be in the ballpark?

[Krishnakumar Vaidyanathan, executive]

See the depreciation would be to the tune of INR 9 crores to INR 10 crores per annum. On the operating costs estimated, let me come back to you offline.

[Gagan Thareja, analyst]

Any ballpark? I mean, a very rough number would also suffice just to sort of get a handle of what...

[Krishnakumar Vaidyanathan, executive]

Our OpEx at Guwahati is around INR 20 crores to INR 22 crores per annum. So I don't expect it to be fundamentally different. But as I said, this is an order of magnitude number. Don't hold me to it. We'll come back and clarify this to you offline.

[Gagan Thareja, analyst]

Right. And -- I mean, again, you indicated that Guwahati, you have a fixed asset turn of 10x. I mean this is a fairly high number when I compare to a whole host of your peers, I understand you know that...

[Krishnakumar Vaidyanathan, executive]

No, it is not. And let me -- because in the domestic formulations business, the fixed asset turnover is always very high. So if you compare apples-to-apples, which is a pure dom form plant, what happens is the asset turnover in a plant that operates to U.S. FDA standards, whether it is API or dosage form, there the fixed asset turnover will struggle to exceed 3 to 4. So when you say you're comparing to our peers, you have to take a plant which does only dom form, and then you will see that the difference does not exist.

[Gagan Thareja, analyst]

Okay, okay. And on the debt, how should we think of debt on the books of the company over the next 3 to 5 years?

[Krishnakumar Vaidyanathan, executive]

So we will -- at the -- after funding the Glenmark acquisition, I think at the end of this financial year, we will be at a net debt-to-EBITDA ratio of around 0.8 to 0.9, right? And this is something that -- and our strategy has been, in the case of acquisitions, that we see a good opportunity, we will fund it through debt. And then since our business is cash generating, because the structure of the business doesn't change, it's still going to be an 80% GC plus business.

So we will continue paying down the debt based on the monthly cash flows. So that strategy doesn't change. So this is the first time I think we have hit a situation where we are close to 1x debt-to-EBITDA. So what will it be in the future? If there are no further acquisitions, then we'll pay this down over the course of the next financial year, right? So we will go to 0 debt. But then what other things might happen on the inorganic side, that is impossible for me to predict. But I think overall, from a debt-to-EBITDA perspective, we don't think we'll go beyond the 1.5x, 2x mark in any circumstances.

[Gagan Thareja, analyst]

But -- I mean as of today, if there are no further acquisitions, you believe that the debt can be paid down in full in the next 12 months?

[Krishnakumar Vaidyanathan, executive]

So at the end of March, we will have around INR 500 crores of debt. It will be lower than that, but I'm giving you an upper number. And if I have no acquisitions in FY '24, we can pay that down fully.

[Gagan Thareja, analyst]

Right. And final question on glargine. The prices of glargine will also -- I mean, they probably already have come down. I don't know what's the final notified price. But I think this year, glargine came under price control and further prices would have reduced. In such circumstances, with the price of Lantus coming down, how do you foresee the market developing out?

[Amit Bakshi, executive]

So on the price front, look, if I'm right, then the major hit -- because it is 70% market share is with Lantus. So we anyway were planning to sell at a lower price, which happens to be lower than the price which had come in, and that would be a strategy going forward also, to sell it 20% to 30% less than the brand leader. If I look at the current numbers, I feel that it is the Indian companies which are doing better. If you look at the growth in the last quarter, then we see that the individual brand is slowly getting to very low digit of growth, and it is the Indian brands which are picking up. And there's a lot of history to it. We have seen that most of the time when Indian companies come up with generics, they tend to take the market share over a period of time. So I don't think there would be something very different this time.

[Gagan Thareja, analyst]

Okay. All right. But given the fact that you plan to price it, whatever, 20% to 30% below the innovator, the innovator themselves would now have to comply with a lower price. So to that extent, your pricing would also have to move down by the additional amount, by which the innovator will come down because of the DPCO. Would that impact the economics for you from what you would have originally planned? Your thought.

[Amit Bakshi, executive]

No, Gagan, because we know that to tend this market, and generally, once you come out with a generic product, there is a fair expectation to get the prices down. So that was anyway a part of plan. Even if this wouldn't have happened, once we get the complete hand on everything, the strategy is to sell at a lower price. And I think that is what is going to happen in most of the companies.

[Gagan Thareja, analyst]

The final question is on the genericization of the SGLT2s and DPP-4s. Would they also, in any manner, impact the usage of insulin? Would they delay the usage of insulin, because now you have affordable and effective newer generation diabetes control oral solid products available?

[Amit Bakshi, executive]

So Gagan, I can tell you the global data where all of these products have been available and even the newer products have been available, which have still not hit the Indian market. We always find that between 10% to 15% of people do need insulin, and that hasn't changed over a long period of time. So what happens is actually somebody who could have got insulin on 40 might get at 45. There might be a delay. But patients who require insulin are the patients who would be requiring insulin. So the global data doesn't suggest that the insulin sales have gone down. So that's the sum of all.

[Gagan Thareja, analyst]

But do you concur with the fact that the onset of the usage of insulin for any given patient might inevitably be delayed because of better oral solid products available. And therefore, to that extent, the market growth of insulins might be cannibalized or taken up by the oral solids from these two product lines?

[Amit Bakshi, executive]

So there're a couple of things playing together. So what happens, there are some indications which are plainly for insulin only. Like, for example, it's type 1 [Foreign Language], it is the GDM, the gestational diabetes mellitus. It is the patient who comes. So it's a play of these 3, 4 things. While what you are saying is right that there has been a delay in insulin, which has been -- it has happened since the pioglitazone was introduced. So it's not something which is new. But at the same point of time, there's a higher incidence of GBM, there's high incidence of infections wherein for short term you need insulin. So a lot of things play together. And when you do a sum total of all these factors, what comes out is that insulin usage has always been around 8% to 10% of diabetics, and that remains.

[Gagan Thareja, analyst]

Okay. And on dapagliflozin, I think AstraZeneca has received approval for indication expansion to heart failure for dapagliflozin. And from whatever I am able to understand after reading NIH data from U.S., the outcomes of Dapa for heart failure are actually better than sacubitril. And if that is the case, especially given that there is a large cohort of diabetics who have heart failure as a comorbid condition, do you see the uptick of dapagliflozin actually improving substantially and it actually taking over some market from sacubitril?

[Amit Bakshi, executive]

So look, heart failure is a failing ailment, it's a failing heart. So there is no treatment to reverse it. It is just to prevent it where it is. So it will always be more the merrier. Since you are talking hardcore science, then let me tell you, the new heart failure guidelines are now talking about initiation of 5 drugs together. And these two are just two of them. There is a beta blocker, there is an ARB, and then there is spironolactone. So because the ailment is such where the heart is failing, more is merrier. So there's nothing like a replacement. But dapa has been showing very good results. DAPA-HF has now come in. It's been some time. Even sacubitril/valsartan has actually -- the major change has happened there.

They were only talking about ejection fraction which was less than 30. Now they're saying even preserved ejection fraction should be given sacubitril/valsartan. So all put together, this is one segment, which in India will grow very fast. And Dapa and sacubitril/valsartan with beta-blockers, spironolactone, and Losartan all of them will remain inclusive. That's what the guideline says.

[Gagan Thareja, analyst]

Yes, I understand...

[Operator]

Sorry, could you come back in the queue, sir? We have our next question from the line of Harshal Patil from Mirae Asset Capital Markets.

[Harshal Patil, analyst]

Just have one question or clarification required. Sometime back you said that we've got some product launches delayed in FY '23 because of some regulatory permissions. So they would be pushed on ahead. So from that perspective, I just wanted to have your qualitative comments on the new launch momentum going into '24, '25. Any qualitative comments on your end would be helpful.

[Amit Bakshi, executive]

Yes. So if I get you right, you are asking that I commented on delays in the new launches because of regulatory issues. And you want some qualitative answer on that. And what is the pipeline looking for the next 2 years. Am I right?

[Harshal Patil, analyst]

Correct, sir.

[Amit Bakshi, executive]

Yes. So yes, these delays, they do happen in business. So there's nothing much to dwell into that. The only difference that it makes is it hurts the budgeting which you do at the start of the year, and you are aware of some movements. But one thing important which we didn't speak during the call, and I'm thankful for you for raising this up. From the last 3 months, we have started putting applications from our own R&D. Since now we have put three applications. One is [indiscernible] sitagliptin, which has got approved. We have done the BECT and the Phase III will start. The second is [indiscernible] dapagliflozin. And the third is a dapagliflozin with [ metoprolol ]. And it's good to tell you that all three had been approved in the first SEC meeting itself. In two, the BECT has already been done. The third one, the BECT will now happen. We just got the permission a couple of weeks back. So we have around 8 such applications to be moved in this year, right? So this is over and above what generally is coming in the market.

So look, let's do the probability number. When 1, 2, 3, 4 drugs come out of patent, then it is like 4 x 3 x 2 x 1. So that's how it multiplies, and then add up the SKUs, it just goes to a different level. So when Dapa came out, Indian companies didn't make Dapa one, they just -- we all combined it with all kind of products, which are all ethical and which are for the good of the patients. So these newer SKUs and the newer combinations will keep on hitting us. Right now, even '24 looks very, very busy on the new product side. And on top of it, we are hopeful that most of our 8 applications, which we are planning to move, will get success, fingers crossed, but I just told you how has the record been for the last three products.

So these things put together, and then another gliptin is getting out in August. There's something important getting out in September. So all put together, the plate is quite full. So going forward, you would see the new product growth being very, very significant for the market itself. And for some good reasons, it is diabetes that you're seeing the maximum number of launches compared to any other therapy. And then followed by cardiovascular, just because of the fact that Dapa has been approved in heart failure and sacubitril/valsartan is coming out. So these two things just make it too many combinations.

[Operator]

I would now like to hand the conference over to Mr. V. Krishnakumar for closing comments. Over to you, sir.

[Krishnakumar Vaidyanathan, executive]

Thank you for your participation in the call. To summarize, we've announced the acquisition of 9 dermatology brands with an annual revenue base of around INR 85 crores from Glenmark, for a consideration of INR 340 crores. This acquisition will give us a deeper presence in medical dermatology and leapfrog our derma covered market rank from #12 to #6. The performance of the Oaknet business continues to reinforce our ability to create value through M&A. The business is on track to exceed an EBITDA of INR 50 crores this financial year, which is 1 full year ahead of our expectation when we went into the deal. We have clear visibility on secular growth in the Cardio Metabolic segment and our three emerging therapies over the next 3 years.

We will continue pursuing growth opportunities in these segments through multiple levers, including new products, expansion of doctor coverage and inorganic expansion. Eris delivered a Q3 consolidated revenue of INR 423 crores, with an EBITDA of INR 137 crores and a profit after tax of INR 100 crores. For the 9 months ended December '22, Eris delivered a consolidated revenue of INR 1,282 crores with an EBITDA of INR 418 crores and a profit after tax of INR 313 crores. For the financial year FY '23, we expect to deliver a consolidated revenue growth of 25% to 26% and a consolidated EBITDA growth of 14% to 15%. Thank you all, and have a good evening.

[Operator]

Thank you. On behalf of Eris Lifesciences Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.