Gland Pharma Ltd

NSE:GLAND

Earnings Call Analysis

Gland Pharma Reports Moderate Growth Amid Challenges in Cenexi

In Q2 FY '25, Gland Pharma reported revenues of INR 14,058 million, a 2% increase year-over-year, driven by a 5% rise in the U.S. market. However, Cenexi faced a 5% revenue decline due to a scheduled shutdown. The consolidated EBITDA stood at INR 2,961 million with a margin of 21%. Notably, Gland's base business achieved a solid 34% EBITDA margin. The company aims for a positive EBITDA from Cenexi by Q4 2025, anticipating revenues to exceed EUR 200 million in the upcoming fiscal year. Despite a net profit dip of 16%, Gland remains optimistic, citing healthy cash flow and ongoing investments in R&D and new capacities.

Stable Performance Amid Challenges

Gland Pharma Limited reported its Q2 FY '25 results, revealing a consolidated revenue of INR 14,058 million, marking a modest 2% growth compared to INR 13,734 million in Q2 FY '24. This increase aligns with management's expectations, given slower market uptake globally and a necessary extended shutdown at its Cenexi facilities for operational upgrades. Notably, the core business outside Cenexi grew 5% year-over-year, demonstrating resilience in key markets including the U.S., Europe, Canada, and Australia, which accounted for 75% of total revenues.

Robust Core Business Fundamentals

The core business's EBITDA margins remained steady at 34%, similar to the prior year, which is a promising sign for investors focused on operational efficiency. The U.S. market, identified as the largest contributor, experienced a 3% year-over-year increase in sales, supported by new product introductions and the performance of existing products. During the quarter, Gland Pharma launched six new molecules, enhancing their competitive edge.

Impact of Cenexi on Earnings

In contrast, Cenexi's performance was less favorable, with a reported revenue decline of 5%, primarily due to the facility's planned shutdown for improvements. The gross margin for Q2 at Cenexi was affected, dropping to 69% compared to typical rates of around 77%. This contributed to a consolidated EBITDA margin decrease, ultimately reported at 21%, down from 23% a year prior. Cenexi's anticipated return to breakeven is projected for Q4 FY '25, spurred by the commissioning of new production lines expected to start by January 2025.

Guidance and Future Outlook

Management has adjusted their outlook for the U.S. market growth to low double digits, impacted by various factors including product launch timing and regional market dynamics. Total revenue guidance for FY '25 anticipates a growth rate of approximately 9%, driven by new product launches and recovery in the rest of the world (ROW) markets, particularly as business from Saudi Arabia is expected to normalize. The company projects reaching EUR 200 million in revenue in the following fiscal year, indicating increasing confidence in future operational performance.

Investment in Research and Future Growth

Gland Pharma maintained a strong commitment to research and development, allocating INR 493 million, representing 4.6% of revenue, signaling a focus on innovation and product expansion. Notably, the company received approvals for eight Abbreviated New Drug Applications (ANDAs) during the quarter, with a total of 363 filings and 304 approvals to date. The complex product pipeline, targeting a substantial market opportunity of $7.3 billion, underlines Gland's strategic focus on future growth drivers.

Cash Management and Financial Health

The company reported solid cash flows from operations amounting to INR 6,436 million in the first half of FY '25, positioning them well with a net cash position of INR 25,413 million after debt adjustments. Gland Pharma's ability to optimize its working capital and improve its cash conversion cycle to 149 days from 196 days a year prior reflects strong financial management. This operational efficiency is essential as the company looks to navigate challenges at Cenexi while investing in growth avenues.

Leadership Transition and Strategic Goals

The appointment of Shyamakant Giri as the new CEO marks a significant transition aimed at reinforcing Gland's strategic direction and operational execution. Mr. Giri's extensive experience in growth and management is expected to drive the company’s expansion strategies, potentially enhancing its market position across emerging markets while continuing to solidify operations in existing territories.

Earnings Call Transcript 2025-Q2

[Operator]

Good day, and welcome to Q2 FY '25 Earnings Conference Call of Gland Pharma Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ankit Gupta. Thank you, and over to you, sir.

[Ankit Gupta, executive]

Thank you, Sagar. Good evening, everyone. We welcome you to Gland Pharma Earnings Conference Call for Q2 of FY '25. My name is Ankit, and I head Investments, M&A and Corporate Strategy at Gland. In India office today, we have Mr. Srinivas Sadu, our Executive Chairperson and CEO; Mr. Ravi Mitra, our CFO. We also have Mr. Alain, the CEO of Cenexi, who is connected virtually from France. We'll begin the call with business highlights from Mr. Sadu, followed by an overview of Cenexi from Mr. Alain and lastly, the group financial overview by Mr. Ravi.

Before we proceed, I'd like to remind everyone that some of the statements made today will be forward-looking and are based on management's current estimates. These statements should be considered in light of the risk associated for our business. The call is being recorded, and the playback and script will be available on our website shortly.

With that, I hand over the call to Mr. Sadu for his opening remarks. Over to you, Mr. Sadu.

[Srinivas Sadu, executive]

Thank you, Ankit. On behalf of Gland Pharma, I extend a warm welcome to our Q2 FY '25 earnings conference call. As this will be the final call before the end of CY 2024, we wish you and your families good health and prosperity throughout the upcoming season. Today, we will review our financial results and operational developments for both the stand-alone entity and the group, which includes Cenexi, our European CDMO business.

At a group level, we reported revenue of INR 14,058 million in Q2 FY '25 compared to INR 13,734 million in Q2 FY '24, representing moderate growth of 2%. This performance is in line with our expectations given the slower uptake in the rest of the world markets for our base business and the impact of the extended annual shutdown at our Cenexi facilities due to the planned installation of a new ampoule line.

Let's take a closer look at our base business performance for the quarter, excluding Cenexi. We achieved INR 10,659 million in revenue, a 5% increase compared to the same period last year. This demonstrates the continued resilience of our operations in a competitive environment. Our base business EBITDA margins were steady at 34%, similar to Q2 FY '24. On a consolidated basis, our EBITDA margins for the quarter were 21%, impacted mainly by Cenexi, as previously mentioned.

We continue to see healthy performance in our core markets of the United States, Europe, Canada, Australia and New Zealand. These key regions contributed 75% of revenue in Q2 FY '25, up from 74% in the same period last year. In the U.S., our largest market, sales increased by 3% year-over-year. This growth was fueled by both an uptick in existing products and the successful introduction of new products.

During the quarter, we launched 6 molecules across 3 -- across these key markets, including 4 in the U.S. alone. Notably, products like Cetrorelix Acetate, Ephedrine Sulfate, Tranexamic Acid and Diazepam are gaining traction with our partners, and we are very optimistic about the future growth potential.

Now turning our attention to the rest of the world markets. We see that these regions contributed 19% of our revenue in Q2 FY '25, which is similar to Q2 FY '24. While we experienced a slight delay in order pickup from Saudi Arabia, we anticipate this will pick up in the second half of the fiscal year. We remain confident in the long-term growth potential of this important market and are actively working to strengthen our presence there. The Indian market recorded INR 874 million in revenue, and this segment contributed 6% of our total revenue.

In Q2 FY '25, our total R&D expenditure was INR 493 million, representing 4.6% of our base business revenue. During the quarter, we filed 7 ANDAs and importantly received approval for 8 ANDAs. This brings our total ANDA filings in the United States with 363 with 304 approvals and 59 pending. Globally, we now hold 1,726 product registrations, demonstrating our commitment to expanding our product portfolio and reaching patients worldwide.

Turning to our complex product portfolio. To date, we have 9 filings completed in a targeted portfolio of 19 products. Six of these complex products have already been approved and launched, with 3 were expected to be approved soon. Our complex products target and IQVIA market opportunity of $7.3 billion, reflecting the significant position of this segment to drive future growth.

The Chinese market, we are adapting our development strategy to address the evolving market dynamics. Four of the 9 products in the plan, the China market are currently under development and 5 have received approvals.

On the biologics CDMO business from India, while we await further developments of the previously announced potential collaboration during the quarter, Gland entered into a binding term sheet with Dr. Reddy Laboratories to establish our strategic Biologics CDMO of collaboration. This partnership will leverage our state-of-the-art biologics manufacturing facility at Genome Valley in Hyderabad. We are very optimistic about the potential of these partnerships to create value for both organizations, and we expect to sign a definitive agreement soon.

Lastly, on Cenexi. The business recorded INR 3,399 million, which is EUR 37 million in revenue this quarter, with a gross contribution of 69%. As anticipated, the annual shutdown impacted our performance, and we reported an EBITDA of negative INR 685 million, which is negative EUR 7.5 million for the quarter. However, our strategic progress at Cenexi is proceeding as planned. We also have Alain on the call with us today to provide a more in-depth update of recent developments and critical initiatives at Cenexi.

In closing, Gland has had a good first half of FY '25 and is optimistic about delivering strong financial results for the entire year. We are executing our strategic priorities, expanding into new markets and building a solid foundation for the future. As you may have already read, we are excited to welcome Mr. Shyamakant Giri, as our new CEO in January. Shyamakant is a highly accomplished leader with over 25 years of experience in driving growth and success across diverse organizations. This leadership transition is a key step in our long-term strategy, ensuring continued strong leadership and execution.

With that, I would like to hand it over to Alain for a closer look at Cenexi's performance. Thank you. Alain, over to you.

[Alain Kirchmeyer, executive]

Thank you, Sadu, and good evening, everyone. Cenexi's performance this quarter is in line with what we communicated during our last call. The performance was impacted by the summer shutdown, during which we invested in new capacity and performed annual maintenance. From a site standpoint, first, in Fontenay, we successfully installed the new high-capacity ampoule line, which is scheduled to start commercial production in January 2025. Due to a strong oversight, the project progressed well and remains on track with our original plans, both in terms of investment and implementation schedule. This new line will significantly increase our ampoule manufacturing capacity, improve customer service and generate additional revenue starting in 2025.

Secondly, in Herouville, validation batches for a new inactivated vaccine and an ophthalmic gel are progressing well. And commercial production is expected to begin before the end of the year. The site is still operating at low volumes. However, we continue to see new business traction. In Braine-l'Alleud, Belgium, we experienced a temporary setback caused by lyophilizer breakdown at the site. We are currently operating at full capacity with our remaining lyophilizer. The issue will be fully resolved during the quarter, and a new backup unit will be installed in the first half of 2025 to prevent future disruptions.

While we are making good progress and our course correction plan is gaining momentum, I want to highlight that these temporary headwinds at the Braine-l'Alleud site will impact our quarterly performance. That being said, we continue to strive for achieving our short-term goals, a positive EBITDA for Q4 or full year 2025. We also maintain our medium-term goal of a positive EBITDA for the next fiscal year, driven by an increase in revenue above the EUR 200 million threshold.

Thank you. I will now turn the call over to Ravi to discuss financial performance. Ravi, please proceed.

[Ravi Mitra, executive]

Thank you, Alain. Good evening, everyone. We appreciate you taking the time to join us today. Let's review our financial performance for the quarter and first half of the fiscal year 2025. In Q2 FY '25, our consolidated revenue from operations was INR 14,058 million, a 2% increase year-over-year, driven by a modest growth in our base business in U.S. At Cenexi, the revenue for this quarter was lower by 5% year-on-year due to the extended shutdown for installation of the new ampoule line at Fontenay.

Base business revenue increased by 5% year-on-year. For the first half of FY '25, revenue reached INR 28,075 million, marking a 9% year-over-year increase. Our other income for the second quarter reached INR 596 million. This includes INR 542 million from interest on fixed deposits and INR 45 million in foreign exchange gains. For the first half of the fiscal year, other income totaled INR 1,111 million, INR 1,023 million from interest income and INR 45 million from foreign exchange gains.

The gross margin for Q2 FY '25 was 59% compared to 62% in Q2 FY '24, primarily impacted by lower gross margin at Cenexi. Gross margin of our base business remained stable at [ 56% ]. For H1 FY '25, the gross margins were at 59% versus 62% in H1 FY '24.

Our Q2 FY '25 consolidated EBITDA was INR 2,961 million with a 21% margin. This compares to INR 3,205 million and a 23% margin in the same period last year. The decrease is primarily attributed to losses at Cenexi. Importantly, our base business delivered a strong 34% EBITDA margin, which is similar to the prior year. Operating expenses at our base business remained in line with previous quarters. The EBITDA for first half of FY '25 increased by 5% year-over-year, reaching INR 3,645 million. This translates to a 21% EBITDA margin for the group, with our base business achieving a 34% margin.

Our net profit for Q2 FY '25 stood at INR 1,635 million, a 16% decrease compared to the same period last year. For the first half of the fiscal year, our net profit reached INR 3,073 million with an 11% profit margin. In the second quarter, our total R&D expense were INR 493 million, representing 4.6% of revenue from operations, excluding Cenexi. This is up from INR 351 million in the same period last year, reflecting our ongoing commitment to adding new products. For the first half of the year, R&D expense totaled INR 982 million or 4.7% of revenue. Our effective tax rate remained consistent at 26% for both the second quarter and first half of the fiscal year.

We continue to invest in our future growth. This quarter, we incurred INR 1,037 million in capital expenditures, primarily for the module expansion of our Pashamylaram plant and Cenexi. This includes at Cenexi, we invested an additional EUR 7.19 million primarily towards new capacity and debottlenecking.

Our strong operational performance generated INR 6,436 million in cash flow from operations during the first half of the year. We ended the quarter with INR 28,201 million in cash and cash equivalents. After accounting for Cenexi's debt, our net cash position was INR 25,413 million. We have also made significant progress in optimizing our working capital, which now stands at INR 20,453 million. Our cash conversion cycle has improved to 149, down from 196 days in the same period last year.

With that, we will now open the floor for questions.

[Operator]

[Operator Instructions] Our first question comes from Tushar Manudhane from Motilal Oswal Financial Services.

[Tushar Manudhane, analyst]

Yes. So first, to start with the bookkeeping question in terms of this milestone income and the profit share this quarter, if you could share?

[Ravi Mitra, executive]

The profit share for this quarter is 8% of revenue at Cenexi.

[Tushar Manudhane, analyst]

Okay. And the milestone income?

[Ravi Mitra, executive]

It is 7%.

[Tushar Manudhane, analyst]

Sir, on the core market sales in terms of -- the sales has been stable for 2 quarters now, while there has been few launches as well. So when do we see the pickup in this segment -- meaningful pickup in this segment?

[Srinivas Sadu, executive]

On a year-on-year basis, still -- U.S. is still growing. Now if you see a couple of things which happened. ROW has degrown. The tender offtake didn't happen last quarter, which we're expecting in Saudi [indiscernible]. That will happen this [indiscernible]. That's one aspect. And one big what we got in [indiscernible] that also will go at this quarter. So that will be a jump on the U.S. business and the ROW business.

But basically, it's a steady growth, which is happening. We are losing some products. Whatever we launched till last few quarters, of course, the few first -- to see last quarter will not take products. This quarter, we launched 6. And always, when we launch products that quarter will have a higher offtake and then it kind of reduces to a normalized numbers. So that's what will happen. But I think some products will go and will be lesser offtake and some will grow. But overall, I think as you take year-on-year, it's about 9% growth.

[Tushar Manudhane, analyst]

So let say, compared to, say, INR 50 crores to INR 60 crores of core market sales in FY '24. And the first half, we have achieved INR 16 crores. So likewise, considering these so many launches, so what kind of growth can be expected in the second half for core market?

[Ravi Mitra, executive]

Are you asking what kind of growth do you expect in the second half for the new products launched?

[Tushar Manudhane, analyst]

For the core markets overall sales.

[Ravi Mitra, executive]

Okay. So first year, we grew by 9%. And considering the factors we just discussed about ROW and U.S. and [indiscernible] timing. We should be -- on a full year basis should be around what we earlier told you about, single digit -- low double-digit kind of growth we are expecting the [indiscernible].

[Tushar Manudhane, analyst]

Got you. And with respect to this biologics agreement, so this is possible for which set of markets in first phase as in U.S., ROW?

[Srinivas Sadu, executive]

We can't really comment on that. It's basically some of the biologic products what Dr Reddy's is going to develop.

[Unknown Executive]

So that's a collaboration we have done. And for now, I think that's what we could [indiscernible].

[Tushar Manudhane, analyst]

Okay. And can you do a time line to see the meaningful benefit of the commercial benefit from these agreements?

[Srinivas Sadu, executive]

The initial financial benefits will get from first quarter of next year. And then depending on the timing of the products and the development then it will pick up.

[Operator]

The next question comes from Neha Manpuria from Bank of America.

[Neha Manpuria, analyst]

Just extending the question from the previous participant. If I look at the U.S. revenue and strip out the profit share and milestone, it's remained at the $70-odd million for 3 quarters now despite the fact that we have launched the number of products that we have.

I didn't quite catch your comment on why you think the U.S. should pick up. And how that low double-digit growth for the entire stand-alone business would come through given if I look at the ROW business, it's also we have been declining in the first half. So just trying to tie in your low double-digit guidance with the fact that U.S. has remained flat for 3 quarters?

[Srinivas Sadu, executive]

So the milestone income and the launches, actually, they're not that much related. Maybe a portion of that will come from the launches. But mostly, it's new contracts what you signed in that quarter. The milestones are also related to that and also some of the CDMO, CMO contract at this time, we also get miles from that. But It's not...

[Neha Manpuria, analyst]

No sir, sorry. My question is, if I strip out the milestone and the profit share, the U.S. revenue for the last 3 quarters has been about $70 million. I'm not asking about the milestone in the profit share. And I think you did mention in the previous comment that your U.S. business should step up from next quarter. Why do you think given that we've already seen so many launches, and we haven't really seen an improvement in the U.S., what gives you the confidence in improvement in the U.S. business, ex milestone and profit share. And given that we've been flat on the U.S., how do we plan to achieve that low double-digit revenue that you're talking about?

[Srinivas Sadu, executive]

Yes. So one is, of course, the new launches, it will happen in every quarter, that's one. Second, as I mentioned, in [indiscernible], the new contract what we're signed, it's not dispatched yet, that will happen this quarter, the [indiscernible] contract, which our part was signed up. And the Saudi business [indiscernible] and that has not gone. So that will start again from this quarter. So these are substantial amounts. If you see the ROW business has de-grown primarily because a lot of chunk business comes from [indiscernible] [ Saudi ] so, that will keep up. Yes.

[Neha Manpuria, analyst]

Understood. Understood. Okay. And my second question is on Cenexi. It seemed while the summer shutdown was well articulated and we understand that. But I did see a very sharp decline in gross margins in this quarter. Usually, we do like a 77% gross margin, that seems to have come off fairly sharply if you could explain that? And what we should expect from a gross margin perspective? I mean, is there any one-off in this number from a margin that you've reported this quarter?

[Ravi Mitra, executive]

Yes. So gross margin this quarter, reduction is largely because of the mix of products where, in the Belgium side, there has been lower uptake as compared to last year. And other sites were more or less in line with Q1. But the mix of the sites will depend on -- will give the gross margin overall basis. So mix is one of the reasons for reduction to 69%.

[Neha Manpuria, analyst]

And this should normalize based on the opening comment that we have resolved the issues?

[Ravi Mitra, executive]

Yes, it should go back to their earlier gross margin level.

[Neha Manpuria, analyst]

Okay. And sir, on Cenexi, is it fair to assume that as we go back to the EUR 50 million per quarter run rate, in the third quarter, we should be able to achieve breakeven in the December quarter. Would that be a fair assumption?

[Ravi Mitra, executive]

So third quarter, we will not be able to comment, but we are targeting after the new line to be up and running from January that should definitely achieve.

[Neha Manpuria, analyst]

Okay. Understood. And my last question on the CMO that you signed with Dr. Reddy's. Are there any more talks with any other partner on this? Or you think the tie-up with Dr. Reddy's would be enough for us to fully utilize the capacity that we have?

[Srinivas Sadu, executive]

No. So this is an open contract, so we can still get other CDMO businesses, likewise, they can also look for other businesses. So it's not that is fully dedicated to just Dr. Reddy's...

[Neha Manpuria, analyst]

Understood. Understood. And sir, what would be the peak revenue potential from this CMO opportunity with Dr. Reddy's? If you have to just put a number, I'm not asking for a time line, but what could be the peak revenue in your view?

[Srinivas Sadu, executive]

It's too early to comment, Neha. Yes.

[Operator]

Next question comes from Bino Pathiparampil from Elara Capital.

[Bino Pathiparampil, analyst]

Starting with this Dr. Reddy's contract, is it for the entire API formulation, et cetera? Or is it -- will it be just a formulation?

[Srinivas Sadu, executive]

It's mostly a drug substance.

[Bino Pathiparampil, analyst]

API?

[Srinivas Sadu, executive]

Yes.

[Bino Pathiparampil, analyst]

Okay. And would it be for the semi regulated markets or regulated markets?

[Ankit Gupta, executive]

This is Ankit [indiscernible] then specifically mentioned as to what market it could cover, they are developing products for the global markets and our site is also designed to service all kinds of markets. So at some point in time, it will be a combination of both [indiscernible] market, but let the fine print come and we'll be able to discuss more specifics then.

[Bino Pathiparampil, analyst]

Okay. Got it. Second, I just quite understand what's the issue with Saudi business. Could you please explain what exactly happened?

[Srinivas Sadu, executive]

So we did win a tender in Saudi. Some of the products offtake has happened. In [indiscernible], the offtake has not happened. The quantities from the previous supplies what we made with the previous tender, that is still there. The stocks are there. So that will offtake will start happening from end of this quarter.

[Bino Pathiparampil, analyst]

Okay. It's just that didn't sell in the earlier quarter, there was no specific incident per se?

[Srinivas Sadu, executive]

It's just the timing, yes.

[Bino Pathiparampil, analyst]

Okay. Okay. And one last question. You have a tentative approval for Latanoprostene eye drops in the U.S. Is that a product likely in the next 12 to 24 months? Or is it far out?

[Srinivas Sadu, executive]

It's under -- it's a [indiscernible], so I can't comment too much on it.

[Operator]

The next question comes from Jinesh Shah from RSPN Ventures.

[Jinesh Shah, analyst]

So my first question was with respect to the Cenexi business. As you mentioned, that we'll be able to do the breakeven for the EBITDA probably by quarter 4. So I would just like to know about the outlook for the EBITDA margins with respect to the Cenexi business that how we are looking for the next year onwards with expect EBITDA margins. What is our vision in that?

[Ravi Mitra, executive]

So see the -- we expect after the new line and some of the additional CapEx to be done, we'll -- next year, we'll end up at EBITDA neutral or low single digits. A year after that, when all the capacity is on stream and we get all the pipeline projects commercially on then we'll end up at the old 10% EBITDA level.

[Jinesh Shah, analyst]

Okay. Okay. Then my other question would be with respect to the maintenance shutdown things, is it like the annual thing that we will expect in next year in FY '26, too, that will impact one of the quarter with respect to revenue in the business or something like that? It's like the annual thing or it's like the periodic phase that we [indiscernible] shutdown?

[Srinivas Sadu, executive]

It's annual maintenance. Every year, this will have, just a few days here and there, but more or less, it will be 3 to 4 weeks. But I think first couple of years, we'll try to use that time to install additional capacity.

[Jinesh Shah, analyst]

So we are expecting in quarter 2 of FY '26 as well, right?

[Srinivas Sadu, executive]

Sorry?

[Jinesh Shah, analyst]

So we are expecting another maintenance shutdown in FY '26 quarter 2 approximately, if I can assume?

[Srinivas Sadu, executive]

No, no, it will be in August of every year.

[Jinesh Shah, analyst]

Okay. Okay. Fair enough. And my last question would be with respect to the tax rate that I would just like to know the reason that though Cenexi is in like a loss-making company at the moment and standard tax rate is around 25%. And how could we are like charged more tax, which is approximately 34% in overall consolidated business?

[Ravi Mitra, executive]

Yes. Because of the Cenexi's negative PBT, there is no tax being created for deferred tax as such. That is why you are unconsolidated, which you are saying is a higher tax rate. Once Cenexi comes back to profitability, then we'll go back to our corporate rate.

[Operator]

The next question comes from Saion Mukherjee from Nomura.

[Saion Mukherjee, analyst]

Your recently announced appointment of Shyamakant Giri, so can you take us through the thought process of separating your role [indiscernible] and what were the thoughts of hiring someone like Shyamakant to run as a CEO here? And should we read something more strategic here? What are you expecting going forward for the new CEO to sort of focus on?

[Srinivas Sadu, executive]

Yes, I think it's more to strengthen the senior leadership to grow the business. And I'll be taking the role of more strategic and long-term -- mid to long-term initiatives, and also a bit more time at probably Cenexi because it needs a little bit more focus. And the new CEO will focus on the rest of the business. And also he brings in more experience in ROW and other market also. So that also adds to our strategy of growing business in different markets, while we continue to have that solid business in the U.S. market. That's the basis.

[Saion Mukherjee, analyst]

Yes. So [indiscernible] given Mr. Giri's experience of running front end, especially in our domain of emerging market. Is that something you are aggressively looking at going forward? [indiscernible] earlier mentioned [indiscernible]?

[Srinivas Sadu, executive]

Yes, we are evaluating that often. I mean, there are pros and cons for that. So that's actively in the evaluation, yes.

[Saion Mukherjee, analyst]

Okay. And secondly, on the bio contracts, so if you can -- I think you mentioned about Dr. Ready's, so how have the discussions evolved if you can give us a sense now what kind of traction we should expect, let's say, from a 2-, 3-year perspective? What are the next milestones that we should watch out for?

[Srinivas Sadu, executive]

I would say this is very important what we just announced because it also gives us the experience and learning what is required in this business. And normally, a lot of companies look at what you've been doing, because it's a new area we're entering. While we're doing this, we're also having some tangible discussions with some of the other players. This will only probably expedite those kind of discussions that we are having. So we can't put a number to it, but it's definitely -- both from -- while it may not add up huge numbers in the near term, but it's -- I would say, it's a foundation laying for the future with smaller revenues in the beginning, but it all depends on how much your business [indiscernible]..

[Operator]

The next question comes from Vivek Agarwal from Citi Group.

[Vivek Agrawal, analyst]

My question is related to U.S. business. So in first half, is it possible for you to quantify the contribution of new products in the U.S. revenue? Basically, how many -- you might have launched around 10 plus products, right? So what is the current contribution in their finance revenues?

[Srinivas Sadu, executive]

The total contribution for the first half, I think, is around about INR 60 crores.

[Vivek Agrawal, analyst]

Okay. So new product contribution is INR 60 crores. Okay. And the second question is how the volumes have grown as far as the rest of the products in the U.S. or the base product -- baseline products in the U.S.?

[Srinivas Sadu, executive]

The -- from a quantity perspective is about 5% growth in the U.S. compared to the Q1.

[Vivek Agrawal, analyst]

Compared to the Q1, okay. And Y-o-Y, what kind of the volume growth was there?

[Srinivas Sadu, executive]

Y-o-Y, it's about a similar 5%.

[Operator]

The next question comes from Anubhav Agarwal from UBS.

[Anubhav Agarwal, analyst]

One, I'm just trying to understand your R&D. So annually, R&D is about INR 200 crores. And I understand from past costs that when you report R&D, part of the R&D spent by the partners also. So can you just help, if you are spending INR 200 crores a year, what would be the gross R&D spend of partner plus you put together roughly?

[Srinivas Sadu, executive]

Anu, just give a second. Vivek, just correct. I think year-on-year, the growth based on the volume is about 13%. 5% is quarter-on-quarter, but year-on-year it's 13%, quantity increase.

[Anubhav Agarwal, analyst]

you want me to repeat the question?

[Srinivas Sadu, executive]

Anubhav, can you repeat now?

[Anubhav Agarwal, analyst]

Yes, absolutely. So my question was on R&D. So Gland R&D annually is about INR 200 crores. And my understanding was, and you can correct it that when for any ANDA that you submit on an average part of the R&D is reported by you, part of the R&D spent by your partner. So on a gross basis, the R&D is higher. So I'm just trying to understand when annually your R&D is INR 200 crores, your partner and you put together, on an average, what would be the gross number?

[Srinivas Sadu, executive]

No. So our partner won't put anything into our R&D, It's 100% our R&D cost.

[Anubhav Agarwal, analyst]

So I'm just trying to understand, so you filing about what 30 products annually and you're spending about $25 million on R&D?

[Srinivas Sadu, executive]

That's correct.

[Anubhav Agarwal, analyst]

So how are you -- I mean you effectively spending $1 million per product, per ANDA give and take, right? And that's a huge payback period. So why are you only filing -- I mean, given your cash book, et cetera, why you're not saying 2x the product or 3x the product opportunity is not small. So just trying to understand, first, versus all other companies that we track, $1 million per ANDA is the lowest I think that we've seen in Gland. And then I cannot understand why are you not filing 2x or 3x of the product that you are filing today with that efficiency.

[Srinivas Sadu, executive]

Give me a second. So one is, of course, what is the pipeline left, right? We already filed 360 products. That's not much pipeline left. That's one. Second, a lot also is going into complex products. That takes larger number of people compared to this. And we also -- we have to balance between your fixed costs and your -- and also the investments what you make.

So while a lot of products also have to look at what capabilities our R&D has, so whether they can actually make some of these products. So we have to increase number of people to double if you have to file more. And we have to look at -- and this is not like you can hire today and then remove off [indiscernible]. So we have to manage -- we had a balance between the filings and how we want to grow this business and then the return on those products.

[Anubhav Agarwal, analyst]

Sir, can I ask you one more question on this. But effectively, if you're spending only $1 million per product, I mean I think you'll be easily able to recover that. There is no question about you're having to fire people after 2, 3 years, even if there is a miss on products. I'm not able to understand that if you're spending $1 million per [indiscernible], $2 million as a CapEx per product, that in the injectable period, with that margin that you have, you're not able to -- even be able to recoup the investment. So where does that doubt come in from?

[Ankit Gupta, executive]

Anubhav, I'll answer this question. See, basically, if you see today, we are a pure play injectable company. And as far as the generic product is concerned, we are by and large, covering most of the opportunities that we can do from our R&D in India. We can't do a certain set of therapeutic categories because of contamination or whatever issues. But outside of that, whatever is the addressable market for us, we are doing it from the R&D capabilities in-house. The way we want to fund the future growth is also to look at outsourcing models and maybe co-development models wherein we can partner with somebody who's more specialized in doing those developments and sort of a fortunate for budgets and capital investments to that side rather than building it only on the organic R&D side.

One, it will speed up the overall process of getting approvals. And second, it will also improve the overall value chain of the products which are going to come on stream for us in the future.

[Anubhav Agarwal, analyst]

Sure, guys. I'll take this a little offline as well. Just one more clarity on Genome Valley, what is the capacity over there?

[Ankit Gupta, executive]

So it's about 8,000 liters [indiscernible] capacity. And we have only used 30% of the site, the capacity can actually go up very significantly. It has quite a lot of unused land. But today, the installed capacity is about 8,000 liters, and it is a mammalian capacity single-use [indiscernible] as well.

[Anubhav Agarwal, analyst]

And for this 8,000 liters, what was the equivalent gross drop here? I mean what kind of investment would have gone in to create this capacity?

[Ankit Gupta, executive]

We have invested close to INR 300 crores on the site.

[Operator]

The next question comes from [indiscernible] from MSA Capital Partners.

[Unknown Analyst]

Sir, a couple of questions on Cenexi. So I was just seeing, in Q2, the overheads in Cenexi P&L has come down. Anything that the management has undertaken, any strategy downsizing anything that you can highlight on that? Hello?

[Srinivas Sadu, executive]

Give me a second.

[Ankit Gupta, executive]

The overhead reduction is purely a function of the site running for 2 months instead of 3. And what happened is while we have a fixed cost structure, which will not be impacted by a month of shutdown, but there are certain other additional costs which come into play when the site is up and running, say, the contract labor and multiples at a light cost. That would not form part of the P&L because the site was not running for, let's say, 3 to 4 weeks.

[Unknown Analyst]

Okay. So this will again go up once we start -- once we start operating it in the normal periods?

[Ankit Gupta, executive]

Yes. Probably for that, we should look at the Q1 numbers. Q1 kind of expense base is what we would have in future as well. But obviously, the revenues would go up because our month-on-month run rate is now picking up significantly. In fact, September and July were very decent in terms of the monthly run rates we had from the site.

[Unknown Analyst]

Understood. And just to double click on the previous participant's question. There was a question about Cenexi breakeven period and once the EBITDA starts to mature that is in year 2 FY '26, FY '27. And you had said that this particular company will be generating anywhere between low double digits EBITDA margin.

So just wanted to understand the management's thought process when we acquired this business, even though this is a gross margin accretive business, it is being a big drag on the EBITDA margin. So if you can just -- it's a bit philosophical question, if you can just highlight that what is it that we are looking to get from Cenexi?

[Srinivas Sadu, executive]

Of course, one is the European branded generics business, and we didn't have any presence in Europe, that's one. Second, it's solid CDMO business in spite of the problems and the issues we say and the business is intact with long-term contracts. And this also helps in -- and also some of the technologies, what this business has, we don't have. So we can use those technologies to file some of our products as well.

And also the -- they have -- they also manufacture [ control ] substances for U.S. and Japan market. That opens up some of the portfolio for Gland also. So there are several areas what we looked at when we acquired this business, but we always knew that it will be EBITDA negative for us in terms of dilutive to Gland, but we also looked at how we can make it more efficient in a duration of time. But it took longer than what we anticipated because of the issues, what we had there.

But in the long run, I think the business is solid, and we also -- we're looking at a lot of long-term opportunities coming because of this European assets. Because most of the time, the big pharma in Europe, they want to -- we wanted the products from the European manufacturing side, this will open up those opportunities.

So I say this was a long-term play what we looked at, and also entering European market with our own products is more competitive and very difficult [indiscernible] it was like a combination strategy of CDMO and our own portfolio how to increase in certain areas where we can't enter -- like the control systems, we can't take it from India to U.S. but there's an opportunity where we can take from there [indiscernible].

[Unknown Analyst]

Also other question that I had, we -- currently, we have a gross block of somewhere around INR 4,500 crores. How fast, how quickly can you see that we come back to a normal asset turnover of 2, 2.5x that we used to do 2 years back? And if you can give me a split between Cenexi business and Gland business ex Cenexi at peak revenues that I'm assuming will be 2.5x gross block?

[Ankit Gupta, executive]

Yes. So on the Gland side, the new CapEx which we have put up in Pashamylaram site, we'll go upstream from next year, which is bag line and the microsphere dry powder line. And a few hormone suspension also will come from next year. So that will bring us back to our old Gland asset run rate, which is 2, 2.5x.

On the Cenexi this year, we would be like EUR 165 million. But next year, we expect to reach EUR 200 million, which is almost like 0.8x. And once we start commercializing the new capacity, which we are putting like one is [indiscernible] line, the new ampoule line and a few other lines also which we are currently planning, then we should have a much higher, between 1 to 2x asset turn, as Cenexi as well. But that will take on a midterm basis and not next year.

[Unknown Analyst]

Understood. Understood. Just the last couple of questions, sir. Sir, in Cenexi, so what I could understand is that the Normandy site is the one that is causing the overhead to shoot up and our asset turns to be low. Is that a fair understanding?

[Ravi Mitra, executive]

Yes, that's correct.

[Unknown Analyst]

Understood. And sir, a bookkeeping question. So goodwill has gone up in September in H2 in the balance sheet. What has led to that? Because we haven't done any acquisition in this H1, correct?

[Ravi Mitra, executive]

Your voice is breaking. Can you repeat that question?

[Unknown Analyst]

So my question is goodwill has gone up from March to September in the balance sheet. So....

[Ravi Mitra, executive]

It's just an exchange difference.

[Operator]

The next question comes from Amlan Das from Nomura.

[Amlan Jyoti Das, analyst]

Sir, my question is regarding the ROW markets. Except the Saudi Arabia market, how has been the performance in the other [indiscernible] markets like LatAm? And what is your outlook regarding these markets?

[Srinivas Sadu, executive]

So the APAC business has gone up and there also several approvals in [indiscernible] start exporting. Mexico business has started in [indiscernible]. If you actually remove Saudi [indiscernible], the rest of the business [indiscernible], but once this comes back, then I think overall ROW business is back on track with the group.

[Amlan Jyoti Das, analyst]

So I dropped in between, I could you just repeat once, I'm sorry.

[Srinivas Sadu, executive]

Are you dropped off?

[Amlan Jyoti Das, analyst]

Yes, your voice dropped in between I couldn't, could you just repeat once?

[Srinivas Sadu, executive]

No. What I said is APAC business has grown, and we also launched new products in South Africa and also Mexico the business started last quarter. So this will start picking up. If you actually remove Saudi and see the rest of the business, it has grown up. It has gone up. So once we start shipping out some of the key products to the Saudi, then I think overall business will be back on growth track.

[Amlan Jyoti Das, analyst]

Okay. Sir, how was been the performance in markets like Brazil and Argentina where you were quite [indiscernible]?

[Srinivas Sadu, executive]

I think that is a steady business we're having in Brazil. Yes.

[Operator]

The next question comes from Shyam Srinivasan from Goldman Sachs.

[Shyam Srinivasan, analyst]

Just the first one on the stand-alone or core costs, right? If I look at gross margins, I think, are down like 50, 60 basis points. So what is explaining just the core gross margins coming off? Is it mix?

[Ravi Mitra, executive]

So as compared to Q2 of last year, it has come down by 1% and that is largely a factor of mix, which you rightly said and also the profit share and element on that.

[Shyam Srinivasan, analyst]

Got it. So this is, say, something like [indiscernible] any of those products which are higher in contribution today versus last year?

[Ravi Mitra, executive]

Yes. But as compared to Q1, our gross margin has gone up actually from...

[Shyam Srinivasan, analyst]

Correct. Yes. So what is driving that Q-on-Q improvement?

[Ravi Mitra, executive]

So that's a mix actually.

[Shyam Srinivasan, analyst]

Okay. So versus last year, mix is inferior, but versus quarter 1, it's better?

[Ravi Mitra, executive]

Yes.

[Shyam Srinivasan, analyst]

Got it. And if I look at core margins have remained flat Y-o-Y. So -- and R&D has gone up 40%. So other expenses, excluding R&D, is actually down quite a bit even quarter -- Q-o-Q is down 20%. So is that sustainable? Or is there any one-off there in terms of the lower cost -- lower other expenses?

[Ravi Mitra, executive]

So power and fuel has gone down at India.

[Shyam Srinivasan, analyst]

No, no. In the [indiscernible] report your power fuel employee, you have other expenses, above EBITDA. So other expenses, I'm excluding R&D, which is up 40%. So that leaves the other, other expenses is actually down 25% of something Y-o-Y.

[Ravi Mitra, executive]

So Y-o-Y, other expenses are actually same, but quarter it has come down, right?

[Shyam Srinivasan, analyst]

Yes, in other expenses. Sir, I'm just removing R&D cost. That's an okay assumption, right? That's where you book R&D?

[Ravi Mitra, executive]

No, It's largely this quarter is a rate we can consider because there is large -- previous year, there would have been some consulting expense for acquisition and other strategic advisory we were taking.

[Shyam Srinivasan, analyst]

Got it. Got it. And my last question, just on guidance, sorry, I missed it. So we earlier had a mid-teen growth guidance for the U.S., right? So you are now seeing is low double digit. Is it? Sorry, I missed this.

[Ankit Gupta, executive]

That's right, Shyam. We are seeing low double digit as the top line growth expected.

[Shyam Srinivasan, analyst]

Yes. Ankit, and what's driving -- volume growth seems to be strong. So I'm assuming is it like because of pricing pressure? Or what explains that or slower like new product launches?

[Ankit Gupta, executive]

Yes. So it's going to be a combination of new launches, which are slated to be done in H2 of this year. And then at the ROW level, we did talk about the Saudi Arabia business, which is going to get back to normal. There were certain [ sales ] to Q3 and Q4, which would pick up. A combination of new launches, a steadiness in base business and the pickup in ROW would drive this growth.

[Operator]

The next follow-up question comes from Neha Manpuria from Bank of America.

[Neha Manpuria, analyst]

Just a follow-up question on the CMO biosimilar business. What is the cost that we are booking for quarter in terms of the burn from this capacity? And once the contribution from Dr. Reddy's starts coming, is it fair to assume that we'll be able to achieve breakeven on the cost starting FY '26?

[Ravi Mitra, executive]

So the biologics you're asking on?

[Neha Manpuria, analyst]

Yes.

[Ravi Mitra, executive]

So current cost is about INR 3 crores to INR 4 crores per quarter. And on the revenue side, as we mentioned earlier, it's too early to comment on that.

[Neha Manpuria, analyst]

INR 3 crores to INR 4 crores per quarter. That's all the costs for the CMO business?

[Ravi Mitra, executive]

That's the current running costs we are incurring.

[Neha Manpuria, analyst]

Okay. Okay. So this is -- as and when that Dr. Reddy's supply coming through, this cost go up, I am assuming?

[Srinivas Sadu, executive]

Yes. This might go up a bit, but the business should cover all those costs.

[Neha Manpuria, analyst]

Yes. Fair enough. Okay. And my second question is, do we have any GLP products in our pipeline or have a partners reached out to us for any GLP products given we have requisite capacity for that, even if it's [indiscernible]?

[Srinivas Sadu, executive]

Yes, we do -- we have already signed a few GLP1 contracts on the CDMO side yes.

[Neha Manpuria, analyst]

This is for the regulated market, sir?

[Srinivas Sadu, executive]

Yes.

[Neha Manpuria, analyst]

And supplies would start when?

[Srinivas Sadu, executive]

Well, there are all patents around it, right. So it should be around -- so we can't really tell the dates because it all client products. So it's -- yes, but we are signed with, I think, 3 different customers on GLP.

[Operator]

The next question comes from Sunil B. Khadri who is an Individual Investor.

[Unknown Attendee]

My question is that when it's likely to be like breakeven of the Cenexi business?

[Srinivas Sadu, executive]

Sorry we lost you.

[Unknown Attendee]

When is likely like now for Cenexi business, we are not doing any profit. We are incurring losses. So when it's likely to be like a breakeven for the Cenexi business? And whatever the capital expenditure you are incurring for this development. So where is likely to be completed and the production plant will give the 100% utilization?

[Srinivas Sadu, executive]

Cenexi, EBITDA level breakeven will happen in Q4. And the CapEx cycle will complete in the next 1 to 2 years' time.

[Unknown Attendee]

Two years' time?

[Srinivas Sadu, executive]

1 to 2 years, more than 1...

[Unknown Attendee]

Your India operations are good. Actually, they are looking -- the Cenexi is making a track on the balance sheet.

[Ravi Mitra, executive]

Yes. So as Sadu mentioned, that this is a -- business is very solid there. We need to invest and improve our capability then the performance will surely follow.

[Unknown Attendee]

So you mean to say that it will take another 1.5 years to 2 years to go the plant onstream or 100% utilization for Cenexi?

[Srinivas Sadu, executive]

No, no. Currently, some of the plants are already well utilized. There are 2 plants which are not 100% utilized. So there are several technology transfers which are happening. So by the time those gets commercialized, it'll take a year or so. So what we're saying is while we want to invest for the new capabilities there, of course, somebody is mentioning about GLP capabilities also. There's also demand for that in European markets. We're also looking to investing in those new capabilities and future growth of Cenexi business.

But for the current capacities, a couple of plants are already fully utilized and a couple of plants, there are projects which are getting transferred. So by the time those gets commercialized, it will take for a year. And that's why we are saying by next year, first quarter, we'll be EBITDA neutral.

[Operator]

Ladies and gentlemen, we would take that as a last question for today. I now hand the conference over to Mr. Ankit Gupta for closing comments.

[Ankit Gupta, executive]

Thank you, everyone, for joining us today. We appreciate your participation and the questions during the call. If you have any follow-on questions today, please feel free to reach out to us. Looking forward to interact with you in the next quarter now. Thank you.

[Operator]

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