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Ladies and gentlemen, good day, and welcome to the Q3 FY '18 Earnings Conference Call of Glenmark Pharmaceuticals Limited. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Mr. Jason D'souza. Thank you, and over to you, sir.
Thank you, Irma. Good morning. Welcome to Glenmark's Q3 earnings call. I would first like to introduce the members of Glenmark management. We have with us Glenn Saldanha, Chairman and Managing Director of Glenmark Pharmaceuticals. We have with us Robert Matsuk, President, North America and API Business. And we have with us V.S. Mani, Chief Financial Officer and President, Glenmark Pharmaceuticals Limited. Before we begin the call, I would want let Bob Matsuk to give you a few remarks regarding the U.S. business. Over to you, Bob.
Okay. Thank you, Jason, and thanks, everyone, for joining us today. The North American finished dosage form business, which includes Canada and the U.S., closed the third quarter with recorded revenues of USD 113.7 million. That was versus last year's corresponding quarter, which was USD 183.27 million, a decrease of 40.21%. Sales from last year's corresponding quarter reflect the launch of ezetimibe, generic version of Zetia, which had exclusivity in the United States in December 2016. On the approval side, the U.S. was granted 4 approvals in Q3. They were as follows: the Aprepitant capsules; HAILEY 24 Fe, which is norethindrone acetate and ethinyl estradiol and ferrous fumarate, 1 milligram/20 microgram; HAILEY Fe 1/20, norethindrone acetate and ethinyl estradiol tablets USP, 1 milligram/20 micrograms and ferrous fumarate; norethindrone acetate and ethinyl estradiol tablets USP and ferrous fumarate tablets, 1 milligram and 20 microgram and that's the generic equivalent for Minastrin 24 Fe. Glenmark continued to gain market share on both new and existing products, building new business for both new and current products. In total, we have 20 ANDAs approved year-to-date, with 2 Canadian approval and 12 U.S. approvals in the last 2 quarters. Three of the U.S. approvals are tentative approvals. The company also filed 4 ANDA applications with the U.S. FDA this past quarter and plans to file an additional 8 to 10 application in the forthcoming quarter.Glenmark's marketing portfolio consists currently of 130 generic products authorized for distribution in the U.S. market. The company currently has 58 applications pending in various stages of the approval process with the U.S. FDA, of which 26 are Paragraph IV applications.From a market perspective, we want to make note of several things: First, price erosion continued to be a challenge for the business. As most of us are aware, this was primarily due to ongoing consolidation of purchasers. And as an industry, this will continue to be a challenging environment and we should expect it to remain that way for at least the next 5 quarters until we launch GSP 301, Ryaltris. We plan on filing our application for Ryaltris within the next 3 months. Despite ongoing price erosion in our business as well as those of many of our other generic manufacturers, we continue to see more initiatives to regulate pricing and/or implement pricing transparency. Other recently implemented regulations continue to negatively impact generic drug manufacturers. At Glenmark, we believe that generic drug manufacturers already are and will continue to be important players and stakeholders in addressing and solving drug pricing problems in the U.S. It's also important to note that while challenging, these market conditions are universal for companies operating in the U.S. generic pharmaceutical space. For this reason, we are optimistic regarding our strategy to pursue growth through diversification of our business segments, including complex generics, specialty branded products and innovative products, to create growth and value for the company. The global API business had a strong quarter. Revenue from the sale of API in regulated and semi-regulated markets was USD 35.83 million for the third quarter ending December 31, 2017, against USD 28.54 million for the previous quarter, recording an increase of 20.62%.During the third quarter, Glenmark filed 3 U.S. DMFs and 1 EU [ CD ] KDMF and concluded several other regulatory filings in key markets. Major products that contributed to the sales growth included Adapalene, Amiodarone, Etoricoxib, Lercanidipine and Perindopril. And with that, I'll turn it back over to Jason.
Thanks, Bob. We'll continue on the business operations, first, the sales of India. Our sales in the formulation business in India for the third quarter was at INR 5,785 million, recording growth of 11.92%. As per IMS December 2017, Glenmark is ranked 13th with a market share of 2.28% and is the second fastest growing company as per IMS MAT 2017, December 2017. The India business continued to strengthen itself across the various therapeutic areas, which is the cardiac segment, the respiratory segment and the derma segment. During the quarter, Glenmark launched Apremilast, an advanced oral and safe treatment for psoriasis, in India. Glenmark was the first company to receive DCGI approval and marketing authorization for Apremilast in India. The company is among the leading player in the field of dermatology, and the launch of Apremilast reinforces Glenmark's commitment to bringing advanced therapies to Indian patients. Glenmark forayed into the OTC space a few years back. In a short period of time, the company has built a sizable OTC business, driven by 3 major brands operating in the consumer space, Candid, VWash and Scalpe Plus. Through the introduction of its brand, VWash Plus, Glenmark has successfully created the female intimate hygiene category in India. Further, Candid Dusting Powder, the 30-year-old flagship brand for the company has been a prescription leader for the treatment of antifungal skin infection and is now a leading product even in the OTC business. According to IMS data, Candid Powder has jumped 2.3x in sales within 3 years post the OTC promotion. All the 3 brands have a dominant market share in each of its operating markets as per IMS ORG data consistently for the last couple of years.The Africa, Asia and CIS region. This region performed well in the quarter, recording growth of 28.29% at INR 3,221.30 million. In the third quarter of the financial year, Glenmark Russia recorded strong secondary sales growth as compared to the market growth, which was at 7.1%. The subsidiary ranked 41 as per MAT November 2017 in the retail segment. Glenmark Russia is also among the top 10 derma companies presently in the Russian market. Glenmark continues to secure a strong position in the expectorant market and is ranked fourth as per MAT November 2017. During the quarter, in the other CIS region, Glenmark also launched one new product in Ukraine and Uzbekistan. During the third quarter, the Asia region recorded strong secondary sales growth with most subsidiaries performing well in the third quarter. The Glenmark Africa region also posted strong secondary sales growth, aided by good performance by the subsidiaries of South Africa and Kenya. Europe formulations. Glenmark Europe operations continued to perform well, recording growth of 14.84% at INR 2,247.52 million.The European subsidiary performed well during the quarter. The Western European recorded good growth during the quarter, driven by a strong performance by the German subsidiary. The Central Eastern European region recorded secondary sales growth of 26% during the quarter. During the quarter, Glenmark successfully closed the decentralized registration procedure for generic Seretide Accuhaler in the Nordic region, including Sweden, Denmark, Norway, Finland and Iceland. This will be Glenmark's first inhaled respiratory product approval in Europe and reinforces Glenmark's commitment in the respiratory area. The commercialization of the product would depend on national approval as well as substitution and pricing approvals. This continues to emphasize Glenmark's focus on this complex product segment and in Europe. Latin America. Glenmark's revenue for Latin America decreased by 5.15% at INR 898.38 million. The performance of the Latin American subsidiary was impacted due to the weak performance of the Brazilian subsidiary. However, the Mexico subsidiary continued to perform well during the third quarter.R&D. The company has a pipeline of 9 core assets, which includes 4 NCEs, 4 new biological entities and 1 biosimilar candidate in various stages of clinical development focused in the therapeutic areas of oncology, respiratory and dermatology. First, an R&D update on the oncology assets. GBR 1302, which is a Phase I, first-in-human study to determine MTD in patients with HER2 positive cancers, is actively enrolling. Dose escalation continues with clinical sites open in Europe and U.S., and several additional sites were opened in January 2018. The study is currently dosing patients in cohort 8, and up to 10 cohorts are planned. In addition, Glenmark announced on January 24 that GBR 1302 interim biomarker data were presented at ASCO-SITC Immuno-Oncology Symposium. GBR 1342, a Phase I, first-in-human study to determine MTD in patients with multiple myeloma dosed its first patient in December 2017. The study is currently in Cohort 2, and clinical sites continue to identify patients for possible enrollment into the study. Up to 10 cohorts are planned for this MTD study. The study’s primary objective is to assess the safety and tolerability of increasing doses of GBR 1342. Additional study objectives include awareness of -- assessment of biomarkers, immunogenicity and measures of anti-tumor activity.1372 results. For GBR 1372, Glenmark plans to file a Phase I, first-in-human study by Q4 FY 2019. Dermatology assets, GBR 830. A Phase IIb study of GBR 830 in atopic dermatitis is set to begin in Q1 FY 2019 in centers across the U.S. and Europe. Glenmark will present Phase IIa data on GBR 830 in atopic dermatitis at the annualMeeting of the American Academy of Dermatology, taking place in February 2018. Respiratory assets. As Bob has mentioned, Glenmark expects to file its first NDA for the treatment of patients with seasonal allergic rhinitis in the first half of CY 2018.GSP 304. Glenmark has completed the Phase II trial on GSP 304 and is planning to consult with the FDA prior to initiating further clinical trials in FY 2019.GBR 310, the biosimilar candidate for omalizumab intended for the treatment of asthma and chronic idiopathic urticaria. Phase I study enrollment has been completed in February 2018 with 168 patients randomized and dosed. Top line results are expected in July 2018. GRC 39815 has completed preclinical studies. It is an inhibitor of the ROR gamma t receptor. Prior to filing/initiation of Phase I, Glenmark is conducting translational studies to further validate the molecule as a treatment of COPD.And the final item is GRC 27864. Glenmark recently announced in January the initiation of a Phase IIb dose-finding study in patients with moderate osteoarthritic pain. The Phase II study will take place in India and enroll 624 patients with osteoarthritis of the knee and hip to evaluate the safety, efficacy and biomarkers associated with GRC 27864 compared to existing NSAID and selective COX-2 inhibitors. GRC 27864 is a candidate for out-licensing.Before we open the call for questions, I have some notes that I would like read out. The gross debt of the company was INR 4,638 crores. The cash for the company was INR 1,035 crores as of December 31, 2017. The net debt was at INR 3,303 crores as of December 31, 2017. This is compared to INR 3,667 crores in March 31, 2017. The ForEx loss for the third quarter was at INR 48 crores, and there was INR 26 crores of ForEx gains [ laboring ] from -- arising from the previous 2 quarters. That ForEx gain was first utilized, and the balance INR 22 crores of ForEx loss was better than our expenditure, thus far realizing the other income is negative for the quarter. In terms of working capital, inventories was at INR 2,059 crores. [indiscernible] was at INR 2,510 crores. [indiscernible] is at INR 1,903 crores. The fixed asset addition during the quarter is under the INR 75 crores [indiscernible] addition to INR 62 crores, including INR 10 crores of software. The R&D for the third quarter was at INR 283 crores, which is about 12.7% of sales for the quarter, and INR 892 crores, which is about 11.8% of sales for the 9-month period. With this, we would like to open the floor for question and answers. Over to you.
[Operator Instructions] Our first question is from the line of Neha Manpuria from JPMorgan.
First, on your commentary on the U.S. environment, you mentioned that you expect price erosion to be challenging at least for the next 5 quarters. Are you seeing any signs of further deterioration or improvement that can come through on the pricing erosion side? Because a lot of our peers have indicated tapering off or stabilization of pricing. So I just wanted to get your views on that.
Yes, I think the pricing erosions has remained pretty constant for us. As we move forward and we head out of the RFP cycles, we might see a little bit of improvement, but we're expecting it to remain in the same area for the next 5 quarters or so.
That will be in the high single digit, double digit or...
That would be around 13% in core business.
And just on the gross margins. Gross margins degenerated significantly on a quarter-on-quarter basis despite an improvement in the U.S. I understand that India was very lumpy in the September quarter, but is there any -- I mean, how should we should look at gross margins? Is this the new base for our margins?
So -- this is Mani. So I think we should look at the gross margin as it was in the Q2 level because as you can -- obviously seen, the Q3 one was obviously the erosion in the U.S., but more importantly, India was -- in the second quarter as a percentage of total sales was about 32%, 33% that has come off of [indiscernible]. So that's a high GC kind of business. So I think going forward, we look at Q2, the 33%, 33.5% being the GC and being the -- basically the material cost, and the GC margin being higher here.
Okay. Because I thought the second quarter lumpiness in the India business was because of GC restocking. So that's not a normalized run rate for the India business that we would see.
No. As we see the quarter going forward, we obviously have done some investments and it's seen that even in the current quarter -- I mean, of course, businesses have a little bit cycle here and there, but if you look at the current quarter, we still have done well in India business. It's about 11.5% growth. And when you look at the [indiscernible], you actually add back about 2.6%. So all in all, India business has done well, but I think we can see better sales in the next quarters. But more importantly, we see the GC margins getting restored back to our 33.8%.
Our next question is from the line of Prakash Agarwal from Axis Capital.
Sir, just trying to understand this R&D investment better. So what percentage of the R&D is currently getting deployed on the specialty side, which is both the complex generics as well as the NCE initiatives?
So Prakash, right now, it's running at about 8% of the total revenues that are going towards specialty and innovation. And obviously, if you add that back, right, the core business is extremely profitable and continues to generate significant cash, right. I mean, the reality is as a company, we are investing in the specialty and innovation piece, right, because we think that's where the future lies. And it's running at about 8% of total revenues.
Okay. And in the last R&D Day, you had given some broad color on our investments towards ABRAXANE, SUBOXONE. What is -- so what kind of development stage they are into? And we talked about filing around CY -- late CY '18, early CY '19. Are we on track with that? And also, some comment on Welchol and Renvela, please.
Yes. So in FY '19, we will file -- we anticipate filing NuvaRing, CONCERTA and our first respiratory product, which is GSP 103, which is actually FLOVENT. So these are the 3, we think, we'll file in FY '19. As far as Welchol and Renvela, again, it's extremely hard to predict. It's been so many years since we are waiting for these approvals. And we really have no visibility on when we will get these approvals from the agency.
Okay. And lastly, on the other specialty, especially the respiratory pipeline 301, so you talked about filing by next quarter. How should we think about monetizing -- I mean -- and same as XOLAIR. So we are tying up or we are going on our own? And which year do we expect the approval?
So 301, we're filing this product in the next 2 or 3 months and our -- the current situation is if you see outside the U.S., right, I mean, we are currently in several discussions to partner 301 out for some of the markets, particularly markets like Australia, Japan, China and various markets. So it's a very exciting product even ex U.S. As far as the U.S. goes, clearly, we will -- we are still working out our launch strategy. So we can't give too much visibility other than the fact that we are anticipating a launch in Q1 of FY '20. And I think over and above that, we continue to have discussions even for the U.S. with partners for the OTC component of GSP 301. So that's the current situation on GSP 301. As far as the XOLAIR biosimilar goes, I mean, we anticipate we will start Phase III if -- assuming the Phase I is positive and Phase I will report top line in around July time frame. Assuming that is positive, we anticipate going to the FDA for an end of Phase II/start of Phase III meeting and hoping to start Phase III in Q4 of FY '19.
That is some time away.
That's FY '19, next year, Q4 of next year, Phase III.
Okay. And lastly, do you anticipate this R&D expense moving up on an absolute terms or in a percentage-to-sales terms, if you could give some color given that all your advanced -- pipeline advancing -- in an advanced stage?
So we are, right now, at around 11.5%, 12% of total revenues this year. And next year, we see that number staying at around 12% of total revenues.
[Operator Instructions] The next question is from the line of Saion Mukherjee from Nomura Securities.
So in one of the earlier -- you mentioned the R&D for specialty and innovation at 8%, right. So that was significant. More than 50%, close to 60% of your spend is now going in innovation-related work.
Sorry, say that again, Saion? So we are saying 8% for both specialty and innovation?
So -- okay. And the rest is for generics, right?
Correct.
So for generics, only 40% of your R&D spend is for generics. Rest is for specialty and innovation.
Correct.
Now the other thing is -- I understand from a long-term perspective, you may see value here, but there are a lot of uncertainties that one deals with, right. So my point is like, how do you answer that? Because these investments, what's the certainty? How do you want to monetize? Don't you think it's important to kind of have some benchmark or guidelines to kind of work with here?
So, Saion, the bulk of the investment is going in projects. So 301, we spent a ton of money last year, okay. If you see FY '17, right, we spent -- on the Phase III, we spent a lot of money. And now we've got a product which we are now filing in the next 2 months, and we will monetize. So that's the monetization. The visibility is very close since we've got passing Phase IIIs and the rest. If you look at now where we are investing, most of that 8% is on the XOLAIR biosimilar because we're anticipating starting Phase IIIs in -- we are currently just completing the Phase Is. We are starting Phase IIIs next year. We are also investing in GSP 304, which is a nebulized product. So I think the certainty -- these are not pure innovative products. So while the -- we're seeing 8%, I would say out of the 8%, as on today, the most of the investment is still going with more behind the specialty products as compared to pure innovative products. On the pure innovative products, we are still at about 4.5% of sales or somewhere thereabouts.
Okay. And any visibility on licensing deal? You mentioned some deals can happen by end of this fiscal year. So what's the outlook on that?
So we have multiple ongoing discussions. We have discussions on GBR 830 for partnering that out. We have discussions on some of the oncology drugs. We've got some good data coming out of GBR 1302 and we did some -- we did a presentation on some of the biomarker data, which looks exciting. We also have discussions on some of the specialty products, including, as I mentioned, GSP 301 and the XOLAIR biosimilar. I mean, these are some of the discussions that we're looking for partnerships on. So I think it's fair to say that I think over the next 12 to 15 months, you should see a lot of activity on the partnership side, right, on our portfolio.
So Glenn, do you think that -- you have been having this discussion for some time. So you need to do more work before you can actually sign the deal. I mean, it looks like it's been pushed out somewhat.
I mean, I think we are -- so right now, we're not getting that sense, but you never know, Saion. I mean, these things -- I mean, doing a deal is pretty complex in terms of trying to match what we want out of the deal and what our partner wants. So I think those are some trade-offs that we are constantly making, right, and taking decisions on potential licensing deals.
Okay. And the last question on the U.S. generics. I think you mentioned 13% erosion, right, in the core business. Now that looks to be on the higher side. So are you basically factoring in competition in Mupirocin, which is your largest product to drive this, because I don't think there is anything very high value in the portfolio other than Mupirocin.
So we are clearly taking at least one competitor into our analysis, right, coming through, I would say, over the next 6-odd months, right, into Mupirocin, and that's what's giving you that level of price erosion.
Okay. And just, Glenn, one thing, like last quarter, you talked about potential more than USD 125 million this quarter, which hasn't come true. So what went wrong here? Is it the [indiscernible] bad consolidation of some new launches? I mean, what was missing compared to the expectation?
I mean, the operating environment is extremely tough, okay, Saion. And it's getting harder to gain market share even on 2-player markets and 3-player markets. I mean, you're seeing competitors defending their market shares pretty aggressively. And that is bringing down the overall -- yes, and then at some point, if you go after greater market share, the price is coming down. So you're ending up with -- taking the whole market down. So I think it's a very, very tough environment. And as Bob mentioned, the U.S. environment continues to remain very challenging.
[Operator Instructions] We'll take the next question from the line of Abhishek Sharma from India Infoline.
Yes, just one question on the rest of the world. There's a significant jump this quarter. I mean, I was going through past few quarters. The last time we had this high number was in 4Q '14. So any color on this, at this currency, if there's any particular territory?
Well, our ROW markets continue to do well for us, right? Between Russia/CIS, Asia and Africa, right, all 3 geographies are doing well for us. I mean, our -- the reality, if you look at our business today, out of -- I would say, if you kick the U.S. aside, which is about 30%, 35% of total revenues in this quarter, right, almost 70%, 75% -- I mean, between 65% to 70% of our total business, right, continues to grow at close to 15-odd percent, right? And going forward, if you look at FY '19 also, right, we expect this piece of the business to continue to grow in excess of 15% with improved margins coming consistently out of all geographies. So other than the U.S. business, the 65%, 70% of total revenues continues to do well for us, and that's what will drive the growth, right, over the next 5 quarters. I mean, the U.S. business, as Bob mentioned, our visibility is that growth will really -- we will have a much better handle on growth post the launch of Ryaltris, right, GSP 301. Until then, there's significant amount of uncertainty in the U.S. business.
Yes. But just under the rest of the world, I mean, is there anything specific territory which is standing out?
So I think Russia is a big driver for us longer term and will continue to remain a big driver. I mean, we have several new product launches coming out of Russia, right, and we have 5 launches next year. So I think growth, particularly in the Russia/CIS region, will continue to remain strong.
Okay. And just your gross debt and the net debt number for this quarter?
So the gross debt for this quarter was INR 4,638 crores, and the net debt was INR 3,603 crores.
[Operator Instructions] Next question is from the line of Aditya Khemka from DSP Blackrock.
Glenn, you mentioned on the 2 products, 1 is called tablet and 1 called suspension. Do we have a tag yet on the 2 products?
Yes, we do, Aditya. But I think that we've had several tag dates in the past, and there have been further questions, so I don't think -- I'm not sure about what is the relevance of those tag dates. As of today, we have nothing outstanding in terms of questions, but it's hard to predict whether we'll get approved on the tag date or no.
That's the first one. But could you -- if you [indiscernible], can you disclose what is the tag date is then?
No, I don't think we can put that out, Aditya.
Okay, that's fine. Also, on the -- the second question would be around Voltaren Gel. I think you have a filing. Do you have a tag date yet on that?
On Voltaren also, we have a tag date, Aditya. We have a tag date.
Yes, okay, okay. And there is nothing pending on Voltaren as yet, as of now?
I'm not so sure, Aditya. I don't know the answer to that.
Okay, that's fair enough. And lastly, Glenn, we did not get the approval of Epiduo on time. So what is it, in your opinion, that has delayed approval there? And by then, should we expect you to do that, too?
So we got a [ CR ], which we are responding to. And we anticipate, I would say, in the early part of FY '19, we should get approval on it.
Understood, understood. And lastly, on the margin front, right, so I heard Mr. Mani said, let's say, that the margins would slowly normalize from hereon. But if I were to -- and I know it's difficult -- given the [ difficult ] environment in the U.S., it must be difficult for you guys to give any sort of forecasting. But if you were pushed to the wall to sort of venture, I guess, on where FY '19 EBITDA margins, what would that be, Glenn, because [ a license up for distribution ] stand back in the sales [indiscernible]?
So our -- all I can say, Aditya, is our margins from here, so this, for me, Q3 was the lowest quarter, okay, both in terms of sales and in terms of margins. And I think from here on, every quarter, right, you should see sales go up and the margin improvement coming through. In fact, I mean, even starting from Q4, right, so one is Q4, of course, as Mani mentioned, the gross margins will come back to where they were in Q2. And from thereon, we should continue to see the margin improvement coming through in the business. So I mean, that's the only visibility we can give. And as I said, for the 65%, 70% of our business, right, we have clear visibility on growing the business in excess of 15% in FY '19, and we have margin improvement coming through, right, for 65%, 70% of our business. It's the 30%, 35% which is the U.S., right, where, clearly, we are struggling to provide any guidance or visibility because of the high level of uncertainty in the environment.
Fair enough. And maybe, let's say, we taking one competitor, are you aware of a filing there? Are you aware of a filing?
We know of a filing, but we also know that it's -- for some reason, the approval has consistently got delayed. But we still believe that, on the conservative side, you should see a competitor post 6 months from now.
Fair enough, fair enough. And lastly, if I may ask you on, let's say, the India business growth rates. So with the 12% growth this quarter, and if you were to sort of [indiscernible] there, barring any changes in the regulatory side, what should be your growth rate on the India business between FY '19 and '20?
Well, I think India will grow north of 15% very comfortably. And in India, the other advantage we have is we have 2 very unique product launches coming up, which we -- which are in license products, patent-protected products, one in oncology and the other one in the diabetes space. And both these -- the oncology product we anticipate will launch in the next 3 months; and in diabetes, we -- towards the second half of FY '19 is when we'll launch the product. So India looks very solid for us. At least for the next few years, we feel pretty comfortable growing this business at about -- in excess of 15%.
Sure, sure. And my last, last question. So I think you mentioned at some point in time you had dividend [ sightings ] of about 23%, 22% EBITDA in FY '21 given the way you saw the business ramping up. So in the current terms, [indiscernible] not that it will be really the same, but 22%, 23% EBITDA margin guidance for FY '21 is still valid?
I think it is. So we still maintain that we'll get there. I mean, for us, we think we've hit the bottom of the U.S. cycle. And from here on, we still have some uncertainty over the next about 5 quarters. But if we get the new product approvals, right, automatically, you will see a constant recovery in the U.S. business, both in terms of top line sales and in terms of margin. So I think that's the only uncertainty we are dealing with, will we get the new product approvals on time, right? And that's been the biggest challenge, I would say over the last 3 months, right? We've had a lot of uncertainty on when the product approvals will come through and what's the time frame, right? But if you see a constant stream of new product approvals like we've seen in the past, we think, even -- you'll see even a recovery in the U.S. generics business. I mean, that's the way we look at it. The rest of the business, as I said, margins will continue to grow from here. Even the businesses like Latin America, where we've struggled historically, I mean, Brazil, for u], this year is a cash breakeven, and margins are positive. And I think next year, you should see margins going to double digits coming out of even markets like Brazil, which we've historically struggled with, right. And Latin America, as a region, should look strong for us from next year onwards because of the product launches and the work we've done there. So it's been a long investment field of over 10, 12 years, but I think now it's finally beginning to pay off.
Sure. And I am basing if you now for this one approved, so if there is 80% of sales, this point of specialty and innovation, so if I add that to your [indiscernible] 25% EBITDA margin for FY '18 on the generic side, can you give maybe also kind of sense of the ROE on the generic side, at being assigned the specialty assets and liabilities?
It has -- this monetary value, we won't have that answer, but we can definitely [indiscernible].
I think one of the things we are thinking of doing going forward, Aditya, is I think from next quarter is we're trying to provide some color on the different segments of the business, okay. That will give you a clear visibility, right? Keeping the specialty and innovation expenses aside, right, how the business will look like and what will be the ROEs and -- of -- on the business. So we'll try to give more visibility around some of that starting next -- starting -- on a full year basis.
Okay, [indiscernible] the audited numbers, so [indiscernible].
Absolutely, they will be audited numbers.
Yes.
Our next question is from the line of Harith Ahamed from Spark Capital.
My question is on the outstanding Form 483 for your Baddi facility. Knowing that you haven't received any approval from Baddi since the inspection, are we to know if there has been any communication from the FDA on -- after your initial response.
So we've provided a very comprehensive response to the agency. And since then, we haven't heard back on -- from the agency. We did get a couple of small CDE kind of approvals, but not new product approvals yet. Also, from a pending perspective, I don't think we have too many filings which are pending out of Baddi.
Okay. And is there -- would you like to share an expectation on the potential outcome of this inspection with [ CR ] escalation into OAI warning letter.
Currently, we have no visibility on the outcome. So as I said, we're waiting to hear from the agency.
Okay. And on GBR 830, so previously, you talked about high level of interest from partners for licensing this asset. Now you also announced in the commencement of a Phase IIb study. So is it in regards of this Phase IIb study that you've decided to put the discussions on hold? Or how should we look at the licensing potential for this asset?
I think the 2 are completely -- they are exclusive, right? We will continue partnering discussions, but we're not going to hold back the development of this asset. So from that perspective, the Phase IIb, we are on course to starting the Phase IIb for atopic dermatitis. And in parallel, we have licensing discussions ongoing.
Okay. And lastly, on GSP 301, based on any market research studies that you'll have done, is there any peak sales estimate that you would like to guide for, for this asset?
We think peak sales will be in the range of 80 million to 100 million in revenues.
Our next question is from the line of Shyam Srinivasan from Goldman Sachs.
My first question is on the cost rationalization, cost tuning that we outlined, I think, last quarter, maybe the quarter before. So can you just give us a quick update? And the related question is, just looking at your other expenses other than R&D, it's about INR 350-odd crores. I think you had INR 300 crores last -- INR 290 crores last quarter. So just trying to get the right base in terms of how one should think about this cost line.
So I'll just give an opening comment, and then Mani will respond. But I think -- so on the cost, it's -- cost control has been a big priority for us, and we continue to focus on it. We currently have close to 3 different consulting firms working at different levels on helping us in terms of cost control. We've yet to see the benefits of that in the current financial performance, but I think going forward, you will see the benefit. Although our expenses are lower currently, right, compared to where we were last year, I still think there is a significant flow-through benefit that we should see over the next, I would say, 12 to 13 months from these different initiatives that we've got ongoing. So I think on the costs side, the current business, we continue to try and improve our overall margins, right, by controlling costs.
Yes. Shyam, and just to add to what Glenn said, like if we look at it, we have been -- while we have appointed various consulting firms to help us, but at the same time, as a firm, we are also being very cost conscious in the last couple of quarters. And we can also see that compared to the previous quarter, which was about -- last year same time, was about almost INR 770 crores; and this year, it's about INR 633 crores, and that includes a small percentage of exchange loss. So more or less, if you really look at it on a broad basis, we are pretty much, much lesser than what we were last year. And compared to the last quarter, it's just a marginal increase. I think going forward, you will see us -- depending on the cycle and how we invest in the marketing campaigns, there'll be INR 30 crore, INR 40 crore maybe difference, but not too much.
And if you can just help us, just maybe the broad buckets where you think there is scope, just illustration, like any line items you would like to highlight?
So I think SG&A is one line item we are looking at very closely. The other is certain operating costs, right, so it will further improve the GC . And the third we are looking at is more in terms of helping us on the supply chain sides, right?
Okay. Okay, my second question is on the European business, just Salmex, the product. Do we now have approval in any European country? I think that's -- that was what are highlighted earlier.
So we have got approval in the Nordics -- in the Nordic countries. And in one of the Nordic countries, we've already got substitution status, which is a big, big thing, right? And as of now, we are the only company that we are aware of that has substitution on an MDI -- I'm sorry, on a DPI, a multidose DPI, right, across Europe. So I think it's a big thing that we've got substitution in one market, Denmark, and we're still waiting for the rest. And I think this year or the next 12 months can we -- really exciting for Salmex if we -- as and when the rest of the approvals come through, particularly the major markets like Germany and some of the others we are waiting on. And if we do get substitution, that could be a huge thing. It's still a very big product in Europe.
Okay. So do you think -- Glenn, any crystal ball on how large this opportunity could be for us in Europe if you assume substitution comes through in, in that case, half the states, let's assume? I'm just giving a scenario.
So look, it's a $700 million, $800 million market in Europe, so -- and being first generic and having substitution could be really substantial. I mean, it's hard to put a number out there because we still don't have visibility around how some of the other bigger markets also would look at substitution, but I think it could be substantial for us.
All right. Do you -- and you think the Nordic experience could be used as a rate across with some of the other guys, perhaps?
We definitely think it will -- the 2 major markets which we are unsure about is obviously the U.K. market and 1 or 2 of the larger European markets. But I think Pan-Nordic countries, countries in Eastern Europe, some of these, right, substitution seems to be possible.
Okay, okay. And my last question, just a technical one. On the tax laws changes in the U.S., has it impacted you in some -- on your tax side? We have seen that even [indiscernible] take some charges there.
Yes, so just to give a color on that, to date, on the U.S., tax reforms will -- basically, the certain tax rates are reduced from 35% to 21%, so we have reassessed our U.S. deferred tax assets and liabilities, and you have a one-off of INR 5.2 crores, yes.
[Operator Instructions] Next question is from the line of Alok Dalal from CLSA.
Glenn, one question on U.S. Is low vertical integration the reason that you are feeling more pressure in the U.S. than peers?
No. I think -- so I mean, this -- we have a [ big dog ] franchise, right? Obviously, some of the pressures are coming from the [indiscernible]; but also some of the other products, we are facing pressures. But I think also, regarding your question on vertical integration, we are now looking much more closely at backward integrating into some of our products. I can't give you visibility on which ones, but that's something we are increasingly looking at doing going forward.
Okay. Look, Glenn, if next 12 months pricing scenario does not improve, is it fair to think that companies with the weaker cost structure would be weeded out first, and then things start to consolidate?
Yes, I mean, I think, very clearly, you're already seeing some effects of some of the big boys who are struggling, right, running into market shortages and supply -- facing supply issues. And some of those businesses are available to pick up, right? Although they are not tangible yet, but I think increasingly, you will see some of the campaigns that don't have the best cost structure or are sort of struggling with the supply chain, right, those businesses will be up for grabs.
Alok, this is Bob.
[indiscernible]
Just one other -- on a -- yes, on a product level, we're starting to see some discontinuations from different manufacturers as well.
Okay. So Bob, you've seen a very fast approval cycle. So there are companies who are also sitting with approvals and not launch those products. So do you believe that if somebody would exit the market, then the other guy who is sitting on an approval not launched can come in, fill the market, and therefore, prices may not improve?
Yes, it's hard to predict, but I think that overall, we're seeing more product sitting situations than we have in the past. And I don't know that we'll see an accelerated entry with each person that exits because of the situation right now.
Okay. And the second question is -- so regarding balance sheet, I think net debt has increased INR 100 crore Q-o-Q. So guys, what is the challenge in bringing down the debt level?
So, Alok, V. Mani here. So as such, if you look at it Q-o-Q, actually, our debt has just gone up by INR 105 crores, okay? So despite of a challenging kind of quarter-with-quarter [indiscernible], in spite of that, we had an operating cash flow of about INR 240 crores and the addition to the assets of about INR 237 crores. But there was this thing of dividend. Of course, we don't think pay dividend every quarter, where the dividend was about INR 70 crores, okay? And so we feel that going forward in the next quarter will -- with a better -- as we explained that our cost structure should also be much better in the next quarter. And also with some amount of refunds coming from the GST, et cetera, working capital benefits, you should definitely see it. And as such, we are already lower than last year, you should be seeing it a little lower than where we are having it as of today.
Yes. So Mani, sir, I think the guidance was to reduce debt by INR 300 crore year-over-year. Is that guidance still holding up?
See, can we -- and depending on how the quarter pans out, I mean, it will be somewhere much lower, say...
Close to that.
Close to that.
Pretty close. I mean, it'll be -- it'll definitely be below March of last year, and it'll be close to that.
Okay. And same goals for next year as well, right, Glenn, you've mentioned in previous calls?
Absolutely. I mean, our goal, as I say, is to try and get INR 200 crores, INR 300 crores virtually every year from here on, okay, right, of cost reduction.
No, that is correct. But Glenn, somehow, last couple of years, that does not happen. So the question that, again, I asked is about where you get the -- or why is that not happening, if something that is difficult to comprehend?
It's very simple, Alok, because our R&D expenditure is very, very high, okay. I mean, we are investing 12%, 13% of revenues on research, okay? And if you add back -- as we said, if you just add back 8%, okay, that we are spending on specialty, innovation, right, and you'll take that capital and you add that back, right, you will easily see INR 600 crores, INR 700 crores off on a full year basis of cash getting generated, which is going into specialty and innovation. That's the reality. The rest of the business, our margins are very, very -- I mean, it's a very profitable business overall, right? And even next year, we anticipate at the EBITDA level, prior to any R&D spend, you're looking at 33%, 34% kind of EBITDA. The challenge is the capital that we are putting in R&D. So we're investing for the long term to make sure that we have a pipeline and we have some big wins and of normal growth, right? I mean, that's the way we are looking at the business, so -- right? So if you -- I mean, all the other competitors, if you see, right, I mean, they're expecting 3%, 5%, 7% on research. Our research spends, right, are 12%, 12-odd percent], right, right now. So the delta of -- if you just add back that 6% or 8% delta, right, that will give you our answer as to where the cash is going. And that's a conscious decision, right, that we made that we want to move up the value chain into being a specialty, innovative company, and that's why we are putting much capital there.
[Operator Instructions] Our next question is from the line of Nitin Agarwal from IDFC Securities.
Glenn, on the margin improvement that you talked about, I mean, which of the geographies, regions where -- which hold probably -- which probably have the main -- probably have, going forward, the maximum influence on the margin trajectory in terms of wherever changes you see in the businesses?
So Nitin, I think it's very broad-based, okay. I mean, right from India, we are expecting margin improvement. I mean, India, as Jason mentioned, right, on the call, I mean, we've invested in an OTC business over the last 3, 4 years. I mean, next year, we anticipate sales of just 3 or 4 brands contributing close to INR 200 crores of sales, right, coming out of the OTC business. And as you know, the initial phase of investment in OTC is very high, right? And now we are seeing the margins -- we are seeing positive margins, and the overall business margins are. So right from India business, where you're seeing margin improvement, we are seeing margin improvement in the Russia/CIS region. Latin America, which, as I said, was a -- particularly Brazil, right, was a bleed for us, right? I mean, this is the first year we are actually -- this year, FY '18, right, we are actually making some positive -- we are cash breakeven, and we are making positive margins in Brazil. And next year, LATAM, as a region, will go to 10% to 15% as the EBITDA level, which has never been the case historically at the margin level. So I think you are seeing delta coming through across. Europe is another big driver, right? I mean, Europe growth is strong. And assuming we launch Salmex, and we have a full year of Salmex next year, Europe should look very positive for us. So it's been a long investment cycle across the different geographies, and now we are seeing the benefits of the investments we've made on the margin profile improving consistently.
Okay. And secondly, on this cost rationalization that we talked about, I mean, based upon whatever work you would have done with the consultants, is there a number -- a broader number of potential synergies that we can target, which we have? Because, I mean, clearly, I mean, that -- they can probably get realized over a period of time even if they'll probably -- they'll take the wrong time to come through.
Sorry, say that again.
Just in terms of the cost synergies that can get realized on the cost -- on the rationalization -- on the various cost rationalization initiatives that you guys are working on, is there a broader number that -- in terms that we can...
So I think -- yes, I mean, I think we should get costs out. Our guess is around 1% to 2%, right, of overall improvement should come through, right, on the cost side.
And what time period do you see that happening?
And while that estimate actually materializes, it's going to take some time, right? So clearly, it's not a, I would say, part of FY '19, more of FY '20 even.
Our next question is from the line of Pavitra S. from Nomura.
Most of my questions have been answered, but just one from my side. So looking at the pressure that you're facing in the U.S. business. And it seems like your quarterly EBITDA run rate would be somewhere around INR 300 crores to INR 400 crores or so, correct me if I'm wrong. But against that, are you comfortable holding gross debt of around INR 4,600 crores? Or do you think you'll have to cut down some of your CapEx or some of your investments in R&D to...
Yes.
To get leverage to more comfortable levels? Or are you okay to hold a slightly higher leveraged balance sheet in the interim?
So I think, look, as I said, if we're able to generate the INR 300 crores of free cash every year, we are okay. And clearly, a lot of the business is tailored around making sure the business now generates free cash, right? I mean, that's a big clarity for us to keep generating free cash on a consistent basis despite the higher R&D spend that we're making, right? If we can achieve that, right, make sure the cash -- the business is generating free cash, and we invest in R&D to ensure our future and make sure we grow consistently and control costs. If we achieve these 3 things, I think we're in a good place.
Ladies and gentlemen, that was our last question. I would now like to hand the conference back to Mr. Jason D'souza for closing comments. Over to you, sir.
Thanks. Thanks, Irma. Just would close the call with the disclaimer. This call has been organized by Glenmark Pharmaceuticals Ltd. The information statement and analysis made during this call describing our future objectives projections and estimates are forward-looking statements and progressive within the meaning of applicable security laws and regulations. The analysis contained herein is based on numerous assumptions. Actual results may vary from those expressed or implied depending upon economic condition, government policies and other incidental factors. No representation or warranty, either expressed or implied, is provided in relation to this subject]. This presentation should not regarded by recipients as a substitute for the exercise of their own judgment. With this, we're ending Glenmark Q3 earnings call. Thank you, everyone.
Thank you, members of the management. Ladies and gentlemen, on behalf of Glenmark Pharmaceuticals Ltd, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.