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Lupin Ltd
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Hello, and welcome to Lupin Limited Quarter 1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to management. Thank you, and over to you, sir.
Hello. Good evening. My name is Kamal Sharma. Welcome you all to this earnings call for Lupin Limited. You already have seen the results, but as a comment on the outset, I'd like to say that measures to improve overall operational efficiency and improving our business structure have been in full swing. I'm aware that the numbers don't reflect them as yet, but the team is absolutely confident that from next quarter onwards, we would definitely see a positive reflection of the efforts that are being put in by the team.
With those few opening remarks, I would now hand you over to our CFO, Mr. Swaminathan, who will walk you through the details of the financial results. Thank you, and over to you, Ramesh.
Thank you, Dr. Sharma. Trends in our previous investor call after the Q4 results, we did guide for a fact the results for the first 2 or 3 quarters could be a little muted. So in line with that, the actual results for the quarter were in line with expectations in that sense. Sales for Q1 FY '23 are at INR 3,604 crores as compared to INR 3,864 crores in Q4 FY '22. It's a 6.7% quarter-on-quarter decline. And on year-on-year basis, also declined by 6.7% as compared to Q1 FY '22. Our sales, excluding the U.S. revenues were higher by 5.9% sequentially and 2.5% year-on-year.
When it comes to the U.S. business, during the quarter, the U.S. sales took a significant dip of 33% from $181 million in Q4 '22 to $121 million in Q1 FY '23 as the company took certain strategic decisions to pay the way for building sustainable and profitable business in the U.S. Firstly, the last few years, we have been experiencing huge stock returns on account of higher inventory levels in the trade. During the quarter, we ensured that the inventory levels across our key products are brought down at normalized levels, creating a significant impact in the quarterly sales.
The pricing erosion FY '22 has brought down the margins of certain products to single-digit to negative territory. The company decided to discontinue some of these products with low and negative margins, which impacted our sales. However, it equally gave us an opportunity to optimize workforce in manufacturing plant in India, the benefits of which will start to flow from the next quarter. We continue to witness double-digit price erosion in this quarter as well, coupled with shelf stock adjustment on the higher trade inventory, creating a dent to the quarter numbers, while the pricing erosion can be offset through new launches, which we expect to come through in H2 FY '23, the first 2 initiatives have impacted the quarter, but will help us to build focus on building a strong and profitable portfolio in the long run. We continue to build Albuterol market share, which improved to 23.2% in Q1 vis-a-vis 22.8% in the previous quarter.
Turning to the India business. India branded formulations business posted a growth of 9.9% in Q1 FY '23 versus Q4 FY '22 on a year-on-year basis, it declined by 2.9% given FY '22 to Q1 had a positive impact on COVID wave 2 in India. API. Recovering API sales in Q1 quarter-on-quarter sales growth at 15.8%. On a year-on-year basis, this has posted a growth of 3.8%. EMEA, year-on-year growth of 26.6% with strong performance by NaMuscla, Luforbec, Etanercept sales to Mylan. NaMuscla growth is about 91% versus the previous year, quarter 1 that is. Sales were -- Q1 FY '23 sales was INR 24.5 crores. In South Africa, [indiscernible] holds 48% market share, up from 31% held pre-COVID.
Talking about the growth markets. Philippines year-on-year basis growth, 20% with TB kit sales impacting about 9% approximately. Better performance in [indiscernible] and Lupimet. In Australia, sales grew by 22.4% quarter-on-quarter and year-on-year by 49%, mainly due to the acquisition of Southern Cross. In Mexico, sales grew by 15.9% quarter-on-quarter, and year-on-year growth was 30% as [ ophthal ] business continues to grow at 26%. In Brazil, quarter-on-quarter declined by 9.5%, year-on-year declined by 8.5%. This is because of higher sales of azithromycin and Lipimed.
When we come to the gross margins, Q1 FY '23 is 55.3% as compared to the previous quarter, which is 57.8%. This is mainly due to a price erosion in America, trade inventory normalization that I just spoke about and of course, the shelf stock adjustment. There's, of course, the impact of cost inflation also, which is actually there in the gross margin line.
If we talk about employee benefits. Q1 FY '23 is INR 778 crores vis-a-vis INR 701 crores in the previous quarter, and this is essentially because the previous quarter also had an adjustment in terms of taking some part of the expenditure in other expenses. There is, of course, the impact of increments, which were rolled out in FY '23, which came in the quarter 1. There's, of course, the workforce planning at the plant level, which impacted about 14% of the workforce, and there would be savings from there, which should start flowing from Q2. On an ongoing basis, we expect employee costs to be in the range of 18% to 18.5%.
On the EBITDA front. Operating EBITDA, excluding FX and other income is 4.5% in Q1, a decline in EBITDA by 140 basis points, led by drop in sales due to trade inventory normalization, shelf stock adjustment in the U.S., price erosion and on account of discontinuing products during the quarter. R&D expenditure is about INR 348 crores vis-a-vis INR 342 crores in the previous quarter. The ATR is expected to be around 35% as a few subsidiaries are still making losses. In terms of the working capital, it's increased to 147 days from 140. However, we are working on this, and we would like to bring it down in the quarters to come.
With that short commentary, may I open the floor for discussions?
[Operator Instructions] First question is from Neha.
Ramesh, could you just help us understand the quantum of the one-off impacts that you mentioned in your opening remarks out of the $60-odd million quarter-on-quarter decline that we have seen. Just wanted to understand what actually your base business in the U.S. was from second quarter onwards?
Yes. So the way we would like to portrait is that things would normalize from the second quarter onwards, and we expect it to be upward of $150 million, somewhere in the range of $150 million to $160 million. So if that were to be the normal, you could expect this to be considered to be a level -- essentially, that's a difference that we have taken this quarter.
Understood. So that would mean quarter-on-quarter, we've still seen a fair bit of erosion in the business? Or does this also include some amount of discontinued products? And what would be the quantum of that discontinued products, please?
So far as the price erosion is concerned, it's in double digits is close to about 10%. And there is, of course, an element of discontinuing products which have been discontinued as well, which flowed into the results.
Okay. Understood. And from a margin perspective, if I were to adjust the number that you've seen, going forward from second quarter onwards, should we start seeing margin improvement or that would entirely depend on our launches coming through in the second half?
The drop in sales kind of masked the efforts that you have taken. So you would expect things to kind of normalize from a sales perspective, that obviously would add to the overall margins. But there's, of course, a host of initiatives that we have been working on. All of those will actually start bearing fruit. For example, we spoke about the workforce planning at the factory level and in other areas as well. So benefits of programs like that will certainly flow on from the second quarter onwards. So margins should certainly keep -- would go up. It could substantially from this particular quarter. And towards the end of the year would reach a fairly decent level.
Next question is from Aditya Khemka.
Ramesh, you mentioned that the India business grew Y-o-Y because in the base quarter you had some COVID-related sales. Could you elaborate on that a bit? I thought we did not have any COVID-related sales, at least your commentary on the previous quarter did not indicate any COVID-related sales in the base quarter.
I can take it. So it's not the core COVID product itself, but it's products like enoxaparin and the like, which had very large sales in Q1 last year. So if you adjust for those products, which went up, so a lot of them were respiratory products, then the growth would have been 5.6%.
Understood, Nilesh. And Nilesh, AIOCD data indicates that excluding COVID-related sales, the market itself in the quarter of June grew about 13%, whereas our growth is in the neighborhood of 6%. So are we losing market share? If yes, what are we doing about it? And why are we losing it?
Actually, quite the opposite actually, as per our data, our market share has actually gone up 10 basis points. So we're actually gaining share. So I think what has happened is our core chronic therapy areas so inhalation, cardiac, diabetes have degrown. And while they degrew minus 3.1%, we actually degrew minus 2.6%. So we actually did better than the market on that count. But because of the degrowth, that's the reason why it looks like degrowth. We believe that this will bounce back. And obviously, from Q2 onwards, we hope to get back to that double-digit kind of growth.
Understood. Just 2 more questions, if I may. The decline Q-o-Q also, to my understanding, happens every time from fourth quarter to first quarter due to seasonality of certain cephalosporin products. So could you -- do you have a guesstimate as to how much of this sequential decline is due to the seasonality of our business in the U.S.? And how much of it is actually your product rationalization and price erosion?
The majority of it is product rationalization and getting the trade inventories at the right level. There was some impact also on the surplus for us though, Aditya. They were down for sure, Q4 to Q1.
Got it, Vinita. Ramesh, last question for you. The debt seems to have gone up. I see -- so what is confusing is that your working capital has gone up, while you've rationalized products in the U.S.? My understanding was U.S. is the highest working capital geography we have. So ideally, with the U.S. sales coming down, the working capital on the U.S. side should have come down and your debt has gone up this quarter substantially.
The debt has gone up principally because we had an acquisition at the beginning of this quarter, essentially Anglo-French Drugs that we bought. So that was the reason for that. There's, of course, an increase in the operating days in terms of working capital. It has gone up from 141 days to 147 days, principally on account of inventories, whilst there's a reduction on the accounts receivable front.
How much inventory of the raw material are we keeping the API raw material because there is cost inflationary environment? So I'm sure we are keeping some stock to ensure continuous production. So what would be the inventory levels?
That's exactly the point. So we have got some strategic inventory buildup in order to offset any potential price increase. So we've been pretty strategic about it.
Yes, but could you quantify as to how much inventories, 60 days, 90, 120?
The day depends on individual materials. So overall, there has been an increase in the receivables on the inventories front.
Next question is from Anubhav Aggarwal.
First question is on the U.S. market. Just trying to understand the decline. So 3 elements you guys talked about one, shelf stock adjustment. Second is some inventory write-down would have come not at the sales level, I hope. So sales level, first, would it be fair to assume shelf stock adjustment would be a single-digit number? I mean, something like less than $10 million. That would be a fair statement to understand?
Yes. In a general sense, we don't disclose the individual components of this. But suffice to state that it has actually had impact of reducing the overall sales for the first quarter. And I would like to repeat the fact that there would be a bounce back in the -- from the second quarter onwards.
But just trying to understand, the numbers are so large, first of all, to build it, one is we can believe you guys, but just trying to understand what has happened in the quarter. Shelf stock adjustment typically will be on 1, 2 products. And that's why I was saying that should we just work with an assumption that a large part of it -- so the way I am trying to understand this is that is there a component that we were stocking very high inventory at the customer level and therefore, the primary sales in this quarter? So one is the discontinued products that we didn't want to sell more. So that's one component. Is there some component that this quarter, we had primarily lower sales of certain products, which will come back in the next quarter?
So we -- as I said, the overall -- the erosion in prices is close to about 10%. So it obviously in so far as stocks trade itself is concerned, we would have given them a shelf stock adjustment. And besides that, of course, we wanted to make sure the total inventories build up at that level is going to be reduced. And for that reason, we sold lower to the trade. It's a combination of both that has impacted the quarter.
And when you talk about, Ramesh, 150 plus next quarter, this will include Suprep as well. So effectively, we're talking about roughly 135, 140, the level that we're doing earlier? Would that be a right understanding?
So even without Suprep, I think the bounce back is expected even without Suprep. Suprep only comes in late in the second quarter, the end of the quarter.
But it comes to end of the quarter, but you will have at least a good amount of a month or 2 months of sales at least of Suprep, right?
So the authorized generics has already launched on Suprep. So we will see how much of inventory trade has. If you have the opportunity of supplying 2 months, we definitely will. But we'll get some upside in September for sure.
But we expect -- I think it's fair to say that we expect the bounce back even without Suprep.
Without Suprep, of course. We basically haven't sold to bear down the levels of invent. We haven't sold a couple of weeks' worth products to the trade.
Okay. And Vinita, on Spiriva, can you just give us a clarity where is this product stuck? Last time, you mentioned that your Germany supplier had inspection. I don't know whether you had a reinspection on your facility again or is the FDA still having the query on the product?
No. So we don't believe the product is stuck and above. In fact, since the last quarter meeting, our device manufacturer was inspected by the agency, and we believe the inspection went pretty well privy to all of the observations and the responses as well. And we have been going back and forth with the agency on a document review and have answered all their questions so far in the last few weeks. They have already inspected Pithampur Unit-3 in the past for tiotropium. So of course, I mean, if the agency decides to reinspect that their prerogative, and they'll be ready to host the inspection. But at this point in time, we believe that we have responded to the agency's questions fully and are hoping that we'll get the approval soon so that we can launch in Q4. We have launched preparations going in full swing at present.
Just one clarity, Ramesh. You talked about personnel cost reducing as a percentage of sales next quarter. But can you talk about an absolute quantum, how much saving we are talking about?
No, I -- so yes, so as I said, about 14% of the workforce at the factory level has been brought down. So you could expect about -- on a quarterly basis, about INR 20 crores reduction.
Next question is from Palak Shah.
Just firstly on the Spiriva, you had earlier mentioned a TAT date of August 22. Does that change, especially after the inspection of the device facility?
No. Our goal date is still August 17.
Got it. Secondly, in the U.S. business, you mentioned that there is shelf stock adjustment as well as price erosion and rationalization. Now part of this, as you mentioned that you have sold lesser by 2 weeks this quarter, and that should be made up in the ensuing quarter. Is the understanding right?
Yes.
But then it will again lead to the same point that your inventory will again inch up in the ensuing quarters then?
No, it shouldn't, right? If we tried to pay down the inventories because we saw excess inventory in the trade, so it's a onetime correction from a trade perspective to get the inventory to a normalized level.
Got it. And just lastly, on the working capital side, you're looking to have if we bat it down again from 147 to 130 to 140 days. Is that understanding right?
Yes. And we'll go back to the way we evolved over time because it used to be 100 days. So it's not as we can get to that level immediately. It's going to be over time. But we're addressing certainly the inventory situation. Some of it is strategic buying at this stage, but with the situation improving, we'll certainly bring it down.
Got it. And just lastly on the Somerset facility, given that you have been stuck with this facility on the warning letter quite some time, are we inclined towards actually exiting the facility and just stopping the functions all together there?
Well, actually, we have positive momentum at the facility now with the clearance of the warning letter last month. I declared the warning letter, which was a record for us within 3 months. We went from 13 observation for a 3 to clearance of the warning letter. So actually, it gives rise to new opportunities for us. We had a couple of product stuff that we were tech transferring into other sites, and we expect these products to come -- to get approved in the near term. So apart from Suprep, we think that a couple of the other niche products like we have diazepam gel that is a small, but nice niche product that we likely can get approval for in the next 6 months.
Likewise, we have a nasal spray where we have first to file Nascobal. It doesn't help us this fiscal year, but it's June next fiscal year, and we're exclusive first to file on that one. So we will likely get approval for that one as well. So we have positive momentum there on new product launches that we can really do with to help grow our business. While we have Tiotropium, we also want traditional products that can help us grow the business.
But just on the -- if you look at the cost of the facility of operating the facility versus the revenue trajectory from these 2 products, can they actually -- the facility be breakeven -- cash breakeven itself?
Yes, it will. I mean we have optimized the site quite a bit, and we'll continue to optimize and really manufacture products only that makes sense at the site.
Next question is from Surya Patra.
First of all, you have clarified obviously, about the kind of margin profile and all that. But see, we have been in the cost rationalization since, I think, over a year or now so. But -- and we have this quarter also seen kind of a multiple adjustment at the inventory level and all that. So still the gross margin level, it is almost -- it is not that erosion, Y-o-Y, if I see. But the major dent at the EBITDA level, what we are seeing, it is because of the other expenses and the staff costs and all R&D and all that. So sequentially, what would really change here? And how should we go back to whatever guidance that we are giving the exit rate of 17%, 18% for the full year?
So let me tackle that question. So you would appreciate that the drop this time around is essentially because of the onetime because of what we spoke about on the sales plant in America. But as we transition to out of the legacy OSP business, which we think is actually on a weaker footing at this stage in America on the more complex generics, you would expect the margin profile to set the realization is to much better the margin profile to increase. We're also stepping out of our O area status across the plants. So to the extent that the ability to come out with products is certainly going to be much better. We have invested ahead of the curve when it comes to a lot of factories and the like.
And we are doing what it takes. We're going to rationalize on the workforce front on the footprint front and the like. There's, of course, over the last couple of years, last few years, I would say, we've been building up a culture of cost consciousness including digital road map, all of this will actually come to bear fruit. And of course, there is, of course, progress across various other geographies. We have Brovana, better products in the U.K., Europe, we have NaMuscla. Things are looking out much better in other geographies as well. So I think it's a combined impact of all of this, which has actually improved the profile for us. India is continuing to do strong -- strongly, whilst, of course, in America, as we just enumerated the various products that you could be bringing to market and so on. So our confidence levels actually flow from this.
Okay. But sequentially, whether the even Albuterol has witnessed a significant kind of a price erosion? And that is one of the key reasons also for the sequential decline in the U.S. business? And also, is it possible to quantify what is the kind of inventory adjustment that you have built in this quarter?
When it comes to price erosion, it has been across various products. So there has been some drop of cost on Brovana itself and a slight decline comes to Albuterol. Overall, we had -- we spoke about 10% for the portfolio overall. The levels of inventories, the PC, I think we are comfortable with it. And it's commensurate with the kind of drop in sales that we kind of forced assets to take for that reason.
Okay. Just a related question further. I think I see this 10% kind of more than 10% or 10% kind of price erosion what we have been talking about. So that's been there even in the previous quarter. So there is no sequentially enhanced kind of erosion that we have witnessed that. And we have exited out of the few of the product basket. If you tell the number, that is also useful. And simultaneously, so what is the model that we are trying to build for the U.S. business? So are we thinking that, okay, going ahead, whatever that is going to happen, it is relatively more complex and may not be specialty or specialty kind of, and we will move out of all the kind of old and commodity nature product completely? So what is the model that ultimately that we are trying to achieve there in the U.S.? So because whatever the product basket that we have created, it is not setting us the right result.
Yes. So we are transitioning the portfolio from the simple generics, the oral solids to complex, and that has started with Albuterol, Brovana will be further strengthened with Spiriva and they have a laser spray product. I mentioned Nascobal. The injectable products, the biosimilars that pegfilgrastim that we have the opportunity to get into the market. I mean we will not vacate the space of oral solids. I mean oral solids is still the bread and butter. But in the kind of price erosion, one has witnessed on the oral solid side, we decided that it made sense to rationalize the portfolio that does not make sense, where there's negative margin or low margin, it makes sense to really take the over out of our P&L to improve profitability. We are taking those steps.
So we'll continue to optimize on the oral solids. And at the end of the day, we want to also manufacture oral solids very profitably. So continued effort in reducing cost of goods on the oral solid front from the optimization on the API front or external vendor development or the like. But wherever we see no real value into our network and P&L, we're getting out of those. It doesn't make sense to really carry lost leaders in the portfolio. So our effort is really to transform the portfolio transition it to complex generics. It started with inhalation products at 25% of our revenues last year. And we hope in the next year or 2 with the pipeline that we have coming, we get closer to 35%, 40% in the years to come. And at the end of the day, we feel like that there is more sustainable, higher margin opportunity in the complex products.
Okay. Just last quick question on the overall R&D spend, which was expected to be reduced through the hiving of the core basic research activities. What is the update there? And also, if you can just give an update about the progress of Etanercept in Europe.
So we are in active discussions with companies right now to monetize our oncology pipeline. And I hope in the next couple of quarters, we'll have some positive results there. But we are an active dialogue right now on the oncology pipeline. On Etanercept, the product is progressing with Mylan Viatris. And we continue to get approvals in new countries and look at launching it in new countries as well.
So is it like more than $10 million kind of level it has reached or is year-to-year achieve that, ma'am?
Yes, it is above $10 million already.
Next question is from Sameer Baisiwala.
So the question is in the next couple of quarters, say, by December, what's the margin potential of the core business without any large U.S. approval, et cetera, because we are running a very profitable India and other markets? So can we just discuss that?
Yes. So as you correctly put it, the -- it's basically the American business, which needs to be -- which is actually undergoing shifting sands out there. We are trying to move out of, in fact, the more commoditizing oral solid business into more complex ones. But the core portfolio is, of course, from a price erosion perspective, it is suffering a bit -- quite a bit. And that's common across the industry as you'd recognize. So whilst we are transitioning, we're also trying to build that. So it takes its own regulatory pathway for bringing in those approvals and reducing it to the market. So it has its own evolution time, so to speak.
But specifically on the margin, right, what's the core margin without the upside strong company products and the like?
For the company?
Yes.
It is really a function of the kind of write-offs that you have taken on inventories and all of that...
Just specifically, we will get to the double digit even for the core business before we layer on anything out of new products or the like.
Yes. Nilesh, that's very helpful. That's what we were looking for. I mean, see, business like yours should have 15%, 20% operating margin as things stand. So is that something that you think is possible? Or is there some structural cost heads that you have, which is different from others?
So maybe I can go and then Ramesh can add. The oral solid, I think we were over-indexed on the oral solids compared to anybody else on the generic side. So that optimization...
Sorry, Sameer, you're asking about the company, right?
Yes.
Overall.
I'm going -- the core business of the company.
So the oral solid, we are paring down part of that. The idea is to rationalize the footprint because associated with that as well. So the oral solid gets to a sustainable profitable level, which is not at this point of time, especially in the U.S. Layered on that would come to complex products and the like over time. India business is obviously is highly profitable. So I don't think there's anything structurally different compared to other companies, but I think it's the over-indexing firstly, on the U.S., primarily the oral solids, the lack of new product introductions in the recent years. I think all of these have been compounding factors which have led to just that regular pipeline of products not coming to market. We're starting to see that come now. So we see the inhalation product. We see some of the other complex products coming as well. We do want to optimize the overall solid part, so that it makes money stand-alone. It is only then that sustainability for the earnings, I think that's all -- it only comes in at that point of time. But I think it will get there. I think we've closed. We've done the optimization measures for the most part. And I think you'll start seeing from Q2 that bounce back happening.
Okay. Great. And just one final question is on the 14% workforce in the plant. So I'm just wondering when your volumes go back up again, then what happens? I mean -- or what were the redundancies, so if you can just talk about that.
So we've actually -- I think what -- I think we were very cognizant on that. We hate doing stuff like this. I think the idea was to just optimize it to the right kind of level. So part of that has been exercised like delayering and the like, just optimizing spans of control in some plants where volumes have gone down, and we are seeing that new product would also not come reducing number of people out of that as well. So I think we'll be able to handle volumes as they go up. We certainly have at this point, more capacity than we need. And the future pipeline, even on the oral solids is not extremely high volume from a new introduction perspective.
Just to add to what Nilesh was saying, so I've said this in the past year also, Sameer, there have been a number of inefficiencies that have kept into the system over a period of time. And we are in the process of kind of ironing it out. Specifically, for example, we have this investing end of the curve, and we just -- we are addressing it through our first planning. We also look at a footprint at some point of time, a reduction there. There are inefficiencies when it comes to, for example, on the at failure to supplies, penalties that we spoke about in the past. So we have to -- that's significantly during the course of this year. And going forward, the results could be -- there's certainly going to be an impact on that.
They've always been focusing on, in fact, a host of initiatives when it comes to the gross margins in terms of routes to synthesis or procurement excellence and the like. Apart from that, there have been inefficiencies in terms of -- because of OAI status itself when it comes to employing or deploying air freighting for moving our products out, there has been a considerable increase in that over time and that we are again reducing.
Apart from that, there has been, of course, unfortunately, the cause of a different kind, and we think of is you can, of course, guess to engage into the future and say how much it is going to be. There is -- we have been working on, in fact, overall production in terms of strategies around a piece in India in terms of bad sizes and the like and other parts, looking at other ways of actually controlling it. So all of these measures, I think, total up to a fairly decent amount and which you think when we work on and actually get the full outcomes of all of this, but helping bring up the EBITDA margins and, of course, shoring up the overall core business of the past.
Next question is from [ Madhav ].
My question was that the products that we are rationalizing in the oral solid -- hello? Yes. My question was that the products that we are rationalizing in the oral solid portfolio, the existing players who continue to supply these products in the U.S. market, are they at a better cost structure than us that they continue to supply or they are okay making negative profits or maybe 0 profits in that portfolio like people who continue to drive down prices, how are they able to sustain? Or do you think prices eventually must bounce back here for supply to continue in the U.S. market for some of these products?
So I think it's a combination in some products, where we are not vertically integrated or we don't have a good cost position. Obviously, someone else has an advantage over us. And if we can't gain that advantage in a reasonable period of time, it obviously does not make sense for us to beat a dead horse. And on the other hand, in other cases, it's surprising to see folks really undercut pricing against a vertically integrated player, where we have strong cost position. So it all depends upon dynamics around the product. So the product by product analysis to determine is it a short-term price event or a long-term dynamic that we are dealing with and to decide what to get out of and what not to get out of. I mean, we don't easily get out of anything. We like to really be the last person standing in the marketplace. But when the pricing comes down to a level and costs are going up, you have to be rational about it from a margin perspective.
How much probability would you assign to a situation where prices for some of these products at least stabilize, if not recover, so that supplies are more stable? Or do you think that there are still some players who know that rational and prices are going to remain low for a long time?
So when you look at the number of approvals that companies have had in the last couple of years, the oral solids have had the maximum number of approvals. So new competitors getting in has been -- has exacerbated the situation as well. So it's hard to really predict. I mean is there going to be a price increase? I think one would want to really be in a position where if there is a price increase on strategic products, we are able to take advantage of that. We are able to take additional volume in the marketplace when others have issues. But those will be around strategic products, not around small products.
So the drop would be the marginal products where we don't necessarily have a fantastic cost position. We don't have great volumes and which really don't move the needle beyond a point. So I think those are the kind of products that have been part of the cut at this point of time. And I don't think we can count on serendipity to make up for these kind of products. If something structurally changes, obviously, we can go back to some of these products.
Next question is from [ Nikhil Mathur ].
So my first question is on the other expenses. If I look at on a quarter-on-quarter basis, the other expense is down almost INR 160 crores, in this R&D is stable. Can you help me if there is any benefit from restructuring initiatives sitting in this 1Q number? Because I believe there will be some lower grade cost as well attached to sales not realized in the U.S. So any restructuring benefit sitting in this number in this quarter?
Yes. So the last time around, there were some one-time expenditure, we had the SOLOSEC litigation expenses and the like. There's, of course, this FTS elements, which are also being considered out there. So those you recognize are really onetime if we took in. So that obviously is significantly low. It's not there this quarter and hence, the reduction.
So in the coming quarters, how should we look at other expenses on an absolute basis? Is it likely to be stable and only the sales growth in '24, '25 would lead to some bit of operating leverage? Or on the other expense side, also, there are some explicit leaders that will potentially be visible in 2Q onwards?
So as we said, there's a number of things that we are actually looking at for cost reduction in a general sense. So the onetime items are really onetime. So we don't expect that to kind of drop up again. So as a percentage of sales, I think these would be -- it will be lower as the sales go up. And as absolute numbers go, they would be more or less the same vicinity.
Okay. So if I look at FY '22, the other expense was INR 4,500 crores. I think INR 220-odd crores was paid to supply I could see in the annual report. Sorry, INR 4,500 crores is after taking out the impact of failure to supplies. So what is the like-for-like number are we working with in FY '23 versus FY '22 on the other expense side?
Absolute numbers, we could take this offline, for sure. So this is really to be taken on a full year basis because what you're comparing is against that. So I would take it offline. But for sure, there are several measures that we have been working on. So if you were to knock up the one time, which will not appear again, you'd see the numbers coming down over time.
Okay. Got it. And Nilesh, one question for you. I heard you in the media in the morning, kind of indicating that India should be back to double-digit growth from 2Q onwards. Now is it something visible? Or is it a hope that because the market should grow, Lupin should be at a part the market, because the way I'm seeing the India business, there are certain headwinds to Lupin's India business in certain in-licensed products. You don't have a product which has been sold out to someone else. So I'm just trying to -- I'm not able to figure out how double-digit growth put the company back to from 2Q onwards.
So like we said, we will adjust it for COVID, the growth was 5.6% in Q1. So that's kind of the base that we're working on from in any case. And you're absolutely right, there are some effects in -- on the cardiac space, obviously, we lost the brand on the -- in the diabetes space, there is competition from generic products coming to some of the other in-licensed products otherwise, respiratory has been slow to grow. We're still seeing slightly lighter doctor footfall than what we would have expected. That's what we would expect to normalize. And we're still holding on. Again, all of these were expected. So Q1 was expected to be the way that it is and future quarters are expected to go back to the double digit. Will we be at 8% or 9% in Q2 before we get to double digits? Maybe. But in general, we're going to be in double digits for the balance 9 months.
Okay. And one final question on gross margins. Now a couple of years back when there was this expectation of Albuterol coming in, even then it was widely expected that Lupin's gross margins will improve. And also, they were talk about procurement efficiencies being realized even then the gross margins have only declined, they haven't improved. Can you help us how the gross margin improve over the next 2 years? I mean Spiriva will come, but you have the base business, which you laid out as well. So some more sense on how the gross margin can improve in that high quality?
In some parts, if you're comparing it in the recent past, it's also because of the fact that we are an element, the salience of we track partnered products have gone up. But as we bring in products from our own stable, we'd expect that to -- that savings be waited to come down. So -- and of course, the various initiatives that we have been following are given adopting in terms of procurement excellence and also synthesis and all of this to come to bear fruit. So you would expect with better products coming in, the gross margins should certainly go up.
Next question is from [ Chirag Dabhi ].
So 3 questions. First is, how should we think about the Q-o-Q dip of $50 million in the U.S., the impact of that on EBITDA? Any thoughts there?
It's actually flown through, right? So essentially, the EBITDA, its impact on the overall EBITDA margins, the absolute number goes down and the fixed load base being water test, it brings down the margin. So once the turnover goes up, which is what we say would happen between the second and fourth quarter, we would expect things to be much better.
Ramesh, you're saying that the -- had this not been the case, EBITDA would have been higher by $50 million.
Gross margin portion of that.
Gross margin -- understood. Okay. Fair point. Secondly, we've talked about INR 500 crores annualized kind of cost savings from the second quarter onwards is what you indicated last quarter. Does that still stand? Or has there been a change there? Has it increased, reduced?
There are a number of initiatives. So there are -- to be very exact, we have got about 7 or 8 initiatives going. There is an initiative -- so we just spoke about the fact that we carried on this workforce planning at the factory and other places as well, there's been a 15% reduction on the overall manpower on the manpower front. There are initiatives to kind of reduce the footprint itself because we recognize kind of enlisted out of the curve.
I spoke about, in fact, the air freighting. I spoke about, in fact, reducing FTS. I spoke about actually dropping negative margin products and the like. All of this are -- it's work in progress. Some parts of it is completed. There are other parts, which will actually play off during the course of this year and passing the early part of next year as well. So the -- it's basically -- it's a approach, and it's a philosophy that we will continue. And for sure, it will bring in more than the INR 500 crores that you're talking about.
Ramesh, can you be a little more specific because clearly, numbers are substantially lower. Can you just give us a sense of the glide path of how the bounce back or improvement will probably progress over the next few quarters? And this is more near term is I understand it's not right to put you guys through this, but just given the kind of disappointment we've seen, a glide path would really help in terms of how to think about this near term.
It will be very unfair to kind of spell out what will be the outcomes from individual initiatives. That will be very unfair on your part to expect the company to spell it out. But cumulatively, in aggregate, the number -- the total quantum could be in excess of the INR 500 crores. It's actually between INR 500 crores to INR 750 crores. And this is exactly what we are setting out to kind of achieve and this will happen during the course of the next 4 to 5 quarters.
Understood. And you indicated on television that you will exit Q4 with 18% margin, did we understand this right?
Yes. So it is aided by the fact that a lot of these initiatives or have paid would pay dividends, the fact that we would also have products being introduced in the market. And of course, repeat depreciation, which also helps in terms of the overall realizations itself. But you should also not forget the fact that there has been a secular inflation, which is impacting this industry as it is impacting other industries. And we have a fair sense about where it is going. But having said that, there could always be moving parts that you cannot kind of anticipate.
[Operator Instructions] Next question is from Sonal Gupta.
So just a couple of small questions. One is, can you share the size of the partnered product portfolio for the U.S.? I mean, like what percentage of your U.S. sales comes from that?
Going forward today, it will always be -- it will certainly be much lower. I could talk about the individual products per se. For example, last time we had grown 15% to 16% is what we kind of got in that bucket.
Got it. And just given the -- I mean, like the correction in the whole U.S. sales, what sort of reduction or correction are you looking in the U.S. sales and SG&A infrastructure because could you shed some light on that? Just trying to understand, is it being right sized? Sorry.
So we have been optimizing the P&L end to end. So now I've been right from SG&A at the commercial end in the U.S. to manufacturing costs like Ramesh highlighted with the workforce reduction in our plants to reduce cost of goods as well as optimization of the R&D spend, we have brought R&D spend down 25% from Q4 to Q1 and intend to optimize further, while not missing out on material opportunities, in particular, on the complex generic front and exclusive oral solids. So it's really end-to-end P&L that we have optimized, and we continue to optimize.
Got it. I mean just trying to get a sense, right, like the U.S. SG&A would be running at like 15%, 20% of U.S. sales. Is that where it would be right now?
Yes. Actually still ahead of that, yes, 20%, 24% is what we have as total SG&A expense lead into the U.S.
End to end.
End to end, including the gap which is allocated to the U.S.
Okay. So that includes R&D as well, or no, that's separate, right?
No, just the SG&A.
So that needs to substantially come down, right, if the U.S. has to be profitable?
If you're going to actually go down the path of products being introduced, which will actually take up the turnover, it will be fair to kind of say that it should be obviously optimize wherever we can, but -- and cutting down to what they think is absolutely necessary. But what we think to the extent that we think it is necessary, we would keep it there.
Next question is from Anubhav Aggarwal.
A couple of questions. One is on the gross margin this quarter. We had 2 impacts. One is from shelf stock adjustments. Second, benefit from discontinuation of low-margin products. If you were to normalize this 55.3%, what would have been a normalized gross margin this quarter?
A couple of percent more, right?
Yes, a couple of percentage points more.
Which is what was Q4 right? So there was no material change on there, but is there some price erosion, but other than that.
Okay. That's helpful. Second, among the different cost-saving areas Ramesh, you highlighted, 7, 8 areas, if you want to pick one and which is low-hanging fruit, which can be implemented this year with some good benefit coming, I'm not talking about how much benefit, which will be that one area that you will pinpoint?
So these are different buckets and all of them have their own nuances really. So we've gone down the path of manpower reduction at the factory level. There's, of course, still capacities that we have invested in that we think we should address in some ways. There's, of course, the FDS element, which you've also addressed this year.
I think the FDS is what we've fixed, right, in the said we did a catch up that we needed to clean up in the past. And now we've got it at a pretty clean plot. The inventory is pretty optimized. Our OTIF levels are way up as well. So obviously, I think the FDS is something that we would expect to keep in control now.
So that's already done, Nilesh. Anything in including that?
But you asked for low-hanging fruit, right?
Yes -- that you can do incrementally from here?
So I think stuff like freight we'll bank on, right? Obviously, credit is coming down again, as we've been able to normalize inventories, we're back to ocean rather than sending stuff by air as well. I think it's going to be a multitude of stuff thereafter.
What's your mix, Nilesh, right now, sea versus air?
I think we'll have to get that to you. I don't have it off hand.
It is close to about 34%.
34% by air.
By air.
And normal will be what, 20%?
So we go back to 2015, it was 0. So I don't think it'll get down to that level, but we obviously haven't done a turn target to bring it down.
Okay. And just one more, sorry, Vinita, this is to you, that when I say Lupin versus your peers, I see very overdependence or very skewed profile of very high U.S. as well as high India. And I see EM being a very small portion of our overall revenues. Of course, the company now has a problem where the profits are not very high. But at some point of time, how do you think about -- in the past, we haven't -- we had Japan, which we exited, but EM is a portion, how you're thinking about it as an area that you want to develop? Second, would you agree that right now is not the time because you want to contain and bring back the margin, but when things are okay, how are you thinking about EM as a category?
Sorry, can you repeat that question, we actually lost power for a split second?
Yes. I was just talking about emerging markets as a category. Lupin versus peers seems to have a profile where U.S. and India are a very significant portion of the revenues and profits. Lupin doesn't seem as diversified as some of the other large cap peers are. So right now, we've not been the best time because we are looking to contain margins, but at some point of time, which -- how are you thinking about diversifying into emerging markets as an area?
So if you look at our emerging market business right now, if you add Latin America, South Africa, Philippines, it's a nice sizable business. I mean last year, it was $200 million in revenues at 18% EBITDA, and it grows double-digit year-on-year. I mean the only place where we are still trying to really get it to the right level of profitability is Brazil. But the other countries are all pretty high-margin countries. And while they're growing organically and have a very rich pipeline, we are looking at small bolt-ons into the emerging markets to be able to grow it beyond the 15%, 20% level to the next 4 to 5 years to get to between $400 million, $500 million in revenues.
And there's tremendous potential in Latin America itself beyond Mexico, Brazil and also in Africa, I mean, we have started the efforts of getting from South Africa to Sub-Saharan Africa, started registering the products to be able to grow into the region. So certainly have plans to really grow our emerging market business. Likewise, we are truly under-indexed in Europe. I mean, if you look at most of our peers and you look at also the global generic companies, they typically have a much larger presence in Europe. We are probably one of the smallest. And we have significant potential there as well, in particular now with the complex generics with inhalation products, with the injectables coming, we have tremendous potential there to grow the business. So continue to look at small bolt-ons to be able to effectively commercialize our products in Europe as well.
I know we are over time, but we'll take 10 minutes more since there's a bunch of questions still pending.
Next question is from Mr. Sandeep.
This question is to Nilesh and Vinita. It seems the problems over the last couple of quarters or a couple of years have been both internal and external, which is pricing-led, et cetera, but seem more internal to the organization. So what are the strategic changes which are required, especially at organizational level -- leadership level to really get the organization back to winning base because an aspiration of 17%, 18% margins is good, but that's still average? So do you think there are a lot more strategic choices needed or a product pipeline coming through will get us back to where Lupin should be?
Yes. So from my perspective, and I agreed that there have been both challenges, external as well as internal, external certainly from a market perspective, internal from the standpoint of delivery, certainly with the GMP challenges that we had that hampered the ability to really get the right number of products into the market that really help offset a lot of the external challenges. We have done a number of things to try to address these challenges. As Nilesh spoke, I mean we have a clear focus on the GMP front, have really taken it to a different level to ensure that all of our sites are meet and exceed FDA's expectations out of the 5 sites that were in trouble. We have cleared 2 and are confident of clearing the other 3 as well, while keeping the rest of the sites compliant. And that's crucial, that's the backbone of the business to help us deliver every product that we file from an R&D perspective.
So really getting the new product launch engine fixed is a big part of our focus. It's a combination of people as well as processes that we have worked upon, and we are fairly confident with the changes that we have made, aided by the GMP status changing now, we should be able to really kickstart the new product engine effectively from this year onward. So for a generic drug company, I mean, it's crucial to get new products, a good number of meaningful new products to launch. So that is just one of them.
I mean there are many areas where we have -- we talked about issues with FTS, back orders that played quarters in the last fiscal year, we have done a number of things to streamline our supply chain. We have implemented integrated business planning in the company last year that has changed the visibility that our team has end-to-end, the alignment our team has to ensure that we maximize on the products that we have in the market, we minimize, mitigate any failure to supply penalties and back orders. And we are in a much different place today than we were 12 months ago. I mean the numbers don't show that as of yet, but we are confident that you will see it in the quarters to come.
If I may just sort of follow on, on this, Vinita, if you look back at the performance and think about these internal sort of issues, when you fix responsibility, is it more new talent required in the organization that really is the question because backfill of orders, airfreighting, et cetera, nothing to do with the GMP or market. So there are lots of issues. So does the organization require new talent because the organization is made of people who have to execute?
I think it's a combination of both talent as well as processes. And we found that the process fix went a long way to give everybody visibility end-to-end in terms of what is needed. But I mean, there are talent lapse as well, I would say, and we're in the process of filling them.
We've made several changes as well, right? Changes in the procurement function, changes in the supply chain function, which is in some of the technical operation roles as well, including in quality even.
Right.
I think we just need to execute versus the plan that we have. I think we have a plan that we are going to rightsize the footprint for the oral solids. We'll execute on the complex generics. We will -- Vinita had talked about some of the other markets. From my perspective, we would double down on India, which is something that we've only started in the last few years. And in India, it's not just pure pharmaceuticals. It's the broader health care spice with some of the stuff that we're doing. We just have to stay at this now.
Maybe last 2 questions.
Yes, we'll take last 2 questions. Next question is from Prakash Agarwal.
A question, again, on the U.S. side. I heard you saying that the sales and the margins are going to bounce back, but the clarity here would help pay down inventory, shelf stock adjustment impact and price erosion. So when you talk about these 3 pieces, out of these 3, the first 2 are onetime. So are you saying that from 3Q, you will be back to 170, 180 or you said something lower? And if these are onetime, why aren't we coming back to 170, 180. And why are we calling it, I think you said 150-odd?
So I think with the erosion rate it comes to the 150, 160 kind of number at this point of time. And that has to be supplemented only by more sales in the in-line products if we do that or otherwise new coaches.
But this base was already 200, and we've been seeing price erosion every quarter. What I'm trying to understand, did we see next -- another round of 10% price erosion on the base portfolio?
That seems to have happened at this point of time.
That's right. I mean, the average was 180 in terms of base last year, and we saw 10% erosion, especially on products where we had significant additional competitors like Brovana, for example, which is the reason why I mean the base comes down.
Okay. And with the approvals and the launches that you're seeing from the facility cleared recently, Goa had few launches. How do you see Somerset shaping up? Do you have some chunky launches, approvals, which can in the near to medium term, say, 1 to 3 quarters out, can they start -- do we see double-digit launch for the year? Or how do we see that?
So we're expecting 10 plus launches in the year. But so far, we have launched one product, Restasis, which was authorized generic from AbbVie in the first quarter. And we expect Suprep coming through in September and full launch prep there. Now that Somerset is cleared, we're expecting a couple more products out of Somerset, 6 or so. But the meaningful ones are diazepam gel that I mentioned, which could really help in the fiscal year. And next fiscal year -- early next fiscal year, we have Nascobal, where we are first to file. We expect that approval out of Somerset in the next 6 to 8 months. So those are the ones that are Somerset in the near term, Prakash.
Perfect. And just a follow-up on this. So 150 base, what is the more downside to that? I mean obviously, I mean, it's difficult to predict that 10% quarter-on-quarter price erosion is huge, but is there more downside to that?
I don't think so. I mean, because Brovana in particular, we had a really strong market share. We still have a good market share, but the pricing has come down with the number of additional competitors. So it's hard to predict pricing in the U.S. market, but we do believe that this should be the base on which we add new products.
Perfect. And second one is on the respiratory pipeline. If you could throw some color there, given that you obviously have talked about a couple of coming this year, but how does it look for '24 and '25?
So Spiriva, obviously, will be the biggest one for us in the near term. And then Nascobal, out of Somerset, we expect a ramp-up of Spiriva also in other countries, U.K., Europe, Australia, Canada. Dulera is still under. We have a little bit of work to do on Dulera, but we have had good correspondence with the FDA on that one. That product is also relevant for us for Canada. So that's in the works. And then we have products both the first aid product, we just got notified about the high-strength approval. We plan to launch that later this year in U.K. and Europe early in the next calendar year and have a full pipeline beyond that, Ultibro and the ELLIPTA franchise, the Respimat franchise, they're making progress on the pipeline on all the material products.
Okay. And your margin guidance of 17%, 18% include all these kind of product launch probabilities?
Well, I mean it's really this year, the 17%, 18% exit with Spiriva coming in. And as we get full impact of Spiriva next year, as we get other products, we should be at that 20% plus.
True, Absolutely.
We'll just take the last question from Sameer Baisiwala.
A couple of questions. One, Vinita, are you expecting an authorized generic on Spiriva?
It's hard to predict, Sameer. We are planning both ways. I mean from a financial perspective, we have planned for an authorized generic to be in. But from a supply planning standpoint, we are ready to take on the market 100%.
Okay. Great. And the second question is, just curious, what's the sort of backward integration that you have and for the U.S. business? Just some broad range? And how does it stack up versus the industry?
I think we are fairly backward integrated when it comes to the oral solids. In the complex generics, it's not as important to be backward integrated is more technology. But on the oral solids, we are fairly backward integrated. I would say like maybe 70% of our portfolio -- in-line portfolio, yes.
Okay. Because I was coming from one of the previous participants that how important is it to be backward integrated to really survive and do well in the U.S.? Or is this an inflection point in the industry structure that even the low-cost producers from India needs to exit because they are such thin margins? So you think there's still...
I'm going to say...
Sorry, go ahead.
Sorry. Go ahead. Please complete your question.
So I guess there's still more time before the industry inflects. Is that the way we should read about it?
I think there is -- for the oral solids backward integration and getting the right cost through backward integration.
Actually it's not just backward integration, it's backward integration and operation at scale.
Yes, both.
You could be back on integrated. If you don't have scale, you're not going to have that cost of goods sold. So that won't work either.
Yes. But I think there will be a shakeout in the oral solids as we see it. And the products that we are backward integrated on and the products that are strategic to us, we will be anchored in there to gain additional share if the opportunity arises. At the same time, products where we are not, don't have a great cost position, we're not going to hold on to it to no end.
Okay. When you are with that logic, if you don't mind, then for that 70% that you are backward integrated and you have scale, I mean, over time, you should be gaining market share and they should be shake out in those products as well?
Well, hopefully, if others are willing to give up space.
Okay. And one final question. How many filings have you done for large value inhalers and complex injectables? Or where are you in the pipeline?
I'd say that, yes, 3 or 4 so far.
But see several others in advanced stages of development.
Yes. I now hand the conference over to the management for the closing comments.
Thank you very much for your participation, and hope you had answers to most of your questions. Look forward to seeing you next quarter. And in the meantime, take care of yourselves and look after yourself. Thank you very much. Bye for now.
Thank you. On behalf of Lupin Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines and exit the webinar.