Lupin Ltd

NSE:LUPIN

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to Lupin Limited Q3 FY 2023 Earnings Conference Call. Please note that all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the opening remarks.Please note that this conference is being recorded. I now hand the conference over to the management. Thank you and over to you.

[Vinita Gupta, executive]

Thank you. Good afternoon, friends. I'm very pleased to welcome you to our Q3 earnings call. I have with me are, Managing Director, Nilesh, as well as CFO, Ramesh. As you would have noted, we have continued to build on our momentum in Q3 both on revenues and in particular on margins.I'm very pleased that in Q3, our U.S. business performed well, India business growth improved and API business rebounded as well. On the margin front, we saw the benefit of NPLs in the U.S., seasonal product upside as well, and continued savings from our optimization measures. We are focused on sustaining this positive momentum, in particular as material new product launches start and our recent investment in a Salesforce expansion in India, starts yielding results.I will let Ramesh talk through the performance in deeper detail. I would like to share some of the business highlights. In the U.S. we continued to evolve our business with optimization of oral solids, driving growth of complex genetics, respiratory franchise in particular and executing on our new product launches.During the quarter, our inline business was almost flat with slight decline due to exit from low margin products, offset almost completely by seasonal products. New product launches in the year contributed well in the quarter with Suprep ramping up, performance generic successful launch and then authorized generic launch.Our respiratory franchise strengthened with Albuterol continuous strong performance, addition of Brovana and Xopenex brands, as well as generic performance launch. As we look at the quarters ahead, we expect new product launches like Spiriva, diazepam gel, Nascobal nasal Spray, and [indiscernible] all products where we have either exclusivity or first to market position will drive growth of our U.S. business in a profitable manner.On Spiriva, we continue to make progress and have received priority review from the FDA for a target action date in April without inspection or July with inspection. In the meantime, we are getting ready with launch preparedness. We continue to see Tutopium as a substantial opportunity for fiscal year '24 with a significant runway, given the competitive dynamics.Products like diazepam Gel and Nascobal we now hope to see approval soon given the recent successful Summerset audit. Our U.S. Generics business has come a long way in calendar year '22 still a long way to go. However with the new product launches coming in, continued optimization efforts, focused efforts in building a niche innovation as well as injectables pipeline. We are optimistic that we will grow our U.S. business in the next couple of years.Switching to India, the largest part of our business. While our growth in the quarter and first half has been below market, this is primarily due to loss of [ Sadness ] from our cardiovascular portfolio and genericization in the diabetes segment in the Gliptins.But for the diabetes portfolio, our growth in Q3 was inline with market, with therapeutic areas like cardiac, GI, respiratory all delivering double digit growth. Our gynecology and GI have actually been the fastest growth therapeutic areas for us.This quarter, we have added close to thousand reps created six new divisions to expand our reach and share of voice. We expect our investments to get us to above market growth in the quarters ahead. We are committed to growing our India business to double-digit growth in the quarters ahead.Other than India and the U.S., our API business recovered with the growth and cephalosporins and other countries like UK on the back of foster generic and Germany due to NaMuscla grew well as well quarter-over-quarter.On the margin front, we expect continued improvement in particular as we execute a new product launches and our recent investment in India and their salesforce in India start yielding results. Likewise, we continue to focus on cost optimization efforts. While we have been successful in optimizing our manpower cost, we have been very disciplined in getting out of low margin products that has not allowed us to optimize the idle cost.Nevertheless, we are confident with the efforts that we have underway we should be able to move the needle on this front of the quarters to come as well. On the compliance front, we have made progress and positive outcomes on sites like Ankleshwar, Nagpur injectable and Somerset. We've also made substantial progress on our remediation efforts in Tarapur and Mandideep. The recent approval of our Nagpur injectables facility will enable us to start building our organic injectables portfolio in full earnest.Overall, we are moving in the right direction. We expect the pace to get better as we execute on our material new product launches in the quarters ahead. With this, I will hand it over to Ramesh for a deeper analysis of our performance.

[Ramesh Swaminathan, executive]

Thank you, Vinita and good afternoon friends. Straight to the current quarter, INR4,244 crores as compared to INR4,091 crores in Q2 FY '23, a growth of 3.7%. On a year-on-year basis, the growth was 3.8% while the previous sales was INR4,087 crores. The U.S. business in the quarter, our U.S. business registered 11.2% growth in local currency terms on quarter-on-quarter basis, that a new product launches in the U.S. generics business and brands acquired from Sunovion.On a year-on-year basis, revenue declined by 12.3% in local terms with price erosion in top brands like Brovana, Albuterol and Famotidine. We launched four new products PERFOROMIST, NSAID, Rufinamide, and Pirfenidone TR tablets in Q3 FY '23 being the total NPS to eight for the year. NPS contributed $20 million in Q3 revenue.India region, India valid formulations business declined by 3.4% in Q3 versus Q2. Whilst on year-on-year basis sales grew by 2.6%. The overall market growth during Q3 was 10%, whilst Lupin grew by 7.5%. Loss of exclusivity and generalization in anti-diabetes portfolio has impacted growth rate of Lupin has paid the portfolio held by Lupin, in the anti-diabetes is close to 55% of the portfolio of the anti-diabetes portfolio.As you would know, a top 3As, are cardiovascular diabetes and respiratory. Apart from that gynecology and GI, you're also doing very well. And they're growing in the case of gynecology by 19.7% and GI by 16.1%. API business sales grew by 12.7%, quarter-on-quarter as core cephalosporins, API sales recovered during the quarter. Year-on-year basis sales growth was 9.8%. On the EMEA front, revenue growth of 11.1% year-on-year basis, while strong performance of Luforbec in UK and NaMuscla in Germany [indiscernible].Sales for growth markets grew by 23.5% vis-a-vis Q3 FY '22 and declined by 5.9% vis-a-vis the previous quarter. Gross margins, Q3 FY '23 gross margins are 59.8% as compared to 58.1% in the previous quarter is mainly due to US margin improvement, better product mix and reduction in freight rates. As compared to Q3 FY '23 gross margins, the slight margin is due to reduction in writeups, freight, offsetting the impact price erosion in the U.S. markets, and of course inflation pressures on the cost front.On the employee benefit front, Q3 FY '23 was INR764 crores, vis-a-vis INR771 crores in the previous quarter. The margins declined on quarter-on-quarter basis because of [indiscernible] payments made in the last quarter, we had highlighted this in our last earnings call as well. On an ongoing basis, we expect employee costs to be in range of 18.5% to 19% of sales as we build a sales force in India. And Vinita just spoke about that.A lot of people have been asking me about manufacturing other expenses spend. I also rushed to say that there is indeed a onetime expenditure base increase by about INR40 crores which will potentially come down next quarter, but could also perhaps in some ways be offset by perhaps an R&D increase next quarter.EBITDA margins, operating EBITDA, external FX and other income is 12.2% in Q3. Our quarter-on-quarter growth by 160 basis points because of highest sales, gross margins and cost control.Normalized ATR is expected to be 35% as a few subsidiaries like LOI digital and healthcare continue to have losses. On the balance sheet front, there has been a lot of optimization that we have been working on and working capital operating days were lower by five working days.With this may I had the pleasure of opening this floor for discussion.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] So the first question is from Prakash.

[Prakash Agarwal, analyst]

Hi. Good afternoon. Just wanted to check on the U.S. run rate. We had fairly good launches, where we have couple of one AG and decent launches. And we also acquired the two decent sized products. Just wanted to understand and the season was also good. I think, the flu season was good. The companies have reported market share gains. Would you -- were you satisfied with the U.S. performance or we missed some contracts or how do you think about it as a base business now?

[Vinita Gupta, executive]

No. We were satisfied with the performance, Prakash. On the one hand, we should never be satisfied with the performance, but it's come a long way in the last couple of quarters, in the business, both the base business, the inline business as well as new product launches have contributed very nicely to the quarter. I'd say that, the impact of the flu season products that obviously as a flu season receipts, which has only started, one will see some decline on that front. But the team continues to work on this now, the $170 million dollars run rate with the current products, until we can get additional new product launches like Tiotropium and alike.

[Prakash Agarwal, analyst]

I mean, so it's a full quarter benefits of these launches as well as the acquired assets is what I was trying to understand and you are saying that, yes, it had full quarter benefits.

[Vinita Gupta, executive]

No. I won't say, it's full quarter benefits. Because, we had the brands only for a couple of weeks in the quarter. And also, performance launch was, yes, we had two months rather. The brand Lupenox and Brovana. And performance, we had some upside opportunity that we were able to capitalize on because of supply issuance of some of our competitors. So, I'd say we will see an increase from the brand products, but we probably see normalization on performance.

[Prakash Agarwal, analyst]

Okay. Got it. Fair enough. And secondly, on Spiriva. So, what I heard was April, the target has moved a bit to April, which is with inspection in June without inspection. If you could just give more color, what does it mean? So that date is, like, what kind of color on the queries that has coming? And without inspection means that, if they don't come by June, it would deem to be approved or how should we think about that?

[Vinita Gupta, executive]

So it's actually the other way around, Prakash. It's April without inspection and July with inspection. So if the FDA decides that they want to come and inspect, then it'll the tab date will be July. But if they decide that they don't want to inspect, which is very hard for us to predict the agency is going to inspect or not, then it's going to likely be April. And we are hopeful that, we can expedite it as much as possible, just given that are back and forth with the agency. Majority of the disciplines have been closed. CMC, the PD and disciplines have been closed. I believe that, quality is still pending, and that's why I say, it's either April or July.

[Prakash Agarwal, analyst]

Okay. And lastly, on the cost side, I think Ramesh did mention that, there is INR40 crores one off. But even if I strip that off, that cost is fairly high even that. And I understand there is a thousand people have been added. So incrementally SG&A, traveling, marketing will increase from here. So first is why the jump apart from normal inflation is there anything else that is increased? Or is it maybe Forex as well? And how do we see this number moving going head?

[Ramesh Swaminathan, executive]

There is of course, a slight impact because of Forex, because the there is a rupee depreciation and only translate expenses outside the country, it has happened that way. But a large chunk of it is actually coming in because of the fact that you have had higher travels. And I also told you in Q2, there was a shift to in fact, payroll expenses, which has shifted back here, to the extent it has kind of normalized out here. There's been a higher component in terms of litigation spends in the light as well.So all of this is actually contributed. While your question actually comes in from the fact that what did we do on the optimization plan. I rushed to tell you that we've been doing a lot of work on that, to be honest, a lot of it actually happens at the gross margins line itself. And that is in terms of routes process external vendor development and the like, and apart from that. But this is also been in some ways eroded by high inflation out there.Apart from that, there were inefficiencies across various lines. And at the start of the year, we spoke about, in fact, trying to address the manpower situation at the factory level. We have been pretty successful there. And it's captured in some ways, the staff costs said.There are other lines where you have been extremely successful, but there are paths, which we couldn't do much, because the fact that volumes did drop, we had to take write-offs in terms of inventories that we had, and plus, of course, issues that we had on the impurities plant itself. So, whilst the initiatives are still on, there have been mixed results, but we'll certainly see a lot more of this bearing fruit in the quarters to come.

[Prakash Agarwal, analyst]

Okay. So, our EBITDA margin guidance of exited of 16 to 18, with cost A, increasing and B, Spiriva moving out to next quarter changes, right?

[Ramesh Swaminathan, executive]

In a sense, yes. So if you're talking about specifically quarter four, it will be in the same line, the same range as the current quarter. But once we actually have the top-line moving, which will potentially happen once we have Spiriva coming in, and of course, you've got Darunavir and others, you can expect, in fact that obviously, impact the bottom-line as well. We will continue to work on the cost lines as well. But I think we really banking on the top-line to shift actually to see a real shift on the EBITDA front.

[Operator]

The next question is from Saion Mukherjee.

[Saion Mukherjee, analyst]

Just to carry forward the question. I mean, you're banking on top-line to deliver the margins. But it's a handful of product. So, you have Spiriva, in case that gets further delayed? What's your outlook on margin in that case? And in that context, it is important to understand in some granular detail, what's the kind of a cost control initiatives that the company intends to take? Because banking on U.S. revenues, and that is a handful of products. There can be potential risks to that, because the margins are very low at this point.

[Ramesh Swaminathan, executive]

So I also recognize that, we also recognize that in lots of ways Saion. So, if the top line doesn't move, then potentially we still have to work on various initiatives on the cost plant. And there are several things that you still can. For example, there is an element of [ HEPTS ] still coming in because of the fact that if there are impurities, and we are not able to supply that it's actually impacting, in some ways, the bottom-line itself. There were write offs that we have taken during the course of this year. But those alliances that we still can work on.Apart from in fact, the footprint that we will reduce in case, there is, further volume drops. So we would, so it has to be, in some ways an [indiscernible]. We need to kind of weigh the pros and cons of potentially when will the top lines start moving, and then potentially work on other items as well. Specifically, when it comes to India region, yes, we are going to add more people, but we are also working on productivity. So whilst, there is going to be an increase in overall expenses, we also believe that there is going to be commensurate increase in the top line. So there will be, so at the very least, what I do expect is that if Spiriva and other products are going to get delayed, the expense lines will certainly will go down that path in terms of reducing. That could, of course, shift the EBITDA line in some way. Not to the extent that the top line can remove it, but they will certainly a perceptible increase because of the reduction on the expense plant itself.

[Saion Mukherjee, analyst]

Would you like to talk more material rates as well?

[Ramesh Swaminathan, executive]

Yeah. So if we talk about, there has been an increase in cost of production because of that, and which is really impacting in some ways our gross margin line. But better sales mix. And, of course, in a reduction in terms of other air freight and others are actually broaden some benefit there and that's reflected in the gross margin increase this time around.

[Saion Mukherjee, analyst]

Yes, Ramesh you would used to talk about, I think 500 crores of savings. I mean, there was a number which you talked about earlier, I mean, is that number still valid and how much have we already achieved? And how much is left? I mean, if you can give some color as to you know, how much more just from a cost perspective, one can expect?

[Ramesh Swaminathan, executive]

Yes, so the 600 crores were really could be broken down into six or seven buckets, so to speak. We achieved a lot of success in at least three or four of them, whilst two others, we are kind of stymied, because the fact that the volumes dropped, and there was like gaps in the light. So overall, I would say that it's mixed results. So at least about 50% to 60% has been achieved. But where we have not achieved also significantly alter the balance. So, still working on those, and it's not so it's it will never get achieved, it will get achieved. It's only a question of time. And that would actually kind of round up the full complement.

[Saion Mukherjee, analyst]

Just one last question. Just a clarification on the new product contribution, $20 million, I think you mentioned, this includes the acquired brands. And also if you can indicate what's the exposure to the U.S. market from the Mandideep facility in terms of revenue?

[Vinita Gupta, executive]

The largest part of it is Superette performance Pennsaid and two months' worth of the brands.

[Ramesh Swaminathan, executive]

We exposure to from when to give us revenues is, any way it's some 10%. I'm not sure if it's up 5%.

[Vinita Gupta, executive]

Yeah, so what we really are looking at so nearly suspensions out there in terms of NG products out there.

[Operator]

The next question is from [indiscernible].

[Unknown Analyst]

So coming back to cost, first few clarification. So you added 1000 people in your India sales team. So when did this addition happened because secretly we haven't seen much in the stock cost. And then you you're planning to add-on more people. So how many potentially could come in? And when do you expect these new people to start contributing meaningfully? So what we understand that it takes around 1.5 to 2 years, so are you expecting similar timeframe?

[Ramesh Swaminathan, executive]

So we are adding from November, and in this quarter, we will complete the addition. A large part of that is really in this quarter, that we're adding. We are creating six new divisions out of that. And part of this is just the fact that, we are under index in India as far as our sales force is concerned.So, we will see some impact this quarter. But as you know, we have also been growing below the industry average in the last few quarters, and that is changing. So I already see that minus teen licenses portfolio, we already had market growth rate. And even after adding these people, we will see further acceleration of our growth. My expectation is that from the second quarter, we will be growing overall at rate faster than the market.

[Unknown Analyst]

So Nilesh, how many people are left to be added? So thousand are done, right?

[Nilesh Gupta, executive]

No. So this that was the entire number. So the entire number is largely done.

[Unknown Analyst]

Okay. But impact of that is not getting reflected in staff cost, right? What we have seen is mostly similar.

[Nilesh Gupta, executive]

Yeah. So I think there was some small number which was added in in this past quarter. In Q4 is where you will see some impact of this staff cost addition. So, that also is staggered through the quarter. And then it gets baked into the numbers called Q1 onwards.

[Unknown Analyst]

Okay. Q1 onwards. Second, Ramesh, you mentioned fourth quarter, sorry, third quarter number obviously had one-off. And then you are saying, if we move to fourth quarter, that one-off might come down. But you are saying R&D will catch up because third quarter was a bit less. So should we assume broadly similar other operating expense cost to continue?

[Ramesh Swaminathan, executive]

Yes. I think it will be more or less the same range.

[Nilesh Gupta, executive]

It'll come down a little bit.

[Ramesh Swaminathan, executive]

It'll come down a little bit in terms of SG&A expense that we can control. But broadly around this. All it cost to have a level, but that's on a different line.

[Unknown Analyst]

So if I just look at the cost and that we wait for square by another key approvals to come in, when we should be seeing, I'll say, notable benefits coming from all the efforts which you have been doing on the cost front for last several years?

[Ramesh Swaminathan, executive]

So that's exactly what I was trying to explain. So -- timing for because of reasons beyond our control, which is really about in some ways, the volumes dropping and because the bright tops and alike. And those buckets, we would be a blessing. So these are not going to continue forever. These are systemic issues that we kind of faced, which we have addressed. Those will get corrected. So if you are talking about the total quantum of 600 gross benefit flowing, and it could have flowed into the P&L by the time we are through with this.

[Nilesh Gupta, executive]

And then we just more specifically, I think, Q2 onwards we would see improvement in performance. We are better than where we have some of this optimization that will kick in as well, that's what we see. And obviously, to your token will only whether it's through that picture.

[Unknown Analyst]

Okay. My last question is on India bit. So diabetic portfolio. Obviously, we have seen generalization. But with more salespeople coming on board, which segments you are focusing, which can clearly help you to outpace the market growth in coming few quarters?

[Ramesh Swaminathan, executive]

So big therapy areas are diabetes, cardiovascular and respiratory. And these are other three areas that would grow as well. So while it's a point of time, that diabetes market is also bouncing back. In addition, areas like GI, areas like women's health are growing strong double-digit as well. And these are areas that we would accelerate as well.

[Unknown Analyst]

Just I think to clarify. And diabetes, are we relying more on say improved penetration? Because maybe like there are some new launches lined out, but are you relying more on volume penetration to pick up pace?

[Ramesh Swaminathan, executive]

The market is inherently bad, unfortunately, it has the diabetes capital of the world. So, I think that market potential is always there. It's value wise, it is vitiated at this point of time, because of the generalization of multiple products in the diabetes portfolio for the market itself. It's the only segment that is really growing at best a single-digit kind of thing in the Indian market. And it's going to bounce back for the market, it's going to bounce back for us as well.

[Operator]

The next question is from Surya Patra.

[Surya Patra, analyst]

So, my first question is on the kind of potential profitability that we can achieve. Over the next one to two-year period. So, practically having seen the pricing pressure in one of the key complex products, what we have been waiting for, let's say Albuterol and other respiratory products. So, now, our focus has been obviously on the complex index and we have been spending a lot, but we are also visualizing that or seeing that the kind of pricing pressure as well as competition with complex products are also witnessed. So considering that, are you confident enough to achieve what you have been trying to fetch from the complex portfolio going ahead?

[Ramesh Swaminathan, executive]

We've already started seeing the benefit of the complex products, just a couple of products, like Albuterol. How much they benefit from us, from a profitability standpoint. We can't wait for a portfolio to be rolled out completely. I mean, when Spiriva gets approved, the potential of Spiriva is substantial both on top-line as well as bottom-line. And we will execute on these opportunities.Meanwhile, until they get delayed, no one feels uncertain about them, but the fact is our team is working 100% to get these products approved and launched. And as we look at launching these products, that will really help us grow the top-line, as well as the margin profile and we feel confident of getting to that next couple of years to the 17%, 18% EBITDA level.

[Surya Patra, analyst]

Whether you are happy to achieve whatever the profitability that you have achieved in case of Albuterol. Because that is a concern that okay, that was a key product and we have been targeting certain level of market share there We achieved everything, but that has not influenced anything at all, to our overall profitability. Although there has been incremental competition incremental challenges to the business generally that has come up, but still.So given the scenario, whether we should see a kind of or weather the kind of profitability that we're trying to achieve, will that justify the kind of money that we have been spending on the complex portfolio?

[Ramesh Swaminathan, executive]

I will say that actually I'll be drawn offset a lot of challenges of the oral solid portfolio as erosion that we saw on the oil solid portfolio. And as we look out the next few years, we expecting that Albuterol will have some price pressure, price erosion, and that we are factoring in new products that we bring into the market that will help us bolster the top line and bottom line.

[Surya Patra, analyst]

My second question is on the let's say, Spiriva. See, obviously, it is delayed a bit. That is fine. But I think in the meanwhile have you understood anything about the potential competition in that product?

[Ramesh Swaminathan, executive]

Yeah, so we don't believe I mean as of yet, no one has really finished clinical trial, we believe that one company has started working on a trial, they're just starting a PD study. So from anyone who's starting a PD study right now, if I look at our timeline, they're going to be three years away at least to get a product to market.

[Surya Patra, analyst]

So till the time that we will be having a kind of exclusivity situation in Spiriva whether that will have some kind of advantage in terms of grabbing market share for other products, other respiratory product as well or there is no continuous benefit that we should see?

[Ramesh Swaminathan, executive]

Well, I wouldn't I mean, that would be an upside, if we can get it, I mean, we are strengthening our respiratory portfolio. So overall position on the respiratory and offering from a customer standpoint goes up, but that will really be an upside to see how we can bundle them if we can at all, when do as just a standalone a very lucrative opportunity.

[Surya Patra, analyst]

Just last one question about the numbers basically. So whether is any debt number that has been added during the quarter because the finance cost looks slightly elevated this quarter? That is one and to be also clear, what was the smooth contribution this quarter? This means the sequential of moving the U.S. sales what we have witnessed, how much was that driven by two?

[Ramesh Swaminathan, executive]

Firstly, on the debt front, yes, so we had a couple of acquisitions and as the bands that we bought in America, bought brands in Brazil, that's actually in our come on to the scene. And there's of course, the god binominal capital expenditure that we continue with should have come through in previous quarters also. So these are actually in some ways taken up the overall debt position. Though, there has been a reduction on the button capital front. This is, it's the M&A front which is really cost us for the take on some debt.

[Surya Patra, analyst]

What is the grace states?

[Ramesh Swaminathan, executive]

It comes to about a total about 3200 crores.

[Surya Patra, analyst]

Okay. This is an edit. Grocery sharing?

[Ramesh Swaminathan, executive]

They're small, it's about 4600 crores.

[Surya Patra, analyst]

And anything on the slow contribution can you? Slow season contribution for the quarter?

[Ramesh Swaminathan, executive]

So it's a low single digit couple of million dollars.

[Nilesh Gupta, executive]

[indiscernible] prices have been drooling at a particular another at a higher and because of that to the actual durability didn't have we didn't actually want to sell at a loss in America also because prices are what they are. We have been focusing on all the products that they're talking about.

[Ramesh Swaminathan, executive]

He was just talking about the increase.

[Surya Patra, analyst]

Yes. I was talking about the sequential revenue increase, which you answered that, it is single-digit kind of million-dollar revenue.

[Operator]

Thank you very much. The next question is from Neha Manpuria.

[Neha Manpuria, analyst]

Yes. Thanks for taking my question. Nilesh, my first question is on the India business. I think you mentioned, we should get back to double-digit growth from second quarter onwards. So at that point, most of the sickness impact and also the diabetes impact will be behind us and we expect the MR start contributing to productivity. That assumption is right, right? So we should start seeing our performance versus industry from second quarter.

[Nilesh Gupta, executive]

Yes. And I actually did not even talk about the [indiscernible] impact that we are seeing, a little bit in the of Q3 and then it obviously ended in Q4 and then obviously a good portion of that we would expect to reverse in Q1.

[Neha Manpuria, analyst]

Understood. And if I were to look at the business in a little more two to three-year perspective, do you think we need any investments organic and inorganic to sort of bolster our position further in India?

[Nilesh Gupta, executive]

I think we are doubling down on India. Like, adding a thousand representatives. We are focusing on what that means in terms of employee expense in terms of selling promotion and alike. But we see this as an opportunity to grow in India. Obviously, in the COVID period, we headed back from adding people and alike.And again, what we are doing is no different from other industry leaders where clearly, there is a renewed focus on India, and it certainly is part of our plan as well. I think we are already committed to doing whatever is required from a people perspective, an expense perspective and R&D perspective to get to the business.I would love to fold in inorganic moves in this as well. We did some smaller stuff, including buying in licensed product on their own, including the -- portfolio, which is actually performing very well. But, I think acquisitions are going to be fluid between because, especially the somewhat bigger ones as you have seen, -- to multiples, right? You really kind of justify. So, we would seek value and that would make it difficult from an organic perspective. But we are looking at everything that comes and for our own part, digging out opportunities that we took place chase as well.

[Neha Manpuria, analyst]

Understood. Given that you are doubling down on India and most of the competition is increasing fee for SG&A. How do I put that in context with the fact that, we want to look at cost optimization further? That would indicate that, our costs are probably -- optimization whatever might come through might be more than offset by the fact that we need to continue to invest to grow in India, which does makes margin expansion without streamer nearly impossible. Is that the right conclusion?

[Nilesh Gupta, executive]

So maybe I get back to that issue. I think, first of all, there are some delayed effects. Yes, we are adding people. Yes, there will be certain costs that are associated with that, and we will not be the return. Obviously, the very day that we had those people. I think the cost optimization measures are largely driven from the optimization that we saw overall from a generic footprint perspective. So a lot of the stuff that we have done optimizing the R&D spend, optimizing the manpower footprint, 16% reduction in our workforce in our manufacturing plant. So optimizing the R&D workforce. Like, a lot of that has gone in the in the direction that the generic market is changing. We will obviously play an oral solid in the right as well. But clearly, the focus is to be a specialized generic player focusing on innovation, injectables and select oral solid.So I think that, to me those optimizations run in parallel, there are still obviously, there are five or six key growth drivers and big business areas isn't Lupin. Some of them will take investments at certain point of time, others will be adopted by us. But net-net, obviously, where we're all working to build a high growth organization, which grows at strong double-digits. And obviously, with a bit of far better than what we have right now. We are very cognizant of the fact that we're under index. So I think these investments are being made, in light of everything else that is happening. But obviously, with the view that in the next few quarters, we should be getting to much more solid numbers.

[Ramesh Swaminathan, executive]

Neha, just to add to that for the color. There's a base beyond, which is impossible to go on quite a few buckets, and perhaps in some buckets, it's not possible to kind of optimize further. But I also identified a few buckets where a great deal of optimization still possible. It is essentially in terms of the footprint reduction in some ways, potentially, you could also look at the idle time associated with that. And third bucket could potentially be on the reduction, on the inventory right up, so that we have seen so far.So those buckets will certainly contribute in some ways to further efficiencies, and that will certainly move the needle. And we are also speaking the same breath of in fact, a two to three-year horizon. And when you get to that point, we are talking about quite a few products coming through in our Spiriva certainly, in our opinion, should certainly come with a great deal of confidence, you're saying this in the first half of the current year itself. And then we are also lining up, in fact, for products for the future.We're working on in fact, the injectables portfolio, we're working on the entire respiratory range. And there's every conceivable product, which is worthwhile looking at, we're looking at out there. And we are pivoting a lot more towards a lot more complex ones. And so to the extent, there's a lot more stickiness associated with that realizations associated with that, which is perhaps not to seen in the OSD portfolio in at least in recent times.So I think, whilst there is further optimization possible on the cost front, there's a lot more possibilities for the top-line. And that has EBITDA ultimately going to be the difference between the two. And of course, the R&D expense and R&D expense to our mind by switch over to in fact, the more complex ones.As a percentage of sales, it will certainly keep going down only. So I differ with you and I would say that EBITDA margins in the next two to three years will certainly be much higher than what it is today. 12% is the absolute ideal from my perspective, and 18% to 20% over the next two to three years is from my perspective, certainty.

[Neha Manpuria, analyst]

Understood. And last question, if I may. Vinita, you mentioned about the Nagpur facility clearance helping unfolded injectable pipeline. Could you give us some color on the number of launches or the opportunity size that we're looking in injectables next year or the year after? Any color would be helpful.

[Vinita Gupta, executive]

So, now that we've got the approval, I mean, we also accelerating our portfolio looking at some of the contract manufacturer partners that we can bring in-house where we haven't had the right cost and supply position. I think in the fiscal year '24, we potentially can bet four to five products into the market. We have couple of filings that are pending, glucagon [indiscernible] as well as other products that we are manufactured outside that we can bring in, in-house in Nagpur with the right cost structure.So in fortified products in the next fiscal year, we'll try to accelerate that and a larger number of the year after.

[Operator]

The next question is from Nitin Dharmawat.

[Unknown Analyst]

Thank you for the opportunity. I see that we are continuously changing our strategy. So I see that wherever there is a momentum we go there, we started somewhere in technology, and now we are hiring 1000 people for India business, or later for Japan, we made acquisitions in USA, and things are not working, and that's why we are making too many changes. Is that the case, are relating too many changes with our strategy?

[Vinita Gupta, executive]

Actually, we're not making any changes on a strategy, when we've been very focused on building our core business, which is one India, two our U.S. complex, generic business. Three, anywhere we can get operating leverage, like other developed markets, with our generic portfolio, the investment that we made in our pipeline and in a manufacturing facilities and four, the other emerging markets, which pretty much are self-sufficient in terms of their P&L as well as the cash flow requirements. So there's no real change -- I mean the only change in strategy that has happened over the last couple of years, I'd say, is a sharper focus on complex genetics, more specialist genetic portfolio, versus a broad generic portfolio.

[Ramesh Swaminathan, executive]

And the entry into Japan, 12 years ago and the except or very well crafted strategy, so to speak, there's nothing tactical about it at all. So I would not agree that, so our entry into in fact complex generics, injectables, biosimilars, inhalation space are also very well crafted. And to that extent, we've been very consistent in actually going down the path for the spins on those, there's been no change whatsoever.

[Unknown Analyst]

So can you give some guidance for the current financial year in the next financial year for top line as well as for EBITDA margins?

[Ramesh Swaminathan, executive]

EBITDA margin, if you talk about the curent, the next quarter, potentially, it will be around the same lines as the current quarter. But I've also indicated that things will get progressively better because you're working on several things on the cost front. And on the top line front, we keep reiterating the fact that there will be products coming in. So things will only get better.

[Unknown Analyst]

And for the next financial year?

[Ramesh Swaminathan, executive]

You know, our ideal target would be to get to the end of the quarter of 20% that the competition is looking at when we get there in the fourth quarter of next year, or in FY '24, '25, it's general the overall direction is there, the target is that and there's no reason why we should not get there because all the initiatives are in place. And we are going down the path of our strategy without retracing any of those.

[Nilesh Gupta, executive]

The top line also we're looking at double-digit growth.

[Ramesh Swaminathan, executive]

Yes. Across markets.

[Unknown Analyst]

Got it. I know there are too many misses that has happened, so even if we achieve something I'll be happy about it. All the best to you.

[Sameer Baisiwala, analyst]

Vinita if I'm not wrong, FDA totally inspected the site for Spiriva, isn't it so why should they be need to do it again?

[Vinita Gupta, executive]

No they have and I don't know if there's a need to do it again, Sameer, it all depends on the agency though.

[Nilesh Gupta, executive]

Standard language actually.

[Vinita Gupta, executive]

Yes. It's been inspected before.

[Sameer Baisiwala, analyst]

Okay. But they have given you two dates. So that means they are thinking about it.

[Vinita Gupta, executive]

We don't know. So they always give you two dates. And its very standard language from the agency now on any product. So that's why we can't say for certain that is going to be a problem.

[Sameer Baisiwala, analyst]

And Vinita what transpired in November that date. In a sense, I thought that, there is a good chance that they might have approved then itself.

[Vinita Gupta, executive]

So we got a priority review at in November, when we had reported. And at that point in time, we got -- we were expecting an approval by close to eligible launch date. It should be very close to April, actually.

[Sameer Baisiwala, analyst]

Okay. Got it. And second question Vinita. Are you seeing the competitive intensity in the U.S. for OSTs going up? Or is it much the same? For the three, four products that you mentioned that you saw some price erosion. But the new entrants, which were bidding lower or even without new entrants, you are seeing prices roll down?

[Vinita Gupta, executive]

Actually, we have seen some rationalization on, and a little bit of retreat on the price erosion front, because there has been a lot of erosion. And companies have started to get out of products. Like, we have gotten out of a couple of products, which really worry our customers.So there have been also supply disruptions with a lot of challenges that companies have had in some years, due to the margin pressure. But otherwise, the GMP related issues. So we have seen degree of getting back to single-digit, high single-digit price erosion at this point. And we hope that, we will see that continue in this calendar year.

[Sameer Baisiwala, analyst]

So Vinita, if I may ask, how profitable is your U.S. business as it's stands today, if you can just talk about it? Because is that what is taking the minimum, taking the entire company average way below? And how sustainable is it to do business in this manner for a company, which probably is a lowest cost producer in that sense?

[Vinita Gupta, executive]

So I'd say that, the U.S. business EBITDA is below the company EBITDA right now. But I can tell you that, when we look at the last full year. I mean, Q3 was probably the quarter where the U.S. business did the best from an EBITDA perspective. So given all the efforts on the cost optimization front, R&D optimization, stabilizing the base as well as executing on the new product launches, we have been able to get Q3 to a much better level than it was in Q2 and Q1. And we continue to build upon it. And two years ago, the U.S. generic business was above the company average EBITDA. And as we look at the next subject to Spiriva happening and some of the other product launches, which are certain. We think it is certain, and alike, we expect the U.S. EBITDA again from fiscal year '24 to be above the company's average level of EBITDA. Otherwise, we'll continue to optimize it.

[Ramesh Swaminathan, executive]

You recognize me here as well as I do, it was a feast for quite some time. There's been better for firemen out there in the last two to three years. But it's not as though this party will never begin again, it will. Once you get the products in place, things should be much better.

[Sameer Baisiwala, analyst]

Ramesh, my worry is excluding Albuterol. Is it a bit in the right kind of a business? And it's not about Lupin, it's just about, is this sustainable business model in general for generics to be supplying at the pricing that it is given the consolidated buying in the U.S.?

[Ramesh Swaminathan, executive]

And you also know this, so that so entire business is kind of pivoting away from OSD into more complex ones. And the more commoditized products is where there's intensity, that is so much of competition, and one doesn't really make too much monies out there. And to the election term, companies should have focus on moving out of OSD. And that's exactly what we are trying to do also.

[Sameer Baisiwala, analyst]

Okay. Great. One final question from my side, if I may, it's Suprep. Vinita two parts, one is how is the pricing been a typical exclusivity type pricing 40% erosion? And second post 180 days, how do you see the competition coming up?

[Vinita Gupta, executive]

This has been a two-player market, authorized generic, the brand launched in authorized generic and us has been a very, very nice opportunity. From a margin perspective, price erosion, even in a two-player market is 60% or so. So, it's been that price erosion. However, the runway that we see is looking better beyond the 180 days, because we believe that the other players have supplier issues on the API that really is impacting the product approval and launch.

[Operator]

The next question is from [indiscernible]

[Unknown Analyst]

Vinita just a couple of specific questions on products that are another you just mentioned. We are set for launch of 600 and 800 in 1Q, right?

[Vinita Gupta, executive]

That's right.

[Unknown Analyst]

Okay. Are we going to follow that up with the other strengths after six months or so?

[Vinita Gupta, executive]

I believe so. I mean, the material opportunity, the larger opportunity we see is the explosive strength that we have in a majority of our revenues, that we see the upside as for the exclusive strength.

[Unknown Analyst]

Got it. And what's the update on [ pegfilgrastim ] in the U.S.? I believe you're looking forward to approval near-term.

[Vinita Gupta, executive]

So we responded to the agency on the queries that they had, just in the last couple of weeks. And we believe that we've been able to satisfy from our perspective. All of the questions that they have. So fingers crossed, that we get that approval in the next couple of months.

[Unknown Analyst]

Next couple of month. Okay, understood. And any further update on Dulera? I believe there also you had some queries to which you've responded.

[Vinita Gupta, executive]

So, on Dulera, we have received a CRL from the agency and we need to do some additional work on the product that is ongoing. So, we'll have to respond to the CRL, which we haven't respond to the CRL, which we haven't responded as of yet.

[Unknown Analyst]

Understood, okay and thank you very much.

[Operator]

The next question is from Shyam Srinivasan.

[Shyam Srinivasan, analyst]

Good evening. And thank you, for taking my question. Just the first one of the data points on the India business. What's the current field force like, you talked about the 1000 people, but where were we at us in March and now so what's the absolute number?

[Nilesh Gupta, executive]

At the end of this, we will be at 7100 reps and 9300 as the total sales force.

[Shyam Srinivasan, analyst]

Got it. Thanks, Nilesh. So, when we track the progress, and you've guided to quarter to next year where you will start growing faster than the market? So, what are some of the monitorable maybe PCPM. If you could, you know, Dr. Coverage, if you could guide us to some of the things that we need to be watching out for?

[Nilesh Gupta, executive]

I think you should be watching for the total number where we report it, I think there's too much granularity I add. PCPM is actually pretty good. I overall, PCPM is INR8.6 lakhs per representative PCPM. So, it's actually a pretty good number overall, but, there's a spread. So, in an acute business, it's going to be lower, it's higher in more chronic high-end business.So, I wouldn't try to watch out for those things. The divisions that we are adding are in the big area. So that is, there's a metabolic division, there's another respiratory division. So, but I think all of it will reflect in the total numbers and the therapy wise numbers.

[Shyam Srinivasan, analyst]

Got it, Nilesh. Helpful. My second question is just on regulatory compliance, and just maybe you can Nilesh can answer it from an industry perspective as well. Right. So, when participants ask, what is the contribution from Mandideep, why is the question being asked? Is it because people worry that every [ OIA ] is now equal into an import alert? So just surprising. So, after so many years of having to work with the FDA, so how should we think about the dynamic and what are you hearing when you interact with inspectors, quality people? What are some of the feedback that you're picking up?

[Nilesh Gupta, executive]

I appreciate you asking this question. You know, from the industry perspective, I think there is an over heightened sensitivity to every [indiscernible] that there is, but obviously if there are except some number of 43s or obviously other regulatory action that is often done, there's no question about that. And from an industry perspective, we've obviously had a few, examples where quality is somewhat pretty bad in other markets and the like, and unfortunately, I think that paints the industry in a bad light.We're coming out from, we had, I believe about 60 odd inspections in India, in 2022, versus the normal 200 plus. So, obviously, we are getting into a period where there will be more FDA inspections, and with the number of facilities that we have, as an industry, there will be, obviously, some portion of negative outcome that you come out as well. But, I would only, we had we had five observations and not for everybody given a hard time, we've got the approval thereafter. So, I think the nature of the observations is important, and not just the nature and not just a number. So I think it's important to get a little bit deeper into this, which is I think you guys do a great job of that.As far as we're concerned, I think we've had some wins and some misses Ankleshwar was a win Nagpur was a win, Somerset was a very nice win, even with a follow-on inspection. Mandideep clearly, we were not at the right level. We don't expect that to at the right level. We don't expect that to -- we are taking the right steps to put it to not grow up further than what it is. But it's not acceptable. Tarapur is not acceptable as well. And there is a clear remediation panel list.So, we do believe that we will get them to the right spot. We are not just going to leave them there just because the contribution may be below a certain level. Whatever we supply, every product that we supply has to be of the right quality. People don't have to look at where the products was made.So, we are committed to this. I think, the industry is committed to it in a broader sense as well. Certainly, the scrutiny on the industry is going to be there. And we have to be up to snuff.

[Shyam Srinivasan, analyst]

Got it. Thanks. Thanks for this feedback.

[Nilesh Gupta, executive]

But we can explain this for another five minutes. Last questions, please.

[Operator]

The next question is from Nitin Agarwal.

[Nitin Agarwal, analyst]

Can you hear me?

[Vinita Gupta, executive]

We can hear you Nitin. I mean, move on to the next question in that case.

[Operator]

The next question is from [indiscernible]

[Unknown Analyst]

My only question was, the you said that the R&D expense as a percent of sales should come down as the revenue base up. So, could you give us a sense, I think we should be about 8% or so for this year. But how what is FY '24, '25 look like as a percent of sales, if you could give us some sense?

[Vinita Gupta, executive]

Yeah. So, this year, it's going to be about 8%. But, on the subsequent years, it will certainly come down by a percentage or 2% for sure.

[Unknown Analyst]

Percentage or 2%. Okay. So, it could be in the 6% or 7%.

[Ramesh Swaminathan, executive]

Not at this point. But, I would say, overtime.

[Operator]

So as there are no further questions from the participants, I now hand the conference over the management for closing comments.

[Vinita Gupta, executive]

Hopefully, we have been able to answer your questions. We hear all your concerns on the margin front. It was not too long ago, couple of quarters ago that, we were in a single-digit margin. And the fact that, we have been able to pull the business back up to double-digit in Q2 and then further improve it in Q3.We will continue to work on this front to ensure that we continue to grow our business in a profitable manner. We certainly don't feel we are even close to our potential as an organization, but we are moving in the right direction and it will ensure that, we can get to our true potential. It might take us couple of quarters longer, just given the delays in product approvals. But, we will get there. Thank you.

[Operator]

Thank you very much. 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.