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Lupin Ltd
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So good evening, and welcome to Lupin Limited Q4 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the management. Thank you, and over to you.
Hi, everyone. This is Vinita here. Very pleased to welcome you to our Q4 earnings call. I have with me are MD Nilesh as well as our CFO, Ramesh. We are very pleased to close the fiscal year with continued improvement in operating margins. Our team has had a sharp focus, as you know, on getting our India business back to double-digit growth and quarter-after-quarter improvement in U.S. margins as well. This focus, along with growth in other areas like API, EMEA and APAC enabled us to deliver margin improvement as planned.
We are committed to sustaining this positive momentum into the new fiscal year and driving strong growth across all our regions, in particular in India based on our recent sales force expansion and the U.S. aided by material new product launches. Our India business, as you would have noted, recorded an 11% plus growth per [ IQVIA ] ex the diabetes portfolio, growth was 15% plus, in line with the market growth.
In Q4, we made a significant investment to expand our sales force in India and enhance our reach. We're very pleased that overall, we delivered margin improvement for the organization despite this material investment. In the U.S., we improved our margins for a third quarter in a row through portfolio optimization, maximizing the high-value products and continued cost optimization efforts. We were able to improve our margins despite increase in R&D spend quarter-over-quarter. Overall, when you look at it for the year, the R&D spend for the U.S. stood at $100 million with an increasing proportion of complex generics, in particular, inhalation and injectables.
Apart from India getting to double-digit growth and U.S. business improvement, our API business recovered in the quarter with demand growth in our core products. Our EMEA business grew driven by South Africa quarter-over-quarter and [ Foster Lubeck ] in Europe year-over-year. In APAC, our Philippines subsidiary, performed very well. Switching to R&D we continue to drive the shift to complex generics with a focus on respiratory and injectable products. We filed 19 products in the U.S. and 10 x U.S. Of the U.S. filings, we had 4 injectables, 3 nasal sprays, and we made progress on [ Respimat ] and [ Alimta ] products on both platforms. Apart from generics, on the R&D front, we optimized the new chemical entity R&D spend in Q3 to focus on our -- on 2 of our oncology pipeline programs, significantly reducing the discovery spend.
Switching to compliance. Compliance front, as you know, we have made progress in part with positive outcomes on the [ Ankleshwar ], [ Napo ] injectables and [ Somerset ] sites. We've also made substantial progress on our remediation efforts in [ Tarapur ], [ Monday beep ] and [ Pithampur ] Unit 2. We are committed to ensure that we get all our sites to a consistent and sustainable level of compliance. I'm sure we'll see more progress on this front in fiscal year '24.
On the M&A front, our recent acquisitions have performed well with Anglo French, Southern Cross, [ Xopenex ], [ Brovana ] in the U.S.; and Paloma in Brazil, all delivering per plan. Our recent acquisition of [ Merasolan ] France enables us to accelerate our injectables franchise in Europe. We are very pleased to be able to close that. We have come a long way in fiscal year '23 and are excited about the prospects in fiscal year '24 as we launch products like [ Tiotropium ], [ darunavir ] and others in the U.S. and drive consistent double-digit growth in our India business. We remain focused on driving operating margin improvement as we grow our business.
With this, I will hand it over to Ramesh for a deeper analysis of our performance.
Thank you, Vinita. Friends, welcome to a refreshing set of numbers. We are hopeful that it sets a stage of better numbers here on. Sales for quarter 3 -- quarter 4 FY '23 are at INR 1,330 crores as compared to INR 4,264 crores in Q3 FY '23, which is a growth of 2% quarter-on-quarter. On a year-on-year basis, the company registered a 12% growth over Q4 FY '22 sales. In the U.S., during the quarter, the U.S. business registered a small degrowth of 1.3% in local terms total currency terms on a sequential basis. The sales have gone down -- come down from 177 million to 174 million in Q4.
During the quarter, [ Alberta ] sales came down marginally due to a seasonality factor. India region. India Branded Formulations business declined by 3.1% in Q4 FY '23 versus Q3 FY '23 whilst on a year-on-year basis, the sales grew by 8.9%, FY '23 and year-on-year, the growth was 3.3%. Overall market growth during Q4 '23 was 14.9% and while [ sloping ] grew by 11.3%. Lupin bit's highest growth in Q4 as compared to the earlier quarters. Q1 was 1%, Q2 was 6.2% and Q3 was 7.5%. Adjusted for diabetes, we are close to market growth rates, which is 14.9% [indiscernible] 15.2%. Loss of exclusivity and generalization of the anti-diabetes business has impacted our growth rate as patented portfolio is a large chunk of our diabetes portfolio. We do well, apart from the top 3 as of Lupin in gynecology and GI.
API business. API business sales grew by 14.6% on a quarter-on-quarter quarter -- quarter-on-quarter basis as core SFS and APA sales continued the path to recovery from higher sales in [ Cefaclor ] and 7 ACCA. On a year-on-year basis, sales was -- growth was 46.4%. EMEA, sales for EMEA region grew by 19.3% year-on-year was 11.4%. South Africa quarter growth of 35.3% in local currency terms, led by higher sales in base products. U.K., the degrowth was 6%, but the higher sales over the last quarter is primarily driven by Foster. Germany, quarter degrowth of 12% was an outcome of Q3 being higher for Germany for the market due to competition stockouts business.
Growth markets. Sales of growth markets grew by 4.7% quarter-on-quarter. Philippines, traditionally, Q4 is a strong quarter for Philippines. Nearly all divisions performed well in comparison to last year. The growth was 14%. Australia quarter-on-quarter and year-on-year growth was led by higher sales in our new acquisition, Southern Cross. Q3 was lower due to shipments getting deferred to Q4. [ Green ] Quarter-on-quarter degrowth was 23.6%, led by stock out of certain products due to plant shutdown. Brazil quarter-on-quarter growth of 9.4% was led by acquired products from Paloma.
Gross margins is an important year. Q4 FY '24 gross margin was 59.7% as compared to Q3 FY '23, gross margins of 59.8%. The sales mix, especially India region, split apart in the slight lowering of the gross margins. Trends at the beginning of this year, we spoke about optimization initiatives on various fronts. I'm glad to state that we did achieve good progress on some elements of the program as in the case of our sales returns, airfreight and so on, both elements of which get folded into this line. Secular inflation of over 5% in input prices has, however, eroded into the games are invisible progress here. We continue to work on write-offs and other initiatives including launch of meaningful products that would make a difference in the gross margins and hence to the bottom line.
The employee benefits line Q4 FY '23 is INR 770 crores, [indiscernible] INR 764 crores in Q3 FY '22 and INR 703 crores in FY '22, Q4 FY '22. Quarter-on-quarter increase is mainly due to field force expansion in the India region, higher bonus accruals, ESOP and U.S. [indiscernible]. On an ongoing basis, we expect employee cost around 19%, despite the lower growth on the top line, the year-on-year increase has been only 3%, reflecting the initiatives on the workforce reduction that we carried on at various functions. This also cap is a negative impact of FX translation resulting from a depreciating rupee.
Manufacturing other expenses Q4 FY '23 is INR 1,033 crores. We service INR 1,333 crores in Q3 FY '23 and INR 1,321 crores in Q4 FY '22. The quarter on core savings is a result of a reduction in business settlements and other expenses were onetime in nature. Year-on-year savings is on account of a reclassification done in travel in Q4 last year from employee benefits. Friends, whilst there are savings as a result of optimization measures, the translation impact of outside India expenses as well as an increase in sales promotion spends in India along with minor investments in adjacent businesses, offset the gains made.
EBITDA front. Operating EBITDA, excluding ForEx and other income is at 13.9% for the current quarter. Reflecting an improvement of 170 basis points in comparison to the previous quarter. The improvement in EBITDA is primarily driven by optimization endeavors, lower other expenses and PLI benefits. The launch of newer products and sharper focus on cost, we expect material continued optimization of EBITDA across quarters over the next year.
R&D, R&D is 7% of sales, INR 305 crores in the current quarter as compared to INR 289 crores 6.8% of sales in Q4 FY '22 and 8.9% in Q4 FY '22. We continue to pivot to more 289 was actually Q3 FY '22. We continue to pivot to more complex products and platforms while continuing to focus on cost and outcomes. Year-to-date, ETR was 36.9% for the quarter. The ETR for the current quarter in only 5.9%. The lower ETR in the current quarter was mainly due to higher profit in the U.S., apart from normalization of accounting for the effective tax rate.
Other operating income quarter-on-quarter, there is an increase in other operating income on account of inclusion of PLI benefits, somewhat reduced by other settlement income, other milestones and the like. ForEx gains is at about INR 26 crores in Q4, again in FY '23 -- Q3 FY '23 was INR 16.6 crores. So with that, I would like to open the field for discussions.
[Operator Instructions] So the first question is from Damayanti Kerai. Go ahead, ma'am.
I hope I'm audible.
Yes.
Okay. So my first question is, can you update us on the status of your [ tire ] filing because you had earlier given 2 tax rate, 1 in April and 1 in June. So if you can talk about it.
Yes. So we've been in active dialogue with the agency back and forth on information requests over the last 2 months on [ tiotropium ]. The tab date right now is on paper July and August, so instead of April and August. And we hope that we will actually get approval sooner. We've had communication on a monthly basis with the agency on the application. Just last week, they cleared a drug master file for the product, which is a very positive sign. So we hope that we should be able to get approval in the next month or 2 on the outer side by July, August.
Why 2 tab date? Is it similar like plant and without plant inspection?
Yes. That's the 2 tab dates. But the extension of the tab dates is based on the information request that the agency is making. And when we respond to the information request, they have an automatic 90-day from the response that they give us as a tab date. So we've been trying to work with the agency to figure out how we can avoid that. So some of them are just clarifications that they're asking of us.
Okay. My second question is on R&D. So now you are down to, say, 3 billion a quarter. So -- but at the same time, you are progressing in some of the complex generic products you talked about [ Ellipta epsimite ], et cetera. So my first question is, how should we look at R&D expense from here on? And if you can split R&D into your complex generic spend and NCE spend, that will be helpful.
So Ramesh, you want to take that? The R&D spend?
[indiscernible] to answer the first part. We are [indiscernible] to more.
Yes. Yes. So overall, strategically, we've been pivoting to more of the complex generic platforms and continue to do so. So when you look at our generic R&D spend, at this point, the percentage oral solids versus complex platform, simulation and injectables has changed in favor of inhalation and injectables. And and we continue to drive that shift towards complex platforms. I mean the NCE spend that you asked about is very small in the scheme of things is less than 5% at this point.
[ 11% ] really, but it's actually coming down to about less than 5%, in fact, being proposed of this current fiscal. We are pivoting more towards in the complex generics. So the resilience of the old audits is actually coming down, that used to be well above 45%, it's coming to much lower figures. And the spend for injectables and inhalation are certainly going up in the course of this fiscal and certainly would be the way forward as there.
Just to clarify, so OSD, you said earlier, it used to be 45% of the generic spend. It is coming down and more is going for the inertion and...
Inhalations and injectables [indiscernible].
Okay. And my , like your fourth quarter number includes costs for the MR addition in India. Does it reflect fully or like more to come in coming quarters?
Yes. A huge chunk of it is actually captured in Q4, but there's, of course, the annualization impact of that because these were recruited in the fourth quarter. The annualization impact will certainly be captured along the full -- the entire year next year. This fiscal -- the current fiscal [indiscernible].
The next question is from Kunal Dhamesha.
This is Kunal from [ Macquarie ]. First question, again, on Spiriva, would you be able to share the nature of the information requests that we are getting from FDA? And secondly, on the same the mix [indiscernible] -- would we have clarity as to whether we will require plant inspection or not by now? And if yes, hypothetically, let's say, if you require, what is our preparedness, have we done any more inspection? Have we proactively employed consultants, et cetera?
So I'll take the second question first, that we have always been inspection-ready in the Unit 3 for FDA in case they come to expect the site for Spiriva. At the same time, we don't know for certain, but we believe that at this point, we are pretty far along with the agency, the information requests that we're getting beyond the last CRL that we responded to was really clarification on the testing method, sample size and the like, the rationale for it? And what is giving us comfort is the fact that they started clearing parts of the application. We've already informed that the PD PK was cleared a while ago. And the fact that the DMF has been cleared last week, and we continue to get minor queries at this point gives us the comfort that we are pretty close.
Sure and so -- we are still sticking to a September time line or second half time line for what? Second half of FY '24?
We're hoping first half.
Okay. Because last time, I think we said September launch for September '23 launch.
Well, so I think August was the outside tab date. So we hope that we'll be able to get approval before that and be getting launch ready.
Sure. And secondly, I think, Ramesh one for you, whatever cost savings that we have done that is getting offset by some of the line items, which have seen increased like sales and marketing, et cetera. But still, would it be possible for you to quantify in terms of our target of INR 550 crore cost savings, which we said at the start of FY '23, where would we be right now? And what's the runway left for us for FY '24?
Yes. We have been able to achieve well over INR 300 -- INR 325 crores to INR 350 crores across at least 3 of the 4 levers that we have progressed along. There is, of course, some most team left in so far as the inventory write-offs is concerned. And we believe on the idle time as well, will it is not a swith on, switch off kind of a thing. So it has to be over a period of time. So we will exercise those levers and potentially see gains over the next several quarters.
Sure. And I think last year, we had a failure to supply penalty roughly around $26 million, $27 million. Would you be able to share the number for this year?
Yes. Well, I don't want to actually make it explicit, but has come down dramatically. It's, in fact, in high single-digit numbers right now.
Sure. And lastly, on the profitability expectation for next year, would you be able to share any form of guidance or range?
We believe that the momentum would be sustained. And so going forward, we'd like to see that Q2, Q3, Q4 will see successful improvements. For sure, after the launch of Spiriva and other products that we're speaking about, Delaware and others in America. And of course, there is expansion of Foster in Europe and the like. So with the cashier of products that we're launching across various markets, and that's actually -- you would see the top line lifting up to double-digit growth rates for the entire year. And of course, with the tight lesion on costs, you would expect EBITDA margins also to go up. We do think that towards the end of this current fiscal, you find a substantial increase closer to impact of where we think we should be upward of 18%.
[indiscernible] exit rate 200.
Exit rate 200. That's what I meant. And for the full year, you could talk about at least upward of 15%.
Next, we'll take from Krishnendu Saha.
Can you hear me?
Yes.
Just wanted to get a hang on for the U.S. numbers for the quarter -- is flat. So just trying to understand, we had one extra month of [ Sinopec ] and [ Brovana ]. We had, I think, so we had [ EGalsoin ] the mid of December and we had launched. So is this [indiscernible] what were the missions and what was the plus additional spirit, which gets to this 175. I'm trying to understand that one.
So the difference was 177 million versus 175, $2 million. And there is a good amount of seasonality that you see in Q3, especially with flu products as well as [ Albuterol ]. So [ Albuterol ] while the share remained the same, the volume came down a little bit in Q4. And but otherwise, [ Suprep ] was very strong and offset some of that actually as well as we had our in-line products, so fairly stable, I would say.
So probably we still have 2 player market, right?
That's right. It's the authorized generic and ourselves so far.
Most [indiscernible] we see this how long do you think that this can continue any [indiscernible] -- I'm not an expertise to understand you on this.
Is hard to predict. So far, we don't see any new entrant imminent.
I'm not saying on the last approval which we launch a [indiscernible] by the end of the quarter, well, [indiscernible] the 2 market have we launched meaning could it be meaningful?
Which one are you talking about? [indiscernible]
Telephone range.
I don't recall having launched it in the U.S.
We haven't. Probably believes might we launch that [indiscernible]
Thank you very much, Krishnendu. So the next question is from Neha Manpuria.
Vinita, on Spiriva, you don't see a scenario of FDA giving us a possible CRL when the tab date comes, right, based on the queries that we're getting? Or is that still a risk?
That will be highly surprising. I mean it's hard to predict the agency at any point in time. But just based on where we are, we feel like we are close to the finish line here.
Okay. Got it. And second, Ramesh, if given private launch, et cetera, it's still tough to predict, and there's also the market share that we end up ramping up to if there is any delay in Spiriva, then how should we look at the margins from the 13% that we are doing? Could there be links to the margin or all of that margin guidance that we've given is dependent on the new launches?
I don't emphasize the situation Spiriva buy is going to be in doubt. But in the unfortunate dividend does happen to be something like that, the base is set at the current levels, and we expect, in fact, better numbers to come in from our India business, and we have products across others also. So I would certainly say that there will be margin improvement. But of course, the more -- the needle really move sharply when Spiriva has really launched.
I would just add to that, other than Spiriva, which of course, will be the largest opportunity as we see it right now. I mean we also have [ Darunavir ] in June. We have [ Sinacobelimin ] that we hope to launch out of summer set. In August, we have [ azepam ] gel that we hope to launch in July. We have [ varenicline ] that we hope to launch, we have a tab date of October for that product, and we have [ bromine ], the ophthalmic product where the exclusive first to file, that is at the tail end March.
So while we have Spiriva as a major new product opportunity, we also have a few others that will help us grow the business. Needless to say, I mean, the margin guidance that we just spoke about, there will be some impact if hypothetically Spiriva was not -- would not come through. But again, we've looked hard. We worked hard on cost optimization, and we'll continue to do that to make sure that we continue to drive our margins forward.
Understood. And Vinita, one other question on the U.S. business. I think you mentioned in the television interview about price erosion being if I heard correctly, low single digit, mid-single digit, just wanted to understand, are you seeing, let's say, things improve on the pricing erosion front or let's say, at least customers not coming back to you with repeated request for advertise revision on the baseline products given what's happening with the plants [indiscernible].
We're starting to see that. And I think I said mid- to high single digit, Neha in the interview because that's a normalized level that we saw in previous years. We've -- given the supply chain challenges that companies have had, our customers have become, again, very, very focused on reliability of supply and are again engaging in more longer-term relationships, contracts or at least the commitments which gives us comfort that they are prioritizing reliability of supply over price. I mean, of course, we always like to get the best price. But they've struggled a lot this past year with the flu season products. So the flu season products, in particular, we are finding that they're engaging with us in a more strategic dialogue on how do we really ensure that we meet the market demand. How do we partner to meet the market demand. So the partnering dialogue is gaining momentum over the transaction model business with our channel partners.
So the next question is from Prakash Agrawal.
Am I audible?
Yes Prakash.
Just on the India business, we talked about we expect double-digit growth. When we see April data, I mean the month is pretty flat. Volumes are down 5%. so first question is what is the strategy that we are following. I did hear you have added some remarks. If you could explain how much you have added with therapies and what is the strategy despite a very soft start for the industry?
We've added close to 1,000 representatives, and we've done 5 new divisions out of that. There's a sixth division that will come up in this first quarter as well. We're seeing growth across the board coming back. We're seeing growth on respiratory. We're seeing growth in cardiac, we're seeing some normalization of growth in diabetes even. And the intent would be for that to continue. Good growth in areas like gynecology, for example.
So I think the mood is extremely upbeat our own internal numbers on April look higher than whatever estimates we originally had. So I do think you are moving in the right direction. I don't think -- I think there's 2 of these of the divisions that we've added that have started giving us some returns. The others that we've just set them up in Jan, Feb, March. So that will really come in the quarters to come.
Okay. And what's the final count as of the March for -- after 1,000 MRs getting added?
About 7,000 and about 9,300 all inclusive for the sales team.
7,000 is the MR with the managers and supervisors? Or?
I believe it's INR 7,000 and 9,300, right? The number -- so 7,000 MRs and 9,300 including the total sales team.
Understood. Fair enough. Secondly, on the facilities issues that we are having across the U.S. FDA issues. Just wanted to have a flavor in terms of what is the remediation expenses we are incurring currently across. And as and when, which ones would be the first one that could get out of the FDA scanner and by when? I mean, if you could just very ballpark what is the thought currently?
Sure. We can talk about the remediation. I think when they'll get cleared, it's a little bit of crystal ball gazing. I think the spend is definitely higher at this point of time. For example, there's a considerable amount of spend being done on [ nitrosamines ] and the like. Part of it would be for the industry as well, but certainly for us, basis some of the observations we had at [ Tarapur ].
So we've made great progress. I think we're close to remediation of that site. We are close to remediation of [ Mandideep ] as well. [ Pithampur ], we're hoping with the next update we close out all the observations that we had and the next step, August would be to engage with FDA and get feedback. So I think there is definitely additional spend at this point on the compliance front which we would hope to see normalize in the second half.
That would be to the extent of what a couple of million dollars or it's a larger number to look at?
No, it is larger than that.
Yes. We spent any large amounts on consultants itself.
Okay. So about $10 million, something like that. I mean some ballpark number?
Times 2.
Okay. And this is annual, right?
That's right.
Can there was a certain number in the base also, all of this is not incremental, but there is definitely room to optimize here.
And at best, it would be what, 6, 12 months, while we see like a clean slate? Or it could be long run as well?
So a large part, we expect to complete in the first half. So definitely, there would be optimization that we would expect to get in thereafter. And some of it will flow into the next half as well.
Got it. Got it. And just last one here on looking at [ Passos ], we had talked about products 1 month for injectable tie-up. Just wondering if there's any update. We had 2 tie-ups, if I'm not wrong, 2 injectables. Is that still on? Or where are we on that?
Yes. So we filed [ DocoCyclin ], I think we have tab date pretty soon. It's a product that we intend to launch in the next 12 months.
And the other one?
[ AmBisome ] is still in development.
Okay. And it is limited to 2 products? Are we planning more?
The for those partnership was the 2 products.
And are we doing more such types or?
Yes. Yes. On the injectables front, we have a pretty active effort ongoing to partner as well as acquire injectable products that can accelerate our build of the injectable franchise.
You would have seen the approval that we had with some of the capital point.
So we have, I think, 5 or 6 capital point products that we intend to launch in the next 12 months.
We'll take our next question from [ Mr. Bin Paipai ]
Within a couple of questions. One, [ petrograstim ] question was the update. I thought that was also expected this fiscal.
Yes. So we're just waiting to gear back from the agency on [ petrograstim ]. We have, after the inspection of the Pune site, we have responded to all of the queries that the agency had and believe that we should be getting that approval if they have no objection. But we're just waiting to get that approval to really determine next steps with the product.
Understood. Could you please repeat the product you said the ophthalmic product you said could get launched in March.
[ Montone ], [ Prolenza ]?
[ Prolenza ].
Okay. And the list of products that you mentioned for launch this fiscal, do any of them depend on clearance of these FDA issues at the facilities? Are all de-risked?
Actually, [ Prolenza ].
Only [ Prolenza ].
Yes. [ Prolenza ] is Peter Unit 2. Yes, which we hope to clear.
Okay. Great. And finally, Ramesh, this year, we had a very high tax rate going forward for the next couple of years. What do you expect the reported tax rate to be?
No. As you can imagine, the tax rate has been high only because back again last picking subsidiaries across. But since then, actually, Brazil has turned around, America is expected to cause to well next year. So I expect the rates to come back to normalized to around 30% next year. It could be a little lower than that also.
So the next question is from Surya Patra.
Sir, first question on the general overall cost. So in fact, thanks for [indiscernible] in the quarter, but still generally, the margins are below par versus the industry trend. We know the kind of the challenges that we have been facing, but having seen the kind of cost containment measures and all that. So we have started seeing some kind of sign of improvement. But could you give some sense that, okay, which are the key cost element that we are targeting currently and where that we can see some improvement because that will give some kind of confidence about it because we have been under the [indiscernible] 15% kind of margins in long.
And one of our big revenue-driving market that has been under launch. So could you give some key cost line items that you are targeting to really control? And also, what is the update on that hiving of the discovery research is a division what we have been talking about to improve our overall margins. So let's say, over next 2- to 3-year kind of origin, what are the kind of margin progression that we can see? And for that, what cost are line items or cost items that we are real considering in this?
I'll start with the easiest. Starting with NCE, we have actually ramped down the overall infrastructure associated with that. So INR 150 crores spend is actually coming down to a much lower numbers. That's the first. So essentially, we'll say close to about INR 70 crores to INR 80 crores on that. On the cost lines, yes, we do realize whilst there has been considerable savings and progress along with these initiators, and I spoke about, about INR 300 crores, INR 325 crores to INR 350 crores kind of savings, we still believe that there is a good INR 250 crores that is possible across lines like inventory write-offs, which still remain high because of products that we're adopting, impurities nitrosamines and the like as impact in those tell.
And that would, of course, come down. It's not as going to be a situation of continuing for long. We're taking active measures in terms of looking at the inventory control. And the evidence of that is really seen in the working capital optimization measures that we care taking -- which is actually bearing fruit even this particular quarter. There is a base below which it is impossible to go below when it comes to impact cost threshold, so to speak. So there is a minimum infrastructure that we need to maintain in terms of staff across various functions. But for sure, we do believe that there is still some scope when it comes to, for example, facilities on the infrastructure, for example, on the R&D or solid dosage front and so on because we keep it lower and potentially there is scope for [indiscernible] the volumes are what they are, then potentially there is scope for footprint reduction across manufacturing lines and the like.
So it is going to be a continuous process. But it's not as though it is going to be something which can be achieved within a period of 2 quarters or 3 quarters. It is going to be over an elegated run, possibly over the 18 to 24 months period. The only thing that we can actually assure you is that the focus is going to be constant, it is going to be -- it's going to be laser sharp in that sense. And he'll show you results over time.
Ramesh, if I can just add. I think first of all, in the gross margin line, I think you guys did a bunch of efforts around that. We did a bunch of around that. A very large portion of that or wipeout by inflationary has been disc [indiscernible] the same way on the SG&A front, there's a significant increase. The majority of that increases towards India and the related adjacencies that we have, in fact, we've optimized expenses and earn a bunch elsewhere. So there is an optimization plan in the U.S. That is actually what's helping getting the numbers to a better level at this point of time. But there's also an investment plan in markets like India that is resulting in an increase in some of these lines as well.
So it's sounds going to look linear from that perspective. It's going to be different strokes in different markets, but U.S. clearly moving down the optimization path. Clearly, the focus on new product launches as well. In markets like India, we're obviously investing. Like we said, we added the sales force. There's a cost [indiscernible] that's just started. So there's going to be additional selling promotion spend that will come around that as well. But that obviously is with a clear visibility of return that we will give literally within 12 months, starting within 12 months from the time that we get the sales force on the ground. So I think the margin will obviously improve, but there are these forces moving things up and out a little bit.
Actually, you mentioned a lot of that at the start of the session itself in terms of my opening remarks.
Yes, sure, sir. Sir, my second question is on the, let's say, all your effort towards the injectable ramping of your injectable base. So -- so the acquisition of the Medical, this one recently that we have done. See, this is a very small company, although it is not very influential one to the overall size and this thing. But See, whether it is having any capability apart from the products, that is one. And secondly, on the injectable front, for our existing key market, what is the kind of core strategy that? Or when are we expecting to see kind of a meaningful contribution from the injectable portfolio as that one. And that is my second question.
Yes. So your 2-part question on the injectables. The first [ Medical ] just gives us access to France. France is a market where we've had very little exposure right now in Europe. We're really in Germany, U.K. directly and then France with the muscular. But this small toehold so to say, just gives us entry into the hospitals in France. And it allows us to really take our injectable pipeline that we have put in place for the U.S. as well as other developed markets and bring it into France to -- the hospital segment in the France is actually pretty attractive for the portfolio that we have invested in.
So it gives us an access point. It doesn't give us a material infrastructure or sales force or it really gives us access to the market. And it's a very accretive deal. It's a small asset but accretive, which our focus has been on all our acquisitions to really buy accretive assets that don't dilute our earnings.
So on the contribution from injectables, I'd say that fiscal year '25 onwards, I mean, so we have been building a pipeline. We have a good number of products filed even in fiscal year '23, we filed [ liraglutide ]. We filed Glucagon, we filed and the captain products profile. So we'll see 6 or so injectable products coming to market in fiscal year ' 23 that is FY '24 rather. They'll be the smaller products. The larger products, whether it's Glucagon or [ Risperdal ] we expect in fiscal year '25. So that will be our -- hopefully, a big ramp-up year for injectables.
And then we are trying to figure out ways and means that we can accelerate that with products that we can partner products that we can acquire. The team -- the U.S. generic team is actively working on it to figure out how we can accelerate the injectable build.
Okay. Just a last question, if I may. On the domestic formulation business, say, how should we see because, see, having seen this segment really contributing meaningfully to everybody's growth to over present during the difficult time of the last 2 years, so hence, everybody is now kind of trying to enhance, expand or whatever in the domestic business. So it is nothing we're just enhancing the competition. So while the growth of the industry or growth of the base is kind of a known and the trend is kind of getting followed on the. So -- is it because of the incremental competition and everybody trying to have their share in that. So whether the profitability is likely to be compromised going ahead?
I couldn't help but smile when you were saying the message. I think there's a massive opportunity in India. There is a massive need in India as well. For example, the sixth division that we're going to launch is an extra urban division where we will go to doctors in geography that we don't even cover at this point of time. So I don't think it is competition with each other. Definitely, when you launch products, obviously, you compete against other companies. But I don't think it's that and I don't think it's going to have a reflection on pricing. There is an opportunity in the bigger scheme of things, I think it's the GDP, the amount of spend on health care out of GDP, the affordability, the ability for people to pay, to people to be diagnosed, they're tested. That is the bigger story in India. And I think anybody who's really focused on India is driven towards that story. Certainly, we are. So I don't see this as a limiting opportunity going forward. I actually see this hopefully is something that should accelerate in the next few years.
Sure, wish you all the best. Thank you.
Thank you very much, Mr. Patra. Now may I request Mr. Sameer Baisiwala to go ahead with his question.
Just quickly, how many complex injectables and inhalers have been fired? And what's the approval visibility over the next couple of years?
So on the injectables front, we have a few. I mean, Glucagon that I mentioned, I think 4 or 5 oproducts, the [ liraglutide ], glucagon, [ ganirelix ] and then for those product, [ epidoxacycline ]. On the inhalation front, it's been the products you know so far in Spiriva and [ Delura ] but we've been -- like this year, we have filed a couple of nasal 3 nasal sprays as well. So by smaller opportunities, but still meaningfully add to the respiratory portfolio.
And I'd say that the [ ELLIPTA ] filing as well as restated should really happen in the next fiscal year. Won't mean we are making good progress on these products, but in terms of the development cycle based on where we are, there will really be fiscal year '25 filing.
Okay. Excellent. And -- and just talking about albuterol, what's the outlook for the current year fiscal '24, both in terms of pricing? And is there a room for market share gains over here?
If there are any market disruptions, they certainly will be ready to take share? I mean so far, the market has been fairly stable. And we've got this 20% plus share, and we hope to be able to sustain it at current pricing or as close as possible. So I mean, I think if there are any disruptions, certainly, we'll have the opportunity to gain share. But it's turned out to be a really nice product for us.
And you said you expect the pricing to be stable for the foreseeable future.
Yes, we think so.
Okay. Great. And just one final on India. For the full year fiscal '23, I see you have grown at 1% or so. Where is the price increases, I would imagine, have been more like 7%, 8%. So does that mean there has been a quite big volume erosion in India? That's one. And second, what's the pricing outlook for fiscal '24 for India?
Yes. So I think the bigger story we impacted on diabetes. And definitely, we deep-roar,right? So -- and from a value perspective. So that certainly happened. As far as the pricing outlook, so obviously, the WPI was 12.2% for the like for the scheduled products. For the most part, we would have taken that increase. We typically don't take it on anti-infective, for example. And then obviously, we optimize other products and take an annual increase as well. There have been input material increases as well last year. So I think we definitely wanted to take more of the increase.
Typically, I think in the nonscheduled portion, 5%, 6% is the prices that you end up sticking to. So I think I think the pricing -- last year, if you take out diabetes, it's a growth story. EBIT diabetes is actually degrowth. So from that perspective, obviously, there's significant room to move. That diabetes part is starting to stabilize. Diabetes is about 20% of what we do in India. So there is a direct impact on the overall India number when we do it. But we're starting to see all of that starting to even out. Respective was slow to start right now that's growing nicely. [indiscernible] is starting to get to the double-digit number as well. We basically see everything. And diabetes will not, but I think other than diabetes, everything else will be in double digits.
And then just to conclude on this, after a 7%, 8% price increase last year, 5, 6 this year, I mean, 14% put together. I mean, you think markets doctors are quite okay to absorb this kind of pricing. I can't remember when last we had such high price inflation in the drug industry, there from.
Yes. So as far as these controlled products, as you know, there was an additional NLEM list. So net-net, there's actually a negative impact on that portfolio from what happened in November, December. So on that list of products, which was there. Obviously, there is an impact. I'm not sure we're getting the 7% to 8% from that certainly was not our price increase last year either. But...
That's the number you get if you see industry-wide volume versus value growth for the industry as a whole and most companies, and that's where it's coming?
No, I think that would also be the portfolio that they're shaping, if there's going to be more oncology, then the value will go up very. I can't comment on that, you can comment on that better. From our perspective, I think, obviously, we look at products very closely from affordability as well. Certainly, with our peer set as well. We would not be priced at the lowest product. We would certainly not be priced as the most expensive product as well. And there have been significant cost increases which have happened over the last couple of years, right? If you look at the [ base ] product, look at anti-infective, look at vitamins, look at some of the starting materials out of China, massive inflationary post is the same thing that we're explaining on the gross margin line, you can directly pass them on in India. I think you only get an opportunity once a year to go and address that. And you wouldn't address it where it's possible to do where you feel that it's not, you don't.
The next question is from Mr. [ Madhav Marda ], please.
A few questions. Just wanted to understand on the R&D side. We're at about 7% of sales in Q4 and about, I think, INR 300 crores on an absolute basis. I'm not sure if you gave some guidance in terms of where we could be as a percent of sales on an absolute basis if we should be like analyze our Q4 number? Or can this go up?
No. So essentially, so they would be actually pivoting to more complex but its magnitude will be around the same vicinity between INR 1,300 crores to INR 1,400 crores banks.
INR 1,300 crores to INR 1,400 crores R&D. Okay. Okay And. The second question was on the India business. By when does the diabetes portfolio generalization impact come through in the base? Like is it Q1 FY '24, where it's fully in the base and then sort of we can start growing at a faster pace?
No, no, it goes into -- I think it goes into '25 as well. I think as some potent. So I think there is definitely -- if you look at what's happened -- so there's 2 things here, right? Products that we would have in licensed where competition comes in or we reduce pricing in line with competition or other products which are getting generic side. Both of these things are 2 elements eating away diabetes, right? So you would have seen in the DPP falls, one by one, each of them has been going off patent. In the [ SGLT2s ], same way that's been happening as well. That keeps impacting the market over time because certain prescription behavior is fitting when a higher-priced product remains, but a lower priced in the same category is available as well.
I think that will go on till 2025. From an India region perspective, while that's a top line story, it's not a bottom line story because in the in-license portfolio, obviously, you make a lower margin profile versus products that you make yourself. But I think we obviously enjoyed the way or the increase in the entire diabetes sales over the years as these new products were brought to market by our [indiscernible]. On the flip side, we are seeing this as well. I think it's part of life, it's going to pan out in the next 2 years. But until then, the growth, I think, on diabetes will remain possibly, in my opinion, possibly high single digit not to get into that double-digit category.
Got it. And just one clarification. You mentioned about INR 250 crore cost impact from the nitrosamine. Could you just clarify what that was? Like that's a savings which can compare.
[indiscernible] or anything like that. We said about $20 million. We said $20 million on consultant spend. We do a total anything particular [indiscernible]
[indiscernible]
Can I request Mr. [ Chirag Dagli ] to go ahead with this question, please. Thank you.
So we spent INR 1,500 crores CapEx -- organic CapEx in FY '23. Can we have some details on what this CapEx is on any much larger question [indiscernible].
No, no. So essentially, a chunk of that CapEx is far lower, in fact, less than half of what you're mentioning. A huge chunk of it is actually for M&A, it was spread across in fact, what we bought in India, what we bought in Australia and what we bought in America.
So there is a separate line item, Ramesh, which as payment for acquisition of business. That's INR 291 crores at separate. There's also another one on capital expenditure plant.
So what you're seeing there on the acquisition, that's only for 1 piece, which is on [indiscernible]. All the other acquisitions, whether it was with the [ novum OpenX Pravana ] or the Paloma acquisition in Brazil. Those are all getting accounted in the line, which is where you see the capital expenditure. And both this acquisition specifically the [ Sunovion ] 1 was a significant one from an acquisition perspective, which we [indiscernible].
Items is property, plant equipment [indiscernible].
So you tend to clarify it.
The intangibles actually, you know what we bought into brands and so on. So be coming as part of.
But I think like you said, the CapEx is basically [indiscernible] INR 600 crores, INR 700 crores, that's global. And about half of that would be really towards maintenance kind of spend and the other part would be for newer capabilities. So both lines together INR 1,700-odd crores is what you see overall.
And we hope to maintain this kind of branded INR 600 crores organic CapEx.
The CapEx would be around the vicinity INR 600 crores to INR 700 crores. So potentially M&A is really going to be based on the proposition the presence itself.
Understood. Understood. And this M&A, we keep doing these small, small bolt deals -- bolt-on deals. My question is, really, how do you -- is there an internal hurdle IRR payback period, return on capital? How are you thinking about how you have that?
It really varies for example, we take the medical thing, it is actually very strategic. So of course, the payback period is -- it's very reasonable from our perspective. So it really is dependent on the proposition and what does it do to our overall portfolio in the respiratory space, for example, we found an opportunity with [ Brovana ] and [ OpenX ]. And so essentially, Paloma, for example, helps in actually stabilizing the overall portfolio in Brazil. So it is actually a bit of strategy and of course, the kind of returns associated with that.
So a long time, our focus has been on big payback and high IRR and EBITDA multiple.
EBITDA accretive as well as much as possible in the very first year.
So we've spent about INR 1,000 crores on these acquisitions, right? INR 1,700 crores of overall CapEx like you're saying.
Yes, that is correct everything [indiscernible].
So my question is this INR 1,000 crores. If you can just give us a sense of -- how are you thinking about payback periods, IRRs or whichever way you're slicing this seems like a fairly large amount. I would have been surprised if you would have told me 12 months back that you would spend about INR 1,000 crores with a single-digit ROIC, you would spend about INR 1,000 crores on [indiscernible]. I'd be surprised. And that's the question that how have you evaluated [indiscernible].
As I said, it is pretty high. So I would say anything north of 19% to 20% on an IRR basis, which includes, in fact, the terminal value of that. So year without that, it will be well above 16%. So from our perspective, it actually adds value economic value to us. Our cost of funds is about 11.3% and thereabouts. So to that extent, all these propositions as well as they are well above those limits, it makes sense to us.
Understood. And just the last question is on the tax rate. At what point do we become a normalized tax rate company?
So in the recent past, we have been in limited by, in fact, losses in various subsidiaries. And that included Brazil and America. And of course, we will still have our entity, R&D potent at [indiscernible] in Netherlands. That would potentially be because it's more R&D spend, but we do expect the other business subsidiaries to start making money for us as was the case in America until very recently. So effective tax rates would actually normalize around the 20% to 30% from next year onwards. India itself is much lower than that.
So FY '25, you're saying, 28 to 30..
In '24. The current year, we will bring it down to about 28 to 30%.
Understood. But a normalized rate should be '25, Ramesh.
It could be but you could expect that out of India because it is possible if I would move to regime to enlarge regime. But of course, we still have tax breaks in India. So that's why we are still shaking on to that. But if you talk about other parts incremental tax rates are in the vicinity of 30% in most parts daily, it is really a function of those. In America, for example, is also have beta apart from federal taxes, you have state taxes we taken. And if you -- so that and I know it. So but actually, you won't be actually making any -- paying any payments some better tax out there.
[indiscernible].
I know we're at the [indiscernible], but maybe last 2 questions.
Next is [ Mr. Sindel Karl ], please. Next question.
If I can understand if you are looking at the coming quarter in U.S., it will be seasonally weak quarter, right? If I follow our general trend. Do you see our quarterly run rate of 175 million sustaining? Or should we assume a more towards fee seasonality that we always come [indiscernible]. Plus with the U.S. base, can you help us understand how [ Suprep ] is expected to pan out for the coming entire fiscal FY '24? Along with [ Andrupal ]. Do you think these both products will continue at the same level for us today? Or you see that they will see some competition, though you highlighted earlier that you do not see meaningful entry into [indiscernible] yet. But any further thoughts will be helpful. That's the first question.
Yes. So we definitely will see a seasonality impact in the first quarter for the U.S. business, all the anti-infectives, cephalosporins and azithromycin [ oseltamivir ], all of that portfolio will be down. So there will be an impact on revenues. But we have some upside also. We have [ Darunavir ] launch, and we'll see when we can launch [ Pariba ], June or July based on FDA approval. We have some launches as well to offset it. But for us, once we launched [ Pariba ], does the revenues pick up in a major way in the U.S. But otherwise, the seasonality will have an impact in the first quarter.
And [ Soren ] [indiscernible]
Yes. So [ Abrutwal ] is already a multi-competitor market. And we believe that it's stable from the standpoint of competitive and from a share perspective for the competitors. We don't see any near-term entrant in neutral in the next 12 months. On [ Suprep ] it's hard to tell. We don't believe that there is any imminent approval right now based on what we understand of the supply chain. But it's hard to tell how long it will remain exclusive. We think the next 3 to 6 months, it should. It could be beyond that as well.
Okay. Okay. And if I have to understand the overall scenario ex these new launches, like if we keep [ Suprepaside ], do you see the price erosion at the mid- to high single-digit run rate only? Or do you think it is higher than that?
We think that it's going to that high single-digit run rate, but for the new products like [ supra ].
Excluding new products, right?
Yes. Yes. That's right.
And if I may understand Ramesh, how should we look at the hedging rates for us. Can you give us some idea around the coming quarters?
There is this philosophy that we should not hedge fully. The current -- the current at least trends kind of indicated to kind of start date around the 82 mark. But given the volatility around the economic front, it's good to be actually open at least for a huge chunk of our portfolio, and that's what we have actually done. We have booked some things for the future and those are well into very acceptable rates at this juncture. But a fairly large chunk of our overall exposure is still unhedged.
Okay. And if I may ask one more question on the API side, what is keeping this kind of growth in the API? Do you think there is some seasonality to this? Or do you think this is sustainable? And what were the key drivers for the API segment [indiscernible] can you please highlight and help us understand there more [indiscernible] will be helpful.
Okay. So, we'll have to wrap up is we are already 5 minutes over time. As far as the API business is concerned, we were basically doing very low in the first 3 quarters. And there's really been a successful build all the quarters on the API business. Every quarter, the business grew. And in Q4, obviously, we've seen a lot more normalization in products like [indiscernible] and [ ServCo ]. That's really what's driving it. We expect it to continue. We don't expect this growth to continue, but we would expect it to kind of continue more or less at this kind of levels.
Last question, please.
Can I request [ Skalari ] are you there? Hello.
[indiscernible].
We can wrap up now.
It just a couple around Spiriva now is my understanding correct Spiriva volumes have been shrinking. And even within that, [ Respimat ], share has been rising. So which means [indiscernible] has been maybe going down in double digits in the last 5 years?
That's right.
So what -- so just what is your expectation once the hand data generic comes in the market, do you expect some share back from the [indiscernible].
We haven't assumed that, but hopefully, that happens. From a pricing perspective, that the retail has -- retailers have the incentive to shift some.
Right, right. And what would be the market size today at the manufacturing level?
It's -- I think a gross level is still $1 billion plus at the gross sales level.
The net level may be 500-odd, would that be a correct understanding?
I would think so. But from a pricing perspective, it's really the gross level that is important.
Sure, sure. Okay. Perfect. Thank you.
Do we have another question? Or can we wrap up?
Yes, I think that pretty much concludes our Q&A session. I now hand the conference over to the management for closing comments, please.
Well, thank you, everyone. Hopefully, we've been able to respond to all of your questions. If not, I'm sure you'll be following up at [indiscernible]. But as we mentioned at the outset, we are very pleased with the progress we have made through the year. Fiscal year '23, closing the year on a positive note in terms of margin improvement. And we continue to be very focused on driving profitability as well as growing our business into fiscal year '24 with our new product launches as well as the basic business, India business as well as other parts of our business.
So look forward to a successful fiscal year '24, and we'll look forward to speaking with you again in the next quarter. Thank you.
Thank you.
Thank you so much to the management team and the panelists. 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. Thank you so much.