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Strides Pharma Science Ltd
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Ladies and gentlemen, good day, and welcome to Strides Pharma Science Limited Q1 FY '19 Post-Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you.
A pleasant good afternoon to all of you, and thank you for joining us for the Strides Pharma Science earnings conference call for the first quarter of financial year 2019. So here we have with us Arun, Strides' Executive Chairman; and Badree Komandur, Director of Finance to share the highlights of the business and financials for the quarter. I hope you have gone through the articles released and the quarterly results presentation, which have been uploaded on our website as well as the stock exchange website. A transcript of this call will be made available in a week's time on the company's website.Please note that today's discussion may be forward-looking in nature and must be viewed in relation to the risks pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out with the investor relations team.I now hand over the call to Arun.
Good afternoon, everybody. Thank you for joining in our earnings call today. Along with me, as Abhishek mentioned, I have Badree and Vikesh and we'll be more than happy to answer questions after my opening comments.Coming out of a difficult year, this has been a quarter, which, from a management perspective, has been satisfying. The numbers don't reflect so much of the green shoots that we are currently seeing in our several businesses. But like we mentioned in the last earnings call, we are extremely confident about the strategy playing out with OpEx leverage and with enhanced increase -- enhanced focus on portfolio, especially in the U.S. market, to get on track very fairly quickly.If you look at our business, we have 3 parts of our business, as all of you know. Our settled business is the Australian business. It's doing well and it's growing greater than industry average and we're happy with the performance. Sequentially, the Australian business would have seen a decline on a Q-on-Q basis, there's been a significant increase of 18%. And let me just also take a minute to explain the reasons for that decline. We had a phenomenal quarter in Q4 of INR 2.7 billion, that's down to INR 2.33 billion. Although year-on-year, that grew by 18%, Q4 of '18, we had a complete back order -- we had a 0 back order situation happen. We had several out of stocks for almost 1 year, which we filled in with the portfolios that we brought back from Strides, so that had an unusual quarter obviously. And then now back to the steady-state run rate quarterly with a very handsome growth.June is a difficult month where de-stocking -- or lower stocking at the distributable levels happened. This is because of the upcoming PBS, the price benefit scheme programs. Customers normally take slightly less stock and we see this moving up. But at the numbers that we have announced, we strongly believe that we are in a leadership position. Our OpEx leverage is playing out. Our portfolio maximization programs, including new product filings and bringing products into our manufacturing system, is creating the value that we have been focused on. We believe that Australia will continue to be a very difficult market for several of our competitors to operate in. And our unique model of control on the pharmacies with increasing focus on pharmacy build- outs is already a differentiated and transformational model.If -- we obviously have announced a merger with Apotex, which is Australia's leading pharmaceutical company, generics company. This is currently under review with the ACCC, which is the Australian Competition Commission. We are also on our respective due diligences between the 2 companies, and we expect to provide another update towards the end of September when we hope we would be at the far-end of this process.The U.S. has been an important market for us. It's been a growth market. We believe we have a couple of quarters before it becomes an anchor market for the company. We've had an improved performance. The Q-on-Q growth increased by 31%, led mainly by our own portfolio of products, increased market shares. Like most other commentaries you must be hearing from other Indian companies, we see pricing environment to be more or less stable for most products. We are obviously looking forward to commercialize the products that we took back from our partners, which we expect to commercialize and invoice from Q3. Adding to what the partners is selling currently, we believe our run rate is about $35 million from the $26 million. So our partners are doing well with the portfolio, and as soon as our stocks are exhausted, we will be going into the market with our own labels on those products.We got some good approvals this year -- this quarter. It also was our highest number of filings. We never had more than 10 filings a year in the company over the last 3 years. We are now upping our guidance to improve our filings to a little over 20 -- between 20 and 23, earlier from the 18 to 20 range. So we expect to file a little more than what we have planned earlier.Our R&D investments are tracking within the budget. We are also very excited with some of the products that we got approved recently, including Cinacalcet and Oseltamivir, which is obviously is a winter product, so we hope that we will have some good news to share towards the end of the year. We're trying hard to work on market share around that. So it's a little early to comment around Oseltamivir and -- but we are very confident that these products and some more products that we expect approval in the next couple of months will add great momentum to our U.S. story.Coming to our other regulated markets, which is our fastest-growing market, we grew that business by 49%. Q-on-Q, there was a degrowth. That is simply because of the lumpiness of this business. It's still in growth phase, so there are specific markets that we had quite a lot of sales. We expect it to be sequentially settled only in about a year's time, but we still believe that this business, which had $52 million of sales last year, will grow to become a very important part of our business and will be growing significantly more than the CAGR for the rest of the business that we have set forth.Our portfolio maximization strategy here is working well. We expect 25 filings across Canada, U.S. -- sorry, Canada and Europe and the U.K., and this will give us a nice fill-up to the business in the next year.Trinity Pharma, our recent acquisition in South Africa, has been successfully integrated and we're looking at leverage partnering in portfolio just like what we're doing in Australia in this market. The regulated process in South Africa is lot [ longer ] than normal, so expect results to flow through only in a couple of years, but the activity around creating value has been successful.Coming to Institutional business. While it has an improved quarter, on a Q-on-Q basis, we grew 33%. If you recall, I did mention that we have commitments and pricing on the donor businesses. We actually just exhausted all our commitments. These were done at great cost to the company as we had no ability to renegotiate our pricing. We suffered from increased input cost, and this increased not only the margins have been significantly lower in this business, but it is also responsible mainly for our 600 points drop in our global growth margins models. This -- we believe that the Institutional business will be sluggish, but the lower business that we will continue to do in the coming quarters will be at significantly better margins because more and more of those businesses will come with products that have been renegotiated or from products that we do not make at the same price.So our contracts and obligations have been completed, and that Q1 is a reflection of that and less about the market opportunity. And also, it's primarily the cause for the margin drop.If you recall in my commentary the last quarter, we did mention that we continue to have significant challenges with a mismatch between the secondary sale and the primary sale in Africa. I guided that it will take us up to 3 quarters before we get this into a good -- in good shape. In Q1, we had 0 sales by design of primary to [ western ] -- in the branded business. And that is that the key reason why the sales in Africa is low. I must, however, report that our secondary sales grew at a healthy 19%, which is great, considering the market is growing only at single digits. So the brands are taken well. We continue to have market share growth. We will see the gap between secondary and primary as committed only in Q3. And Q2 also, like I mentioned earlier, would be subdued, but we are happy that the gap has been reduced dramatically in the last 3 months. And we will reach the ideal gap between primary and secondary by end of September. And from October, we'll start invoicing, so for the last 6 months, there has been 0 invoicing to the African brands business, so that we are course-correcting the inventory mismatch, while still focusing on execution. This is also one of the key reasons that we -- it's a very important market for us, but it's also one of the key reasons why you would see an EBITDA drop in the overall company because we spend close to about EUR 2 million a quarter in operating this business. So even though we don't sell anything primary, to manage our secondary sales, there is an expense.The rest of Africa business, what we see here is basically our ownership of Universal. Universal is our -- in Africa for Africa strategy business. It had a flat quarter, mainly to do with the plant getting ready for certain significant inspections during this quarter. So we took a partial slowdown in some of our lines for some parts of the quarter. We are now back on full production and we expect Q2 to be a fairly reasonable quarter for the generics business in Africa, while the brands will continue to be flat.This is in essence, the high-level summary and I'll be more than happy to answer questions. Me and my colleagues will be more than happy to do that. And if there are any questions, please do ask us.Before I do that, I just want to clarify our net debt. Our net has increased by 60 crores, predominantly driven by the working capital increases because of GST. A bulk of our refunds will start coming through this quarter. And we think it's the -- that will get normalized to its previous levels as a consequence. We have been very focused on operating cost. We have significantly reduced our OpEx and we continue -- we believe that the base that we have working on in Q1 would be the base that will go forward, say, for the marginal salary increases that occur in this quarter, which is our review period. And then with increased sales there's been increased distribution cost. But for that, the base will remain fairly flat, and we think we've done quite a lot of work in the last 4 to 5 months to improve our cost base.So with that, and relentless focus on R&D. There has been 0 reduction in our R&D spend. We're very excited about the portfolios that we are building. We believe in the next couple of months, we will receive very important products that will take us to the next level of growth.With that, I open the forum -- the session for questions, please.
[Operator Instructions] The first question is from Nitin Agarwal from IDFC Securities.
Arun, on the U.S. business, as we look to the next 3 quarters for the year, I mean, how -- directionally, how should we kind of look forward for in the scale-up in the business?
Nitin, like I said, adjusted for what is currently partnered but will revert back to us, we are now trading at around $35 million, if I add what is currently sold by partners. We believe we'll be able to not only maintain it and grow it from that level. This is on the existing range of products, but we'll be launching ibuprofen and ibuprofen soft gelatin in Q4. Q3 they were tablets, so that will add nice numbers given the good supply issues around these products. So the base -- the adjusted base is now about $35 million. It should go up a little -- significantly more from there, but I can't put a number as yet. We obviously have to look at some of the settlement agreements and how those play out, especially with Cinacalcet and products like that.
And in terms of the newer launches barring [indiscernible] how does the year look like for new launches going forward?
We're expecting at least another 8 approvals this year. And they would be slightly more material than what we have already announced. And we think they will be important pivots for our growth in the U.S.
And secondly, on the gross margin. So you talked about the fact that this quarter, gross margins are impacted by the pressure on the profitability in the Institutional business. So I mean, if you make those adjustments, I mean, what will be the normal -- I mean, what would be the term normalized gross margins for our business going forward?
So emerging -- our regulated market business operates at -- in the range of 57 -- 55% to 57%. That has been not impacted even in this quarter. Our Institutional business is the killer when it comes to gross margins because like I said, we are committed in terms of pricing. We had no choice but to honor those commitments. They still form a part of our under-recovery strategy in terms of manufacturing costs. So the emerging market is a combination of how well Africa does, how well our brands are taking and how the Institutional business is running. But the reg markets where we focus is -- runs in a 54% to 57% range, depending upon our mix of products.
[Operator Instructions] The next question is from the line of Chirag Dagli from HDFC Asset Management.
The quarter-on-quarter gross margin dip is fairly sharp, and the level of sales seems to be broadly similar-ish. Is there anything specific to call out? Or as you mentioned in the opening comments, largely this is because of these Institutional business input cost inflation?
In the case of your question and related to your question on gross margins, the answer is yes. It's predominantly to do with Institutional. We cannot get into a default situation with these organizations. So we completed all our obligations. You will see our Institutional business dropping, but we'll have better margin profiling.
And this -- so have the new prices been renegotiated across the board? Where does this business go from here?
So like I said, we completed our pending obligations, and that is why you will see an uptick of the business. We have exited all products which do not make the margins that the company needs to make. We have guided that our malaria business has reduced to less than 15 -- to about $15 million. We still retain that guidance. The Institutional business will probably be within the range of what we did last year, which is about 500-odd crores, but we believe that the next quarters will be slightly better in terms of margin profiling.
Okay, sir. And one more question, sir. This -- the other expense base seems to have declined quarter-over-quarter, 4Q versus 1Q. And in your initial comment, you mentioned that this level of OpEx is what one should consider. So should we sort of annualize this 137 crores of that expenditure quarterly base?
You should just be careful about 2 items there. There will be -- half of this cost is approximately employee costs. So the employee costs, there will be a revision of salaries this quarter and you will see it next year. But that is on a global basis, it will not be a very big number. The OpEx, you assume these numbers moving only for incremental sales, as we have distribution costs as part of our OpEx, and that's approximately 4%, 4 to 5% of our total sales. So any incremental sales from the number that we have reported you will have to adjust for that.
[Operator Instructions] The next question is from the line of Prakash Agarwal from Axis Capital.
This is Prakash. Trying to -- just clarification on the statement you made on the U.S. sales. You mentioned $35 million run rate or I mean, my numbers suggest $25 million for the quarter?
Prakash, what I mentioned is that if you recall, we have $80 million of partnered products. We mentioned last -- in the last call, that 50% of all the partnered products have returned to us, okay? These products can be only commercialized from Q3 due to our agreement with our current partners that we can only get to the market after the current inventory is exhausted. I was adding up what our partners sold as per August data in terms of units and attributing the sale of $35 million to include those 2 products that if we were marketing ourselves, would have a run rate of $35 million.
Which should start coming to us from Q3 onwards?
Q3 onwards. Right.
Okay. And incrementally, new approvals will add up to that run rate?
Yes.
Okay. And this includes -- you mentioned about this ibuprofen OTC and the other products coming in. So those are -- apart from that, you will also see 8 new approvals, just to reiterate?
As we already said, OTC is already approved, Prakash, because...
Launches, I mean, sorry.
The launch is going to happen in Q3, in December, because in November we will receive hopefully the change of API source to our group source, simply because ibuprofen is not available from our current approved source.
Okay. Understood. And if you could help us, you know what -- the approval that we got for generic Sensipar, Cinacalcet. What is the landscape there in terms of the launch?
We can't discuss anything about that. It is a settlement agreement. We are bound by confidentialities.
Okay. Understood. And lastly, if I were going to look at Stelis, what is the current update there? And what is the percentage we hold?
So currently, Strides owns 36% of Stelis. And the current update is that the manufacturing facility of Stelis is currently under validation. We expect the first product for Stelis to be registered in Europe, which is a device with a biotech drug with a device, in this quarter. And commercialization of that product to happen sometimes toward the end of the year.
Okay. And lastly, the net debt absolute numbers, sir?
It increased by 70 crores, 1770, mainly led by GST. We expect most of the GST refunds to start it's already started happening. So that will be net debt, 1770.
1717 crores?
1770.
[Operator Instructions] The next question is from the line of [ Ashish Rathi from Lucky investments ].
Sir question in particular for generic Tamiflu. So how should we look at this opportunity for Strides? What kind of contribution and what kind of target market share we would be looking at?
It's too early to say, Ashish, currently there are 5 incumbents. They obviously have control of the market. We are a new player. It's really too early. We need to see how the flu season evolves. If the flu season is like last year, it will be a great year for everybody and there will be space for a new player to get significant market share. But we believe that everybody will defend their market share. It's a little too early. I mean, I can give you some more color in the Q2 earnings call simply because we will have a little more visibility. It's very, very early, it's peak -- it's not even peak summer in the Europe and in the U.S. for us to even start thinking on these lines.
Okay. Sir, another thing on the Insti business, except the antimalarial, where we have the ARV portion. Sir, what is the basic -- what is the basic molecules we are supplying here? And if I'm not wrong, these are mainly second line of ARV or treatment of existing drugs?
Yes. You're right.
So do you think there's a risk to this business as and when first set of treatments increase or replacements come from newer molecules like dolutegravir, et cetera? I mean...
If you read my commentary on the Institutional business deck, we have mentioned that we are -- the R&D pipeline is now almost complete for the entire next-generation combinations of all the drugs. So as those new drugs are in the donor list of procurement, we will be in the forefront of that.
Which drugs will this be?
The dolutegravir range of products.
Okay. Another thing on the ARV from the competition of -- players have reported that this will increase in the API prices for them, from where they source from China. How is that case for us for our products? Is there a particular business segment?
I have been -- acknowledged in today's call, I probably spoke about it 3 times. It's also mentioned in my Institutional business readout. The escalation of API prices is significant, and that is the reason of the drop of the gross margins.
I thought this is applicable to the Institutional business for antimalarial. You are mentioning for ARV, is it?
I'm talking about [ retail ] -- my note also talks about ARV.
Next question is from the line of Tushar Manudhane from Motilal Oswal Securities.
Sir, just on the Australia business. We would like to understand how many products in total have been now transferred to in-house manufacturing? And how is it helping it improving the gross margins?
20 have been filed, 15 have been approved and all 15 have been commercialized. If you look at the last line of our Australia deck, it says that total of 20 products have been filed with the TG for site transfers. 5 are filed during this quarter and 15 products has been commenced, already supplied.
Okay. And secondly, just on this U.S. adjusted number of $35 million, is there any assumption of the partner coming to market, or how does it work?
The partner is not coming to market.
[Operator Instructions] Next question is a follow-up from the line of Chirag Dagli from HDFC Asset Management.
Sir, just on your initial comments, you mentioned about PBS cuts. Have these -- when do these take effect? Is there any sense of the quantum for our portfolio and what this means for our margins on the business?
So about 80% of our portfolio has already completed in the entire PBS cycle, which means they don't come through any new cuts. It's just procurement behavior in the marketplace that impacts -- nothing to do with any potential impact for us. The next cut -- the next is in October.
So on the -- on 20% of our portfolio, we will see some cuts?
We will see some cut, but that's factored in our margin expectations.
And empirically, sir, how much -- how big can these cuts be?
It depends. So if you are in the first cycle of a cut, the cut can be as high as 20%, 30%. But if we are in the fifth or the sixth cycle, it may be 1% or 2% or 3%.
Okay. And this comment that you're making is currently on the Strides business, not on the combined Apotex business?
For the Strides business.
Next question is from the line of Sriraam Rathi from ICICI Securities.
Just 2 questions. One on the Australia. I mean, how is the margins trend this quarter? I think last -- in Q4, we disclosed 20%-odd. So just to get an idea what number...
Q4 we had a margin just slightly higher than 20%. And the commentary was -- because of that, throughout the whole year, we reached a 20% EBITDA. We are now retaining a 20% EBITDA, so there has been no drop in the margins for this quarter.
Great. How should we look at it going forward?
I think we have -- I mean, it can move up very marginally because we continue to be dependent on third party supplies until a lot more of these products come into the Strides system. And we have 30 other Strides transfers happening this year, but the benefit of that will come only towards the last quarter. So we will -- we -- I think that if we can bring in a 20% margin of the business with above 3 or 4x industry average growth, I think we'll be all right.
Okay. Got it. Secondly, in terms of net debt, which around 1770 crores right now, what is the target in terms of repayment coming? What kind of repayment can we expect?
Just so you understand. We have a working capital -- included in this, we have a working capital limit of around 800 crores, which is normal revolver on the working capital. The rest of the debt is long-term debt, fully borrowed for the Australian acquisition. The debt -- there is no repayment of the debt for the next 2 years. That's significant free cash that the Australian business delivers should take to service this debt.
Okay. Got it, got it. And what is the CapEx plan now for the next 2 years? And what kind of CapEx are you expecting to incur?
$10 million per year maintenance CapEx.
Next question is the line of Rahul Jeewani from IIFL.
Sir, although it's too early to comment anything on the Apotex merger, but how have been the due diligence process going on? And what kind of divestment can we expect from the competition authority for the merger to go through?
Okay. So firstly, if this merger goes through, there will be 0 divestment of any portfolio from either of the companies. So just that we have explained this several times that there'll be no divestment of any product. It is not a combination of products Australia is bothered about. If this doesn't go through, it would be for other reasons as in the competition, the pharmacy is complaining about this deal, distributors objecting to this deal. This is -- unlike a U.S. merger, it is not about portfolio because every company has got a large range of products. So even if Apotex were to sell all their products, they can sell our products. Or if all our products have been sold, we can sell Apotex products in Australia. It works very differently. If the issues could be our distributors unhappy with it because the combination will make the distribution negotiation -- may create some issues around distribution. That may be one of the reasons. But otherwise, we -- the combined entity would only have about 30% or 35% of the total market by units. And of course, while it still becomes the market leader, we don't see any big issues around this, to be honest.
So basically, the combined sales of the 2 entity would remain as such, and then they would not be any dilution as far as your overall top line is concerned for the combined business?
[indiscernible]
And just to clarify, you said 35% market share in terms of volumes?
Yes. Units.
Of the combined entity? Hello?
Yes, yes, yes. You're right.
Our next question is from the line of Nitin Agarwal from IDFC Securities.
I don't know, on the other developed market business that you sort of alluded to in your opening comments. I mean, which are our key markets. And what about -- what is it about these markets that makes us sort of optimistic on the outlook going forward?
So one is -- so we front end our markets in the U.K. and Canada now. The -- in Continental Europe, we partnered as we licensed our products out. We do a profit share [indiscernible]. We have some very good products where we have very good market leadership. Our biggest product is Vancomycin. We almost have 50%, 55% of the European market. We make significantly more revenues than in the U.S. on that product -- our profits on that product. So basically it's a product selection, it's the ability for us to partner our product, reach across Continental Europe and yet get significant market share and profitability.
And in terms of the product portfolio in these markets, are there any specific -- I mean, even the U.S. portfolio that you will be replicating these markets? Or there is something else that we're looking for this [indiscernible] markets?
We are liberating the Australian portfolio for these markets because Australia, Canada, Europe and U.K. follow a similar regulatory process.
And [indiscernible] the growth rate for this segment is going to be faster than the overall business?
Yes, it is.
And just [ as an applicable start for us ] I mean, even for FY '19 also?
That's right.
Next question is from the line of Amey Chalke from HDFC Securities.
I just have 2 questions. One is related to our filing strategy in the U.S. market. You've said in the PBT that the R&D spend is capped at 20 million, and we have increased our filing rate to more than 20. So what kind of filings we are looking at, like in terms of like how much will be the banner-free filings? Or how the formulation would be divided? Like, how many would be [indiscernible] products? So if you can give some color on their filings for the U.S. market.
Yes. So our portfolio has got a mix of soft gelatin capsules, dermatology, creams and liquids and ointments. Most of these products have got some level of complex technology involved or a manufacturing challenge or a clinical challenge. So product selection is based around this. Most of our products, we don't have more than 2 or 3 powerful challenges, but the ones we have we think are evolving. And it's a combination of difficult to develop products, difficult to manufacture products or there is a clinical strategy that requires great attention to the development strategy.
But in terms of number of players, what are we looking at? Like, when will we be launching this product, we will be at least among first 4 or fourth...
I don't think that matters for Strides. This is not a strategy that impacts us. Take an example of that if you mean around 14 ANDAs manufacturing, ANDAs approved. We were the last approved and we have the highest market share. So it depends upon what we think is a problem, why the 14 companies are not commercializing the product or what is that one factor in the [indiscernible] supply chain that where we have an advantage. Or if you take a product like ergocalciferol or vancomycin, where we have more than 30% or 50% market share, it's just -- had this not been for today, we have been adding market share of ergocalciferol or amoxicillin or [ butistran ] for maybe 3 or 4 years continuously. So the idea is that the product selection, the ability to be one of the few players as the next generic comes out to 5 or 6 years. This is the one differentiating strategy in our product selection.
Okay. But you think that the per product revenue would be higher for these filings from the current run rate?
Of course, EBITDA would be higher than this year, but not revenue.
And on the second thing is on the ibuprofen OTC soft gelatin capsule, which we are looking at, which is a substantial product. But how do you see -- what will be the difference between the OTC product and the Rx products when you will gain market share? Like, would it be similar in terms of like what happens when we launch Rx products, it is very easy to get market share? But do you think it will be similar in the OTC market when we have a [ tame ] product portfolio in the OTC side?
First, in the OTC, we've partnered to go-to-market. The IP belongs to us, we keep all the profits. We only pay a distribution charge to one of the largest impactors in the OTC business in America. So we have a strategic relationship with them, and ibuprofen is part of that program. They control close to 30% to 40% of the store brands business.
So is it right to say that your partner is already there in the market? Or you would be launching the product over [indiscernible]?
The partner already has the products of somebody else. It will be [ replaced ] it will be reflected the larger conversation that we have had with this partner.
[Operator Instructions] Next question is from the line of Anmol Ganjoo from JM Financial.
You spoke a lot about U.S. and I know some of the stuff that's doing there in terms of rewarding partnership, et cetera. But from an FY '19 perspective, given that you have some sense for the next 3 quarters, should we be able to better $120 million overall run rate that we had for the full year in FY '18 or...
Well, that's a very unique question. So you have to do the math yourself. On an annualized basis, we'll beat that number by far, considering along with partner products, we are already at 35 million. But what will make this more, because of this mismatch between primary reporting and secondary sales, is the function of how some of our new products that we have approval now and the ones we are expecting in the near term will add to our revenues. So you'll have to -- we've guided the market right in the beginning. It is for the last year that Strides have had a significant H2 outlook, both in product approvals filings and sales growth. And this is the first time that we have linearity in our filings on a quarterly basis, starting from Q4 of last year. So from Q4 of last year, an average filing of 7 files, 8 out of 10 files at Strides are approved in 10 months, gives us a very different perspective of what we think we will be achieving in the near term, without the lumpiness of our business, and with reduced increments of the partners, we are a lot more bullish on what we think we can build up with the U.S. business.
Okay, that's helpful. Second question is around the comments you made around Institutional business. Obviously, the sharp drop in gross margins you attributed to certain obligations, which are to be met. But at the same time when you say that going forward, we should still be able to do the 500 crores-odd annualized run rate in Institutional business, then what is the incremental business that we'll let go for an inferior margin profile? And what will bridge the gaps? Any color there?
The problem of price and the obligation of others who have completed the contracts are not unique to Strides. I think all of us probably would have completed all the contracts. The other agencies are not getting product. Everybody has reset or recalibrated the obligations to the low-end of the range. And we expect the new contracts to come and to be in place in the next couple of months, which will show much better pricing. But it's a practical business for us. I mean, I think that the more and more that we sell in the regulated markets, our manufacturing, under-recovery, different things on Institutional business reduces. We probably maybe slightly different of having filled capacity ahead of time. So under-recovery is -- has been a challenge at Strides. We are seeing that gap narrowing dramatically. And as our U.S. business builds out, add more and more products from Australia coming to our manufacturing system, the different things to do a significant numbers in the Institutional business obviously reduces.
So if I understand you correctly, what you're saying is that the incremental contracts that you're going to see in quarter 3 and quarter 4 are going to be much better priced at an industry level?
Yes.
Last question before I get back into the queue. You spoke about very tight cost containment measures. So if you look at the current quarter, obviously, other expenses have shown some kind of a plateauing. But in terms of areas you can go after in the cost, how should we be thinking about them for the next 2, 3 quarters?
I really don't think there's much to squeeze out. When you go through any program of cost reduction, you get to get these results immediately. The squeeze out from here would be very marginal.
Next question is from Dilish Daniel from Geojit Financial.
And sir, my question is regarding the regulated markets. Sir, we have -- Y-on-Y basis, we have growth of 14 [indiscernible]. But when we look at the quarterly, it's like down by 20 percentage. Can you explain the reasons for that drop on a quarterly basis?
On the other regulated markets? Yes? Okay.
Yes.
So we had -- like I said, this business is in a growth phase and we do have lumpy quarters. Sometimes, the customer ordering style, especially in Europe, which are -- the market is fairly tender-based. They may buy for 0.5 years upfront so that they're not out of stock on any supplies. Especially in market like Germany and Netherlands, the penalties for non-supply is very high. So the lumpiness in the order taking is what is causing this.
So how much percentage of growth can be attributed to the Trinity Pharma? That is already integrated last quarter, right?
It's a small part of it, yet it is. You're right. It's a small part of it, but it will be approximately 3 -- $2 million to $3 million.
Okay. And sir one more question. I understand the cost of materials on a quarterly basis, I think it's high, right, the cost of materials? And what's the reason behind that higher cost of materials?
We just explained the whole story of our Institutional business. So that's attributable to that.
So when the -- like you said the margins will be bettering by third and fourth quarter, right, for Institutional business?
Yes. On a lower scale of revenues probably for some time.
Okay. So -- okay. And so my next question is, what is your R&D spend this quarter?
INR 29 crores.
Next question is from the line of Anik Mitra from Stewart & Mackertich.
Sir, I [indiscernible] your guideline on CapEx. Like what's your CapEx during this quarter and...
It's not clear. Can you just repeat your question?
Yes, on your CapEx guideline. My first question is what will be your CapEx during this quarter? And can you provide some guideline for your CapEx for the year?
We don't give our CapEx by quarter. We explained to you our CapEx will be between the $8 million to $10 million range on an annual basis.
Okay, sir. And I have one other question. In the presentation, you mentioned regarding a few molecules in their market -- and your market share, like [indiscernible]. Can you show some light on -- in terms of their market size?
Market size?
Yes, sir.
So you could just write in the note. I mean, I'm not going to read out the total market size in an earnings call. You can write a note to investor group and we'll send you that data.
Our next question is from the line of Alankar Garude from Macquarie.
Arun, you mentioned that our partners in the U.S. are not going to supply those products from third quarter onwards. So just wanted to understand, is there any possibility of them pushing their inventory in the first half? And could possibly that number be included in that $35 million sales, which you mentioned in the first quarter?
It may be possible. It will really not bother me as long as it gets rid of the inventory. The quicker it gets rid of the inventory, it's good for us. So I mean, I would not want to comment around this because if you look at it when we were supplying to them directly, we were -- we had 2 quarters of sales of over $35 million. So I don't think it's very different from what they normally sell, but you may -- I mean, we have motivated them to exit their stocks quicker could be -- but the adjustment may be $1 million or $2 million.
And this is for all partners, right? So we will be doing primary sales based on our own for all the products?
For 2 of the products, where the total sales is $40 million.
Ladies and gentlemen, we will take the last 2 questions now. Next question is from the line of Tushar Manudhane from Motilal Oswal Securities.
Just with respect to the business, which is the partner business, which is [indiscernible] now what is the market size of those products?
Market size?
Yes. Currently [indiscernible].
So one is Omega. We already told you, the product is approximately $120 million in sales total market and IMS and ibuprofen is approximately $400-odd million.
Understood. So just -- so the [indiscernible] that we are kind of even if we...
IMS.
Yes. [indiscernible] we are like factoring in what's possible for every setting at a similar price as what the current price is?
We're not going to get...
[indiscernible]
We're not going to get into specifics. We -- currently, our partners have approximately 20-odd percent of the market in terms of units.
Next question is from the line of Prakash Agarwal from Axis Capital.
Just wanted to check on this approval that you've got for [ artishimade ] suppository during the quarter. What is the market opportunity here for us? And are we still maintaining about 15 million or less for antimalarial business? Will not that help us in moving this $15 million run rate?
So basically, the [indiscernible] suppository is a novel drug. It is developed in partnership with a global grant, which was shared between [ supplier ] with and developed a normal suppository, which is for pediatric use for children suffering from severe malaria. This is -- like any drug in Africa, is a function of creating awareness and marketing around it, which is what we do. We think it's an important for us in the near term. I don't see anything much happening this year, but it will probably add $1 million $2 million of sales on an annualized basis each year. Eventually, this will become an important product because currently, there is no drug approved for severe malaria in -- for pediatric use.
Okay. And that's why your $15 million doesn't change much, is it?
Yes.
But with IPCA coming, won't the volume and pricing be pretty much more impacted?
IPCA does not have this product and...
No, no. What I mean, generally, what I'm saying for the anti-malaria business. Like $15 million last year and this year.
So Prakash, when we gave the $15 million guidance, it assumes correctly what is in the covered in the market.
And so my question was actually we did $15 million last year, and you give a similar guidance for this year. That's what I'm asking.
Yes. That is because, like I said, the donor's quantum has reduced, but our market unit share has slightly increased.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Kumar for closing comments. Over to you, sir.
Thank you, ladies and gentlemen, for joining us today at our earnings call. Thank you for your support, as always. Like Abhishek mentioned, if you have any questions, please go ahead and contact me or one of our colleagues. And we look forward to continuously talking with you in the near term. Thank you, and good day.
Thank you very much, members of management. Ladies and gentlemen, on behalf of Strides Pharma Science Limited, that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.