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Strides Pharma Science Ltd
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Ladies and gentlemen, good day, and welcome to Strides Pharma Science Limited Q2 FY '19 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, sir.
A very good afternoon to all of you, and thank you for joining us today for the Strides Pharma Science's Earnings Conference Call for the second quarter and half year ended financial year 2019. Today, we have with us Arun, group CEO and Managing Director; and Badree, Executive Director, Finance, to share the highlights of the business and financials for the quarter. I hope you have gone through our results release and the quarterly investor presentation, which have been uploaded on our website as well on the stock exchange site.The 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 include forward-looking in nature and must be viewed in relation to risks pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to the Investor Relations team. I now hand over the call to Arun.
Good afternoon, everybody, and thank you for joining us a little early today, considering it's a trading time, much appreciate your time today.To start off, I am very pleased with what we have reported this quarter more from the strategic outcomes and less from the financials. But I am happy to announce that we strongly believe that most of our businesses have since course-corrected and starting delivering on our stated intent of becoming a diversified and profitable player. It's been a good quarter from the regulated market perspective. We've achieved a key milestone this quarter in terms of our U.S. business, where we had a quarter breakeven at $32 million. So slightly ahead of what we had hoped to achieve.Adding to the products that are marketed by our partners, which we are in the process taking back, this adds another $4 million to $5 million of revenue. So it's a good outcome from a U.S. perspective. We continue to have good approval momentum and filing momentum, and we believe that we are on a cusp of creating an important site in the U.S. market, and we'll continue give you updates quarter-on-quarter, how we progress. If I look at the business overall, a growth -- we had a Q-on-Q growth of 10.2%. Coming back from a very poor Q4, this has been quite a strong pullback. We still have got lots of work to do and -- both on our top line growth and our EBITDA. And I am sure that in the next couple of quarters, you'll see that panning out.We have had a good regulated market outcome of 13% Y-on-Y, 14% growth Q-on-Q, and regulated markets now contribute about 78% of our business. Australia, especially, has been very, very good for us. There are no product shortages. Most of these product shortages are being sorted out by supply chain management out of Strides as we brought -- bring more and more products into the Strides' manufacturing system. Our other regulated market continues to be our fastest growing business, and we'll only see more improvements as we speak and go forward.What is also important is that we now have, in the last 12 months, we have an NTN track record of around 18 filings and equal number of goal dates that have been set for us by the FDA. That now gives us the linearity both in our filing momentum and also in our portfolio maximization. Interestingly and pleasingly, I must say, that we didn't have any price pressure on any product lines in the last quarter in the U.S. And that's a good trend as we believe that for the products that have left the competition, especially and for products that are also commodity, but there are fewer players, a lot of incumbents have exited the market, which has resulted in improved market share.U.S., particularly, it has seen market share increases for several of our key products. FY '19 Q3 will have -- Q3 and Q4 will have important product launches. And in the U.S., we have taken back the -- we have launched the ibuprofen Rx products, which is a fairly large partnered product in the middle of Q2 as we speak -- Q3, sorry, and we think it's such an important product. And there are several nice small niches that we expect to launch in. Potassium Chloride modified release is an important product, and we have got [ all be ] an important market share in this product.You'll see how -- we hope to launch the product in the next couple of days, and we will continue to build on market share on this product.Australia, we have had another solid quarter. Our market -- our business grew from $46 million to $48 million. We are growing slightly ahead of our guided growth targets. Profits have been steady at a little over 20%, we see further improvements as we go forward. Other reg markets is growing well. It's grown 52% Y-on-Y and 15% Q-on-Q. We believe we'll be able to continue this momentum for some more quarters. We have strong H2 order book in our other reg markets, and we are continuing to maximize our products across different margins -- sorry, different markets.The problem child continues to be the Institutional business. It had a very muted quarter. In fact, it had a Q-on-Q and -- Q-on-Q degrowth and also Y-on-Y degrowth. This is, of course, getting less and less important for us as we build out. Our U.S. market capacities are being realigned -- reassigned to these markets. But we still believe it's an important business to stay invested. We will stay invested with a more guarded approach in terms of margins and focusing on fewer molecules as we get into the new regimen of products, which we are either in development or in approval stage.I'm also pleased to report that Africa has since been cost corrected. We've started small primary sales into the African territories. Nothing as much as what we would normally do, so there's been a pullback of the business. Margin improvements will start falling through the -- flowing through the system once we increase our business by another $3 million to $4 million, which we hope to achieve before the end of this year.Overall, a good business outcome from strategic outcomes. From the financials we've had an EBITDA of a little over INR 100 crores, just a tad over INR 100 crores, improved numbers over the last quarter, and we believe that we will have a very solid Q3 in the U.S., especially with all the other markets continuing to grow and then we hope that we would have a very differentiated outcome going forward. We continue to invest in R&D. We had a quarter where we had significant filings, so therefore our R&D costs are slightly ahead of what we normally spend. But we believe that especially that the quality of the filings that approval time -- approvals coming through within -- normally within the first cycle in most cases. Our 2 product designation of CGT, which we believe we will be the only Indian company having that designation, are important opportunities for the next financial year and we're excited about what we are building and have cost corrected in the recent past.In April, for -- sorry, in May, I discussed with investors about the consumer health business. We lost a lot of money investing in that. We have now found a marquee private equity investor to put in -- invest $20 million in our PAT business, so it can live on its own legs and can be funded from this capital, but it will -- it is an important business, but at this time when Strides is preoccupied in rebuilding its generics business and its branded business in Africa, it is best run as a separate entity where we still hold a controlling interest and, therefore, we decided to go ahead and do this investment with [ ATP ], which is a niche investor in the healthcare space, and we're delighted to have them as our partners.So with this, I'm more than happy to take questions. I have my colleague, Badree, who will address questions about finance and other expenses, but if there's anything with strategy, I will take those questions. Thank you.
[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.
So just trying to understand U.S. better in terms of run rate. You mentioned that it is breakeven now. So -- and you called out few important products, which would be launched now with their own front end, so how do we see this momentum building up by the Q4?
Prakash, I can't give you a specific guidance, but if you look at the U.S. business, we have moved it from $21 million to now $32 million in the last 6 months. And I think it is quite reasonable to assume that we can add the $6 million or $7 million of [ profit ] for the next at least 2 quarters and we'll see how it goes from there.
Okay. So in effect, when you say it's breakeven in U.S. at about 13% margin, so once that run rate comes, it flows through, and we do see a good margin expansion in the business? This is my understanding.
Correct.
Okay. And secondly, tender business. So last time, I think, there was a mention that the tender business for the new contract has begun for us. So is that -- is there any change there? Or since you mentioned that pricing volume both have come down, that's why this momentum is likely to be such. But the tender business is still on for the anti-malaria global tender business I'm referring to.
There's no change to those numbers. But those numbers are not big, it's only $15 million if you recall, which we mentioned is the tender that we won. So we still have that and we are on track to do that, but the larger issues on the anti-retrovirus where it is very price sensitive for the APIs.
That's a bigger pie, basically, which is getting hit. Okay. And the global, you said, is $15 million?
Yes. Yes, anti-malaria.
Okay, and one more, if I may, on the other expenses. So there seems to be a good jump on a sequential basis. So what does -- is it related to Africa, Australia? If you could highlight, that would be great.
The other expenses are mainly because of an increased R&D spend of around INR 4 crores in the last quarter. And then we have a -- we have 2 things, one is we have an important Q3 and Q4, as you could see from the portfolio that we have mentioned in our slide for Lantus in the U.S. And we -- which means that we typically produced against a plan and you ship outputs prior to an approval. So it's quite common in the industry that you build an inventory in anticipation of the launch otherwise you don't get market share. So we have incurred significant costs in adding more stocks into our U.S. business because as we build our business by $5 million to $6 million every month, and we are also taking that -- the products from our partner. We have the supply into the -- I mean we have to schedule more product into the supply chain. That's resulted in a significant negative result and consequently to that, higher manufacturing costs were incurred to get to that $5 million so that we could have a significant different Q3 and Q4. We also had several shortages in the U.K. market, and we had to airfreight lots of goods to kind of cash out on the U.K. business and that is why our direct business has ramped up and that has also incurred some one-off costs. So all of this together adds bulk of increased change in the Q-on-Q on the other expenses.
Okay. And the debt and the working capital also you mentioned is largely due to the build-out for the U.S. launches? It seems to be pretty large, sir.
It's only the restatement of the currency and the increased working capital on the inventory buildup.
[Operator Instructions] The next question is from the line of Nitin Agarwal from IDFC Securities.
Can you help us understand a little bit more on those 2? So you do like filings -- filings for these 2. How should we look at those filings and what kind of opportunity could be there?
So the 2 CGT designated products have -- the CGT actually works when the -- it has to be one of products that have been listed by the FDA where there is no competition or no generic or limited competition or supply chain disruptions existing. And the system works is that you get a priority review on this files. Typically, you should get the approval in the first 10-month cycle. Our current action -- target actions dates for both these products will be in H1 of next year. And you are assigned more experienced and senior reviewers. As a consequence, you have reviews move very fast, you get very little time to review -- to respond to your deficiencies. And if you get a CGT designation, which we have, and you get the product approved on time, then you get a 180-day exclusivity provided you have launched the product within 75 days of approval of the product. We have 2 products, one of them is in the $400 million -- high $400 million range and another one is a smaller product. And together, they are about $550 million of opportunity. We feel very confident that we will be first off the block on both these products. So we'll keep you posted as we hear more. But at this time, we obviously can't, for various reasons, give you specifics on the products.
And secondly, on the U.S., now with -- that you've been talking about ramping up, and so -- and also in terms of the new ANDA filings, but in the market given the competitive situation which is there on especially the oral side, I mean, where have -- I mean do you still see opportunity in the oral space, the general perception is that there's not much money to be made in the oral sort of space in the U.S. market anymore.
Well, yes. So considering that we are newer player, we do not have a cost base of operations of some of the more established players. Secondly, even in the order product, considering that we're coming up with the newer file, we believe the robustness of the product determines a lot in terms of how much a competitor is willing to offer the product in the marketplace. We believe that we have very solid, robust products and good supply chain integration to ensure that we have no out-of-stocks in the market. We've gotten to be a -- considered to be one of the few companies in the U.S. which do not have out-of-stocks. And we are taking more and more market share simply by supply chain efficiency. So I just don't think that you should cover us with the general theme that there is no opportunity. We have continued focus on either new technologies and APIs that are being used to make APIs cheaper or developing a doser differently with a different cost point allows us to grab market share and yet maintain our margin. If you look at our gross margins, they are no different from players who are not necessarily in the oral dosage forms. I don't think you should ignore the fact that the over -- the significant amount of age and withdraws by the big 5 players have also resulted in a capacity squeeze available on the big products and therefore, there's a lag between the time when the product was withdrawn and then the product actually going off the market. And those are these times that it takes typically a year for a company to withdraw a product and yet withdraw the -- for you to still find the product on the shelf. So we believe that these are good times in a reset U.S. market. We have seen, if you look at the drug shortage list, you'll be surprised with that are products that are now appearing in the drug shortage list and for the first time, you will see oral dosage forms coming up like products like buspirone or mycophenolate mofetil coming back in the drug shortage list. So these are new situations which you should watch carefully and then you will probably appreciate why we strongly believe that niche product selection and robust supply chain continues to be a good combination to take significant market shares in the U.S.
If I can squeeze in one more. With the increasing proportion of the U.S. business, there should be incremental stress on the working capital cycle for us. Given that construct, I mean, how should we view our net debt situation over the next year or so?
Well, I think on the debt, what you need to understand, Nitin, is that we have INR 900 crores of long-term debt where we have no repayments still for another 2 years, okay? And we have INR 900 crores of working capital, which is backed up solidly by inventory or receivables and all of that stuff. Then take that, especially since we are increasing our business in our front end, to answer your specific question, yes, we will need more working capital, but we think that we have already started using -- a large portion of that must be working capital because you have to invest in advance of the sales for that working capital. So I think to -- we don't probably have to increase too much from here, probably $25 million, $30 million more to get to a very important size, and from there on, the business is kind of -- will manage to use its profits to generate -- profits generated to support the working capital.
[Operator Instructions] The next question is from the line of [ Virpal Shah ] from [ Virpal Way ].
So I had a couple of questions. One on the balance sheet where we've seen sizable jump on the capital work in progress. So is this amount significantly related to our Singapore facility or is there something I'm missing?
I'll hand to Badree to answer that.
It was related to the Singapore facility as the facility is coming up at least, just a few days -- coming up in a few days, so the last -- as you know, the last 2 years have been very capital intensive for us where we have spent about $100 million. In the last 6 months also, we have continued our investments in Singapore and that's what you see in that line.
And how much furthermore commitments do we have? And when do you think this facility will start generating revenues for us?
Next financial year. From Q1.
Another thing, is I just want to check on the receivables now from Solara. When do you think this will be settled?
By March. By next year, before the next year.
It is in 2 payments, 1 coming this year and 1 in...
Yes, next year.
And last, if I may squeeze in. Just going through your notes on the exceptional items where these unwinding or of a discount on the put options which we've written on some uncontrolling interest in subsidiaries, which -- so I think we had a liability on our balance sheet last year of around INR 38 crores I think we've added another INR 4.75 crores in the first half. Where do you think -- I mean, how do you think this will move out -- pan out in the next 6 months?
This will continue for the next 2 years because these are all the put option obligations which we've taken on certain acquisitions we did in Australia. This will go on through 2019. And then they will unwind it.
So will we have a net obligation to pay or you think these are accounting entries, which will reverse?
Contractually in 2020. So that's the reason we are recording this as an obligation to cover the -- we are recording the obligations with the interest element of the obligations in this time.
The next question is from the line of Chirag Dagli of HDFC Asset Management.
The presentation mentioned about 17 product supplies have started for Australia from India. What is the value of sales that these 17 have -- of the total of 200 or more than 200 products?
About AUD 15 million.
About AUD 15 million? Is that more to go -- you know what is -- if you can just sort of give us a sense of what is the potential opportunity or what you can do out of India?
Annualized basis, next year, we think we can take this up to AUD 40 million.
40, sir?
Yes.
In U.S. dollars?
Because the AUD 3 million is absolute even if you analyze the AUD 15 million, it'll be about AUD 20 million, AUD 25 million and then there'll be more products coming through, so it will be about AUD 40 million.
U.S. dollars?
Australian.
Australian. Okay. And on the merger, once the merger is consummated, will you consolidate this? Or will this become like a joint venture where only profit will come in there?
Well, if you recall the transaction, say it's at under whatever circumstances, the deal, the final numbers. We would have a controlling interest in the transaction. So we will consolidate.
And post-merger, sir, is there opportunity to bring more products out of the joint entities to India? Is there something that you are preparing for?
We are preparing for that.
And can this potentially -- so I mean, what I'm trying to think about, sir, is that post the merger, can the Australia business for Stride as a whole be higher than the current 20% EBITDA margins that we are making?
Not in the near term. But yes, eventually.
Okay. And so last question was on the gross margins. On a quarterly basis, they are very volatile. If you can just spend some time on what are the moving parts. And then is -- are margins dramatically different between the Australia business, U.S. business and the other pieces?
So what the volatility mainly comes from -- I think our regulated markets is in the mid-50s and they are quite stable. And the problem really is when the emerging markets in the Africa business, if they underperform, then it drags down the overall gross margin. But the right markets generally perform well and the more and more business we do, the right markets we see more stability around the gross margin. In terms of your specific question, obviously, the U.S. business is -- has got the highest gross margin followed by Australia and followed by other regulated markets.
Next question is from the line of Shashank Krishnakumar from JM Financial.
This is Anmol. My first question is on the U.S. market cost structure. So we have been around 12% R&D here and also achieved an EBITDA breakeven. Do you have any specific R&D run rate in mind for the full year? I'm just trying to understand that the incremental sales net of because will that fall to EBITDA or how does it work?
It is a reflection of kind of our peak quarter run rate. We had a lot of filings and when you do filings, your fee -- your R&D cost goes up because that's a very significant part of the program. So as we increase our filings and we see constant increase of rates by the FDA, there is this factor which keeps moving quarter on quarter. But I think it will be safe to say that INR 135 crores to INR 140 crores would be the annualized R&D run rate. Bulk of it is for the U.S., as you know, because for the unreg markets, we just use the same U.S. filings to just do some marginal work and [ be ready ] for Australia, Canada and the other markets.
Okay, that's helpful. My second question is in Australia. Australia, we obviously resolved certain product shortages and see healthy 12% growth, but how much of this would be attributable to these product shortages getting resolved and therefore, not be repeatable?
So product shortages are there in the Australian market. So we see are benefiting by not having shortages ourselves, but also we are able to get increased market share. So it's not a one-off. What you need to understand is that the market shortages were not consequences of Strides not delivering. Because these IPs were managed and delivered by some other third-party players, and we have now taken the product in-house where we have better control on the supply chain, the costs and the margins. So we are meaning more about that.
So the 12% number is cushion and it kind of stays, give or take, this is no variations. Is that a fair way to look at it?
The variations that you'll see an uptick in -- through the call -- otherwise, yes, we feel right in front of 10% growth, but we are slightly ahead of that.
Yes. And my last question is on the Institutional business. You make a comment in the future perspective of your presentation that you continue to stay invested. I'm just trying to understand, from a fixed cost perspective, how much is the quantum of that, which continues to be a drag on the business? Second, from a turnaround timeline where you can introduce a lot the recombinant next gen ARV, how far are we from an eventual turnaround in this business? I know you're not giving guidance, which in terms of an assessment of how long the turnaround on this takes.
Yes. So there are 2 things. One is that when you -- our model has always been to build out capacity ahead of the demand. And that's always resulted in a certain under-recovery in our model. And it also helps us with our compliance strategy that the more you run plants over time and late shifts, it lags companies and products in recovery. So we've been, as a policy, always investing ahead of time. And this sounds like, for example, Singapore or in India, always have an under-recovery of $15 million to $20 million a year. And that this -- is our stated policy of the company that we better off having to under-recovery rather than having to produce under stress. This under-recovery -- the Institutional business plays a big role in reducing this under-recovery. So if you don't do Institutional business, then that $20 million gets impacted in all our other businesses. So that is why we continue to keep the Institutional business, more from that perspective. But as we build volumes in the U.S. and in Australia, which is what we are doing, we will moderate the Institutional business and only focus on products, which are profitable. In the early -- in the first regimen that is currently there, we have -- answering the next question, we have now successfully completed chemical studies around the key products and the new regimen. These do not require the same volumes as the older regimens required. And we believe that because we are integrated with a lot of API, we believe we have some advantages with regards to our most preferred status and all of that. So this is the situation that we watch carefully, and we operate the business, depending upon how we increase the capacity results, and so it's more practical than strategic for us.
[Operator Instructions] The next question is from the line of Nitin Agarwal from IDFC Securities.
On the Australian business, have there been -- since the time we had a session a few months back, has there been any more changes in the Australian business environment? And which sort of be place for the better -- which improves our competitiveness in the market once we merge – our proposed merger with Apotex business going to be through. Or rather given where we are, I mean how do we see this Australian business now shaping up over the next 2 to 3 years in terms of priorities -- strategic priorities?
Well, like we mentioned in the Australia day when we met in Melbourne. We say that this market can only grow so much. It will be -- with the merger, we will have gone to a very significant size and other than synergies, growth from there on is going to be very difficult because the combination has almost every single product in the market. And only for products going off patent, which are not so many in Australia, we will have incremental opportunity as a dominating player in that market, but what is important is it's a profitable business from where we stand now, but there's much work to be done on the Apotex range of products considering that they have some supply chain issues and compliance issues and other matters. So to get all those products in and get all the synergies may take us some time, but I think that once this is done, it may be very hard to grow the business at the 10% growth that we are currently used to. So if we are stand alone to get to a #1 position, it looks like more like a 2- to 3-year play for us. But on the combination, it's all about synergies and less about growth from that combined $500 million size.
And what is the peak profitability you can do on the $500 million size in that business over a period of time?
Ideally, we should get to the 20% that we have, or slightly more than the 20% that we enjoy today as Arrow. But this is a function of timing because we are yet to get into more details on how many products Apotex has given their IPs to third party manufacturers on longer-term manufacturing agreements and all that. That's the work that we're doing now. To see what time it takes for us to actually also get the Apotex business to same margin points. So yes, it's little more time so that's why we've guided that by guided that by 15th December we will give you a final update on this transactions and where we are.
And lastly, you mentioned in the past that you can use Australian IP for growing your other regulated market business. And how should we -- if you can probably help us understand the opportunity of the order-driven market part of the business. It's be -- it's grown well over the last few quarters, I mean where does the business really end up over the next few years?
Certainly, last year, we had a run rate of around $40 million. I strongly believe that this year we should be very close to doubling that, Nitin. And I don't see any reason why we would not be able to have a CAGR of at least 25% for the next 2 years. So this is going to be our most important market growth and you will be actually surprised that the supply shortages are now becoming big challenges even in markets like Germany and U.K. And everywhere that orders price drops and other things, many people are interested in the market. And if you look at the U.K. you should see several products, on what is called the NDSO, whatever it's called which is supply list -- shortage list. So we're very excited about the other reg markets and we can mirror the Australian portfolio to develop these markets, including Canada, which we are progressing. And we will continue to look at opportunities to build this market, which we are already excited because we think that Australia settled, other clients, U.S. will get settled before the end of this year. And then our focus will be on building out the other reg markets.
And if we could close it with, how is the profitability in the [ Sigma ] segment? Versus when you say compare the U.S. or Europe and the Australian business for you?
Comparable to Australia.
And next question is from the line of Prakash Agarwal from Axis Capital.
Looking at the presentation, you talked about -- that you were -- or sell Tamiflu -- does Tamiflu already launch in Q3. So has the season in U.S. already begun and how has been the response of that?
Yes. We are already selling the products as of October.
Okay. But last year, was a bumper winter and I think many companies had -- it was a great product for many. So you think the start of the year has been good?
We don't want anybody in America to be sick. But the point is that yes we -- the early trends are that we've been quite successful with what we have done in the first month. It's too early to predict how this product will pan out, but it's been a good first part, yes, that's all I can say for now.
Okay. And you also mentioned in the past about Lovaza, that you are tied up and now you want to bring it on your own and a couple of quarters, which was Q1, Q2, you'll not book much sales but you intend to come back by Q3, Q4. So what's the status there, sir?
So our partner Par now sells almost double the quantity that they were selling in Q1. So if you look at Symphony, they are now at almost 80,000, 90,000 vacs. And it dipped a lot to under 30,000 vacs in Q1 and Q2. So our inventory will get exhausted. We will -- we were thinking we may have some inventory risk, but this is no more the case. Our inventory will exhaust in -- by March and we will make a decision -- because it's doing quite well under the Par label, we will take a decision on are we bringing -- we have -- we are working, sign up -- signed up a deal to bring it back, but there's conversation should we keep it on or should we bring it back. I'll let you know in the next quarter results. But either way, it's now becoming -- coming back to be an important product.
Understood. And lastly, just to understand the P&L better, maybe Badree can answer this like we are reaching almost around INR 100 crores for the EBITDA. However, we have increasing trend in terms of depreciation and interest expense and at the same time, lower other income. So at PBT level, we are seeing smaller number and maybe negative at times. So going forward, the only ways to expand the EBITDA and that we are looking -- but other income has also come down, sir. So here the debt has increased, I agree, but what is -- what were the 2, 3 big elements on other income that has led to a lower other income?
This is mainly to be -- to put it in mutual funds, growth-oriented funds.So actually the income doesn't go into the P&L. And it will be entered at the time of redemption. And the second thing is the -- that is important is the interest and depreciation is very consistent in the last 4 quarters because it has been in the range between 40 and 42 and the depreciation has been between 44 to 46. So the operating leverage will definitely come into the P&L in the coming quarters.
Okay. And there was some rental income in other income also?
Yes. It's a very small amount. It's not a big amount. It's a normal very, very immaterial amount.
Okay, understood. And lastly, on the Mylan, the -- you know, we have some off balance sheet liabilities on the Mylan, the dealer deal that we have done. What is the status there? We were supposed to get some cash.
We will have a final -- so there was one third-party arbitration that is going on. We will have the final answer of that during this quarter. So for the next quarter update or prior to that, we will let you know.
That was about $40 million, if I'm not wrong?
That's right.
Yes.
Your next question is from the line of Chirag Dagli from HDFC Asset Management.
So just on these 2 CGT products, I mean $400 million and $150 million, these are fairly large numbers. Why is it that there were no generics? What is it that Strides is doing to make sure that, a, you get approval on time? And what is the sustainable post the 180-day exclusivity? What is the sustainable tail of profitability on these products?
We don't know for that. One is that, your question, why, it's because we tend to focus on products which are hard to make. To be fair to the CGT process, we already had this product in portfolio. We did some early work, our first clinicals didn't pass then we re-did the clinicals -- it's a very difficult clinical program. It's a very special clinical program and that had to be done several times, and we got the last clinical past meeting standards. And the agency also came up with some kind of guidance, which means that several companies will take at least 2 to 3 years to be in the marketplace, unless they are ahead of us, which we don't know. It's a hard clinical program, which we successfully completed and that is why our file was accepted. So we have been at this product for the last 3 years, and we were lucky that it was nominated in the CGT -- we've got a CGT nomination classification. And we believe that it is a complex product that's modified release, it's privatization technology, so there's a lot of things happening here. So we think that all of these combinations make it hard for several players to be in place. And we believe that, a, we will be successful with the approval. And we will also have a residual tail on this product, which will be quite substantial. So let's see how it goes. It's too early to pass judgment on the product. We are halfway through the review program, so let's see how it goes. So far, it's going well.
This comment on sustainability is also varied for the second product, sir. The $150 million?
That's not very easy to assess that. I think it's more to do with price increases companies have taken -- a company has taken on that one product, they are the sole players. I think that may not be as sustainable as the $400-plus million product.
Next question is from the line of Kunal Randeria from Antique Stockbroking.
My first question on the [ institution ] business. So in the last call, you had mentioned that you are renegotiating some ARV contract to focus on improving business margins. And in the presentation I see today, you had said that you just have a more of a guarded approach. So should we read something that it's difficult to pass on the cost to your customers? Or deliberately going slow on this part of your business?
It's a combination. So one is that it's not that we are not trying to improve our pricing. But you see, the thing is that donors expect you to respect contracts for 2 to 3 years because when the prices come down for any reason, they don't come and renegotiate pricing with you, so they expect you to do the same. So -- but you have a choice to accept the range of volumes. So our guarded approach is to take the lower end of the range of the volume so that we don't lose too much money or we just about breakeven with what we are trying to do.
Right. Right. And then a second question on the U.S. business. Maybe it's a repeat one. But your execution has been fairly good in your existing products, plus you have 2 CGT products, and you are keeping on maintaining a filing tempo. So I'm just wondering, where do you see pockets of opportunity for a company of our size and capability?
One, if you look most of our products, there is some element of scarcity. I'm not using the word niche. Everybody uses of that these days. Scarcity is either in an API or a manufacturing. So bulk of our products that are doing very well are soft gel if you will notice. There are not many players in that space. So the niche is to identify a commodity even and say that this commodity is with a particular API supplier and it has poor chemistries, it was developed 15 years ago, 20 years ago and you can find a new API vendor who has got a transformational chemistry or continuous manufacturing or a catalyst that they use where they're able to get -- they are interested in our volumes that we can bring on the table and yet deliver a very solid price point. So these combinations add incremental value for us and after certain point, gross margin is equal to EBITDA, right, in this business after your distribution cost. So I think a combination of product selection continues to be our big winner here. And then to always -- never going after the larger market share on any product. By default, we end up getting the larger market share, when we see the bigger market share incumbent falling with supply -- shortages of supply. And that's when we take larger market shares. So a good example these days is buspirone which is like, there were some 15 players in the market. It is in the shortage list in the U.S. And we may be the only company who does inventories but yet, we will not go and take 75% of the market, which is available to us because we know it's temporary. So we rather keep solid relationships with our customers and that allows us to get more and more products because, you know, although we do $32 million, we are still a small player in the overall scheme of things. So we need to engage with our buyers with superior service, customer advocacy and service, which is what we are focused on.
Sure. But I was wondering, since the execution has been good, so far and you've identified a lot of good products, but what about -- I mean you're filing 20 products a year, right? So do you see enough ammunition for the next 2 years with our capabilities?
Yes. I think the model kind of plateaus at a certain level and that's what we want. We don't want to be the biggest player in the U.S. So we are not aspiring to do anything like a 400 filing momentum and all of that. We believe that at some point in time next year, we would have generating significant free cash in our U.S. operations to fund more programs around the U.S. business, which will be more complicated products and various technology there. And we are working on that in early stages, but sometime this year -- this time next year, we would be in a stronger position to say that we have some very solid products that we are either in-license or partnered, where we do not have the capabilities, but we have the ability to go to market with those products.
Ladies and gentlemen, we'll take the last question from the line of Srihari from PCS Securities.
Firstly, can you all please tell on the competitive scenario for Zenica for which you have a tentative approval? And secondly, as the proposed ARV mentioned new generation combination. So can you please throw some more light on that?
So the Zenica asset is currently at the tentative approval and there are several litigations that are happening around it. At this time, we believe that a launch could happen anytime or as late as 2021. So we are keeping watch. We are not in the forefront of the litigation process because we are not willing to launch the product at risk. So it's too early to call, if the opportunity arises for a tender company to launch, we'll be in the first wave of market formation. On the ARV, it's not that new generation. ARV is not unique to Strides. Several of our competitors are ahead of us in terms of filings and approvals. So mainly these are the newer molecules that are used in ARV. We are a little late in the development, but we think that by the time the market forms and the tendering market and donor markets, we'll be in time with other large players with a much stronger proposition, fully integrated and a good cost point on all of these ARVs. So they are just new APIs that are used in the cocktail therapy.
So is it relatively the DTF?
Yes, that's right. TAF and DTG and all that.
Sorry TAF and? Sorry?
DTG, yes, the dolutegravir.
Ladies and gentlemen, that was the last question. I'll now hand the conference over to the management for closing comments.
Thank you, everybody. Thank you for joining us today, and please feel free to write to us if you have any questions. Thank you. Bye-bye.
Thank you very much, Sir. Ladies and gentlemen, on behalf of Strides Pharma, that concludes this conference. Thank you for joining us, and you may now disconnect your line.