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Strides Pharma Science Ltd
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Ladies and gentlemen, good day, and welcome to StridesShasun's 3Q FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Alankar Garude. Thank you, and over to you, sir.
Good day, and a warm welcome to all participants. On behalf of Macquarie, I would like to welcome you all to the Q3 FY '18 Earnings Conference Call of Strides Shasun. From the management, we have with us Mr. Shashank Sinha, Managing Director; and Mr. Badree, Executive Director. Thanks to the management for giving us this opportunity. Over to you, sir, for the opening remarks.
Thank you, Alankar. Good afternoon, and welcome to all of you. Thank you for joining on a busy day of earnings today. I'd like to welcome you to our third quarter earnings call. I'm joined by Badree, as mentioned before, and other team members.Before we get into the financials, I'd like to spend a couple of minutes underlining the fact that we've been pursuing our strategy with discipline in the previous quarters. There are 3 pillars to our strategy: First, our focus on regulated markets; secondly, our effort to build a repeatable business model; and third, to drive operating leverage. And in this quarter, I am pleased that we are able to see some early benefits of this strategy coming through, and I'll talk a little bit more about it as we go on. In quarter 3, we are reporting adjusted numbers of the continuing business. And the rationale for doing that is to give visibility of our repeatable model on a like-for-like basis. The reported Q3 EBITDA is for the continuing business, which is -- which means it is net of the API -- the demerging API business, and net of the divested India Brands business, number one. This EBITDA is also adjusted for the temporary upfront advertising investment that we have been making in our consumer health care business last quarter and this quarter, and I'll give you some explanation of how this is going to trend as we taper it down in the future.Because this is for a temporary period, we are adjusting our EBITDA for the advertising investment. And on that basis, the Q3 EBITDA we are reporting was INR 144 crores. The like-for-like comparison to last quarter is INR 121 crores, and the same number in quarter 1 was INR 79 crores. So INR 79 crores in quarter 1, INR 121 crores last quarter and INR 144 crores this quarter. The impact of advertising investment that we have adjusted here, which is behind our consumer health care business, was negative INR 12 crores in this quarter, which is down from negative INR 16 crores last quarter. This will taper down, as I just mentioned, to around INR 5 crores to INR 6 crores next quarter and will become negligible from the first quarter of FY '19.Our sequential earnings growth is mainly driven by the performance and the ramp-up in our regulated markets business. The regulated markets business now comprises nearly 80% of our portfolio of our total business. This when you compare it to last year was about 60%. So the weighting of our regulated markets business has gone from 60%, 62-odd percent to close to about 80% of our business. This -- the regulated markets business was INR 585 crores this quarter. This is up from INR 500 crores last quarter and was INR 415 crores in quarter 1. And again, you will see these quarter-on-quarter numbers in the press release that we have put out.Our U.S. portfolio now is about 1.5x last year's size. And this is driven by both a stable base business and good new product growth. The base U.S. portfolio is built mainly around some strong market share positions that our products continue to enjoy, and therefore is relatively well protected against price erosion. Again, we have a niche portfolio, so the price erosion that is being talked about in the industry is perhaps less relevant for our portfolio. Even so, to give you an example, for our Ranitidine business, our market share this quarter was 33%, which is up 6 percentage points compared to what we reported last quarter, which was 27%. And for a product like this, we don't see any price erosion.Similarly, our vitamin D product, ergocalciferol, where we are the market leader with 42% market share, we continue to maintain our market share. And again, we don't see much evidence of price erosion. So therefore, our base portfolio is well protected against significant price erosion. We launched 2 big products as we mentioned in the last quarter: Potassium Citrate extended-release tablets, and we also launched Omega-3. And as you would recollect, last quarter it was launched towards the end of last quarter. These 2 products are contending with some aggressive pricing action from incumbent players, which in some ways is natural as they defend their market share position with our entry. So they are contending with that, but the products are being distributed with key customers and are tracking well. They are in line to achieve their market share objective, which we have stated earlier of more than 20%. And as this progresses, we will continue to report back in the future.I want to talk a little bit about our R&D program, which is mainly targeted to the regulated markets, mainly to the U.S. market. We continue to invest in our R&D program. The investment in R&D program this quarter was INR 42 crores. This is up INR 4 crores from last quarter where it was INR 38 crores. 12 new products have already been filed this year. We have stated our objective of filing 15 to 20 new products during the fiscal, and we are on track to achieve that, to deliver that. Cumulatively so far, we have 574 ANDA applications, of which 44 have been approved. And of the 44, we have received 12 approvals so far this fiscal. We, obviously, would like to launch most of our new product approvals into the market as quickly as possible, and we are doing that in majority of cases. But we are also being disciplined about ensuring that the timing of launch of these products is based on the market and the pricing and the margin scenarios.And while speed -- time-to-market is important, we also believe timing-to-market is important to ensure that we have a profitable portfolio, certainly in an environment where there is a lot of takeout in the U.S. generics market with legacy players rationalizing their portfolio. So sometimes in a few cases, we have experienced that it is perhaps better to wait for the right opportunities than to launch our products immediately, and we're taking those decisions product by product.So that's about our U.S. business. I want to turn to our Australian business. We have, obviously, a leadership position in Australia. It's a good strong business and it continues to track well. I'm pleased that the integration of the acquired Amneal business is ahead of schedule. And therefore, the synergy benefits will flow through faster than we had anticipated in the future periods. Our distribution reach has grown to 1,200 pharmacies this quarter compared with 1,000 pharmacies last quarter. A lot of that, obviously, is the new distribution we have gained and the distribution synergy we gained from the Amneal acquisition.We have launched 23 new products this year, of which 9 were launched in quarter 3. So our new product launch momentum is also gathering speed. The backward integration program, which is really crucial in -- as we go forward, in margin expansion is accelerating. We had been awaiting approval of site transfer applications from TGA. We have now received 13 site transfer approvals. And in fact, we have commenced supply for several of them from India. This is, obviously, going to gather pace. And as that happens, we will see the benefits of reduction in cost of goods flow through to our margin. It's our objective that by the end of next fiscal, we will have backward integrated roughly half of our Australian portfolio.So let me turn now to the emerging and institutional -- Emerging Markets and the Institutional business, where you will see that we have dropped in quarter 3, which is mainly due to the timing of orders of the Institutional malarial business. I'll come to it in a minute. Compared to INR 270 crores of revenue last quarter, our Emerging & Institutional business this quarter was INR 169 crores. Roughly INR 100 crores down in revenue, and obviously, is consequent gross margin impact on the business.The tender for our Institutional business, there had been one. So last quarter, we had reported that we were awaiting the tender awards. These awards have been made. We have won our tenders, and we received our volume share of the total business. However, the procurement order from the beneficiary agency, who this funding goes to, those orders are expected in Q4 and supplies are expected to commence from Q1 of the next fiscal. So that's about the malaria business. Purely timing issue. We should recover the dropped sales that we -- that you're seeing in this quarter from Q1 FY '19.The ARV business has also been hit unexpectedly by supply chain disruption, mainly from API suppliers ex-China and that, obviously, has also kind of curtailed the total availability of API for the ARV business, which again we expect in time will come back to normal. On the other hand, the good news is that our UCL business, which is a Kenyan operation that we have, where we have been busy upgrading the quality systems, upgrading the processes. And also we had the certification of that site as a GMP site by the World Health Organization, which was reported last quarter. We have received our first site transfer approval from WHO for this site, which means that we will now be able to supply those approved product for the Institutional business, which finally go into Africa from the Kenyan site, and that should commence with the first approval now in. We expect to receive more site transfer approvals. And therefore, a part of our Institutional business portfolio will ship from our Bangalore flagship facility to the Kenyan facility, which was the rationale for this acquisition. The Africa Brands business remains steady, is tracking well. And obviously, they have been underpinned by good brand with strong market share. It's a sticky business. And therefore, that is tracking well.With that, I will conclude my opening remarks. And obviously, we'll open the line for questions. Both Badree and I will be happy to address questions that you have. Thank you.
[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.
I was just trying to understand the Q-on-Q movement of the regulated markets. I understand you have an acquisition of Amneal in Australia. So ex-acquisition, how we have grown in the regulated markets, if you could give color? And would it be fair to assume that growth in U.S. is higher versus the Australia piece?
Thank you, Prakash. The simple answer to your question is, yes. The growth in U.S. is significantly higher because, obviously, the base is smaller. And we are launching many new products, which -- as I remarked earlier. So we have significantly higher growth in U.S. The Australian portfolio base is, obviously, much bigger. And there the -- your question was related to the impact of the Amneal acquisition, right?
That's right, sir.
Badree, you have an idea for the Amneal acquisition?
It is incremental and -- but it is not very material number, Prakash.
Okay. I mean, I'm just trying to understand whether the full quarter impact of...
Yes, the impact of Amneal has been put in the regulated markets.
Okay. And so, I mean, if we look at U.S. and Australia, how would have been the growth organically Y-o-Y and Q-on-Q?
Well, the U.S. growth is upwards of 20%. And obviously, in the mix, the Australian growth is high single digits.
Okay, perfect. Second question is, trying to understand the deferment of these tenders. So one, I understand the anti-malaria has been shifted to Q1, not Q4. And the ARV should come back to Q4 or that also shifts to FY '19?
The -- so the tenders are not deferred, Prakash. The procurement orders, and that we understand is not a deferment, it's a procedural -- by the time the budgets get allocated and purchase orders are raised, this I believe is across the industry, not specific to Strides. ARV, ARV is, obviously, sensitive to margin. So we -- because of the shortage of order supply disruption of API, we continue to watch the margins. And it is not that there are no orders. We will only accept orders when the margins are at our threshold level. So again, I'm saying, the ARV disruption is mainly related to API supplies that pushes up API prices and squeezes margins. And therefore, it is more discretionary company by company. So we have certainly orders on the table that we could supply to date, but we would stay away from them if that is below our threshold margin. I hope that answers your question.
Okay. And lastly, on the gross margin and EBITDA margin, if I look Y-o-Y, so gross margin is actually flat given the fact we had good U.S. launches, should -- ideally would have improved. And actually, EBITDA margin is actually down Y-o-Y. So just trying to understand it better, would the Emerging Market, especially the tenders -- I mean, would that be above company level gross margins and EBITDA margin? I'm not able to get this.
Difference in the gross margins is mainly because of the malaria. We had an excellent quarter in last Q3, not the case in the current quarter and – but that was compensated. The gross margins are similar because what we've got in malaria is replaced by the launches in the U.S. in the current quarter.
And the decline in EBITDA, sir, Y-o-Y?
The decline in EBITDA is mainly because the -- it is, again, the same reason in the sense that we also had the malaria decline was much higher than the new product launches. So to that extent, it has contributed to the EBITDA margins also. And second thing is there was also a small decline because of [ CSC ], which was about 1.9%. So that is -- those are the 2 factors which contribute to the decline in gross margins from 20.6% to 17.5%.
The next question is from the line of Nitin Agarwal from IDFC Securities.
Shashank, on the ARV business, now -- as you mentioned, there is this -- a lot of supply disruptions and price escalations happening on the API side. Now they being reasonably sort of not vertically integrated in the segment, I mean, so what is the strategic rationale for us to continue in this business given the fact that we are reasonably clinical in terms of approaching -- in terms of business segments?
Yes. Vertical integration is not the big factor here. The situation is for the entire industry. It is not specific to Strides. We are an important supplier in the ARV portfolio. We -- and what we are talking about is our existing product portfolio. We have several new products in our pipeline where there isn't the same API situation. So as you know, these are combinations, right. Double combinations, triple combinations and new molecules which are in different combinations. ARV treatments evolve every few years. And as the next phase of products come in, we believe that still it is going to be a very interesting and a very -- incrementally a very good business to be in. So and also the disruption is temporary, because the reason for the disruption is related to some environmental issues among suppliers in China. This we have seen with other APIs as well. But they sort it out and we come back into the market. So again, it's temporary. And I think that we have a pretty good position in the ARV market. We'll continue to evolve our portfolio and improve our margin mix as we go along.
So on that note, I mean, have you filed for [ DDG ] combinations also? And where do we stand in terms of approvals?
We have filed new products. I won't go into the specifics of what combinations we've filed. But clearly, we have filed for new combinations as they evolve. And we are in close touch with the authorities as to what is the evolving treatment and continue to adapt our portfolio to that.
And secondly, on the U.S. business, you mentioned that the market share gains on the 2 big launches have been slow. Would they've contributed in any meaningful way in the current quarter, these 2 launches, in revenues as well as profitability?
So second question was, whether they have contributed meaningfully? Yes. I don't recollect saying that the market share has been slow. I said that as we have ramped up in quarter 3, we are on track to achieve -- they have received the distribution of the key customers. They are on track to achieve their market share goals. I mean, obviously, these market shares will not be achieved on the first day. And as we go along, this will get reported as well.
So I mean, just to finish that, do you see scope for further contribution from these 2 products in the coming quarters or...
Look, the portfolio will include these products. So as we report results in the coming quarters, it will include both these products as well.
The next question is from the line of Pavan Ahluwalia from Laburnum Capital.
Two sets of questions. One on the Australia business. Could you give us a sense of why the Australia market looks the way it does? So it's not clear to me why the supplier market needs to be so concentrated. Because I understand that if you have a large dispersed set of pharmacies, it makes sense for there to be a small number of wholesalers because there are scale advantages and the ability of people to make bouquets. But these wholesalers should be contracting with whoever it is around the world that can give them each a specific product [indiscernible] possible cost. So if you could help us understand why aside from the wholesaler market the supplier market is concentrated, that would be helpful. And when you did these acquisitions, whether it's Arrow or Amneal, what were you really buying? Was it – were you buying relationships with pharmacies? Were you buying brands that have customer mindset? Were you buying products that had regulatory approval? And also to the extent that you need to offshore some of the manufacturing of this really create margin expansion, create value in these acquisitions, how easier is it to do that from an Australian regulatory standpoint? The second broad question is, the rationale for the API demerger, so one reason for getting into Shasun to start with was the business case for being a fully integrated player in an era where cost pressure on generic drugs is intensifying substantially. By spinning off a large part of the Shasun business, are we basically saying, look, we don't see value in being a fully backward integrated player anymore?
Okay. I'll just try to summarize the questions, so that I'm able to answer it better. So the API question you wanted to understand was related to the rationale. We have stated that the rationale of our business is to be a B2C business. And Strides 2.0, which is the kind of the second coming of the Strides portfolio is basically concentrated on B2C business to the extent that the merger with Shasun was strategic, was to provide vertical integration, source security and cost advantages of the APIs for the products that we formulated market to customers directly. That is the rationale and that played out, is playing out, will play out in the future.
How will it play out if you're spinning it off? And how are you B2C when you're really supplying to the Wal-Marts, the Rite Aids of the world in the U.S., which are effectively businesses?
Yes. And clearly, we can spend more time with you on one-on-one to take you through some of the strategic aspects since the focus of this call is on the quarterly earnings. But to answer your question on how is it B2C? Business to customer is what B2C in the pharmaceutical business is, right. So we don't sell to consumers directly because the supply chain in regulated market doesn't allow you to sell to consumers directly. Unless, of course, Amazon comes in and consumers are buying online, but that is much into the future. However, rather than the theoretical discussion, I would say the vertical integration, you said how will it be vertically integrated if you're selling -- if you're demerging the business. Again, we have stated in the past that we are keeping the strategic API business with us and demerging the commodity API business. The commentary talks about demerging of the commodity API business. This is what we sell to the rest of the market. The strategic APIs, we don't sell to the rest of the market. It is only for captive use and we are keeping that. So that is the differentiation that I'd like to draw there. On the Australian market, your general question is quite broad, and it requires us to spend some time for us to take you through how the business is structured. It's a point well taken, but I would suggest that we take it offline for the benefit of the other people on this call.
The next question is from the line of Amey Chalke from HDFC.
I have just a follow-up question from the earlier participant related to EBITDA margin, that the year-on-year decline was there from the 19% to 16% in this quarter. So if you assume that it was on account of lower malaria sales in this quarter, so if this Institutional sales is back again in the first quarter of FY '19, then do we see the margins again moving up to 18%, 19% kind of a level?
Yes. Thank you for that question, Amey. So we are close to 18% margin already without the benefit of the Institutional business as I commented. If you look at that piece, we have basically a negative revenue delta of INR 100 crores in the Emerging Market and Institutional business. When that comes back, we will have the benefit of that clearly in our EBITDA margin. And you're right, we should expect that EBITDA margin to be back at that level.
Okay. And second question is on Australia business. Going ahead, how many launches do we expect in FY '19? And what -- and other thing is, related to the in-house manufacturing, we have stated that 50% of the business of the sales will transfer to our facilities in India and Singapore. So how that would change the margin trajectory from here? Or the margins would change in FY '19 for that business?
As new products is concerned, Amey, we have an objective of 15 to 20 new product launches in Australia on a year-on-year basis. You will appreciate that the total portfolio that we take to market in Australia is about 300-odd products, of which -- total portfolio in pharmacy is 300-odd products. When we become first-line generics, we have the opportunity to supply the entire assortment, of which we are about 2/3 of the way there with 200 products, including the products that we got from the Amneal acquisition. So we still have a headroom of about 100-odd products, and we are aiming to launch between 15 and 20 new products. It could be up or down a little bit from there year-on-year. Obviously, there will be some failed products that won't make sense for us. But most of it, we aim to do. Your other question is, sorry, can you repeat that? Related to offsite...
Related to the in-house manufacturing that if we achieve that 50% of sales coming in from the Indian facilities or Singapore facilities, how much would be the margin impact?
Yes. It's early days right now because as I said, the first supplies have started. We have approvals, but we have not yet fully started the supplies. So, I guess, we will be in a position to answer the question a little bit better, let's say, at the start of next fiscal year where we will have had one more quarter of more product supplies into Australia. Clearly, the margins will go up. How much they can go up, we'll have to drill it down and look at the product by product cost of goods reduction based on what they are sourcing from third parties versus what we are able to supply in-house and be able to work that into the full margin. So it's a fair question, but we need some time before we can give you more details on that.
Okay. Okay. And the third question is, largely that we have outlined that we want to become a B2C company. So any clarity on the OTC franchise on U.S. and Australia both? What are our plans over there? And what are products -- key products which are there in both these markets? And how do we expect to scale up? Because we have started spending on advertisement. So how do you see that thing going up going ahead?
Yes. I'll just answer that. Before that, I do want to clarify. When we said B2C, it's not strictly only the consumer health. [indiscernible] The differentiation we are making in our context, in the Strides' context, when we say B2C, and probably this applies to the earlier comment as well, is that we used to be a B2B company. So Strides 1.0 was basically a business where we sold products to principals, like Pfizer, like GSK, like Eli Lilly, like other products. And so all that like a contract manufacturing type of operation, where we had a handful of customers, right, like it happens in B2B business. Handful of customers with kind of large portfolios that we would supply to them. But we were not front-end integrated. We didn't have a front-end. We had only -- we were basically a manufacturing business. The difference between that and what we have today is that in Australia, in U.S., we have -- we take the product to market ourselves. We distribute it ourselves. We have our own front-end. And we take it to the next level of customer, which is basically the retailer or the pharmacy or the wholesaler [indiscernible]. And therefore, it's more vertically integrated towards the front-end. Coming to your question, but specifically about the consumer health care business, so consumer health care business that we have in Australia is -- which is the Chemists’ Own business. This is a full spectrum over-the-counter business. If you walk into a pharmacy in Australia, there are basically 3 types of product assortments in their pharmacy: One is the cosmetic product that is really the front of the shop, as you enter, right. They could be deodorants, they could be sunscreen, they could be cosmetics, et cetera, et cetera. Then there is what is called the middle of the store, middle of the shop, middle of the counter, which is where the branded medication and the store-brand medication is sold, which is Nurofen for pain and then you will have ibuprofen from Chemists' Own as the alternative product. This is the same as you see, let's say in a Boots store. When you go into Boots, you will have the brand and then OTC brand. You will have Nexium and you will have Boots' omeprazole, right?
Yes. The white label one.
Yes, correct. The white. So Chemists’ Own is -- there is no store or no pharmacy called Chemists’ Own. It's a brand that is adopted by all pharmacies in Australia as their white label or private-label or store-label brand. And therefore has the entire assortment. We sell everything. We sell sunscreen too, right. And we sell, of course, everything from GI products, pain products, et cetera, et cetera, right, full spectrum. And in the 1,200 pharmacies, which we have today, we are the incumbent store brand, right. We are also distributing in other pharmacies besides because other pharmacies also are attracted by the kind of assortment that we have. The U.S. business is a branded business. That is where -- that is like, actually, trying to sell Advil or Nexium or something, where we sell Jointflex. And we advertise it on television, consumers walk into the store, and they have to pick our product from the shelf. So the prospect for the business is that we are seeing very encouraging signs to our advertising campaigns. In the U.S., we expect that this business will become self-sustaining, as I mentioned earlier in my commentary. And we'll have kind of a separate revenue stream -- and a separate value stream of its own.
Okay. Okay. Is there any key strength of ours, which we are utilizing in that business, like softgel manufacturing or anything else which -- where we are leveraging basically in that business?
Clearly, as far as the product format is concerned, we are manufacturing, we are transferring. So we make topicals as well. We are transferring the Jointflex manufacturing facility to our in-house manufacturing in Italy. So we're going to -- this used to be supplied by third party. So there is, obviously, that confidence that we're bringing in-house. But we also believe that we understand the entire kind of healthcare category better than non-pharma companies. Because we are, I mean, whether the product is prescription or it is OTC, it still addresses the consumer need and we understand the ability to serve that consumer better than, let's say, a food company or a cosmetic company or some other company. So that is the core competence that we bring to the business, which is understanding the health care needs of our consumers better.
The next question is from the line of Anmol Ganjoo from JM Financial.
My first question is around various drivers for the quarter. Is it fair to assume that this quarter for a while does represent the steady-state business that will be operating as we go into FY '19 in terms of stabilizing the current businesses? Restructuring the rejig which we had in terms of selling some of the brands, divesting Strides. Is that -- is this it for a while?
Yes. To answer your question, absolutely that is the intent and the objective. I said one of the pillars of our strategy is to create a repeatable business model. And by stating or the continuing -- the results of the continuing operation and also the historical or the -- at least the last 2 quarters, the comparable numbers, we are attempting to provide good visibility. And the answer to your question is that yes, that is the intent.
On visibility, in the past in similar situations, you have helped us with some kind of a directional guidance on EBITDA. Would it be possible to kind of given the state of business that we are in, not an exact number, but probably provide us a range what we are aspiring for from an FY '19 perspective?
You mean, visibility of the future numbers?
Yes.
That we are not providing right now.
Okay. And my second question before I get back into the queue is that, the rationale for reentry into Australia was driven by 2 factors: One was the expectation that there will be rational competition. And there will be a consolidation of the market. So if you can just provide us some color with respect to the fact that what part of portfolio is now available at a discount? What are the -- has the government saved more than what they envisaged earlier? And what gives the confidence that Australian landscape lends itself to sustaining the kind of high-margin reasonable growth trajectory that we are aiming for?
Sure. I can talk about essentially what we are seeing evolving as the policy related to the PBS pricing environment in Australia. There is decent policy around the fact that PBS cuts are kind of bottoming out. And the reason is that they have defined the level of discount between brand and generic that once achieved will probably be the steady state. So this is very new. It's in the past few months that this has been in the Australian policy framework, but they have defined a certain level. And at that level, the PBS cuts on those products will be minimal or actually 0. Also they have said that after a series of PBS price reduction, for any product, it cannot continue forever. So there will be 5 or 6 that they have defined. After which -- and remember there are 2 PBS events in every year. So let's say, for any product after 5 or 6 PBS actions, there will be not any further action. So I think, overall, the policy in Australia is that the discounting or the PBS environment is going to stabilize. It is bottoming out, it is going to stabilize and, obviously, for the existing portfolios. Related to that is the point about consolidation. So I think as mentioned earlier, also, the comment is that the Australian market is consolidated, is essentially a core player market. And all the wholesaler alignment, et cetera, work like that. We believe the market is consolidating. So all the kind of other smaller players are consolidating -- and one of the examples is the Amneal acquisition here. Because to -- without scale benefits or operating leverage, it's impossible to operate in that market. And unless you have a threshold level of scale in terms of distribution and in terms of product portfolio, it's not a market where you can afford the overheads and the SG&A cost that comes with operating. Because remember, you still need a field force to be able to serve that market. It's not as efficient or efficiently structured as the U.S. market where 3 or 4 big retailers, and you basically require 4, 5 people to manage a -- 4, 5 sales people to manage business. So the general comment I'm making is both that, you know the pricing environment is stabilizing, the market is consolidated and will consolidate further in Australia.
Okay. If I may squeeze just one last question. Can you just help us understand what is the best way to track the progress on the U.S. business? Because we have some kind of an arrangement, so it becomes difficult to track the progress of individual molecules so that there are no surprises after the end of the quarter. On a monthly basis, is there a good way to track the progress that we're making in the U.S.?
In the public domain, it would be the IMS, I'd say. There is a lag, but that is the best way to do that.
The next question is from the line of Anil Sarin from Edelweiss.
I have some questions regarding the Australia business, again. What is the quantum of products that are now getting in-sourced? You mentioned in your opening commentary that around 13 are going to be manufactured in Singapore and India. But is this the sum total, or it is a part of much more? And also going forward, let's say, next year this time, how many products would then be getting in-sourced from own resources of Strides as opposed to buying them from outside?
Yes. First clarification on the 13 is that we have been filing for site transfer approval with TGA, and that we have -- of the products that we have filed, we have received 13 approvals, right. We have filed more products, 25, 30. I mean, I don't know the exact count right now off the cuff, but many more products that we have filed, and we have received approvals for 13. We have started the supply of the first 1 or 2 products now because all of this has happened in the last few months, right, and we have started the supply. So the 13, obviously, we intend as -- because we have filed for site approvals in India, we intend to supply as quickly as possible. There are commitments and transition timing because commitments from, let's say, third-party manufacturers and other manufacturers who used to supply the Australian market, sometimes they have to provide notice. So once you get approval, you have to provide notice. You have to run through the inventory, et cetera, et cetera. So it doesn't happen overnight. But our intention is to as quickly as possible ramp up and bring in-house the supply of the 13 approved products. As we go along, and we will make, obviously, disclosures related to that, we will get more approvals of the pipeline that is pending. If you look at the next year, I mean, obviously, we expect this to double. If you ask me, we stated that we want to almost have 50% of our portfolio in Australia sourced out from India by the end of next fiscal, that broadly is our plan. Have we filed all of them, no. But the approval time line is also shorter. So we have to go product by product. And it is classically a make versus buy decision. What do you buy versus what do you make? And it is margin related. And therefore, you have to go product by product. And also, we are a high-volume manufacturer. So there are smaller niche products that won't make sense for us to transfer in-house, is better to continue to outsource them. So it is a detailed work, but I can -- the comfort I can give you is that what we have talked about now is the beginning of a process, where we want to bring in half of our portfolio in-house. And the time line that we're defining for that is the next 15, 18 months.
And as a rough yardstick, what kind of cost saving would you achieve by insourcing, by self-manufacturing?
It can be very variable. So I wouldn't want to make a very general comment. As you know, depending on where products are sourced from, I can tell you that products into Australia are sourced from multiple locations, from Europe, from South Africa, from other contract manufacturers in India, so which means other companies, other Indian generic companies and also from some 1 or 2 local Australian suppliers. So it really depends on where the product is coming from. I wouldn't be in a position to make a very general comment with much confidence right now. But clearly, the objective is that the cost of goods will be lower when supplied in-house. And it will have its impact on the gross margin -- positive impact on the gross margin.
Okay. One last thing. On the U.S., of the 12 approvals that you have received, how many products are you not proceeding with launching given the situation on the ground over there?
Of the 12, only 1 or 2.
The next question from the line of Sriraam Rathi from ICICI Securities.
Most of the questions have been answered. Just a couple of bookkeeping questions. I mean, in this quarter, we have seen a gross margin of around 53.3% and -- which this is not very different from the previous quarter's gross margin despite the fact that the API business is now not into the numbers. So does it mean that our API business gross margin and the remaining business gross margin are more or less similar?
Sorry. So you're saying that the gross margin reported this quarter as compared to last quarter is similar, but the gross -- but the API business is not integrated. I didn't understand your question correctly.
So basically, generally, the thought process is that API business has lower gross margin compared to the regulated market formulation business? So...
At the gross margin level, there would not be a big difference in my opinion. But please carry on with your question.
Okay. So basically, gross margins will be more or less similar -- may be slightly better in regulated market business?
Yes. I think, the -- you wouldn't see that bigger delta in gross margin thereby -- yes, it's a matter of operating cost, really. Gross margin -- so, I mean, to answer your question, yes, it's a fair question, but I wouldn't expect that the gross margin difference will -- EBITDA will, obviously, change as that has a different level of EBITDA margin.
Okay. Sure. And on the personal cost, I mean, this quarter it's around INR 118 crores. So this will be the now likely run rate which will go -- which will continue going forward, right?
Yes, that's correct.
Okay. Got it. And lastly, what is the gross and net debt figure for this -- at the end of the 31st December?
There is -- see, what we have done is we have repaid all the cash back to loans, which are given as lien. So what we have is the INR 1,775 crores of net debt. So this is the -- that's the current position now.
Sorry. How much net debt? Just...
INR 1,775 crores.
Okay, INR 1,775 crores net debt. Perfect. And this -- interest cost for this quarter, that is around INR 50 crores. So the impact of domestic business sales will be visible next quarter, right?
Yes, that is correct. And yes, the net is INR 43 crores. And this also include some of the prepayments, which we've done at the time of borrowing. So this contains some -- so the sustainable figure will be in the region between INR 38 crores to INR 40 crores.
The next question is from the line of Dimple Kotak from SKS Capital & Research.
Yes, sir. My question is pertaining to what will be the growth guidance for FY '18 and FY '19 in terms of top line and the margins? And sir, secondly, if you can give me the cash figure on books as on today? And sir, I just missed on the question somebody had asked regarding why have been the -- reasoning for the flat gross margins?
So we'll come to both your cash question and gross margin question. Related to your question on guidance, we are not providing guidance on revenue or on gross margin. We are not making forward-looking statements related to that. On gross margin, the point that we will be making -- the question that was asked earlier is that, with the demerger of the API business, why aren't we seeing a big change in gross margins. And the response to that was that the gross margin levels are similar. It is at the EBITDA level that there is a difference between the formulation in the API business. And therefore, you may not see the gross margin variation. And then the cash -- there is a cash question, right. So...
Yes.
Yes, I'll just...
It's about INR 1,000 crores.
Sorry.
It's about INR 1,000 crores.
INR 1,000 crores. And so at the end of the year, what kind of debt you would be having on your books?
Yes. So the -- this depends on the GST refund have to be accelerated. And we have got one more quarter of quarterly performance. Currently we are at a debt of about INR 1,775 crores. So we will be, I think, in the range of about 1,700 crores.
That is the net debt figure, right?
Yes.
The next question from the line of Nitin Agarwal from IDFC Securities.
Shashank, in the press release, you mentioned about hitting the stated -- going near the stated exit rate for the U.S. business, for the North America business. Can you remind us again of the numbers that we should be watching out for the exit number?
That I'll point you to transcript of the last quarter quarterly call. But, Nitin, the point that we have made here is essentially, with the objective of providing, let's say, visibility or this repeatable kind of model that we've talked about. Look, our business has expanded in the U.S. and it's about, as I mentioned, 1.5x what it was last year. If I look at the second half of this year, which is Q3 and also kind of how we're tracking in Q4, we are close to the $40 million to $45 million number that we were talking about earlier. And that's kind of what I'll point you to. But more details, obviously, that is -- if you go back to the transcript, you will see the details of what we talked about.
Okay. And secondly, Badree, on the India business got divested sometime in December. So will it include some component of -- I mean, the overheads must be there, right, for some portion of the -- of these -- for some part of the quarter? Your staff cost and the other expenses?
Yes. That is classified as a discontinuing operation, Nitin, all operations taken, what you see -- are seeing in the P&L is a complete formulations P&L, including the GSK business.
So the number that you've given for Q2 also represents on an ongoing, continuing business basis only?
All the quarters have been restated to reflect the formulations business.
The next question is from the line of C. Srihari from P.C.S Securities.
You mentioned about supply constraints and price hikes in the ARV segment. Can you please be a bit specific and -- regarding the products and what is the situation currently? And secondly, as regard the Australian business, what would be the delta between margins – or blended margins and the Australian operation margins?
So your second question first. So we are not breaking out margins by individual lines of business at this point in time. So I won't be able to comment on that. Your first question, can I request you to repeat it because I couldn't get it clearly.
That ARV business, I mean, which molecules, in particular, and has the situation stabilized now?
So the molecules we are talking about are lamivudine, zidovudine APIs. There would be others that these companies are supplying to the market. The situation is normalizing. It is not fully normalized yet.
What would have been the price hike?
I can't go into specifics of details there because, obviously, this is competitively quite sensitive.
Okay. I mean, regarding the Australian operation, I mean, if you could let us know whether the difference is significant or not that significant?
So if I understand your question correctly, are you saying that if the total margin -- EBITDA margin of the business is 18%, is the EBITDA margin of Australian business in line or out of line with that? Is that -- sorry, is that your question?
Yes, that's right. That's my question, yes.
It would say, broadly in line. That's what I would say.
Okay. And you expect significant uptick on -- in this regard?
We expect uptick in the Australian margins.
Operator, can we take the last question, please.
Sure sir. The last question is from the line of [ Amit Yadav from KGMC Group ].
Just I want to know that whether the commodity API business, court has approved the demerger or not?
Yes, it is expected to happen in Q4.
In Q4, we can expect that?
Yes. In the month of March.
And whether you can through some light on what will be the record date and actual date of listing?
The appointment date, what we have been given for the merger is October 1, 2017. Once we get the NCLT order, it will take about 60 days to complete all other process and to get it listed as a separate company.
Thank you. Ladies and gentlemen, that was the last question. On behalf of Macquarie, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.
Thank you.
Thank you.