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Strides Pharma Science Ltd
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Ladies and gentlemen, good day, and welcome to the Strides Pharma Science Limited Q3 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, and thank you for joining us today for Strides Pharma Science's Earnings Conference Call for the Third Quarter Ended Financial Year 2019. Today, we have with us, Arun, Stride's Executive Chairman; and Badree, the Executive Director of Finance, to share the highlights of the business and financials for the quarter. I hope you have gone through the results release and the quarterly investor presentation which have been uploaded on our website. The transcript for this call will be available in a week's time on the company 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 Relation team. I now hand over the call to Arun to make the opening comments.
Thank you, Abhishek. Good evening, everybody. Much appreciate your coming into our call today. Before I start, let me just give you -- I'm going to half this opening conversation into 2 parts, 1 to focus purely on the operations; and then since we have announced several corporate actions, I'll take you through all of them and spend more time on the bigger ones. So overall, from Strides' perspective, we had a good quarter. We've achieved sales of close to about INR 800 crores, 8% Q-on-Q, with an EBITDA growth of around 20%. This is mainly driven by the regulated market uptake, which is now 82% of our revenues. In spite of the African business and the Institutional businesses about breaking even in both cases, adjusting for that, our regulated business now delivers approximately 19% EBITDA, post R&D. This is a 400% increase in margins for the regulated business from Q1. So overall, growth in the U.S. has been fairly significant. We are at 30% Q-on-Q growth. Revenues growing from $32 million to $41 million. The quarter, like I mentioned, was fostered with significant margin uptick. We had a good track of new launches and good market share increases on our existing products. And almost -- we now have 10 products which are amongst the top 3 products in the U.S. as per IMS. Several of the corporate actions that we have been taken today and earlier have resulted in us now converting most of the partnered products back to Strides. So when I came back to run these operations on 1st of April, I set some clear guidelines, if you look at my first quarter call. And that was: A, to bring back partnered products for the business; improve the quality of the business and the sustainability of the business; continue with the differentiation in terms of diversity of the model; and finally, work on the debt book. And I think to some extent, or to a large extent, we have either completed most of these actions or have embarked through these announcements on pivoting on them. So overall, from a company strategic proposition, we believe that we are -- we have now on a good wicket. And we look forward to the next few quarters where we will get to robust performance and improved margins as we go forward. Australia was a flat quarter, simply because it was the financial year end for wholesalers, and it's quite normal in Australia for them to destock. But overall, it had been a good quarter with the standard EBITDA of around 20% to 21%. Growth continues to amaze us in the other regulated market. We have -- we are benefiting from improved pricing, we are benefiting from lesser players operating in several of the European markets. And we had a 55% Y-on-Y in the other regulated markets and almost 14% Q-on-Q. We believe this business organically will grow rapidly. And we are benefiting from the fact that we are leveraging our Australian pipeline for these markets. As many of you know, we have common regulatory strategies for Australia and markets like Canada, Europe and the U.K. So we get fast-track approvals, and this is -- and we are benefiting from this. Finally, I can report that the African business has broken even. The hygiene issues are behind us. And I'm now looking forward to a consistent and forward-looking growth where this business will become valuable for the company. The Institutional business continues to be a challenge for us. We faced significant headwinds. We have a guarded approach simply because we are very selective on what contracts we can continue to service. Some of them, we are trying to renegotiate with the donors simply because most, not only us, but several companies, are suffering from this fixed-price contracts, given that the API cost from Chinese supplies have increased significantly. So overall, a good quarter. Strong outcomes in the U.S. And we believe that the momentum in the U.S. will continue. And now I will switch to some of the corporate actions that we have announced today. And let me dwell on the significant one, which is Australia, where I'm sure a lot of questions -- you will have a lot of questions. We already had received several calls. So let me dwell on addressing the Australian business first. So we firstly announced the transaction of potentially merging with Australia as early as 7, 8 months ago in May of 2018 to be precise. And it's taken us a long time to get there, and as you know, that it has been a very complex process. So let me just take you through the process that was involved. When the 2 companies decided to merge in Australia to become the largest generic company in Australia, it is truly a very unique situation to be in. So the first milestone that we had to cross for us was get to the Competition Commission's approval, which we did. After which, the 2 companies opened up its books for diligence. Now this has taken a long time. Since we got ACCC approval, it has also taken a long time simply because the back and forth, all of these processes, advisers and third parties that were involved in the diligence took to get to this stage. And finally, it was clear to us that the synergies that we originally envisaged was not panning out in the time frame that we had anticipated. So we had an option, an option was to acquire the 50% share that we would not already own in the JV. And that would have caused significant new leverage situations for Strides. And as we were rebuilding the business, this is not a position that I was ready to accept. And while I strongly believe that the ongoing challenges of liquidity is not only a problem for India, but also globally, and this would have come at great cost to us and it would not accrete the business in the time frame that we had envisaged. So consequently, in the best interest of the Strides shareholders, the management and board strongly believed to support the recommendation to exit the business in Australia. And just to give you a little bit of context on the transaction. The business currently delivers approximately $40 million of EBITDA. We have entered into a 10-year preferred and exclusive supply contract which guarantees us almost 50% of the EBITDA for the next 10 years. So when you look at the deal value and the deal contours, you must put a perceived value for the supply contract that will now be in -- that is secured for the next 10 years. We take control of all the 140-odd IPs that we own and we only license one of them to Arrow, which means that we retail IPs for global exploitation. And then we have a limited noncompete period of 3 years, after which, we have the option to go back to the Australian market. So this -- in the end of the day, we have confirmed this is a transaction which has an annuity EBITDA of almost AUD 200 million for the next 10 years, that is AUD 20 million a year. It could only go up because, as a preferred supplier, we have the opportunity to provide them -- provide this -- the merged company lots of new products. We -- and we will by far, be the most preferred supplier simply because we have mastered the art of supplying and servicing the Australian market, which is otherwise a little complex for most other suppliers because of the small size of the market. And we will also continue to develop products for our global other reg markets, which will include Australia, and then we'll have licensing opportunities with our partners. So we think, in all, the transaction, which gives us about AUD 395 million, plus an annuity income of EBITDA of AUD 20 million and growing, will -- has resulted in a good outcome for the company, given the circumstances this transaction -- given the circumstances that we were in this transaction. And I'm sure there will be several questions. I'll be more specific. I'll be more than happy to answer specifics as we go through this call. Now the -- during the quarter, we also had -- we successfully won the arbitration that was outstanding between Phosphagenics and Mylan. And as a consequence of that -- the application was led by Strides with active support from Mylan. And as a consequence of that, we've received our escrow amounts. And together with these 2 transactions and the first payment from Australia, we have close to about USD 260-odd million of cash, that have come to us within this quarter. The Phosphagenics/Mylan arbitration escrow amounts have already been received, and we propose to pay down debt by about $160 million, approximately INR 1,100 crores. That will bring our net debt to under INR 1,000 crores. That will be a very important milestone for us to have achieved in these circumstances. And our business -- and as regards to top line fall of around AUD 100 million-odd, or a little more than that, our significant growth trajectory in U.S. will continue. Inorganics that we announced today, will more than make up for that loss of top line. So in all, if you go through all the corporate actions that we've announced and add up all the numbers, we believe we are now on the path of strategic -- what do I say, a strategic scaling. But also at the speed in which we believe that this company can evolve in the next many quarters. So strong balance sheet, great performance in the U.S. And if I add inorganic U.S., we already are now at a $200 million run rate. That is a little more than 70% to 80% more than what we did last year. Continued momentum in product approvals, filings, continued compliance. And all of this puts us in a good wicket as far as we, at Strides, are concerned. Alongside today, we announced a few other deals. We also acquired the 50% of Vivimed Labs that we didn't already own. We paid them the same valuation as we entered in 2017, which was INR 150 crores for 100%. So we paid another INR 75 crores for the 50% that we didn't already own. So this will also -- I mean, part of the transaction also allows us -- for the ANDAs to return from partners Vivimed had made. So effectively, almost 80% of sales will now come from direct sales in the Strides label, and that will include the Vensun portfolio. Vensun had revenues of around $17 million in the U.S. And they do have -- they have a been a significant partner for Shasun, that's a legacy transaction that we acquired. They bring in a lot of technical capabilities on what they call is niche and complex products. And we have 4 products that are currently commercialized through Vensun. And in that partnership state, CGT for $400 million, which we are expecting approval in the next 2 quarters. And that -- with this transaction, we will have control of that key product, but also have control of profitability and market share opportunities on what we think is a very critical product. We also made an announcement regarding Canada, and Canada mirrors the Australian market. We did a small acquisition to get into the Canadian market. And we have a very aggressive filing strategy for Canada. And we expect Canada to be an important part of our other reg markets. So to summarize -- and apologies for this long opening statement. To summarize, we believe that there are several pivots that are now operating. All our businesses except the Institutional business has now turned around completely. And we are very delighted to -- with the position that we are in. And I now -- I also have my other colleagues, Badree and Vikesh here on the call. And I'll be more than happy to take questions. And we will be more than happy to take questions. And if there are any follow-on question, we are available on a call, given the paucity of time on this conference call. Thank you all, and appreciate your time.
[Operator Instructions] The first question is from the line of [ Verbov ] from [ Ashmore ]
Could you help me understand how the $100 million loss in revenues would be compensated by growth in U.S.?
So the U.S. business is -- so I'm saying that when we started the year, we were at around $21 million. Just in Q3, we are already at $41 million. And if you add the inorganics that we announced, that is $40 million a year, that's $10 million per quarter. So going out quarter this year is already $50 million. So that's $200 million in the U.S., assuming there is no growth on these base numbers. So that, itself, is -- that incremental revenue of about $100 million already makes up for the loss of revenues from the U.S. -- loss of revenues from Australia, sorry.
The next question is from Prakash Agarwal from Axis Capital.
Sir, just trying to understand the statements you made, top line loss of $100 million. So if the -- I mean, what are you saying, the EPS implies -- that you would do would be worth $100 million sales, and the EBITDA would be $20 million. Is the understanding correct?
Yes, but the top line, the cost of goods is not 100% of revenue, right? So it's typically half. So if the company has a revenue of $200 million in Australia, then the cost of goods is $100 million, we don't supply all of it. So we'll end up supplying a lot of it, though.
Okay. So if we are making a bit of, say, $20 million, for example, I'm just trying to understand the kind of top line we would be reporting going forward.
Yes, so the Australian business can be between $60 million to $75 million at peak.
Okay. And the corresponding EBITDA would be $20 million for the peak sales?
Correct.
Understand. And you mentioned about the debt. So currently, you're at about INR 18 billion of debt. You -- and the AUD 300 million comes to us. So would the entire money be used? I missed that statement in terms of debt reduction.
No. Because we also announced several corporate actions which required cash. So between the Australian payment and the Mylan payout, we have approximately $250 million, of which, $160 million we are going to pay down debt. And $90 million will be used for growth capital, including some of the deals that we announced.
USD 160 million, you are saying?
Yes. Also, the $250 million is U.S.
Okay, so -- okay. So $160 million. Okay. Fair enough. And just one on the strategy. I mean, I was looking at our past notes, when we had announced the Apotex structure -- I mean, the module. So we had talked about year 1 EPS accretion. So what really has changed? And I mean, we could have gone -- I mean, we built a very sticky business in the last 3 years to have a perfect head against the fast-growing U.S., but a bit volatile. So what really had changed? So a, the EPS question, and the mindset of selling the sticky business.
But a couple of things. One is that the Australian business, as you know, has more or less plateaued for us from a rapid growth. So improvement -- yes, it is a sticky business from a cash flow perspective. It's great from a margin perspective and all of that. But the synergies, like I mentioned in my opening statement, has not played out post the diligence as far as we are concerned. And a lot of the synergies are related to front-end cost rationalization, but also to supplies. And we just don't believe that the combined margins are good enough. So we, obviously at the time, we needed a reset of the economics. And that was not doable. Well, probably the conversations around that were not successful, if I may say. And because the reset of ownership was not possible, then that is when the discussion of an outright buy was discussed. And then the leverage did not add up, given the cost of money these days.
Okay. So the resulting entity...
Sir Agarwal, I'm sorry to interrupt. [Operator Instructions] The next question is from the line of Aditya Khemka from DSP Mutual Fund.
Sir, on this Australian divestment. So as the previous participant was asking, that AUD 60 million to AUD 75 million top line and AUD 20 million EBITDA, that is what you get from the business that you had in Arrow. Now with the Arrow entity merging with Apotex and then is taking over that entity, why doesn't your estimate include further backward integration from the Arrotex entity, which includes the Apotex business?
It does. The thing is that, for some of the reasons why the synergies for us don't add up because, a, there are several supply contracts that Apotex has, which may take a little longer than anticipated to move to Strides. There are several products that are in this supply contract which includes the Apotex volumes. At this time, there's opportunity for us to build more from here, but I think it's better to err in the side of caution.
Sorry, just a clarification. So what you mean is that in future, the combined Arrotex entity would still be open to outsourcing products to Stride as a preferred supplier? Yet for now, what you would get is the INR 1,000 crores business that you are transferring to them, the backward integration benefit of that is what you retain for now.
There would be some products which will also be included, but overall, today, we only supply 26 to 27 products. As you know -- 200 products that Arrow sells. But the 26 products [ that we sell ] constitutes a very significant part of their supply chain. So we are not supplying 100% of the Arrow procurement today. So if they are buying $100 million, we are not selling $100 million. We're probably saying $25 million or $30 million or whatever that number is. And the number that I'm giving you also includes, in some cases, an incremental volume of Apotex products -- Apotex [indiscernible], sorry.
Okay. Then would it be right to guide to day 1, $20 million number from this backward integration? I mean -- by what you're saying, it won't probably be a day 1, $20 million number.
I said it could be between 40% and 50%. And it'll take us probably a year to get to 50%. [ 2015 ]. To get into $20 million, it could take us all of 12 months.
Understood, understood. And my second question pertains to this Vensun acquisition. So I couldn't really understand the language written in the presentation. Could you throw some light on this upfront payment and then the linked milestones? What is the structure of the transaction? And I understand the majority of the deferred payout would be linked to the CGT product, so you could you throw light on how that dimension is structured?
So this is a legacy transaction that we inherited from Shasun. So Vensun has transactions with several companies on the same basis that the profits are split 50-50. When we acquired the business from Shasun, we also inherited the contract, which means that this business -- this part of our business with Vensun was a fairly significant profit-share arrangement. There was an important -- out of the $17-odd million that Vensun does, a significant part of the revenues come from products from Strides. When we pay $20 million, which is the payment that we do for 100% of the ownership, the economics shift from 50% to 70% in our favor. So that's what we get for paying the $20 million. So the economics of the profit share moves from 50% to 70%. The 30% is an earnout for the shareholders because this company has invested significantly more money than we are paying. So the earnout is directly linked to certain outcomes, mainly on the CGT, but several other products that are equally interesting, not necessarily coming from Strides, but we have exclusive rights over these products. And in the next couple of months, you will see several new products that will come approved -- will get approvals from Vensun. And as that ramp up happens, Vensun shareholders will get 30% of the economics, up to a cap of $75 million, for -- within a period of 6 years. So -- which the long stop date. If -- and we obviously wanted the control of the CGT product ourselves because there was a significant amount of -- I mean, if everything goes to plan, there's a significant amount of profits that we leave on the table. And we wanted to have the security of the marketing opportunity on this product. So I hope I'm clear with the...
Yes, you are. Just one clarification, though, on the previous question. The 10-year supply contract, does the Arrotex entity have a call option on the contract and can be terminated before 10 year? And in a similar line, can they -- can you -- do you have a call option? Can you renew the contract after 10 years? Do you have the right to renew it, or is it an obligation? If they want to renew it, then only, you would be able to supply. How is that condition structured?
Currently, a 10-year guaranteed supply. And at this stage, after that, there is no obligations on both sides.
The next question is from Sachin Kasera from Lucky Investments.
Just a couple of questions from my side. First question was, you mentioned that you would be retaining around $80 million to $100 million as growth capital. I think the transaction that we announced totaled to something around $35 million, $40 million. So what are the areas we are looking for this incremental $40 million to $80 million -- $50 million for deployment as far as existing and retained growth businesses are concerned?
Well, at this stage, very little. We are looking at mainly a little more investments in Europe, but these are all going to be very small-ticket amounts. And if we don't end up using anything in the next 3 to 4 months, then we will use this money to further reduce our debt.
Sure, Sir. And secondly, you made mention that initially, you would be receiving AUD 300 million from the transaction. What about the remaining AUD 94 million, sir, what are the time lines for that?
Well, it is a little early for us to disclose that. But it is a secured payment guarantee through an instrument. So once the [ SAJ ] is signed up -- and for the next board meeting, when the final [ SAJ ] is signed, that we should be in a better position to let you know.
And the intent would be to use it also to roll down the debt? Or we may well some growth opportunities once we get the final tranche from Australia?
Not yet decided. We don't know what to do as yet.
Secondly, sir, you mentioned that these 2 acquisitions in -- that we announced for the U.S. would incrementally add around $40 million to the top line. What are the type of margin synergy we can bring with these 2 transactions to the overall U.S. business?
Currently, our total global business has a gross margin of 52%, and regulated market is slightly more. So we expect the margin flow to be the same in these acquired assets. But obviously, in the Vensun transaction, we already consolidate 50% of that margin because of our ownership. So we -- this incremental business should deliver a targeted yield of at least 20%.
The next question is from the line of Tushar Manudhane from Motilal Oswal Securities.
Sir, just on the Australia part, now that we are going to be preferred supplier, but when the price cuts, as and when they happen from the Australian government side, will that have any impact on our profitability? Or that remains intact?
About 90% of the portfolio that we supply Arrow has completed all the previous price cut cycles. So there are no more official price cuts on those products.
The next question is from Nitin Agarwal from IDFC Securities.
Arun, on the States business, we have made an incremental investment around some other incremental investment. I mean, what are the opportunities that -- how should we look at that business from a Strides perspective over the next, say, 1 year, 1.5 years in terms of what kind of opportunities does it offer us?
Well, several. We are looking at several opportunities to capitalize on that business. We a -- one, we expect at least 2 products approved in Europe in the next 12 months. I mean, one in the next -- before 12 months and one in about 18 months. So in the next financial year, we expect, significant, 2 product approvals. So we should have revenues. And we are contemplating how best we can monetize this to benefit the Strides shareholders. So we are currently evaluating those options, Nitin, and we probably need a couple more months before we come back to you with more specifics.
On the U.S. business, the run rate that you [ recorded ] at -- and so where you see this business really ending up for us as a combined business over the next few quarters? I mean, the CGT obviously is going to be a big influence around -- on the run rate on the business, but barring the CGT product, how should we see -- look at the business now, with these 2 inorganic transactions also coming in play, say, if we take a 12-month view of this business?
So like I said, if you're assuming no incremental growth in Q4, which is not the case, there would be incremental growth because a part -- if you recall in my first quarter calls, I mentioned to you that the partnered products will return to us in Q4, and they have. So we will actually start commercially selling those products in Q4. So that's typically a $4 million to $5 million business that one should add to the baseline, minimum, per quarter. A little more than that, actually. So we think that, including the inorganics, it will be safe to say that $55 million to $60-odd million quarterly run rate should be the reset number for the U.S. which is 2x of where we started.
Right. And how do you look at the next year in terms of approvals, barring the CGT product, as mentioned?
12 to 15 products approvals. We have the tags for about that many products.
The next question is from Dhaval Shah from Birla Sunlife.
Just wanted to understand on the other regulated markets is now INR 500 crore annualized revenue run rate. What is the outlook on other regulated markets market from here on?
This going to be a more significant market going forward in terms of growth and profitability. We have grown -- from a low base, we have grown at around 55%. I think it will be safe to assume a 25% to 30% CAGR on this business for the next 2 to 3 years.
Okay. And what -- which markets are driving this growth?
Mainly U.K. and Europe.
Sure. And my next question is on the U.S. margins. It's mentioned in the presentation that you have broken even at the current levels. And you mentioned that it will be going towards to $55 million to $60 million kind of a run rate. What is the margins that you should expect from U.S. when you are at that kind of a run rate and growing on the overall business...
Dhaval, we mentioned in our press release that we broke even in Q2, that is at $32 million. So obviously, we make money this quarter out of the U.S. Typically, every incremental dollar over $32 million per quarter, you should assume approximately $0.35 to $0.40 going to EBITDA for your calculation.
The next question is from [ Sheshan Krishna ] from JM Financial.
This is Anmol. We are looking at CGT approvals in the next couple of quarters. U.S. business has also started to fire. Our leverage situation is not as precarious as it was, say, 3, 4 quarters back. Yet, we have chosen to withdraw from Australian and double down on the U.S. You've realigned the company to materially different markets. What causes the change in world view that we are refocusing our priority markets?
When I set off an agenda publicly that I want to reset the strategy. It takes a little while. It's taken us 3 to 4 quarters to reset the strategy. I think it is important for us. I mean, if leverage was not a challenge, we would have kept Australia, to be honest. But having said that, as the new player in the U.S., we just come with a clean slate, much better pricing, more robust product supply chain, customer advocacy, we're just getting more and more market share. And if you look at our press release and our deck, you will see that over 10 products, we have actually increased market share significantly from Q1 to Q3 on almost every single product. And that's not on price, that's purely on supplies, a lot of withdrawals -- and while withdrawals were actually announced last year, actual effect of those withdrawals of product not being on the shelf is already happening now. So we are seeing an upswing in demand. It's not across the board, but in specific products, we are seeing an upswing. I would like to say that we could see this coming and we kind of stood firm with our strategy and it's paid out well. And I think that there are several key products that we were -- we had partnered. And with all of these actions that we did with bringing back products from all these players. As there wasn't, earlier, enough money for 2 companies to share. That's a very different situation today when you control the economics yourself. So overall -- and the momentum of filings and approvals have also added to our favor. And I think it's a good situation to be. At the end of the day, there's no other market other than U.S. that will give you the volume, price and the growth that you need at the scale that we are. So if you have so much resources, and with those resources, what's the best outcome you want? And that's the reset that we did.
The next question is from the line of Alankar Garude from Macquarie.
Arun, firstly, how does the Arrow sale impact the profitability below EBITDA?
Actually, positively. Because there is INR 120 crore goodwill and interest cost attached to Australia. So that, itself, adds about INR 7 to almost INR 10 per share to EPS.
Understood. And the second question is quite similar to what the previous participant was asking. So you mentioned about Apotex synergies being lower than earlier expectations. So my question is, had you not announced the Apotex merger, would you have retained Arrow? And basically, whether we had considered selling our stake in Arrow even before Apotex came into the picture? So before May 2018, had you considered even -- selling even some stake in Arrow?
No, we would not have. And your point is right. The only thing that would have changed this now, with the wholesale -- with the challenges that the Australian market has delivered for the wholesalers, because there's been some activity around Sigma and Sigma is our exclusive supplier -- I mean, preferred wholesaler. So around that, there would have been some uncertainty, but to be very honest and to answer your question direct, if this transaction was not announced with Apotex, we would have been happy to keep Arrow, to not have changed anything in our scheme of things.
So even the share swap deal was not considered, is it?
No, the share swap deal was considered. But the point is that the economics and the synergies that added up meant that we had to renegotiate the percentage of ownership, which didn't work out the way we wanted.
The next question is from the line of Pankaj Tibrewal from Kotak Mutual Fund.
A couple of questions. One, over the last few years, too much of to and fro in the Australian markets: 2012; then 2015; and now 2019, we are exiting the market again. From a priority and the shareholder value creation, can you outline your thoughts that, will U.S. be the core market now from a growth perspective? Or U.S. entry could again be possible in the near term, and near term, I mean 1 or 2 years. Earlier, you had thought about Africa being a core moat for the business getting created, that didn't happen. Indian business didn't execute well. So what are the ways you are outlining the growth over the next 1 to 2 years from a shareholder value creation? Can you just help us understand that?
So well, basically, we are -- the model is based on the principle of what is the differentiator that we have? And that we think is to operate in difficult markets with a portfolio that is quite unique to Strides. Third is that are we building sustainable business? And the sustainability is where we are able to deliver not only growth, but profits and cash flow. Where profit and cash flow would have come -- would have continued from Australia, growth would have been a challenge but -- unless we did this transaction with Apotex. We think that the growth will come from the other reg and in the U.S. business. You're right that several missteps in Africa did happen. We believe that what we have retained in Africa is very valuable. We'll continue to stay invested and grow that business, and you'll see outcomes of the actions of that we have taken in the last 3 quarters emerging in the next few quarters. So we have committed to the strategy of being a player in the highly regulated market. There's been a lot of disruption in the market in terms of compliance and supply chain. And Pankaj, I mean, we have to accept the fact that the generics business is all about agility and shifting focuses, and we just do that. I mean, we cannot deliver a steady state strategy. You can say that we are opportunistic or label us however you like, but the bottom line is we are chasing sustainability in our reset model. And I think what we are doing today are all the right drivers and the pivots. We are building an organization around it, institutionalizing the processes and getting the people skill sets and continuing to deliver around compliance and execution in R&D efficiently. So I think we have the enablers in place, we have the differentiation strategy in place. Scale is important, speed is important, and that's what we are now building on. So we will continue to chip away from our strategy till we get it right. And I know a lot of people get very upset with an unsettled strategy, but I think generics is all about being unsettled.
In this transaction, in 7 years, this firm has not created value because, I remember in 2012, you're selling it for $375 million, $380 million, except for the currency part, I'm not talking about that. Then you bought around the same amount, you bought generics partners. You bought, in 2017, one more company which you integrated with Arrow. And here, you are selling it $380 million, $390 million again. So just wanted to understand, in 7, 8 years, back to the same field with the same amount. So what didn't work?
I think you got a few facts wrong, Pankaj. So firstly, the first business that we sold was an Australasian business. 65% of the revenue -- the EBITDA came from Asia and not from Australia. So you can't call that an Australian business. It was an Australasian business. We had manufacturing in Singapore, 65% of our business -- our EBITDA came from Singapore. So what we did is we went and created, we went back and learned from our experience in Australia, created a business, what we think is valuable. You are -- you have chosen not to value our preferred supply agreement value. If you put a value to it, that is a $200 million value, and if I put a 10x multiple to it. And if you look at the NAV for a 10-year contract of $200 million of EBITDA, there's another multiple for it. So you can pick and choose how you want to address this, but the bottom line is that we think that, given the circumstances the global pharmaceutical industry is going through and the fact that liquidity is a concern, this, we thought, was the best option for Strides.
The next question is from Sriraam Rathi from ICICI Securities.
Two questions on this. One, what will be the tax implication of this transaction in terms of the net cash outflow that will be coming from this deal, by selling this Arrow?
I'm going to let Badree answer that on tax.
So we have structured this transaction through a Singapore subsidiary. So we will [ since these ]. There are implications from [ a transition ] standpoint, so we'll be able to come back with the exact amount of taxes once -- as we complete the transaction.
Okay, sure. And will it be possible to share what will be the balance sheet impact because of this transaction in terms of fixed assets, goodwill, and on the P&L side depreciation, how much of? And was there also any debt involved in the Arrow books?
So this is an equity transaction, so there's no debt included in the transaction.
Okay. No, I mean, to say that we are selling the Arrow [ subsidies ] in Strides books. And in consolidated books, the debt is there. So I mean, if there was remaining debt in the Arrow books, then that would also be part of Strides' book in the future debt.
The debt, the [ fund ] debt is because of Arrow transaction. So we will be repaying the debt of about $160 million. The assets' worth is about $300 million-plus. So we will be -- we will have -- we see that reduction in the assets, plus, we'll also see a reduction in the debt by about $170 million, will be offset $160 million. And we should be having a debt in the range of about INR 1,000 crores.
Okay. And what was the [ indication ] for depreciation in the P&L? Any quantum?
It is about -- as Arun answered, that between the depreciation and interest, it is about INR 130 crores.
Next, we have a follow-up question from the line of Aditya Khemka from DSP Mutual.
So just on the last participant's question. INR 120 crores, Arun, you mentioned was the amortization of the goodwill of the Arrow transaction. Am I incorrect to read that there will be some fixed assets transferred as well, and there should be depreciation over and above the amortization number?
[ We just said ] amortization and interest together is about INR 130 crores. Answer to what would be the goodwill...[Audio Gap]
Sorry, Arun, I couldn't hear you for the last 30 seconds. So could you repeat yourself?
I said that there is no fixed assets transferred [ as a consequence ] a reduction, the interest and the amortization of the goodwill.
Okay. There is no fixed assets per se to be transferred. Okay. And on the U.S. side, your exit run rate being, let's say, $55 million or $60 million, whatever, yet may turn out to be. And with your CGT product now, your own front with Vensun marketing it. So what is the competitive landscape that you expect for the $400 million CGT product? And a bit on that could be very helpful.
Well [ if you see the CGT ] that one's with no generic. [ That's one, there is no generic [indiscernible]
I am sorry to interrupt you, but we can't clearly hear you, the management team.
Can you hear me now?
Yes, sir. Please go ahead.
So I was telling Aditya that the premise for CGT is that there is no competition. It is still the innovator. So if -- as soon as there's a first generic approved, the CGT status is lost. We still believe that we are on track to be, hopefully, the only player getting this product approved, but we can't say that at this time. And we expect to -- we expect this product to be significant if we get the approval, which we expect in the next 2 quarters.
Just 2 clarification on that, if I may, Arun. One, this $400 million sale, is it the IMS sale? Or is the primary sale of the product?
It is IMS sale.
It's an IMS sale. And secondly, even if you get CGT designation, you are awarded the exclusivity, my question on that was your understanding of the competitive intensity post the [ management endeavor ]. And as you say, even at this point in time, you are saying hopefully, does that mean that there are other filers also fighting for approval? And if they get approval before you, then they might actually get the CGT exclusivity and not you?
That is a possibility. But at this time, we believe that this whole product hinges on a very complex clinical study, and the clinical study is a very long-drawn process. And that's our hope, that anybody who's even started work on this -- or have crafted, would probably be behind us. But at this stage, I think there is just speculation. We believe we have a good situation with this product, but time will tell.
Okay, but there are other people doing clinical trials. So therefore, you know that there are others filers for the product already?
We don't know as yet.
Next question is from Sachin Kasera from Lucky Investment.
Yes, sir. If you could give us some sense of the outlook in margin for the African institution business going forward for FY '20.
Well, at this stage, the Institutional business looked like muted for several quarters. We don't think it's going to contribute any EBITDA. We are going to downsize that business to only our limited obligations. We are converting -- we are moving to the new regimen of products and we believe that this business will bounce back only after 12 to 15 months. But the Africa business will get to the company average -- regulated market average very soon, probably 1 or 2 quarters. So that's something which will be positive.
Okay. And sir, just one clarification on the U.S. business. This EBITDA breakeven at $32 million you mentioned was including R&D, or excluding the R&D expenses?
Including R&D.
Including R&D?
Yes.
Okay. And so how do we see the overall R&D spend going forward? Because I believe now, you've ramped up the R&D spend to INR 35 crores a quarter.
I think that's the peak. We don't go more than that. We only -- we had a lot of filings this year, so when you -- this quarter. So we had 6 filings. So when you have lots of filings, your fee increases. Otherwise, the R&D is the maximum run rate is about INR 32 crores, INR 33 crores.
And do we need to know if there are any significant CapEx next 2 years, post all the transactions, sir?
No.
And just lastly, sir. Will it be possible to break this INR 130 crores below EBITDA, Australia, between interest and amortization?
INR 60 crores is interest and -- so INR 60 crores is amortization and INR 70 crores is interest.
The next question is from Tushar Manudhane from Motilal Oswal Securities.
Sir, just was calculating the EBITDA breakdown. So Institutional and Africa and EBITDA 0; Australia business largely at 20%; and U.S. business is incrementally $9 million to be giving EBITDA of $3.5 million. So does it indirectly mean the other regulated market is at a very significant EBITDA margin?
It is.
Is it sustainable, or this is one-off?
It's sustainable.
Any probable reason for this, if you can highlight?
So again, it is the same -- if you look at IMS around these markets, it's all about operating in niche products, single -- 1- or 2-company products. So this is the strategy the company's been following through constantly.
Due to time constraints, we'll be able to take one last question. We take the last question from the line of Prakash Agarwal from Axis Capital.
Maybe discussing about $250 million, and of which, $160 million toward debt reduction and $90 million towards acquisitions. You're just adding the ones that you announced adds up to about $30 million. So what we're thinking about the rest?
Well, at this stage, nothing as yet, Prakash. So if we don't spend that money in the next couple of months, we will reduce debt further.
Okay. But entering into specialty or complex generics, would that be something which would excite us?
It will, but I think our scale in the U.S. will take care of the incremental R&D. See, I don't know if you remember that we've been always saying that we will not build a U.S. business to -- beyond a certain point in terms of revenues, and that's $400 million, $500 million range. For that kind of a portfolio, we are more or less done with R&D. So we think that our generic R&D spend will start reducing, and we will improve. Within the INR 170 crores that we spend a year, we would be able to fund the specialty programs that we have.
Thank you very much. We'll take that as the last question. I will now like to hand the conference back to the management team for closing comments.
Thank you all for your patience and your questions. Like always, please feel free to write to me or to one of my colleagues, and we'll be more than happy to reply back to you. Thank you, all. Good day.
Thank you very much. On behalf of Strides Pharma Science Limited, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.