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Strides Pharma Science Ltd
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Ladies and gentlemen, good day, and welcome to the Q3 FY '23 Earnings Conference Call of Strides Pharma Science Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. [ Abhishek Singhal ]. Thank you, and over to you.
A very good evening, and thank you for joining us today for Strides earnings call for the third quarter and 9 months ended financial year 2023. Today, we have with us Arun, Founder, Executive Chair Person and Managing Director; and Badree, Executive Director, Finance and Group CFO, to share the highlights of the business and financials for the quarter. I hope you've gone through our results release and the quarterly investor presentation that have been uploaded on our website as well as stock exchange website. The transcript of this call will be available in a week's time on the company's website.
Please note that today's discussion will be forward-looking in nature and must be viewed in relation 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 the Investor Relations team.
I now hand over the call to Arun to make the opening comments.
Thank you, Abhishek, and good evening everybody joining us today on our call. Let me first start with general overview of Strides. I know there would be specific questions around Stelis, which I will allude to in a bit. So as regards Strides is concerned, we are extremely pleased with the progress that we are making Q-on-Q in bringing back the company to its normalized EBITDA in the next couple of quarters. As you recall, we started off this year with an EBITDA of less than INR 4 crores. We are now at INR 120 crores in less than 3 quarters. A lot of that is driven by our focus across the group in term -- post COVID in terms of how we reset for the company in terms of our focus on portfolio, price discipline, margins and also our keen eye on our cost structures.
All of this is playing through. If you see the Q3 numbers -- revenue numbers slightly depressed in comparison to Q2. It was predominantly because we had zero revenues on our institutional business. This is quite normal as the institutional business is awarded every 3 years. Like we alluded in the last quarter, we have already completed our large allocation in H1, which led to a very hefty H1 numbers on our institutional business.
But I'm also now pleased to let you know that we have been awarded similar volumes in terms of our institutional business. We have received our awards, and we will commence supplies to the institutional business starting from Q1 for a 3-year contract. So adjusted for that, it's been a great quarter. And typically, we have INR 15 crores to INR 20 crores of flow-through gross margins on a quarterly basis on that business, which should have lifted our EBITDA significantly higher than the INR 120 crores that we reported.
But generally, significant milestones this quarter. First time, we've crossed $100 million of revenues in our regulated markets. We continue to grow well in our U.S. portfolio reporting yet another highest quarter. So we have beaten -- we have, obviously, done better than our Q2 numbers. I must say, however, we were -- we benefited from a significant seasonal opportunity, which is quite -- was quite unusual. Strides does benefit from these opportunities. But that also gives us the ability to further fine-tune our portfolio and exiting lines that don't make profits.
In the U.S., we still have over 100 approved ANDAs that go through rigorous processes of cost improvements and robustness before we relaunch. And therefore, we have a very strong pipeline for the next 2 to 3 years to continue the momentum of growth that we are showing in the U.S. Pleasing, of course, is the improved gross margin. Historically, our regulated market delivers 60% gross margin. We are very close to those numbers. So over the last few quarters, we have improved gross margins by 700 basis points.
And as we hoped and committed, we did receive the deferred payments from Australia. We received it just a few days before Christmas. So in the next update, you will see a significant drop in the gross debt to net debt. We continue to focus on improving our balance sheet quality, reduction of our debts, which is going well. One must also appreciate the fact that we have added $60-odd million of revenues in the U.S. in the last 9 months with no incremental cost -- no incremental increase in our working capital lines. Our U.S. revolver close to about $80 million has now been renewed for another 5 years, showing the strength of our U.S. business as that revolver is based on our U.S. operations.
Chestnut Ridge, which is a facility we acquired from Endo is now very close to breaking even. It still does have an under recovery that we are -- we believe we will solve for by the end of this financial year, and that should then add further momentum to the U.S. business. We guided in Q2 after a depressed other regulated markets business that will come back to the historical numbers and that was just a timing issue. We are also pleased to today announce that our other regulated market businesses, especially led by strong rebound in our B2B strategy and our U.K. businesses are now back to traditional quarterly throughputs. And in rupee terms, this is now again highest quarter that we reported.
So overall, the regulated market delivered a very strong $100 million-plus revenue. And we strongly believe that the fundamentals of the business have been solved for. We have now started our network optimization, cost improvements. We brought your cost levels to the levels that we were in FY '21. This is in line with what I mentioned in Q1 of this year. We have now moved from almost negligible EBITDA to closer to 14%. And we are chugging along, and I'm sure that we will add more to these numbers in the coming quarters, and we'll get back to our historical numbers in -- not in the distant -- in the future.
So key, of course, here is the continued momentum of relaunches of our approved ANDA portfolio. We have several new programs and B2B partnerships that we're building out in Europe. You will see a significant drop in the emerging markets because as you would note from our notes in Q2 results that we have deconsolidated Universal, our Kenyan operations, which delivered approximately INR 200 crores of revenue per year. And this is more to do with local strategies in terms of securing new businesses. We still have beneficial interests have not changed. But -- however, from an accounting standpoint, we stopped consolidating UCL as we have communicated earlier.
So with the pickup of the institutional business from Q1, we think we should be back on track to what we said would have been the end of -- or more or less the end of the reset strategy for Strides.
Overall, it's been a productive 3 quarters. We have grown steadily Q-on-Q with renewed focus on our governance and how we run this business, on our capital allocation and also our focus to -- on product portfolio and profit maximization. You will see more of the playing through because you'll also appreciate that several of our cost improvements included significant cost reductions of our overseas operations, which leads to several actions leading to costs that we carry through the financial year. All of that will be behind us as of the end of Q4. And that adjustment itself should add another 2% to 3% to our EBITDA.
So I'm confident that not only will we have a very strong come back in FY '24 as previously guided, but we will also be in line with our historical EBITDA, which is approximately in that 18% to 21% range for the next financial year. So I'm excited with the opportunities that Strides has set for itself. We have a very motivated and dedicated team delivering outcomes as charted. And I'm very happy with our progress. Our progress at Strides maybe are overshadowed by the referrals related to Stelis, but this is something that we've been guiding The Street for several quarters as we have taken several prudent provisioning in Stelis as we move from a product company to a pure-play CDMO. And I'll discuss more details in a little while as we get into Stelis.
Overall, debt reduction. We have now reduced debt by close to about INR 600 crores, and we'll continue to focus on reducing debt as we complete certain actions that we are focused on, which will not have an impact on our revenues or our growth strategies. We hope to give you more updates in the next quarter in the full year update.
Separately, in terms of our cash flow generation, we -- Badree can allude to that in his comments, but we have now become a cash flow positive company, which is great, considering that we have several quarters of challenges. So that's -- so we are focused on our capital allocation and our tight governance on our cash flows as resulted in improved inflows and that momentum should continue given that we are not refilling a lot of our inventory given that we had a large inventory position when we started off this year.
Having said that, we think that we will continue our focus. We will improve our margin expansion and you will see more important growth coming from other regulated markets as we stabilize the U.S. business mainly focused on portfolio max -- profit maximization and launching the right products that add to those -- the philosophy of our -- previous philosophy of niche product selection and margin expansion.
I know that there would be several questions on Stelis. We have endeavored to put in a very detailed note, but let me give you more color around this. Now as you probably are aware that Stelis is an investment in our biopharmaceuticals division that we have invested for several years. During COVID, we got into the -- we expanded our biopharmaceuticals business to setting up a new multi-model facility, which could make amongst other things vaccines and got into this contract with the Russian Direct Investment Fund, which is a sovereign fund of Russia. And we received all permissions to export the products but given the challenges, geopolitical situation, our take-or-pay contract has not been executed.
So although we have now received extension of inventory timing until end of June, we have made prudent provisions in terms of all COVID-19-related inventories as we now become a pure-play company. Consequently, we have also written down approximately some IP value of close to about INR 100 crores on products that we do not intend to continue developing, which we have been developing for the last 7 to 8 years as we believe that the value in Stelis comes from its pure-play CDMO strategy, and that is what is playing out well.
I'm also very pleased to let you know that we have had three very important inspections by the U.S. -- two from U.S. FDA and one from the EMA. And the only one product that we have developed got EU approval, and we are now in the process of licensing that product to a very large European company. We will make an announcement in time for our results in the next quarter.
Promoters have gotten along with investors at Stelis. Close to INR 650 crores -- have made commitments of INR 650 crores of capital to ensure that we meet all operational losses, debt obligations and COVID-related provisions and also to meet all our obligations. So we have reduced debt quite significantly in Stelis and debt at Stelis will now drop down to INR 700 crores by the end of March. And we now have a CDMO order book for the next year in excess of INR 300 crores now giving us the confidence to guide the market that Stelis will be EBITDA positive from next year. As you know, this is a high 90% gross margin business that we operate in.
Post our U.S. FDA approvals, our request for quotes have been very significant. And our RFPs issued now runs into several million dollars in terms of both contracts and also our engagement with big pharma and large biopharmaceutical companies have been very, very significant ever since we got our FDA approval. There have been -- these have been challenging times for biopharmaceutical companies globally in terms of compliance, and we are starting to gain from these opportunities.
We know we owe an answer to the Strides shareholders on what we intend to do with Stelis. I'm now pleased to let you know that after much deliberation, we have appointed a global banker to evaluate the strategic options, including a listing option for Stelis in the near term. We will have more concrete and final updates for our stakeholders with our FY '23 results or earlier. So we strongly believe that while Stelis has significant headwinds, not that it's making end to its liking, the shift to the CDMO business is playing out extremely well. We have added several new customers, and we are benefiting very significantly from the shortages of certain types of capacities that are still challenging the industry. And we are very happy with the new customer list that we are onboarding.
So with this rather long-ish opening commentary, I will suggest -- I request the operator to then let for questions so that we can address as many as we can. I have with me, Badree, my colleague, who will address questions on finance, but do you want -- so we have covered a little bit of the debt book, but if there are specific questions on finance, we are more than happy to discuss them. Thank you.
Mike, can you take the Q&A?
[Operator Instructions] We have the first question from the line of [ Rishab Jain ], an investor.
I have two set of questions. Firstly, on the U.S. business. So the U.S. business seems to have hit its revenue outlook now with the current quarterly run rate. So how should we think about this business over the next 2 to 3 years in terms of approval and new launches? And secondly, on the other regulated markets. So it has bounced back strongly during the quarter. So are there any one-offs or we can assume the growth trajectory to continue? And what will be the key drivers for this business going forward? And are there any specific geographies we should watch out for?
So the U.S. business at $63 million, as you rightly said, is in line with our exit run rate range to hit $250 million of revenues. We have two now consecutive quarters. So that is the base number that you can bake in, which is what I mentioned in the last quarter call. From here, we already have over 100 ANDAs approved through our acquisition through Endo, which we are in the process of relaunching from several of our sites. We are not dependent on any new product approvals because as in April, you would recall that I have mentioned that we are not investing in R&D in the U.S. because we have a very strong portfolio. And that answers your second question that we have diverted a lot of the R&D capital to the other regulated markets, which is where the build-out is coming with several filings and approvals that are expected, and we are getting on a regular basis. Our other regulated market business at $39 million has got no one-offs, and that is a number that we have hit at least three or four quarters consequently -- I mean, previously. So that is a good base number to keep, and there are no one-offs in that number.
We have the next question from the line of [ Aman Shah ], an adviser.
Am I audible?
Yes.
So I have two sets of questions. First is the emerging market business has seen a significant decline during the quarter. Can you help us understand the reason for the same? And what's the outlook for this business in the coming quarters? And the second question is also how does this place split into the overall strategy given that it's now approximately at 6% of the overall revenue?
Yes. Emerging markets, I explained in my opening statement that the emerging market is typically a market that we call for our Brands Africa business and UCL, which is a Kenyan operations, which we deconsolidated starting beginning last quarter. So adjusted for that, our emerging market is particularly about -- not more than about INR 400 crores a year. In the industry...
Aman sir, we request you to kindly mute your line. There's some disturbance coming from your line.
So the emerging markets business should be estimated at INR 400 crores. But in that INR 400 crores, almost INR 250 crores to INR 200-odd crores -- INR 250 crores is institutional business. This business is awarded to us once in 3 years. The contract was completed in H1 of this financial year. We have just won our awards a couple of weeks ago, and we have retained our volume share. So we still believe this business -- so you should in your evaluation -- I mean, in your calculations, you should consider the emerging markets to peak at INR 400 crores, and you'll see that run rate from Q1 of FY '24.
We have the next question from the line of [ Vishwas Nandini ], an individual investor.
My first question is regarding gross margins for the company. So we have seen a sharp bounce back in our gross margin on a Y-o-Y basis, I think [ GM ] expanded by 800 bps. So what is driving this margin expansion? Is this sustainable? And how is the overall pricing environment across the key markets? And my second question pertains to our operating leverage. We have seen an operating leverage playing out for the business over the last 3 quarters. So what is driving this improvement in operating -- is it operating cost, margin expansion? And from a long-term perspective, where are we in our journey on the margin expansion part? So these are my two questions.
Right. Our gross margin is sustainable at 57%, 58%. This is the second quarter running that we are delivering these numbers. So I don't see any reason why this will be any lower than this. It could be 1 or 2 percentage points lower once in a while. Especially when the emerging markets come up, the margins don't -- are not so much. Having said that, our journey is to get back to our 2019, 2020 numbers, which is approximately 61% to 62%. So we have moved from 50% to 57%, but 57% to 61%, 62% will be a slow climb, but we will get there in a couple of quarters.
Our OpEx leverage is coming directly from our oversight of OpEx. So we have reduced significantly our network cost across the globe. We have been supported, to be honest, also by reduced freight costs because of the significant drop in freight costs. So that's playing out to our budgetary numbers. So this is what is playing through. We are able to pull -- reduce every line item of cost, be it HR cost, be it warehousing costs, logistics, network. So we have been very successful in getting back the cost structure to where it should be. It's a frugal business. So we've brought frugality back to the business, and that's what we are focusing on.
We have the next question from the line of [ Rohan ] from ICICI Securities.
Am I audible?
Not so much, [ Rohan ]. You may want to try again?
So I have a few set of questions. So firstly, does the current write-off in the JV account for all the inventories...
Go ahead with your questions.
[ Rohan ], your question is not very clear. You need to come off the microphone or if you could join the queue back again.
I will come back again.
We have the next question from the line of Nitin Agarwal from DAM Capital Advisors.
Arun, on the U.S. business, given where we are and with whatever changes that you see in the landscape, I mean, how do you see in 15, 20 new launches that we're planning out, from an exit perspective, how should we look at maybe probably next year if you give us some sense on that?
So, Nitin, one thing that we're doing is while we're introducing that 15 to 20 products, we are also churning out or exiting products that don't make -- don't add any sense to us given the competitive landscape of certain products or -- and that is effectively getting the company back to the traditional Strides model. So it's not that I'm suggesting that $250 million with 15 other products will get to $300 million next year. That's not what I'm suggesting. What I'm trying to tell you is that 65 -- the $250 million being the base, we want to calibrate growth from there.
We are still very focused on our $400 million play in the next 2 to 3 years. We are in no hurry to get there. But we are in a hurry to move our margins up from 57% to that 61%. And that has been the focus, and we don't want -- and that is relentless, and we don't want to change that focus. So I'll be very happy if we get to $300 million in the next 12 months, but move up our gross margins by 4 points. And that will then give us very strong balance sheet, strong leverage, and we will achieve our target to be significantly lower than 3x on our debt-to-EBITDA. So that is our primary focus, Nitin.
Okay. And the slide mentioned about corporate actions and network optimization efforts, which have probably shifted to Q1. So any sort of broad color on what you have in mind on that account?
So we -- see, couple of things are very clear in this business. You either position yourself as being a very significant top tier player in the U.S. market or you position yourself as a company which is very focused on customer advocacy, having products on time, delivered on time and then become a reliable player as what we used to be. So from 2016 to 2019, we had, for example, zero failure to supply in 3 years and $500 million of sales. We want to get to those kind of recalls rather than saying we are the thirtieth biggest company in the U.S. or the thirty-first biggest or fifteenth biggest. So that's no more the focus.
I mean -- so the network optimization, we have achieved a growth of almost $70 million of incremental revenue with no incremental unit sales. So the question you're asking ourselves from a network is that do we really need so much of infrastructure to run a business of our size and -- or we use the infrastructure that we want to have and deliver products which are more profitable. The Endo acquisition allows that -- allows us that luxury to pick and choose products that we want to launch because if we -- if I tell you that I want to build this business to $600 million in the next 2 years, then I'll have to be on the treadmill. And I don't want to be on the treadmill when it comes -- given the significant challenges the industry is facing.
So I don't want -- I want to be a very measured player in the U.S. with the right product selection and launching with the right price discipline. And key for me is to get the manufacturing operations in New York to a profitable level, which it hasn't in this year. So I'm actually carrying a fair amount of under recovery still from our Chestnut Ridge facility in New York. And I think that we can fix that in the next financial year. So those will be a bigger focus. You would see margin uptick. I'm not so sure about revenue uptick, and that's not my focus in the next 12 months.
Right. And on the debt part, so you've guided to about a 3x debt to EBITDA by the end of the year. Now over a slightly longer period, aspirational. I mean, where would you want -- I mean how would you want an ideal debt-to-EBITDA picture -- debt profile to look like for Strides as a business?
So see, I'm very comfortable with the debt to EBITDA of under 3. There is absolutely no problem. The company has got no -- very little long-term loans, very little long-term loans. One of the other reasons why I'm not so excited about growing rapidly the U.S. business is that any incremental dollar revenue takes close to about 200 days of new working capital on the sales. So I would want the U.S. business -- today, it's already making profits for us, but it is also solving for the Chestnut Ridge facility in New York.
Once that is fully sorted out in the next couple of quarters, I don't think it will take us more than 2 quarters to sort that out, we would then be able to use the free cash that we generate in the U.S. to solve for growth. So I don't want to -- if I'm going to [ activate ] growth, I will have to increase our working capital deployment for the U.S. So it's a chicken or egg situation, unfortunately, but we are very happy with the trajectory because our other regulated markets will more than make up for any adventures that we may be missing out in the U.S. in the near term.
And the last one, if I heard you correctly. The emerging market business given the restructuring, we should now look at as including the branded business about INR 100 crores per quarter -- I mean, on INR 400 crore annualized business roughly speaking from modeling perspective?
Yes, but because we won the contract a couple of weeks ago, we have the allocation, so I can give you comfort around the numbers. But this will be starting from Q1. We will start very little supplies from this quarter. This is very typical that the global funds have a 6-month lag between 2 contracts.
But you mentioned the restructuring bit where the business is not getting consolidated. Despite that, we will end up recording this -- so this INR 400 crores is after adjusting for the restructuring, which is there?
Yes. So if I had not deconsolidated INR 400 crores, it would have been INR 600 crores.
We have the next question from the line of [ Devanshi Mehta ], an investor.
So I just wanted to understand from a portfolio build-out perspective, how should we look at the overall R&D investment for the business going forward? And also given the regulated market businesses witnessing a strong growth, how are the utilizations at the plants? And how do we look at the CapEx requirements for the business to support the growth plan? That's from my end.
Yes. So the R&D spend in size is lower since the last 1 year. We've brought it down from $25 million to just about $10 million. And this is because we don't need to spend new R&D monies for the U.S. as we have over 100 approved ANDAs that have not been launched. And every year, we are launching 12 to 15 new products from this approved list, which does not require any R&D activities because these are already approved products.
So we are just moving these products from Chestnut Ridge in New York to other sites within the group. And that leads to your next question, that currently, we have approximately capacity utilization of only 60%, which means we have significant capacity unutilized, which is why we talk about under recoveries very often in our conversations. So there would be no new CapEx required for several years even if you double our business on where we are. So that's on the business. On the regulated business, your question specifically was on capacity, right, and utilization. So I think we addressed both.
We have the next question from the line of Amar Maurya from AlfAccurate Advisors.
Am I audible?
Yes.
Couple of questions from my side. Firstly, in U.S. business, as you indicated that the winter portfolio had also done well in this quarter. So what kind of like the uptick we would have got from that winter portfolio?
We don't give specifics. We have a lot of products, which -- and as you probably would appreciate, we don't have anything called summer and winter anymore. So most often, some of our seasonal products are sold throughout the year or at least 9 months or a quarter. So we don't call out a specific number. We're just saying that we benefited from that. So I'm not suggesting, therefore, our business will drop from the next quarter. It just gives us flexibility on what products we introduced quickly into the market for -- without contracts and with contracts.
So basically, my point was like probably this particular product is largely having a better margin than the overall portfolio...
Not necessarily. Our margin profile, if you look at, has only improved from 57% to 58%. So if these products were very big, then our margin expansion would have been far greater from the last quarter.
Okay. Okay. And secondly, sir, like you indicated that largely you are targeting operational profitability and less focusing on the revenue growth at this point of time.
No, that's not true. I'm saying only with regard to U.S. Because in the U.S., when we hit $250 million, we have added over $100 million of sales from last year. So we have grown 40%. So going forward, you will see growth coming from non-U.S. markets. So our focus this year has been to increase the U.S. growth quite significantly.
Because you already reached to -- if I do the annualization of this particular quarter number, I think you already hit to the $250 million number, right?
Correct.
So that's what is your aspiration for the U.S., as you said.
Correct. So we have already hit it. So what we are saying is now that we have done with that, we'll steady the business with a large portfolio of approved products to improve our margin profile to what we have a target margin profile of 62% -- 61% to 62%.
Okay. Okay. And this you expect to happen, let's say, in '24?
As in the margin expansion, that is our hope. I mean, but we do not know how markets play out. But yes, we think we -- with all -- everything that we're doing, we think that we'll get closer to the 60% in FY '24. And that is why I suggested that our EBITDAs were -- are at 14%, we'll get back to the 18% to 20% range. And that's the reason. We need to take the gross margin up by about 300 basis points.
We have the next question from the line of Sarvesh Gupta from Maximal Capital. Mr. Gupta, your line is not clear. Kindly come to the -- go off the speaker phone.
Is it better now?
Yes. It's much better now.
Yes. So first question is pertaining to the gross margin. So this quarter, we saw that our institutional business actually fell off the cliff. In spite of that, on a quarter-to-quarter basis, there is no increase on the overall gross margin, which should have ideally increased a lot because of much higher mix from the regulated markets. So that is number one. Second is that you -- there were some news reports on the reintroduction of ranitidine in the U.S. So if you can throw some color and if there are any comments on that front. Thirdly, on the Stelis. So this is the first time I think there is no slide or no presentation on Stelis business as...
There is -- there is, Sarvesh. There is a big -- there is a very significant detailed presentation on Stelis. You must have a look at it.
Okay. Maybe I missed it. But now I think last quarter also, you had sort of alluded that on account of this global banker, which has been appointed, and we were planning a big fund raise to lower down the debt at the Stelis level significantly...
So if you look at the deck, we were -- we have appointed a banker to the strategic options, not to fund raise. The fundraise has already been done, INR 650 crores of fundraise has been committed in Stelis, of which INR 475 crores has already been invested. So it's all there in the Stelis deck. And to answer your question on Strides, the other regulated market does not have the same gross margin profile at the U.S. market. But at the same time, it does not have the same cost structure as the U.S. market. So if you see the growth of the incremental $9 million has come from other regulated markets. So the U.S., obviously, run -- operates at a much higher gross margin.
Understood. And any comments on the ranitidine thing?
Ranitidine is there and done. Currently, we don't think the product is going to be relaunched by anybody in a long while. The current regulatory framework that the FDA has asked companies to do on ranitidine is almost impossible. Having said that, ranitidine is coming back in certain countries in Europe, Canada, Australia. So we are watching. And in these markets, we hope to relaunch the product in the near term.
Understood. And finally, on the rightsizing of our infrastructure. So if you can throw some color, I mean, what exactly are we planning to do? Are we planning to sell some of these facilities? Or are we planning to sort of...
No. Rightsizing can mean a lot of things. It could be operating facilities instead of two shifts in single shifts, moving plants from less efficient plants to more efficient plants. Bringing products from -- to the U.S. to India or taking products from our group to external manufacturers. So that is what is the network rightsizing means. And it could also include, does it make sense to have so many plants? So all of that is a function of long-range plans and strategy and what our focus is if you have to build margins, you really don't need to sell billions of units to improve the quality of your business. You can still sell few -- less units for more outcomes.
We have the next question from the line of [ Vikram Somani ] from [ Somani ] Securities.
Can you all hear me?
Go ahead.
So one question with respect to Stelis. Can we anticipate any further write-offs going forward in terms of either [indiscernible].
Everything is taken into account.
Everything is taken into account? Okay. Great. Another question with respect to our shareholding in Stelis. In your document where you're refinancing the loans, you all say that Strides holds 31.5% in Stelis and the investor presentation says 33%. So what's our current shareholding or are there some outstanding volumes that are being factored in there?
Sorry, it's fully diluted because as you see on the deck of Stelis, there is outstanding capital that needs to come through. Like we said, out of the $650 million, $475 million has come in. When all the $650 million comes through, Strides will go down from 36% to 31.5% -- 33% to 31.5%.
Okay. Got it. Noted. And one question with regards to the industry segment. This gap that you are seeing over the 2 quarters, I know you've elaborated a little bit. I just wanted a clarification.
Which segment?
In the industry segment. The 2 quarters, is that of a PQ inspection or compliance delays?
No, no, no. So the global funds award contracts once in 3 years. Typically, they completely offtake in about -- instead of the 36 months, they complete the offtakes in about 30 months so that they're keeping up inventory for -- and then the bidding starts in the process and they're in no hurry to stockpile because they already have stockpile. And that is why if you look at our H1 numbers, our institutional business in H1 was almost $40 million -- $35 million or $40 million. So we did the entire annual year's production in H1.
Got it. Good to know. And going forward, can we expect to maintain the same volume? As you actually said that volume...
We have already received the same allocation. We got a slightly better operation.
We have the next question from the line of [ Ankit Jain ], an investor.
Are you expecting any more write-offs in terms of Stelis or in terms of Strides? And then second, how you think the margin will be play out...
Can you just speak up, please, [ Ankit] ?
Yes. So what I was saying is there any...
First question, we understood.
And the second is how the margin will play out in the future for the acquisition that we did?
Okay. So the -- like I said, first one is on write-off slides, there is one. We don't anticipate anything. We have a very good system there. When it comes to -- the second question was on acquisition of the Endo. I did mention in my long-ish introduction that we will break even the plant in FY '24. We did a lot of actions. We have reduced our costs from $47 million to now $31 million. But that cost reduction had to go through what is called a regular WARN notice program in the U.S. And we will get the full benefit of that starting from Q1.
So we are carrying an acquired cost and there were certain challenges on us to make those decisions regarding rightsizing based on the contracts we signed up. But all that is now done and dusted. It's in the public domain that we have issued a WARN notice, and we will have a head count reduction starting from 28th of this month, but we'll still carry certain costs till end of April. But after that, we'll get -- we would have reduced the cost that New York facility by about $15 million. And that is what will drive the U.S. operations to profitability.
We have the next question from the line of [ Pushkar Bhavre ], an individual investor.
Can you hear me?
Yes, [ Pushkar ]. Go ahead.
Okay. So the question is that since June 2021, Strides took almost five quarters to come back to the historical level of U.S. revenue business. Then in quarter 2 of this FY, U.K. business went down from $40 million to $31 million. Then again in quarter 3, U.S. and U.K. came back to a historical level. But this time, Africa and institutional business came down. So as an investor, I have -- there is no consistency in our overall business. So are we getting value to our investments? Because since 2017, we are not getting any value to our investments. That is my first question.
Second is that you have launched 10 products in U.S. this financial year. You have said that 20 products would be launched in this financial year. That is one. Second, you said that $240 million will be done in U.S. in the entire FY. Are you confident about -- regarding the -- reaching this level?
Yes. So if you look at our exit run rate, yes, the answer is we will reach $240 million to $250 million. That was what we've guided as our exit run rate. We are on track to get there. And I do appreciate your angst in not having created value since the last several years. And that has nothing to do with a one-quarter dip in our business. In Q2, we had guided that the other regulated market had a one-off quarter spill, which we will completely recoup in Q3 and we did exactly that. So we guided you as an investor in Q2 that we had more -- it was more an invoicing, accounting logistics issue, which we solved for, and we are back on track. So we are -- if we have six continuous quarters where we have performed in the $37 million to $40 million range, and if we have guided the market that we had a one-off issue for various reasons, I think it's an unfair position for you to take in terms of our consistency.
Second, talking about Africa. I just mentioned that we don't -- the Africa business for us is a branded business, and we are doing extremely well with that. There is no lack of consistency. Probably you have not paid attention, [ Pushkar ], to the fact that we said in Q2 that we've deconsolidated our Kenyan operations. So you're not doing a like-to-like comparison. Separately, we told you that we have already won our emerging market contracts from the institutional business, which will get back our revenues back to INR 400 crores from Q1. So when you do all of that, that is very standard in our business that there are contracts that you win, there are contracts that you lose, but overall, you should do well. So our focus has been on getting the company from negative EBITDA to a positive EBITDA traction to set the goals for the next year, where we are very confident that we'll get back to our historical highs. And I'm -- first of all, thank you for your persistent investments in Strides, and I'm sure that these actions will give you the results that you're looking for.
We have the last question from the line of [ Aditi Kasbekar ], an individual investor.
Arun, hope you're doing well. Am I audible?
Yes, you are, [ Aditi ].
So basically, I have one clarification. I think like a few con calls back, it was mentioned that we have got a total basket of about 260 approved molecules, out of which about 60 is commercialized and the rest is sort of approved and yet to be commercialized. Out of which, I think it was said that 80 to 100 molecules need 60% gross margin criteria. So firstly, how has that mix of sort of commercialized molecules changed to support the $63 million U.S. run rate? That's the first question.
And then the second question is on the other regulated markets. I think our peak -- I mean, if I see the quarterly run rate, the peak was in fourth quarter of FY '22, when we did about $42 million. So do we see us getting sort of to that level or sort of getting to that $42 million to $45 million level? Or like you're mentioning on the U.S. market where you said that $240 million to $250 million annual sales is what you're targeting. Similarly -- or are we thinking on ORM also a similar kind of an overall size for the annual revenue in terms of the exit run rate? So those are the 2 questions.
Yes. Thank you. So on the U.S., while we -- you're right with the number of molecules that would meet our threshold margins that we are used to as a company. What really happens, [ Aditi ] is that a lot of the heavy lifting that we have done on product launches goes to support the Chestnut Ridge facility, which is under recovery. I did tell you -- allude that by the end of this quarter, all of the actions to get the cost size right has been taken. And therefore, you will see an incremental flow through. So almost $60 million to $70 million in my revenues in the U.S. goes only to support the Chestnut Ridge facility without adding any EBITDA to the group. And that's going to change because all the actions to cost -- to right size the cost has been taken and dusted. So you would see the flow-through of those margins actually coming through starting from May when our cost structure is reduced with all the actions we have taken.
Considering these are major corporate actions, U.S. regulations require us to follow certain processes, and these are not employment at will opportunities that we can normally use. Therefore, there are -- there's a WARN notice, there is time you have to give people. There's a severance pay. You have to put forward various investments to ensure that they can be reemployed in other places and stuff like that. All that has been done. And as of 28th of January, that will fall in effect, but we still carry costs for 3 months. And by 28th of April, we will get to a cost level that is comfortable where we know that the U.S. operation with this portfolio will start delivering markets.
On the ORM, $39 million, $42 million is a good base level from where we would grow. I would like to believe that this business will be -- will mirror the U.S. business in about 2 to 3 years. There's a lot of focus that we are attaching here. And I would estimate the business to exit at least $50 million in the next financial year. This is a slow growth business because it's a diverse continent with several customers and countries and languages and packaging. But it's slow and steady, it's very sticky and it's -- it cannot deliver the same gross margin as the U.S. business, but it doesn't of course incur the cost that we are used to running the U.S. business. So I think next year, exit run rate this time at $50 million would be a reasonable level of guidance from us at this stage.
That was the last question. I now hand it over to the management for closing comments.
Thank you all. Really appreciate your time today. And as always, if you have questions, you may please reach out to me or [ Abhishek ] or to our Investor Relations cell. Thank you very much.
Thank you. On behalf of Strides Pharma Science Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.