Strides Pharma Science Ltd

NSE:STAR

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to Strides Pharma Science Limited Q4 and FY '22 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.

[Abhishek Singhal, analyst]

A very good morning, and thank you for joining us today for Strides earnings call for the fourth quarter and full year ended financial year 2022. Today, we have with us Arun, Founder, Executive Chairperson 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 have gone through the results release and the quarterly results presentation, which have been approved on our website as well as the stock exchange. The transcript of this call will be available in a week's time on the company's website.

Please note that today's discussion may be forward-looking in nature and must be viewed in relation to risk pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to the Investor Relations team.

I now hand over the call to Arun to make his opening comments.

[Arun Kumar, executive]

Thank you, Abhishek. Good morning, everybody, and thank you for joining. In all, this is a very unusual time for us [ giving ] Strides' earnings call, as we had to announce the results quite late yesterday, given some of our directors are overseas. Thank you for the accommodation and look forward to this engagement.

So before I start, let me start off saying that while it has been an extremely challenging year for Strides and we see green shoots, as a promoter and as the founder of the company, I take full responsibility for the events of the last year as regards the organization's performance. It is easy to rationalize on COVID, the business environment [ whenever ] where it is critical to accept responsibility, fix it and move forward.

I'm actually very delighted to say that I'm happy to come back to work full time at Strides. And as a family, we are fully committed to ensure that Strides gets back to its previous glory or past glory, if I may. And we are determined to institutionalize the organization to face challenges of this -- of the environments that we faced or any future environments that may come our way.

I also give credit to the fact that while we've had a difficult year, we had a set of extraordinary people staying fully invested with the company and its opportunities.

We have -- with my coming back on April 9, although I started getting involved into the business a little earlier. First of all, I want to thank all the leaders who served the company in the last 2, 3 years and have moved on for better -- for other interests or for the reason that the company has revisited and recalibrated its strategy.

Having said that, I'm very happy with the team that we now have in the organization. And apart from my coming back, I'm also delighted to welcome Venkatesh, who will now head our U.S. business.

Venkatesh until very recently was the CEO of [ Alcon's ] U.S. business and Micro's U.S. business before he joined us. Being a seasoned professional with deep experience in the market, he will lead our sales and marketing activities in the U.S. And U.S. continues to be an important market with respect to [ what the ] business environment it currently operates in.

The transaction with Endo, in my view, is extremely accretive to the organization. The integration of the Endo business, which actually technically integrates to us only from June 22, is an important milestone to our reset and recalibration strategy. To have Venkatesh leading that business is an extremely important step that we have taken.

And I also wish to thank [ Terry ] who notedly got us the transaction closed, but also integrated and is in the process of handing over the business in a seamless manner to Venkatesh and his team.

So Q4, nonetheless, has been a much better performance, especially coming back after 2 difficult quarters. We are seeing green shoots across all our businesses. In spite of the -- in the doom and gloom, we have had some outstanding outcomes. For example, our U.S. business has started to pick up. We are now confident of hitting $250 million guided. This is not going to be telescoped towards H2 or it's going to be leaner, which effectively means we will see growth pick up fairly quick. And as early as in H1, we should get into a leaner situation with our numbers in the U.S. That will give us a lot of headway to build the business from there on, considering that we have over 150 products that come through the acquisition.

We have a strong plan for a launch of 20-odd products per year starting now. The -- all of these products are approved. So we are not dependent on any regulatory inspections or facility inspections as these are approved investments, approved ANDAs.

More importantly, in the U.S. especially, we are sitting -- we are sitting on significant inventory as the volumes dropped in the last year. And with the volume pickup being quite significant and we are already seeing growth in volumes as early as this quarter. We believe this will improve our cash flows quite dramatically. This is an important step for us to bring our balance sheet size in order, apart from the fact that we have guided that we will reduce our debt by INR 1,000 crores through a combination of the fact that we have now successfully managed to -- not managed, we have requested, and our partners in Australia have been very kind, to bring forward our payments. So we expect to receive these payments in H1 against December 31 as previously contracted. This is going to help our debt book quite a bit.

And also the fact that we have reset the businesses to focus on large businesses where we have complete control on cash flows. We would exit miniscule and tiny businesses which do not move the needle for us for revenue or EBITDA. That and free cash generation will significantly help us achieve our stretch target of reducing debt by INR 1,000 crores. And bring the company back to a very solid exit run rate, of EBITDA exit run rate of -- to be under 3x EBITDA.

This is the path that we have set for ourselves. We're very confident of achieving it. This will also be aided by strong performance in other markets outside of the U.S. We reported in Q4 our highest quarter in the other regulated markets, with strong pickup coming in post COVID in the last 2 quarters. And we believe that we see a similar pickup in the U.S. operations in the coming quarters.

The emerging markets continue to be -- continue to grow. Of course, it's subscale, but it helps us in our manufacturing and the recoveries, and we will continue to focus on that business and build from where we are in terms of top line growth. The margin flow-through is not very significant, but the absorption is very, very important for us.

We have a series of cost improvement programs that includes a very significant relook at our cost structures, reducing the complex natures of our international businesses, reducing the number of subsidiaries, operating companies in more in [ matrix ] and sometimes on a functional leadership manner, reducing cost consequently, and we expect our cost improvement programs will enable us to get market leadership in several products and also reduce our cost structure quite significantly.

Given our significant investments that we have and approvals that we have, we are reducing our R&D investments into the U.S. as we don't see the need for significant R&D investments over the next 3 years. Although we will keep our eyes open and continue to file critical products that we believe are important for our domain and niche strategy. So that will continue, but we will not be a 25-30 product filer anymore in the U.S. and shift the focus to develop the launch of products that are already approved.

What Endo has done for us -- the transaction with Endo has done for us, that's clearly solved what used to be an acute only strategy which worked very well for us pre-COVID. But COVID clearly exposed the portfolio strategy gaps. And now with the combined portfolio that we have from Endo and Strides, we don't have any more excuses on our narrowness of our portfolio. And we strongly believe that the new domains in controlled substances, hormones and nascent space will give Strides enough ammunition for future growth and also product launches.

We are -- we have created significant working streams, clearly laid out scorecards for our leadership to execute across globally, and we're all working in sync to create what we call the one Strides and build a company of scale and size, which I'm sure that you will see the results flowing through in the near term.

I won't dwell too much on FY '22. Some of the key issues, obviously, was that a significant drop in the gross margins. For the first time, we had a drop in revenues, although Q4 has started to look differently. We had a 16% increase in operating costs, employee and other expenses. We obviously as sitting on significant inventory, which we are now already seeing a normalization. We expect this inventory to be normalized to the extent that we need to have by the end of the year, releasing cash but also then starting on the under recovery process in our plants. Considering that we are sitting on large inventories, we obviously are not filling in new stocks until the stocks are [ gaining over ].

But this year, it's going to be a very important year on -- or raise a sharp focus on execution, margin expansion and also bringing the balance sheet to size.

The detailed deck has got individual slides on the U.S., for example, the U.S. sales has moved from $38 million to $44 million. And if you're guiding the Street for $250 million, then obviously this needs to be closer to a $60 million run rate. We are very confident that we will get there very soon. And that's mainly to do with the integration of the Chestnut Ridge operations in the U.S.

We are expanding significantly our other end markets. And we are -- and in any markets that we are not present, we have significantly secured new partners and we are working with -- on increasing our B2B, IP-led B2B profit share model across Europe in markets that we do not want to operate ourselves in the front end. And we have exited many markets like Canada and some parts of Europe where we can't scale. But in the markets that we can scale, we are putting all our energies to become a leading player with OpEx leverage and significant margin expansion.

Our emerging markets, especially our French Africa markets was not impacted by COVID. We all know that COVID was not at figure in Africa, especially in Northern Africa, where we operate. And we continue to benefit from those [ and ] our margin expansions. Productivity of our sales reps now numbering about 150-odd sales reps in French Africa and continuing to introduce new products will ensure that we will have an improved sales in those markets.

There are a few markets in Africa that we operate that we are now revisiting if it fits into our overall strategy of scale: that if you're not a top 5 player in a domain or a frontier market, then does that make sense for us to be in. And we are reviewing those and -- but none of that is going to impact what would be an important year for sustained, substantial growth in top line and EBITDA.

We spoke -- we have a very detailed deck this time on how we propose to reduce our debt and during the -- when we open the house for questions, we'll be more than happy to answer in specifics, but we are also have detailed explanations on Stelis. We believe that Stelis has done extremely well as a pure-play CDMO in its first year of operations. We have a revenue model, which we have articulated in our deck.

We have 2 parts. We have 2 businesses, namely the CDMO business where bulk of our investments have been made. And with the completion of our new site, we now have amongst the top 20 global capacities in microbial and mammalian manufacturing capabilities, but we are one of the few global players which are fully integrated from cell line development to fill finish.

We are delighted to have it -- to have onboarded 6 customers in our first year. In the first 3 months of our operations in this quarter already, we have added another 6 new customers. Market services agreements that we sign up with these customers are always linked to a contract for supplies, and our supply book is now in the vicinity of $100 million for the first years of master service activities that we have done.

Now just that you understand, it's understood well. A market service agreement typically leads to a commercial supply agreement in about 3 years. We are approximately a 1 year, 1.5 years away from breaking even in that business. Outside the challenges on Sputnik and the sanctions on [ RDI ], which we are finding all kinds of solutions to resolve, including taking the help of the government of India to use -- to work with their good offices with the Russian government to find solutions, as we are sitting on inventory of a sale value of close to about $40-odd million, which is extremely critical to -- for us to find a home. And we are working for it.

Luckily for us, our dating on that is -- of our stocks are good. We still have 12 months of inventory. So we don't see any risk for the next 3 to 4 months.

The next 2 quarters for Stelis is extremely important as we find a solution for Sputnik, but more importantly, our own COVID vaccine, which is called AmbiVax, which is the -- which is in-licensed from Akston Biosciences, has completed the full dosing of the Phase III patients in India. As some of you may know, we have an EUA status on the start-up issues at the government of India. And we have now applied for a booster study across all variants. And this being the only -- or the first or one of the few thermostable vaccines, which doesn't require cold chain.

I mean it requires cold chain, but normal under 25 degrees makes AmbiVax a very unique vaccine. And therefore, we still believe that there are a lot of legs left in this program.

Outside of that, the CDMO business will do well. We expect the MSA contracts for this year will help us operationally break even. And we have existing investors have got an additional $70 million, $65-odd million of commitment of capital, which everybody is committed to invest. Consequently, we don't see any challenges for the funding of Stelis. Of course, this does not include the fact that there continues to be ambiguity around Sputnik, but we want the next 3 months to resolve for this and to also see how AmbiVax itself progresses, because we are expecting to submit our Phase III final clinical data through the government of India by middle of June.

So there's a lot of important milestones. Most interestingly, the facility -- we have 3 plants. 2 blocks were inspected by the EU authorities, and we are expecting formal approvals, but we have great outcomes. And consequently, we are seeing a strong inbound of customers.

Stelis's CDMO business is unique, considering that we do not do small contracts. We do service contracts only with [ suppliers ], which makes us a very uniquely different biotech, biological CDMO compared to other players in the country. And with the size and scale of what we have achieved, I am extremely confident that this will be an important pivot for Strides.

We've also announced that Stelis, 2 significant announcements with regards from the business development. We have a stellar team in house who's world class in the last 2 years building out this business. But as we build -- as we grow globally, I'm delighted to invite -- to welcome Frank and Dr. [ Axel ], both veterans in the biotech CDMO business development activity, having more than 25 years of experience respectively in -- both in Europe and in the U.S. and with deep connects to big pharma.

So I'm quite excited about the opportunities around Stelis. I know that there will be questions on what are our plans for Stelis. We have put all our plans for Stelis on hold till we find a solution for Sputnik, till we hear about AmbiVax and we continue to see value [ in us ] to convert some of the major customers that we are expecting to convert in this year.

We also are -- we have been announced the U.S. FDA inspection. That's a very critical milestone. So in the next update, I think we'll have a lot more news about the limited -- I mean the 2 or 3 elements which are still [ under review for Stelis ]. But we are right on top of matters, and we're very excited about our investments in Stelis, and we look forward to address any specific questions.

I must also apologize that most of you may not have had time to read through our very detailed explanations, including our slide on extraordinary items. And if there -- and we believe -- and we know that it's a busy day for many of you. So we'll be more than happy to take calls from any individual investors or analysts who may want to ask these questions, and please write to us or to Abhishek and we'll be happy to address. And we now are happy to take any questions that you may have.

[Unknown Executive]

Operator, can you open up for questions?

[Operator]

[Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal.

[Tushar Manudhane, analyst]

So just would like to understand on the U.S. front, like the Endo portfolio would have a similar gross margins as the Strides portfolio in first place?

[Arun Kumar, executive]

Yes, that's a fair estimate.

[Tushar Manudhane, analyst]

So secondly, even on the Strides side, we had a good number of products which are already approved. But if you could just explain any reasons for you were not able to launch in the past? And then what gives you the confidence that they would be still very profitable going forward as we launch in the coming years?

[Arun Kumar, executive]

So Tushar, out of the 200 or 150-odd ANDAs that are not launched, more than 100 of them came through the federal inorganic transactions, small ones we did earlier and now with Endo.

Many of them needed significant improvements in terms of costs, so which means vendor changes -- some significant changes mean that the past approvals from the FDA can go up to, go over 6, 8 months of work from our side and 6 months of approval time.

We have now received several approvals and we continue to receive several approvals of key products on a regular basis, and that is why we are now committing to launch at least 20 products from the current 55 to 60-odd products that are launched. We should be able to take that more than 20 per year or 20 at the minimum.

[Tushar Manudhane, analyst]

And given that there has been a good amount of price disruption, I mean, that is what we hear from the peers. So on our existing portfolio and even on the Endo portfolio, what kind of price erosion we would have experienced?

[Arun Kumar, executive]

So we -- I mean, in FY '22, the price drop was very significant. I mean, we dropped -- I mean you can already know that the fact that our gross margins have dropped by 10%. The drops have been, in some cases, as high as 30%, 35%, in some cases, as low as 10%. But what we are seeing is not across the platform, across some products, especially in our portfolio, especially in a few to be fair, we are seeing [ prices ] by either people who disrupted the market now no more operating of having got rid of their inventory because it doesn't make sense to play at those prices.

So we are seeing rebates. We are winning at higher prices. We are winning businesses and we are growing our base business.

So we are not seeing -- I think our value deflated, revenue deflated by from almost $200 million to $230-odd million if I'm not mistaken -- I'm sorry, $160 million. So we had a $50 million revenue deflation. We are now very confident of getting back the base revenue this year [ in sales ]. And then added to the Endo portfolio, and that's what makes our $250 million quite feasible.

So we are not seeing more deflation on our portfolio, because if we are seeing they're obviously not winning or bidding for them because it doesn't make sense. But overall, given that we have the luxury of so many unlaunched products. And with the fact that we started the cost improvement programs probably 2 years ago, we are very close. And we are getting some very nice approvals as we speak. They are small, but they are very nice and niche, and we'll see some more in the next couple of months.

We believe that the margin uptick will come on the $250 million. I don't see a drop in margins from where we are. But it won't be across the board that we'll be able to [ up print driven ] margins and it's going to take us some time before we get back to our historical 60% gross margin.

I mean, to be fair, our U.S. gross margin was 70% and now it's about 60%. So getting back to 70% is a long haul. And I think somewhere between 60% and 65%, we should settle in the U.S. and then kind of recoup at least 3% or 4% of the global gross margins that we have lost in FY '22. And I'm quite confident about getting there.

[Tushar Manudhane, analyst]

Understood, sir. And going a little below the gross margin, you have elaborated on good 300 bps improvement in the logistics cost. If you could elaborate? And this could happen over what period of time?

[Arun Kumar, executive]

So last year, because of the supply chain disruptions, especially with input material, either where we're sitting on too much of inventory, which means you are paying for very expensive warehousing costs in the front end. And these are not cheap because we pay by the week, by pallet. So normalizing that when you're not shipping new goods and getting pallets out of UPS and warehouses, that obviously will reduce our cost.

But more importantly, with very stringent focus on our AOP, or annual operating plan, which gets constant updates, we are now producing only to demand and not to estimates. So because we have a lot of inventory, we don't really have to rush anything by air.

So from end of September, except for extraordinary opportunities that adds to our $250 million uptick, we don't see the need to send any goods by air. So all the sea fares have gone up from an average of $6,000 to now $25,000 per container, and containers are not available for the U.S. as you would have probably heard from many other peer groups. The fact that we are able to take off even more expensive freight costs from air into sea will reduce the cost. And most of the cost reduction will come from front end [ also ] reduction costs.

[Tushar Manudhane, analyst]

Got you, sir. So considering the improvement in the sales and the reduction in the cost, like we are currently at about 5% EBITDA margin as we ended FY '22 in fourth quarter. So what kind of EBITDA margin can we think of for, let's say, in FY '23?

[Arun Kumar, executive]

[ La can guide you for a percentage margin ]. Our focus is to get to focus on revenue growth. Revenue growth will get back our volumes and not necessarily from the U.S., from all markets. That will ensure that our capacity utilization in our plants will improve, leading to lesser under recovery, which is important.

And we expect, if you go to our debt book, you will see that we expect to exit at least at INR 150 crores of EBITDA for us to be under 3x debt-to-EBITDA after reducing INR 1,000 crores of debt.

So I think our focus this year is about solving for inventory, improving our cash flows, reducing the balance sheet and to improve growth. And then all of these inefficiencies that have been inbuilt in the business because of COVID or whatever we want to say, will normalize to what we -- I hope -- the idea is that by the end of the year, we should be in the -- between the 16%, 20% range, if that interest is your question.

But, yes, and you would see growth Q-on-Q from here. I think we are done with the bottoming out of the business. We're seeing growth coming back, and we are excited about the opportunity just [ not in present ]. And [ some of parts ], we are confident to get there.

But I can't give you an exact finite number. I think the focus this year is focus on growth, improve capacity utilization, reduce inventory, improve free cash, get out of few businesses that don't make any strategic or value sense in the near term, and yet grow the business from where we are. All of this will lead to significant improvements to the overall business. And I think you should be asking us percentages more closer to H2 and closer to the end of the year.

[Tushar Manudhane, analyst]

Sure, actually, the perspective was more of your... .

[Operator]

Can I request you to come back in the question queue?

[Tushar Manudhane, analyst]

Just one last, if I may?

[Badree Komandur, executive]

Go ahead.

[Arun Kumar, executive]

Go ahead, Tushar.

[Tushar Manudhane, analyst]

So just on this INR 450 crore debt reduction, that would be largely from the internal accruals or because of the kind of margin trajectory which we are kind of building from the point where we are today? So -- just to understand the trajectory.

[Arun Kumar, executive]

Yes. Absolutely. So free cash generation from -- we are sitting on inventory which is being exhausted this year. And I think that -- and when I look at exit of minor PMOs, we are not talking of anything more than about INR 100 crores or INR 150 crores in that range. So it's nothing significant. It's just that we want to focus on the bigger outcomes. But otherwise, even if we don't do any of that, we are confident of free cash generation to that extent.

[Operator]

[Operator Instructions] The next question is from the from Vinay Bafna From ICICI Securities.

[Vinay Bafna, analyst]

I have a couple of questions. So [ mine on the bit pati ]. So I just want to clarify. We are assuming a $250 million annual sales for the U.S. business next year, which is -- and you highlighted in your statements that it will be leaner. So we are assuming a $250-odd million quarter run rate, which is approximately 35% sequential growth. I understand it might not be entirely in Q1. However, I just want to understand how much of it will be contributed by the Endo? And considering the plant at Pondicherry is still under regulatory concern, what is the dependency on the plant as of now?

[Arun Kumar, executive]

Well, our Pondicherry dependency is zero, because we have changed all those -- I mean we have developed those most -- almost all products from our other sites. So they are not material at all.

We don't need any new -- so to launch any approved product, the OI in Pondicherry has got no impact. You can launch a product from a site if the product is already approved, right? So we don't have a problem with that. So Pondicherry, really not a challenge.

It will be hard for me to give you specifics of how much is from Chestnut and how much is coming from India. But I can give you an indication that Chestnut Ridge will add an annualized -- so remember, we take charge only in June, although we are starting to consolidate some of the businesses. We expect Chestnut Ridge to have an exit run rate of about $25 million a quarter in this year to our top line. But I can't give you the quarterly outcomes on Chestnut Ridge.

[Vinay Bafna, analyst]

That is very, very helpful. So if I understand correctly, then at least the initial part of the first half is going to be driven by our internal growth. So considering the bump-up in the...

[Arun Kumar, executive]

We do have some Chestnut Ridge products that we have started. We took the charge as soon as the deal was announced. So there is a certain amount of value, but the bigger product launches are happening as we speak. So you should watch Q1 and Q2 for launches orders Chestnut Ridge.

[Vinay Bafna, analyst]

Okay. Got it. That was very helpful. Secondly, sir, we have said that we have gotten an upfront payment from our partners in Australia. Since it was a payout that you were expecting several years later, does it impact our agreement for those steady sales that you do all there? And how much of the payment is left to be from there?

[Arun Kumar, executive]

Well, first of all, it's not several years, it's only a few months. The payment was due on 31st December '22, we should have the funds in our bank in H1. So it's a few months in advance so that's 6, 7 months. So that's what is important, it may be 5, 6 months, if I may.

And our contract for supplying to Arrotex is for 10 years. So we don't have any challenges on that. In fact, our business will grow from where we are.

[Vinay Bafna, analyst]

So do we have any more payment left on their side for this agreement? Or is this the last one?

[Arun Kumar, executive]

This is the last payment.

[Vinay Bafna, analyst]

Okay. Got it. Last bit is, you did highlight a bit on the logistic cost for the previous participant. But what I understand is that it was a significant jump during the quarter, and you also highlighted how the freights have gone high. I'm sure that you've taken up several measures and you were highlighting how you want to reduce it. But considering how the situation is and what the payers are saying, no one is really talking about these costs going down. You want to highlight anything very specific wherein you're trying to save on costs?

[Arun Kumar, executive]

Yes. So like I said, a large part of our logistics costs include our front-end warehousing cost. So if you are sitting on inventory which you sell out over 6 months, then you are sitting on too many pallet stations that you pay too much of rentals on a monthly -- on a weekly basis, right? So if you are not loading new pallet stations because you are not producing new until the stock is resolved, your logistics costs automatically comes down in [ Arrotex ].

So it's not a peer-to-peer comparison. The fact that our volumes dropped last year by more than half, but our AOP was -- or the production was for almost all the annual operating plan and that's how this business works because if you do not have inventory in the front end, then you will not win business. You can't win business unless you have stock in hand.

So considering that we have enough inventory for at least 3, 4 months compared to the average 2 months, that itself and that normalization itself will reduce our logistics costs. I'm not taking away anything from the fact that...

So in effect, to sell the same dollars or more, we'll be shipping maybe 40%, 50% containers less than what we shipped in a bad year. So that will be -- it's just a normalization. It's nothing to do with we're getting any better prices than anybody else is getting with container freights.

[Vinay Bafna, analyst]

Understood. But then I have actually 2 sub questions to it also.

[Operator]

This will be your last question.

[Vinay Bafna, analyst]

First part is that since we are sitting on such high inventory, and we are wanting to liquidate them as well. Considering, obviously, the shelf life issue as well with them. We are still assuming a growth on our base portfolio largely because of the volume [ there ]. So isn't it a bit contradictory, at least maybe you can help me understand, that we are trying to push more volumes, but you're not expecting [ a higher ] ...

[Arun Kumar, executive]

I'm not pushing any more volumes. During COVID times...

[Vinay Bafna, analyst]

Even if the demand is coming in, it will be at the cost of price unless that situation...

[Arun Kumar, executive]

But it's not coming in at the cost of price. In the acute therapy, the number of players continue to be few in which what Strides flourished, its strategy. So in the acute, when we [ so they all dumped ] the product, there's no more in the market. In fact, that market has become more attractive for us as the number of players have probably even reduced further.

The volume drops, the volumes have started coming back with prescriptions coming back, which effectively means that we haven't lost market share at all. So it's just that our market share, let's say, on ibuprofen was 28% or 30% for many years. It hasn't changed since COVID. But now the volumes -- if the volumes move up by 500 million units, so your 28% share also moved up by 500 million units. So it's nothing to do with us selling at a cheaper price. That's not what we do.

[Vinay Bafna, analyst]

Got it. So is it that our product baskets are benefiting from the situation, which is improving at the market level which is fair enough. Got it.

[Operator]

[Operator Instructions] The next question is from the line of Gautam Bahal from Mauryan Capital.

[Gautam Bahal, analyst]

So a couple of them. I'm just trying to make sense of Slide 16 that you guys posted last night. Would I be right in interpreting this as in Q4, you had INR 77 crores of exceptionals to your EBITDA. So you would pass INR 46 million to INR 77 million to get to 122. Would that be right?

[Arun Kumar, executive]

Sorry, Gautam. Could you just -- you kind of faded in between. You may want to repeat your question.

[Gautam Bahal, analyst]

So Slide #16 in the ppt. Nonoperational items slide. So trying to interpret that, would that be right that in Q4, you had INR 77 crores of exceptionals, which will not be repeated going forward?

[Badree Komandur, executive]

Yes, that is correct.

[Gautam Bahal, analyst]

So to interpret the Q4 number, you just add the INR 77 crores to the INR 46 crores of reported EBITDA, adjusted reported EBITDA.

[Badree Komandur, executive]

No. See, what happens is, see the company has got an accounting policy to -- traditionally, in the last many years, they have been reporting all these line items and exceptions. And these are all exceptions whenever there is a product recall and it's a return by FDA we take all of this here. And it is consistent with the past practice and this is of onetime nature predominantly.

[Gautam Bahal, analyst]

So just trying to understand, the INR 46 crores that you have printed as well as your consolidated EBITDA, if we were to adjust it [ 77 crores ]...

[Arun Kumar, executive]

It doesn't have any adjustments.

[Gautam Bahal, analyst]

So it should be taken -- I'm just trying to get to the sense that if we add INR 46 crore to INR 77 crores, that already implies a 14% margin. Is that the right way to think about it or not?

[Badree Komandur, executive]

No, no. No.

[Gautam Bahal, analyst]

Okay. Okay. Fair enough. Okay. Maybe I'll reach out offline on that one. The next question, Arun, is the INR 1,000 crore debt repayment that you've outlined, does that include anything to do with Stelis secondary sales [ abroad ]?

[Arun Kumar, executive]

No.

[Gautam Bahal, analyst]

Okay. Good to know.

[Arun Kumar, executive]

Then we will have no debt.

[Gautam Bahal, analyst]

And one -- I mean, I guess you have implied this already, but when you say 3x debt to EBITDA, that implies a INR 650 crore EBITDA, would that be right, in FY '23?

[Arun Kumar, executive]

Run rate.

[Gautam Bahal, analyst]

Run rate in -- in the exit quarter or something like that?

[Arun Kumar, executive]

Yes. They are pushing to be better, but that's the [ talent ].

[Gautam Bahal, analyst]

Okay. Okay. And that also implies around 16%, 17% EBITDA margin run rate and exit?

[Arun Kumar, executive]

It is what I was alluding to on -- to an earlier question from Tushar.

[Gautam Bahal, analyst]

Okay. Okay. And Arun, given that we are almost 2/3 through Q1 already, are we sort of trending towards these better numbers, I mean trending towards 60 million quarterly run rate in the U.S. already or not yet?

[Arun Kumar, executive]

Well, we -- our headline sales guide for an encouraging FY '23 outlook, which effectively means we -- you're right, if we are very close to June, we probably know what we're telling you. And if we are headlining our U.S. sales to be near linear then the answer to both your questions is yes.

[Gautam Bahal, analyst]

Okay. And last one from my side. Where does -- I mean there's a lot of moving parts around the top line and on the cost side, right? Why does the business settle out in a couple of years or 3 years from now? Like is...

[Arun Kumar, executive]

[ All these flights are ] moving for everybody in the industry. I mean all these flights keep moving. What exactly is your question?

[Gautam Bahal, analyst]

No, my question is, where does it settle out in 2 or 3 years on a normalized basis? Do we ever see a 20% margin again on this business? What's your thought?

[Arun Kumar, executive]

Absolutely. We don't see any reason why we won't be there and that's because of the diversity of the business. I don't think -- I think all the emphasis of the people who look at us is for the U.S. as is the case. Please look at our other regulated markets business. How quickly it's growing, how rapidly it grows, that it doesn't have the SG&A and costs associated to U.S.

So while you may run a lower gross margin, the flow-through margins to EBITDA is stronger. And you'll see lumpiness from here on because we are adding several new markets, but the base is a very solid base. And I may not -- I won't hesitate to say that we are amongst the top 10 players in Europe in other regulated markets out of the country.

We want to focus on that market. We've got lots of opportunities and product approvals coming our way, but it doesn't get too much attention, but that's where our focus is. Because it's a massive market. There's been massive consolidation of national players in Europe.

The big players are [ hurting ] for portfolio, supply chain and we are passing with them on profit shares and no contract manufacturing activities. And we also see an uptick in our business, and you'll see more and more of that in the next 2 to 3 years.

Mirroring U.S., the other end markets in 3 to 4 years, is the goal for the company, and that's what is going to make the OpEx leverage very, very different, and the EBITDA flow through be very different. And we're very determined to get there with that strategy.

[Gautam Bahal, analyst]

Okay. I appreciate the color, Arun. Just a final data point. What is the sort of maintenance CapEx you should build in for this year, approximately?

[Arun Kumar, executive]

The good thing now is that when you have capacity utilization as low as you're building up, you have inventory and you don't have to use all your plants. We have the ability to move one product from one facility to another considering we have several FDA-approved sites. So we are going to be very low on CapEx. Our typical CapEx will be about INR 100-odd crores per year for the next 2 to 3 years. There is nothing major that is going to investments in terms of CapEx, because all our plants are well equipped and have got large capacities and enough capacity for the next 2 to 3 years in terms of build-out.

[Operator]

We'll take the last question from the line of Nitin Agarwal from DAM Capital Advisors.

[Nitin Agarwal, analyst]

Arun, on the U.S. you've talked about increased RFQs and all been coming in the market. So for an older focus player like us, has it -- I mean, what is it really implying? Is it implying more volumes? Or are you seeing some improvement in the pricing also?

[Arun Kumar, executive]

So there are 2 things, Nitin. One is, if I am sitting on too much of inventory, I can go and [ shake ] an existing incumbent by giving a price and then how it works is I get an offer to accept the price. And in many cases, we didn't accept the price, so we exited the market less. And once the inventory was exhausted, you can further notice saying that I don't want to supply after 90 days or 180 days. And then typically, the customer then comes back to the market for a new vendor. And that's what I mean.

So for about 3 to 4 months post COVID and the U.S. is clearly picking back, there, nobody was getting any request for [ codes ]. But now it's back to normal. Of course, there is price intensity in some products, but especially in our acute products, we are bringing back the contracts. And we have many contracts that we have lost, we are winning. They don't move the needle much in terms of revenues, but they move the needle a lot in our gross margin uptick.

[Nitin Agarwal, analyst]

The -- on the Chestnut portfolio, we've talked about how complex the pharma presentations like hormones, patches, [ com ] et cetera. By when do you see some of these things beginning to get commercialized for us? Are those complex sort of non-OC formulation?

[Arun Kumar, executive]

So you can look at our hormone launches in Q2. You can see a controlled substances coming back which are now being currently sold coming back in Q4. But there are several special products, especially products like magistral where we may be one of the only few players in the market, you will see that coming back in that product as early as this quarter.

So we are -- now that we have complete control of the business starting in a couple of days -- or rather a couple of weeks, you will see more launches coming out of Chestnut Ridge and from here.

So by H2, I think you will see the momentum of launches. But some -- one of the reasons I'm giving you more linear guidance on U.S. because we are also [ Chestnut Ridge ] has not reached the attention it requires in terms of market share.

We are gaining market share in the product simply because when Endo was exiting the market, they obviously for the right reasons didn't pick up new contracts as they were not willing to take the liabilities of supply. But now that we have started bidding and winning new businesses that also adds.

[Nitin Agarwal, analyst]

And lastly, on your debt, I think the question has been asked a few times. But on the guidance, what the guidance really implies ex of the investments in [ CHC ] and Stelis, a net EBITDA number of about INR 1,500 crores or thereabouts, net debt number of INR 1,500 crores or thereabout at the end of the year?

[Arun Kumar, executive]

Net of investments our debt to EBITDA on the pharma will be under 2 by this year.

Exit run rate, yes? Don't take a mistake me for that.

[Operator]

I now hand the conference over to the management for closing comments.

[Arun Kumar, executive]

Thank you. Thank you, everybody, for coming in this early and appreciate your time and questions. I'm sure that many of you may have follow-up questions, please feel free to write to our Investor desk or [ sunleeds ] or Abhishek or even to me or Badree, and we'll be more than delighted to answer your questions. Have a great day and I thank you.

[Operator]

Thank you very much. On behalf of Strides Pharma Science Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.