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Sun Pharmaceutical Industries Ltd
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Ladies and gentlemen, good day, and welcome to the Sun Pharmaceutical Industries Limited Q1 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Nimish Desai. Thank you, and over to you, sir.
Yes. Thank you. Good evening, and a warm welcome to our First Quarter Fiscal '19 Earnings Call. I'm Nimish from the Sun Pharma Investor Relations team. We hope you've received the Q1 financials and the press release that was sent out earlier in the day. These are also available on our website.We have with us Mr. Dilip Shanghvi, Managing Director; Mr. Sudhir Valia, Whole Time Director; Mr. Kal Sundaram, Whole Time Director and CEO of India, Emerging Markets and Consumer Healthcare; and Mr. Abhay Gandhi, CEO of North America.Today the team will discuss performance highlights, updates on strategies and respond to any questions that you may have. As is usual, for ease of discussion, we will be looking at consolidated financials. Just as a reminder, this call is being recorded and replay will be available for the next few days. The call transcript will also be put on our website shortly.The discussion today might include certain forward-looking statements and this must be viewed in conjunction with the risk that our business faces. You are requested to ask 2 questions in the initial round. If you have more questions, you are requested to rejoin the queue. I also request all of you to kindly send in your questions that may remain unanswered today.I will now handover the call to Mr. Shanghvi.
Welcome and thank you for joining us for this earnings call after the announcement of financial results for the first quarter of FY '19.Let me discuss some of the key highlights. Our overall sales for the quarter were at INR 7,139 crores, a growth of 16% over the same quarter last year. We've recorded good growth in all important markets. We continue to record a gradual improvement in performance despite a challenging U.S. generic pricing environment.Our U.S. business has recorded growth both on year-on-year and quarter-on-quarter basis. We're gradually crossing key milestones in our speciality initiatives. As you all know, FY '19 is an important year for our speciality business with 3 potential launches lined up in the U.S. Of this, we have already commercialized Yonsa, while we plan to commercialize Ilumya and Cequa in the U.S. in the coming quarters.Given the competitive intensity in the U.S. generics market, cost control and improving efficiencies have become imperative with these efforts spread across R&D projects, manufacturing footprints and other areas. These steps will ensure that we continue to earn reasonable returns on our investments.Another important event during the quarter was the clearance of Halol facility by U.S. FDA. With this development, we now expect a gradual improvement in our business and new approvals from Halol for the U.S. market, including 2 speciality products in license from SPARC.I will now hand over the call to Mr. Valia for discussion of Q1 performance.
Thank you, Mr. Shanghvi. Good evening, everyone, and welcome to all of you.Our Q1 financials are already with you. As usual we will look at the key consolidated financials. Q1 sales at INR 7,139 crores, up by 16% over Q1 last year. Material cost as a percentage of the sale was 29.5% higher than in Q1 last year, mainly due to product mix as well as higher COGS, cost of goods, for Taro. The same reasons applied for the sequential decline in the gross margin. Staff cost was at 20% sales lower than Q1 last year and in line with that of Q4.Staff costs are likely to inch up in the coming quarters as we gradually expand our speciality sales force in the U.S. Our expenditure was at 29.1% of the sales, lower than Q1 last year and lower compared to Q4 as well. This is partly due to lower R&D costs, as you all know, our R&D costs are -- were evenly spread across out all the 4 quarters of the year. We expect to incur higher R&D cost in the coming quarters.As a results of above, the EBITDA for Q1 was at INR 1,521 crores with EBITDA margin of 21.3%. Net profit for the quarter was at INR 983 crores, up by 87% over Q1 last year. After adjusting for the exceptional item in Q1 last year, EPS for the quarter was INR 4.10.Let me now briefly discuss Taro's performance. Taro posted Q1 sales of USD 155 million, down by 4% over Q1 last year. Taro net profit for Q1 was USD 67 million, up by 24% (sic) [ 23% ] over Q1 last year.I will now hand over to Kal Sundaram, who will share the performance of our India and emerging market business.
Thank you, Mr. Valia. First let me take you through the performance of our India business.For quarter 1, sales of branded formulations in India were INR 2,152 crores, growth of approximately 22% over last year, and accounting for approximately 30% of total sales. As you're all aware, the growth is on the lower base of Q1 last year, which had the GST impact.Adjusted for GST impact, our sales in India have now grown approximately by 29%. For quarter 1, we launched 16 new products in the Indian market. Sun Pharma is the largest pharmaceutical company in India, and holds approximately 8.3% market share in the over INR 122,000 crores pharmaceutical market as per June 2018, AIOCD-AWACS report. We continue to focus on retaining our strong brand equity with doctors, while simultaneously putting in efforts to improve overall productivity of the India business.As per latest SMSRC report, Sun Pharma is ranked #1 based on share of prescription with 13 classes of doctors.Let me now focus on performance in emerging markets. Our sales in emerging markets were USD 195 million for quarter 1 with a growth of 16%. Emerging markets accounted for 18% of total sales. The growth is broad based amongst emerging markets, key markets which contributed to the growth rate: Romania, Eastern Europe and Asian markets.Now I'll hand over the call to Abhay. Abhay?
Thank you, Mr. Kal. I will briefly discuss the performance highlights for U.S. businesses.For Q1, our overall sales in the U.S. were up by 8% at USD 380 million accounting for approximately 36% of overall sales. New launches for the quarter were Yonsa in the branded portfolio, and authorized generic of XELPROS. These new launches coupled with improved sales [ come off ] our existing are the main drivers of growth.Let me now update you on developments in our speciality business. We commercialized Yonsa in U.S. during the quarter. The launch preparations for Ilumya are ongoing. We're awaiting U.S. FDA approval for Cequa, previously known as OTX-101, and plan to launch it in the U.S. during the course of this year. Although we have built the front-end infrastructure for the speciality business in U.S., there would be specific marketing and other cost at the time of launch of these products. They will entail high upfront investment.I will now hand over the call to Mr. Shanghvi.
Thanks, Abhay. I will briefly discuss the performance highlights of our other businesses as well as give you an update on our R&D and speciality initiatives. Formulation sales in the rest of the world market, excluding U.S. and emerging market were USD 107 million in Q1, a de-growth of 7% over last year. ROW markets accounted for approximately 10% of Q1 revenues. We continue to focus on developing and utilizing APIs for captive consumption for benefits of vertical integration. For Q1, the external sales of our API business were INR 394 crores, up by 28% over Q1 last year.We continue to invest in R&D for enhancing our pipeline. Consolidated R&D investments for Q1 were INR 500 crores accounting for 7% of sales. Our current generic pipeline for the U.S. market includes 135 ANDAs and 3 ANDAs awaiting approval with the U.S. FDA. We expect higher R&D spend in the coming quarters for the speciality business. This R&D spending enables development of future product pipeline, including speciality and differentiated products.With this I would like to leave the floor open for questions. Thanks.
[Operator Instructions] We have the first question from the line of Manoj Garg from Healthco.
Congrats on the solid quarter. I have a few I would like to drill down to on the U.S. business. One, can you talk a little bit about the backlog out of Halol? And when you expect to start getting that cleared? Two, you spoke at length about the increased investment in the U.S. specialty business, both in terms of R&D and marketing. Can you maybe add some more color there in terms of what levels of investment you are targeting? And when you expect that business to reach breakeven? And then lastly, just given the bifurcation of your growing specialty business and the challenging generics market, it would be helpful if you could start providing specialty product breakdown going forward?
So let me respond to the first part of question in connection with the Halol. So I think the way the process I understand works is that whichever product that we expect the approval for, we have to kind of specifically request or if there are some last-minute amendments to our filings or this then we do that, then we get a goal date for when we are expecting the approval. So difficult to respond, but we've started hitting some potential goal dates during the year as well as sometimes even in the beginning of next year. So depending on when and how these goal dates start coming, we expect to start getting the approval of the products. For the U.S. cost, I think, Abhay will respond. And we will keep your suggestion for sharing more transparently the separate costs and bifurcation between the generic and the branded business. It's something that we will consider. And if we feel that that's best in the interest of shareholders then we'll start sharing bifurcated costs. So Abhay, maybe you can respond about the costs for other things.
So Mr. Garg, your voice on the first couple of questions were cracking up for me. If I understood you correctly, on the speciality business, your question related to the investment on R&D, is that correct?
Yes. So basically in both the press release and your prepared comments, you talked extensively about increasing R&D and SG&A spend to support the specialty business going forward. So -- I think it would be helpful to understand what level of investment you're talking about? And then two, when you would expect to achieve at least, breakeven on that investment?
So on the R&D front, I think, there is for all our specialty assets. A certain label, which has been approved by the FDA. And this the team in looking at the product and -- we keep looking at how we can improve the label, and are there other indications or situations that the product can be used. These, obviously, entail high investment based on each indication and what kind of patient population you need, the centers that you need. And it's different for each product an each study that we undertake. But to keep improving on the product label and hopefully, for us to be able to generate better sales on products, that investment is something that we'll keep looking at and keep investing. So I don't have a firm number for that as yet, but it will clearly be a substantial investment. On SG&A, there are certain expenses which we incur prior to launch, and there are certain expenses which we will incur closer or post-launch. Added up, we have always guided that this will be significant over the next few quarters, at least. We really haven't worked out at a broader level what will be the breakeven for the entire business. Each product has a different time line for launch and a different modeling that we have done. So I don't have a number which we can give you as to when the overall business will be able to break even. The third part of your question, I think, Shanghvi has already answered, so let's stay there.
Also Mr. Garg, I think, we've guided for an overall R&D spend of between 8% to 9%. So that, I think, potentially includes additional cost for developing the speciality product in terms of clinical indications.
The next question is from the line of Prakash Agarwal from Axis Capital.
Just a follow-up on the earlier participants' question. In terms of from Halol, you mentioned, there are several potential goal dates. But any broad color in terms of number of launches and approvals, that would be very helpful?
No. I think anticipated launches from Halol, as I had explained even in our last call, are factored in our guidance. So -- but at this point of time, no additional information is something that we can share.
Okay. Understood. And clarity on the expenses side, when we do the deals, like Yonsa with Churchill, and we have deals with SPARC for Elepsia and XELPROS. So once these commercialize, would there be any milestone payments? And which expense item it is plugged into?
[indiscernible] maybe you can...
Based on the initial milestone, based on the agreeable -- but subsequently post-launch, it's based on the agreement as per the terms, like royalty -- it will be there. But otherwise, I don't think any capital is being treated as revenue expenses, in our income statement. So it will be treated as a revenue expense.
Revenue expense.
If any.
All the milestones are mostly the revenue expense?
The milestones, as I said in the beginning, it's capital expenses. Post-launch expenses, if any, we have to pay or receive that's all sustainable revenue.
Okay. And lastly, on the gross margin side. I understand last quarter, there was higher other operating expenses of the milestone income received. But this quarter, despite India being higher and U.S. showing some improvement, if you could explain why the gross margins actually come off?
We've already -- it has been told in the readout pack was partly due to the higher cost for Taro what we have, and also the overall products and -- that's what we have told what we have said.
Yes. I mean, I was referring to ex Taro also. So is it due to the increase in raw material prices? Any broad color would help.
Yes. I think multiple figures...
It's a product mix also is a subject. But if you put our last whole year 2018 expenses along with you, then you will find almost it is 25% everywhere.
Next question is from Neha Manpuria from JPMorgan.
Sir, could you give us some color on Absorica? Last quarter you indicated that it was subdued, but it seems like it's picking up now. Isn't it surprising that Absorica has picked up, it's still not contributing to gross margin given the profitability from the product was expected to improve?
So, Abhay, maybe you can respond.
Profitability, as I explained in the earlier calls, has clearly improved. As far as the overall business is concerned, in terms of prescriptions, I think, we still have a headroom to do better than what we have done.
And this would be more in the next few quarters? Or would that take longer?
I mean, as somebody was running the business, I would really hope the time is next few quarters and not next few years.
Okay. And, sir, any reason for the delay in Ilumya launch? I mean, because I think you had guided to launch sometime in this quarter. Are we indicating sort of a -- some sort of a delay in the launch? Did I read that correctly?
I still think we will be able to launch it in Q2.
Okay. And my last question is on R&D. The R&D trajectory seems to indicate quite a sharp jump from the current level. Like, sir, mentioned, I think, it's partly for the existing pipeline in terms of label enhancement or other indications. But beyond the product that are already there in a pipeline, are we looking at opportunities beyond the 2, 3 products that we have as discussed and disclosed?
No. This R&D expense only includes budgeted R&D expense. So if we don't have any budgeted acquisition for which we have to spend any money, then that's not included. So if we announce any subsequent acquisition or licensing and if that changes the basic numbers, then we will share it at that time. But as on today, this is not reflecting any future licensing.
Next question is from the line of Anubhav Aggarwal from Crédit Suisse.
My question is on Ilumya. Just a couple of questions over there. That -- what kind of insurance coverage we've already achieved in this product? And will this product mostly get a Tier 3 coverage?
Sorry. What was the second part of your question? DSE coverage, I couldn't understand it.
Tier 3, Tier 3 coverage. On the formulary -- Tier 3 coverage.
Tier 3, you said.
That's correct.
Actually, we don't know the answer. I mean, right now, we -- the detailed discussions with the payers and other stakeholders, we are trying to coincide it very close to the actual launch of the product. So we haven't really entered into commercial discussions with the payers. We've been talking about the product, its attributes, benefits and the science behind it. We remain cautiously optimistic on getting a decent coverage at the point of launch. But since we don't have exact day on which we launch the product, and we're trying to time our discussion to coincide with that, there is no firm answer I can give at this point in time. But I remain cautiously optimistic.
That's helpful. And this second question was on the U.S. ex [ sales ] That we have seen an increase this quarter. Mr. Shanghvi would you, or Abhay, would you largely attribute the delta to be the new launch that we have in this quarter? Or would you attribute to Absorica or the base business there?
Generic [ Brevicon ] Has clearly been a contributor, but a lot of our other products have also done well, so that's not the only contributor. I'm happy with the spread of business which has moved up and done reasonably well, and hopefully will keep doing the good work going ahead.
But what would have been a dominant contributor out of the 2, base business or [ Brevicon ]?
So there is no dominant contributor. I think that the broad-based performance of different parts of the business, and that's good. That's good from our perspective, clearly.
Next question is from Nimish Mehta from ResearchDelta.
I just wanted to know about the 2 products that we launched recently. One is INFUGEM and another is Kapspargo Sprinkle. So, if I understand and if I recollect well, INFUGEM is also something that you launched in the European market. So if you can give some color about the performance there? You know -- basically trying to understand the U.S. performance? And also some color on how this Sprinkle [ performance ] Is likely to be addressing [ industry next year ] And what is the addressable market there?
We haven't launched INFUGEM in the U.S. market as of now. We have an approval. And over the next few months, we will launch it. We haven't launched it so far. Kapspargo, we are just in the process of launching. I don't expect it to be a very large product. It's an interesting product in a nice niche. And we have indicated that 40% of patients who are in the long-term care segment have dysphasia. So it's a product that the customers and the patients will need. But I don't expect to be a very, very large product, no.
Okay. If you also can -- allude to the INFUGEM potential market, I know it can be launched over a few months. But some color, some understanding on how is it doing in the European market? And also for both the products, if you can let us know whether this will be sold at a premium to the generic products in market? Or how will that, some color on that?
So, obviously, I will not discuss pricing strategy on this call. And to be honest, I don't have a firm answer either, because the team is working on different scenarios of how using in the RTU segment, which is our first launch incidentally. So there is a lot of learning that is involved by the team to look at. Obviously, we feel there is potential and that's the reason why we are launching it. But too premature for me to give you a hard number in case that is [indiscernible]...
But sir we have launched it in Europe, at least, tell us what is the performance there? How is the performance there? That will be helpful. If nothing else.
Maybe [ it will be ] Europe, you will have a better idea.
No. I think, Europe, we've launched it in a few countries. And in the countries in which we've launched, in one country, it is yet to pick up. But in other countries, I think, it's doing quite well, both in terms of share of the total market as well as in terms of our ability to price the products sensibly. Clearly, the product will not be priced like a new innovative product. It will be priced at a premium to generic product for the value and the benefit that it provides to the patient.
The next question is from the line of Surya Patra from PhillipCapital.
A clarification on XELPROS and Elepsia. Presently, you're still there in the Halol plant to be manufactured. But because SPARC had indicated that they were looking for site transfer of this product prior to the approval itself, plant clearance. So any clarity on that front would be useful.
I mean, there is a plan for getting -- working for getting an approval out of Halol, that's for sure. Now as to further progress with the product transfer from CRO, I think, I don't have a clear update beyond what SPARC would have shared with you.
Okay. And this is the kind of launch that we are planning this year, sir? Current financial year that, whether we have indicated that way?
Yes. Abhay, maybe you can respond.
So XELPROS, clearly, we will try and launch during the course of this year. Elepsia, I'm still contemplating how much we can take on our plate, because in the U.S. and some of the launches are all clustered in a couple of quarters, whether we take it on as a cluster or we stagger it a little is something, I'm still not made up my mind on.
Okay. On the spend front, sir. In one hand that we are saying there is a cost-cutting effort, obviously, that is seen also. And simultaneously, we are now planning for enhanced spend on the SG&A front because of the speciality portfolio. So what is the kind of SG&A once you clearly look at going ahead in the subsequent quarters? Means, whether there is a kind of meaningful improvements sequentially once you [ create ] The factor?
Abhay, I think you gave some information in your readout that there will be some additional cost that will be there, so maybe you can develop on that front.
I did, but -- maybe I didn't understand the question. I thought it was to do with the factoring that in how would the overall SG&A for the company look like, is that -- was that the question?
Exactly. Yes, yes. That's the question.
Or maybe [indiscernible]
[ Similar ] Activity.
So there will be, I think, cost this year for businesses which will not generate as much revenue to justify the cost. There will be potential negative effect.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
I've got a couple of questions. One is on the FX impact for the quarter, especially mark-to-market or translational gains. Can you just help us with that number? How much was that coming from net current assets? And second is on Ilumya. Abhay, if you can just share with us, what are the big pluses and minuses for this product when you talk to the insurance companies?
So, Sameer, I think, foreign exchange details and fluctuations, we are not sharing specific information. However, that's factored in the, what you call, the results. Abhay can maybe respond about the second question that you asked.
Look, on Ilumya...
Sorry, go ahead.
Go ahead. Go ahead, sorry.
No. The only reason why I brought up FX -- because on a sequential basis, rupee dollar has moved up quite a lot. And so therefore, some of this current assets and receivables can actually make the result look a lot better than what it is. So just wanted to check if that's the case?
So we have a liability as well as investment. We have a payable and receivable. So it's -- we have [ age ] over each other. So it's not any which is -- of any significance, but it has not been worked out. Most of it is nullifying.
Okay. Okay. Fine. So if it's neutral impact, that's fine, okay.
I'll go to the Ilumya part of your question then. I think the part of you clearly that, whether it is the doctors to whom we are talking to, the [ players ] understand the product intimately or even the payer. I think the overall profile of the product in terms of the efficacy, the lasting effect that the product shows for patient, and the very loose incidence of side effect clearly are huge positives, which are creating an impact. I wouldn't qualify it as a negative, but clearly the fact that we are entering into a competitive progress market with competitors are bigger, and they have been in that business for longer time. And we are entering the market late as a molecule, it's clearly a challenge that we have to overcome. So I don't want to call that a negative. I mean, it's a status that we are in and we have to fight it through.
Abhay, but just on this point, when you talk about efficacy is passing 90 score that we have versus the others? And I think we're in mid-40s and other than around 70. So I'm just saying just from a top end this is. Is that an impediment? And how do payers look at it? And second following on this is -- I'll bring it to you versus IL-17, Dilip you mentioned that people are more happy with 23. But if I see the commentary from 17 and also their numbers, how they're ramping up sales, it looks like 17 are also been actually pretty strong?
Latter part of your question, I mean, there is a certain comfort that doctors have for having used the IL-17 for a longer period of time. It will take them sometime for them to gain experience and then -- and get the same level of comfort with the IL-23 plus. And it's for all the marketers to try and address that. And make sure that this segment grows. We're clearly seeing the growth happening. We obviously would like it to be faster, so that you can ride the waves so to say. That is what I think they will be attempting to do when we get into the market and start promoting our product. I mean, as far as the customers are concerned, they look at things holistically. They don't look at just one parameter of the PASI 90, or how soon it acts. I mean, they look at the product holistically, and then they see the overall profile of Ilumya. I think, my sense is they like the product.
No. One is [indiscernible] Sameer, PASI 90 and PASI 75 and all clinical type trial measurement. That is not something which doctors use in their clinical practice, because in clinical practice doctors, it's only a scale used for measuring outcome in clinical trial. So I think by and large all the doctors who've been part of the study and with whom we have discussed, people are very happy with the overall performance of the product, both in terms of overall efficacy as well as the duration of response and robust implementing of the response. However, I think, clearly, both of us agree that it's not going to be as big as Cosentyx or [ Dadra ] Clearly, not in a short period of time. Otherwise, I think, we would be looking at very different numbers than what we are looking at right now.
Yes. Sure. No, no. Good luck with this one. I know it's a very big investment for the company. I have a few more, I'll get back in the queue.
Next question is from Saion Mukherjee from Nomura.
Sir, on Yonsa, can you share what kind of traction you're seeing in the formulary coverage? Last time, you mentioned, it can be an interesting product from a short- to medium-term perspective. Any more color if you can give on that?
So it's an ongoing process. We are talking to different payers for contracting. Some we have already got an entry into. Some are work-in-progress. And we still maintain it will be an interesting product in the short to medium-term.
Also, I think, Abhay has, I think, we'd have discussed in the past. it's also linked with how the litigation for Zytiga or -- what is the kind of judgment on that. That I think also has a significant impact.
Okay. Got it. And, sir, my second question is on the Levulan solution. There is an order book [ we enter ] which expires next year. It's a drug device combination. I just wanted to understand, is it possible for a generic company to launch the product once the patent expires? And use the [ BLU-U ] device that you have provided to the practitioners. Is that feasible? Or there are some hurdles for a generic to enter the market even after patent expiry?
Our current view is that it will potentially require a study for a generic to be able to come to the market.
[indiscernible].
Yes. Yes. But I think we can't discuss and design this on behalf of the regulator.
Okay. And that study would require the blue -- the [ ray ] device from Sun Pharma, right? Or --
Or a computing device.
The next question is from Purvi Shah from Sharekhan.
Sir, you've highlighted on the call saying that on the operating leverage that we had this quarter is likely to, I mean, may not continue that's basically because of the couple of reasons like R&D cost increasing as well as SG&A increasing because of the investment that will have to do for the speciality launches in the upcoming. So even though this quarter's performance like which was 100 basis improvement in operating margins over the entire year's 21% will not be sustainable in the upcoming quarters is what you were trying to indicate?
So we're not guiding for profitability and EBITDA. But we're also what you call sharing with you along with various positives. There are potential what you call cost that we investors need to be aware of.
Okay. Sir, Okay. If I have to say that the INR 500 crores of R&D in the absolute terms that we spent in this quarter is likely to -- it's been 7% this quarter, but we've guided for 8% to 9%. So if that's the case, I mean, we see a dip -- or is it that other thing that you highlighted the cost -- is something we're also looking at. And the synergies from Ranbaxy also probably something that we're looking at, and that's likely to help us to maintain at this level also?
I mean, last time I'd guided that we have been a high EBITDA company in the past, and we will continue to make conscious efforts to improve our EBITDA. And that's with various, what you call, initiatives, controlling costs, improving margin, focusing on higher-margin products. But that will require investments. But maybe before the profitability goes up it may go down, but I'm not guiding for profitability during the year based on this. But I want investors to be aware that there is going to be extra cost for sales and marketing efforts because that's not fully in first quarter. Second thing is that during the rest of the year we expect R&D investment to go up. How much of that we'll be able to, what you call, optimize from better margins or cost controls and focusing on various initiatives for improving profitability, it's not something that we have any guidance or clearance about.
Okay. Sir, I appreciate that. And the other thing on the tax front. I mean, for the quarter, it has been low compared to what we have done in the past 2 quarters. So is it that we're still sticking to that rate or [ largely ] -- or will there be a decline in the tax rate?
Sudhir?
Yes. So in the past, we've indicated that it would be appropriate for us to look at the tax on a full year basis rather than a quarter because of the various moving parts
Okay. So 20% is a range that we can assume for the full year?
Broadly.
Broadly, we've indicated in the past, last call also that our tax rate will increase, so around that range.
Next question is from [ Mittan Soni ] From GC Investments.
Just wanted to understand, if you see the way we are moving over the next 2 years, the incremental effort, is it going to be more on the super speciality in these generic speciality products? And hence, the breakeven level which was earlier there, will just be on the higher side compared to what was always there what we were seeing earlier, is that the right way to see?
No, what is the question?
So -- basically, the emphasis of the company, is it going to be more and more towards super speciality? And hence, as you explained that the company will have to make investments towards the front-end SG&A and sales team. To that extent the breakeven point, the breakeven sales what we were earlier doing and making a certain level of margins will be on the higher side?
No, but that's in the beginning, because the sales have not kicked in. So sales also will start contributing, and then these products are clearly at a very different cost structure. So they will start contributing to profitability. So the key is that we're looking at speciality business has not as a substitute for generic business. We are looking at speciality as an additional engine of growth. And for that business to become profitable, we will have to invest initially until that business achieved a certain critical size and mass.
So the sort of incremental R&D spend what we are targeting, which is going from 7% to whatever 8% or 9%, which we're targeting, to be almost directed towards the super speciality and generic speciality products?
What I have guided for is the overall R&D spend, including saying that some of the clinical studies will start during the year. So they are not fully valued in the current R&D spend. But I'm not breaking up the R&D spend between the generic and speciality.
Okay. And sir, currently, what -- is it possible that you can share like, by when or what is your -- by when we can hit the $300 million-odd, excluding Taro off sales run rate, over the next few quarters? Would you be able to give some view on that?
What is the question?
The past -- we were earlier making about $300 million of revenue on the quarterly basis, excluding Taro. Is it possible that you can share some view as to by when we can reach that sort of number right -- how much time will need 4, 6 quarters? Something like that?
No. I think, we don't give longer-term guidance. Our guidance this year is overall 11%. I mean, low double-digit growth.
Next we have a follow-up question from the line of Prakash Agarwal from Axis Capital.
Just on the guidance only, since you have done 16% and you earlier guided for low teens. So just asking if there is a rethink on the guidance?
No. We have to wait till the year progresses. I think for last year first quarter was a relatively low quarter and we have larger quarters coming up. So we've not revising the guidance at this point in time.
Okay. I understand. And sir, understanding [indiscernible] Is a product impacts, and then marketed only to generic players. So do we expect more competition in the near term in this product? Or we have some window of 6 months or so on this?
Abhay?
There may be approvals, but as of now, none has come into the market. So in the generic world, every extra month that we get with the product is a nice bonus to have.
Okay. Okay. It's just that the approval which is not getting through. There is no window of, what you call, settlement or so the ED period or the limited period by [ another ] Impact?
Not to my knowledge.
Okay. Great. And lastly, on India business, just trying to understand the growth mix from chronic and acute side. So, I mean, because full year, I understand it would be still mid-teens or low mid-teens. But how is the mix behaving? I mean, is chronic started to grow faster again? Or if you could throw some color on chronic and acute growth?
Chronic has always grown faster than acute. And it will continue to grow faster than acute across multiple [ -lty ] businesses, specialty business, particularly in chronic will grow faster than acute. And has been but historically growing faster.
Any number, sir, you'd like to give? And how it has grown in the last quarter, chronic and acute?
That level of play, in all honesty, I don't have it with me. But the quality of growth for chronic has been consistently higher than acute.
Next question is from Aditya Khemka from DSP Mutual Fund.
Sir, so we were experiencing some supply constraints from Halol while we were doing remediation and while we were under warning letter. Would you say that this quarter accounts for the resumption of supplies or the normalization of supplies for the already approved generic products?
My sense is that some of the increase in business will be linked with improved supplies, but may not be the only reason.
Okay. But is there any further scope of normalization? Or are we where we want it to be in terms of supply so far as existing product portfolio?
So I think we have to find a way to grow the business all the time, and that is possible only if we have more products to sell.
Fair enough. And then this quarter, did we see any stocking impact as -- and who started resumption of supply, 2-, 3-month inventory of certain products into the channel? Or is this like a normalized sale of the Halol products?
Abhay, maybe you can respond?
No. There is no stocking impact.
All right. Just one last question on the specialty side. So Dilip, again I see you mentioned some of these products and we look for more opportunities. Do you have a ticket size in mind or a range of ticket size in mind in terms of the milestone or the upfront that you would like to shell out for such opportunities?
I think more important is our, what you call, confidence that we can do a good job. Because one is financial ability to pay, but more important is that after we pay for it, then whether we can market the product in a way which can where people will buy, we can capture the highest value. And I think, our decision is more driven by our ability to manage rather than the only the size, I mean, clearly, we don't like to think which we can't afford, but that's not the only constraint.
All right. And sir, are you getting any enough opportunities for investing in the market as it seems that the entire generic seems to be focusing more on specialties and differentiated product offerings. So are you -- one, are you seeing enough opportunities for sale in that segment? And secondly, are you seeing enough bidding for the opportunities that are available?
I think if you heard Abhay's answer, is it currently it is this year and maybe part of next year, we have a challenge in being able to handle so many new product launches. That may be a short-term problem, but that's our current problem [ that we want to ] add something.
Next question is from C. Srihari from P.C.S. Securities.
On the speciality side, I would appreciate if you could give us some kind of a indication on what the fixed costs were for fiscal '18? And what is it likely to be in the current fiscal? I mean, irrespective of sales?
We're not breaking down the costs and separating business by business profitability.
I mean, it would be of help in modeling. I mean, if you could give some kind of a ballpark number?
No. I understand. I think it's -- it clearly will help, but I have my challenges. Because it's not only information available to investors, it's also an information available to my competitors.
Next question is from Saion Mukherjee from Nomura.
Sir, in your opening remarks, you talked about challenging U.S. environment and subsequently about the cost control initiatives. Now the general understanding is that the worst in terms of the competitive -- the channel consolidation and competition we've already seen. So I was just wondering when you mentioned, challenging environment, are you referring to the value of new launches because you're seeing more players coming in? Or you see pressure in the base business itself? And also on the cost front, I don't know how much you can share. What is the quantum you're looking at? And which other areas where things can be further tightened?
So Abhay maybe you can respond to the first part. I think, in all parts of operational, manufacturing, quality, R&D, cost of product, all of that we have opportunity to become more efficient.
I mean, if it is substantial do you think, sir? I mean in terms of as a percentage of sales?
Hopefully.
And sir on the market dynamics?
On the market dynamics, I think, it's a blend of everything put together. We clearly see larger number of approvals coming through. Runway available for a product even if you are the first or second in market, it's much shorter than what it used to be. And the competitive intensity and the pressures that we see, personally, I don't think it is abating.
Next question is from the line of Neha Manpuria from JPMorgan.
Sir, on the marketing cost that you mentioned related to the speciality launches in the U.S., is my understanding correct that the marketing associated launch, the marketing associated cost is probably the lumpy part of it? And once these launches are through, probably in FY '20 would see SG&A part of it become more normalized? I understand that the MR -- the field force cost will be there, but the launch associated cost?
I haven't really modeled the SG&A expenses over a longer time frame so difficult for me to give you a clear answer. It will clearly not reduce, whether it will stay where it is or it will up will also depend on the initial response and how well the trajectory looks like. And, of course, if there are R&D expenses to go with newer indications and trials that will go along with that, then that will be over a longer time frame, not clearly a lumpy first year and then a watered down year 2, year 3. So, overall, I think, my sense is over the next 2 to 3 years, clearly, we will have to continue to invest in the business to help it grow and reach where it should.
Due to time constraints, we'll take that as the last question. I would now like to hand the conference back to Mr. Nimish Desai for closing comments.
Yes. Thank you everybody for joining us on this call. If any of your questions have remained unanswered, do send them over and we'll get them answered. Thank you, and have a good evening.
Thank you very much.
Thank you.
Sun Pharmaceutical Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.