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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 '21 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Nimish Desai. Thank you, and over to you, sir.
Thank you. Good evening and a warm welcome to our first quarter FY '21 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. Abhay Gandhi, CEO of North America; Mr. C. S. Muralidharan, CFO; and Mr. Kirti Ganorkar, Head of India business. Today, the team will discuss performance highlights, update on strategies and respond to any questions that you may have. As is usual for ease of discussion, we'll look at consolidated financials. Just as a reminder, this call is being recorded, and the replay will be available for the next few days. The call transcript will also be put up on the website shortly. The discussion today might include certain forward looking statements, and this must be viewed in conjunction with the risks that our business faces. [Operator Instructions] I also request all of you to kindly send in your questions that may remain unanswered today. I will now hand over the call to Mr. Shanghvi.
Thank you, Nimish. Welcome and thank you for joining us for this earnings call after the announcement of financial results for the quarter FY '21. I hope you and your family are safe. Let me discuss some of the key highlights. Consolidated sales for the quarter were at INR 7,467 crores. This is in line. [Audio Gap] Q4 call wherein we had indicated some softness going forward. The Q1 performance shows we've done well and have not lost market share in any of the key products for key specialty products in the U.S. or in any other market. Our timely risk mitigation initiatives ensure smooth operations of our manufacturing network, thereby maintaining continuous supplies of APIs and formulations for our customers and patients. Also for the Q1 last year, we had the onetime contribution from special business in the U.S., and hence the numbers are not comparable to that extent. Let me now update you for our global specialty business. We witnessed the impact of the lockdown on our U.S. specialty business, which we view as temporary. For Q1, our global specialty revenues were approximately USD 78 million across all markets, while specialty R&D accounted for about 39% of total R&D spend for the quarter. We have recently received regulatory approval for Japan for ILUMYA, and launch preparations have been initiated. This launch in Japan will be a step for Sun Pharma in expanding the growth of ILUMYA.We've also recently entered an exclusive licensing agreement with Hikma Pharmaceuticals for commercialization of ILUMYA in Middle East and North Africa region. Abhay will give you more details on the specialty business later. We've commenced clinical trial in India for 2 products, which we are repurposing for COVID-19. These trials are progressing quite well. As a matter of fact because of the current large number of patients across the country, the enrollment is much faster than originally planned, and hopefully we should be able to announce the result of these 2 studies in possibly after 2 quarters. We continue to focus on employee protection, keeping workplace COVID-free, while at the same time engaging with doctors in a safe and consistent way, ensuring and also ensuring supply of continuity of our products across markets. I will now hand over the call to Mr. Murali for a discussion of Q1 financial 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 key consolidated financials. Q1 sales are at INR 7,467 crores down by 9.6% over Q1 last year. Material cost as a percentage of sales was 26.4%, lower than Q1 last year due to product mix. Staff cost was at 23.6% of sales, higher than Q1 last year all due to a lower sales base, an increase in field staff in India and the U.S. There was no rationalization of manpower across the organization due to the COVID-19 pandemic. Other expenditure was at 28% of sales, lower than Q1 last year mainly due to reduced marketing, selling and traveling expenses across markets. EBITDA for Q1 was INR 1,725 crores with EBITDA margin at 23.1%. This quarter, Taro had a provision of about USD 419 million related in the settlement with the DOJ in the U.S., plus an additional provision of about USD 60 million for the related ongoing multi-jurisdiction civil antitrust matters totaling to USD 479 million or about INR 3,633 crores. Adjusted for this onetime exceptional charge as well as the minority interest on it of INR 832 crores, the adjusted net profit for Q1 FY '21 was INR 1,146 crores with adjusted EPS of INR 4.78. Including the above exceptional charge, the company reported a net loss of INR 1,656 crores. Let me now discuss the key movements versus Q4 of last year. Our consolidated sales were down by 8% Q-on-Q, mainly due to sequential decline in Taro sales as well as in U.S. specialty sales. Material costs at 26.4% of sales are lower than Q4 on account of efficiencies and management of inventories, including the provisions for the slow and non-moving. Staff costs at 23.6% of sales are higher than Q4 mainly due to lower sales base, merit increase and increase in field staff in India. Other expenses of 28% of sales are lower than Q4 due to decreased marketing, selling and traveling expenses across markets. We had a ForEx gain of INR 79 crores for Q1 against ForEx loss of INR 143 crores in Q4. Reported EBITDA for Q1 was INR 1,725 crores, higher by 37% compared to Q4 last year. Adjusted net profit for Q1 was at INR 1,146 crores higher than Q4 adjusted net profit by about 73%. During the quarter, the company had reduced its debt position by an extent of $200 million as compared to the March quarter ended 2020. Let me now briefly discuss Taro's performance. Taro posted Q1 FY '21 sales of USD 117.6 million, down 27% over Q1 last year. Excluding the onetime charge of USD 478.9 million, net profit was USD 29 million compared to USD 66.2 million in Q1 FY '20. Taro reported net loss for Q1 was USD 434.9 million. Taro reported settlements and loss contingencies of USD 478.9 million, which reflects the onetime settlement charge of USD 418.9 million related to the global resolution of the Department of Justice investigations into the U.S. generic pharmaceutical industry. An additional provision of USD 60 million has been taken for the related ongoing multi-jurisdiction civil antitrust matters. The ultimate outcome of the antitrust matters cannot be predicted with certainty. I will now hand over to Mr. Kirti Ganorkar, who will share the performance of our India business.
Good evening, everyone. Thank you, Murali. Let me take you through the performance of our India business. For Q1, sales of branded formulation in India were INR 2,388 crores, a growth of 3.2% over Q1 last year, accounting for approximately 32% of total sales. Given the challenges of the lockdown across India, we have done well for Q1 and have retained our overall market share. Our chronic business has shown good performance. We faced some challenges in the acute segment due to closure of doctor's clinics in the quarter. Also as expected, there were savings in branding and promotion and traveling due to the lockdown. While many doctors have started their clinic recently, the patient flow still remains low. For non-COVID hospitals, OPDs are gradually starting. We continue to engage with the doctors digitally for brand promotion and new launches. Our medical representatives have started field works, barring in those areas that has been designated as a containment zone by respective government authorities. Our expansion of the field force in India is nearing completion, which will help us in the long term to enhance our geographical and doctor reach. For Q1, we launched 10 new products in the Indian market. Sun Pharma is the largest pharmaceutical company in India and holds approximately 8.2% market share in INR one lakh 42,000 crore pharmaceutical market as per June 2020 AIOCD-AWACS MAT report. We also continue to remain the partner of choice for in-licensing, given our strong #1 position in many therapy areas. I will now hand over the call to Abhay.
Thank you, Kirti. I will briefly discuss the performance highlights of our U.S. businesses. For Q1, our overall sales in the U.S. were at USD 282 million, accounting for approximately 29% of overall sales. Although we recorded a 33% decline year-on-year, the numbers are not strictly comparable as sales for Q1 last year included a onetime contribution from the specialty business in U.S. Let me now update you on developments in our specialty business. Our specialty revenues in the U.S. have declined over Q4. This quarter reflects the full impact of the lockdown due to COVID-19. 2 of our specialty products, ILUMYA and Levulan, are clinic-administered products, hence the temporary closure of clinics has impacted these products. The decline is mainly driven by lower sales of Levulan as the entire treatment is undertaken in the clinic setting. CEQUA also witnessed some decline in sales compared to Q4. For most part of the quarter, dermatology and ophthalmology clinics were closed. However, the important thing to note is that we have not lost market share in any of our key specialty products. Prescription share is now near to pre-COVID levels, and we also see a month-on-month sales improvement. We continue to rely on digital engagement with doctors and health care workers for promoting our products. Patients in the U.S. have also significantly expanded their digital connect with doctors. Let me now update you on our U.S. generics business. As we have all seen, Taro has recorded a decline in sales for Q1, leading to a de-growth in our overall generic sales for the quarter. The U.S. generics business continues to be competitive. I will now hand over the call to Mr. Shanghvi.
Thank you, Abhay. I will briefly discuss the performance highlights of our other businesses as well as give you an update on our R&D initiatives. Our sales in emerging markets where USD 173 million for Q1, down by about 10% year-on-year and accounting for 18% of total sales. The decline is driven by reduction in tender revenues of our South Africa business. Excluding the tender business, sales were flat compared to Q1 last year. Formulation sales in rest of the world market, excluding U.S. and emerging market, were USD 136 million in Q1 FY '21, down by about 18% over the same period last year. This decrease was mainly driven by lower sales in Japan, coupled with some decline in Taro's rest of the world sales. Rest of the world market accounted for approximately 14% of the Q1 revenue. We have done well in our API business with Q1 sales at INR 554 crore, up by 20% over Q1 last year. We continue to invest in R&D for enhancing our specialty and differentiated generic pipeline. Consolidated R&D investments for Q1 is INR 421 crores, accounting for 5.6% of sales. Our current generic pipeline for the U.S. market includes 95 ANDAs and 6 NDAs awaiting approval with the U.S. FDA. Over the past months, we have learned how to operate in COVID-19 virus [ could be ]. This experience is important towards various parts of our business...
I'm sorry to interrupt you, Mr. Shanghvi, but your voice is breaking. We can't hear you very clearly.
Okay. Can you hear me now? Is this better?
Yes, much better.
We continue to invest in R&D for [ using ] specialty and different [R&D] pipeline. Consolidated R&D investments for Q1 is INR 421 crores, accounting for 5.6% of sales. Our current generic pipeline for the U.S. market includes 95 ANDAs and 6 NDAs awaiting approval with the U.S. FDA. Over the past few months, we have learned how to operate well in the COVID-19 environment. This experience imparted more resilience to our business. We continue to focus on supply chain and ensuring business continuity without compromising on safety of our employees. With this, I would like to leave the floor open for questions. Thank you.
[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.
My first question is regarding the other expenses. So I'm just trying to understand there's been a significant drop both Q-on-Q and Y-o-Y. So you mentioned a large part of it is India, or you mentioned marketing, selling and traveling expenses have been lower. So I'm trying to understand, is it largely India-led? Or is it a function of the U.S. branded marketing initiative also, which has come down, and it has an ability to come back again once it is normalizes?
So I did mention that the marketing sales and traveling has been lower across regions.
Across region?
Across. So that's -- I already mentioned that one.
If I see the stand-alone, I see that India reduction is less. So I'm just trying to understand, is the U.S. a bigger piece or India is a bigger piece?
No but at the end of the day, you are seeing a delta which is material enough, which is driven by the factor what was explained. And both India and U.S. and other markets also contributed to this.
It is across the market, is what you said?
Yes.
Okay. Fair enough. And my second question...
Prakash. This is Nimish here. Just to add to what Mr. Murali is saying, you also have to keep in mind that the entire India business is not reflected in our stand-alone numbers. You know that a part of the India business is also in one of the subsidiaries. So I think looking at consolidated number is much better rather than stand-alone.
Fair enough. I understood that. And my second question is on the specialty business. Given the lockdown, sales have come down. R&D as a percentage has moved up. Just top management thought process, is there a plan moving ahead to monetize part of it to reduce the burden? I mean we could clearly see the margin that has come up with reduction in costs. Is there a plan to monetize a part of specialty asset going ahead maybe 2, 3 years out?
No, there's no plan to actually reduce the specialty business. The focus is on growing that business and also potentially looking at future synergistic addition. That is something that we've clarified multiple times.
No, no, no. I think I have not asked it properly. I meant to create an [ SPV ] and develop a [ state ] out of it so that...
We have no need. We are generating enough cash so that we don't need to create [ SPV ] to generate cash.
The next question is from the line of Tushar from Motilal Oswal.
Just on the India business side, just if you could share your experience in terms of launching products during the COVID phase, where I presume there would be a lot of digital connect with the doctors on one hand, and at the same time there has been relatively reduced patient/doctor connect. So how do you map the way the product launches that would have happened has converted to revenue. Though 2, 3 months is quite a short period to map, but just if you could throw some light on it?
Sure. Yes. This is Kirti. As I said in -- we have launched 10 new products, including SKUs -- almost close to 27 SKUs during this first quarter. And this has been a very different experience of launching product digitally to the doctors. And also making it available into supply chain was also challenging. So what has happened is some of these new products which are having less competition and some unique features. They are doing well and they are also available across the supply chains. So our experience is launching a new product digitally is challenging and since the patient flow at the doctor is also limited, there is less opportunity for the doctors to write a prescription for a new therapy or for a new molecule. But this is in the short term. I think going forward in next quarter or following 2 to 3 quarters, it should pick up very fast. But only the advantage of digital launching is now doctors know our brand very well because they have been exposed digitally during the launch of the product. Whenever they get opportunity, I think the sales will pick up very fast for new products.
So does it mean that structurally, the operating cost for launching product will be lower compared to the campaigns, which pre-COVID we used to have?
Yes. That's correct. For the first quarter where we have launched new products, most of them were launched digital. So the cost of launching the product digitally is lower than what we do in a normal case when we launch product physically to the doctors.
Understood. That helps. And just secondly on this specialty side prescription trends. So is it to do with the pent-up demand or that is in addition to pent-up demand, though overall recovery is very much visible?
Are you talking on chronics type?
On the specialty portfolio for the U.S. or the development.
The U.S., okay. I will let Abhay answer that question, yes.
Tushar, I did not understand the question. So what is the pent-up demand you are speaking of?
So you highlighted in the opening remarks about the prescription trend coming back to pre-COVID levels. So out of that, how much would be, let's say, because of there is any pent-up demand, or this is more the new -- how prescription is being done?
If it's patients who were not reaching out to doctors coming back to the clinics gradually, and we're regaining share to where our pre-COVID levels are for our prescription base. So that's what I was talking about. I hope that answers your question.
Sure, sure.
the next question is from the line of Neha Manpuria from JPMorgan.
My first question is on specialty business. Now Levulan you said obviously was probably the most impacted along with ILUMYA. Are you seeing -- by when do you expect near normalization of trends in terms of patient portfolio? In your view, will this take a couple of quarters? And second is in on ILUMYA itself. In your interaction with the doctors, what is the biggest selling point for ILUMYA versus the other IL-23? We understand that IL-23 will gain share, but I don't know. What is the biggest selling point for the doctor prescribing ILUMYA versus the other IL-23 therapies -- drugs, sorry?
Neha, you have asked 2 questions. Let me respond to them sequentially. For me to be able to forecast when things will normalize. It's really something I will not be able to do. Because if I see it in the U.S. context, I think just a couple of days ago, the death toll in the country has crossed 150,000. And even today we are seeing close to anywhere from 90,000 to 100,000 new detections every single day. In the past week or so, 4 important states have sort of once again reinforced their lockdowns. Florida, Texas, a little bit of Arizona, California, these are major markets. So these were one of the few markets we were first to open up but after seeing the spike in cases, they are going back to lockdown kind of a situation. So while in some states, the situation is improving; in some states, it has actually regressed. So when things will normalize? Very difficult to say. Month on month, whether it is ILUMYA or Levulan, I'm seeing an increase. But when it can reach pre-COVID levels is a tough question to ask, and I really wouldn't have an answer to that. On your second question, I think we have said this on different calls as well. I think the 3 major points we are talking to doctors, one is of course on the efficacy of ILUMYA. The second is on the safety. And the third is on the durability of results. And these 3 messages do resonate with doctors. And they are also able to see the product leading up to their expectation on these 3 fronts. And therefore in the face of COVID as well, many doctors even ask their patients to continue, not come back for ILUMYA and to stay where you are because they knew that the results and the patient's [clearance or] scale would sustain. And when the patient is then able to come back to the doctor, I think the prescriptions of ILUMYA has resumed.
So is this your ability of results, will that allow us to probably regain share faster than our peers?
We hope to. But also do remember that in our [given] medical benefit product in others than our pharmacy-benefit product. But just working on one aspect of a product attribute, alone will not help us to regain share. We have to work on multiple fronts and make it a cohesive working unit to ensure that we improve our market share and gain faster than others, and that's always the objective.
Understood. Just to follow up on the R&D spend on specialty, that has stepped up quite a bit quarter-on-quarter, even though our total R&D has come off. As we look at our R&D pipeline for specialty, how should we look at the specialty R&D spend through the rest of the year? Is this level enough for us to take up programs through? Or should it increase further?
So I mean first of all, I think in today's situation, one of the biggest casualty has been the clinical trials. Because since the clinics were not operating, doctors are not putting patients on trial medication. So we really don't when the normal operations of the clinical studies will start. Now my sense is that our continued investment on ILUMYA as well as additional indication for Odomzo, plus the recently licensed product from SPARC, which also the Phase II studies will start shortly. So the overall spend if the clinical studies get into the normal return, that spend will go up a little bit.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Sir, what's the update on Halol remediation?
So we continue to update the agency about whatever remediation that we've done. And in my understanding, almost all the remediation would have been done, or are likely to be done shortly. But the agency hasn't yet come out with any clearly defined guideline on how to audit the facility, which is currently on an OAI status. So they are working on it is what I understand. But in time there is clarity, we really don't know how the agency will look at it. Hopefully, they will come with a way by which like what they are seeing for regular product and for pre-approval inspections and regular audits, it can be based on the desk audit. We will find a way to complete this also based on the desk audit but difficult to respond at this point.
Okay, great. And Abhay, this is for the derma portfolio, both for the specialty as well as for generic in the U.S. Now whatever sales has been lost right now or the prescriptions, so how do you see this going forward? Is it gone? Or do you think this then comes back in some measure?
So the situation is gradually evolving, Sameer. So we have had around 35%, 40% of the clinics opening until about last month, doesn't necessarily mean that all of them were willing to meet your reps and have normal kind of visit. But electives were also pushed into the background, so we were doing what was sort of important. And electives were still being put into the background. And you're right. That did impact both the specialty as well as the generic part of the derm portfolio. There is improvement seen literally on a week-to-week basis, but it's not so rapid but I can say that things will normalize in the next couple of weeks or in the quarter. So it's a gradual process and as I was mentioning to Neha earlier on the call, some states are actually going back on their reopening plans and going back into a shutdown mode. So it's an evolving situation here in the U.S.
Okay. And just one final one from my side on Taro settlement on DOJ. Sir, given that the underlying sales was about $500 million that was cited, was it a bit of a pervasive practice in the company during that time period? And second is how do you think about the ongoing 44 state attorney general case on the same price fixing?
Yes. I think Sameer, I think that's where we have a challenge. Because Taro being a public company beyond whatever that Taro has shared, I don't think we can share any further information. But at the same point of time, I think there is a structured process for all this DOJ settlement. So we have to remain in compliance with those settlements.
The next question is from the line of Nithya Balasubramanian from Bernstein Research.
My first question was on the India market. Are any of the savings related to either -- from either more efficient marketing or more efficient selling now that the doctors using digital tools, et cetera? Are any of these savings likely to outlast COVID? And then as you see normalcy come back, do you see any of the savings being sustained?
What I think is some of the savings would continue in second quarter. And then quarter 3 and 4 if things are normalized, then some of these savings will reduce substantially, then things will start coming to normalize maybe in the third or fourth quarter.
Okay. So you do not see anything, any fundamental changes in the way you do business in India? So all the expenses that used to happen, they are likely to come back once the market has opened up?
So what we hope is once things are normalized and all of the expenses will come back. There will be some savings here and there, but that will not be very substantial.
Got it. My second question was again a related question on the DOJ [proof] in the price fixing. So beyond Taro, I think Sun has also been named in some of these case. So again, a question around what is the progress currently? And what can we expect going forward?
So I think as we explained, the settlement is only for Taro, and it does not include Sun. The products for Sun as well as Taro are also [ lifting ] and really different. So as on today, I think there is no progress but we can report beyond whatever that we would share.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
One question I had for Kirti for the India business. I just wanted to understand that if you look at the mix of marketing in terms of digital channels versus physical interaction, can you just provide us some indication May versus July? What percentage will be based? I'm just looking for a trend. I'm not asking for the exact number. Just looking at as things started opening up, patients at the visiting office, et cetera, how digital marketing has started phasing out, so May versus July as the trend.
Yes. I mean I think I will just start from April, like the lockdown started in March end. And so you can say like April, almost there were no calls to the doctor. There were no physical call to the doctors in the month of April. In the month of May at least the first quarter also, there were no physical call to the doctors. But from the second half of the May at least in a green zone areas as they were defined at that point of time, we started working in the field. And in the June, I think most of our field force now are working in the field, except in a containment zone or wherever there are restrictions. So if you see the transition, April was almost like I would say 100% digital where the medical reps or managers are calling the doctors. May is like 20% to 30% of the calls, which are like physical calls. And when you come to June, then things have improved a lot. So in June, you will see like almost close to 50% of the calls which we can go and meet with the doctors for a short period of time. This is how the progression is happening. And July is still -- we see some improvement, but not to the extent what I was expecting. We have a lot of challenges in terms of local lockdowns.
So the [ specific question ] right now in July is some [ 80%.]
Yes, yes, it's slightly better than June, but -- as the number of patients visiting to the doctors are very limited. Still, there is a big challenge in the fear of [psychosis ] in the mind of patients.
My second question, I just wanted clarity that personnel cost for us on a consolidated basis has gone up by INR 100 crores sequentially. So is it -- have we recruited more guys? I mean that would have significance. So what could explain this [ 100 increase ]?
So Anubhav, this is Murali. The increase is attributable to a number of factors, increase in the field force in India and U.S. some component of exchange rate impact and actual valuation impact. So these are certain components and drivers for this change.
So this India sales force increase was already planned, it's just that people and the -- it's just the new decisions are not taken as sort of 10% increase you talked about. They just started going in.
Correct.
The next question is from the line of Damayanti Kerai from HSBC.
My question is regarding the U.S. generic business. So if we see some further delay in Halol regulation, how do you see your U.S. generic part evolving in next 2 to 3 years? And what is the pricing environment right now for your portfolio?
So when I look at the opportunity that is available with current products and some of the products which we have launched or are launching in the next few months, I'm pretty confident that there is still scope for us to do better in the overall Sun generic part of the business. And I think that's what the team is working towards. Pricing situation are consistently maintained and is not improving from an industry perspective. And we continue to face a challenging environment.
Okay. So challenging means most of your peers have mentioned about mid- to high single-digit kind of pricing erosion to continue. So are you witnessing the same level of erosion?
Very product specific. So in an aggregate sense, maybe I would probably would like to go along with the same kind of a number. But when I see some products, I mean sometimes the drop can be so severe, it just moves the earth under you. But at an aggregate level, yes, maybe you can take that kind of a number.
Sure. My second question is regarding ABSORICA. So you had plans to move your patients from ABSORICA to ABSORICA LD formulation. So how has it progressed there?
Very gradual, and I think the COVID situation is the primary contributing reason to that. So the shift is very gradual. So in the absence of proper promotion to the doctors, the loyal customers or the products stay with what they know, and that's the ABSORICA brand. So some shift is happening, but not as fast as we would like, clearly.
Okay. So any year-end target? Like what percentage of patients would like to move after seeing the disruption of COVID?
That would be a difficult question for me to answer now because it's a -- something which is a strategic question, and I would not like to answer that.
The next question is from the line of Vishal Manchanda from Nirmal Bang.
Could you share an expect guidance for the year?
We have always maintained tax rates sort of at an annual level. And last year FY '20, our ETR was about 16.4%. And we have guided already last year that gradually will inch up, so we'll maintain that position.
So will this merger have any implications on pharma global [ level ]?
No. No.
Okay, and just one more. One of the executive orders that do not [indiscernible] has passed, talks about passing on the rebates to customers. The pharmacy benefit managers should basically pass on the rebates. So does this have any favorable or unfavorable implication on your specialty revenue, especially ILUMYA.
So the fine print of the order and how exactly it will get implemented is still unknown. The whole industry and the associations are trying to work through it and trying to understand more. So as of now, it's very difficult to respond to that.
The next question is from the line of Krish Mehta from Enam Holdings.
I had 2 questions. The first one is about -- if you could share the net debt position for consolidated and stand-alone statements? And I'm guessing this will be x Taro?
The net debt position on the x Taro is about $850 million at 30th June.
Okay. And the other question I had was if you could share...
No, I stand corrected. I stand corrected. The net debt position as of June 30 for x Taro was $431 million, okay.
Okay, 431. And I had another question about the working capital. If you could share the accounts receivable, payable and inventory numbers for this quarter consolidated?
Accounts receivable, payables in this quarter, we will let you know separately.
Okay.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
Just the first one is on the gross margins, it seems to have come up quite well. And when we look at Taro, clearly Taro has declined. So I'm just trying to see what has happened in the rest of the business from a gross margin perspective?
Overall, we have also seen readout that there has been efficiencies in management of operations, coupled with -- we have also managed our overall inventory management more efficiently. That includes these low and nonmoving related management of inventories. So these are some of the factors that help us to improve overall margins.
Got it. So Murali, is this sustainable? Do you think -- or when the mix kind of comes back to a normalized mix, this will be sustainable or not? I think that we follow up.
It's very difficult to answer. We -- we need to wait for the mix or what's going to happen.
Okay. Got it. My second question is on the API business. It's grown 20% Y-o-Y. Anything in terms of -- and the press release talks about using it more for capital. But is there any trends that you're seeing from third-party sales on the API business?
We seem to have lost the line of Mr. Shanghvi.
Can you repeat the question?
Yes. My question was on the API business. It has grown 20% Y-o-Y. And the press release talks about using it more for capital purposes. But I'm just trying to understand from trends to third party sales, is there something that you are observing in terms of qualitative color?
No, we have been in maintaining a robust position API business consistently. The philosophy is of course to leverage the vertical integration capability the company has, which helps us to speed to market. That's why we are saying that we will try and enhance more and more captive. At the same time, we are also focusing on whatever available on the third-party sales, and we have consistently performed on the API in the third-party sales also.
And last one is on the API localization efforts by the government. Is there any update? Or are you looking at any specific drugs in that list for you to kind of localize?
Yes. I think there are quite a few products in that list other than antibiotics that we are considering because we already are in that business. So we are evaluating all options, but the idea would be to use this as a way to become fully integrated in India.
We have Mr. Shanghvi connected. We take the next question from the line of Surya Patra from PhilipCapital.
Two questions, one on the 2 product studies offering for COVID that you had mentioned. So how are you thinking whether -- just thinking for the domestic market? Or you're thinking as a kind of a global initiative for [ through this ]? Any purposes on that? And in terms of opportunity, how big and what that you are thinking about it? So if you can tell something on that front.
So of course we are currently doing the study in India, and these studies are being done with a view to meet the Indian regulatory requirement. All different countries have different regulatory requirements. Plus we also have to keep in perspective that we only have IP for AQCH and not for nafamostat So I think depending on what the opportunity and what kind of clinical outcome benefit we will get, we have to then decide about launching the product outside of the country.
Okay. My second question is about the specialty business. See I believe in the previous quarter commentary, you had mentioned that most probably this year, FY '21 is likely to see a kind of decline in terms of specialty spend. Last year I believe on the promotional side that you are mentioning, so whether any progress that we have seen on that front? That is one. And secondly, relating to the specialty only, see, we have seen the sequential [ increase ] of quarter-on-quarter run rate has come down by almost like $30 million, $40 million because of the COVID factor. And there is also a sequential decline in the branded business of our ROW emerging market as well as India. So despite that, there is a kind of sequential improvement in the gross margin thing that is visible. So whether it is coming from the sequential correction in the raw materials, and hence that would be sustainable.
No. I think it's a complicated question. Abhay, maybe you can respond to the gross -- because I think you're mixing up multiple things.
3Yes. 2 questions I have asked, in fact.
Yes, yes. So I think if we look at the reduction in the marketing spend, some of this is planned. And some of this is a response to the COVID because we can't spend the money. People can't travel. They can't visit doctors. So all of those things. And as Kirti says and even our [ basis], I think once post-COVID and then things become normal, we will evaluate which kind of expenses don't produce any meaningful additional business. We may relook at those expenses. Otherwise, most of the other expenses will continue to be normal.
Now so in fact I was trying to understand the specialty spend. So I was believing that you had indicated this -- in this year possibly we'll see a slightly low kind of specialty spend compared to FY '20. So on that front, is there any different that would change in the thought process?
No, there's no change in thought process. I think...
I think we have mentioned on the last call also, one of the reasons why the spend may be a little lower than last year is because we have optimized the DTC spend on ILUMYA. I should keep that apart and the rest of the spend is more or less what we have planned for. I'm sure both for Kirti in India and for me in the U.S., going ahead, the total money that we spend may not change. But having said that, within that, the marketing mix of the promotional mix may change depending on what works with customers and what is required to be done COVID and a post-COVID environment.
Okay. Okay. And on the gross margin front, if you can give me, sir, if you can. Despite the branded business coming down and that there is a sequential decline in the specialty revenue, still there is a gross margin improvement. Is it purely because of the saving in the -- or declining raw material prices or something else?
So this is Murali. I think I -- the same question I responded. What I did share is that efficiency in manufacturing operations, coupled with management of inventories more efficiency, which includes the management of slow nonmoving inventory related matters. So that -- these are the contributors for the improvement in material cost consumption.
Yes, Murali. What I can add is also product mix for India business improved.
The next question is from the line of [ Mara Telli ] from Equirus. The next question is from the line of [ Gaurav Hinduja ] from GEPL Capital.
So firstly, I wanted to know that in the U.S. business, we are seeing some sort of pricing erosion as mentioned on the generic. So from a long-term perspective, do you see any changes to our product mix sort of increasing on the branded portfolio to augur well for the margins? So that's my first question.
Okay. So sorry, I thought you were doing both questions together. But let me answer your first question since you paused there. I think the key in the generic business is to have a wide product basket. And if you see the number of new product filings that we have, and we have been giving this on our earlier calls as well, I think we have a robust pipeline of products to be able to cater. And then of course the other thing which you do as part of running the business is there are products which we feel that the pricing is so low, that it actually is not worthwhile doing it. And we continually look at products and to try and see whether we need to continue or throw them from the basket and keep them dormant.
Okay. So are we likely to see the current product mix sort of normalizing for the next couple of quarters going to the gross margin and the EBITDA margins targets come up. So how long...
Sorry. I do not understand what you mean by product mix normalizing. Again, I don't understand what you mean by that.
You mentioned that the gross margins have come up a little bit because of the product mix, I think in the earlier question. So are we likely to see this on a recurring basis for the next couple of quarters? Or is this only due to the COVID-led disruptions?
So in generics pricing is something that you can be sure of today. And if there is a new RFP or [ RFO ], things can change. So to look at what the pricing for a particular product with a particular customer is today and to then give a forecast of how we can look a year down the line becomes a very challenging task because it can change pretty quickly.
The next question is from the line of Nimish Mehta from Research Delta Advisors.
Yes. I have a follow-up question. You mentioned that the number in cost reduction in the marketing expenses is across the board. So can you let us know whether the specialty business has been increasing a lot compared to the last quarter, and the difference to the last quarter, or increased -- decreased a lot from a direction of [indiscernible]?
Sorry, I'm not sure who you asked the question and what was the question. Because your voice broke up, for me at least, very badly.
Okay. Is this better? Is this audible?
Yes, much better. Much better. Thank you
Yes. The question is for you [indiscernible]. It's basically -- I'm trying to understand the profitability of specialty business. I mean directionally, whether it is higher or lower sequentially, given that there has been reduction in other marketing expenses, even for that business.
So we are in the investment phase, so there is no profitability as such. Having said that, we -- at the beginning of the last quarter itself when we were entering into the COVID phase, and we mentioned this on the call also last time. We took Very conscious decisions to cut down on what we thought were nonbusiness-critical expenses, freeze nonbusiness-critical hiring. So that has led to a conscious reduction of costs for the current quarter. And depending how the situation evolves, we will either continue to maintain a tight control over the expenses that we have. Or we might sort of loosen the purse strings and start investing if the situation comes back to normal. So it's a watch and respond situation rather than take a decision now, regret later.
Yes, understood. I'm sorry, I actually made use of the word profitable, but I just wanted to know whether the loss would have increased or decreased. If you can let me know, that will be great. Vis-à-vis the Q4 FY '20.
I haven't looked at that really. Murali, I don't know if you have a sense? But the drop in this turnover, I think we have said is -- because I have not done the analysis personally. And I think business-by-business anyway on the call, we would not share the details anyway.
Okay. The other thing I just wanted to know the API cost. It has -- we have seen -- we have been seeing that it is increasing from a lot of products. And there is a sense that it will -- the higher cost to continue. So in view of that, how do you see our input material cost changing? And any view on the API cost also would be very helpful.
No, I don't think we can look at the API cost as a whole. In some of the products, there is a clear increase. In some products, we also see reduction. So maybe a slight overall increase. Difficult to kind of take a longer-term view because multiple dimensions.
Understood. So as of now from whatever rupee [ level ] in India is going to be at today, and again, it remains the same. We won't see much impact on our margin. Is that a fair understanding?
No, I think what you don't factor is that we have different countries and different businesses. So what is relevant for India business, maybe India business because it's price controlled and so many other variables. There is a direct correlation with cost and that may go up because of the multiple products, which are -- which have gone up in terms of cost in China. Now at the same point of time, in some other businesses, the impact of cost is not so high. So difficult to give a very defined answer.
The next question is from the line of Anubhav Sahu from MC Research.
I have a couple of questions. One, sir, for the India business, could you please segregate what was the growth of chronic portfolio versus acute portfolio? And how much of India sales is from chronic [ stays ] now? Did we gain market share in the last quarter?
Yes. I think broadly, if you look at the IMS data or even for that matter AIOCD-AWACS data, 50% of our portfolio is our chronic portfolio, and rest will be like a semi-chronic and acute. And I just missed your second question. What was it?
And sir, can we have -- sir, sorry, my first question was on the segregation of growth. I mean in this quarter, what was the growth of chronic portfolio in India? What's your acute portfolio in India?
Sure, sure. So like when I'm saying chronic portfolio, it's like a cardiovascular and CNS type of therapy areas has grown by 10%. And semi-chronic has grown negatively. And some of the others like acute has even [ de-growth ] by minus 20%, 22%. So the chronic business looks like a normal business. It still continued to grow what it was pre-COVID period.
Okay. And sir, particularly on the chronic portfolio, did we gain market share or did we maintain market share? What was the situation?
So I can give you overall picture for India business. And I can look at this from 2 perspectives, the way you can look at the data. So if you can look at the IMS data for this quarter or quarter 1, April, May, June, then you will see that Sun Pharma as a whole business, we have gained 0.5% market share. But at the same time if you look at AWACS-AIOCD data, then our market share is 0.1% gain. But more importantly is the markets are not growing. Our markets are showing negative growth in the first quarter both in AWACS as well as IMS. Against that, we have shown a 3% growth. So I think we are going in the right direction to gain market share.
Got it, sir. And sir, I had a question for Shanghvi, sir. So I wanted your thoughts on recent executive orders by U.S. President on the pharma sector. I know it's earlier days and fine print is awaiting. But the way debate has shifted to [ what it was ] before, how much of price negotiations process. Any early comments on that? I mean what -- how should we position for things, when things begin changing? Will it lead to a potentially increasing pricing pressure for the specialty portfolio? Or do you think there is a case for a better market next year?
No, I hope we have clarity because it is necessary for us to get it for making investment decisions. But I don't think there is clarity. Now my own sense is that if I simply look at stock prices of all the large pharma companies, there is no major impact post that executive order. So I don't think that people are expecting any significant impact. But I think it's good to have clarity as our basis. We are looking at details and understanding the fine prints. And we are not even sure whether this will be challenged or we will -- all of the changes we've made whether they are [ within the ] presidential authority. So all of those things, we will -- people will analyze and come back with some kind of greater clarity.
Got it, sir. So final one on is specialty business. Do we see a situation of breakeven-like fiscal at the EBITDA level? Or do we have any target in mind for the breakeven, Shanghvi?
No, I think we should not look at specialty business alone. We should look at product by product. And I think we will start breaking even on some of the products, well, next year.
We'll be able to take one last question. We take the last question from the line of Anubhav Aggarwal from Crédit Suisse.
I just have one question. I just wanted to understand, get a general understanding of this price litigation case in the U.S. just in terms of if I look at the parties who are involved, one was -- one is Department of Justice, second is state, and third is the commercial insurance. And my question was more from the commercial insurance perspective. As I look at it, they represent more than 50% of the market. Most of the cases and investigations we have seen so far are from the state attorney generals and Department of Justice separately investigating, that in fact, In your experience, how does commercial insurance do in this basis? Will it generally -- do they go with the [indiscernible] or whatever decide in the state on the [ to run the ] cases, or they have separate cases? What's the process like in general?
Yes. I think, the biggest challenge in all of this is that very few of this actually go into litigation and final judgment. Most of them get settled out of court. So I think ultimately it will be a function of how that negotiation will go and what gets settled. And I'm not responding to your specific query. I'm giving you a general comment. And very few cases like, let's say, esomeprazole litigation that we had for previous payment. It went all the way to litigation, and we got a favorable judgment. But like that, very few companies actually go up to the end. So generally, it gets settled. So difficult -- and how that gets settled is [ lower ] so difficult to predict.
I just have one query on that. When we look some, ex Taro, like some of the drugs where we had case against by state attorney generals. So when we look at the commercial insurance cases there for Sun ex Taro, and apparently I have not looked at that in great detail. But have you've been litigated by multiple commercial insurance companies over there?
No. I think there is a litigation ongoing by a large number of companies. So -- but ultimately it will depend on the strength of the litigation, the size of the business and all of these issues. And the evidence they have on the board and the -- ultimately, there is a certain amount of burden of proof. It's difficult to -- all plaintiffs and what we call litigants would have different -- all companies also will have a different strength of their case.
Thank you very much. We'll take that as the last question. I would now like to hand the conference back to Mr. Nimish Desai for closing comments.
So thank you, everybody, for joining this call. If you have any questions that have remained unanswered, do send them across, and we'll get them answered. Thank you, and have a good day.