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Sun Pharmaceutical Industries Ltd
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Ladies and gentlemen. Good day, and welcome to the Q1 FY '22 Earnings Conference Call of Sun Pharmaceutical Industries Limited. [Operator Instructions] I now hand the conference over to Mr. Nimish Desai, Head of Investor Relations. Thank you, and over to you, Mr. Desai.
Thank you. Good evening, and a warm welcome to our first quarter FY '22 earnings call. I'm Nimish from the Sun Pharma Investor Relations team. We hope you received the Q1 financials and the press release that was sent out earlier in the day. These also are available on our website. We have with us Mr. Dilip Shanghvi, Managing Director; Mr. C.S. Muralidharan, CFO; Mr. Abhay Gandhi, CEO of North America; and Mr. Kirti Ganorkar, CEO 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 will look at the 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 our 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. 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 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 first quarter of FY '22. I hope you and your family are safe and healthy. Let me discuss some of the key highlights. We recorded the highest ever quarterly revenue in the first quarter. Consolidated sales for the quarter were at INR 96,694 million, recording a growth of about [ 29% ] year-on-year and a growth of 14% quarter-on-quarter. All our businesses, excepting API, witnessed strong growth driven by a combination of robust core business growth, low base of the last year and sales of COVID and associated products. However, we are enthused by the all-round growth across all our businesses compared to Q4. Let me now update you on our global speciality business. For Q1, our Global Speciality revenue was approximately USD 148 million across all markets. Global speciality sales do not include Ilumetri end market sales. Specialty sales have increased over March '21 quarter despite the entry of ABSORICA Generics and the subsequent reduction in ABSORICA sales. Ilumya sales have increased both on a year-on-year and quarter-on-quarter basis. We are encouraged by the sequential growth recorded by Ilumya and also by CEQUA, and we expect it to record strong double-digit growth during the year. Ilumetri sales are also ramping up as it gets launched in more European countries. Specialty R&D accounted for approximately 26% of our total R&D spend for the year. Abhay will give you more details on the specialty business later. I will now hand over the call to Murali for discussions on the 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 the key consolidated financials. Q1 sales are INR 96,694 million, up by 29% over Q1 last year. Material cost as a percentage of sales was 27.4% which is higher than Q1 last year due to product mix and geography mix. Staff cost stands at 18.2% of sales. Other expenditure stands at 26.6% of sales. Increase in absolute value of other expenses is attributed towards higher selling and promotional expense in R&D, while in Q1 of last year, these expenses were lower on account of total lockdown across markets. As indicated in our past earnings call, the expenses are seeing an increasing trend across all the markets as we reach full normalization. Now they are currently restrained. ForEx gain for the quarter was INR 799 million compared to a gain of INR 792 million of Q1 last year. As a result of the [ above ], EBITDA for Q1 was at INR 27,717 million, up by 59% year-on-year, with resulting EBITDA margin at 28.7% compared to 23.3% for Q1 last year. Let me now briefly discuss the exceptional items for Q1. Taro has made a $60 million provision relating to its ongoing multi-jurisdiction civil antitrust matters. The exceptional items also include charges of INR 1,503 million towards impairment of DEXASITE and acquired intangible assets under development and INR 382 million on account of write-down of a manufacturing facility, which has been classified as asset held for sale as per the requirements of IND AS 105. Excluding the impact of exceptional items, the adjusted net profit for the quarter was at INR 19,792 million, up 73% over adjusted net profit of Q1 last year. Reported net profit for Q1 was at INR 14,442 million, while reported EPS for the quarter was INR 6.02. Let me now discuss the key movements versus Q4 FY '21. Our consolidated sales were higher by 14% quarter-on-quarter at INR 96,694 million. Material cost stands at 27.4% of sales, which is higher quarter-on-quarter on account of product mix and geography mix. Staff cost stands at 18.2% of sales. However, in absolute terms, the staff costs have increased on account of annual merit increases. We had a ForEx gain of about INR 799 million for Q1 as against ForEx loss of about INR 908 million in Q4. As a result of the above, EBITDA for Q1 at INR 27,718 million was higher by 39% compared to Q4. EBITDA margin for Q1 was at 28.7% compared to 23.5% for Q4. Adjusted net profit for q1 at INR 19,792 million was higher than the adjusted net profit of Q4 by about 47%. The company has repaid debt of about USD 185 million in Q1 FY '22. Since over the last 5 quarters, we have repaid debt of about USD 765 million. As of 30 June 2021, we are net cash positive even at the ex-Taro level. Let me now briefly discuss Taro's performance. Taro posted Q1 FY '22 sales of USD 147 million and adjusted net profit of USD 41 million. On a year-on-year basis, sales for Q1 FY '22 were higher by 25%, while the adjusted net profit was higher by 42%. I will now hand over to Mr. Kirti Ganorkar who shall share the performance of our India business.
Thank you, Murali. Let me take you through the performance of our India business. For Q1, the sales of branded formulation in India were INR 33,084 million, recording a growth of 39% over Q1 last year. India business accounted for about 34% of consolidated sales for Q1. The growth was driven by a combination of core business growth, sale of COVID related products and low base of last year. Sale of products used in treating COVID symptoms and other associated products accounted for about 8% to 10% of India sales for Q1. However, I'm happy to announce that we have recorded a strong growth in the underlying base business, even if we exclude COVID-related product sales. In terms of the growth -- core business growth, we continue to witness good growth in chronic segment, while the subchronic segment was a significant growth contributor for the quarter. The second wave of COVID infections in India, particularly in April and May month impacted our field activities. Many states in the country had imposed lockdown restriction, which has resulted in savings in selling and travel costs. For Q1, we launched 13 new products in the Indian market. Sun Pharma is the largest pharmaceutical company in India, and we have about 8% market share in the domestic market, as per June 2021 AIOCD AWACS MAT report. As per SMSRC report, we are #1 ranked by prescription with 10 different doctors categories. We also continue to remain the partner of choice for in-licensing of products given our strong #1 position in many therapy areas, including therapies for the treatment of COVID infections, coupled with our large distribution network. 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. grew by 35% over Q1 last year to USD 380 million. While all our businesses in the U.S. have grown, the main driver of growth was the Specialty business. U.S. accounted for about 29% of consolidated sales for the quarter. Our specialty revenues in U.S. have grown over Q1 last year, mainly driven by Ilumya, CEQUA, Levulan and ABSORICA LD. Specialty sales have also grown compared to March 2021 quarter despite the drop in ABSORICA sales. While doctors clinics have been opened in the U.S. during the quarter, the situation is yet to fully normalize. Patient flow to doctor clinics as well as frequency of doctor calls by our medical reps are both still below pre-COVID levels. All of you would have seen a recent announcement of in-licensing of Winlevi in U.S., an anti-acne specialty product subject to [ agit son piernes ]. Winlevi is a new class of topical medication in dermatology and will complement our existing oral acne portfolio. The addition of Winlevi further strengthens our position in the acne segment. It is already approved by the U.S. FDA, and we expect the commercial [ impact ] in the U.S. in the October, December 2021 quarter. Let me now update you on our U.S. generics business. While the U.S. generic business continues to be competitive, the Sun Ex-Taro generic business has recorded growth both on year-on-year and quarter-on-quarter basis. This growth is driven by a combination of new launches and better supply chain management. I will now hand over the call to Mr. Shangvhi.
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 were at USD 218 million for first quarter, up by about 25% year-on-year. The underlying growth in constant currency terms was about 19%. And emerging markets now account for about 17% of total sales for Q1. Formulation sales in rest of world markets, excluding U.S. and emerging markets, were USD 185 million in Q1, up by about 35% over Q1 last year. ROW markets accounted for approximately 14% of the consolidated Q1 revenues. API sales for Q1 were at INR 5,149 million, down by about 7% over Q1 last year. We continue to invest in building an R&D pipeline for both our global generics and the specialty business. R&D efforts are ongoing for the U.S., emerging markets, ROW markets and for India. Consolidated R&D investment for first quarter was at INR 5,926 million compared to INR 4,206 million for Q1 last year. Our current generics pipeline for the U.S. market includes 86 ANDAs and 13 NDAs awaiting approval for the U.S. -- from the U.S. FDA.Let me now update you on our specialty R&D pipeline with multiple clinical trials ongoing for enhancing our specialty portfolio. The key molecules include Ilumya, which is undergoing Phase III clinical trials for psoriatic arthritis. SCD-044 undergoing Phase II clinical trial for atopic dermatitis and for moderate to severe plaque psoriasis. MM2 is also undergoing Phase II trial for treatment of knee pain in patients with symptomatic knee osteoarthritis. And finally, our GLP-1 agonist is in Phase I trial for diabetes. With this, I would like to leave the floor open for questions. Thank you.
[Operator Instructions] The first question is from the line of Neha Manpuria from JP Morgan.
Abhay, on the recent Winlevi in-licensing. Just wondering, when we launched this product, given we have the ABSORICA sales force and the Derma sales force already, how should we look at the incremental cost associated with launching Winlevi in the later half of this year? And second, could you explain the differentiation of this product versus the -- given this is a new mechanism of action, you mentioned that in the press release. But how confident are we of the [ tough ] market share the partner has mentioned in the communication previously?
Maybe I will start with the last question first. Clearly acne, as you know, in the market [ factor ] condition. And at least there are 4 different factors and problems which can cause acne. In the last quite a few decades, no one mechanism of action has come through as clearly the first one. And there are at least 2 distinct pathways of [ 24 ]. And therefore, in hormonal acne whether it is in males or females, this would be a very good position to be [ arinitee ] among the doctors. On the other hand, if you see ABSORICA, the indication is very specific, it's only [ in sedi or boliner ] acne that cannot be cleared by any other treatment including antibiotic. So it has a niche in the treatment of acne. Our expectation is that the [ nearly ] would have a far more broad-based acne. So for us to be able to handle 2 acne products in the same team making it [ the product for us ] should be [ perfectly ] possible. So the ABSORICA team that generally has the relationship with the customer will be the 1 that will be marketing this product, and I think they are best positioned to make it into a good successful product for the company.
And sir, in terms of launch activity, would this require a higher spend given this is more broad-based in ABSORICA world? And you would have [ seen ] ABSORICA spend over the years ?
So in the SFR period, I mean, we are not allowed to plan ahead of what we will do. But conceptually, as it's a new product, there will be a certain investment which should have to be made to familiarize doctors with the drug. So that is clearly yes, we will have to do some investment on the product. To be honest how much amount we haven't [even ] figured it out as of now.
Okay, fair enough. And my second question is on CEQUA. We launched the DTC earlier this year. In the last call, you also indicated more sort of stepping up on the promotion efforts that has sort of gotten impacted because of COVID. Where are we in the entire process? And by when do we expect to see momentum in our market share? I know you mentioned the way that there has been profit growth. But in terms of market share, when do you think there would be an improvement in CEQUA market share?
I think we are gaining market share. That's my understanding. Yes, sure, all of us would like to see even faster growth than what we have seen. But I think we are gaining market share. So I think for a new product, it will take time to ramp up. And we started DTC as [ of only ] 2 quarters ago. It will be the second full quarter of DTC. So I think we will see improvement, and that's what the team is focused on anyway.
The next question is from the line of Damayanti Kerai from HSBC Securities and Capital Markets.
My question is on Ilumya. Can you specify the sales number the way you have done in previous quarters? I just also wanted to know the progress of launches in other markets such as Japan, Australia? If you can share some update in quantitive terms say, market share gain or sales, how we are progressing in ex U.S. market wherever we have launched? So that's my first question.
[Technical Difficulty] the global number that you have on.
No. Abhay, I think we've shared the annual number.
No, Specialty business is what we have given.
Sorry. We've not given product-specific numbers.
Yes. that I know. But in total specialty business, I think I don't recall is it $143 million or $140 million for the...
$143 million this quarter.
That is what we have last year and
And last year $81 million
$81 million.
Product specific numbers, we haven't given. So this is for specialty business that we have given.
So Q1 last year, our total global specialty revenues was $81 million.
So you are not specifying a product-specific number for the quarter? Just to clarify.
Yes. We are not specifying product specific. We have been sharing global specialty revenues for the branded products.
And so progress in other geographies, the key geographies where this product has been launched, say, Japan or some other markets, big markets?
So Japan, I think we are in the process of gaining -- I mean gating entry into hospitals because unlike many other countries, Japan still has end restrictions on COVID and medical reps being able to visit hospital. So the outtake is a little bit, likely a little bit slower, but as Japan very confident about becoming successful with that product. Australia also, I think we continue to grow the product quarter after quarter. And in terms of getting new patients, I think it's competing quite well within the IL-23 class.
That's helpful. My question is on U.S. generic business. So you mentioned business remains competitive, but like what are your observations on U.S. pricing environment recently? Some of your peers have faced some challenges. So on your portfolio, what kind of changes or -- changes you are observing on the pricing part? And how do you see U.S. generic business moving up from current label in terms of growth over the next few quarters?
We have consistently maintained that the pricing environment remains challenging. And it is, of course, the broadest specific thing. Depending on the quantity, you could face slightly more or slightly less pressure. That's been our consistent stance and nothing has changed, which makes me [ think on ] any differently. Having said that, in that environment, I mean, we have continued to try find ways years to grow the business. New product launches is 1 avenue. And, of course, trying to increase the share of existing portfolio of products, so both in-market activities as well as the management of supply chain, I think are the critical components of our strategy.
The next question is from the line of Krish Mehta from Enam Holdings.
Congratulations on a great set of numbers. So I wanted to ask on the plaque psoriasis, a second indication for Ilumya, which I think you said was psoriatic arthritis. So the Phase III trial, when are you expecting the results?
I think there's some confusion. I said that Illumina is undergoing a Phase III study for psoriatic arthritis. It's already approved for plaque psoriasis. ACD-044 the product that we licensed from Spark, that undergoing Phase II trial for atopic dermatitis as well as for, sorry, [ trial ] overall ADG 1 antagonist. So -- and we are very [ sure ] that the product is likely to be very effective [ overly ] work in the region.
And what's the market size for psoriatic arthritis, if the product gets approved?
Abhay, you want to respond about Ilumya?
I don't have the exact numbers, which I can speak to, as you know it's a large market. But to be able to break down by indication of different products is a difficult task. So I don't have that granular detail, but I can give you a number and say it's a market of this size.
And just to follow up on the first one just to clarify the Phase III trials...
It's a large indication in a large size of market. I don't want to misquote by giving you a number in my...
Right. And just to clarify on psoriatic arthritis. It's undergoing Phase III trials, right? So when do we expect these results?
I mean we haven't disclosed that timeline, but I think the trial is currently recruiting patients across centers.
The next question is from the line of Anubhav Aggarwal from Credit Suisse.
[Technical Difficulty] report ABSORICA LD sales. In this $148 million, is the ABSORICA LD sales included? Or is that included in the U.S. [ sales ] revenue?
ABSORICA and ABSORICA LD both are [ generic ], Anubhav.
No, I was talking about the outside [ clinic ] that you launched, sir.
AG. He's asking the AG model operation, Murali. [ I think that has been ] the generic steps.
It's in the generic steps.
Okay. So the [indiscernible] [ speciality ]. And with the lower cost that you're running right now...
Anubhav, you were breaking up. So I don't who know the question was for, but at least I'm not able to get part of your sentence.
Sorry. So I was saying that for the [ specialty line ], now we have the higher scale and lower cost. Have you achieved EBITDA positive in this segment now?
No. I -- yes.
Just a -- [ AG has not ] -- hopefully, by next year or in subsequent year, it will become positive. So that's not changing.
So you mean to say, Dilip, by FY '23, you expect it to be EBITDA positive?
I mean if we are able to gain market share and grow, then hopefully we should be able to. And I think that I'm happy with the progress that we are making.
We move to the next question. The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Sir, the first question is on Winlevi. I'm just wondering, it's -- which is a mature market in the sense that you've got other options for topical treatment of acne. So how important is the new mechanism of action if the old mechanism is working perfectly fine?And just on the reimbursement environment over here, I would imagine that there will be a lot of generic lower cost options available. So who would you be competing against? So would it be these generics that you need to convert back into significantly higher priced Winlevi? Just your thoughts on this.
If you speak to doctors, attendees, level of dissatisfaction with the current available options for the treatment of acne are very real in the top price line. And because, really speaking, what will work and what will not work in the level at which the doctors will see is skin clearance for acne patient. This is a challenge that they all face. And that's the reason why in acne, polypharmacy is very commonly used by doctors. And the rate of change over from one drop to the other is also pretty high. So the need of a doctor to get something more and especially a new mechanism of action, it's very real. And so I don't think it's a saturated market the way you say. So some molecules like the ones that you probably are alluding to are genericized, but there is always a place for a new mechanism or action. And when you talk about access, a new mechanism of action, it's always helpful to gain access. And I think we haven't even started the work until the [indiscernible] clearances are through. But at some point in time, when that is done, we have to start thinking through the value drop from a payer perspective. But too soon for all that.
Yes. Abhay, that's very helpful. Just a small point, voice's a little changed. So if -- can you speak a bit, maybe it would help. The second question I have is about the generic business in the U.S. So a couple of points. One is it's been very long, I would say, 10, 15 or 20 years since the pricing has been eroding, not only for new ports even for the base business. I mean is there some sort of a time when we say we're at the bottom of the price? How can it go on eroding the base business, the older molecules? That's one. And second, sir, where do you see the opportunity for complex generics over the next 5-year period? And how is Sun positioning to benefit from this?
Sameer, you asked me the million dollar question, which I don't think many in this industry has an answer to of where is the bottom. So really don't know the answer to that. And we all hope it is today not even tomorrow, but I don't see that happening in the near future at least. How the industry will pan out and reorganize it still going ahead and a question on everybody's mind, but no real solution. What was the other question? The other one?
Sameer, I think Abhay is asking more about the complex generics and how are we positioned for that. But before you respond to that, Sameer, my own view is that this business will continue to see price erosion because there will always be some products which have excess margin. I think you reach a saturation of pricing on some products. When they reach there, then I think competition clears out and maybe the product may see also price increase in future. But that's how the business is structured. Abhay, asking. You can just...
And surprisingly, if you see that even in the last 4 or 5 years, with the price pressure being there, you can see that a large number of companies, new companies are still coming into the market. And they're testing product, may be a single product maybe 1 or 2 products. But competition is intensifying. FDA is giving permissions -- or approvals to products. So the competitive environment is we're actually gaining strength rather than reducing.
The second part, the complex generics?
So complex generics is something that we are focusing on and some of the products that we have launched we are able to do reasonably well. It's also a learning process for us because sometimes for a complex generic, the more in pay at which you sell [ nonenteric and ] generic versus a complex generic is different. You have to go through the speciality network and so on. So it's a good learning process and I think we are learning rapidly in whichever products we are launching within [ and we think ] we're happy with the share that we are starting to see.
No, sir, the question is about next 5 years. Where do you see the opportunities? Just a broad segment. Is it all modified release or sort of a long-acting injectables or some of those categories? I just was trying to ask here, is it a fertile ground? Or is the ground drying up and they're not -- there aren't so many opportunities?
This is Abhay. I cannot pinpoint to a technology and say that even if you have a portfolio of, say, injectables or this or that, that's where the opportunity is. I think we tend to look at opportunity more from a product part of portfolio point of view and the channel in which we can have a substantial offering, which you can then become meaningful to the buyer. So that's how we tend to look at it rather than focus on a technology platform in the complex generics.Now sure, a lot of them happen to be in the injectable space. Some of them happen to be the [ emulsion ] space. So that does happen. But our focus is more to try and look at it from the A, B customer and secondly, from a product perspective rather than get a technology focus.
The next question is from the line of Anmol Ganjoo from JM Financial.
My first question is on domestic formulation. I know there's been commentary to the effect that it does contain a fair amount of COVID contribution. But if I look at our portfolio and a sequential bump up of close to INR 600 crores in domestic sales, a significant part of it has to be driven by some of the other factors like pent-up demand and some normalcy in this quarter as well.Besides that, we also see things like consolidation of market share. So I just want management commentary to the effect that how much of incremental INR 600 crores sequential sales is attributable to COVID? I know I won't get a number for that answer, but any help directionally would help.
Sure. But now let me share at least the directionally, the COVID numbers, [ 8% to 10% ] of our sales for the quarter. So I think the way we should look at it, we have grown on a base business also. So I will put this into 3 buckets, 1 is the chronic business, then semichronic and active. So what we saw our chronic business has a good growth, then semichronic has done exceptionally well and the active business is also in line with the expectations.So in quarter 1, all 3 businesses have performed well. And in addition to that, we got some upside from the COVID sales. But this is some form of performance. But if you look at both in IMS and as well as in AWACS, overall, the Indian pharmaceutical market has also grown substantially during this first 3 months. So we are in line with market. We are not very different from the market, but I'm happy that in spite of COVID and challenging times in the month of April and the April lockdowns, our team could perform well and our best business has grown in double digits.
That's helpful. My second question is to Dilip. Dilip discussed with reference to some of your earlier remarks where you said that at some point, obviously, there are a large amount of products in the U.S. where competition will withdraw going to the challenged pricing scenario. Just trying to understand in your assessment, how far are we from that? Because you have been, contrary to a lot of industry commentary for the last 6 quarters, emphasizing that U.S. pricing has not turned the corner and a lot of teams have validated that view.Also trying to understand from a 3- to 5-year standpoint, given now that the cash machine is chugging along $185 million repaid in the quarter, are we ready to make incremental investments in the speciality portfolio to take it to the next level? Or we'll await execution milestones on the existing portfolio?
So I think we believe that we, in addition to our existing business, with our cash flows and our ability to finding the appropriate place for this cash flow, opportunity to invest in creating a global scale as well as global speciality business is an important opportunity for us, and we are focusing on strengthening our ability to succeed in that. I am happy with the progress that we've made. And this progress allows us to confidently look at potential future opportunities that will come our way because if we are able to successfully execute, that will give us the confidence to do more transactions.So we will continue to focus on growing our existing business and also look at additional opportunities for us to grow. Because if you've seen Sun Pharma, I think it's a history of organic growth and bolt-on acquisitions or sometimes more strategic acquisitions. So that we can continue to grow at a significant pace, even on our very large base business.
And the earlier part that we'll be also positioned for the fact that at some point, generic pricing will bottom out, what in your assessment? What is the distance we are away from it, if at all? Or...
No, I think for you, generic price is an amorphous statement. For us, in the industry, we look at product-wise pricing. So at any point of time, there are products which are, let's say, likely to see a price increase. At the same point of time, there are products which are likely to see a price reduction. And some products may remain stable. So the impact of this on different companies is different because which is a larger percentage of their product portfolio. And this is something which we have to keep in our perspective so that we can anticipate. And so if you [indiscernible] has Sun significant price erosion quarter-after-quarter over the last maybe 3, 4 years.Similar level of price erosion, Sun hasn't seen because we had larger percentage of product in what you call already a highly competitive marketplace. So I think that price erosion has an impact, which is different for different companies. And that's not going to change. So if tomorrow, let's say, we have it out of our existing business a large percentage of business coming from high-priced, very profitable product, then with new competition coming, we will also see price erosion. The trick is to keep on rejuvenating our product portfolio so that you can continue to grow the business in spite of eroding part of your sales.
The next question is from the line of Nithya Balasubramanian from Bernstein.
I had one question on Winlevi. So is the licensing agreement restricted only to the approved brand? Or will this also extend to any future optimizations that Cassiopea might do on the class cortisone formulation?
So right now, it is on the approved and -- only and for both U.S. as well as Canada. And to the best of my knowledge, I don't think they have any product life cycle management results going on, on the prospect effect product in question.
Okay. The other one was actually on India SG&A expenses. If I look at your other expenses line, I found it's broadly flat quarter-on-quarter. So just -- I wanted to get a sense of would you say that sales and marketing expenses in India have largely normalized? Was Q1 another quarter? Or there was, of course, these 2 are -- should we expect to see these numbers in chart when things are hopping back to normal?
So in our readout also, I have said that the current quarter expenses have restrained. Yes, the second wave was more so in India and not same across all geographies put together. There are expenses which have increased, however, there are moving parts like we have some savings in traveling maybe in India. But at the same time, in other expenses, we have the R&D, which has increased a good component of that. So we do expect expenses to increase as full normalization happens. But we saw definitely in this quarter, it's been currently restrained. That's what we shared in our readout.
The next question is from the line of Surya Patra from PhilipCapital.
Congrats with a great set of numbers. Just on the branded business, it's almost like 70% of our business was branded business. If I just put to bed all domestic and let's say you made ROW kind of. So then all these markets have really delivered a strong double-digit Y-o-Y growth and cyclical improvement is also in the range, if you think, about [ 8% ].So is it driven by some kind of a channel filling because we are coming out from a lull period to a kind of normalized period? Is it that and hence, accordingly, we are seeing kind of composing the overall profitability of margins can just add something to this and whether this is a kind of a quarter-specific trend or kind of a possibility for continued momentum that you can see?
So I think we need to factor multiple issues before we respond because current COVID status across different markets is very different. And we have no understanding of how that is likely to impact the business. And I'm talking specifically about international business. But even in India, we are looking at a potential third wave. And we have no understanding of how severe that wave would be. So in such a situation to give out a long term or even a significant guidance number that we will continue the growth or not continue the growth, I think, would be responding without having adequate operating control. I think what we are happy about is that in a challenging environment, all our businesses have found ways to deliver significant growth, more than what they were giving in the past. And also, as I see things, in -- yes. So I think I am reasonably confident that our [ sales ] will continue for things that are not in our control.
Okay. But just -- but this is not the channel filling kind of development in which led to the branded market -- strong growth in the branded market. Is that correct, sir?
Yes. I mean, that's something that we are very, very closely monitoring all the time. We track secondary inventory in the marketplace with customers on a current basis.
Okay. My second question is on the speciality standpoint. So now since we are getting ready for a kind of recent product introduction and we are also seeing a kind of a healthy progress in the overall speciality portfolio, and hence possibly no incremental spend that we should be possibly seeing. So given these 2 facts, so is it fair to believe that SG&A spend on the speciality side is likely to either remain flat or kind of correcting kind of a trend that we can see going ahead?
Abhay, maybe you can respond.
I got the question very gently. So if I had to state what I've understood your question. I think speciality spend with the addition of [ many, many ] remain flat or it will increase. Is that the question?
Yes. Considering new product introduction and also potential reduction in the current spend rate in the [indiscernible]. So what is the trend that once we've seen for?
So first of all, I mean, how much we're going to spend on Winlevi, we haven't [ addressed the ] [indiscernible] phase. And having said that, I mean, I said conceptually a new product will require some investment going in. But you also have to factor in your thinking that the kind of expenses we used to make on ABSORICA will come down. There will be an expense on ABSORICA LD for sure, but still, there will be some reduction in the expense, which we [ will have other internal ] the whole ABSORICA franchise on a higher turnover. So that, to some extent, that's my hope, and I said we haven't done the work in that yet. This is normalized to some extent. Other businesses will require if we have to invest freely, keeping a long-term view in mind. And where we think the spending has been optimized and on the same expense base now the real task is to grow share of market, we will go on those directions. So again, it will be dependent on a particular product, what kind of life cycle it is in, what kind of investment it requires. And we will look at it definitely very prudently.
Sure, sure. Just a small clarification. Basically, Levulan has become normalized in this quarter, that is one. And secondly, if you can say, sir, in the share of ILUMYA in the IL-23 category in the U.S. This thing, can you both clarify?
So Levulan share has normalized, but remember that quarter 1 was also a low quarter for Levulan because of the seasonal factor. Also, if you see the overall market, I don't think it will come back to normal. The number of cases that a doctor is able to see with social distancing norms is lesser than what it used to be maybe 1 year, 1.5 years ago. So when we say normalized, I mean it is compared to upfront with COVID times. But I don't think it is back to where it should be in a pro-COVID -- pre-COVID environment. So 2 ways of looking at the whole thing. And your second question was share of ILUMYA, the IL-23 market. I think I don't recall the exact number, but in the ballpark, I think it should be in the range of around 8% or so.
The next question is from the line of Nimish Mehta from Research Delta Advisors.
Just one question. Earlier, we used to see that doctors will prefer IL-23 over IL-17. Has that still remain like that, even with current increase in sales, are you more confident about that? Or what is your understanding of the trend?
Abhay, you are responding?
No, sir, I didn't get the question. As I said, I'm not getting the voice very clear.
He's saying that IL-23 over IL-17, the doctors prefer it, then -- I mean that's it. That's what I understood, Nimish. So what is your understanding?
Yes, it's the same. So earlier, we had this [ one kind feeling ] and I just want to know whether we still hold on to it? Or is there any change in the view, even if it is consolidated, that would be a good one to have.
I still haven't undertood the question. What is the question then.
What do you say to the -- you said in one of your trials saying that doctors like IL-23 over IL-17. So whether that's still your view.
Yes. That is still my view. [ Please, let me...]
Yes. No -- I see no reason to kind of look at this any differently because even though IL-17 is growing, IL-23 is growing much faster.
Exactly. You should see the top 3 products in terms of growth in the overall therapy, the IL-23s are the ones which are driving the market. SKYRIZI is #1, and ILUMYA is #2 in terms of growth. So the driver for growth of the overall category is driven by IL-23. And therefore, I think I'm comfortable concerning my view that doctors are happy with the performance of this class of drugs.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
Just the first one, margins have clearly surprised on the EBITDA side this quarter. We have moved out of that range of over 20% to 24%. So I just want to understand, I know you don't give bullet point guidance, but how should we look at this as we go forward? I'm just trying to tie some of the comments around [ action ] is going up, but is there something that we need to keep in mind? I also noticed that this is 1 of the 3 times that gross margins have come down, but EBITDA margins have gone up. So I know there are a lot of moving parts, but just anything that can help us directly on EBITDA margin?
So Shyam, as we said, that the expenses in the current quarter relatively have moved up comparatively. However, different geographies have different impact on the second wave in India. Certainly, April, May, there were impact. So overall, what we are saying is that the expenses will inch up as normalization increases. However, the company continues to focus heavily on cost optimization and improving efficiencies. That's one of the reasons. If you see last 8 quarters, there is the consistent improvement we're trying to make on the overall EBITDA margins and effort will still continue, pushed by the strong growth in top line and operational efficiencies.
Got it. Got it. That's very helpful. Last question is on R&D. I think you called out quite a lot of clinical trial activity. We're at about 6% or so. Is there anything that we are budgeting higher? Is it 6% to 7% or 7% to 8% like we've seen off the press releases? So I just want to understand how should we look at R&D? Is there going to be bunching up? Or you think the very best in terms of the different trials for the different candidates, how should we look at that number?
I think you should range between 7% to 8%.
The next question is from the line of Sayantan Maji from Credit Suisse.
[indiscernible]
We can't really hear you.
I can't hear you at all.
Is this better? My first question was on ILUMYA. Just wanted to get a very broad clarity, if you consider those segment, commercial segment and the Medicare segment, of the total sales today, which is the largest segment out of these 2.
The commercial segment will clearly be the bigger segment.
[ That ] segment will be larger of the 2, right?
Correct.
Okay. And the second question was on Winlevi. When you evaluated the molecule, the...
When we what? Sorry, your voice is breaking for a moment. When we what?
When you evaluated the molecule...
Evaluated. Okay.
Yes. So Cassiopea talked about them having the prediscussion with the doctor, talking about efficacy levels similar to Epiduo and ACZONE. But both the molecules will go generic soon. So in your evaluation, what's the impact? So those molecules the kind of 1 million-plus prescriptions they have done, what would be the impact of them going generic before -- or around the time when you'll be launching this molecule?
So my answer is what I've said earlier. I think for a new mode of action, there is enthusiasm at the doctor's level because of the business transaction with current therapies and the outcomes. And also the use of polytherapy. So I think both these gave me the optimism that despite the fact that 2 products will be going generic around the same time that we launch our product, there will be interest in the doctor community for initiating the use of our product. So we -- and that's one of the things that we factored in, you're right, in our entire evaluation of the product.
Okay. Dilip, I -- just a question to you on the speciality segment. Is it a situation on an earlier question that I asked. We are right now [indiscernible] [ $200 million ]. If I [indiscernible]...
I'm not able to hear you very clearly.
Well, I'm just trying to ask, even outside R&D are still EBITDA negative?
So we don't break out such detailed responses. But I think my long-term view is always that at some point of time, this business will become far more profitable and will justify with return on investment in line with our other profitable businesses. So we will continue to invest on this business. And also, I think like what Abhay said is that even though all our businesses in the U.S. have grown, the -- our speciality business has grown much faster. Now -- and we are expecting that because we have a relatively low share of the overall business, we have significant opportunity to become bigger.
We'll take that as the last question. I would now like to hand the conference over to Mr. Nimish Desai for closing comments.
So thank you, everybody, for taking the time out and attending our call. If any of your questions have remained unanswered, do send them across, and we will have them answered. Thank you, and have a good day.
Thank you.
Thank you.
On behalf of Sun Pharmaceutical Industries Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.