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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 Q2 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nimish Desai. Thank you. Hand over to you, sir.
Thank you. Good evening, and a warm welcome to our Second Quarter Fiscal '19 Earnings Call. I'm Nimish from the Sun Pharma Investor Relations team. We hope you received the Q2 financials and the press release that were sent out earlier in the day. These are also available on our website.We have with us Mr. Dilip Shanghvi, Managing Director; and Mr. Sudhir Valia, Whole Time Director; Mr. Kal Sundaram, Whole Time Director and CEO of India Imaging Markets and Consumer Healthcare Business; and Mr. Abhay Gandhi, CEO of North America. Together, team will discuss performance highlights, update on strategies and respond to any questions that you may have.As is usual, for the 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 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're 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'll now hand over the call to Mr. Shanghvi.
Welcome, and thank you for joining us for this earnings call after the announcement of financial results for the second quarter of FY '19.Let me discuss some of the key highlights. Our overall sales for the quarter were INR 6,846 crores, a growth of 4% over the same quarter last year. Our soft Q2 performance does not reflect the actual health of the underlying business. We continue to focus on strengthening our core operations and enhancing our overall efficiencies, and we are certainly positive on our performance for the rest of the year. We continue to progress further our speciality initiatives. Abhay will discuss more details on our speciality initiatives later.We also continue with our efforts to control costs and improving efficiencies. These steps are necessary to ensure that we continue to earn reasonable returns in the current competitive state of the U.S. generic market. Post the clearance of Halol facility by the FDA in June, we've started receiving approvals from Halol for the U.S. As indicated earlier, we expect a gradual increase in new approvals from Halol for the U.S. I will now hand over the call to Mr. Valia for discussion of the Q2 performance.
Thank you, Mr. Shanghvi. Good evening, everyone, and welcome to all of you. Our Q2 financials are already with you, and we will look at the key consolidated financials.Overall, Q2 sales INR 6,846 crores, up by 4% over Q2 last year. Material cost as a percentage of the sales was 25.7%, lower than Q2 last year. Staff cost was at 21.5% of the sales, higher than Q2 last year. This -- the increase is slightly due to the expenses of our speciality team in the U.S. The other expenditure was at 31.8% of the sales same as Q2 last year. As a result of the above, the EBITDA for Q2 was at INR 1,440 crores, with EBITDA margin at 21%. Adjusted net profit for Q2 for the 2019 was at INR 996 crores, with resulting adjusted net profit margin of 14.5%. After accounting for a provision of INR 1,214 crores for the estimated settlement amount to be able to all remaining plaintiff related to the Modafinil antitrust litigation in the U.S., the net loss for the quarter was at INR 2,019 crores (sic) [ INR 219 crores ]. Adjusted EPS for the quarter is INR 4.10 crores.Let me now discuss the quarter-on-quarter movement. Material cost at 25.7% of the sales was lower than June quarter, mainly due to the lower cost of goods for Taro and write-back of certain provisions made in the past. Other expenses were higher than June quarter, mainly due to the build-out of the speciality business in the U.S.Now we will discuss the half year performance for first half. The net sales were at INR 13,985 crores, a growth of 10% over first half last year. Material cost, as a percentage of the net sales, was 27.6%, which is slightly lower than H1 last year. The staff cost for the first half was 20.8%, same as H1 last year, while other expenses were 13.4% lower than H1 last year. As a result of the above, the EBITDA for the first half was at INR 2,961 crores, a growth of 25% over first half last year. The resulting EBITDA margin is at 21.2%. The adjusted net profit H1 2019 was at INR 1,978 crores, up by 38% over H1 last year, with the resulting adjusted net profit margin of 14%. The reported net profit for H1 at INR 764 crores was after providing an amount of INR 1,214 crores for estimated settlement amount payable to all the remaining plaintiff related to the Modafinil antitrust litigations in the U.S.Let me now briefly discuss Taro's performance. Taro posted for Q2 '19 sales of $159 million, down 6% over Q2 last year. For the first half, the sales were $314 million, down 5% first half last year. The Taro net profit at Q2 was $63 million, up by 19% over Q2 last year. Net profit for first half '19 was $130 million, up by 21% over last half last year.I now hand over to Kal Sundaram, who will share the performance of our India and emerging market business.
Thank you, Mr. Valia. First, let me take you to the performance of our India business.For quarter 2, sales of branded formulation in India were INR 1,860 crores, a degrowth of 16% over Q2 last year and accounting for approximately 27% of our total sales. The decline was mainly on account of a planned inventory reduction in supply chain, coupled with higher base of Q2 last year, which had witnessed post-GST destocking. Year-to-date, the secondary sales to stockists is tracking to plan and is growing at low teens year-on-year.Sun Pharma is the largest pharmaceutical company in India and holds approximately 8.3% market share in over INR 126,000 crore pharmaceutical market as per September 2018 AIOCD-AWACS report, as per latest SMSRC report, Sun Pharma is ranked #1 based, on share of prescriptions with the 22 classes -- 12 classes of doctors. For Q2, 13 new products were launched in the Indian market.Let me now discuss our performance in emerging markets. Our sales in emerging markets were USD 195 million for Q2 and accounting for 20% of total sales. While we continue to grow the business in local currency terms, many emerging market currencies have depreciated, thus impacting our reported growth for emerging markets. Key markets which contributed the growth were Romania, Eastern Europe, Brazil and Mexico and Latam markets.Now I'll hand over the call to Abhay. Abhay?
Thank you, Mr. Kal. I will briefly discuss the performance highlights of our U.S. business. For quarter 2, our overall sales in the U.S. were up by 11% at USD 342 million, accounting for approximately 35% of overall sales.Let me update you on the developments on our speciality business. We are recently commercialized Ilumya in U.S., and we are excited with the initial response to the launch. With this launch, we have already commercialized 2 speciality products in the U.S. in the first half. We have also received U.S. FDA approval for Cequa and plan to launch it in the U.S. during the course of this year.Although we have built the front-end infrastructure for the speciality business in the U.S., there would be specific marketing and other costs at the time of launch of these products. They will entail high upfront investments. I will now hand over the call to Mr. Shanghvi.
Thank you, Abhay. I will briefly discuss the performance highlights of our other business as well as give you an update on our R&D initiatives. Formulation sales in the Rest of the World market, excluding U.S. and emerging markets, were USD 108 million in Q2, a degrowth of 2% over last year. Rest of the markets accounted for approximately 11% of quarter 1 revenue.We continue to focus on developing and utilizing APIs for our captive consumption for the benefits of vertical integration. For Q2, our external sales for our API business was INR 426 crores, up by 10% over Q2 last year.We continue to invest in R&D for enhancing our pipeline. Consolidated R&D investments for Q2 was INR 452 crores, accounting for 6.6% of sales. Our current generic pipeline for the U.S. market includes 134 ANDAs and 6 NDAs awaiting for approval for the U.S. -- from the U.S. FDA.We expect higher R&D spending in the coming quarters for the speciality business. This R&D spending enables development of future product pipeline, including speciality and differentiated products. We also continue to critically evaluate generic R&D spend, given the competitive nature of the U.S. generics markets.With this, I would like to leave the floor open for questions.
[Operator Instructions] The first question is from the line of Chirag Dagli from HDFC Asset Management.
Sir, can you indicate the magnitude of increase in the speciality operating expenditure that we've seen in the first half of FY '19? A ballpark should help, sir.
Abhay?
I think the most significant expense we have incurred the quarter is on the expansion of the field force for the impending launch of Cequa. That is the biggest expense. And then on the marketing-related activities geared up towards the launch of all the 3 products actually, Ilumya, Cequa and XELPROS. So that's a very big ramp-up that we have had in the quarter 2. As we get closer to market, I mean, some of these expenses are already in your base and some will get target when we are close to launch.
So this is spread across both the line items, the staff costs as well as other related expenses.
Yes.
Yes.
Fair point, sir. And sir, in your initial comments you said you were evaluating generic R&D, does this mean that there's a chance that on an absolute basis the generic R&D spend can come down?
I don't know whether we will be able to quantify the total value. But many products that we use to look at for the development in the past, we are now not looking at as important product for us to focus on and develop. So to that extent, I think the relative attractiveness of products have changed.
Okay, sir. And sir, just one more question if I can squeeze. In terms of what you've paid for Odomzo and what you've spent on tildrakizumab, ballpark, do you think that you've spent about 2x what you've paid for Odomzo for tildrakizumab? Is the payoff period expected to be dramatically different? Or payout profile, payback profile, whichever way you think about this IRR or NPV, is it expected to be dramatically different for tildrakizumab versus Odomzo?
So Abhay, would you like to answer this?
Actually, I don't have the comparative numbers with me right now. But all I will say at this point is that, internally, we have a certain way of looking at things. And we have known there's no dramatic difference between products. But I'm just saying at the top of my mind, specific cases of Odomzo and Ilumya I don't have the figures in front of me.
Yes. But generally, my sense I think is that the ramp-up in the orders of business is not as a rapid as originally we had said that we will be able to achieve. That is something that we're working to fix. And I think if I look at the initial uptake of Ilumya, I think the initial uptake, specially factoring in all of the competitive scenario, I think it's quite exciting. Would you agree with that assessment, Abhay?
Yes, sure. Sure.
The next question is from the line of Prakash Agarwal from Axis Capital.
Sir, just a question on the U.S. business on the Q-on-Q decline, especially ex Taro, if you could help us explain what are the key parts which is leading to that kind of decline.
I think primarily have been the -- first quarter had a larger component of the Yonsa sales. In the second quarter, that same quantum of sales we have not seen and that is the primary reason. Otherwise, all other parts of the business are trending as per plan.
Sir, but delta is quite large, it's more than $40 million. So will there be more elements of some AG sales of Welchol or -- which continued in Q2 also, or Halol or some gains on Halol or whatever? I mean, because Yonsa, $40 million not able to get the numbers.
The biggest one is Yonsa, and the generic business is more or less having a similar kind of numbers month-on-month that I see. And so as Mr. Shanghvi also mentioned, there hasn't been a growth on Odomzo and there has been no fall either. So the way I look at the numbers, I think the biggest contributor is Yonsa.
Okay. And there's no major Q-on-Q decline in the base portfolio is what you're saying.
Yes. When I look at the base portfolio, I don't find a big decline.
Okay. Fair enough. And secondly, on the gross margin side, there was mention about write-back of certain provisions. So I understand this is onetime, but what could be the quantum? Would we normalize Q1 gross margin as a base or how should we look at it?
I say it's difficult for us to respond to that question. Yes, H1 I think is a better indicator.
But could you -- is it possible to quantify the...
It's difficult, yes? Because we can't say which product will sell more. Difficult to -- and we have very different product margins. If we sell a product with higher margin, then it will have some impact on the overall margin. So difficult for us to quantify but I think H1 is a reasonable number.
The next question is from the line of Abhishek Sharma from IIFL.
Sir, I had a question around India market decline. Last year, when we had this GST event, that also would have given you an opportunity to do destocking. In fact, it was forced upon you. So I was just wondering, why this onetime inventory reduction after such a drastic event last year. Did we aggressively restock in the market post event? Or was there some structural way of doing things that we are now trying to change?
I think if you go back to last year, Q1 was weak for rest in the industry. Q2 was quite strong. And I sort of said close to normal inventory levels reached at that point. The other thing I'll mention will be this is what I've -- my recollection of what I've seen in our actual report is, [ Sankyo ] average inventory level at the sort of stockist level is some of the lowest in the industry. So pretty much what I'll say will be inventory levels are sort of fairly very well monitored and we focus on prescription generation. Much about sort of internal measurement is based on, the stock is to uptake and not necessarily under primary sales. So where I'm concluding is last year, it was not that first half was in totality weak. The first quarter was weak, compensated by second quarter. Compared to that coming into this year, overall as a company and sort of looking at our [ billables ] also here, our efforts are to optimize working capital, improve ROCE, et cetera, is part of that initiative. We are doing a planned destocking, it's a onetime event. We are not planning to repeat it through the year. And I'm fairly confident the underlying business is in good shape. Like I mentioned, it's in sort of low teens is the first half growth. And I'm confident we'll maintain the momentum going into the second half.
And just like the destocking quarter, GST destocking quarter last year, there was a bounce back across the industry. Would see a similar kind of a bounce back for you in the second half?
No, no, no. What I'm saying is the underlying demand will be sort of quite robust, and we are not planning for a destocking at this stage.
The next question is from the line Anubhav Aggarwal from Crédit Suisse.
Continuing from the last question, can you please indicate the quantum of this inventory reduction? And did it -- particular to any -- corresponding to any particular therapy? Because it can't happen that, across therapies, you just take inventory reduction.
I don't quite remember the sort of rupees and crores. What I remember is without the destocking, the degrowth would have been low single digits. And it was not across particular therapy area, it's more broad based.
Sir, can you explain this? I don't understand this -- your comment that it's a broad-based inventory reduction. How would that happen in general? So you're saying that it's a ROCE improvement initiative. So in general, the inventory -- even if it could happen, the inventory levels were significantly higher that you wanted to reduce now across the therapies. Sorry, I just don't get this.
Anyway, Anubhav, as you are may be aware, we have a distributor to basically sell the stockist -- what I would say is sell inventory into stockists in the country. So the inventory reduction is not at stockist level, which I mentioned is probably some of the lowest in the industry. This sort of fell into the super distributor, super stockist or distributor of our company. Understood?
Yes, that's helpful. Second question is on the balance sheet. We have seen tangibles increasing by almost INR 2,000 crores in the first half. Can you help? Because I don't remember you guys made any acquisitions this year.
[ So what he means is ]...
Yes. So this is regarding the capitalization of the speciality products in the current year. So related only to that.
But which item is this bucket is coming from? So where were these items -- because I see tangibles under development also going from INR 1,000 crores to INR 600 crores. So where were these items earlier present in the balance sheet?
So the overall milestones for the speciality products paid to date is also included in this. So the -- post the approvals, the launch of these have been capitalized accordingly, the intangibles have increased.
So we -- there were also many approval events. So many what you call milestones would have been triggered based on the approvals. So depending on how the agreements have been signed, you will have milestone events also linked with those approvals. So some of these are back-ended and some of these are front-ended. So I think that is what [ merely ] he's trying to explain to you.
But just the quantum delivery was $300 million is a large quantum, that's why I was thinking the milestones can't be so large, that's why my question was there.
But I think it's only milestones.
The next question is from the line of Nitin Agarwal of IDFC Securities.
Sir, on the R&D cost, we've had a reasonably muted H1, how's -- versus what our guidance of 8% to 9% R&D spend for the year. I mean, do we see a meaningful ramp-up in the second half of the year? Or are we going to be much lower than our initial guidance on R&D, sir?
So we will be actually much higher than what we are. I think I also said that in my readout that some of the speciality business related R&D and some of the initiatives of clinical studies, those costs are likely to be in the second half. Also I think in our internal calculations, we also calculate the, what you call, product-related milestones also as an R&D cost. It's not reflected in the financial, but when we look at it ultimately, it's linked to the approval of the product.
And sir, on that metric -- including that metric that you have -- that you had mentioned around the milestones, are we tracking the 8% to 9%, or it's -- even with the milestones at this point of time?
No, no. With milestones, we've actually gone significantly higher.
Okay. Fair enough. And secondly, likewise, on the other thing that you've been guiding to fairly regularly is on the other -- on the SG&A sort of been higher because of speciality spends. Now you've had some increase in H1, so is bulk of the increase that'll happen already in the base or we have some more increase to come through?
So Abhay, maybe you can respond.
I did not get the question. Can you please repeat the question.
His question is whether all the costs related to speciality business are in the base, or you will see some additional cost.
There will be. I mean, I think especially in quarter 4, there will be an increase. Plus when you launch your 2, 3, 4 products almost [ primarily ], there will be a lot of backdoor group meetings that we will conduct in what it is that we will initiate. So there will be -- I mean, I would not say all of the cost is in the base. So probably, there'll be some which are things which we will have to do in the first few months of launch as part of what activities and strategies to make the product successful.
The next question is from the line of Saion Mukherjee from Nomura Securities.
Sir, just continuing on that point on SG&A spend. We have seen some increase of around INR 100 crores Q-on-Q, but there would have been some impact on rupee depreciation also. So I mean, you had earlier mentioned there will be significance. So you would say the large part of the increase has already come and what you are going to see in Q4 will be relatively lower.
Depends on what we are seeing that you'd -- sorry, Dilip, you were saying something?
I was saying I didn't fully understand the question.
Sir, what increase we have seen around $14 million on a sequential basis, because I was expecting because of the tildra launch this quarter, it would have come, right? And that happened towards the end of it. So I was wondering whether this increase sort of captures the kind of expense you would need for tildra or more of it will come. And on top of that, there will be expenses related to Cequa. Exactly trying to understand the quantum of increase that we could see, let's say, when we enter Q4 -- or in Q4, rather, when Cequa and tildra both are marketed.
That is what I'm trying to explain repeatedly. That I think in the next 2 quarters, the marketing-related costs will actually lower because we'll be working towards making the product successful. So while we feel who's first, it will be now into base almost like a constant going ahead. And then the marketing spend in the first few months of launch will be higher.
Okay. Okay. Sir, my second question would -- is on Yonsa. You mentioned that was a big delta quarter-on-quarter. So I mean, how do you see this going forward? I mean, is it all but related to some kind of inventory fill that happened led to that increase? And how do you see our outlook going forward for this product?
I will not call it an inventory buildup. But clearly, out of the gate, the product moored out pretty fast. In the latter half of the year, I mean, we will have -- we may not be able to see that kind of an outgo of the product from the warehouses. So to the extent, I mean, the quarter was a little slower for Yonsa as compared to the first quarters'.
Okay. Okay, sir. And the final one question if I can, on this Modafinil litigation. You still have one more settlement to go, right, sir, and is it possible to quantify it? Because you have a settlement earlier, now there's still one more left. Any color that you can give. And is there any other settlement of any other product...
I think that we have explained that this reflects our estimation of the total liability.
Okay. Okay. Okay. And sir, you -- there is no recourse to Daiichi for this as part of your...
And this Nimish, can you rejoin the queue, please.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
I have just one on Ilumya. Can you give some quantitative benchmark or some color when you say that the initial uptake has been good. I mean, that would be great. And second is, given that it's a competitive market, so which -- do you have a customer or a patient segmentation which is really taking up Ilumya?
Sameer, the latter question, obviously, I cannot answer [ obviously ] my customers in the segmentation. I mean, it's competitive, so I cannot really give you any color on that. On the core, well, let me say that we are pretty clear of who are the customers we want to reach. And so far, and I see the first month -- I mean, last [ year ], we -- first month we completed of having Ilumya in the market, and I see a large number of the customers whom we had targeted in the first quarter, those customers which would at least try the product and see what will happen.On the access side again, the [ theories ] that we have seen is more or less as part of the expectation. Of course, it's an ongoing discussion with different [ case ] one by one. And since we are more on the medical side, then we have to lean with the larger number of customer because the medical formularies are run by individual payers. So we have a very large number of customers that we need to go to. But overall, coverage has not proved to be a barrier to the customer getting the product, the patient getting the product and that is very heartening. A long way to go, it's only a month into the business. We are learning along the way and we are improvising along the way. But the team and I feel very confident about this product.
Abhay, I just want to point, should we take the previous 2 IL launches as a benchmark as to how they did in first 3, 6, 9 months? Is that the right way to look at it? And second is, given the fact the recent other launches were also...
In terms of trajectory, Sameer, yes. But in terms of actual, you've got to remember that when you are the first, second, third, fourth in the market, and then you are only sixth or seventh, you will not be able to match the units. But in terms of trajectory, I mean, that is how I would also look at it. What kind of access did the other IL 23 get in the first few months, what is it that we have, how many customers were they able to get -- to prescribe and how many do we have. So I would also benchmark. Sure.
I think what, Abhay, he's trying to ask whether he can estimate the sales which they have announced at the quarterly update, as a part of his future projection. So Sameer, I think you have to be clear on one issue, is that even if your product is equally good, second product in the same class, generally ends up getting a relatively smaller share of the total market. And this is true for...
Which is what I said, the subsequent products will have a lower share.
No, I don't want Sameer to start to think, what you call -- actually like Cosentyx did in the first quarter or what -- as a part of the future projections. So I think -- but considering that we are a new player, considering the what you call relative lack of familiarity that we have in the biological side, we are quite excited with the update that we think and acceptance that we are seeing.
So just to complete this point with your permission, a follow-on, on ILUMYA, sir, the fact that the previous couple of launches were auto injectors versus us being a vial or injection, does that make a difference? And that's one. And second is the next IL, risankizumab, which is going to come from AbbVie, I think it would be middle of next year. So does that change anything from -- for you? I mean, does AbbVie get into contracting well ahead of time and that is sort of an impediment with you as you approach for coverage now?
For the new product, I mean, you cannot legally start contracting well ahead of time. But nowadays, I mean, the laws have become a little bit more lenient on that. So I think a few months ahead of launch, yes, you can start talking into payers, not contracting. But you can start talking, you can make your medical presentations and so on. So naturally, the market will get more competitive as risan also coming in. And AbbVie, of course, has as far more experience than we have, thanks to the HUMIRA. So we will become competitive. And it was always known and factored into our thinking and planning. But yes, we have to maximize the time that we have before the next competitor comes in and that's the challenge and that's the reason why we are working on a speedy execution.
The auto injector, sir?
Auto injector for us, I mean, when I speak to customers, the fact that the product is used the way it is and it's a medical benefit, I mean, if I look at it holistically, it is of actually a benefit to us.
The next question is from the line of Manish Jain from SageOne Investment Advisors.
Just wanted to look at the specialty side, that before March '19, we will have 3 more launches. And that is CEQUA, XELPROS and Elepsia. Or will we have some more?
I'm factoring in CEQUA and XELPROS.
Yes, I'm glad you said that because that, sir, I had a follow-on, where typically given that Elepsia falls in a different segment altogether, how much time one should budget for the sales team buildup and the other because it's a new segment altogether for you all?
So as of now, I really haven't made up my mind in how I would like to go about the marketing of Elepsia. So I really don't have an answer for you. But I'm grappling in the same question that, can we take on one more segment? And can we take on another 3, 4 and do a new segment launch with all that we have? So it's a strategic decision that we need to internally discuss and agree upon.
The next question is from the line of Surya Patra from PhillipCapital. [Operator Instructions]
Just on the spend and the launch-related expenses for the specialty portfolio, which is likely to come up in the subsequent quarter. So how sticky or how sustaining that expenses would be? And that is one hand. Secondly, is there any sense on the break-even timeline that you would be having internally? Like for the specialty portfolio, what would be the break-even time that you'll be estimating?
Some of the expenses will be sticky, of course. You can't have a point-setting kind of expense on marketing. Of course, the initial ramp-up will always be on the higher side. And then to that extent, up to some point, it will taper down and then remain almost like a constant. We haven't done detailed budgeting in all item buys for the next few years. So it's difficult for me to give you a sense on that exactly.
Okay. On the break-even side, any sense for the -- this entire specialty portfolio project?
It's a lot of moving parts. And each product is in a different stage. I mean, something has been launched a year ago, something has been launch now, something will be coming 2 years later. But broadly, I think at least 2 to 3 years for the product, if I do a period, for at least 2 to 3 years, there will be investment going into businesses.
Okay, that's helpful, sir. And just extending the same question, on the overall margin front for the consolidated business, since we are of the view that you talk on the R&D spend that is likely to move up in the subsequent quarter or second half rather and the expenses on the specialty front also is that is likely to move up. So is it right to believe the kind of margin profile, what we are having currently for the first half, is relatively better than what it could be in the second half or in the near future?
No, I think we will also get some additional new business. So generally, we don't guide for the overall margin. But I'm only helping you look at -- you're only looking at the expense side of the cost. But we have now ability to start selling the product and generating income. So that's something which you should [ effect ].
Okay. So the quality of portfolio that should be improving sequentially. So that should one point once we'll have it in mind.
That's correct.
The next question is from the line of Neha Manpuria from JPMorgan.
Just one question. Sir, on the last call, you'd mentioned that we are talking with customers on contracting for YONSA. Given the unfavorable litigation for ZYTIGA, has that slowed that process in terms of our ability to get adequate coverage for YONSA?
It has. And well, I mean, the payers are looking at scenarios of when the generic would come in. And we are now dealing in the what-if situations and trying to modulate our contracting strategies accordingly. So to that extent, it has slowed down.
Okay. So this would probably remain fluid for some time until we get some clarity on the generic competition?
That's correct.
And the second question is on ABSORICA. Now after the copay, the change in the copay there, we haven't really seen a recovery in prescriptions so far. Do you think -- will the prescription stay at this level and it's unlikely to go back to what we were doing before with ABSORICA? I understand it's a more profitable product for us now.
The peak that you saw with the liberal copay, we will never reach, that is for sure. But if you see the last 3 months, then there has been a steady increase in prescription, not significant up, but there has been a steady increase in prescription. And we are also now utilizing the strategy where we are ensuring that the prior routes of the product can go through seamlessly. And that is working out quite well for us. So the fill rate is much better now than what we had at some point in time. So the bucket is no longer leaking so heavily with the prior route thing that we have.
The next question is from the line of Nimish Mehta from ResearchDelta Advisors.
Sir, on ILUMYA, you mentioned that there had been a good amount of ramp-up or it has been exciting. So will you ascribe the performance of ILUMYA to a general shifting biologic? Or is it more IL inhibitor-specific? Or is it more ILUMYA-specific? Or if you were kind of rank order that, that would be very helpful.
I mean, in 1-month experience, I mean, none of these 3 questions I would have a clear answer to because the kind of granular data that you need to be able to make those assessments, I don't have that 1 month for. And no external data, so even what kind of patients we have received, which kind of patients doctors have used the product on, I don't know myself because it's too soon.
I see, but -- okay, I mean, data is one thing. But some kind of intuition or some kind of -- something which is matching your expectations...
Intuition will not help me answer those very broad questions or what has been issued, whether it's a class or a product. Doctors clearly were -- overall had liked the profile of the product. And therefore, I think they were eager to give it a try. But what kind of patient they have tried it on and to answer that question in one parter, it comes at least too soon.
Okay, fair point. The next one is actually on the India business, sir. With the lease talking exercise, I mean, is there any chance that -- I mean, is it basically because of the GST-led structural change, which is why a lot of the reports that we might have established to capture some tax benefit is no more important than those we are kind of consolidating EBIT, something like that? Or I'm just trying to understand.
No, I think this is fundamentally, how do you say it, it's our effort to improve business efficiency. I don't have any idea whether [ it's set up a ] tax benefit or anything like that. If it is, it's a bonus to us. This is a drive to improve the working capital efficiency, particularly for the inventory levels to the supply chain.
The next question is from the line of Kunal Dhamesha from SBICAP Securities Limited.
So the question I had is on ILUMYA. So you said that trajectory that you are seeing is similar to some other molecules. So I just want to understand why your market share will be lower as compared to big molecules.
We never said that. I said if I have to look at the performance of ILUMYA internally, I would benchmark myself against the competitors. I mean, with 1-month performance, how can we say that the trajectory is similar or somewhat better? It's just 1 month. So I think -- I don't want to jump to any conclusions. And I wouldn't want you to come to that conclusion. It's too soon. The initial response is good. That's what we said both on the HCP side as well as the payer side. But beyond that, I mean, I haven't said anything on this call.
Okay. And just on a similar line, how do you view the difficulty level of switching from one biologic to another biologic? Or is it only the new patients that starts with a newer entrant?
I think I've answered this question again earlier when I said that it's just 1 month. I don't have the data which tells me what kind of patients the doctors used or were they bio naive patients...
No, I'm not talking about ILUMYA. I'm talking about in [ ANDA, ] you must have studied the market, right, that people usually don't change the brand they use because it's a chronic disease. Or any insight on that?
I think the failure rate of some of the products is quite high. So after getting initial response, after a few months, maybe even a year or so, doctors do see failures. And when they see a failure, the doctor is inclined to switch from one biologic to another.
Okay. And second question is on the API business. So this business has been going strong in the first half. So any particular reason? Or is it because of the China supply issue? And how do we view this business for the rest of the year and going beyond?
I have some background noise coming on my line. Is everybody hearing that or it's just me?
Sir, that is from the line of Kunal Dhamesha. [Operator Instructions]
So the question is on the API business. So that business has been doing well in the first half. So any outlook on that business? And what is driving that business in FY '19?
It's a relatively small part of our business, right? Why give so much attention? But the business is doing well and it's expected to continue to do well.
The next question is from the line of Surajit Pal from Prabhudas Lilladher.
My question is on domestic formulation. See, in Q2 FY '18, your growth is 11%. So if that's considered as a higher base for this quarter's number, along with -- if I had just my destocking things, is it a matter of past of 11% growth? Or are we settling for a kind of a growth of around 7%, 8% year-on-year on a normalized basis?
We didn't understand...
Can you repeat the question?
See, if I add just your inventory destocking with this quarter's sales and if I consider -- or as you say it, the Q3 FY '18 was a higher base. But growth was only 11%. So 11% growth, does it imply for Sun Pharma is a matter of [ costs ], so we have more of a settling of 7% or 8% year-on-year growth in domestic formulation on a normalized basis?
Kal, you didn't say 11%?
No. And that's what I'm saying. All I'm saying is the underlying growth is tracking low-teens and is tracking to plan. And my expectation is that the momentum will continue. All the indices that you can see are steadily healthy. I am not saying everything is working 100% to our expectation. But all overall health of the business is good. And through the year, I would expect us to maintain a demand level in low-teens.
Okay. Another point is that adjusted EPS reached, I think, you said is around INR 4.1 crores, adjusting that extraordinary items. This extraordinary items is post tax?
There is no tax on that.
There is no tax benefit for that?
Yes, there is no tax benefit on that.
The next question is from the line of Ashish Thavkar from Motilal Oswal Asset Management.
Sir, I have a question on working capital. So if I compare this first half with last year, have you seen a substantial change or pressure on our working capital, especially because now Halol is also ramping up and there's a specialty basket that they are promoting?
There is no pressure on working capital.
What do you mean actually by pressure on working capital?
Sir, in terms of, say, what we were seeing last year, so if I go to see where your net current asset as a percentage of sales, so is there a substantial change in that number?
I don't think...
No major -- no material change.
So even though Halol is like gradually ramping up, you feel -- it would be a normalized number that we should be working on?
Yes.
Okay, that's helpful. Then broadly in FY '18, if I go to see the return ratios, ROCs and ROEs, they are appearing very depressed in nature. I understand there could be various of factors. But if you could help us understand how should we look at our core business ROEs and ROCs going ahead.
So I think what you need to factor is that we are building a new business. And that business requires a lot of investment, both in terms of working capital or allocation of capital and also creating infrastructure and creating cost structures. So while all of this is happening, the existing business is funding all the future engines of growth. And this engine of growth will start generating profitability and value addition. Then we will see through overall profitability because clearly the current EBITDA numbers don't reflect the underlying businesses through profitability.
So for a while, you meant to say that the [ 10 ] difference which are sub-10% currently, they would continue to remain so? Or we could, in the next 2 to 3 years, you are looking at something, ballpark -- and I'm not asking for a number, but just ballpark mid-teens kind of number we should be comfortable working with?
No. I think what I am saying is that the current cost structure is for creating a future business. So I'm not giving you any guidance. But I am explaining to you that the current profitability is not the profitability of the producing business. It's also paying for building the future business.
Okay. So just last question, if I may squeeze in, there's an increase in receivables compared to like March quarter. So anything -- like INR 1,200 crores increase in receivables.
Particularly, it's the translation of the currency receivables, which reflects tax increase.
But that could normalize as we approach FY '19 end?
It depends upon how the currency also moves.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
Just first one on the U.S. generic business. And you can even talk about the industry as well. Ex of Taro, how has the base business actually behaved? Have you seen Q-on-Q increase ex of YONSA? Have you seen increase in our base business sequentially? And just related question on the kind of conversations you're having today with the channel, the distributors, has it actually improved over the year in terms of the conversations you're having? That's my first question.
So the business is doing as per expectations. I can't say that quarter-on-quarter, there has been a big jump. We also haven't launched any major product in the second quarter. So it's in line with our expectations for the year. So when you say conversations with customers, I mean, we always have good conversations with customers. So what were you alluding to?
So Abhay, I was just talking about is, is there an insistence on price discounts versus, say, a surety of supply? Have you seen this kind of narratives change? That's the key point I'm trying to see.
No, I think in the last 1 year, I don't think the narrative has really changed. I mean, there is pressure product-specific, we keep seeing that. And I haven't changed -- I mean, I haven't seen them changing.
Got it. And my second question is on the tildrakizumab for Europe. Has it been commercialized? And how should we look at these 2 markets, Europe versus the U.S.? Anything that you can share in terms of qualitative color will be helpful.
I think tildra should be commercialized hopefully with this quarter-end. And it will be launched gradually country-by-country in Europe, so based on reimbursement and various other things, which are required for Europe. So once we launch the product, I think we will get a greater clarity on how the product is doing.
The next question is from the line of from Charulata Gaidhani from Dalal & Broacha.
Are there any specialty generic launches? Or how many specialty generic launches do you plan in the second half?
Generally, we don't give these numbers. But there are some interesting products which are coming in the second half of the year.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
Yes, I just have one question for ILUMYA. I have this question on the formulary access. I just want to understand, what does it take for us to get first or second line access in that therapy? I understand one is a time factor, second is the price. Is there any other determinant other than that?
I don't know whether, Abhay, you're still on the call.
I am still on the call. But can I -- because you spoke a little fast, can you just repeat the question, please?
Yes, so I was asking that for the formulary access for ILUMYA, what will it take for us to get first or second line formulary access there? I understand that right now, we have constraint of step therapy and most of the formulary access that we got. When can, let's say, a year after or 2 years after or after a certain point of time, what would it take for us to get a better access in the formulary coverage?
So there are 2 ways at looking at this. And both are different if you ask me. Now what will it take to be a first line therapy? That's one part of the question. And the other is what does it take to be the preferred product? Now I don't think we are even aiming for being the preferred as long as we have the chance to be the first line. And then the HCP makes a choice of what the doctor considers to be his first line. We are comfortable with that. And there's a question on how much do we need to discount to have a certain position? So the aim is to get yourself at parity with your competition. Then, let's say, people then choose based on the merits of the product and the profile of the patient of what it is that they would like to use as their first line in each individual case.
That's helpful, Abhay. I was just asking, is price -- like can a company use price as a bigger factor and therefore better advantage over competition if you are...
More than price, it will be rebates and discounts, so not price per se.
Yes, I'm taking rebates and discount as part of price basically, net effective price, right, or rebate.
Sure. But the question is how much would you like to discount and rebate the product? And what do you gain at the end of it? So there's a very complex modeling that for each and every contract that we would go through. And contractors themselves will also look at their own way and data. And we will come to a point which is comfortable for both the company as well as for the payer.
The next question is from the line of Saion Mukherjee from Nomura Securities.
Sir, can you update us on the status on the field clinical trials for the InSite Vision products? And when do you expect NDA filing for those?
So both the clinical trials for InSite products are ongoing. I think I don't have exact -- I mean, I don't recollect the exact line for filing the product. But it's also not expected to be, I think, Abhay, filed this year. Correct?
Yes, that's correct.
So sometime next year, it will be filed.
Okay. And on emerging market and ROW, I mean, any color you can-- we don't have much clarity or transparency on these 2 markets. I'm just wondering, is there any element of volatility that you see in terms of like components of kind of business et cetera that we should be aware of? Or do you think we should more or less expect fairly cyclical in constant currency terms?
I think the underlying business, I'll probably sort of predict the continuity of the momentum for the rest of the year. So we didn't have any on our business, which is unlikely to either not continue or not -- we are not also anticipating any one of business to occur in the next 6 months.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Just for ILUMYA, for tildra for both U.S. and Europe, can you give us a holistic picture of the accounting treatment for both milestone and royalty? And the fact that for Europe, you will get approval in September. So therefore, would that not have maintained milestone in flow? Or is the intangible a net number?
Can you please repeat the question, Sameer?
I am talking about tildrakizumab. For example, maybe you took a $300 million milestone payment out of Merck and therefore the build-out of intangible in the balance sheet, so took it directly to balance sheet. So for Europe, for Almirall, would it be the same treatment that you would take it through the balance sheet? And did you not get an inflow because in September, you got the EC approval?
So as far as the tildrakizumab, the milestone payments, as we spoke in the past previous questions, we have capitalized that as part of intangibles. That is capitalized. It is part of the intangibles and the balance sheet.
Sameer, you're presuming that the $300 million is all linked with ILUMYA. Because it's not. It's also linked with CEQUA.
Okay, got it. But the fundamental question remains that when you get the inflow from Almirall, would you also again take it through balance sheet and they do not receive it because you've got the approval from EC in September? They did not trigger inflow milestone.
So the other component, what you're talking about, it's a deferred revenue occurring over a period of time.
Sorry?
The other conference, Sameer, talked about in terms of Almirall, licensing income. These are deferred revenue that actually accrue over a period of time.
So like we are amortizing the expenses, we will also amortize the income.
Okay, I'll take it offline. I'm not sure I fully understood that. And just a second question, sir, on the U.S. market. When you say that the relative attractiveness of a few products is not as good and you may take it out of your pipeline, I'm just wondering then if you take it out of your pipeline, then who will service the U.S. market for those volumes in the sense that India and yourselves have probably the best cost structure? So if this is an obstacle point and a sector-wide point, then who does this business go to?
No, I understand. I think that it's a challenge that we struggle with every day, is that if everybody drops out, then what appears to be a very unattractive product may become a very attractive product. But at some point, you have to trade off against the probability. But your question is correct is that -- and that is what I think is the challenge for both the trade as well as the industry, is that if your current squeeze on pricing will take already initiative and the interest of the manufacturers both in investing for manufacturing, facility expansion and R&D, all of that will potentially lead to future disruption in supply and future shortages, which will increase their longer-term cost.
And so how does one break the cycle?
I think the only way by which the cycle gets broken is that on all the commodity products, when there is what you call business becomes less attractive, the supply becomes scarce because marginal producers stop producing. And then that leads to increase in profitability, bringing your suppliers back to market. I mean, that's what will happen here also.
Due to time constraint, this was the last question. I now hand the conference over to Mr. Nimish Desai for closing comments. Over to you, sir.
Thank you, everybody, for being on the call today. If you have any questions that have remained unanswered, do send them across and we'll have them answered. Thanks, and have a good day.
Ladies and gentlemen, on behalf of Sun Pharmaceutical Industries Limited, that concludes this conference call. Thank you for joining us. And you may now disconnect your lines.