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Sun Pharmaceutical Industries Ltd
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Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Sun Pharmaceuticals Industries Limited. [Operator Instructions]I would now like to 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 second quarter FY '22 earnings call. I'm Nimish from the Sun Pharma Investor Relations team. We hope you received the Q2 financials and the press release that was sent out earlier in the day. These are also available on our website. We have with us Mr. Dilip Shanghvi, Managing Director; Mr. C. S. Muralidharan, our 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 the ease of discussion, we will look at consolidated financials. And just as a reminder, this call is being recorded, and a replay will be available for the next few days. The call transcript will also be but 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 basis. You are requested to ask two 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 second quarter of FY '22. I hope you and your family are safe and healthy. Let me discuss some of the key highlights. Consolidated sales for the quarter were at INR95,567 million, recording a growth of about 13% year-on-year. All our businesses, excepting the API business, have grown year-on-year. Compared to Q1 of this year, sales have grown by about 2%, excluding the contribution from COVID-related products in both the quarters.Let me now update you on our global specialty business. For Q2, our global specialty revenue was approximately USD157 million across all markets. This includes USD10 million in sales milestone for two of our specialty products. The global specialty sales do not include illumatry end market sales. ILUMYA has grown on year-on-year and quarter-on-quarter basis. It continues to gain traction in both the U.S. and other markets. We have recently announced the availability of ILUMYA in Canada, adding one more market to global ILUMYA franchise. We have also launched WINLEVI in the U.S. recently. Speciality R&D accounted for approximately 28% of our total R&D spend for the quarter. Abhay will give you more details on the speciality business later. I will now hand over the call to Murali for discussion of Q2 financial performance.
Thank you, Mr. Shanghvi. Good evening, everyone, and welcome to all of you. Our Q2 financials are already with you. As usual, we will look at key consolidated financials. Q2 sales are at INR95,567 million, up by about 13% over Q2 last year. Material cost as a percentage of sales was 26.4%, which is higher than Q2 last year due to product mix and geography mix. Staff cost stands at 18.9% of sales. Other expenditure stands at 27.1% of sales. Increase in absolute value is attributed towards higher selling and distribution and traveling expenses, while in Q2 of last year, these expenses were lower on account of global pandemic.As indicated in our past earnings calls, the expenses are seeing an increasing trend across all the markets as we reach full normalization. Forex loss for the quarter was INR764 million, compared to a loss of INR1,164 million for Q2 last year. EBITDA for Q2 was at INR25,608 million, up by 21% year-on-year, with resulting EBITDA margin at 26.8%, compared to 25% for Q2 last year. Reported net profit for the quarter was at INR2,470 million. Excluding the impact of the exceptional item for Q2 last year, the net profit is up by about 29% year-on-year. The reported EPS for the quarter was INR8.5.Let me discuss the key movements versus Q1 FY '22. Our consolidated sales were lower by about 1% quarter-on-quarter at INR95, 567 million, primarily due to lower sales of whole products in India in Q2 FY '22. Excluding the COVID-related sales in both the quarters, our top line has grown by about 2% sequentially. Material cost stands at 26.4% of sales, which is lower quarter-on-quarter on account of product mix and geography mix. For Q2, staff costs were at 18.9% of sales, while other expenses were at 27.1% of sales, both marginally higher than Q1. We had a Forex loss of INR764 million for Q2 as against Forex gain of INR799 million in Q1.EBITDA for Q2 stands at INR25,608 million, which is lower by 8% compared to Q1, mainly driven by the Forex movement. Reported net profit for Q2 was at INR2,470 million. Excluding the impact of accretion item for Q1 this year, the net profit is [indiscernible] quarter-on-quarter. Now we will discuss the half-year performance. For the first half, net sales were at INR192,262 million, a growth of 20% over first half last year. Material cost for H1 was at 26.9% of sales, which was higher than H1 last year, mainly due to product mix. Staff cost stands at 18.5% of sales, lower than H1 last year. However, in absolute terms, [indiscernible] increased on account of annual barite increases and increase in field incentives.Other expenses were at 26.8% of sales, lower than H1 last year. However, in absolute terms, the other expenses have increased on account of higher selling, distribution and traveling expenses, while in H1 of last year, these expenses were lower on account of panamic-related lockdown across markets. Increase in R&D expenses has also partly contributed to higher other expenses. As a result of the above, the EBITDA for the first half was at INR5,325 million, a growth of 38% over the first half last year, with resulting EBITDA margin of 27.7%, compared to 24.2% for H1 last year. Excluding the exceptional items, adjusted net profit for H1 FY '22 was at INR40,262 million, up 47% year-on-year. Reported net profit for H1 FY '22 was INR34,912 million. The company has repaid debt of about USD209 million in H1 of the current fiscal. Over the last 6 quarters, we have repaid debt of about USD790 million. As of 30th September 2021, we continue to remain net cash positive even at the ex-Taro level.Let me now briefly discuss Taro's performance. Taro posted Q2 FY '22 sales of USD132 million and adjusted net profit of about USD25 million, lower by 10.2% and 40% respectively over Q1 FY '22. On a year-on-year basis, sales for Q2 FY '22 were lower by about 8%, while the adjusted net profit was lower by about 45%.Lastly, I would like to draw your attention to the news report published in the section of the Indian media today, allergic that a complaint has been filed in the U.S. Securities and Exchange Commission related to [indiscernible] of Taro shares. Sun Pharma strongly denied all the allegations made in the news report, neither [indiscernible] subsidiary, Taro Pharmaceutical Industries Limited have received any communication from the U.S. Securities and Exchange Commission or from any other regulatory agency on this matter. Therefore, we have no further information to share at the moment, and we will not be discussing this matter in today's earnings call.I will now hand over to Kirti Ganorkar, who will share the performance of our India business.
Thank you, Murali. Let me take you through the performance of our India business. For Q2, the sales of branded formulation in India were INR31,878 million, recording a growth of about 26% over Q2 last year. India business accounted for about 33% of consolidated sales for Q2. We have maintained the trend of the past few quarters of outperforming the average industry growth. Sun Pharma has increased its market share in Q2 compared to Q1 of this year, and also over Q2 last year.As per AIOCD AWACS MAT data for September 2021, our market share has increased to 8.1%, compared to 8% of June 2021 MAT data. We have witnessed growth across most of our therapies. The growth was driven by the combination of factors like improving the demands for non-COVID treatments, which is driving the growth in chronic, semichronic segment, peak monsoon season leading to higher demand for anti-infectives cough, cold medication, improved patient flow to doctors clinic and increase health care awareness.Sales of product used in treating COVID symptoms and other associated products accounted for approximately 2% of India sales for Q2, compared to about 8% to 10% of India sales for Q1 this year. I'm happy to announce that we have recorded a strong growth in the underlying base business, excluding COVID product sales. Field force operations were near to normal in Q2 with almost all doctors' clinic operationals. The new sales force has started contributing and is already on the ground engaged in the field work. Travel costs for the medical representative is near to normal, while we continue to see some savings in terms of the cost of medical conferences.For Q2, we have launched 28 new products in the Indian market. Sun Pharma is the largest pharmaceutical company in India, and as per SMSRC report, we are #1 rank by prescription with the 10 different doctor categories. We also continue to remain the partner of choice for in-licensing products, given our strong position, #1, in many therapy areas, including therapies for treatment of COVID infection, 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 Q2, our overall sales in the U.S. grew by about 8% over Q2 last year to USD361 million. The main drivers of growth were the specialtiy business, coupled with the Sun ex-Taro generics portfolio. U.S. accounted for about 28% of consolidated sales for the quarter. Our speciality revenues in U.S. have grown over Q2 last year, mainly driven by Ilumya, Levulan, Podanzo, Cequa and Absorica LD. Speciality sales are slightly lower compared to June 2021 quarter. While Ilumya has grown quarter-on-quarter, Absorica sales have declined as expected due to generic entry.We also witnessed a slight decline in Levulan sales compared to Q1 FY '22 due to some temporary supply constraints, which are in the process of being addressed. Further, Ilumya and Cequa grew by about 70% and more than 100% respectively on an annualized basis for September 2021. Quarter 2 is typically a soft quarter for dermatology products. In addition, there was a surge in COVID cases in the U.S. While doctor 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 representatives are both still below pre-COVID levels.You would have seen our recent announcement of launch of Winlevi in U.S., and anti-acne speciality product. 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. The nature of the acne market is such that there is a room for a new product, especially with the new mechanism of action, which Winlevi has. It is for the first time that an androgen inhibitor will be used for treating acne. Our established presence in the acne market will help in ramping up Winlevi going forward.Let me now update you on our U.S. generics business. While the U.S. generics business continues to be competitive, the Sun ex-Taro generics business has recorded growth on a Y-o-Y 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. Shanghvi.
Thank you, Abhay. I will briefly discuss the performance highlights of our other businesses as well as give you an update on our R&D initiatives. Our sales in emerging markets were at USD243 million for Q2, up by about 16% year-on-year and 12% higher on Q1 this year. The underlying growth in constant currency terms was about 14% year-on-year. Emerging markets accounted for about 19% of total sales for Q2. Formulation sales in rest of the world markets, excluding U.S. and emerging markets, with USD188 million in Q2, up by about 5% over Q2 last year and 1% over Q1 of this year. Rest of the world market accounted for approximately 15% of consolidated Q2 revenues. API sales for Q2 were at INR4,358 million, lower by about 15% over Q2 last year, mainly due to lower OpEx revenue.We continue to invest in building our R&D pipeline for both the global generics and the speciality businesses. R&D efforts are ongoing for the U.S., emerging markets, ROW markets and for India. Consolidated R&D investment for Q2 were at INR5,364 million, compared to INR6,127 million for Q2 last year. The year-on-year decline is due to spillover of some clinical studies into subsequent quarters. Our current generic pipeline for the U.S. market includes 88 and 13 NDAs awaiting approval with the U.S. FDA. With this, I would like to leave the floor open for questions. Thank you.
Thank you very much. [Operator Instructions] The first question is from the line of Prakash from Axis Capital.
Sir, first question is actually a clarification. U.S. business ex-Taro, what I heard right was it was a growth Q-on-Q led by new launches and better supply chain management. If you could highlight more which were these new launches because I understand the market is very competitive and there's a huge pricing pressure that is happening. Did we have any big product launch?
So we had 6 new product launches in the U.S. in the last quarter. And of course, with the help of the supply chain and the production and quality and R&D teams, we ensured that most of our products remained available to the levels that we wanted them to, so we could look for businesses and keep our existing business continued.
Prakash, this is Nimish here. What Abhay had indicated in his opening remarks was that Sun ex-Taro generic business has recorded growth on Y-o-Y basis. There was no mention of Q-o-Q.
Okay. And some outlook can be shared, that would be great on the U.S. generic business. I mean what is on ground pricing pressure? Has it been better or the competition has increased. Some color would be helpful?
Situation broadly remains the same, Prakash. A number of competitors looking at specific products keeps on increasing every quarter. And like we have said consistently, depending on the product and the number of competitors, the pricing pressure on the ground is something we continue to face. I mean that's the reality of the market. I don't think much changes from a quarter-to-quarter basis.
Okay. Perfect. And from a Halol side, are we seeing any communication already from the FDA as seen by other corporates also they're sounding? I mean, do we expect it by this fiscal year and some resolution? Or what is our current thinking around this?
We haven't received any information from the agency about their plan to audit the facility. We continue to stay in touch with them with a request that they should audit the facility at the earliest, because we make many products which are potentially or sometimes in regular shortages. But it all depends on their priority and their importance of the facility based on which I think we will decide when to inspect us.
Okay. Perfect. And my last question is on Winlevi. So from a build-out perspective or I mean, is the existing setup good enough? Or do we need to invest in the near-term, at least 1, 2 quarters before we see gaining momentum or the existing setup is good enough?
So when you say set up, you're talking about the field force?
Yes, sir.
So we have had some increase in the size of the field force than the team we choose to promote Absorica and Absorica LD. And I think for the last quarter, a large part of that cost has already been reflected. So more you will see in this quarter 3. But there has been an increase taken in the size of the field force looking at what the potential of this product can reach.
Okay. Perfect. So unlikely to see a major cost expansion is what I heard.
If you say unlikely?
Yes.
Yes. I would agree with that.
The next question is from the line of Kunal from Emkay Global.
So first, on the R&D expense, which we have already indicated that a couple of clinical trials have spinned over. Are those the trials related to psoriatic arthritis and SCD-044 we are talking about?
That's correct. I think the cost of the clinical trial is linked with the ability to commission new sites as well as enrollment of subjects. And if that is going slow, then the cost is much lower.
So does that mean that the cost would be apportioned over a much longer period and hence this lower R&D expense as a percentage of revenue would continue?
I mean in the sense that my understanding is the major reason for the slowness of the enrollment is linked to the COVID. As Abhay said that till last quarter, there was a potential impact in the patient visiting doctors split. But gradually, I think things are normalizing. So we should expect that we should go back to the normal and then that should help enrollment of subjects faster.
Sure. And the second question would be on the -- I think that is one clarification that I require. you have said that Ilumya and Cequa sales on an annualized basis, which I believe would be kind of a MAT basis, has grown at 100% and 70%. Is that the right way to look at it?
Yes. That is the right rate and annualized growth comparable periods.
Okay, sure. And so my last question would be on the specialty breakeven, which we earlier guided to be kind of next year. So do we still stick to the fee breakeven -- speciality breakeven?
I don't think we ever said that there will be a breakeven across the board next year. We always said that this is a business by business working that we do. And internally, we are clear which business will breakeven in which year based on how well we execute on our plans.
So any guidance for the speciality business as we face today on the growth that we are seeing?
Are you talking about breakeven?
Yes, yes.
No, no real guidance really. We don't give those details business by business, of course.
The next question is from the line of Damayanti Kerai from HSBC Securities.
My question is again on Winlevi. So here, will you be incurring DTC cost for next few quarters? And how is your reach in terms of formulary coverage for the product?
Initial focus will be on communicating our messages to doctors. What you need to remember is in the U.S. for the first 6 months post launch of the product, you can't do any DTC. That's not allowed. So 6 months post launch, we can't do DTC anyway. So our focus will be on communicating our messages to doctors, convincing them that it's a product they should give a trial to see the results and then hopefully start describing it far more regularly.
Okay. And how about the formularly coverage for the product? What has been progressed here?
So it's a launch product. We, in fact, launched it yesterday. So yesterday was the first day of launch. So formally, the access is an ongoing process. So it's not that you get complete access before the launch or day 1 of launch. Different payers take their own time and period to make a determination of whether to cover and how to cover and in which formulary they should put it on. So it's a process that we have to go through, but we are comfortable with the initial coverage that we have for launch, and we find that it is comparable to a lot of new products in the space, which have been launched in the past.
Okay. That's helpful. My second question is, how do you see higher commodity prices impacting your gross margin over the next few quarters?
So can you repeat your question, please?
How commodity price -- higher commodity price, how it's going to impact your gross margins in next few quarters?
So I think the margin will be under pressure from the cost point of view. So margins that like currently our cost of goods is X, it may go up a little. But in many businesses, we are able to pass on the cost increases to customers. So then to that extent, there is an adjustment.
Okay. But broadly, there will be some increase from current label in the next few quarters? That's what you are seeing.
I mean I have no understanding of how long this increase in the commodity prices is going to continue, because we are seeing that in many products, there is also a reversal. It doesn't go back to its original price base, but it comes down significantly from the big digital region. So it's difficult to quantify. The positive for us is that because of the COVID, we created a strategic inventory for many products, and that is the reason why you see our working capital is a little bit higher. But that is now useful for us in terms of those materials have been procured at old prices. So we don't know when will start it.
The next question is from the line of Krish Mehta from Enam Holding.
Congratulations on a good set of numbers. My first question was related to ILUMYA in terms of the Phase III trials for psoriatic arthritis. So given the slowdown because of COVID enrollments, is there a rough time line you could share on when we expect these trials to be completed?
We haven't shared the specific date by which we should have the last patient enrolled in both psoriatic arthritis as well as in other studies. But I think our focus is to find a way to complete the study at the earliest.
Okay. And my other question was on the sales and marketing expense and other expenses in general. So would it be fair to assume that the percentages we are seeing in Q2 would be a steady state percent going forward to account for the COVID aberrations you've seen in the last few quarters?
So we have maintained our position in the last even call also that we have the normalization of operations is happening quarter-by-quarter, we would also see the increase in expenses. However, we also maintained that probably even a full normalization, maybe we may not read the full pre-COVID levels. That's what our position is.
The next question is from the line of Anubhav Agarwal from Credit Suisse.
Yes. Hello. Just a couple of clarities. One, this $10 million milestone that you talked about in the speciality business, is that included in revenues, so that's included in the other income?
Anubhav, it's included in the revenues.
Any reason for including in the revenues, not in other income?
So it is part of the NDAs accounting and revenue is the contract for supplies as per the NDA gap.
So when you report USD361 million, is this USD10 million inside the USD361 million?
The H1, what you are seeing numbers reported, it includes our USD157 million includes USD10 million. Let's put it like this.
No, but that's right, but USD157 million is across the businesses. And this I assume USD10 million specifically for the U.S., that's the reason I'm asking that. Is that USD361 million includes that USD10 million?
So total what we have reported that include USD10 million revenue. That's what we say.
Okay. Sure. Second, on the COVID phase, you did mention about contribution from India, but was there any material sales turn to EM and ROW market as well in this quarter or not?
There would be marginal, I think, sales, not significant.
Okay, sure. And last question just on the DTC and Ilumya. So our current expenses reflecting the normal level of DTC and Ilumya like in the past, you mentioned that DTC and Ilumya has come down from the -- when you started initially. But as the situation normalizes in the U.S. as the cases go down, etc, is this the base level of DTC that we need to do if we are doing already, situation normalizes, you need to ramp up on the DTC and Ilumya?
No, I think you can consider this to be your baseline.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
A question on operating leverage. I think company has done a great job over the last few quarters. But where the margins are now 26%, 27%. Do you think we should expect more of this to continue, which is sales going faster than the cost?
So Sameer, that is the effort. How much we are able to execute, I think, will determine whether it happens or not.
Okay. Great, sir. And the second question is on the U.S. side, especially on the generic side. So can you give us some visibility of new launches as we go forward and especially some high-value context for them?
I can tell you the number of products I did that last quarter, we launched around 6%. This quarter again you will have some launches. But till we have an approval in hand and are able to tie up business, I think I don't want to give names of products because that affects me competitively. But yes, every quarter, the attempt is to have a few products and come to market preferably first to market or at least in the first batch of products to come to market.
Okay. I'm not looking for any name specifically, but just that some highlights and I know the timing can be very up and down. But if you take a 4- to 8-quarter view, you think you have sufficient ammunition that can come to market? Yes, I do.
The next question is from the line of Nimish Mehta from Research Delta Advisors.
My first question is actually about Winlevi, can you explain as to how is better than the standard of Winlevi? In fact, it would be great if you can also allude to which is the standard of care? And what is the mechanism of action of Winlevi? I mean there is some element that is given in the press release, but it's hard to understand if you can help that will be great?
So I mean, to be able to fully answer your question, I will have to give you a complete product briefing. So I'm perfectly all right if you want to take this offline, and I can explain to you the product and the mechanism and the scope. So I'm happy to do that if you wish.
Yes, I would be very happy to that.
Yes. I think Nimish or Gaurav can find time and I will be happy to brief you on that.
The other one actually may be related to the same. You mentioned that there are 13 NDAs, which are pending approval, and that's quite a large number. So if you can kind of break it up between how many would be fine or behold and how many would be NCEs?Thatwould be helpful.
And all of them are in the 505(b)(2), are generic space. There is no NCE in that.
Okay, fine. And if I may, last one to squeeze in out of the domestic business, it has actually grown significantly above the wider market, the overall market as well, even if we adjust for the COVID-related fee flow. Any specific reason, how should we read that going forward?
I think I just told and read out that overall things are coming back to normal. So what I see is almost close to 95% to 98% of the doctors are practicing. The patient footfall still is not pre-COVID level, but it is around 85% to 90%. And there are only two specialities, which is like pediatric and dermatology where footfall is within 70% to 75%. So it's like...
That must be true for the entire market, right?
Yes, that is for entire market. And second is even this year, the monsoon started early, and it was a long drawn period. So that also helped. And as you know, there are a large number of infections like a viral infection, cough, cold. So anti-infective market has also grown substantially compared to last year. But in this growth, I think we have done better than the market. So we have gained market share, as an example, in both subchronic as well as acute therapy, we have grown faster than the market, both in Q1 and Q2.
Yes. Exactly that is what I wanted to. How like any specific reason? And is this something that is likely to continue? I mean, growing better than the market and significantly better than the market?
No, I think the India business objective is to grow faster than market and again market share. That's what we are trying to do. If you remember, we have done expansion also, so 10% of the field force we have added 2 years back.So that's also helping us. Last year was a COVID and there was a challenging time. But now the things are coming back to normal. This expansion has also helped us to gain better growth compared to our competitors. So it's a mix of all the factors, but I think the idea is to grow faster than the market in most of the therapy area where we are present today.
The next question is from the line of Tarang from Old Bridge Capital.
Sir, just wanted to check, given the size, scale and the moving parts of the business, just wanted to get a better handle on which are better or more profitable revenue segments, so would it be possible for the management to provide revenue segments in descending order of gross margins? Without the numbers, just the ranking would be right.
I think this call and information that we share is not only with analysts and investors, it's also with competition. So we need to be cognizant of that. We will generally avoid doing anything which will negatively impact our business. So that would be difficult.
Sure. Okay. The second question is if you could give us a sense on your launches last quarter in Q1 FY '22? And how many launches should we see in FY '22 as a whole in North America generics, ex-Taro?
So I answered this part of the question earlier. I said last quarter, we have launched 6 products. But the future, I mean, I don't really want to give a number because it is uncertain. We are doing our best. And it's also competition-sensitive information, right? So for me to give a number, again, impacts us negatively.
So I meant Q1 of FY '22 when I asked you.
FY '22 was a similar number. I don't recall exactly, but it was 5% or 6% again. Quarter 2, I could confirm it was 6. And to an earlier question, I did mention that when I look at the portfolio over the next 4 to 8 quarters of what we think we'll be able to come out in the U.S. market. I'm comfortable with the pipeline that we have.
The next question is from the line of Surya Patra from Philip Capital.
Congratulations for a good set of numbers, sir. First question is on Winlevi. So considering the kind of superior -- the attributes of the product, like tolerability and debt profile, the superior debt profile. and the way it is indicated for like moderate patients. So does that provide some indication in terms of faster or kind of relative to a larger volume in terms of the penetration of the product in the first year? And also a communication from your partner side indicate that before the launch of the product itself, the enrollment of the product with the payer group is like one of the best. So does that really indicate anything about the penetration of the product and the quantum of the prescription that it can generate in the first year?
Frankly, we really couldn't understand the gist of the questions. Could you kindly rephrase it for us?
Sure. What we are seeing so I think the product has got better tolerability as well as the debt profile, and also as per the partners communication for Winlevi, they are saying that the product has already got enrolled with maxim payer group in U.S. before launch. So does that indicate anything great about the penetration of the new molecule compared to the comparable products?
Let me take the first part of your question. I mean, anecdotally, when we have spoken to the KOLs about this product, even before we licensed it, and today, when we are talking to doctors after licensing it in doctors conferences or individual doctors and clinics, we see a fair degree of interest because it's a first-in-class molecule after a span of almost four decades. Attempt of the team, obviously, will be to convert that initial interest into an action and then repeated reduction in terms of prescription. And that is what will give us that volume that you talk about. I am [indiscernible] to the what you call the so-called partners communication about whatever that was a term you used best in kind of the access, to a response to an earlier question, I did say that access is an evolving thing when you launch a product and each payer has a different time line when they make a determination of when to cover and how to cover and on which formulary to cover. So it's an ongoing negotiation. And I also said that at the point of launch, I'm comfortable with the access that we have and the attempt of the team will always be to improve and that won't be our next 3 months kind of a task. It will be an ongoing forever kind of a task to maintain and to grow access will be a forever task.
Second question is on red limit. So, is it possible to share like what is the time line and how is our preparedness for launching the product as per the settlement, although that is not known?
So that will be difficult. We will not be able to share that because it is definitely competition-sensitive information.
And also, I think there are some confidential...
There are confidential parts of the agreement as well. So all in all, I cannot give you specifics on that.
Okay. Okay. So, just last question, if I may. About the biosimilar initiative, what you talked in the earlier calls also, can you just give some sense that, okay, what is the progress? Or what is the kind of thought process about it to add product or build product or develop products like that?
So I think we have indicated that the product that we've chosen is a product, which is likely to be in the third wave of biosimilars, which means that potential patent expires after 27, 28. And I think we're working on the product in the R&D right now. And we haven't yet scaled up to any kind of size. We are still at very small fermenters. But I think the early validation of the structure and characterization, that's the case that we are on the right part.
The next question is from the line of Cyndrella Carvalho from Centrum Broking.
The first question is on the Winlevi side. If you could -- I don't know if you will be comfortable giving guidance, but what will be your peak sales estimate because there were some analyst expectations that were indicating net worth USD400 million peak sales for this particular product. Do you relate to it or anything that you would want to share on this?
Clearly, the analyst knows far more than I do, but no, I really cannot give any guidance on that.
Sir, on the PH side, on the API lower sales, we have specifically identified that lower opiate sales have led to this. Any current scenario that you can highlight or and any sense that you can provide on the outlook?
So our sense is that opiates, I think, are controlled by norcotic commission and they are not currently issuing permits. So they want get people go on now. So I think the expectation is that they are not issuing new permits till the company has existing inventory. So to that extent, I think the sale is subdued. Hopefully, comes down, then some better sales will start.
This is very helpful, sir. And sir, one last question, if I can slip in. So only India run rate, quarterly run rate at almost INR3,200. how should we see this going ahead? Do you think this is a more sustainable run rate going ahead?
What I can say is very difficult to predict because we are in uncertain times. So we don't know whether the COVID wave 3 will come and how much it will impact our business. So it's very difficult for us to see like next 2 to 3 quarters will be. I think things remaining normal. Our endeavor is to keep on growing faster than the market. That's what I said earlier.
The next question is from the line of Neha Manpuria from Bank of America.
[indiscernible] if I were to compare our performance in both of these in terms of how they're trending versus COVID expectation. Is it in line with that? Or do you think the time loss due to COVID there is still recovery when it comes to the performance of these products?
Clearly, I think if there was no COVID, I'm certain the uptake of these products would have been better than what we have today. There is no doubt on that because all said and done, these are new products launched by a relatively new company in the speciality space in the U.S. So to be able to directly meet doctors, communicate your product benefits over that of the competitor, gaining access. I think these are all things which have to be done on the ground. You can't do it virtually, not at least for a newer product and a newer company. So clearly, I think -- but for COVID, we would have been in a better place than we are now. That's for sure.
And that does not change any of your expectation -- does not change COVID. I mean I know there is a bit of some uncertainty in terms of NSBF coming through, and therefore, this kind of ramp-up. But how is your expectations on these products change either way up or down post COVID?
My personal mindset always is that you can either let circumstances bog you down or try and find ways by which you do better than what you are, if you think you're capable of under any circumstance. So in my head, at least, this is not a setback of a permanent nature. We have to find creative ways of getting back to where we should be and keep moving forward. That's my personal mindset.
Understood. My second question is from a capital allocation for the speciality business development. Do you have seen after doing any smaller assets than many seems to be a mid-sized asset, you'll have to see how that runs up, but is it -- two questions there. One, is there any part of the specialty segment where we'd like to see more product additions versus another in terms of our fixed cost investment there, etc? And second, has, let's say, ramp up or success so far in these speciality launches that we have done or progression speciality launches change the type of the assets or the size of the asset that you are ready to lead?
So we don't necessarily start off any business development process by looking at size. If we look at gaps in our portfolio and needs of customers or what is it that they're looking for. So whether you call Winlevi midsize asset or a large asset, the fact is if you look at it from a customer point of view, they were looking for an androgen inhibition drug for the past 4 decades. We were able to acquire that and give the customers what they want, and that will translate into a business opportunity for the company. So rather than look at the size of the acquisition, we try and look at gaps in therapy, needs of the customer and how we can augment our portfolio in the segments that we said that we remain keen on investing and growing, of course.
Okay. So it's not just we are -- even though there might be assets available here to look at a larger asset now versus, let's say, we won as 2 years back?
I think our view was that it's better for us to see a certain size that we achieve in our speciality business before we continue to make additional investment, because even as I think there is a learning process. And clearly, what we know today is more than what we knew 2 years back. So I think that gives us the confidence and the courage to consider future investments.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
Just the first one is on capital allocation again. We're generating significant amount of cash, just looking at even your half yearly numbers. So I just want to understand, we've been paying down debt so far. So it looks like now with net cash, that avenue probably closes. So just trying to understand what are some of the capital allocation priorities? Is it more R&D? Is it CapEx? Is it M&A? Any sense on that like a 3 to 5 year that we need to keep in mind?
No, I think the focus is to find businesses that will help us improve our return on capital employed, return on equity. So that anything which will help us grow our top line as well as bottom line as long as it is reasonably priced or something that we can afford to pay. Now what is reasonably price is a very big zone of reasonableness. But I think that is an important decision for us and we will always remain disciplined about what we pay for an asset.
Will it be just ooking at the quantum of cash flows, do you think the rank order, I'm an applying my life with the rank orders today. So is it India asset? Is it U.S. spec assets, any directional sense?
Directionally, I think we've explained in the past also is that with our size and with our presence in almost all therapy areas of our interest in India, unless and until we get a specialized opportunity, we are not looking at buying something in India. But we will look at bolt-on businesses in markets, in emerging markets where we have existing presence and we can scale. We can look at small, medium-sized businesses in Europe. We can also look at existing businesses with either existing products or products close to market in the U.S. And because the market is much bigger in terms of value, possibly that can be a much more higher cost potential acquisition.
My second question is just on Absorica. I think they mentioned that there has been Q-o-Q decline. Maybe I think it's in the generic part of the thing. So how should we -- or is it the entire portfolio, I'm unable to understand. So how should we look at this? Is there a more 1, 2 quarters of pain more before kind of then stabilize some market share where we think in don't get worse, sir?
It will depend on how you want to look at the overall business. One way to look at is, say, about a year ago when we were only marketing Absorica, we had roughly -- and I'm rounding it off, we had roughly like a 7% share of market. And then we launched Absorica LD, and a few months ago, we launched the authorized generic of Absorica also. Now if you look at all 3 products put together or 3 forms of the product book together, then our market share is more or less the same.
But maybe the realizations are different. Maybe that's where probably the...
The realizations would be different and also where it is classified. So Absorica will be classified as a speciality product business, whereas the AG will be classified as the ex-Taro generic business.
Got it. And last question, Muralidharan, on the ETR. I think Q2 was abnormally low, but if you can help us what could be ETR for fiscal '22?
Also, as far as the Q2, ETR being lower as the onetime adjustment out of the power control not there. Otherwise, Shyam, we would say that at least we should look at the ETR average basis..
And Muralidharan, when is going trending up gradually, that's been the previous guidance?
So we started the same guidance to inch up as we progress.
The next question from the line of Vishal Manchanda from Nirmal Bank.
I have a question on Cequa. Just wanted to get your views on what it would actually take for you to gain share from Restasis. Because as I understand, there is a large population that does not respond to Restasis. And so we probably are still struggling around single-digit number. And I also understand you've been doing a post-marketing study to understand Cequa in nonresponders. So any color there will be helpfu?
So you're right. I mean better execution is the only answer. And a lot of our marketing strategy is to try and convert share from the existing incumbents, whether it is Restasis or Xiidra product. And I think we clearly will have to do a better job at executing on our strategies. So I'm with you on that and yes, to the second part of your question, I mean, through different IITs, we are trying to work on the product and creating scientific evidence of why adopters should either start a patient on Cequa or move a patient to Ceque in case they are nonresponders to existing products.
So would we have some data around this any time now or later?
Data on what?
Basically, nonresponder Cequa performance and Restasis nonresponders?
So once these studies are published, then they are in public domain. And therefore, then you will have access to it. But obviously, till it is in public domain, I cannot share it with you.
Got it. And just one more question on Taro. So there was a sharp decline in gross margins on a quarter-over-quarter basis, about 500 basis points. Could you share some color there?
So the decline in the sharp decline is due to onetime impact in the cost of goods sold. Otherwise, we don't see any change in the normal range bound margins as per Taro is concerned the gross margin level.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Nimish Desai for closing comments.
So thank you, everybody, for taking time out and joining this call. If any of your questions have remained unanswered, do send them across, and we will have them answered. Thank you. And lastly, from all of us at Sun Pharma, Wish you all a very happy Diwali.
Thank you. On behalf of Sun Pharmaceutical Industries Limited, that concludes this conference. Thank you for joining. You may now disconnect your lines.