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Sun Pharmaceutical Industries Ltd
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Good day, ladies and gentlemen, and a very warm welcome to the Sun Pharmaceutical Industries Limited Q3 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Nimish Desai. Thank you, and over to you, sir.
Thank you. Good evening, and a warm welcome to our third quarter FY '19 earnings call. I'm Nimish from the Sun Pharma Investor Relations team. We hope you have received the Q3 financials and the press release that was sent out earlier in the day. These are also available on our website.We have with us Mr. Dilip Shanghvi, Managing Director; Mr. Sudhir Valia, Whole Time Director; Mr. Kal Sundaram, Whole Time Director and CEO of India Emerging Markets and Consumer Health Care; and Mr. Abhay Gandhi, CEO of North America. Today, the team will discuss performance highlights, update on strategies and respond to any questions that you may have.As is usual, for ease of discussion, we will look at consolidated financials. Just as a reminder, this call is being recorded and a replay will be available for the next few days. Call transcript will also be put up on our website shortly.The discussion today might include certain forward-looking statements, and this must be viewed in conjunction with the risks that our business faces. You are requested to ask 2 questions in the initial round. If you have more questions, you are requested to rejoin the queue. I also request all of you to kindly send in your questions that may remain unanswered today.I'll 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 third quarter of FY '19.Let me discuss some of the key highlights. Our Q3 performance was in line with our expectations of our second half being better than the first half of the year. Consolidated sales for the quarter was at INR 7,654 crores (sic) [ INR 7,657 crores ], a growth of 16% over the Q3 last year and a growth of 12% over September quarter. All our businesses have grown during the quarter.We are beginning to see the results of focus on strengthening our core operations and managing our overall cost structure, which is necessary to ensure competitiveness in the market. We have also progressed further in our speciality initiatives. Abhay will discuss more details on our speciality initiatives later.Post the clearance of Halol facility by the U.S. FDA in June, we have received approvals for 4 ANDA and 4 NDA from Halol till date.Let me now update you on the whistleblower complaint. While we do not have access to the whistleblower complaint, we've received information request from SEBI related to our 2004 FCCB issuance and also for our transactions with Aditya Medisales. We've responded to these queries. Beyond this, we do not have any update to share.I would also like to take this opportunity to clarify on certain queries that have been raised by some investors. The queries pertain to whether Aditya Medisales has benefited in the past at the cost of Sun Pharma minority shareholders. AML's financials that are available in public domain, and it can be seen that it earns an EBITDA margin of only 1.4% from Sun Pharma for distributing its products in India. And its net margins are less than 0.4%, which actually includes significant dividend income, which it receives for its equity holding in Sun Pharma. So net -- actually, the net margin is even lower than 0.4%. Given this low margins and the size of Sun Pharma's domestic formulation business, AML was operating on extremely tight working capital, necessitating Sun Pharma funding AML from time to time, for which interest was always covered at arm's length. I would like to reassure investors that at no point of time Sun Pharma shareholders have been disadvantaged in transactions with AML.Also as recently announced, we are in the process of transitioning the distribution of India formulation business to a 100% Sun subsidiary by Q1 FY '20. We have also received queries from investors regarding the Atlas transaction and whether we had funded Atlas. So I would like to clarify. We are entered into this transaction to conserve cash so as to retain the flexibility of undertaking mergers and acquisitions in the speciality space. Let me clarify that Sun Pharma had given loan to Atlas on 2 occasions. The first time, a temporary loan was given in FY '15 to enable Atlas to consummate transaction it has ended -- entered with Sun as Atlas needed some time to raise the USD 400 million from the debt market. This temporary loan was duly repaid subsequently in FY '16 after Atlas fundraising from global banks. The second time that Sun funded Atlas with a loan of $300 million was during FY '18. This was as per the supply contract terms and conditions since we were unable to supply the -- fulfill the supply obligations towards Atlas due to GMP issues as Halol.Recently, we announced the unwinding of the Atlas transaction. This unwinding will result in the assignment of the supply contract to one of our wholly-owned subsidiaries and Atlas moving out of the transaction. Hence in our consolidated financials for FY '19, the USD 300 million loan will get squared off against our unfulfilled supply obligation. I hope that with these 2 clarifications, these 2 issues which have been bothering investors is behind us, and we can focus on performance of the company and growth of the business.I will now hand over the call to Mr. Valia for discussion in Q3 performance.
Thank you, Mr. Shanghvi. Good evening, everyone, and welcome to all of you. Our Q3 financials are already with you. As usual, we will look at the key consolidated financials.Q3 sales are at INR 7,657 crores, up by 16% over Q3 last year. Material costs as a percentage of the sales was 28.3%, staff cost was at 19.5% of the sales, and the other expenditure was at 25.2% of the sales, all lower than Q3 last year. This improvement was driven by better top line growth, product mix and cost control measures. Gross margins have improved year-on-year from 68.2% to 71.7% due to better product mix. The EBITDA for Q3 was INR 2,069 crores, up 48% with EBITDA margin at 27%. The improvement in EBITDA margin is partly driven by the ForEx gains including that reported by the Taro exchange impact of the ForEx gain from the -- and from the other expenditure, the EBITDA margin for the quarter was 24%.Net profit for Q3 was at INR 1,212 crores (sic) [ INR 1,242 crores ], up 49% year-on-year, after adjusting the Q3 net profit of last year for the onetime impact of the charges in U.S. tax laws. EPS for the quarter was INR 5.18.Let me now discuss the movement versus Q2 of this year. Material costs at 28.3% of the sales was higher than the September quarter, partly due to the lower cost of goods to -- for Taro and write back of certain provisions, which were booked in Q2 last year -- last quarter. Other expenses were lower than September quarter, mainly due to ForEx gains in Q3.Now we will discuss 9 months performance. For 9 months period, net sales at INR 21,642 crores, a growth of 12% over 9 months last year. Material costs as a percentage of the net sales was 27.9%, which was slightly lower than same period last year, mainly due to product mix. The staff cost for the 9 months was at 20.3%, which was slightly lower than same period last year. While other expenses were at 28.6%, lower than 9 months last year, partly due to ForEx gain and lower R&D spend.As a result of the above, the EBITDA for the 9 months is INR 5,031 crores, a growth of 34% over 9 months last year, with resulting EBITDA margin of 23%. Adjusted net profit for the 9 months was at INR 3,244 crores, up 46% after adjusting it for the exceptional item and the onetime tax charges related to the charges in U.S. tax law.Let me now briefly discuss Taro's performance. Taro posted Q3 '19 sales, USD 176 million, up by 13% over Q3 last year. For the 9 months, the sales was at $490 million, marginally up over 9 months last year. Taro net profit for the Q3 was $93 million, while for the 9 months, its reported net profit of $223 million.I will now hand over to Kal Sundaram, who will share the performance of our India and Emerging Market business.
Thanks, Mr. Valia. First, let me take you through the performance of our India business. Quarter 3 sales of branded formations in India were INR 2,235 crores, a growth of 7% over Q3 last year and accounting for approximately 29% of total sales. As compared to the sequential quarter, our India business grew sales by -- grew -- sales grew by 20%, partly due to lower base of Q2. Year-to-date, the secondary sales to stockists is tracking as per our plan and growing at low double digits, year-on-year.Sun Pharma is the largest pharmaceutical company in India and holds approximately 8.2% market share in over INR 129,000 crores pharmaceutical market as per December 2018 AIOCD-AWACS report.Let me now discuss our performance in emerging markets. Our sales in emerging markets were USD 203 million in quarter 3, up 8% year-on-year and accounting for 19% 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. Key markets contributing to the growth were Russia, Brazil, South Africa, emerging Asia and Bangladesh.I'll hand over the call to Abhay. Abhay?
Thank you, Mr. Kal. I will briefly discuss the performance highlights of our U.S. businesses. For Q3, our overall sales in the U.S. are up by 10% at USD 362 million, accounting for approximately 34% of overall sales.For the U.S. generics business, we have not seen any broad-based improvement in pricing, but at the same time, prices have stop going down, which has imparted some stability to the market. Let me now update you on developments of our speciality businesses. In October, we commercialized Ilumya in U.S., which was well received by doctors. Close to 800 doctors have prescribed this product as of date. We have also recently launched XELPROS in U.S. With these launches, we have already commercialized 3 speciality products in the U.S. in this year. We expect the launch Cequa in U.S. in Q1 next year. We also received U.S. FDA approval for alopecia some months back. Although it is a good product, we have decided not to launch this product in the U.S. since the high cost of setting up a CNS sales force will not be justified for having just one product in the bag.We continue to invest in branding and promotion of these speciality products. Although we have built different an infrastructure for the speciality business in U.S., there would be specific marketing and other cost for 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 businesses as well as give you an update on our R&D initiatives. Formulation sales in rest of the world, excluding U.S. and emerging markets, were USD 125 million in Q3, a growth of 4% over last year. ROW markets accounted for approximately 12% of Q3 revenue.We continue to focus on developing and utilizing APIs for captive consumption for benefits of vertical integration. For Q3, the external sales of our API business were at INR 426 crores, up by 15% over Q3 last year.We continue to invest in R&D for enhancing our pipeline. Consolidated R&D investment for Q3 is INR 465 crores, accounting for 6.1% of sales. Our current generic pipeline for the U.S. market includes 123 ANDAs and 6 NDAs awaiting approval with the U.S. FDA. During the quarter, we have withdrawn some unviable ANDAs. This R&D spending enable 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 market.Our overall [Technical Difficulty] was INR 1,417 crores at 6.5% of revenues. At the start of this year, we had guided for R&D spending of 8% to 9% of sales. Given the spending in the first 9 months, we expect to end the year at approximately 7% to 7.5% of sales. We expect higher R&D spending next year for the clinical trial expenses related to new indications of Ilumya and other products.With this, I would like to leave the floor open for questions. Thank you.
[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.
Sir, my question relates to the U.S. business, on a -- so we've seen a 10% growth. But if I exclude assuming Taro to be 90% U.S., we are [Technical Difficulty] 8% Y-o-Y and 2% Q-on-Q. So you mentioned about Ilumya launch. Just trying to understand how would be the takeoff be since you mentioned that 800 doctors have also started to prescribe, some color would help?
So the U.S. formulation business has grown Y-o-Y by 8%. And in that if you see the Ilumya impact, it was effectively launched in November, you just have about 1 month initial sale, which is hardly anything. So the impact of the launch of Ilumya will be seen in the quarters that are ahead of us. For Q3, it is hardly material.
Okay. And any sense on the Yonsa launch we did a couple of quarters back?
So we had a good uptake in the quarter that we launched, and as I said in the last call also that subsequently, of course, with lot of generics being available in the market, we don't expect to have the kind of sales we had in the quarter 1. So relative to the first quarter, sales are muted, however, whatever as a business scale, when we acquired the product, licensing the product rather, we are about on our estimates in achieving it.
Okay. And one more on the U.S. side. Since a lot of other companies are pulling out products and we also done the same for few of the ANDAs filed, but on the products we are in the market, are we seeing increased business since Halol is out of any FDA issue? And are we seeing increased business in the base?
That's the normal part of running operation that we always for every product that we are in market, our attempt is always to try and increase our share of the market, and that's not related to anybody exiting the market necessarily, even if it's a competitive market. So whatever products we have on market, we will be trying to grow our share, so that's the normal part of our running the business.
No, I understand that. What I'm trying to asking is did we see the market share gains during the quarter?
Specifically, for the quarter, I haven't looked at it, but from the beginning of the year to, let's say, the end of 9 months, there are quite a few products where we have tried to increase our share of market and that has happened.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
One question for Kal, that question is in the India business. I just want to understand for Sun Pharm what is covered market growing at?
Anubhav, the covered market, or the represented market, is growing in the region; of up 11%.
And you mentioned that our secondary numbers for 9 months is going at about similar to market. Both -- when do our reported numbers catch up to the represented secondary numbers that you seeing right now?
Sorry, I missed you there.
I'm simply asking that, when do our reported numbers match up to this 11% to 12%?
8%. Anubhav, I don't think that what we said the reported numbers will catch up this year, given the fact that we have taken steps to gradually reduce inventory at AML.
So is the inventory still very high at AML?
Not very high, but it's now a business requirement.
So this quarter was also impacted, because we had inventory...
No, no, no. This quarter, when we we say -- I'll consider this as a normal quarter, where I'm instead of looking at my notes also here, we have roughly about INR 2,238 crores or something what we are reported this quarter.
So Kal, I was asking that simply because we've shown a growth rate of 7%.? And I mean, 7% is like one of the, I mean, weaker numbers we see among the peers. We understand the base impact for Sun, the covered market growing at 11%, 12%. Are we -- yes, go ahead.
And as much of this year, what we say, secondary and primary as it would correlate well, this we are comparing with sales into AML last year.
No. But if AML inventory was not a issue in this quarter, I'm just trying to understand that this quarter growth rates would have been...
Anubhav, what I'm saying is, AML what I said about is a reduction that we wanted to take last quarter, we have taken. And as I've said this quarter is give or take will represent secondary demand in the market. The 7% represents a growth over what we sold into AML last year, to a degree you are not comparing like-for-like.
Okay. That's useful. Dilip, I have one question is on the Atlas deal. I just want to understand the deal little bit. So Sun Pharma under the deal were supplying products to Atlas. And over the last 4 years, Sun's liability to Atlas have reduced by more than $100 million, so that's a fact. The question I want to simply understand is that so when Sun Pharma supplies product to Atlas, does the sales fully show up in consolidated financials of Sun? Or part of it gets knocked out when Sun Pharma reports consol financials?
Well, I think you are asking me a financial question. Give me a moment to get the information. Well, I think the way in which the transaction gets covered is that the Atlas supplies to our subsidiaries, and when they sell, that gets captured into our books.
Okay. So basically, Atlas supply is intact, we sell to Atlas, Atlas supplies to another sub of Sun, that's the structure.
Yes, that's the structure.
The next question is from the line of Chirag Dagli from HDFC Asset Management.
Sir, this -- for our speciality products, does IMS reflect whatever is happening underlying in the market adequately? Or is there some nuance that you want to call out while we evaluate the IMS data because that comes on a monthly basis?
I'm going to give, what you say, nuanced answer here. Directionally speaking, IMS numbers will be broadly, right. When you go to, what you say, by therapy area, by molecule, by state, as you drill down deeper and then the, what you say, duration of the period that you are drilling down becomes shorter, the variations will become higher.
I am sorry, sir. My question was for U.S. speciality. I should have mentioned this in this first place. I'm sorry.
You said IMS, so I just...
Sir, I'm sorry, my mistake, sir. My mistake. So this for the U.S. speciality businesses. Whatever Ilumya sales or Odomzo sales that IMS is picking up, is this a reflective of what the underlying trend is or what you're seeing at the primary level is with? Or is there some nuance that you want to call out? That was the question, sir.
To be honest, when it comes to the branded business with all kinds of rebates and discounts and charges that we have, I really don't really look at IMS sales at all. So even if I want to understand a comparative, probably, I'll look at their annual reports more than IMS.
Okay. So that's not an indicator?
Yes.
What I think he is -- also, I think, you can explain possibly about Ilumya being a, what you call, a differently administered product.
So when -- for us, I mean, if you are looking at it from an Ilumya point of view, it's a medically administered product in a doctor's chamber. So IMS reflection will be even lower than had it been a pharmacy benefit product.
Okay. Understood. And the second question I had was, sir, in your opening comments, did you mention that excluding foreign exchange gain, EBITDA margins for the quarter were 24%?
Yes, yes.
Yes, that's correct.
And this is foreign exchange gain, which is reported across line item. So there will be some ForEx in other expenses also, there'd be something in other income as well, all of it put together, the net impact is this one?
Just give us a moment. So Murali, maybe you can...
So this is only ForEx movement which is in the other expenses line. There is no other impact in the movement.
The next question is from the line of Neha Manpuria from JPMorgan.
Sir, on the margin question. If I were to adjust the FX impact, it seems like we -- there hasn't been any spend on promotion or marketing despite us launching Ilumya and XELPROS in the quarter. Whereas, I think you indicated even in the last call, even in this call, we should expect marketing and launch expenses. Is there some postponement of expense? Or how does it work? I mean, do we see these expenses in the launch quarter before the launch quarter?
Abhay?
Bulk of the expenses are in the field force. And that has been now, at least, I think, 2 or 3 quarters, it has already got reflected. So now what we are spending is the variable expense on direct promotion to the doctors, which is smaller than the cost of the infrastructure. And as we go ahead and as we are launching the product, I think because of different strategies that we will adopt going ahead, I expect the expenses to move up again.
Okay. Understood. That would be more related to the product strategy other than new launches?
I'm referring specifically to Ilumya because that was part of the question that you asked.
Yes. But you will new cost once you launch Cequa.
Yes. For us -- for a different product like Cequa, yes, there will be incremental cost which will come.
But even in case of Cequa, sir, our field force is already built out, right? So again that would be more variable cost associated with the launch.
For latter half of the quarter 3, is when the entire field force was onboard. Full cost of the field force of the upheld deal will be felt in the next quarter.
Understood, understood. And sir, my second question is on emerging market. That has seen quite a strong improvement. Any specific reason for the -- is there any one-off tender, et cetera? I know you've called out a next couple of markets, but is this revenue momentum that we've seen in the quarter sustainable?
No. There is no one-offs in the numbers. Like I mentioned, few of the markets where our performance has been good is supported by ongoing, underlying demand for the products.
So it's fair to assume that this as the new base for our emerging market business?
I would say so.
The next question is from the line of Nilesh Mehta (sic) [ Nimish Mehta ] from Research Delta Advisors.
Most of them have been answered. Just on the other expense, you mentioned that we should deduct foreign exchange income, then our EBITDA margin is actually about 24%. So if I were to recalculate other expense, it seems that it is higher than the second quarter. So how you explain this because I understand second quarter relates to lumpiness because I hope...
What is the question?
If I were to adjust the other income -- other -- sorry, the other expense with the ForEx income, based on your guidance of EBITDA margin of 24%, I see the other expenses in Q3 to be higher than that in Q2, whereas in Q2, where I understand, there was lumpiness because of launches that were to happen of speciality products. So how do you explain this increased other expenses over Q2?
What we will do is that while Murali works out the details, so that we give you some more accurate answer, we can go to the next question. And in the meantime, Murali, can give you proper working.
Okay. So the other thing I just wanted to know was, I mean, when can we expect high value launches from Halol? Maybe showing broad guidelines would be helpful.
I mean, I think, our guidance includes all launches, high and low value. So we are close to the end of the year, and -- perhaps in next year's guidance, we'll include the potential new launches. So I have no ability to specifically respond to this because we generally don't talk about future products.
No, understood, but I mean, it was kind of a good product when Halol was facing the GMP issues. You mentioned that there are a few high value launches that might come after the Halol...
I think in that cause I also said, that ultimately, all the products that we will launch is covered in our guidance. So I think maybe if we can move to some other questions from somebody. Muralil, if you worked out, maybe you can?
Yes. So in regards to the other expenses this sequential quarter, if I set of the overall FX adjustment in both the quarters, the increase is attributable to the brand-related expense in U.S., and also certain S&P expenses in India, that's the reason for the major activity.
Sorry, what was the second thing you said? Certain what kind of expenses you will get?
The selling and promotion expense in India.
Okay, okay. So these are pretty much recurring items, correct, and there is no one-off there?
Yes.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Dilip, I just wanted to understand, for Ilumya, which are the new indications that you are looking for? And what might be the outlay -- R&D outlay per indication?
So I think, 2 indications for which Phase II studies are ongoing, are related to ankylosing spondylitis and psoriatic arthritis. So once the readout on the Phase II studies are there, then we will decide looking at the potential competitive scenario, whether -- what kind of investment we want to make. And that, I think, as I explained, in the next year, some of these clinical trial, not only for these, but also potentially for Odomzo and others, will come into the clinical trial.
Okay. This is very helpful.
What we haven't decided is that what we want to do for Ilumya for gastroenterology indications.
And that's something that you'll decide by next year, is it?
That is something that we will decide shortly, correct.
Okay. Dilip, I'm just curious because in case you do or choose to do more than 1 indications, then -- are we talking of $50 million to $100 million per indication sort of an outlay?
Per year you're saying?
No. Spread over the rest of...
If we do gastroenterology, then the total outlay will be in excess of $250 million, one of the gastroenterology indication, not even both.
Cumulative.
Yes, cumulative, total. Phase II, Phase III, all together, and possibly some additional safety studies because gastro indication will require much higher dosing.
Okay. And Dilip bhai, is this choice of doing or not doing dependent on how the product is doing currently in the market, feedback from doctors? Or is it something else?
No. I think, Sameer, maybe, Abhay can explain more.
It is more an -- a decision on whether we feel that the IL-23 mechanism will work and what are the chances.
And also competitive scenario...
Yes.
Competitive -- very highly competitive area.
Okay, got it, got it. And sir -- Abhay, you mentioned that you're presently targeting 800, I presume, all dermatologists? And what is the target that you want to take it up to?
Yes. I wasn't clear or the line was not clear. What I said was, around 800 doctors have started prescribing Ilumya. So you're not targeting 800, that's a very small number. But with this, my sense is around 20% of doctors, who are informed from a biologic perspective, have used Ilumya at least in 1 patient as a trial.
Okay. Okay, fair enough. Dilip, the other question is, and sorry to needle you on that, for Atlas, and that's the question that people asks, who are the people behind Atlas, in the sense that, who owns that company? And historically, what we have learned is that this company was trading in basmati rice or something. So anything that you can share...
Well, I think that, Sameer, the important issue is that even we looked at Atlas as essentially as a trading company or we'll use financing and trading as a part of the business. Their business even in our case was to buy from us and then to our subsidiary. And it was, what you call, third-party, with -- and transaction was at arm's length.
The next question is from the line of Alok Dalal from CLSA Limited.
One question on Cequa. Why is that Cequa has got pushed out to the first quarter? I would have thought that Cequa would have receive priority over XELPROS. So can you help clarify this?
Cequa, clearly, will have priority over XELPROS. But unfortunately, when we took up the batch 4 production, we had some technical issues. We have more or less identified and have a rectification plan in place and that's the reason why the launch pushed off by a quarter. Okay.
And Dilip bhai, we've not seen any major deal announced in 2018 on the speciality side. So what could be the reason? Are you looking for initial monetization of these 2 large products, and then take a fall? Or these deals are not available that suit your requirement?
I think partly both. One is that clearly, many people ask and also we also believe that if committed close to $1 billion in speciality business, it needs to start justifying that investment and produce return, which will justify that investment, so that's one issue. Second issue is that, in the context of the uncertainty related to reimbursement and pricing, especially in the U.S., I don't think the valuation truly reflects the underlying value of the product in the market. So I think we expect the market pricing to adjust to new reality over time. In the meantime, I think in last 2 calls, I have been consistently saying that we will focus on what you call investing and getting best out of the products that we've launched. Actually, if you see this year, we've launched 3 products already. With Cequa, it will make it 4. So I think, it's a big launch and big cost for any company, forget the small company like Sun Pharma in speciality business.
The next question is from the line of Aditya Khemka from DSP Mutual Fund.
Sir, 2 questions. Firstly, I missed the comment or initial comment on the U.S. formulation business Q-o-Q 10%-odd growth, was it driven by new launches, specialty or improvement in the business portfolio?
The only key product launch in quarter 3 was Ilumya. And I said that the impact of Ilumya in that quarter is very infrequent so far. Most of the business is driven by the existing products, like products launched prior to it.
Okay. So perhaps there were no key generic products launched in the third quarter, and therefore, it's all base business, which is driving the improvement?
That's correct.
Okay. And sir, secondly, if I could understand or just a request or maybe improved disclosure on the speciality and generic verticals of our business in both of the companies, which are conglomerates of the 2 divisions tend to report separately, even Dr. Reddy's in India does that. Any thoughts on providing such data in annual report or maybe in a quarterly basis?
I think we are evaluating various changes in our disclosure policy. And our plan is that from business first quarter next year onwards, whatever changes that we wish to make, we will make it effective after that, so that there is a year-on-year clarity that people will get.
Okay. That will be helpful sir. And one more, if I may. On the generic landscape, so you are seeing fair amount of inorganic consolidation happening in the generic space in regulated markets, especially U.S., partially maybe driven by a very cheap valuation of assets, which are available and partially maybe because at least on some products, you are seeing a reversal in the pricing trend. Your thoughts on that Dilip bhai?
No. I think if your question is that in the current overall economics, generic is not a very attractive business, that is a fact. It's not attractive. And it's a business where longer term, I think your cost basis and ability to manage supply chain effectively will determine your success. However, we find that it's an interesting business for us to continue to invest in, but factoring the new reality.
No. So actually my question was that your view, again, is to maintain a cash balance of like $1 billion because U.S. is counting for assets on the generic side and you want to be opportunistic. Now in the real terms that -- apparently no speciality asset or few opportunities in the speciality side to spend that cash. What would be the optimal utilization of that cash balance? Would it be to pay dividends, do buybacks or buy assets on the specialty side? I mean, I just want to understand the thought process there, that's it.
So I think, we still remain optimistic about our ability to get a fairly valued asset. And till that time, I think our current thinking is to remain liquid. So our sense is that, in a difficult market, our ability to close deals certainly with predictable certainty will give us some significant competitive advantage.
Okay, that's fair enough, sir. Buyback is not something that we are concerned during the -- due recent turmoil in the market?
You're talking about Sun?
Yes, sir.
Sun, I think, we don't have net cash. We have major cash is, I think, Sun has some significant debt, and also, money, which is outside of India.
The next question is from the line of Shashank Kumar from JM Financial.
This is Anmol Ganjoo. A couple of questions from my side. Just to understand Ilumya and the speciality philosophy better, Dilip bhai, having spent $1 billion in specialty, I know it's early days yet, just a couple of quarters, and because we keep getting conflicting data points from 3% formulaic upgrades to 800 doctors prescribing it. Do you feel more confident having allocated $1 billion worth of capital to your overall speciality initiatives in the U.S. given whatever you see at this point of time?
Maybe Abhay can answer. He can also answer them also wherever it is.
[Audio Gap] As we deliver, it could be in spot here. Clearly, I mean, there is -- look, very seriously, there is a learning involved, there is a confidence that the team can learn and deliver as we learn a new market, a speciality way of doing business, which is completely different from what we as Sun have done. If we did not had that underlying confidence in ourselves and the products that we are in, then we would not have invested that kind of money in creating the business. And now that we are there, I think we have no option, but to find ways to succeed in that market. So we will learn. We will make some mistakes, hopefully not big ones. And will try and get a fair share of a competitive market.
So I think Abhay is being very modest. My view is that in a very competitive marketplace, if we could get prescription from 800 doctors for Ilumya in a short period of time, in a market in which we compete with Novartis, with Johnson & Johnson, with Eli Lilly, and they're investing significant resources and also advertising money. I think it's a good performance. And it allows us to be confident that if we continue to push and pursue, we can do well. Whether this is the best performance, clearly, you know, and I think I have already told this people, to whoever entrusted with me is that, if, let's say, this instead of us, if Galderma would have launched the product, maybe they would have done much better than us because their relationship and their existing brand name, and also, ability to get better reimbursement from peers will help. But at some point, we will have to reach there. So there is always a starting point. And I think this is a good product to start with. I hope this answers your question.
Yes, it does. And my second question is regarding your opening remarks, where you said that this Atlas transaction will be reversed. Could you just explain it better in terms of the reversal mechanism. Is it monies which are going to come back to Sun and then the liability be sold? Any more deliberation or color on that would be helpful.
So I think what we have explained in the past, and maybe Murali, you can explain better.
So what we have explained in the past is that there will be the assignment of the rights and obligations by which the supply obligations, which is standing in the less liability side and loans advanced what we extended both will get squared off by end of the 31st past '19, that's what even we have said today, in FY '19-end both will be squared off, we're already working on it. That's what we've said.
Dilip bhai, if I heard you correctly, you also spoke about assigning some part of the liability to another subsidiary?
The assignment will happen to the subsidiary only. That's what I'm saying, the assignment will happen to the subsidiary. So instead of Atlas, our subsidy will come on the picture. So on a consorted level, there will be no impact, that's what I'm saying.
Okay. Okay, that's helpful. And my last question before I get back into the queue, Dilip bhai, given the volatile times for the business, last quarter, you helped us directionally by telling us second half is going to be better than first half. As we looked at 9 months, how do you feel about the business for the next 9 months, directionally?
So I think, our focus is to improve the basics everywhere, on cost, on efficiency, on speed, the market. So all of this, I think -- as we focus on all of these issues should help us continue to succeed. But next year guidance, I think, we will give at the end of the last -- next quarter's, what you call, Investor Call.
Current call.
Yes, current call.
The next question is from the line of Prashant Nair from Citigroup.
So my first question is on the speciality business, you'd earlier guided that you expect to breakeven on this business by fiscal '20. Is that -- given that now you have seen 9 months of this year, is that something you can still maintain?
No. I think I've also indicated that we might decide to do something significant in terms of, let's say, say advertising for Ilumya or -- because we think that, that is a benefit for longer term or we might decide to do a large clinical study, which is not factored, then that can change the economics. And it will potentially differ the breakeven, but it will create a longer-term value. So our focus is to ensure that we are able to fully leverage our assets that we have, so that we are able to, what you call, use them for maximum benefit for creating value.
Okay. Understood. And my second question is on the ForEx impact, can you also tell us how much it was for -- I mean, how much it would have adjusted margins for the 9 months?
That has -- we haven't worked out. So we will work out and maybe Nimish can give you the details. Just a moment. So we will do actual working and -- before responding, but on that cursory working, it is not appearing to be material.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
My first question is on R&D. I think in the opening remarks, Dilip bhai, you said that it's coming lower or rather, it's now 3 quarters, now it's coming lower than the 700 -- 7% to 8%, we had actually at the start of the year. Can you just tell us what is the key reason for it coming lower? Is it like timing differences in projects? Is it like, restructuring...
Yes. I think initiating clinical trials, a little bit later, forming difference in clinical studies.
So that's the key difference that you would say. And your guidance for next year is that it's going up. Have you -- are you quantifying what the number could be in the next year?
Of course, not.
We will quantify when we give the guidance.
Got it. Dilip bhai, last question on R&D is, what's the kind of split in terms of how much is now -- I was just looking at number of filings, we have now had 3, 4, 5 sequential number of filings for ANDAs. How much is coming from simple generics and commodity generics versus how much is coming from the most specialitiy stuff? If you can help us understand how that pie is for the R&D?
Generally, we don't give specific product-driven information. I think, as a potential idea, what we are seriously evaluating is whether from next year onwards, we will start giving some breakup of speciality R&D versus generic R&D. But as of today, I'm not able to respond to your question.
Okay. And the last question is on the tax rate, it's about 18%. Are we now in the realm where we have talked about in the past that the tax rates will grow -- will rise gradually? Are we there yet? Or with the kind of distribution changes that will probably be rolled out by FY '19, you think this tax rate can go up further?
Yes. I think, we've generally guided for gradual increase.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
Yes. I just -- one data point, this is for Murali. Taro declared a dividend of $500 million. Just wanted to understand how much net cash we received from that?
I don't have the exact number. But I think, it's around $375 million or $380 million, net of taxes.
So there was no new taxes, Dilip bhai, because we have 75% stake. 75% of $500 million is $375 million, so we didn't have to pay any tax at all?
Tax has to be adjusted.
Tax has to be...
Adjusted.
Adjusted.
$20 million will be the tax.
Around $20 million will be the tax.
$20 million. So we had some special -- because is there withholding tax on the $20 million, which is only 4%?
So Anubhav, there are some participative exemption in the territory where the derivatives being received.
Okay. That's not for the same -- all shareholders, basically Sun Pharma because of some exemption gets 4%, but the other shareholders will have a higher value?
That's correct.
The next question is from the line of Hansal Thacker from Lalkar Securities.
In the opening comments, you made a note on alopecia, that the company has decided not to launch it. So are you in a position to [Technical Difficulty] or it's been decided to not launch indefinitely?
Okay. Your voice is broke while you were speaking. So...
Hansal, if you're on speaker, please turn that off. We are...
Sorry. Is this any better.
Yes, thank you.
Okay. So I was saying that in the opening comments, you made a comment that alopecia has -- you decided not to launch alopecia as of now on account of high costs. I'm wondering if you are in a position to shed any time line on this at all?
So I mean, now, what I said was that Sun will not be relaunching alopecia because we are -- it's a -- it'll become a single product business unit and -- with the kind of infrastructure that we will have to create, it'll always be a cash drain. So we will be returning the license back to SPARC and it's a good product, so I'm sure they'll be able to find somebody else who can do a good job with marketing of the product.
Oh, okay. An sir, my second question would be, just to get some idea, would Sun ideally begin to in license like PICN from SPARC, since oncology is a focus area for Sun?
We're actually right now working on the business case to see whether it'll be a good product for us. SPARC will also be asking for other companies to make their own offers and trades, and whatever is in the best interest of SPARC will then be the chosen path they will take.
The next question is from the line of [ Anuj Jain ] from [ Globe Capital ].
Sir, my question is more related with the P&L. It is regarding the depreciation that has moved from INR 339-odd crore to INR 471 crore. So I just want to have -- and the finance cost, that has risen from INR 95 crores to 124. So I mean, just want to have some color on those things.
So [Technical Difficulty] there are part of our intangibles. Now amortization [Technical Difficulty]. So that is the major reason for the increase in depreciation. As per finance cost is concerned, incremental borrowings have happened, that's why you're seeing a bump up in the finance cost.
Okay. And...
Anuj, we are getting some disturbance from your line.
Now it's fine, sir.
Yes, thank you.
I just want to have one more thing, like this is a tax expense. In this quarter, we are having some 15-odd percent tax provisioning in debt expense. So what is the -- what would be the effective tax rate for the whole year? I mean, what we are working on?
So see, [Technical Difficulty] on a normalized basis, currently trending at about 18%, so we are only guiding and gradually, the tax increase.
The next question is from the line of Saion Mukherjee from Nomura.
Abhay, sir, just one question on Ilumya. You mentioned 800 doctors have over prescribed. Can you share what is the number of patients who have taken it so far? And any indication whether these are new patients or patients who have used other biologics and it hasn't worked and the majority of patients are those? Can you give some color on the nature of population which you would get in future at this point?
I think that will be a very highly competitive information that you are asking. So right now, for the sake of my own brand, I prefer not to answer that.
I think you can give some color about whether doctors are happy or...
Anecdotally, as I said, I mean, data will still take few more months to come. We're getting very good anecdotal feedback from doctors in all kinds of patients, which is a good part. We are seeing even very large body surface patients. I mean, I have heard of a patient who is 300 pounds and in 1 dose was cleared. But these are anecdotal. So I don't want you to look at that any -- but we are getting very good responses and doctors who have used seem very happy, repeats are also good, but of course, it's a short time. So again, 1 doctor who had written 1 patient, writing the second one, doesn't mean much. So I mean, I don't want to jump to any conclusions in some 2, 3 months of period of time. But we're pleased by the initial response. And like Dilip bhai also said, I think, we feel we can do far better.
Yes, that's helpful, sir. So we'll look forward to more comments. And also, sir, on Cequa, I mean, what do you think would be the impact of potential RESTASIS generic? Any color you can give, and how should we think about the landscape there?
I've said this in previous calls as well. I mean, as of now, there has been no generics which is in market. But as soon you will have generic, from a payer perspective, that will be stripped. So to that extent, access will be a challenge and the scope of a product with no genetic in market and with generics in market, will always be different.
The next question is from the line of Saket Bansal from StockAxis.
Sir, my question is on Ilumya. Since it is going to be a very competitive market, can you throw some light whether price of the product was to play an important role into it? I mean, got enrolled into it who would get subscription from the patients -- to subscribe to the patients?
We haven't kept the sized distinction with the competitor. We have, I mean, but a very, very minor one. So we haven't used price as a way to entry because when you have a good product, we didn't want to use a specific way to...
So the efficiency of, let's say, that our competitor's product what Johnson has and what Novartis have, so are we getting the clients from -- are we getting the patients from those products who have already subscribed to those products?
We have very little data. We still -- I mean, where are we getting the patients from, how much of it is bio-naïve, how much from some other competitor, very difficult to -- limited information that I have to give you any color.
Okay. So where do we -- do we have any forward statement, that is like will you want to see this [indiscernible] margin FY '20, or '21?
I'm in the midst of a war. If you're asking me forward-looking statement, I mean, first of all, I want to get out of it alive.
Okay. And can you throw some light on BromSite, sir, like I missed you initial comment and the answer?
I've answered the question to an earlier question that...
Yes, I missed that part, can you throw some...
Yes, I think, Nimish can give it to you, I think. Why don't you take that?
The next question is from the line of Sajan Didwania from Frontline Capital Service.
Congratulations for good set of numbers by the company. I just want to ask something different. I just wanted to know is the company is going for any more litigation cases like Modafinil and Protonix? And can any contingent liability can arise in this event?
I think we have a lot going on in litigation, but we are unable to comment as to risk and the probability of any contingent liabilities.
Okay. Sir, this Modafinil is over or something more can arise from that?
Yes. I mean, from our point of view, I think, it's over.
It's over. So lastly, also in the Protonix patent case?
Yes, Protonix is over.
Protonix is over and Modafinil. And new contingent as it is, you can say anything on that?
I mean, nothing that we are providing for.
The next question is from the line of Alok Dalal from CLSA.
Dilip bhai, you would have witnessed many FDA audits in 2018. Any plan that has outstanding issues that you may want to call for?
Nothing that comes to my mind. My recollection is that, almost -- not almost, all our audits last year and this year have not led to any observation. We haven't excluded the audits.
Okay. And second, Dilip bhai, how do you plan to use the Taro dividend?
So I think, part of it we will use for repaying some of our existing debt, and part we want to give for potential acquisition transaction.
We will take the last question from the line of Sameer Baisiwala from Morgan Stanley.
Abhay, my back of the envelope calculations for your competing products for Ilumya, which is tailored Cosentyx, et cetera. From gross-to-net, I get a figure of 25% to 35%. Is that something that you think is the correct benchmark for this category of products and also for Ilumya?
I don't know.
It's a very loaded question.
It is a very loaded question, and I don't even know how you have got that, so...
No. I think it's not too difficult.
Sameer, I think, your 25% to 30% number is a reasonably good number looking at the current average industry gross-to-net even for the most innovative products. So -- but I don't think that from a public data, it's possible to actually see gross-to-net because not only it's difficult, but almost impossible because you have multiple plans, and you have different gross-to-net with different plans. And many of these companies would have also overall company discounts. So I think, it's very difficult to estimate. I mean, if we can learn that from you, then it will also help Ahbay to understand how to competitive estimate, such that you can do it properly.
Sure. What I did, I mean -- and actually I have only public date to work with. So IMS captures this number, and I'm sure it's approximate based on VAC pricing, which is gross pricing and companies reported on a net pricing. So I think took the different cumulative.
I understand. It doesn't capture some of the sales, first of all, in the IMS because IMS doesn't get data from many of the clients or many of the distributors and peers. So like especially in the products, which uses a lot of speciality...
Speciality pharmacy.
They don't get to deliver. IMS numbers will be way off the mark, inaccurate at the most, yes.
Okay. Okay. But sir, just to conclude on Ilumya, so it's 5%, 10%, it could be more closer to the industry average?
Yes. I think, that you should go with because current industry average would be around 25%.
That was the last question. I now hand the conference over to Mr. Nimish Desai for closing comments.
Thank you, everybody, for being on the call. If any of your questions have remained unanswered, kindly send them across, and we'll have them answered. Thank you, and have a good day.
Thank you very much. Ladies and gentlemen, on behalf of Sun Pharmaceutical Industries Limited that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.