Alkem Laboratories Ltd (ALKEM) Q2 FY23 Earnings Concall Transcript

Alkem Laboratories Ltd (NSE:ALKEM) Q2 FY23 Earnings Concall dated Nov. 11, 2022

Corporate Participants:

Amit Kumar Khandelia — Assistant Vice President, Finance

Sandeep Singh — Managing Director

Rajesh Dubey — Chief Financial Officer and President of Finance

Amit Ghare — President, International Business

Yogesh Kaushal — President, Chronic Division

Analysts:

Saion Mukherjee — Nomura — Analyst

Tushar Manudhane — Motilal Oswal Financial Services Limited — Analyst

Kunal Randeria — Nuvama Wealth Management Limited — Analyst

Prakash Agarwal — Axis Capital — Analyst

Sumit Gupta — Motilal Oswal — Analyst

Pujan Shah — Congruence Advisers — Analyst

Nikhil Mathur — HDFC Mutual Fund — Analyst

Prashant Nair — Ambit Capital — Analyst

Sonal Gupta — L&T Mutual Fund — Analyst

Bino Pathiparampil — InCred Capital — Analyst

Madhav Marda — Fidelity International — Analyst

Harith Ahamed — Spark Capital Advisors — Analyst

Naushad Chaudhary — Aditya Birla — Analyst

Yash Tanna — Ithought PMS — Analyst

Shrikant Akolkar — Asian Markets Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Alkem Laboratories’ Q2 FY ’23 Earnings Conference Call, hosted by Motilal Oswal Financial Services. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Tushar Manudhane. Thank you. And over to you, sir.

Tushar Manudhane — Motilal Oswal Financial Services Limited — Analyst

Thank you, Mike. Welcome to 2Q FY ’23 earnings call of Alkem Laboratories. From the management side, we have Mr. Sandeep Singh, Managing Director; Mr. Rajesh Dubey, Chief Financial Officer; Mr. Amit Ghare, President, International Business; Mr. Yogesh Kaushal, President, Chronic Division; and Amit Khandelia, AVP, Finance.

Over to you, Amit, for the opening remarks.

Amit Kumar Khandelia — Assistant Vice President, Finance

Thank you, Tushar. Good evening, everyone, and thank you for joining us today for Alkem Laboratories’ Q2 FY ’23 earnings call. Earlier during the day, we have released our financial results and investor presentation, and the same are also posted on our website. Hope you had a chance to look at it. To discuss the business performance and outlook going forward, we have, on this call, the senior management team of Alkem.

Before I proceed with this call, I would like to remind everyone that this call is being recorded and the call transcript will be made available on our website as well. I would also like to add that today’s discussion may include forward-looking statements and the same may be viewed in conjunction with the risks that our business faces. At the end of this call, if any of your queries remain unanswered, please feel free to get in touch with me.

With this, I would like to hand over the call to Mr. Sandeep Singh to present the key highlights of the quarter gone by and strategy going forward. Over to you, Sandeep.

Sandeep Singh — Managing Director

Thanks, Amit. Good evening, everyone. Since we have shared all the results, I’ll keep my talk very short and spend more time on Q&A. So during quarter two, our India business delivered a strong growth of 13% year-on-year, while our US business was impacted by significant price erosion and reported a year-on-year decline of 0.9% in rupee terms. However, our year-on-year growth in US market was impacted by a significant contribution in base business from preferred Famotidine. But a point to note is, on sequential basis, US business reported a growth of 8.5%.

Our domestic franchise outperformed the Indian pharmaceutical market by 500 basis points, thereby increasing market share across all acute therapies. Our growth in anti-diabetic segment is 4 times the market growth rate on back of new launches. And I must share with you that we have had a remarkable execution on sitagliptin launch, on which Yogesh Kaushal can happily take questions later. We want to carry out this outperformance of domestic franchisees to the next — in the next half of the financial year. To add to this outperformance, a lot of cost optimization projects are underway in the organization, which will play out in the next six months to two years. Also, during the quarter, we have generated cash of INR400 crores, taking a cash position to about INR1,350 crores as on September — end of September 2022.

Thank you. With this, we’d like to open the floor for Q&A.

Questions and Answers:

 

Operator

Thank you. We will now begin the question and answer session. [Operator Instructions] We have the first question from the line of Saion Mukherjee from Nomura. Please go ahead.

Saion Mukherjee — Nomura — Analyst

Yeah. Hi. Thanks, and good evening. Sir, I would like you to talk about the cost pressures. The reason — I mean, you mentioned last quarter of how things have moved. It looks like the cost pressures are still very high. It is a seasonally strong quarter and the EBITDA margin that was recorded is probably the lowest we’ve seen in the past many years for the second quarter. So just want to understand, is there a cyclical component here or there are structurally these costs are higher, how should we think about margin? And in that context, the guidance that you’ve given for the EBITDA margin for the full year, where do we stand? Thanks.

Sandeep Singh — Managing Director

Yeah. Thanks, Saion. I’ll just answer some part of it and I’ll give it to Mr. Dubey our CFO, for some — putting more details on it. So, I think, first things first, Saion, I think you’re right. The guidance which we gave off, I think close to 16% for this financial year, might be challenging looking at the scenarios. So I think there are multiple reasons for compressed gross margin. I think one of them is that API price is high. One of the reasons is also the price erosions we have in US. So, I think, cost is not going up further, it has stabilized. But I will let Mr. Dubey throw some more light on that.

Rajesh Dubey — Chief Financial Officer and President of Finance

Yeah. Thank you, Sandeep Ji. Saion, I think, you want me to stick to quarter two or you want me to have YTD figures? So, in fact, I will start with quarter and as Managing Director, he rightly said, yes, of course, impact of material cost is there, but that is well compensated by our favorable mix. Actual hit in our gross margin, which is 4.7% in the quarter, more or less it has come totally from price erosion what we have in the US market. So price erosion impact on gross margin is to the tune of 4.8%. And as Managing Director, he already told you, our guidance of 16.5% — 16% to 16.5%, we feel — if this situation is going to continue, then it will be difficult for us to be there and there could be minor side to the extent of 100 basis point or something like that.

Saion Mukherjee — Nomura — Analyst

Sir, just — if I can ask for some elaborations if you were to — so you were mentioning price erosion in the US, but if you look at your domestic business, how has the profitability or margin for the domestic business moved? Is there a pressure in the domestic as well?

Rajesh Dubey — Chief Financial Officer and President of Finance

Sandeep ji, I’m taking this.

Sandeep Singh — Managing Director

Yes.

Rajesh Dubey — Chief Financial Officer and President of Finance

Actually in domestic business, on overall basis, if you see there is no pressure on the margin. So there we have a higher material cost, which is having impact somewhere close to 1.7%, 1.8%, but that is well compensated by a better product mix. So that gets compensated and in fact, there is no negative impact on our domestic margin. So, as I said, this complete 4.7% downside we see in gross margin is on account of price erosion in USA.

Saion Mukherjee — Nomura — Analyst

Right. So what you’re saying, sir, is that it seems to be structural here. So we are sort of guiding towards somewhat lower margins in the years to come, is that right?

Sandeep Singh — Managing Director

No, no. I’ll comment here. Sandeep here. So, Saion, no, this is only for this financial year. We have identified some good cost-cutting parameters, which I think I briefly just kind of touched upon in my opening speech, which we will implement over the next one year a large part of it, if not all of it. We see that our EBITDA margins will go up next year. There are some very concrete steps, Saion. So for some of the things, that is — it’s too early to say. But in the next two, three months itself you’ll hear them. Some networking optimization, some things with our plan restructuring, and things like that. So very concrete steps — very, very close to kind of triggering it. The only reason we are not kind of elaborating is because it has not happened yet. But we understand and we acknowledge that our margins have to improve and we are very close to kind of implementing it. Yeah.

Saion Mukherjee — Nomura — Analyst

Okay. And do you want to quantify that number, Sandeep, in terms of the..

Sandeep Singh — Managing Director

So we have identified around INR200 crores to INR250 crores of cost savings, which are doable.

Saion Mukherjee — Nomura — Analyst

Okay. Thank you.

Sandeep Singh — Managing Director

Which are doable in the next 12 months. Yeah.

Saion Mukherjee — Nomura — Analyst

Okay. Thanks. I’ll join back. Thanks.

Sandeep Singh — Managing Director

Thank you, sir.

Operator

Thank you. We have the next question from the line of Kunal Randeria from Nuvama. Please go ahead.

Kunal Randeria — Nuvama Wealth Management Limited — Analyst

Good evening, everyone. So, Sandeep, US has been a big drag now for a business that is 25% of revenue. I mean, it’s having a — playing a havoc on gross margins and it seems that new launches aren’t compensating for price erosion. So, I mean, what’s going wrong over here? Aren’t you getting approvals on time, or it’s just that even the approvals that you are getting are highly competitive? And how do you sort of plan to — have you enough ammunition in your pipeline for the next six to 12 months to sort of at least stop this corrosion?

Sandeep Singh — Managing Director

So, I think, Amit Ghare will come on the details, but I’ll just quickly say that see, I think next six to 12 months, we — I mean, don’t go by this 30% price erosion this quarter, which we had some reasons, it somehow didn’t happen every quarter and Mr. Amit can review on that. So that’s point number one. Second, honestly, next six to 12 months, we don’t see anything dramatically changing that something can kind of turn the tables. It’s not got to do with approvals, it’s just the market conditions and it’s just what it is playing for most of the guys. So, Amit, do you want to comment, please?

Amit Ghare — President, International Business

[Technical Issues] factored in for the revenue perspectives, as we can see year-on-year, our degrowth is 1%. So [Technical Issues]

Operator

Sorry to interrupt you, sir. Your audio is not coming very clear, sir. So if you can come closer to the mic once.

Amit Ghare — President, International Business

Okay. Are you able to hear me clearly now, or is it still bad?

Operator

It’s still muffled, sir.

Amit Ghare — President, International Business

[Technical Issues] Are you able to hear me now?

Operator

Yes. This is much better, sir.

Amit Ghare — President, International Business

Okay. So what I’m saying is that, the degrowth of erosion for has been 1% [Technical Issues] despite the last price erosion, we’ve been able to compensate the revenue side of it, for new markets, our market share increases [Technical Issues] we are doing all the cost-cutting measures that they are trying to do. We hope that the business or a price erosion will deceive and this will grow and the margin will grow as well in the US side.

Kunal Randeria — Nuvama Wealth Management Limited — Analyst

Fair enough. So I can — I mean, I understand this theoretically. But the thing is, I mean, other companies haven’t faced this kind of price erosion on a consistent basis, right? So it’s just that for lot of companies where the new products that come in and tend to just help and cover up whatever has been happening in the base portfolio. So, I mean, my question is, maybe there were some approvals you would have penciled in, they’re not coming or if the competition is as expected? And just add some more color on the kind of, let’s say, pipeline that you have in the next 12 months or so.

Sandeep Singh — Managing Director

Really pipeline, I don’t want to comment on. But, obviously, each company always looks upon two things to come through and we are no different. And we hope that some of those things will come through for us, which will then obviously help us going forward. So you’re absolutely right in a way we have to see how our pipeline does. Do we get our approvals on time? Do we get our launches on time? And if we do, that certainly helps overall without a doubt.

Kunal Randeria — Nuvama Wealth Management Limited — Analyst

Sure. My second question is on the domestic business. So, maybe, if you can just highlight on how different divisions performed in the quarter? I mean, has — maybe pointers as state generic done exceptionally well or all three divisions have grown in double digits? Some color would be helpful.

Sandeep Singh — Managing Director

Mr. Yogesh, if you can take this, it would be great.

Yogesh Kaushal — President, Chronic Division

Okay. So particularly some of the divisions in acute front, which are gastro-dependent. Because in acute, COVID last year extended till almost — previously COVID, then Omicron, and then Dengue. So last year if you see, there was very heavy sales of anti-infectives, pain, and multivitamins, and those are muted. So those division which has this portfolio in acute, they did reasonably okay, they have just sustained the base or have grown by a single digit. But the divisions in acute, which are based on orthopedics or gastrointestinal, they have delivered a very healthy double-digit growth. So this is on acute front. On chronic front, our — barring cardiology, almost all divisions — this I’m telling you internal number, not IQVIA number. So barring our cardiology, diabetology, dermatology, CNS, and neuro, all have delivered a very healthy double-digit growth in the first and the second quarter both. So, overall, as a chronic, there is a reason we are showing around 19% to 20% growth. So this is how the division-wise summary or therapy-wise summary is.

Kunal Randeria — Nuvama Wealth Management Limited — Analyst

That’s helpful. And just one more, if I can. On the trade generics market, several of your peers have now started to enter this space. So what is it about this market at this stage that people are so interested in expanding their presence here?

Yogesh Kaushal — President, Chronic Division

Sandeep?

Sandeep Singh — Managing Director

Yeah, Yogesh, you can take that, sir.

Yogesh Kaushal — President, Chronic Division

One second. So, see, we have been consistently saying this for a couple of quarters and enforced by Mr. Sandeep Singh as well, our Managing Director, see, there are certain core competencies in generic business as well. So whether it is distribution relationship, team penetration and various other competencies, which are required. So while some of the new entrants will come, but those core competencies we have, we are very confident that the traditionally the way generic has delivered, they will continue to do so. This year you are seeing slight muted growth. This is because of very heavy base on last year.

Sandeep Singh — Managing Director

Yogesh?

Yogesh Kaushal — President, Chronic Division

Yeah.

Sandeep Singh — Managing Director

His question was, why other people coming in? What’s in that market that’s driving that?

Kunal Randeria — Nuvama Wealth Management Limited — Analyst

Yeah.

Yogesh Kaushal — President, Chronic Division

Okay. So, I’m — sorry, I misunderstood the question. So, see, the generic will — see, now with so many stores coming up and being promoted by government, so there may be those purchase pattern which are changing and there are options being given to patients that they can change the brands and ask chemist to give a cheaper version. So that is one way. Second — that is one reason. Second, of course, is, generic, generally, you will see operates in those market where the branded either are not reachable or there is no overlap of branded, particularly in our organization. So generic also reach in those class Tier 3 or Tier 4 towns, where the branded business may not go and that’s the reason that many players now — not many, quite a few are now just entering the generic business. These are the two major reasons.

Kunal Randeria — Nuvama Wealth Management Limited — Analyst

Thank you very much. And all the best.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Prakash Agarwal — Axis Capital — Analyst

Yeah. Thanks, and good evening to all. Just trying to understand again this better. So our India share went up. Last time, we had said that the price hike benefit will flow through from Q2 onwards, that has not flown fully in Q1, and we had some one-off expenses which was launch expenses relating to sitagliptin plus there were ForEx, one-off ForEx which was unlikely to recur. So all these four, five things have — have they still played out? And, obviously, you’ve seen margin improvement, but not to that extent which was expected. So are these launch expenses continuing and ForEx expenses continue?

Sandeep Singh — Managing Director

Mr. Dubey, you can take that.

Rajesh Dubey — Chief Financial Officer and President of Finance

Yeah. Prakash, actually, yes, we discussed in our quarter one call and there we did not see complete impact of our price increases in quarter one. You are very right. But if you see quarter two, our growth NRV component is 5.3% out of our total growth, about 10% growth we have shown. So that is biggest component. So it is a clear indication in fact of price increases definitely coming in. And, I think, all these three levers; NRV, new launches and volume; is a reasonably good number in quarter two. So we have very clear indication in fact price increases coming in.

Yes. As far as material cost impact is there, obviously, we discussed in our quarter one call also, some of the material we already consumed in quarter one and something is going to follow in quarter two and that’s exactly happened. That is the reason impacting our gross margin. And I’m not very clear about your second question, Prakash.

Prakash Agarwal — Axis Capital — Analyst

So launch expenses, which was related to sitagliptin, so if you see, Q1, there was a spike in cost. I think, it was mentioned that it was due to new launches in India market. So with that kind of cost, it would have continued, is what I’m asking? And there was a ForEx element also, so is there a ForEx element sitting in other expenses for this quarter also?

Rajesh Dubey — Chief Financial Officer and President of Finance

ForEx losses, actually that was mainly from Chile, but it’s unlike quarter one. Quarter one it was a bigger component. It is small in quarter two. As far as launch expenses you referred, I think that is going as per our business plan only. Nothing abnormal. So that’s already factored in our estimate and nothing abnormal we have noticed.

Prakash Agarwal — Axis Capital — Analyst

Okay. And with respect to input prices that you mentioned, so since our 40% of the business is anti-infective, antibiotics, et cetera, so penicillin prices remain at pretty elevated levels. This one of the few things which have not come down, so is that a direct correlation with our raw material prices or is there more to it?

Rajesh Dubey — Chief Financial Officer and President of Finance

Yeah. You are very right. Actually most of anti-infective, we have not seen pre-COVID level of pricing coming to that level. So you are very right. More or less, all anti-infective prices is unlike November, December of last year, but it has not come back. So — and whatever material we procured in November, December and January, sale has happened against that consumption. So that is another reason. But I think, going forward, this 2% impact on gross margin, it is going to come down, definitely it is going to come down and then are we positive, we are going to have continued going forward. So we are going to have advantage there.

Prakash Agarwal — Axis Capital — Analyst

Okay. And, lastly, for Sandeep. On sitagliptin, I mean, you are among the top five players, so congratulations there. But what is the growth plan ahead in terms of diabetes franchise? Are we going for more molecules in a similar way? So we did top three in one of the CNS products, now sitagliptin, so what is the growth plan here?

Sandeep Singh — Managing Director

Yeah. Growth plan, things have to go off-patent for us to launch, because we are not the top in-licenser for lot of reasons and we can get into it. So our growth plan will be linked with expiry of innovative brands and without taking names there is one big one coming up in January, February. It’s not diabetes, but it is cardiovascular. So, I think, we’ll have to play the game. Ultimately, we’re a generic company, so we are bound by whenever drugs go generic. And I would — maybe, Yogesh, wants to comment there. I think we are the number one or two in generics if you forget Sun Pharma and the Innovator. What do you think, Yogesh? Are we top five or we’re better?

Yogesh Kaushal — President, Chronic Division

No, sir. You are perfectly right, Sandeep. In generic market, we are number one. We have outperformed all the top diabetes players in the industry. And for last three months, we are sustaining number one position in both the SKUs of sitagliptin.

Sandeep Singh — Managing Director

In volume, I guess, Yogesh?

Yogesh Kaushal — President, Chronic Division

Yeah.

Sandeep Singh — Managing Director

So to be clear to them, so that they are..

Yogesh Kaushal — President, Chronic Division

Yeah. Both, Sandeep.

Sandeep Singh — Managing Director

Okay, wonderful.

Rajesh Dubey — Chief Financial Officer and President of Finance

In sita, in both, we are leading the market amongst generics.

Prakash Agarwal — Axis Capital — Analyst

Okay. Got it. And..

Sandeep Singh — Managing Director

So, Prakash, you are driven by the market fundamentals, I mean. We don’t have anything out of the blue, which would — maybe you can execute better and we’ll have to fight it out.

Prakash Agarwal — Axis Capital — Analyst

Understood. And, lastly, on the M&A side, given the cash generation is still very strong, I keep on asking this, but are you seeing actively some of the acquisitions which is strategically fit into your portfolio or you are —

Sandeep Singh — Managing Director

I think, you have been consistently asking and my answer also remains consistently the same. Not much, Prakash. We will do it things organically. Even if you do something, it’ll be very kind of small compared to what others are doing.

Prakash Agarwal — Axis Capital — Analyst

Okay, got it. Thank you.

Sandeep Singh — Managing Director

At least in the next possible future.

Prakash Agarwal — Axis Capital — Analyst

Understood.

Sandeep Singh — Managing Director

Thank you so much. Thank you, Prakash.

Prakash Agarwal — Axis Capital — Analyst

Okay. Thank you. All the best.

Operator

Thank you. We have the next question from the line of Sumit Gupta from Motilal Oswal. Please go ahead.

Sumit Gupta — Motilal Oswal — Analyst

Yeah. Hi. thank you for the opportunity. I have just one question on like the higher — other expenses, which are growing at a much higher-rate than the revenue (indecipherable) if you can comment on this?

Sandeep Singh — Managing Director

Yeah, Mr. Dubey please take it.

Rajesh Dubey — Chief Financial Officer and President of Finance

Yeah, I think, Sumit, you’re looking for or comment on other expenses?

Sumit Gupta — Motilal Oswal — Analyst

Yes, sir.

Rajesh Dubey — Chief Financial Officer and President of Finance

Yeah, so I’ve got expenses as you know other expense, as you know, it includes everything and if you take marketing expenses, plant expenses, corporate overhead and most of the R&D expenses, everything it goes in other expenses. So, I think you’d like to know why our other expenses they are on higher side, last year’s quarter two it was 22.3% and now it is 24.3%, so actually some of the marketing expenses it was on higher side and then, last year, it was it was very close to COVID era and traveling they have not normalized, 80% to 85% only travelling it has happened, but this time since environment is clear and all marketing activities are happening, so both these marketing expenses as well as traveling expenses, these are on higher side, so that’s why it is 24.3%.

Generally our other expenses it’s in the range of 23.5% to 24%, Sumit, so we are not very far off. Yes, if you compare with last year’s quarter two, definitely it will look little bit on the higher side but it is within range.

Sumit Gupta — Motilal Oswal — Analyst

Okay, sir. So going forward also, it will be maintained in this range, 23.5% to 24%?

Rajesh Dubey — Chief Financial Officer and President of Finance

Yeah, generally it is 23% to 24% kind of. Cool. Okay. Thank you, sir.

Operator

Thank you. We have the next question from the line of Pujan Shah from Congruence Advisers. Please good ahead.

Pujan Shah — Congruence Advisers — Analyst

Sir, my three questions would — can we just scatter [indecipherable] bifurcation for specific therapies, like for chronic and active or could we just get the — possible?

Sandeep Singh — Managing Director

Sorry, what is this?

Pujan Shah — Congruence Advisers — Analyst

Bifurcation for chronic and acute, both.

Sandeep Singh — Managing Director

This is — see, we are 84% – 16%, so our acute is 84% in chronic 16%.

Pujan Shah — Congruence Advisers — Analyst

Okay and sir could you just get us the gross margin for different geographies?

Sandeep Singh — Managing Director

You mean to say in domestic business?

Pujan Shah — Congruence Advisers — Analyst

No, no, I’m talking about all geographies like, India, Australia, U.S., and yeah, Australia and [Indecipherable] so.

Sandeep Singh — Managing Director

Yeah, I understood and actually in fact we are not talking gross margin on geography wise but definitely each business is different, so gross margin has to be different to respect to geographies.

Pujan Shah — Congruence Advisers — Analyst

Okay, okay, got it. Thank you, sir.

Operator

Thank you. We have the next question from the line of Nikhil Mathur from HDFC Mutual Fund. Please go ahead.

Nikhil Mathur — HDFC Mutual Fund — Analyst

My first question is on procurement. What is the dependence on Chinese Companies for raw material procurement? What is the percentage looking like today?

Sandeep Singh — Managing Director

Mr. Dubey you can take that, sir.

Rajesh Dubey — Chief Financial Officer and President of Finance

Yeah, Nikhil, our direct import from China or Chinese supplier, it is not much, it is in the tune of 10% to 12% but yes, whatever API we purchase, our API suppliers, they have intermediate dependency on Chinese suppliers. So indirectly, if you see, somewhere around 65% to 70% of our API is getting influenced because of China.

Nikhil Mathur — HDFC Mutual Fund — Analyst

Right. So. I mean we are not fully sure how things are panning out in China, when the lockdowns will open, so are you in touch with our vendors on a derisking, kind of a strategy, are they also equally focused on trying to have multiple sources? Are you seeing on the ground that there are many other chemical companies based in India, who are stepping up investments into intermediate with that are relevant for your portfolio?

Rajesh Dubey — Chief Financial Officer and President of Finance

Yes. I think that is happening but it takes time to set-up capex, it’s already started happening last year, but it’s going to take a lot of time and there will always be Chinese dependency. We’ll never be out of it very honest. But we will get better.

Nikhil Mathur — HDFC Mutual Fund — Analyst

Okay. So nothing disruptive, things will steadily improve but it’s just not going to change a hell lot in the next one or two years.

Rajesh Dubey — Chief Financial Officer and President of Finance

Yeah. I think so, but these are very in — we cant ponder much about it, we don’t know, honestly.

Nikhil Mathur — HDFC Mutual Fund — Analyst

Sure. Thank you. Thank you. Second question, can you help me, what is the total MR strength today and how many MRs have been added in the most recent quarters, let’s say in the last two quarters?

Sandeep Singh — Managing Director

Yogesh, you can take that, sir. the net additions please if you can give that.

Yogesh Kaushal — President, Chronic Division

So, we have around 11,000 representatives across the company and we have added around 1,000 this year as well. Last month. Last few months, 1000. Not this financial year, but last 12 months.

Nikhil Mathur — HDFC Mutual Fund — Analyst

1000, okay. And sir can you also, help me with what is the fully-loaded cost of medical rep looking like? I mean, including both fixed and variable payouts is it more like large 12 lakh, 14 lakh, 15 lakh how much lower than that, some indication here?

Sandeep Singh — Managing Director

Yeah, Yogesh?

Yogesh Kaushal — President, Chronic Division

Yeah, yeah, Sandeep, so, generally our loaded cost means if I include only the CTC of a representative plus his operational cost, I exclude the marketing cost which the reps have, so CTC plus his operation cost, tours and all would be average, I would say will be roughly around INR6.5lakh to INR7lakh.

Nikhil Mathur — HDFC Mutual Fund — Analyst

INR6.5lakh to INR7lakh. Okay, so we are looking at a INR70 crores kind of a drag, basis of these recent MR additions, which obviously they will be given at some point and then there was some contributing. So, is that the right way of looking at it?

Yogesh Kaushal — President, Chronic Division

Now let me — can you repeat? Because your voice is patchy still, I am not able to hear you properly. Can you repeat?

Nikhil Mathur — HDFC Mutual Fund — Analyst

Is my voice clear now?

Yogesh Kaushal — President, Chronic Division

Go ahead, I will try to understand your question. You’re not so clear but please repeat.

Nikhil Mathur — HDFC Mutual Fund — Analyst

Okay. So my question is that, whatever these MRs have been added, last last six months or so, last one year or so, they wouldn’t have very broken even by now, right? I mean it takes a bit of time, one, one and half, two years, so to that extent that is the level of cost that is still sitting in the P&L in the last couple of quarters at least?

Yogesh Kaushal — President, Chronic Division

Yeah, because to reach a — normally what we do in the businesses is, whenever we hire such large teams, we don’t give them completely new brands. So there is product rationalization also which happens but of course, this breakeven takes time. So any reps which we have, 1,000-odd reps, will take at least two and half, three years to reach a breakeven.

Nikhil Mathur — HDFC Mutual Fund — Analyst

Understood. And sir, are there any competitive forces at play which is pushing up the medical rep costs as well, because when we hear from many of your peers, most, I mean most of the companies are in a field force expansion mode after almost one and a half, two years, so, is that also dragging the profitability of it?

Yogesh Kaushal — President, Chronic Division

Very few on a case-to-case basis we do address but generally, we stay to the — we stick to the broad guidelines in the Company of hiring. So very rare cases where we succumb to those requirements. But we stick to guidelines of the organization.

Nikhil Mathur — HDFC Mutual Fund — Analyst

Sure. And sir, one final question if I may, what is the mix between metros and non-metro cities for Alkem’s domestic business today? What was it, let’s say, four years, five years back and are we in a situation where new-age molecules, especially in diabetes, which are going off-patent, a company like Alkem, which might be having lesser share of metro, more share in non-metros, will possibly be in a better position to commercialize such products at a pan-India level, irrespective of whether there is legacy product presence or not?

Rajesh Dubey — Chief Financial Officer and President of Finance

So see acute will always have a high salience towards non-metro towns because of antibiotics been written by largely GPs and non MMBS, so they will always have a bigger field salience in non-metros but our metro coverage by acute also is at par with competition. So there is no less but yes, because of our demography, we will always have more reps in acute working in non-metro towns.

Coming to chronic, by strategy, we have chosen to strengthen metro and Class I towns. So we have a very niche marketing approach to the specialist, so metro and Class I in chronic, I don’t have accurate data but roughly around 60%, 65% team would be in a metro and a Class I town.

And your third question? Yeah, please, yeah, tell me?

Nikhil Mathur — HDFC Mutual Fund — Analyst

And so, sir, basically what I’m trying to understand is that is there a market still — is the market being formed for product [Indecipherable] in the non-metros as well or the market formation for these products in these markets it will take some time?

Yogesh Kaushal — President, Chronic Division

See, to penetrate Ceta and all current molecules you know, largely are sold up to Class I town only, or maybe Class II but we don’t know. See diabetes has, you there is no study which says that it will restrict only to metro and non-metro, so it will go below everywhere. But yes, for doctors, specialists are largely in metros and Class I towns, if you go below, there are more generalists, so they will still continue to right older anti-diabetic drugs, but metro and Class I will shift to the current guidelines, EBA guidelines, which talk about Dapagliflozin and Sitagliptin, this will become core in these, at least these towns, up to Class I towns.

Nikhil Mathur — HDFC Mutual Fund — Analyst

Sure sir, thank you so much for answering my question and all the best.

Yogesh Kaushal — President, Chronic Division

Sure.

Operator

Thank you. Participants are requested to kindly restrict your questions to one per participant, as there are a number of members in the queue. We have the next question from the line of Prashant Nair from Ambit Capital. Please go ahead.

Prashant Nair — Ambit Capital — Analyst

Yeah, good evening. So can you — there is a sense of what is the quarterly spend on your biosimilars initiatives and is this likely to increase from here or would this be the current — would this be the steady state for some time?

Sandeep Singh — Managing Director

Mr. Dubey, you can take that.

Rajesh Dubey — Chief Financial Officer and President of Finance

Yes, sir. Yeah, so biosimilar, I think you are more interested in biosimilar R&D or composite?

Prashant Nair — Ambit Capital — Analyst

No, composite. If you will [Indecipherable].

Rajesh Dubey — Chief Financial Officer and President of Finance

Yeah, so annually, we have total budget for biosimilar, somewhere in the range of INR100 crore to INR140 crores total opex, and revenues somewhere close to INR160 crore kind of. So out of that, R&D is somewhere close to INR100 crore.

Prashant Nair — Ambit Capital — Analyst

Okay and is this likely to be the range going-forward as well or do we see some pickup?

Rajesh Dubey — Chief Financial Officer and President of Finance

It is as per our business plan only, so —

Sandeep Singh — Managing Director

No, going forward they asking, so going forward no, it will be steady, not picking up.

Prashant Nair — Ambit Capital — Analyst

All right. And a question on the cost-reduction initiatives you mentioned earlier, just if you could give us a sense whether — so these costs that you are reducing would relate to any specific business like the U.S. or would it be at an overall corporate level? How do we think about it?

Sandeep Singh — Managing Director

Yeah, I’ll talk about it and Mr. Dubey you can please add on if I forgot something. So, these are for international business as well as overall corporate. So some of I think levers and the procurement, some of the levers are in supply-chain, let’s say inventory days reduction and some of — a large part of it is also in — in savings in plant overheads and R&D expenditure. So pretty much touching base everywhere.

Prashant Nair — Ambit Capital — Analyst

Okay great, thanks a lot. That’s it from.

Sandeep Singh — Managing Director

Thank you.

Operator

Thank you. We have the next question is from the line of Sonal Gupta from L&T Mutual Fund. Please go ahead.

Sonal Gupta — L&T Mutual Fund — Analyst

Hi. Sorry, good afternoon and good evening and thanks for taking my question. So just on. I mean, I’m just trying to understand, right like, on the US business given the — I mean what is your longer-term outlook, I understand that you’re still optimistic but I mean, clearly some of these cost-cutting measures that you’ve outlined seem to pertain to that as well and I mean like is this, just trying to understand what is the longer-term strategy is it going to be a calibrated investment-based on the sort of revenue throughput or how are you looking at it?

Sandeep Singh — Managing Director

Sure. So I’ll take this, and Amit you can add-on to this at some point. So you’re, right. I mean most of the cost initiatives are, let’s say for international and when I said R&D and things like that we are calibrating our investments to U.S. So, we’re kind of controlling the capital allocation we do there, hoping that this can become slightly better in couple of years. And longer-term outlook, see again, to be honest, no one knows, this is going through real tough times for the entire industry. If things don’t improve in some time, then of course, we could again discuss what needs to be done but as of now, we are going aggressive on cost-cutting and allocating lesser capital.

Sonal Gupta — L&T Mutual Fund — Analyst

And so even if so, does this mean that even at current level of revenue, do you expect that your U.S. profitability will improve by next year?

Sandeep Singh — Managing Director

It will improve, it is certainly improve but is it like improving enough to kind of justify how much capital we put in a bigger question, but certainly it will improve, because I think and I would — it does sound funny in hindsight but we do think we have hit rock-bottom. I hope I’m correct but so it’ll certainly improve from now but could it get worse? We don’t know.

Sonal Gupta — L&T Mutual Fund — Analyst

Got it and just related to that, so what is the R&D spend you are looking at now for this year and next year?

Sandeep Singh — Managing Director

I think same as we said last time, in terms of kind of percentage — so because we have biosimilars and all that as well, so even if we are controlling it as a same percentage, means we are getting back on traditional U.S. investments, right, in generics, so yeah.

Sonal Gupta — L&T Mutual Fund — Analyst

Got it. So it will remain. I think in the 5% to 6% range?

Sandeep Singh — Managing Director

Yes, correct. That’s a safe estimate, absolutely.

Sonal Gupta — L&T Mutual Fund — Analyst

Got it, great thanks. I’ll join back again.

Operator

Thank you. We have the next question from the line of Bino P from InCred Capital. Please go ahead. Hi, just two questions. You’ve launched generic products with exclusivity in the U.S., did it benefit in any material way in the U.S. business this quarter?

Sandeep Singh — Managing Director

Amit can you take that please?

Amit Kumar Khandelia — Assistant Vice President, Finance

Sure. We haven’t had any exclusive, exclusive launch in the U.S. this quarter. We’ve had a shared exclusivity launch. Any launch. any launch which was either in the exclusivity period, of course, if are exclusive the only person, the only generic in the market, it will definitely help. And even those where you are within the 180 days and you’ve launched, which is a shared exclusivity with other generics, generally the margins tend to be better. And that’s a very generic statement but that’s true. Any new launches generally come at a better gross margin than the existing business, but then the downside, they also go through a rapid price revision.

Bino Pathiparampil — InCred Capital — Analyst

Understood. Sir, in this current quarter number, is it a — is it a significant number?

Amit Kumar Khandelia — Assistant Vice President, Finance

We launched, yeah, it is not a significant number from a revenue or from a margin perspective for that particular product.

Bino Pathiparampil — InCred Capital — Analyst

Okay and one just follow-up. There is generic supreb[phonetic] which you have filed in the US and the exclusivity is getting over in another three, four months, do you — are you in line to launch right after the exclusivity period?

Amit Kumar Khandelia — Assistant Vice President, Finance

We are hoping, but I don’t want to comment anything more than that at this time.

Bino Pathiparampil — InCred Capital — Analyst

Okay, thank you.

Operator

Thank you we have the next question from the line of Madhav Marda from Fidelity. Please go ahead.

Madhav Marda — Fidelity International — Analyst

Hi, good evening. Thank you so much for your time. Just wanted to understand that given we are — seem to be holding back on the capital allocation towards the U.S. business, would it be fair to say that earlier, we were sort of expecting 10%, 12% growth, given the price erosion is us holding back on capital allocation there, growth might not be that much, it could be a bit slower, is that a fair assumption to make at this point?

Sandeep Singh — Managing Director

Amit, if you could take that, sir?

Amit Kumar Khandelia — Assistant Vice President, Finance

Fair assumption, obviously, if we hold back the R&D investment, it definitely will have some impact. Now our task obviously is to see how we can do smarter investment so that we can still expect a revenue that — revenue growth that we expected and margin growth as well.

Madhav Marda — Fidelity International — Analyst

Understood. Okay, thank you.

Operator

Thank you. We have the next question from the line of Harith Ahamed from Spark Capital. Please go ahead.

Harith Ahamed — Spark Capital Advisors — Analyst

Hi. Thanks for the opportunity. On the generic product launch, again, given that it’s just two generic player market currently, our market share that I can see is that in single digits, it seems to be on the lower side and the innovator seems to be holding on to close to 80% market share there. So anything that is unique about this product or anything that is challenging about this particular launch that our market share hasn’t really ramped-up the way we expect in our new generics market?

Sandeep Singh — Managing Director

Amit?

Amit Kumar Khandelia — Assistant Vice President, Finance

I’m sorry, I didn’t get the question, was that for a particular product that you mean?

Harith Ahamed — Spark Capital Advisors — Analyst

Yes, it was about the generic version of Pradaxa, where we have been in the market for almost three months. The question is about the market reach.

Amit Kumar Khandelia — Assistant Vice President, Finance

Sure we have — we’ve done sort of a limited launch on Pradaxa dabigatran and to some extent, it’s not become [Indecipherable] it is because of our supply-chain. We are not able to get our raw materials and I don’t want to elaborate anything further there. So whatever we are able to manufacture and supply, we are able to sell that in the market, obviously. There are only two generics in the market as you know. So we’re doing the best we can and we are working on our supply-chain.

Harith Ahamed — Spark Capital Advisors — Analyst

Got it and on our biosimilar, Denosumab, I see that we have a Phase I trial going on for this product. so will we be looking for a partner for this product before we get into Phase-III and if you can share some timelines around this product, particularly from a U.S. standpoint?

Sandeep Singh — Managing Director

Yeah I’ll just take that and the if need be, Amit will come in. See, we, right now we’re not looking for any partner we believe by 2026, whatever requirements we have our field force and all that will go off, in a way, and we are not waiting to do phase III to find a partner. We kind of have to run Phase III, Phase I, both parallelly, and we are kind of doing that already.

Harith Ahamed — Spark Capital Advisors — Analyst

Okay. All right. thanks for that. That’s helpful.

Operator

Thank you. W e have the next question from the line of Naushad Chaudhary from Aditya Birla. Please go ahead.

Naushad Chaudhary — Aditya Birla — Analyst

Hi, thanks for the opportunity. First clarification on the margin side sir. You indicated from the earlier guidance of 3.5% you indicated a few BPS, 100, 200 BPS down for a full year, you maintained that guidance, which comes to around 14.5% to 15%. So that implies around 17, 18 kind of percentage kind of margin in the second-half and despite second-half being a seasonally weak for us, can you clarify on that, do we still maintain that 14.5% or 15%, or was that for the second-half?

Sandeep Singh — Managing Director

No, I think we mentioned for overall, Mr. Dubey, I think, what do you think?

Rajesh Dubey — Chief Financial Officer and President of Finance

So, for overall, on overall basis, we are going to be somewhere close to 15%, 15.5% and then obviously, second-half our EBITDA margin is going to be on higher side. So if you see first half, our EBITDA margin is 11.6% and for the second-half, we expect our EBITDA margin to be much more higher, which is ultimately going to land somewhere close to 15%, 15.5%.

Naushad Chaudhary — Aditya Birla — Analyst

And that much more higher is only because of that cost initiative we have taken or is there something else which would lead to, because –?

Rajesh Dubey — Chief Financial Officer and President of Finance

It’s on overall basis actually, complete impact of price increase we see in quarter three, then material cost also we see some betterment there and our estimate is there, besides this, in the second-half, we expect our sales incentive to be to be little bit on lower side compared to first-half, and then our accounting cut off also, that also is another major factor which is going to come ultimately in-quarter three and a major portion in quarter four. So all, these are the factor which is going to give us additional EBITDA margin in second-half.

Naushad Chaudhary — Aditya Birla — Analyst

And one quick one on the cost-saving initiatives, would there be any impact on the existing revenue base?

Rajesh Dubey — Chief Financial Officer and President of Finance

I’m not very clear on you question. You said cost saving initiative impact on revenue you want?

Naushad Chaudhary — Aditya Birla — Analyst

Existing revenue base, is there anything which we want to discontinue and that would bring more cost-saving, anything like that?

Rajesh Dubey — Chief Financial Officer and President of Finance

No, not but any significant or we have — we are thinking purely on cost saving front, so having impact on revenue. I don’t think and we also don’t have anything in our mind.

Naushad Chaudhary — Aditya Birla — Analyst

All right thank you so much and all the best.

Operator

Thank you. [Operator instructions]. We have the next question from the line of Yash Tanna from Ithought PMS. Please go ahead.

Yash Tanna — Ithought PMS — Analyst

Yeah, good evening and thank you for the opportunity. Can we get the MR productivity breakup for acute versus chronic? And how do we see the growth in chronic productivity as chronic is scaling up well for us?

Sandeep Singh — Managing Director

Yogesh?

Yogesh Kaushal — President, Chronic Division

Yeah, sure, Sandeep. So acute productivity is around INR6.5lakhs, and chronic is around INR3.8lakh to INR3.9lakh. And so whatever growth we have taken for the year, accordingly the productivity will increase, so this is all.

Yash Tanna — Ithought PMS — Analyst

So like two to three years, do we see, how do we see growth for this productivity, and overall productivity?

Yogesh Kaushal — President, Chronic Division

So as per our guidance, if I go by around 10% to 12% growth for next three years, accordingly the productivity will grow. In chronic, of course, we will try to drive faster growth which is around 1.5% to 2% of market, so that we may be slightly more than chronic in terms of absolute gain.

Yash Tanna — Ithought PMS — Analyst

Got it. Thanks for that. My second question is so we have reduced guidance on margins for the, current year. I think last quarter you had mentioned that next year just maybe you would get back to about 18% margins, so do we still hold that guidance?

Yogesh Kaushal — President, Chronic Division

Sandeep sir, you want me to take that?

Sandeep Singh — Managing Director

Sorry, sorry what was the question, can you repeat, please?

Yash Tanna — Ithought PMS — Analyst

Yeah, sure so for this year we have reduced our guidance 100 basis-points odd but I think last quarter you mentioned that FY ’24 onwards, we’ll get back to 18% or 18% plus, so do we hold that guidance?

Sandeep Singh — Managing Director

Yes, yes, hold it.

Yash Tanna — Ithought PMS — Analyst

Okay, all right, thank you. And one last question if I may, so usually we have seen outperformance in all therapies in the market, but maybe there is a slight slip in this quarter in Cardiac and few other therapies. And I think given on a half year basis, we have lost one rank in cardiac, so how should we look into this or is it something that we look into or is it just a normal quarter?

Sandeep Singh — Managing Director

Yogesh, you can take that.

Yogesh Kaushal — President, Chronic Division

So in cardiology, if you look at our product portfolio, our major challenge has been through anticoagulant, so you know, we sold very well Dabigatran during COVID time, so our first six months was was going very well for cardiology and the focus was also more on Dabigatran. But with the change in COVID and the change in approach of anticoagulant, when new anticoagulant are coming, that has impacted largely the business. So we had changed our strategic approach, we will be certainly focusing on the molecules, which are which was has a large prescriber base, particularly antihypertensives and the lipid management, so these two will you a core focus in cardiology segment to drive the growth.

And of course, we have launched a new anticoagulant, which is challenging Dabigatran, is Apixaban. So they’re — in the first IQVIA, we are in unit number one, so this will give us some cover but our large focus will be on antihypertensives, we have Olmesartan and Telmisartan, and we will also focus on our lipid management, which is our [indecipherable] category. So this would be the growth driver for cardiology.

Yash Tanna — Ithought PMS — Analyst

All right. Got it. Best of luck.

Yogesh Kaushal — President, Chronic Division

And of course just to add, what Sandeep said in the beginning, we are launching Sacubitril / Valsartanor for heart failure and that can be a blockbuster in cardiology.

Yash Tanna — Ithought PMS — Analyst

Right, right, thank you for that. That’s helpful.

Operator

Thank you. We have the next question from the line of Shrikant Akolkar. Please go ahead.

Shrikant Akolkar — Asian Markets Securities — Analyst

Hi, this is Shrikanth from Asian Markets Securities, can you please highlight what was the price realization during the quarter and where do you think this will move in the next six months to one year?

Sandeep Singh — Managing Director

You’re talking about U.S. I assume?

Shrikant Akolkar — Asian Markets Securities — Analyst

Yes, U.S. price realization. Yes, Mr. Ghare, you can take that one.

Amit Ghare — President, International Business

I’m sorry can you repeat the question please?

Shrikant Akolkar — Asian Markets Securities — Analyst

Yeah, sure, so I just wanted to know what was the price erosion, U.S. price erosion during this quarter and where do you see this moving in the next six months or one year time?

Amit Ghare — President, International Business

Yeah, current quarter price erosion numbers are a little bit all over the place, I’m sorry about that, because of the way we have done some adjustments, but these certainly were higher in double-digits, we were somewhere between 10% to 15%, probably more than 15%. We are expecting the last quarter, if you remember, we had reported a live number in the range of 20%. Q2 last year, we had launched couple of products which were first-to-market, exclusive, so obviously, they have gone through a rapid price erosion. So long story short, we have this particular quarter, quarter two, we had a large price erosion, you can only hope that doesn’t stay, the initial signs are that the price erosion is still there but not of the same nature. Specifically answering, I would be happy with a single-digit price erosion.

Operator

Thank you. That was the last question. I would now like to hand over to Mr. Amit Khandelia for closing comments.

Amit Kumar Khandelia — Assistant Vice President, Finance

Thank you, everyone for joining the call. If any of your queries are unanswered, please feel free to get in touch with me. Thank you have a great weekend.

Sandeep Singh — Managing Director

Thank you, guys. Have a great weekend. Bye, bye.

Operator

Thank you. On behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.