Alkem Laboratories Ltd (ALKEM) Q3 FY23 Earnings Concall Transcript

Alkem Laboratories Ltd (NSE:ALKEM) Q3 FY23 Earnings Concall dated Feb. 10, 2023.

Corporate Participants:

Tushar Manudhane — Investor Relations

Amit Kumar Khandelia — AVP Finance

Sandeep Singh — Managing Director

Amit Ghare — President, International Business

Rajesh Dubey — Chief Financial Officer

Yogesh Kaushal — President Chronic Division

Analysts:

Saion Mukherjee — Nomura Securities — Analyst

Kunal Dhamesha — Macquarie Group — Analyst

Rashmi Shetty — Dolat Capital — Analyst

Prakash Agarwal — Axis Capital — Analyst

Damayanti Kerai — HSBC — Analyst

Neha Manpuria — Bank of America — Analyst

Bino Pathiparampil — InCred Capital — Analyst

Sumit Gupta — Motilal Oswal — Analyst

Yash Tanna — iThought PMS — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Alkem Laboratories Q3 FY ’23 Results Conference Call, hosted by Motilal Oswal Financial Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Tushar Manudhane from Motilal Oswal Financial Services. Thank you and over to you sir.

Tushar Manudhane — Investor Relations

Thank you, Tanvi, welcome to 3Q 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 from the finance team. Over to you, Amit, for the opening remarks.

Amit Kumar Khandelia — AVP Finance

Thank you, Tushar. Good evening, everyone, and thank you for joining us today for Alkem Laboratories Q3 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 must be viewed in conjunction with the risks that our business faces. After 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 Sandeep Singh to present the key highlights of the quarter gone by and strategy going-forward. Over to you, Sandeep.

Sandeep Singh — Managing Director

Thank you, Amit. Good evening to all of you and thank you for joining us today for our quarter three FY ’23 earnings call. I will briefly take you through the key operational and financial highlights of the quarter gone by, and would then leave the floor open for Q&A. This quarter has been a strong quarter for the company with year-on-year revenue growth of about 16%. EBITDA margin improved substantially from the previous two quarters and came in at 19.7% and the PAT after minority interest at about INR450 crores.

During the quarter, we generated cash-in excess of INR500 crores, which has helped us further strengthen our balance sheet with a strong net cash position of INR1,000 crores as on December 2022. In a recent development with regards to our biosimilar business, Enzene Biosciences, this company has raised about INR161 crores and partnered with Eight Roads Ventures and F-Prime Capital. This further instill confident confidence and reaffirms our journey towards building a leading global biological company that leverages innovation to enhance global health.

After having commercialized key products in Indian market, Enzene has launched adalimumab in this quarter. Enzene has also received approval for cetuximab which would be a fifth biosimilar product in Indian market. We are seeing good traction on CDMO side also, and we expect CDMO segment to make a meaningful contribution to Enzene in the coming years.

Building on the pace of quarter one and quarter two, our India business delivered a good growth of 9.7% year-on-year during the quarter. We have outperformed the market in all quarters of the financial year, and in quarter three our performance is even starker then the Indian pharmaceutical market as the secondary sales data by [Indecipherable]. While IPM grew by 10%, Alkem grew by 16.7%, thereby beating market by 670 basis point.

We have gained market share across all acute therapies, areas of anti-infective, vitamins, minerals, nutrients, pain management and gastrointestinal. In chronic therapy, areas like anti-diabetic, neuro CNS and urology, we are growing ahead of the market. Our growth in these therapies is more than three times the market growth rate. We have gained three ranks in anti-diabetic, two ranks in Neuro CNS and four rank in urology during the quarter.

Moving on to our international business, after two quarters of subdued performance, our U.S. business posted a strong growth in quarter three on the back of good season in U.S. market. The U.S. business posted a year-on-year growth of 33% and sequential growth of 26% in rupee terms. During the quarter, we filed two ANDAs with the U.S. FDA and received three approvals including one tentative approval. Our other international markets delivered a year-over-year growth in excess of 15% on back of good performance, majorly from Chile and Kazakhstan.

Coming to regulatory inspection conducted by U.S. FDA during the quarter, in terms of regulatory status of our manufacturing facilities, St Louis was inspected in the month of November for which PR is received. All our manufacturing facilities applying to the U.S. market have an ERR as on date.

To summarize, we have delivered another quarter of market bidding performance in our domestic franchisee, and we would continue to maintain our leadership position. A lot of cost optimization projects are under way in the organization, benefits of which will start during the coming period.

With this, I would like to open the floor for Q&A. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Saion Mukherjee from Nomura Securities. Please go ahead.

Saion Mukherjee — Nomura Securities — Analyst

Yeah, thanks for taking my question and good evening. Sir, my first question on the U.S. market, there is a strong sequential momentum, how sustainable is that because there might be some seasonal benefits, if you can guide for the next quarter and quarters ahead on the U.S. market.

Sandeep Singh — Managing Director

Thanks, Saion. I would like Mr. Amit Gary to take this question, because, I think it’s much closer to reality. Amit, over to you.

Amit Ghare — President, International Business

Thank you, Sandeep. Saion, you’re absolutely right. Most of the performance in the quarter came because of the season, because especially of the flu season. We do have lot of anti-infectives and other products related with that. Quarter four guidance we will not be similar to quarter three for sure. We are hoping it will be better than quarter one and quarter two or certainly in-line with that.

Saion Mukherjee — Nomura Securities — Analyst

Okay, that’s helpful. And also, on the cost front, how you are seeing raw material cost? Your other expenses were also somewhat — the growth was muted. So, if you can talk about the costs, how that sort of playing out? Any changes you’ve seen in the recent past.

Sandeep Singh — Managing Director

Mr. Dubey, please add.

Rajesh Dubey — Chief Financial Officer

Yeah. Saion, as you see in, quarter three, other gross level margin, 100 basis-point improvement is visible. So, 58.9% margin we have led us. In sequential quarter, it was 100 plus basis point down. As far as cost of material is concerned, I think we have not yet come to pre-COVID level, so raw-material prices, they are on higher side but manageable. Unlike what we saw in the the month of November and December of last year. Second, going forward also, BPCO price increase because of higher inventory, we were not able to take 100% penetrate in quarter two. Quarter three, I think that benefit has also come. So, these are the two major reasons. And as we guided earlier, I think we are going to remain somewhere close to 58%, 58.5%, at gross margin level.

As far as your question on other expenditure is concerned, if you are referring quarter three, definitely in quarter three, it is on lower side. In fact, it’s a 22%, whereas in earlier quarters or on an annualized basis, it was higher. There are two major reasons behind it, one — currency fluctuation positive. It has some in this quarter, because mainly Chilean peso, it got strengthened. That was one big factor, and another reason being some of our R&D expenditure, it has got deferred for the period, so not in quarter three. So, we have a little bit on lower side.

So, there are some marketing expenditure related also, little bit on lower side, but they’re not very significant. These are the major two items which is indicating other expenses on lower side. If you have any further question, I will be happy to answer.

Saion Mukherjee — Nomura Securities — Analyst

Yeah, just one clarification. I mean. I think the foreign exchange fluctuation had a negative impact, if I remember correctly, in the first quarter. So that has got reversed, and what is the quantum here?

Rajesh Dubey — Chief Financial Officer

Yeah, for quarter three, it is to the tune of INR50 crores.

Saion Mukherjee — Nomura Securities — Analyst

Okay. Okay, INR50 crores.

Rajesh Dubey — Chief Financial Officer

Because in quarter two, there was negative of 20, and we have positive of 30 basis, so sequential quarter if you see, impact is around 50 crores.

Saion Mukherjee — Nomura Securities — Analyst

And that is under other expense.

Rajesh Dubey — Chief Financial Officer

Yes.

Saion Mukherjee — Nomura Securities — Analyst

Okay and just one last point. Sir, I mean with the China opening, you mentioned raw-material prices are high and it will remain there. So, you do not expect any moderation in raw-material costs, or you don’t have any signs of that happening.

Rajesh Dubey — Chief Financial Officer

I think particularly anti-infectives have lost volume, and I think now the prices again have started going up P&G. We can clearly see prices have started going up. So, we don’t know, but going forward, we think it will get normalized and the situation will be in control. But currently, yes, definitely anti-infective especially we can witness rising price of raw material.

Saion Mukherjee — Nomura Securities — Analyst

Okay, thank you sir.

Operator

Thank you. The next question is from the line of Kunal Dhamesha from Macquarie Group. Please go ahead.

Kunal Dhamesha — Macquarie Group — Analyst

Thanks for taking my questions. Just couple of clarifications. First, I think, we have seen some kind of supply issue with one of the products in U.S. in quarter two where probably we also have exclusivity. Has that been resolved in this quarter? And that product contributed meaningfully in this quarter?

Sandeep Singh — Managing Director

Mr. Amit Ghare, you can take that.

Amit Ghare — President, International Business

No, that supply challenges remain. That product has not contributed meaningfully in this quarter. Perhaps not at all.

Kunal Dhamesha — Macquarie Group — Analyst

Okay, and then going forward, how we see competitive landscape there? Are we able to resolve those challenges, and we still see opportunities for that product, or once the exclusivity period is over, the competition will take over.

Amit Ghare — President, International Business

The exclusivity in any case is for the shared exclusivity, more than two players who are there in the market had or could have got approval. So, obviously they have not got approval because of their own reasons. It’s very difficult to say when the competition will come in. As we speak today, the opportunity still remains, but we need to get a good hold on our supply-chain like we discussed in the earlier quarter.

Kunal Dhamesha — Macquarie Group — Analyst

And what is this issue basically? Is it related to API on — is it an in-house API product or [Indecipherable] API product, that is the issue that we are facing?

Amit Ghare — President, International Business

I don’t think I’m at liberty to discuss that at a product-specific level in detail.

Kunal Dhamesha — Macquarie Group — Analyst

Sure, sure. And the second question is on India business. Can you provide some kind of color in terms of what was the growth in that region, like business in the quarter or maybe the contribution of trade generics business in this quarter?

Amit Ghare — President, International Business

Can you repeat the last line, I couldn’t hear.

Kunal Dhamesha — Macquarie Group — Analyst

The contribution of trade generic business in our India business in this quarter.

Amit Ghare — President, International Business

[Speech Overlap] it is around 20% to the total business for the quarter.

Kunal Dhamesha — Macquarie Group — Analyst

20% for the total, and for the nine months?

Amit Ghare — President, International Business

Almost similar, almost similar.

Kunal Dhamesha — Macquarie Group — Analyst

And then lastly, on the cost efficiency side, if I have to attribute it to a particular geography, which geography would you be targeting more from the cost-efficiency perspective? Or is it a general kind of improvement, of course

Sandeep Singh — Managing Director

So, I think that is general, but it’s more [Indecipherable] led to some extent, but it’s overall, it’s a company-wide kind of initiative which we are taking up.

Kunal Dhamesha — Macquarie Group — Analyst

[Technical Issues]

Operator

Sorry to interrupt you. Kunal, your voice was not audible in between.

Kunal Dhamesha — Macquarie Group — Analyst

Yeah, I was just saying the last one, have we taken steps which might start flowing from maybe next quarter or maybe in within couple of quarters. If yes, what could be the quantum?

Sandeep Singh — Managing Director

So, I think obviously, we have taken steps, which will start benefiting us, but the quantum might not be substantial next quarter or something. I think these are very — these are medium-term projects, so I think, next year you could see a benefit, and this is similar to what we have guided in the last call, so I think all that is part of that. So, there is nothing which can we added on top of what we have said. So, it’s an ongoing thing. We will see improvement in EBITDA margins next year, but nothing substantial in the next quarter or something.

Kunal Dhamesha — Macquarie Group — Analyst

Okay, thank you and all the best.

Operator

Thank you. The next question is from the line of Rashmi Shetty from Dolat Capital. Please go ahead.

Rashmi Shetty — Dolat Capital — Analyst

Yeah, thanks for the opportunity. As you mentioned in the call that some of the expenses have been deferred to quarter four, and normally quarter four is a soft quarter, where we see most of the expenses coming in, and our nine-month EBITDA margin is roughly around 14.4%, so do you think that you know the earlier guidance of 15% EBITDA margin achievement in FY ’23 it is now looking a bit challenging? If you can update on that.

Sandeep Singh — Managing Director

Yeah, Rashmi. We remain with our guidance on EBITDA margin. So, we have reasons to believe why we are going to land 15% to 15.5%. And the reason being, we have a sizable spillover revenue recognition which is going to happen in quarter four, that is one thing. And then second, our business is moving as per our estimate only, so we don’t think this year quarter four is going to be so soft as it used to. We believe quarter four is going to be reasonably good. On overall basis, we are confident we will be somewhere where we have guided it to.

Rashmi Shetty — Dolat Capital — Analyst

Okay, and sir on India business, you know how, do we see our India growth? Are we expecting that you know quarter-four growth to be higher, and we can actually complete FY ’23 growth at around high-single-digit growth?

Rajesh Dubey — Chief Financial Officer

Yes, certainly we can. There’s no reason why we should not be able to do that.

Rashmi Shetty — Dolat Capital — Analyst

Okay, and on India business, have you launched valsartan/Sacubitril product? So have you added any new MR for that or you know segregated some of your MR from the current strength for this particular product, and how are you seeing the competitive intensity in this particular product?

Yogesh Kaushal — President Chronic Division

Yeah, so you know, Sacubitril/ valsartan review is going to be intense. So, we have created a separate team where we have done a product rationalization. So we have launched a second cardio-diabeto team, so we have separated two brands, so that we make space for Sacubitril/ valsartan. And we have been preparing this almost a year before, so we understand the market dynamics and we are prepared. We should do good here.

Rashmi Shetty — Dolat Capital — Analyst

Okay, sir. And finally on the U.S., if you can update on number of launches that you did in nine months and also price erosion in the oral solid space, how is it for the Company?

Sandeep Singh — Managing Director

Mr. Amit Ghare, you can take that please.

Amit Ghare — President, International Business

Sure, thank you Sandeep. Number of launches so far I think have been eight over the nine months, if I remember correctly. And the price erosion still continues from our overall deflation perspective. It is still in double digits for us, it did reduce in quarter three, but for nine months, it continues to be in lower double-digits for us.

Rashmi Shetty — Dolat Capital — Analyst

Okay sir, thank you and all the best.

Operator

Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Prakash Agarwal — Axis Capital — Analyst

Yeah, hi, good evening. Thanks for the opportunity. My question is, one is on the cost-saving initiatives that we had taken, so you mentioned it is on track, what I’m trying to understand is it like the INR250 crores kind of cost-saving, is it for the year fiscal ’24, or is it — how do we see that over which what period of time do we see that?

Rajesh Dubey — Chief Financial Officer

Prakash, yes, fiscal ’24 next year.

Prakash Agarwal — Axis Capital — Analyst

Which is about 2% of the overall company EBITDA margins [Technical Issues] space of about 15 odd percent this year, so how should we think margins for next year, broad color will help, what are the levers in terms of base business apart from the cost-saving initiatives.

Rajesh Dubey — Chief Financial Officer

No, sir. I will — okay so, I will not try to segregate between usual and apart of like special-cost savings because we always do these things. When we spoke about it last time, we also had in back of our mind, and keep in mind that we might gun for INR250 crores, but all might not happen. So, I would try to curb enthusiasm over there to really say that we can get all the INR250 crores, it doesn’t happen like that in life. So, I mean, same thing Prakash, we spoke last-time, whatever we land this year, we could go to 100 basis-point above that next year.

Prakash Agarwal — Axis Capital — Analyst

Okay. And how do we make sure that there is no revenue impact of the cost-saving initiatives that you are taking? I mean, have you thought about that?

Rajesh Dubey — Chief Financial Officer

Of course, of course, that’s my job, Prakash, I’m paid for that. So obviously, I don’t cut costs and let go of revenue. That — we are very, very conscious of that, Prakash. We are a sales and marketing strong company. We don’t do things for short term and create long-term pain, sir.

Prakash Agarwal — Axis Capital — Analyst

So why I’m asking this is like the Pen-G and Pen-G prices on the raw material side and a couple of products in the U.S. really shook the margin trajectory. I mean, Alkem 70% India, very steady margin with very steady growth rates in the past. I mean [Technical Issues] three months, six months have been a little volatile compared to the history, hence the question sir.

Rajesh Dubey — Chief Financial Officer

No, no. So I mean, your question was that whether we’ll cut costs such that revenue is impacted? The answer is clear no. Now if you’re coming to on RM and Pen-G stock, that’s a different ball game. Also keep in mind, Prakash, that within one year’s time, Pen-G will be produced in India. I’m not here to like talk about other companies, but we know those large companies doing it. So, we don’t know, Prakash, but I think it will stabilize. I mean, and even if it does not, we have to live with it, and there could be other avenues to work on it. But I’m still positive, Prakash, that — it cannot go completely berserk at end of the day. It’s an antibiotic, the cost has to be curtailed somewhere even at the government level and things like that. I’m sure it will not berserk. Thank you sir.

Prakash Agarwal — Axis Capital — Analyst

Yeah. Secondly, sir, congrats on the Indian deal. So, can you speak about what is the three-year plan here? How many products are under development? And have you taken any product to rest of the world markets? What’s the three-year plan here and what is revenue recognition here? Is it captured — how is it captured in the balance sheet?

Sandeep Singh — Managing Director

Yeah. So, I think the financial question, Mr. Dubey, you could take that of the revenue recognition and balance sheet, and then on the products and market, I’ll take up.

Rajesh Dubey — Chief Financial Officer

Yeah. So revenue recognition is as per accounting norms, Prakash. If you have any specific question, whatever revenue is accrued [Indecipherable] that is recognized in our financials. So, if you have something specific, I will be happy answering it.

Prakash Agarwal — Axis Capital — Analyst

Sale is accounted for — there is no other income impact, right? So, sorry, other income impact.

Rajesh Dubey — Chief Financial Officer

Other income impact on what?

Prakash Agarwal — Axis Capital — Analyst

On the sale or partial sale of the equity.

Rajesh Dubey — Chief Financial Officer

Still, I’m not very clear what you are asking.

Prakash Agarwal — Axis Capital — Analyst

I’ll take it offline, sir. Okay.

Rajesh Dubey — Chief Financial Officer

Okay.

Prakash Agarwal — Axis Capital — Analyst

And lastly, if I may add just one more. So, January was a little softer month for everybody given high Omicron base. So, is it just the base related or the market itself was softer in terms of volume? What is our take on that? And secondly, on the NLEM list, which had come with revised prices in December, what is the impact that we can see for our portfolio?

Rajesh Dubey — Chief Financial Officer

Yes. Prakash, this January month, I’ll take this question. See, it was actually not a softer month. Last year January, we had Omicron. So, some of the therapies, particularly anti-infectives, multivitamins and pain, these three had inflated days last year, and therefore, you might see some diluted growth in the month of January. But overall, if you look at broad therapies, they have shown a good growth. Internally, also in line with this, we have done well. Actually, January month overall for Alkem was a good month across therapies.

Prakash Agarwal — Axis Capital — Analyst

Okay. And then [Indecipherable]?

Rajesh Dubey — Chief Financial Officer

Analium [Phonetic], we have minor impact. We have an impact of close to INR40 crores in quarter, and we are set to compensate this through our unit growth, so we should manage this.

Sandeep Singh — Managing Director

Yeah. And Prakash, Sandeep here, you had asked on Enzene, So I think we did not finish it. On financials, as you said, you’ll take it offline with Mr. Dubey. So, we don’t give numbers, but I’ll tell you for Enzene, though on a small base, I think we are doubling every year, and next year also we’ll do the same. We’ve got three products going for global development. One is in clinical trial stage. And the other two are — one is in preclinical, other is about to enter clinical. So, we’re not doing a lot of it because the costs are very, very high on this. What we try to do is we try to out-license the product to at least one key geography, so that licensing fee kind of funds some amount of clinical trials. That’s how we plan to kind of keep it, let’s not say very high the clinical trial cost in terms of impact on P&L. And in India, we have got approval of five biosimilars, four have been launched. So, I think it’s going great. And Enzene as a strategy is working with everyone. So, it’s B2B business, which is larger than what it supplies to Alkem to that.

We are an independent company, we wanted to do business with everyone, and it’s growing well. I think in the next two, three quarters, we’ll able to share a lot more color to it.

Prakash Agarwal — Axis Capital — Analyst

Okay, lovely. Thank you, and all the best for Enzene.

Sandeep Singh — Managing Director

Thank you, Prakash.

Operator

Thank you. The next question is from the line of Damayanti Kerai from HSBC. Please go ahead.

Damayanti Kerai — HSBC — Analyst

Hi. Good evening. Thank you for the opportunity. My first question is on India. So, trade generated is around 20% as you highlighted earlier. So, between these two, like what is the growth differential? Are we seeing more growth in the branded portfolio or it’s similar for both? And how should we see growth profile for these two segments going ahead?

Yogesh Kaushal — President Chronic Division

No. Our branded portfolio has grown faster than generic. Generic is roughly around 5% to 6% while formulation is healthy double digits. So, our formulation is really much faster than — double of generic. Yeah.

Damayanti Kerai — HSBC — Analyst

Okay, a question from the slide which you shared earlier. So, you have outperformed in most of the therapies, which Sandeep also highlighted earlier, but one segment, I believe, cardiac is one where you have grown below market. So, what exactly is happening in that particular segment? Anything to point out?

Yogesh Kaushal — President Chronic Division

I think cardiac, to be very honest, we have to address this strategically, and this is a good question you asked. We were focusing more on very niche product, particularly products for atrial fibrillation and anticoagulants like dabigatran and all. So, though we did very well there, but from the volume point of view, it is not bigger market. So, what strategic change we have done is that we’ll focus more on mass molecules like telmisartan, olmesartan and all those, which are big volumes. And of course, your lipid regulators, your rosuvastatin. So, these three constitute close to around 65% to 70% of cardiology market. So, we will slightly restructure our strategy and see that from quarter onwards, you should see a better trajectory in cardiology as well.

Damayanti Kerai — HSBC — Analyst

Okay. So, shift in strategy here to move towards the higher volume product?

Yogesh Kaushal — President Chronic Division

Yes, yes. Because niche– although niche, we create a good impression, but doesn’t give us volume, so there we will do a strategic change. And this will show us results soon.

Damayanti Kerai — HSBC — Analyst

Okay. Okay. Got it. Okay. My second question is on your margin guidance for FY ’22. So, you mentioned you should be maintaining somewhere 15%, 15.5% outlook for the year. And you mentioned there was some spillover sales, which I missed. Can you, like you said some spillover sales will be there in the fourth quarter?

Rajesh Dubey — Chief Financial Officer

So, Damayanti, I think you are talking for margin of 23 sales.

Damayanti Kerai — HSBC — Analyst

Yes, Yes.

Rajesh Dubey — Chief Financial Officer

Yeah. So as we discussed and we reconfirmed our EBITDA margin is going to be in the range of 15%, 15.5%. As far as spillover of sales is concerned, as per accounting norm, if whatever revenue recognition we cannot recognize because of non-completion of entire revenue recognition cycle, and in that, it’s a very specific delivery of goods, whatever you have sold. So that needs to be recognized when you deliver it. When risk reward is getting passed on. So, in quarter three, as of 31st December, we have material sales which needs to be recognized revenue in quarter four in the month of January itself. And since March, most of the company, they complete their sales order cycle, dispatches, everything well before year end closer. So, spillover is hardly anything for the month of March. And that’s the reason I mentioned one sizable material amount, we have to be recognized as revenue in the month — in fourth quarter.

Damayanti Kerai — HSBC — Analyst

Okay. Understood. My final question is on how do you see R&D costs moving ahead now, like Enzene obviously have sufficient funding. So how should we look at this part moving ahead? And where you’ll be spending most of your R&D budget?

Sandeep Singh — Managing Director

Yeah. So most of the budget would still, I mean, be for small molecules because that’s traditionally a large business. We will manage, as we said last time, everything within 5.5% including biosimilars, R&D clinical trials, everything.

Damayanti Kerai — HSBC — Analyst

Sorry, Sandeep, its within 7%?

Sandeep Singh — Managing Director

No, 5.5% I said.

Damayanti Kerai — HSBC — Analyst

5.5%. okay. So, despite progressing in some of the clinical programs, you should be sustaining that?

Sandeep Singh — Managing Director

Yes, yes. Don’t say 7%, everybody will fall off the chair over here.

Damayanti Kerai — HSBC — Analyst

Okay. Sorry, that’s my mistake.

Sandeep Singh — Managing Director

No, no, I’m just kidding.

Operator

Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.

Neha Manpuria — Bank of America — Analyst

Thanks for taking my question. Amit, on the U.S. business, we’ve seen a lot of our peers indicate base business margin — sorry, base business improvement because of supply disruptions, players exiting, etc. Is Alkem also seeing similar trends in our existing product that could play out in the near term?

Amit Ghare — President, International Business

So, most of the improvement in business in quarter three actually came from all the legacy products, but those were because of the seasonal effect. Coming to your question in general, overall, not just seasonal products, but overall. We definitely are seeing a lot of customer inquiries and calls coming through in terms of — because of either discontinuations or regulatory challenges to competition. However, how much of it will actually get realized to us as the ongoing business remains to be seen, because essential road block is pricing. So, I’ll leave it at that. As our performance comes through for quarter four, we will be able to witness it or not witness it.

Neha Manpuria — Bank of America — Analyst

Understood. So just to clarify, obviously, Alkem taking up the additional revenue would depend on a better pricing versus the existing for some of these products, that would be a fair assumption?

Amit Ghare — President, International Business

Yeah. What I mean is that, obviously, there are — the customers need product and if the existing supplier discontinues or has a different challenge, the customer will look for an alternate supplier. And the question is, is that alternate supplier Alkem or someone else takes that position is what kind of remains to be seen.

Neha Manpuria — Bank of America — Analyst

Understood. Okay. Got it. And my second question is on the cost optimization. Sandeep, I know you mentioned cost optimization and the amount, but given that we are making progress on it, could you highlight two or three areas in terms of where these cost optimization is being implemented? And what’s the progress that we’ve made, just so that for us to understand when we can start seeing contribution into margin?

Sandeep Singh — Managing Director

Right, right. So, these are, as I said, company initiatives, 20%, 30% of it kind of we have identified, rest we are identifying. Some part of it is getting implemented. So, these are from manufacturing to R&D. And these are manpower in both of them. It could be even kind of some project reduction and some pipeline being more stringent about what kind of products we do. So, it’s encompassing, and we’re looking at the whole stuff. And so largely R&D and manufacturing, I would say, and then some amount of rationalization we could even look at going forward in other areas as well. Manufacturing cost, restructuring, those are also on the play and we will disclose in the next couple of quarters.

Neha Manpuria — Bank of America — Analyst

And when you say rationalization, could this be portfolio rationalization, let’s say, in markets like U.S.?

Sandeep Singh — Managing Director

More than portfolio, it could be some kind of plant optimization, those kind of stuff. Letting go off these products may not be right for us, but yeah, we could find better ways to do it for sure.

Neha Manpuria — Bank of America — Analyst

Understood. thank you. So much.

Operator

Thank you. We’ll move to the next question from the line of Bino Pathiparampil from InCred Capital. Please go ahead.

Bino Pathiparampil — InCred Capital — Analyst

Hi. Good afternoon to all. Just a couple of follow-up questions. One on dabigatran in the U.S., so you had the supply issues which you are working on. Do you have any visibility of stocking that out in a quarter or two or so, or is it still a fluid situation.

Sandeep Singh — Managing Director

Amit, over to you, but we know what you want to say. Amit, over to you.

Amit Ghare — President, International Business

Sure. Now we are working on two strategies to restore our supply chain. And we think it is still going to take about six months to do that. But then there could be a few regulatory pathways, which could make it sooner unlikely, but could delay it as well.

Bino Pathiparampil — InCred Capital — Analyst

Okay. So, is this a difficult product or is it one of its components that are very difficult to source, thing that not practically nobody getting approval, nobody is being able to launch or ramp up, etc.? Is it a technology challenge or a social challenge?

Amit Ghare — President, International Business

So for us, it’s a supply chain challenge. For others, I would not like to comment.

Bino Pathiparampil — InCred Capital — Analyst

Understood. Okay. The second question is about the forex gain of INR50 crores. So, it’s there in other expense. I would just like to understand the accounting there. Is the INR50 crores, is it related to some hedges that you make?

Rajesh Dubey — Chief Financial Officer

No. It is not hedges. It’s a conversion, currency conversion. And mainly, it is out of Chilean peso to dollar and then dollar conversion to INR. So, it is not related to hedging.

Bino Pathiparampil — InCred Capital — Analyst

Okay. So if I understand, you would have booked the sales related to this maybe in a quarter — last quarter or a couple of quarters back. And when you finally realize the receivables, you get a higher amount, is that correct?

Rajesh Dubey — Chief Financial Officer

It’s a conversion when we prepare our financial statement. Local currency needs to be converted to reportable currencies. So, the currency difference needs to be accounted as income or losses in financial statement. So yes, you rightly mentioned in earlier quarters, there were loss, whereas now CLP has firmed up against U.S. dollar and that has given us benefit. If you recollect in our earlier quarters also, when we recognized notional loss in our financial statements, deliberately we kept remittance on board because we wanted currency to take some reverse. And after getting this reverse, we started actual realization.

So, you can say in earlier quarters to a certain extent it was notional, Current, in quarter three also, unwind has happened. And now quarter four, actual realization is happening where we found this becoming [Indecipherable] I was able to clarify your queries?

Bino Pathiparampil — InCred Capital — Analyst

In some sort of, but just one follow-up. So is it that you have a subsidiary in Chile, which you are consolidating and that is why this is coming?

Rajesh Dubey — Chief Financial Officer

Absolutely.

Bino Pathiparampil — InCred Capital — Analyst

So, it’s basically balance sheet consolidation coming from. Okay, my impression was that, that gets clubbed with other income.

Rajesh Dubey — Chief Financial Officer

No, if you have gain, it will go in other income. If you have losses, it will come under other expenses.

Bino Pathiparampil — InCred Capital — Analyst

This quarter, we had a gain, so it should have gone in other income, right?

Rajesh Dubey — Chief Financial Officer

Here, we are talking quarter-to-quarter actual currency fluctuation. So, when you see YTD, ultimately, reporting is going to YTD level. Quarterly, of course, there is a gain, but YTD, but still some small amount of negative is there. That’s why it has gone in other expenses.

Bino Pathiparampil — InCred Capital — Analyst

Okay, understood. Thank you very much.

Operator

Thank you. Next question is from the line of Sumit Gupta from Motilal Oswal. Please go ahead.

Sumit Gupta — Motilal Oswal — Analyst

Hi, good evening. Thank you for the opportunity. I just want to know regarding the overall investment till date, which has been done in Enzene by Alkem and other investors?

Rajesh Dubey — Chief Financial Officer

Other than investor, our investment is INR915 crores, if I’m not wrong. And other investors’ investment is INR161 crores. So, you can see somewhere INR1,170 crores.

Sumit Gupta — Motilal Oswal — Analyst

Okay. And sir, what are the biosimilar sales in India for the nine-month or 12-month basis?

Rajesh Dubey — Chief Financial Officer

You mean to say Enzene sales or total biosimilars?

Sumit Gupta — Motilal Oswal — Analyst

Overall, Enzene and biosimilar both.

Rajesh Dubey — Chief Financial Officer

It is in the range of around INR90 crores to INR95 crores on YTD level. So here, we are considering whatever Alkem has sold and whatever Enzene has sold to third party, not intercompanies.

Sumit Gupta — Motilal Oswal — Analyst

Include CDMO.

Rajesh Dubey — Chief Financial Officer

Yes, and CDMO income is also included in this.

Sumit Gupta — Motilal Oswal — Analyst

Okay. So, it is Enzene plus CDMO.

Rajesh Dubey — Chief Financial Officer

Yes, that is Enzene CDMO, so Enzene’s non-biosimilar work as well.

Sumit Gupta — Motilal Oswal — Analyst

Okay. Okay. And sir, last question is regarding the currency benefit, which was there in the third quarter. Do you expect it to continue in the fourth quarter as well?

Rajesh Dubey — Chief Financial Officer

Currency benefit, nobody can predict, sir, but we hope similar kind of trend is going to continue in next quarter also. But nobody can say with confidence.

Sumit Gupta — Motilal Oswal — Analyst

Okay sir, thank you.

Operator

The next question is from the line of Yash Tanna from iThought PMS. Please go ahead.

Yash Tanna — iThought PMS — Analyst

Hi, good evening. Thank you for the opportunity, and congratulations on a good set of numbers. My question was on diabetes over the last two years you’ve done significant brands from, I think 21, now they’re 15, 16, and we’re also growing significantly ahead of market. So what is our ambition to sort of get into the top 10? And what will get us there? Are we looking at any sort of brand acquisitions? Or will it mostly be organic?

Yogesh Kaushal — President Chronic Division

Yeah. So diabetes, we are being strong there, and what has led us over here and will take us to future is our success of new products, particularly dapagliflozin and Elite, and then sitagliptin, and linagliptin. All three, we have done good there. We have done exceptionally good there. So we now intend to build this molecule to bid brands of INR100 crore plus types. These three brands we are investing heavy and we should do good. Along with that, we have a legacy brand like Glucoryl, which will keep on supporting. So overall, we expect from rank 15, our aspiration is to be amongst the top 10.

Yash Tanna — iThought PMS — Analyst

Okay. Any time period you would like to share for the same?

Yogesh Kaushal — President Chronic Division

I know, it’s going to be challenging, but around three to four years, we should be amongst the top 10.

Yash Tanna — iThought PMS — Analyst

All right. That’s helpful, sir. One question on the MR productivity. So, I wanted to understand at what number does the operating leverage start paying out in a number of activity, especially for the [Indecipherable] The last quarter, you mentioned about 3.8 lakh, 3.9 lakh FEMA productivity we have. So after what number would we start seeing operating leverage and margin improvement for the division?

Yogesh Kaushal — President Chronic Division

So see, number of reps is very subjective, but a headquarter gives us a breakeven at around close to INR2 lakh side. So if headquarter does close to 2 lakh productivity, we get a breakeven. So, in line with that divisional breakeven starts here.

Yash Tanna — iThought PMS — Analyst

So we are already much higher than that. So, anything more would just start contributing to the margin?

Yogesh Kaushal — President Chronic Division

Yeah, correct. Any additional productivity now will contribute to the net margin.

Yash Tanna — iThought PMS — Analyst

All right. That’s helpful. One question on Enzene. I think we’ve spoken on a lot, but we have raised about — sorry, am I audible?

Yogesh Kaushal — President Chronic Division

Yes.

Yash Tanna — iThought PMS — Analyst

We have raised money now from independent — from different investors. And is it right to understand that going forward, Enzene will be independently funding the profession as care growth? And what is our long-term outlook? I mean do we see it as a separate independent entity in the next three to four years?

Rajesh Dubey — Chief Financial Officer

I think it is already a separate independent entity. So — I mean, your question, I’m not very clear. Do you mean that will it not need to raise funds? I’m not sure what you want?

Yash Tanna — iThought PMS — Analyst

Not much of Alkem support in terms of development.

Rajesh Dubey — Chief Financial Officer

No, I think we will evaluate it. If we find it attractive, we’ll continue to invest in Enzene. I think it will continue to be a very attractive, I think, growth engine for Alkem. So, I mean it’s possible we keep investing. And it’s also possible that we’ll keep taking outside money as well. So, I mean. Yes.

Yash Tanna — iThought PMS — Analyst

Okay, that’s helpful. Thank you, Sandeep ji and Best of luck.

Operator

Thank you. We have the last question from the line of Kunal Dhamesha from Macquarie. Please go ahead.

Kunal Dhamesha — Macquarie Group — Analyst

Hi. Thank you. For the follow up. So, couple of questions. First, on the trade generic, you have alluded we have seen 5%, 6% growth. I believe it’s kind of a multi-quarter low kind of growth. So, is it a function of more competition or high base from the last year same quarter or basically the market being slow?

Rajesh Dubey — Chief Financial Officer

I think it’s a combination of the first and the last one you said, that the base is very high this year. Because of the last year, we all know the base acute sales and trade generics and all that was substantially high. So it’s coming off a high base. And the market is also slow, I mean, because of the same kind of reason. So, it’s a one-off. I don’t — there is nothing — so we cannot anticipate — so just like how U.S. high sales we don’t think will continue. Similarly, U.S. generic low sales will not continue. They both are aberrations.

Kunal Dhamesha — Macquarie Group — Analyst

Okay. You meant the India trade generic as well?

Rajesh Dubey — Chief Financial Officer

Yes, yes, yes.

Kunal Dhamesha — Macquarie Group — Analyst

And secondly, I think on the new business opportunity in U.S. which we are still not sure whether that will accrue some of that to us — those products will come to us. But let’s say, hypothetically, that does come to us, does that kind of delay the cost efficiencies that [Speech Overlap].

Rajesh Dubey — Chief Financial Officer

No, no, no. If it will not do any cost. There is nothing to do with the launches and things like that.

Kunal Dhamesha — Macquarie Group — Analyst

If you get — because the focus is on manufacturing rationalization, etc., if we get more products which means mores [Speech Overlap]

Rajesh Dubey — Chief Financial Officer

No, no. I told you no. Sir, I understand, it does not matter.

Kunal Dhamesha — Macquarie Group — Analyst

Okay, perfect. Thank you.

Operator

Thank you. I now hand the conference over to the management for closing comments.

Amit Kumar Khandelia — AVP Finance

Amit Khandelia this side. Thank you everyone for attending this call. If any of your queries are unanswered, please feel free to get in touch with me. Thank you, and have a great weekend.

Operator

Thank you very much. [Operator Closing Remarks]