Hello, and welcome to Lupin Limited Quarter 1 FY 2023 Earnings Conference Call. Please note that all participants' lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the opening remarks. Please note that this conference is being recorded. I now hand the conference over to management. Thank you, and over to you, sir. Hello, good evening. My name is Kamal Sharma. Welcome, you all to this earnings call for Lupin Limited. You already have seen the results. As a comment on the outset, I'd like to say that measures to improve overall operational efficiency and improve on our business structure have been in full swing. I'm aware that the numbers don't reflect them as yet, but team is absolutely confident that from next quarter onwards, we will definitely see positive reflection of the efforts that are being put in by the team. With those few opening remarks, I would now hand you over to our CFO, Mr. Swaminathan, who will walk you through the details of the financial results. Thank you, and over to you, Ramesh. Thank you, Dr. Sharma. Friends, in our previous investor call after the Q4 results, we did guide for a fact that, you know, the results for the first two or three quarters could be a little muted. In line with that, you know, the actual results for the quarter were in line with expectations in that sense. Sales for Q1 FY 2023 are at INR 3,604 crores as compared to INR 3,864 crores in Q4 FY 2022. It's a 6.7% quarter-on-quarter decline. On a year-on-year basis, it also declined by 6.7% as compared to Q1 FY 2022. Our sales excluding the U.S. revenues were higher by 5.9% sequentially and 2.5% year-on-year. When it comes to the US business, during the quarter, the US sales took a significant dip of 33% from $181 million in Q4 2022 to $121 million in Q1 FY 2023 as the company took certain strategic decisions to pave the way for building sustainable and profitable business in the U.S. First, the last few years, we have been experiencing huge stock returns on account of higher inventory levels in the trade. During the quarter, we ensured that the inventory levels across our key products are brought down at normalized levels, creating a significant impact in the quarterly sales. The pricing erosion FY 2022 has brought down the margins of certain products to single digit to negative territory. The company decided to discontinue some of these products with low and negative margins, which impacted our sales. However, it equally gave us an opportunity to optimize workforce in manufacturing plant in India, the benefits of which will start to flow from the next quarter. We continue to witness double-digit price erosion in this quarter as well, coupled with shelf stock adjustment on the higher trade inventory, creating a dent to the quarter numbers. While surprising erosion can be offset through new launches, which we expect to come through in H2 FY 2023, the first two initiatives have impacted the quarter but will help us to build focus on building a strong and profitable portfolio in the long run. We continue to build Albuterol market share, which improved to 23.2% in Q1. We versus 22.8% in the previous quarter. Turning to the India business. India branded formulations business posted a growth of 9.9% in Q1 FY 2023 versus Q4 FY 2022 on year, on year-on-year basis. It declined by 2.9% given FY 2022 Q1 had a positive impact on COVID wave two in India. API. Recovery API sales in Q1 quarter-on-quarter sales growth at 15.8%. On year-on-year basis, this has posted a growth of 3.8%. EMEA, year-on-year growth of 26.6% with strong performance by NaMuscla, Lithobid, etanercept sales to Mylan. NaMuscla growth is about 91% versus the previous year, quarter one that is. Q1 FY 2023 sales was 24.5 crore. In South Africa, FFUC, IB holds 28% market share, up from 31% held pre-COVID. When we talk about the growth markets. Philippines year-over-year basis, growth 20% with TB kits sales impacting about 9% approximately. Better performance in Furic and Lupimeb. In Australia, sales grew by 22.4% quarter-over-quarter and year-over-year by 49%, mainly due to the acquisition of Southern Cross. In Mexico, sales grew by 15.9% quarter-over-quarter and year-over-year growth was 30% as wholesale business continues to grow at 26%. In Brazil, quarter-over-quarter declined by 9.5%, year-over-year declined by 8.5%. This is because of higher sales of Azithromycin and Dipyridamole. When you come to the gross margins, Q1 FY 2023 is 55.3% as compared to the previous quarter, which was 57.8%. This is mainly due to a price erosion in America, trade inventory normalization that I just spoke about, and of course the shelf stock adjustment. There's, of course, you know, impact of cost inflation also, which is actually there in the gross margin line. We talk about employee benefits. Q1 FY 2023 is INR 778 crore. We established INR 71 crore in the previous quarter, and this is essentially because the previous quarter also had you know, an adjustment in terms of taking some part of the expenditure in other expenses. There's, of course, the impact of increments, which were rolled out in FY 2023, which came in the quarter one. There's, of course, the workforce planning at the plant level, which impacted about 14% of the workforce. There will be savings from there which would start flowing from Q2. On an ongoing basis, we expect employee costs to be in the range of 18%-18.5%. On the EBITDA front, operating EBITDA, excluding FX and other income, is 4.5% in Q1. A decline in EBITDA of 140 basis points led by drop in sales due to delayed inventory normalization, shelf stock adjustment in the U.S., price erosion, and on account of discontinuing products during the quarter. R&D expenditure is about INR 348 crore. We established INR 342 crore in the previous quarter. The ETR is expected to be around 35% as a few subsidiaries, you know, are still making losses. In terms of the working capital, you know, it's increased to 147 days from 140. However, we are working on this, and we would like to bring it down in the quarters to come. With this short commentary, may I open the floor for discussions? Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask question may raise your hand from the participants tab on your screen. Participants are requested to use headphone or earphone while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from Neha. Yeah, thank you for taking my question. Ramesh, could you just help us understand the quantum of the one-off impacts that you mentioned in your opening remarks out of the $60-odd million quarter-over-quarter decline that we have seen? Just wanted to understand what actually your base business in the U.S. was from second quarter onwards. Yeah. The way we would like to portray it is that things should normalize from the second quarter onwards, and we expect it to be upward of $150 million, somewhere in the range of $150-$160 million. If that were to be the normal, you could expect this to be considered to be a level, you know. Essentially, that's the difference that we have taken this quarter. Understood. That would mean, you know, quarter-on-quarter, we've still seen a fair bit of erosion in the business or does this also include some amount of discontinued products? And what would be the quantum of that discontinued products please? Insofar as the price erosion is concerned, you know, it's in double digits. It's close to about 10%. There is, of course, an element of, you know, discontinuing products which have been discontinued as well, which flowed into the results. Okay. Understood. From a margin perspective, you know, if I were to adjust the number that you've seen, you know, going forward, from second quarter onwards, should we start seeing margin improvement or that would entirely depend on our you know, launches coming through in the second half? The drop in sales kind of masks the efforts that we have taken. You would expect things to kind of normalize from a sales perspective. That obviously would add to the overall margins. There's of course a host of initiatives that we have been working on. All of those will actually start bearing fruit. For example, we spoke about the workforce planning at the factory level and in other areas as well. Benefits of programs like that will certainly flow on from, you know, the second quarter onwards. Margins should certainly keep, you know, would go up. It could, you know, substantially from this particular quarter. Towards the end of the year would reach a fairly decent level. Thank you so much. Thank you, n ext question is from Aditya Khemka. Yeah, hi. Thanks for the opportunity. Ramesh, you mentioned that the India business grew YOY because in the base quarter you had some COVID-related sales. Could you elaborate on that a bit? I thought we did not have any COVID-related sales. At least your commentary on the previous quarter did not indicate any COVID-related sales in the base quarter. Would you like to take this one? Yeah. I can take it. It's not the core COVID products itself, but it's products like Rivaroxaban and the like, which had very large sales in Q1 last year. If you adjust for those products which went up, so a lot of them were respiratory products, then the growth would have been 5.6%. Understood, Nilesh. Nilesh, AIOCD data indicates that excluding COVID-related sales, the market itself in the quarter of June grew about 13%, whereas our growth is in the neighborhood of 6%. Are we losing market share? If yes, what are we doing about it, and why are we losing it? Actually, quite the opposite actually. As per our data, our market share has actually gone up 10 basis points. We're actually gaining share. I think what has happened is our core chronic therapy areas, so inhalation, cardiac, diabetes, have de-grown. While, you know, they've de-grown minus 3.1%, we actually de-grew minus 2.6%. We actually did better than the market on that count. Because of the de-growth, then that's the reason why it looks like de-growth. We believe that this will bounce back. Obviously from Q2 onwards, we hope to get back to that double-digit kind of growth. Understood. Just two more questions, if I may. The decline QoQ also, to my understanding, happens every time from fourth quarter to first quarter due to seasonality of certain cephalosporin products. Could you, do you have a guesstimate as to how much of this sequential decline is due to the seasonality of our business in the U.S, and how much of it is actually your product rationalization and price erosion? The majority of it is product rationalization and, you know, getting the trade inventories at the right level. There was some impact also on the cephalosporins, though, Aditya. You know, they were down for sure, Q4 to Q1. Got it, Vinita. Thanks for that. Ramesh, last question for you. The debt seems to have gone up, I see. What is confusing is that your working capital has gone up while you have rationalized products in the U.S. My understanding was U.S. is the highest working capital geography we have. Ideally, with the U.S. sales coming down, the working capital on the U.S. side should have come down. Your debt has gone up this quarter substantially. The debt's gone up principally because we had an acquisition at the beginning of this quarter, essentially Anglo-French Drugs & Industries that we bought, you know, so that was the reason for that. There's of course an increase in the operating days in terms of working capital. It has gone up from 141 days to 147 days, principally on account of inventories, while there's a reduction on the accounts receivable front. How much inventory of the raw material are we keeping? The API raw material, because there is cost inflationary environment, so I'm sure we are keeping some stock to ensure continuous production. So what would be the inventory levels? That's exactly the point, you know. We have got some strategic inventory build up in order to offset any potential price increase. We've been pretty strategic about it. Yeah, could you quantify as to how much inventories? 60 days, 90, 120? It really depends on individual materials, but overall, there has been an increase in the receivables, on the inventories front. Okay. Thanks a lot, guys, and all the best. Thank you. Next question is from Anubhav Aggarwal. Hi. First question is in the U.S market, just trying to understand the decline. So three elements you guys talked about. One, shelf stock adjustment. Second is, some inventory write-down would have come, and not at the sales level, I hope. So sales level, first, would it be fair to assume shelf stock adjustment would be a single-digit number? I mean, something like less than $10 million. That would be fair statement to understand? Yeah. In a general sense, we don't disclose the individual components of this, but suffice to state that it has actually had a, you know, the impact of reducing the overall sales for the first quarter. I would like to repeat the fact that, you know, there would be a bounce back from the second quarter onwards. Just trying to understand, you know. The numbers are so large, first of all, to build it. One is we can believe you guys, just trying to understand what has happened in the quarter. Shelf stock adjustment typically will be on one, two products, and that's why I was saying that, should we just work with an assumption that large part of it. Mm-hmm. The way I am trying to understand this is that, is there a component that we were stocking very high inventory at the customer level and therefore the primary sales in this quarter? One is a discontinued products that we didn't want to sell more, so that's one component. Is there some component that this quarter we had primary lower sales of certain products which will come back in the next quarter? We, you know, as I said, the overall, you know, the erosion in prices is close to about 10%. You know, obviously insofar as stocks with the trade itself is concerned, we would have given them a shelf stock adjustment. Besides that, of course, we wanted to make sure the total inventories are built up at that level is going to be reduced. For that reason, we, you know, sold lower to the trade. It's a combination of both that has impacted the quarter. When you talk about Ramesh 150+, next quarter, this will include Suprep as well. Effectively we're talking about roughly INR 135-INR 140, the level that we were doing earlier. Would that be a right understanding? Sorry. Even without Suprep, I think the bounce back is expected even without Suprep. Suprep only comes in late in the. The third quarter. In the second quarter. Second quarter. The end of the quarter. You know, it comes end of the quarter, but you will have at least a good amount of a month or two months of sales at least of Suprep, right? The authorized generic is already launched on Suprep, so we will see how much of inventory trade has. If we have the opportunity of supplying two months, we definitely will. We'll get some upside in September for sure. We expect. I think it's fair to say that we expect the bounce back even without. Without Suprep. Without Suprep. Of course. Okay. We basically haven't sold, you know, to pare down the levels of inventory. We haven't sold a couple of weeks' worth of products to the trade. Okay. Vinita, on Spiriva, can you just give us clarity, where is this product stuck? Last time you mentioned that your German supplier in Germany had inspection. I don't know whether you had a re-inspection on your facility again or is the FDA still having the query on the product? No. We don't believe the product is stuck, Anubhav. In fact, since the last quarter meeting, our device manufacturer was inspected by the agency, and we believe the inspection went pretty well. We're privy to all of the observations and the responses as well. We have been going back and forth with the agency on a document review, and you know, have answered all their questions so far in the last few weeks. They have already inspected Pithampur Unit 3 in the past for trospium. You know, of course, I mean, if the agency decides to re-inspect, that's their prerogative, and we'll be ready to host the inspection. At this point in time, we believe that we have responded to the agency's questions fully and are hoping that we'll get the approval soon so that we can launch in Q4. We have, you know, launch prep preparations going in full swing at present. Thanks. Just one clarity, Ramesh. You talked about personnel cost reducing as a percentage next quarter, but can you talk about an absolute quantum, how much saving we are talking about? As I said, you know, about 14% of the workforce at the factory level has been brought down. You could expect about, you know, on a quarterly basis, about INR 20 crore reduction. Okay. Thank you. Thank you. Next question is from Palak Shah. Hi. Thank you for taking my question. Just firstly, on the Spiriva, you had earlier mentioned a target date of August 2022. Does that change, especially after the inspection of the device, facility? No. Our goal date is still August 17th. Got it. Secondly, in the U.S. business, you've mentioned that there is shelf stock adjustment as well as price erosion and rationalization. Now, part of this, as you mentioned, that you have sold lesser by two weeks this quarter, and that should be made up in the ensuing quarter. Is the understanding right? Yeah. It'll again lead to the same point that your inventory will again inch up in the ensuing quarters then. No, it shouldn't, r ight. If we tried to pare down the inventories because we saw excess inventory in the trade. You know, it's a one-time correction from a trade perspective to get the inventories to a normalized level. Got it. Just lastly, on the working capital side, you're looking to actually pare it down again from 147 to 130 to 140 days. Is that understanding right? Yes. And then- Go back to the, you know, to the way we evolved over time. You know, it used to be 100 days, so it's not as if we can get to that levels immediately. It's going to be over time. We're addressing certainly the inventory situation. Some of it is strategic buying at this stage. You know, with the situation improving, we'll certainly bring it down. Got it. Just lastly, on the Somerset facility, given that you have been stuck with this facility on a warning letter for quite some time, are we inclined towards actually exiting this facility and just stopping this functions altogether there? Well, actually, we have positive momentum at the facility now with the clearance of the warning letter. You know, last month in July, we cleared the warning letter, which was a record for us. Within three months, we went from 13 observations for an OAI to clearance of the warning letter. Actually it gives rise to new opportunities for us. We had a couple of products stuck that we were tech transferring into other sites, and we expect these products to come to get approved in the near term. Apart from Suprep, we think that, you know, a couple of the other niche products, like we have Diazepam gel that is a small but nice niche product that we likely can get approval for in the next six months. Likewise, we have a nasal spray where we are first to file Nascobal. Doesn't help us this fiscal year, but it's June next fiscal year. We exclusive first to file on that one. We will likely get approval for that one as well. We have positive momentum there on new product launches that we can really do well with to help grow our business. While we have tiotropium, we also want additional products that can help us grow the business. If you look at the cost of the facility of operating the facility versus the revenue projection from these two products, can they actually the facility be break-even cash break-even on itself? Yes, it will. Got it. I mean, we have optimized at the site quite a bit, and we'll continue to optimize and really manufacture products only that make sense at the site. Got it. Thanks. Thanks, Vinita. Thanks, Ramesh. Thanks, Suresh. Thank you, next question is from Surya Patra. Thanks for the opportunity. First of all, you have clarified obviously about the kind of margin profile and all that. See, we have been in the cost rationalization mode since I think over a year or now. We have this quarter also seen kind of a multiple adjustment at the inventory level and all that. Still the gross margin level, it is almost not that erosion year-over-year as I see. The major dent at the EBITDA level, what we are seeing it is because of the other expenses and the staff cost and all, R&D and all that. Sequentially, what would really change here and how should we go back to whatever guidance that we are giving the exit rate of 17-18% for the full year? Let me tackle that question. You know, you would appreciate that the, you know, the drop this time around is essentially because of the one time- Because of, you know, what we spoke about on the sales front in America. As we transition out of the legacy OSD business, which we think, you know, is actually on a weaker footing at this stage in America, onto more complex generics, you would expect the margin profile to start, the realizations to be much better, the margin profile to increase. We also stepping out of our OAI status across the plants. To the extent our ability to come out with products is certainly going to be much better. We have invested ahead of the curve when it comes to a lot of factories and the like, and we are doing what it takes. We're gonna rationalize on the workforce front, on the footprint front and the like. There's of course, you know, over the last few years I would say, we've been building up a culture of cost consciousness, including digital, you know, our digital roadmap. All of this will actually come to bear fruit. There is progress across various other geographies. You know, we have Luforbec, better products in U.K, Europe. You know, we have NaMuscla. You know, things are looking up much better in other geographies as well. I think that it's a combined impact of all of this which would actually improve the profile for us. India is continuing to do strongly, while of course in America, we just enumerated the various, you know, products that we could be bringing to market and so on. Our confidence levels actually flow from this. Sequentially, whether even Albuterol has witnessed a significant kind of a price erosion, and that is one of the key reason also for the sequential decline in the U.S. business. Is it possible to quantify what is the kind of inventory adjustment that you have built in this quarter? When it comes to price erosion, it has been across various products, you know. There has been some drop of course on Brovana itself and a slight decline when it comes to Albuterol. Overall we are at, or we spoke about 10% for the portfolio overall. The levels of inventory, the PC, I think we are comfortable with it and it's commensurate with the kind of you know drop in CSP kind of you know we've forced our assets to take for that reason. Okay. Just a related question further, I think, see this 10% kind of more than 10% or 10% kind of price erosion what we have been talking about. That's been there even in the previous quarter. There is no sequentially enhanced kind of erosion that we have witnessed. We have exited out of a few of the product basket. If you tell the number that is also useful. What is the model that we are trying to build for the U.S. business? Are we thinking that, okay, going ahead, whatever that is going to happen, it is relatively more complex and may not be specialty or specialty kind of, and we will move out of all the kind of old and commodity nature product completely. What is the model that ultimately that we are trying to achieve there in the U.S.? Because whatever the product basket that we have created, it is not fetching us the right result. Yeah. You know, we are transitioning the portfolio from the simple generics, the oral solids to complex, and that has started with Albuterol. Brovana will be further strengthened with Spiriva and, you know, we have a nasal spray product I mentioned, Nascobal. You know, the injectable products, the biosimilars that, you know, pegfilgrastim that we have the opportunity to get into the market. I mean, we will not vacate the space of oral solids. I mean, oral solids are still the bread and butter. With the kind of price erosion one has witnessed on the oral solids side, we, you know, decided that it made sense to rationalize a portfolio that does not make sense. Where there's negative margin or, you know, low margin, it makes sense to really take the overhead out of our PNL to improve profitability. We are taking those steps. We'll continue to optimize on the oral solids. You know, at the end of the day, we want to also manufacture oral solids very profitably. Continue effort in reducing cost of goods on the oral solid front from the, you know, optimization on the API front or external vendor development or the like. Wherever we see no real value into our network and PNL, you know, we're getting out of those. It doesn't make sense to really carry, you know, loss leaders in the portfolio. Our effort is really to, you know, transform the portfolio, transition it to complex generics. It started with inhalation products at 25% of our revenues last year. We hope in the next year or two with the pipeline that we have coming, we get closer to, you know, 35-40%, you know, in the years to come. You know, at the end of the day, we feel like there is more sustainable, you know, higher margin opportunity in the complex products. Okay. Just last quick question, ma'am, on the overall R&D spend, which was expected to be reduced through the hiving of the core basic research activities. What is the update there? Also if you can just give an update about the progress of etanercept safety in Europe. We are in active discussions with companies right now to monetize our oncology pipeline. Hope in the next, you know, couple of quarters we'll have some positive results there. We're in active dialogue right now on the oncology pipeline. On etanercept, the product is progressing with Mylan, and we continue to get approvals in new countries and look at launching it in new countries as well. Is it like more than $10 million kind of a level it has reached, or it is yet to achieve that, ma'am? Yeah, it is above $10 million already. Sure. Okay. Thank you. Thank you. Next question is from Sameer Baisiwala. Sameer, please unmute yourself. Yes. Good evening, everyone. The question is, in next couple of quarters, say by December, what's the margin potential of the core business, you know, without any large U.S. approval, et cetera? Because we are running a very profitable India and other markets, so if we can just discuss that. Yeah. As you correctly put it's basically the American business which needs to be, you know, which is actually undergoing, you know, there are shifting sands out there. We are trying to move out of, in fact, the more commoditizing oral solid business into more complex ones. The core portfolio is, of course, you know, from a price erosion perspective, it is suffering a bit, quite a bit. That's common across the industry as you would recognize. Whilst we are transitioning, we're also trying to build that, you know. It takes its own regulatory pathway for bringing in those approvals and introducing it to market. It has its own evolution time, so to speak. Sir, specifically on the margin, right, what's the core margin without the upsides from? For the whole business. from new products and the like? For the company? Yeah. It is really a function of the kind of write-downs that we have taken on inventories and all of that. Just specifically, we will get to the double digit. Yeah. Even for the core business, before we layer on anything out of new products or the like. Yeah. Yeah. Yeah, Nilesh, that's very helpful. That's what we were looking for. I mean, see, you know, business like yours, you know, should have 15%-20% operating margin, you know, as things stand. You know, is that something that you think is possible or is there some structural cost heads that you have which is different from others? Maybe That's why. Yeah, go ahead. Sorry. Maybe I can go and then Ramesh can add. You know, the oral solids, I think we were over-indexed on the oral solids compared to anybody else on the generic side. That optimization. Sorry, Sameer, you're asking about the company, right? Yeah. Overall? I am getting there. He's talking about core business. Yeah. Yeah. Yeah, the oral solid, we are paring down part of that. The idea is to rationalize the footprint associated with that as well, so the oral solid gets to a sustainable, profitable level, which it's not at this point of time, especially in the U.S. Layered on that would come the, you know, complex products and the like over time. India business obviously is highly profitable. You know, I don't think there's anything structurally different compared to other companies, but I think just the over-indexing on, firstly on the U.S., primarily on the oral solids, the lack of new product introductions in the recent years, you know. I think all of these have been compounding factors which have led to, you know, just that regular pipeline of products not coming to market. We're starting to see that come now. We see the innovation products. We see some of the other complex products coming as well. We do want to optimize the oral solid part so that it makes money standalone. Because only then does, you know, that's sustainability for the earnings. I think it only comes in at that point of time. I think it'll get there. I think we're close. We've done the optimization measures for the most part. I think you'll start seeing from Q2 that bounce back happening. Okay. Yeah. Great. Thanks. Just one final question is on the 14%, you know, workforce in the plant. I'm just wondering when, you know, your volumes go back up again, then what happens? I mean, or were there redundancies? If you can just talk about that. We've actually. I think we were very cognizant on that. You know, we hate doing stuff like this. I think the idea was to just optimize it to the right kind of level. Part of that has been exercises like delayering and the like, just optimizing spans of control. In some plants where volumes have gone down and we're seeing that new product would also not come, you know, reducing number of people out of that as well. I think we'll be able to handle volumes as they go up. We certainly have, you know, at this point, more capacity than we need. The future pipeline, even on the oral solids, is not extremely high volume from a new introduction perspective. Just to add to what Nilesh was saying. You know, I've said this in the past to you also, Sameer, there have been a number of inefficiencies that have crept into the system over a period of time, and we are in the process of ironing it out. Specifically, for example, you know, we have this inventory out of the curve, and we are addressing it through workforce planning. We're also looking at a footprint at some point of time, a reduction there. There are inefficiencies when it comes to, for example, on the delivery failure to supplies, the penalties that we spoke about in the past. We have addressed that significantly during the course of this year. Going forward, the results could be, you know, there's certainly going to be impact on that. They've always been focusing on, in fact, a host of initiatives when it comes to the gross margins in terms of route to synthesis or operational excellence and the like. Apart from that, there have been inefficiencies in terms of the supply. Because of OAI status itself when it comes to employing or deploying air freighting for moving our products out, there has been a considerable increase in that over time, and that we are again reducing. Apart from that, there has been, of course, you know, unfortunately, recalls of a different kind. We think of, while you can't, of course, you know, crystal gaze into the future and say how much it is going to be. There is you know, we have been working on, in fact, overall reduction in terms of, you know, strategies around APIs in India in terms of batch sizes and the like, and, in other parts, looking at other ways of actually, you know, controlling it. All of these measures, I think, you know, total up to a fairly decent amount, and which we think, when we work on and actually get the full, you know, the outcomes of all of this, would help in bring up the EBITDA margins, and of course, shoring up the overall core, you know, business of the past. Okay, great. Thank you so much. Thank you. Next question is from Madhav. Hi, good evening. Am I audible? Yes. Yeah. My question was that, the products that we are rationalizing in the oral solids portfolio. Hello? Go ahead. Can you hear me? Yeah. Yeah. My question was that the products that we are rationalizing in the oral solid portfolio, the existing players who continue to supply these products in the US market, are they at a better cost structure than us that they continue to supply or they are okay making negative profits or maybe zero profits in that portfolio? Like, people who continue to drive down prices, how are they able to sustain? Or do you think prices eventually must bounce back here for, you know, for supply to continue in the US market for some of these products? I think it's a combination. In some products where we are not vertically integrated or we don't have a good cost position, obviously someone else has the advantage over us, and if we can't gain that advantage in a reasonable period of time, it obviously does not make sense for us to beat a dead horse. I mean, and on the other hand, in other cases, you know, it's surprising to see folks really undercut, you know, our pricing against a vertically integrated player where we have strong cost position. It all depends upon, you know, dynamics around the product. It's a product by product analysis to determine, you know, is it a short-term price event or a long-term dynamic that we are dealing with, and to decide what to get out of and what not to get out of. I mean, you know, we don't easily get out of anything. We like to really be the last person standing in the marketplace. You know, when the pricing comes down to a level and costs are going up, you have to be rational about it from a margin perspective. How much probability would you assign to a situation where prices for some of these products at least stabilize, if not recover, so that supplies are more stable? Or do you think that there are still some players who are not that rational and prices are gonna remain low for a long time? When you look at the number of approvals that companies have had in the last couple of years, the oral solids have had the maximum number of approvals. New competitors getting in, you know, has been, you know, has exacerbated the situation as well. It's hard to really predict. I mean, is there gonna be a price increase? I think one would want to really be in a position where if there is a price increase on strategic products, we are able to take advantage of that. We are able to take additional volume in the marketplace when others have issues. But those will be around strategic products, not around small products. The drops would be the marginal products where we don't necessarily have fantastic cost position, we don't have great volumes, and, you know, which really don't move the needle beyond a point. I think those are the kind of products that have been the part of the cut at this point of time. I don't think we can count on serendipity to, you know, make up for, you know, these kind of products. You know, if something structurally changes, obviously we can go back to some of these products. Understood. Thank you so much. Thank you. Next question is from Nikhil Mathur. Yeah. Hi, good evening. Am I audible? Yes. Yeah, sure. My first question is on the other expense. If I look at on a quarter-over-quarter basis, the other expense is down almost INR 160 crore. And this R&D is stable. Can you help me if there is any benefit from research initiatives sitting in this Q-on-Q number? Because I believe there will be some lower direct costs as well attached to sales not realized in the U.S. Any research benefit sitting in this number in this quarter? Yeah, the last time around, there was some one-time expenditure. You know, we had the Solosec litigation expenses and the like. There was, of course, these FTS elements, which are also being considered out there. Those, you would recognize, are really one-times that we took in, so that obviously is significantly low. You know, it's done. It's not there this quarter, and hence the reduction. In the coming quarters, how should we look at other expense on an absolute basis? Is it likely to be stable and only the sales growth in 2024, 2025 would lead to some bit of operating leverage? On the other expense side also there are some explicit levers that will potentially be visible in 2Q onwards? As we said, you know, the number of things that we are actually looking at for cost reduction in a general sense. The one-time items are really one time, so we don't expect that to kind of crop up again. As a percentage of sales, I think these would be, you know, it'll be lower as the sales go up. As absolute numbers go, they would be more or less in the same vicinity. If I look at FY 2022, the expense was INR 4,500 crores. I think 220-odd crores was failure to supply. I could see in the annual report. INR 4,500 crores is after taking out the impact of failure to supply. What is the like-for-like number are we working with in FY 2022 versus FY 2021 on the expense side? In absolute- Do you want to comment? In absolute numbers, we could take this offline for sure. You know, this is really to be taken on a full year basis because what you're comparing is, you know, is against that. I would rather take it offline, but for sure, you know, there are several measures that we have been working on. If you were to knock out the one times which will not appear again, you would see the numbers coming down over time. Okay. Got it. Nilesh, one question for you. I heard you in the media in the morning, kind of indicating that India should be back to double-digit growth from 2Q onwards. Now, is it something visible or is it a hope that because the market should grow, Lupin should be on par with that market? Because the way I'm seeing the India business is there are certain headwinds to Lupin's India business in certain in-licensed products. You don't have a product which has been sold off to someone else. I'm just trying to. I'm not able to figure out how double-digit growth would the company be back to from 2Q onwards. No, you know, like we said, even adjusted for COVID, the growth was 5.6% in Q1. That's kind of the base that we're working on from in any case. You're absolutely right, there are some effects in. On the cardiac space, obviously we lost a brand. In the diabetes space, there's competition from, you know, generic products coming to some of the other in-licensed products, otherwise. Respiratory has been slow to grow. We've still seen, you know, slightly lighter doctor footfall than what we would have expected. That's what we would expect to normalize. You know, we're still holding on. You know, again, all of this was expected. Q1 was expected to be the way that it is. Future quarters are expected to go back to the double digit. Will we be at 8% or 9% in Q2 before we get to double digits in three? Maybe. You know, in general, we're gonna be in double digits for the balance nine months. Okay. One final question on gross margins. Now a couple of years back when there was this expectation of Albuterol coming in, even then it was widely expected that Lupin's gross margins will improve. And also there were talk about procurement efficiencies being realized. Even then, the gross margins have only declined, they haven't improved. Can you help us how the gross margin will improve over the next two years? I mean, Spiriva will come, but you have the base business which will erode as well. Some more sense on how the gross margin can improve, I think that would be very helpful. In some parts, if you're comparing at the you know, in the recent past, it's also because of the fact that we had an element, the salience of the partner products are gone up. You know, but as we bring in products from our own stable, you'd expect that to you know, salience, the weightage to come down. You know, and of course the various initiatives that we have been following we've been adopting you know, in terms of procurement excellence and outsourcing thesis, and all of this to come to bear fruit. You would expect, with better products coming in, the gross margins to certainly go up. Sure. Thanks a lot, and all the best. Thank you. Next question is from Chirag Dagli. Chirag, you might be on mute. Go ahead. Yeah. Hi. Sorry. Three questions. First is, how should we think about the QOQ dip of $50 million in the U.S, the impact of that on EBITDA? Any thoughts there? It's actually flowed through, right? Essentially, the EBITDA, it's its impact on the overall EBITDA margins. You know, the absolute number goes down, and the fixed cost base being what it is, it brings down the margin. Once you know, the turnover goes up, which is what we say would happen between second and fourth quarter, you would expect things to be much better. Ramesh, you're saying that. Had this not been the case, EBITDA would have been higher by $50 million? Well, the gross margin portion of that. Gross margin portion of that. Gross margin. Understood. Okay. Fair point. Secondly, you know, we've talked about INR 500 crore annualized kind of cost savings from the second quarter onwards is what you indicated last quarter. Does that still stand? You know, has there been a change there? Has it increased, reduced? There are a number of initiatives, you know. To be really exact, we have got about seven or eight initiatives going. There is an initiative. You know, so we just spoke about the fact that we carried on this workforce planning at the factory end and other places as well. There's been a 15% reduction on the overall manpower, on the manpower front. There are initiatives to kind of reduce the footprint itself, because we recognize that it kind of invested out of the curve. I spoke about, in fact, the air freighting. I spoke about, in fact, reducing FTS. I spoke about actually dropping negative margin products and the like. All of this are, you know, it's work in progress. Some parts of it is completed. The other parts, which will actually play off during the course of this year and perhaps in the early part of next year as well. It's basically, you know, it's a balanced approach and it's a philosophy that we will continue. For sure, it will bring in more than INR 500 crore that you're talking about. Ramesh, can you be a little more specific because clearly numbers are, you know, substantially lower. Can you just, you know, give us a sense of the glide path of how the, you know, bounce back or improvement will probably progress over the next few quarters? This is more near-term issue. I understand it's, you know, it's not right to put you guys through this, but, you know, just given the kind of disappointment we've seen, a glide path would really help in terms of how to think about this near term in the next quarter. You know, it will be very unfair to kind of spell out what will be the outcomes from individual initiatives. You know, that will be very, you know, unfair on your part to expect the company to spell it out. But cumulatively in aggregate, the total quantum could be in excess of INR 500 crore. It's actually between INR 500-INR 750 crore. And it is exactly what we are setting out to kind of achieve. This will happen during the course of the next four-five quarters. Understood. You indicated on television that you will exit Q4 with 18% margin. Did we understand this right? Yeah. It is aided by the fact that a lot of these initiatives would have paid, you know, would pay dividends. The fact that we would also have, you know, products being introduced in the market. Of course, repeat depreciation, which also helps in terms of, you know, the overall realizations itself. You should also not forget the fact that, you know, there has been, you know, secular inflation, which is impacting this industry as it is, you know, impacting other industries. We have a fair sense about where it is going. Having said that, you know, there could always be moving parts that you cannot kind of anticipate. Understood. Okay, sir. Thank you so much. Best wishes. Thank you. As we have limited time, we request to keep two questions at a time. Next question is from Sunil Gupta. Sunil, please unmute yourself. Yeah. Hello? Yeah. Yes, please go ahead. Yeah. Thank you. Sorry about that. Just a couple of small questions. One is can you share the size of the partnered product portfolio for the U.S? I mean, like, what percentage of your U.S sales comes from that? It is, you know, it'd be going forward. It'll always be, it'll certainly be much lower. I could talk about the individual products, per se. For example, last time we had Brovana, 15%-16% is what we, you know, kind of, have got in that, you know, in that bucket. Got it. Just given the erosion, I mean, like, the correction in the whole U.S. sales, what sort of reduction or correction are you looking in the U.S. sales and SG&A infrastructure? Because, yeah, could you shed some light on that? Just trying to understand. Is it being right-sized? Sure. Sorry. We have been optimizing the PNL end-to-end, Sunil, right from SG&A at the commercial end in the U.S to, you know, manufacturing cost, just like Ramesh highlighted with the, you know, workforce reduction in our plants to reduce cost of goods. As well as optimization on the R&D spend. You know, we have brought R&D spend down 25% from Q4 to Q1 and intend to optimize further while not missing out on material opportunities in particular in the complex generics front and exclusive oral solids. It's really end-to-end PNL that we have optimized and we continue to optimize. Got it. I mean, just trying to get a sense, right, like, the U.S SG&A would be running at, like, 15%-20% of U.S. sales. Is that where it would be right now? Yeah. Around, actually slightly ahead of that. Yeah. About 24% is what we have as total SG&A spends relating to the U.S. End-to-end. End-to-end, including the gap which is allocated to the U.S. Yeah. Okay. That includes R&D as well? No, that's separate, right? No, just the SG&A. That needs to substantially come down, right, if the U.S has to be profitable? If you're gonna actually go down the path of products being introduced, which will actually take up the turnover, you know, it'll be fair to kind of say that it should, you know, we'd obviously optimize wherever we can, but and cutting down to, you know, what we think is absolutely necessary. What we think, you know, to the extent that we think it is necessary, we would keep it there. Got it. Great. Thank you so much. Thank you. Next question is from Anubhav Aggarwal. Yeah, hi. Couple of questions. One is on the gross margin this quarter. We had two, impacts. One is from shelf stock adjustments, second benefit from discontinuation of low margin products. If you were to normalize, this 55.3%, what would have been a normalized gross margin this quarter? Couple of% more, right? Yeah, couple of percentage points more. Which is what was Q4, right? Yeah. There was no material change from there, but for some price solution, but other than that, yeah. Okay. Thank you. That's helpful. Second, among the different cost saving areas, Ramesh, you highlighted seven, eight areas. If you were to pick one and which is low-hanging fruit, which can be implemented this year with some good benefit coming, I'm not talking about how much benefit, which will be that one area that you'll pinpoint? These are different, you know, buckets, and all of them have their own, nuances really. We've gone down the path of manpower reduction at the factory level. There's of course still, you know, you know, capacities that we're invested in that we think we should address in some ways. There's of course the FTS element which we've also addressed, this year. I think the FTS is what we've, you know, fixed, right? Yes. In the sense that we did a catch up that we needed to clean up in the past, and now we've got it at a pretty clean trot. The inventory is very, you know, pretty optimized. Our OTIF levels are way up as well. Obviously, I think the FTS is something that we would expect to keep in control now. That's already done, Nilesh. Anything incrementally- You asked for low-hanging fruit, right? Yes. That we can do. That you can do incrementally from here. So I just- I think stuff like freight we'll bank on, right? Obviously freight is coming down again as we've been able to normalize inventories. We're back to ocean rather than sending stuff by air as well. I think it's gonna be a multitude of stuff thereafter. What's your mix, Nilesh right now, sea versus air? I think we'll have to get that to you. I don't have it offhand. I think it's close to about 34%. 34% by air. By air. Normal will be what? 20%. If we go back to 2015, you know, it was zero. I don't think it'll get down to that level, but, you know, we obviously have a debt target to bring it down. Okay. Just one more, sorry, Vinita, this is to you. When I say Lupin versus your peers, I see very overdependence or very skewed profile of very high U.S as well as high India. Of course, the company now has a problem where the profits are not very high. At some point of time, how do you think about in the past we haven't. We had Japan, which we exited. EM is a portion. How are you thinking about it as an area that you want to develop? Second, would you agree that right now is not the time because you want to contain and bring back the margin? When things are okay, how are you thinking about EM as a category? Yeah. Sorry, can you repeat that question? We actually lost power for a split second. Yeah. I was just talking about emerging markets as a category. Lupin versus peers seems to have a profile where U.S and India are a very significant portion of the revenues and profits. Lupin doesn't seem as diversified as some of the other large cap peers are. Right now may not be the best time because we are looking to contain margins. At some point of time, how are you thinking about diversifying into emerging markets as an area? you know, if you look at our emerging market business right now, if you add Latin America, South Africa, Philippines, it's a nice sizable business. I mean, last year it was $200 million in revenues at 18% EBITDA, and it grows, you know, double-digit year-on-year. I mean, the only place where we are still, you know, trying to really get it to the right level of profitability is Brazil, but the other countries are all pretty high margin countries. You know, while they're growing organically and have a very rich pipeline, we are looking at small bolt-ons into the emerging markets to be able to grow it beyond the 15%-20% level to the next four-five years to get to, you know, between $400-$500 million in revenues. You know, there's tremendous potential in Latin America itself, beyond Mexico, Brazil, and also in Africa. I mean, we have started the efforts of, you know, getting from South Africa to Sub-Saharan Africa. We have started registering the products to be able to grow into the region. Certainly have plans to really grow our emerging market business. Likewise, you know, we are truly under-indexed in Europe. I mean, if you look at most of our peers and you look at also the global generic companies, they typically have a much larger presence in Europe. We are probably one of the smallest. We have significant potential there as well, in particular now with the complex generics, with inhalation products, with the injectables coming. You know, we have tremendous potential there to grow the business. Continue to look at small bolt-ons to be able to, you know, effectively commercialize the products in Europe as well. Thank you. I know we are over time, but we'll take 10 minutes more since there's a bunch of questions still pending. Thank you. Next question is from Mr. Sandeep. Hello, am I audible? Yes. Yes. Yeah, hi. This question is to Nilesh and Vinita. It seems the problems over the last couple of quarters or couple of years have been both internal and external, which is pricing led, et cetera, but seem more internal to the organization. What are the strategic changes which are required, especially at organizational level, leadership level, to really get the organization back to winning ways? Because an aspiration of 17%-18% margins is good, but that's still average. Do you think there are a lot more strategic choices needed or a product pipeline coming through? Will get us back to where Lupin should be. From my perspective, agreed that there have been both challenges, external as well as internal. External, certainly from a market perspective, internal from the standpoint of delivery, you know, certainly with the GMP challenges that we had that hampered the ability to really get the right number of products into the market that really help offset a lot of the external challenges. We have done a number of things to try to address these challenges. Nilesh spoke, I mean, we have clear focus on the GMP front. Have really taken it to a different level to ensure that all of our sites are at, you know, meet and exceed FDA's expectations. Out of the five sites that were in trouble, we have cleared two and are confident of clearing the other three as well, while keeping the rest of the sites compliant. That's crucial, that's the backbone of the business to, you know, help us deliver every product that we file from a, you know, R&D perspective. Really, you know, getting the new product launch engine fixed is a big part of our focus. It's a combination of people as well as processes that we have worked upon. We are fairly confident with the changes that we have made, you know, aided by the GMP status changing now, we should be able to really kickstart the new product engine effectively, you know, from this year onward. I mean, you know, for a generic drug company, I mean, it's crucial to get new products, you know, a good number of meaningful new products to launch. You know, that's just one of them. I mean, there are many areas where we have, you know, we talked about issues with FTS, back orders that plagued quarters in the last fiscal year. We have done a number of things to streamline our supply chain. We have implemented integrated business planning in the company last year. That has changed the visibility that our team has end to end. The alignment our team has to ensure that we maximize on the products that we have on the market. We minimize, mitigate any failure to supply penalties and back orders. We are in a much different place today than we were 12 months ago. I mean, you know, the numbers don't show that as of yet, but we are confident that you will see it in the quarters to come. If I may just sort of follow on this, Vinita. If you look back at the performance and think about these internal sort of issues, when you fix responsibility, is it more new talent required in the organization? That really is the question, because backfill of orders, air freighting, et cetera, nothing to do with the GMP or market. There are lots of issues. Does the organization require new talent? Because organization is made of people who have to execute. I think it's a combination of both talent as well as processes. You know, we found that the process fix went a long way to give everybody visibility end to end in terms of what is needed. I mean, there are talent gaps as well, I would say, and we're in the process of filling them. We've made several changes as well, right? Mm-hmm. Changes in the procurement function, changes in the supply chain function. Mm-hmm. Changes in some of the technical operation roles as well, including in quality even. Right. Right. I think we just need to execute versus the plan that we have. I think we have a plan that we are gonna right-size the footprint for the oral solids. Yeah. We'll execute on the complex generics. We will. You know, Vinita talked about some of the other markets. From my perspective, we would double down on India, which is something that we've only started in the last few years. In India, it's not just pure pharmaceuticals, it's the broader healthcare space with some of the stuff that we're doing. We just have to stay at this now. Got it. Thank you. Thank you. Maybe last two questions. Yeah, we'll take last two questions. Next question is from Prakash Agarwal. Yeah. Hi, good evening. Am I audible? Yes. Yes. Yeah. Hi. Thanks for the opportunity. Good evening. Question again on the U.S side. I heard you saying that, you know, the sales and the margins are going to bounce back, but the clarity here would help, you know, pare down inventory, shelf stock adjustment impact and price erosion. When you talk about these three pieces, out of these three, the first two are one time. Are you saying that from Q3, you will be back to $170, $180, or you said something lower is. If these are one time, why aren't we coming back to $170, $180, and why are we calling it, I think you said $150 odd? I think with the erosion. Price erosion. It comes to the INR 150-INR 160 kind of number at this point of time. That has to be supplemented only by more sales in the in-line products if we do that, or otherwise new product launches. No, this base was already 200, and we've been seeing price erosion every quarter. What I'm trying to understand, did we see, you know, another round of 10% price erosion on the base portfolio? That seems to have happened at this point of time already. That's right. I mean, you know, and our average was $180 in terms of base last year, and we saw 10% erosion, especially, you know, products where we had significant additional competitors, like Brovana, for example, which is the reason why, I mean, the base comes down. With the approvals and the launches that you're seeing from the facility cleared recently, Goa has few launches. How do you see Somerset shaping up? Do you have some chunky launches, approvals, which can, you know, in the near to medium term, say one to three quarters out, can they start, you know? Do we see double-digit launch for the year or how do we see that? We're expecting 10 launches, 10+ launches in the year. So far we have launched one product, Restasis, which was authorized generic, you know, from AbbVie, in the first quarter. You know, we expect Suprep coming through in September and on, and full launch prep there. Now that Somerset is cleared, we're expecting couple more products out of Somerset, six or so. The meaningful ones are diazepam gel that I mentioned, which could really help in the fiscal year and next fiscal year, early next fiscal year, we have Nascobal, where we are first to file. You know, we expect that approval out of Somerset in the next six-eight months. Those are the ones out of Somerset in the near term, Prakash. Perfect. Just to follow up on this, so 150 base, what is the more downside to that? I mean, obviously, I mean, it's difficult to predict that 10% quarter-on-quarter price reduction is huge. Is there a more downside to that? I don't think so. I mean, because, you know, Brovana in particular, we had a really strong market share. We still have a good market share, but the pricing has come down with the number of additional competitors. You know, so it's hard to predict pricing in the U.S market. Yeah. We do believe that, you know, this should be the base on which we add new products. Perfect. Second one is on the respiratory, you know, pipeline. If you could throw some color there, given that, you know, you obviously have talked about couple upcoming this year, but how does it, you know, look for 2024 and 2025? You know, Spiriva obviously will be the biggest one for us in the near term. Then Nascobal out of Somerset. We expect you know, a ramp up of Spiriva also in other countries, U.K, Europe, Australia, Canada. You know, Dulera is still under. You know, we have a little bit of work to do on Dulera, but you know, we have had good correspondence with the FDA on that one. That product is also relevant for us for Canada. That's in the works. Then we have products both are like the Fostair product. You know, we just got notified about the high strength approval. You know, we plan to launch that later this year in U.K and Europe early in the next calendar year. You know, have a full pipeline beyond that, Ultibro and the Ellipta franchise, the Respimat franchise. We're making progress on the pipeline on, you know, all the material products. Your margin guidance of 17%-18% include all these kind of product launch probabilities? Well, I mean, it's really this year, the 17%-18% exit with Spiriva coming in. As we get full impact of Spiriva next year, as we get other products, we should be at that 20%+. True. Absolutely. Okay. Okay. Perfect. Makes sense. All the best to you. Thank you. Thank you. We'll just take the last question from Sameer Baisiwala. Hi. Thank you so much. A couple of questions. One, Vinita, are you expecting an authorized generic on Spiriva? It's hard to predict, Sameer. You know, we are planning both ways. I mean, from a financial perspective, we have planned for an authorized generic to be in. From a supply planning standpoint, we are ready to take on the market 100%. Okay, great. The second question is, Vinita, just curious, you know, what's the sort of backward integration that you have and, for the U.S business, you know, just some broad range, and how does it stack up versus the industry? I think we're fairly backward integrated when it comes to the oral solids. You know, in the complex generics, it's not as important to be backward integrated. It's more, you know, technology. On the oral solids, we are fairly backward integrated. I would say like, maybe 70% of our portfolio. Backward integrated. 70% of the in-line portfolio. In-line portfolio. Yeah. Yeah. Because I was coming from one of the previous participant that, you know, you know, how important is it to be, you know, backward integrated to really survive and do well in the U.S? Or is this an inflection point in the industry structure that even the low-cost producers from India needs to exit, you know, because they have, you know, such thin margins. You think there's still- I would say for more. Sorry, go ahead. Sorry, go ahead. Please complete, yes, your question. No, I guess, you know, there's still more time before the industry inflects. Is that the way we should read about it? I think there is, for the oral solids, backward integration, you know, and getting the right cost through backward integration is gonna be key to survival. In fact, it's not just backward integration, it's backward integration and operation at scale. Yeah. Right? Both. You could be backward integrated. If you don't have scale, you're not gonna have the right cost of goods. Right. That wouldn't work either. Yeah. I think there will be a shakeout in the oral solids as we see it. The products where we are backward integrated on and the products that are strategic to us, we will be anchored in there to gain additional share, if the opportunity arises. At the same time, products where we are not, don't have a great cost position, we're not gonna hold on to it to no end. Okay. Vinita, with that logic, if you don't mind, then for that 70% that you are backward integrated and you have scale, I mean, over time you should be gaining market share and there should be shakeout, you know, for, in those products as well. Well, hopefully, if others are willing to give up space. Okay. One final question. How many filings have you done for, you know, large value inhalers and complex injectables? Where are you in the pipeline? I'd say that. Three, huh? Yeah, three or four so far. Not too long ago. Several others in advanced stages of development. Yeah. Okay. Okay, fine. Thank you so much. Thank you. Thank you. I now hand the conference over to the management for the closing comments. Thank you very much for your participation, and hope you had answers to most of your questions. Look forward to seeing you next quarter and, in the meantime, take care of yourselves and look after yourself. Thank you very much, bye for now. Thank you. On behalf of Lupin Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines and exit the webinar.