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Edited Transcript of ALKEM.NSE earnings conference call or presentation 13-Aug-19 5:30am GMT

Q1 2020 Alkem Laboratories Ltd Earnings Call

MUMBAI Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Alkem Laboratories Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 5:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Amit Ghare

Alkem Laboratories Limited - President of International Business

* Gagan Borana

Alkem Laboratories Limited - General Manager of IR

* Rajesh Dubey

Alkem Laboratories Limited - President of Finance, President & CFO

* Sandeep Derjit Singh

Alkem Laboratories Limited - MD & Executive Director

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Conference Call Participants

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* Aditya Khemka

DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare

* Ashish Thavkar

Motilal Oswal Asset Management Company Limited - Associate VP

* Damayanti Kerai

HSBC, Research Division - Analyst, Healthcare and Hospitals

* Kunal Randeria

Antique Stockbroking Ltd., Research Division - Research Analyst

* Neha Manpuria

JP Morgan Chase & Co, Research Division - Analyst

* Nimish Nagindas Mehta

Research Delta Advisors, Research Division - Research Analyst

* Prakash Agarwal

Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals

* Rashmi Sancheti

Anand Rathi Financial Services Limited, Research Division - Research Analyst

* Saion Mukherjee

Nomura Securities Co. Ltd., Research Division - Head of India Equity Research

* Surajit Pal

Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst

* Tushar Manudhane

Motilal Oswal Securities Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to the Alkem Laboratories Limited Q1 FY '20 Earnings Conference Call hosted by Motilal Oswal Financial Services Limited. (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.

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Tushar Manudhane, Motilal Oswal Securities Limited, Research Division - Research Analyst [2]

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Thanks, Stephen. Good morning, everyone. Thanks for joining this call. From Alkem Senior Management team, we have Mr. Sandeep Singh, Managing Director; Mr. Rajesh Dubey, Chief Financial Officer; Mr. Amit Ghare, President, International Business; Mr. Yogesh Kaushal, Senior Vice President, Chronic Division; and Mr. Gagan Borana from Investor Relations.

Over to you, Gagan.

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Gagan Borana, Alkem Laboratories Limited - General Manager of IR [3]

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Thank you, Tushar. Good morning, everybody, and thank you for taking your time in joining us for Alkem Laboratories' Q1 FY '20 Earnings Call. Yesterday, we have released our financial results and the same also posted on our website.

Today in this call, we have the senior management team of Alkem to discuss the business performance and outlook going forward.

Before I proceed with this call, I would like to remind everybody that the call is being recorded and the call transcript would be made available on our website as well.

A brief disclaimer for today's call. Today's discussion may include our forward-looking statements and the same must be viewed in conjunction with the risks that our business faces. At the end of this call, if any of the queries remain unanswered, please feel free to get in touch with me.

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

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [4]

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Thank you, Gagan. Good morning, everyone. I am pleased to share that we have made positive start to the financial year in both our India business and International business, delivering a steady double-digit year-on-year growth during the quarter.

Our EBITDA margin has also shown a healthy year-on-year improvement of 200 basis points during the quarter, highlighting our continuous effort towards cost optimization and productivity improvement. This, coupled with lower effective tax rate on account of investments made in manufacturing facilities that are entitled to fiscal benefits, we have delivered a robust net profit growth of 36%, compared to the previous year.

On the working capital front also, we showed good improvement over the last year, which has translated into better operating cash flow during the quarter.

Talking in greater details about the India business, I'm happy to share that as for IQVIA data via -- for the 12 months ended June 2019, Alkem has gained 1 rank and now is ranked the fifth largest company in India. This has been achieved on back of continuous outperformance by the company, vis-à-vis industry, driven by strong brand, formidable product portfolio, extensive marketing and distribution network and an experience over 40 years in the Indian pharma market. Also during the quarter, the company's secondary sales growth reported by IQVIA was 18.7%, which was significantly ahead of the market growth of 10.4%.

In our established territory areas of branding sectors, gastrointestinal and vitamins, minerals and nutrients, our growth was much ahead of the therapy growth rates. Also, in the chronic therapy segment, the company delivered a growth that was higher than the therapy growth rate.

During the quarter, we gained 2 ranks in CNS and neuro segment. And now we are positioned as the sixth largest CNS/neuro company in India.

Moving to international business. Our U.S. business delivered a steady growth of 13.7% year-on-year during the quarter. This growth has been achieved on the high base of last year, where we grew by almost 40%. The growth in the U.S. business was mainly on the back of new product launches and scale up in the existing products.

During the quarter, we invested about INR 103 crores in R&D, which is about 5.6% of our total revenue. We filed 2 ANDAs during the quarter and received 5 approvals, which included 2 tentative approvals.

We now have a fairly strong pipeline of 127 ANDAs already filed with U.S. FDA, with over half of them yet to be commercialized. Timely new product approvals and the commercialization would be a key driver of growth going forward in the U.S. market.

On the regulatory front, we recently received an EIR for our formulation manufacturing facility at Baddi, which was inspected in the month of May 2019. With this, all our manufacturing facilities, except the St Louis facility in U.S., has then -- we are in place.

In regards to central facility where we have an OAI, our team is working towards addressing the observation and resolving them. Currently, this facility accounts for less than 3% of our U.S. sales, but it is an important facility from the future point of view, given that we have planned to introduce our non-soluble production and controlled substance in the facility -- from the facility.

Summing up the performance of the quarter gone by, I would say that we have made a good start to the financial year in terms of revenue growth, improvement in profit margins and better cash flows. I'm hopeful that the significant investments we have made in our infrastructure and in our people over the last couple of years will help us sustain this momentum for the remaining quarters as well.

Last but not the least, cost optimization and productivity improvement will be one of the most important aspects of our strategy going forward.

With this, I would like to open the floor for question and answers. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Rashmi Sancheti from Anand Rathi.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [2]

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In terms of domestic business growth, can you split between branded business and trade changes during the quarter? And how are we looking for the entire year? And in domestic business itself, I want to know number of inventory days and total MRs as on date. Are we -- have we added anything beyond 9,000?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [3]

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Yes. So we normally don't disclose quarter-on-quarter, the business split-up generic and trade generics, so we'll -- like it's worded. But roughly, we have -- I mean always maintained in the past calls as well. They're close to 15% is at trade generic proportion.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [4]

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Okay. And sir, but currently, these trades in the business are showing growth?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [5]

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Yes. Yes.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [6]

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Okay. And how are we looking for the entire year, both clocked together?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [7]

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What do you mean?

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [8]

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For the entire year, any guidance on domestic business?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [9]

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So we always give that. So the thing is changing this quarter. We always maintain that we'll outperform the industry by, let's say, 200 basis points. So I think that will continue, and there's no reason for us to change that guidance.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [10]

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Okay. And sir, on total MR as on date?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [11]

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So what we said last time, we have close to 10,000 medical reps on the ground.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [12]

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You mean to say, the exact sales force, excluding the sales manager?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [13]

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Absolutely, yes.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [14]

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Okay. And sir, my second question is related to U.S. sales. We have not seen much decline even though mycophenolate has seen competition. So is it because that valsartan has picked up during the quarter? Or it is a combination of many products?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [15]

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It's a combination of many products, Rashmi.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [16]

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Okay. And sir, lastly, on gross debt and CapEx figure. If you can give how much is the gross debt as on date? And what would be the CapEx guidance for the entire year in FY '20 and 21?

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [17]

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Rashmi, our gross debt is somewhere close to INR 1,050 crores. And on net level, our debt is INR 120 crores, kind of. And sorry, I missed your second question.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [18]

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Sir, on CapEx guidance?

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [19]

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Yes, CapEx this quarter, our cash flow on CapEx, it was around INR 96 crores, but for this year, we'll be landing somewhere INR 400 crores to INR 450 crores.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [20]

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INR 400 crores to INR 450 crores. And how much would be the maintenance out of that INR 450 crores?

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [21]

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Maintenance is around INR 100 crores, INR 125 crores.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [22]

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Okay. And largely, the CapEx would be spent on which facilities?

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [23]

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It would be our bio facilities going on. So that is one. Then we have our indoor facility. And then from -- that selected facility, there are expansions also. But I think more or less, we are through with our CapEx requirement. And all of this INR 400 crores, INR 450 crores, what I mentioned, there are carryforwards also of last year. So I think more or less, we are through with CapEx and we are going to be -- a little more business normalized CapEx going forward.

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Rashmi Sancheti, Anand Rathi Financial Services Limited, Research Division - Research Analyst [24]

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So in FY 2021, we can expect a maintenance CapEx of INR 150 crores to INR 200 crores, kind of?

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [25]

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Along with maintenance, something -- some are other expansion, it goes on and the automation also, it goes on. So we believe going forward, our CapEx will be in the range of INR 350 crores.

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Operator [26]

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The next question is from the line of Prakash Agarwal from Axis Capital.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [27]

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Sir, my question is on the India business growth. So 12%, I think one of the best in the peer group that we see, but if you could split between the volume, new product and you include this price increase for the quarter?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [28]

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Let's see. For the quarter, our unit growth is close to around 3.5% and on price increase, around 5% and new product also is around 4.5%.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [29]

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Okay. And if you could help us understand...

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [30]

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Prakash, I stand corrected. It is around 2.7%.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [31]

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What is 2.7%, sir?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [32]

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The new introductions.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [33]

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New introduction is 2.7% instead of 4.5% what you said?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [34]

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Yes, yes.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [35]

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Okay. Okay. Understood. And sir, in terms of volume uptick, I think the April and May were very soft. June is where we started to see some wins and volume pick up, especially on acute segment. How do we see the volume picking up in July and August? And was the disruption largely due to low seasonal off-take in acute or it's a confluence of many factors like we can also include the economic slowdown or the (inaudible) -- if you can share the outlook. How do we see the volume picking up or we expect this to be similar levels?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [36]

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See, the first 2 months, we can attribute, to a certain extent, seasonality for sure. And there is certainly a change in the disease pattern also. So there's some correction you will have seen in the first quarter. So waterborne disease and your vector borne disease, there are some challenges, okay? But then, along with these diseases, certain molecules which are associated with this disease, they also are part of the treatment. So they also get reduced.

So in second quarter -- or you would have seen -- even if you see last around 8 to 10 months trend. You've seen unit growth slightly diluting because of these diseases. And going forward from here, if you see, I see a correction in the industry. So last month, unit growth is around 3.5% to 4% again. So it is, again, coming back to faster unit growth. Now I see a similar pattern in the coming time also.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [37]

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Okay. From flattish, you're expecting for the year to be around 3% to 4%? Is that correct inference?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [38]

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Yes, yes.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [39]

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Okay. Understood. And sir, on -- you're clearly growing much higher in anti-infectives despite having a large base. What are the strategies we are implementing to keep the growth momentum, which is 2x of the industry growth? That is the first part.

And secondly, what incrementals we have done in the CNS portfolio to have gone up to merchants and banking?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [40]

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Yes, still related to our domestic growth, I think last 2 years, if you see during our last session, also so we said, we are working on a strategy, which is reach. So we have added close to around 2,000-plus medical representatives -- reps in the last 2 years. So I think that strategy is paying dividends. So that's the reason we are growing faster than the industry, so particularly our acute business has massively expanded in last 2 years. So we are sustaining our volume growth there as well, overall growth in acute.

And we know that in the future of industry will be chronic, where we were not literally so strong. So in last 2 to 3 years, there has been equal massive expansions in chronic also. So the unit growth and all we have to sustain and we will continue growing more than the market, then chronic has to contribute a little bit better than what we have today, and that's what's our second strategy.

So acute strategy is reached. And again, we're working on productivity, and then strengthening chronic, so that we come to the industry balance. We know that it'll take time, but this also has started showing dividends.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [41]

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But anything special you have done on the CNS to move up too much?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [42]

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I think CNS, we were very focused. We chose 3 to 4 therapies. We didn't want it to go everywhere. So our 40% was a target where we have become number one. We are close to 37% market share. And then we chose 2 more therapies to be leaders there. So there are 8 to 9 therapies, and we focus only on 3 major to build our CNS portfolio. That is paying now dividend to us.

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Operator [43]

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The next question is from the line of Aditya Khemka from DSP Mutual Funds.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [44]

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So a couple of questions. The first one for you, Amit. So now the U.S., if you could just take me through the kind of filings we are doing and the R&D budget? And how do you see the plain vanilla market or a solid market in U.S. currently versus the more complex derma, respiratory market?

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Amit Ghare, Alkem Laboratories Limited - President of International Business [45]

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So let me answer the internal question first. R&D budget remains between 5% to 6% of our revenue, and I think we've been very consistent there over the years, and that's what we continue to maintain. Some ANDA filings over the years have been up and down in terms of numbers, but the overall spend will continue to be in that range that we talked about.

Aditya, I'm sorry, I missed your second question. I think you were talking about...

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [46]

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The environment regarding plain vanilla versus the complex derma/onco/injectable market, how is the pricing environment there? And what is interesting to you right now?

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Amit Ghare, Alkem Laboratories Limited - President of International Business [47]

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Right. So we continue to work across a cross-section of our portfolio. I mean a portfolio available in the market for genericization. And consciously we made efforts to also develop and register ANDAs in nonoral solids category. So I don't want to just say complex generics, but at least from a dosage form perspective, nonoral solids. And we are -- as you know, we already are commercial in a few products on all those categories. And it's a work in progress.

So as we continue doing more and more development, we will continue doing development of other dosage forms. Mind you, overall solids because the oral solids continues to be 80% of the market, and it will be same, maybe a little higher split for us as well.

In the marketplace, ultimately, what really gets decided in terms of either genericization or erosion of pricing, whatever you want to call, is a complex factor of competitive landscape for that particular molecule or that particular product versus, of course, the customers for that product. So there are products which are complex generics but will show pricing trends like just a vanilla generic.

And then there will always be somewhere [not] generic, which will have different competitive landscape and therefore, a different pricing structure. But I don't think I can answer your question in a very general way. It's a very product-specific case, specific reason.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [48]

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Yes, that's fair enough. So let me put it the other way around. In your base business, excluding, let's say, a nonoral form, are you still seeing a double-digit price erosion or healthy price erosion drop to a lower single-digit around the [CO]?

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Amit Ghare, Alkem Laboratories Limited - President of International Business [49]

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Well, the price erosion for us was always single digits, Aditya, at least in the molecules that we used to operate in. Yes, the market at some point of time had gone to a slightly higher number, but since last 12 months, I would say the market is already -- in terms of price erosion, is in single digits.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [50]

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And for us, is it mid-single digit, low single digit? Any qualitative color?

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Amit Ghare, Alkem Laboratories Limited - President of International Business [51]

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Yes, mid-single digit, it is for us. Very much in line with the trend and the industry.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [52]

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Fair enough. Second question for the business. Sir, on the material cost, so it's now 38.5% for us, this gross margin. So would you say the reduction in cost of the raw material coming in from China, that is fully reflected in this quarter? Or there is still more benefit to go on the gross margin side from the Chinese cooling off of prices of raw material.

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [53]

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Aditya, you said very correct. Actually, we witnessed a lot of it in quarter -- last year's quarter -- started in quarter 2, but quarter 3 and quarter 4, it was affected significantly. And you rightly said on softening of API prices of -- if you know about China-related issues, we witnessed API prices coming down. But this was our first quarter. So whatever material already procured in Q4 of last year, that is having impact on COGS still in quarter 1 also.

We expect going forward in quarter 2 and after that, we expect a good amount of improvement as far as COGS is concerned. So if you see last year's quarter 1, our COGS was 38% and this time, it is 38.5%. And I think going forward, we expect somewhere close to 38% kind of. That's our estimate.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [54]

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Understood. And that is -- when you procure material from these Chinese manufacturers, do they invoice you in dollars or they do invoice you in RMB?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [55]

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See, we have our major procurement is happening domestically, of course, this material is from China. So that is having impact. So we do have some imports also. So…

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [56]

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I think dollars.

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [57]

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We do have some small procurement in dollars also, but resulting in INR.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [58]

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Okay. So my question actually was that, given the recent changes in the exchange rates between China -- Chinese currency and the USD, would that inflate our material prices because we are importing from there and their currency has depreciated? So how -- as in -- or the other way around I mean?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [59]

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We don't see very much impact because we are not importing in Chinese currency, first of all.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [60]

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You're not importing, okay.

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [61]

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But -- on our dollar importing is also not very significant.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [62]

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Fair enough. Last question for you, Sandeep, then I'll get back in the queue. So now that most of your CapEx seems to be behind and they are just related to slightly some capacity debottlenecking here and there. What is the incremental plan for the cash flow deployment? So you will have some surplus cash that will submit from operations. You could use it to acquire companies, do bolt-on acquisitions or you can return it to shareholders by way of dividend or buyback. So what is the management currently thinking in terms of how to utilize this excess cash that you will generate?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [63]

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So we always maintain -- see, our dividend policy is that we give 20%, 25% of profits. So we stand on that. I think the problem of 20% -- whenever you come to it, we could discuss it, but I think it's still far away where we have pressure of, let's say, having too much cash. And I think that'll be a great problem to have. So until we don't come to that, I think, that's premature. I mean -- you know you heard Mr. Dubey. He said we have a gross debt of INR 1,000 crores plus and net level also, we have around INR 100 crores. So it's not that we are pulling in cash currently and it's [hand over first]. And we, however, Aditya, will discuss, we will talk to shareholders, we'll take feedback, we'll look at our business plans once again. But just to be very clear, we do not think that we'll make any large acquisitions; that's not something which we plan to. Yes, small bets, we'll be taking some of the innovation and all that, but later on, Aditya. So I'm very happy you keep asking us. You're very confident that we'll do it. So we have no problem to discuss it. But it's still for some time.

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Operator [64]

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The next question is from the line of Neha Manpuria from JPMorgan.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [65]

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Sir, on India, qualitatively, we'd indicated last time that we were tightening credit to some extent on the Gx segment. And now has the growth there normalized from taking initiatives and tightening credit, et cetera? Just wanted to understand was the Rx business growing faster in this quarter versus Gx?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [66]

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So you're quickly right. Last time, we had tightened up, we had cleaned up some business. This quarter, I think we have normalized. And it is as per our expectations. To answer you, which is very important, I think both of them more or less on the same growth rate. So it's not that Rx is doing much better than a prescription -- branded generics or something like that. It's more in line with the business of overall domestic business.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [67]

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And sir, one of the large peers is changing their distribution in the quarter. Would that benefit Alkem in any way being another large player in the Gx segment given this is a sort of supply heavy quarter -- supply heavy business?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [68]

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So I don't -- I mean, maybe in a very short term, but I think we have a lot of respect for the company you're talking about. They have just seen the business model. So they'll be impacted for maybe 3 to 4 months and it is more at the primary level. So I don't think -- so there is something up for grabs immediately. And it's not something, which any company, whether Alkem or anybody, can exploit it immediately and grow.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [69]

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Understood, understood. Fair enough. And then second question is on the other expenses. If I were to strip out R&D, other expenses still seem pretty high. Quarter-on-quarter, there's been an increase even though year-on-year, it's not as much. And given we had some 1 month index on 116 impact, any reason or is there any one-off in this quarter? This is the number that we should be looking at?

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [70]

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Yes, I may have initial figure. Actually, if you see my other expenses, it is around INR 483 crores in this quarter, whereas in last year's quarter 1, it was INR 485 crores. So in fact, if you see, there is a reduction of around INR 3 crores in this quarter. So I don't know about our -- in other expenses, it's mainly marketing expenses or R&D expenses, excluding payroll cost. So I think things are in line with our estimates only, and we don't see any one-off kind of thing.

Yes, something or other will happen depending on nature of expenditure, but it's in line, yes. I would like to mention here, operating leverage, we have started because our production volume, it has increased and definitely, that is going better operating levels as far as production cost is concerned. So that advantage we are having.

R&D spend, we already -- Mr. Sandeep Singh, he already mentioned. It is going to be even further closer to fixed cost. And that expectation -- that estimate is always there. And even in quarter 1 also, it's in line with that.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [71]

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Sir, is it fair to then assume, sir, that the improvement in margins that we want to see over the full year, would be a result of gross margins rather than -- and to some extent, operating leverage because we're not seeing too much in terms of cost reduction that we mentioned in the opening comments.

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [72]

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No, actually, cost reduction is also there. As I mentioned, the operating leverage we are going to have. And I think Mr. Sandeep Singh here has already covered. So we are very cautious on costs. And that was the reason why I explained further operating leverage we are having. And that we are going to get continuously going forward also.

See, on EBITDA margin, our guidance, I think it was 125 to 150 basis point. And at the time of giving guidance, 116, it was already captured. So we are having impact of 30 basis points in that. So -- and we hope -- and we are very confident we are going to meet the guidance.

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [73]

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Neha, it's Sandeep here. I mean I would -- yes, so I think you have a point there. We mentioned costs, and we are working on that. A large part of the further expansion will come from operating leverage and gross margin. So I think I agree with you now.

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [74]

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Even material costs also.

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [75]

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Yes, yes.

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [76]

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So in nominal terms.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [77]

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Understood. And my last question...

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [78]

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Just Neha, just to mention something. Just one thing to keep in mind. Q1 FY '19, there has been some reclassification with -- of one item between the raw material and our expenses...

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [79]

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Yes, yes, that's fine. No, that's why I was looking from a full year basis, not necessarily quarter-on-quarter.

And my last question is on the tax rate. I think we've guided to about 20%. But this quarter has been 11%. So what should we be looking in our...?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [80]

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Our tax rate of 20%, it was for last year. So if you see last year, we are 19%. And guidance for this year is somewhere between 12% to 14%.

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Operator [81]

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The next question is from the line of Nimish Mehta from Research Delta Data Advisors.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [82]

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All of my questions have been answered.

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Operator [83]

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The next question is from the line of Ashish Thavkar from Motilal Oswal Securities Limited.

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Ashish Thavkar, Motilal Oswal Asset Management Company Limited - Associate VP [84]

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On the India piece, there seems to be some volatility concerning the fact that last year, we had made some changes in the distribution policy. So this full financial year, all the quarters will be comparable on a like-for-like basis? Or we should think it in a different way?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [85]

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Ashish, [cut-off to] sales in India is [115]. It was implemented last year. But when you see last year's quarter 1 and this year's quarter 1, our [cut-off shifting out] sales of -- it is more or less comparable, it is equivalent amount it has not shifted.

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Ashish Thavkar, Motilal Oswal Asset Management Company Limited - Associate VP [86]

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Okay. So given that the second quarter of last fiscal was pretty strong for us, you could say that even this second quarter would -- on a like-to-like basis would be in a similar nature?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [87]

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Hope so, yes. It's comparable to reiterate.

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [88]

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But then, which is in terms of top line and the margin across the last year, 4 quarters, the sales will remain the same.

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Ashish Thavkar, Motilal Oswal Asset Management Company Limited - Associate VP [89]

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Okay. Okay. And can we have the numbers for primary and secondary growth? Just wanted to see if there's a mismatch there?

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Rajesh Dubey, Alkem Laboratories Limited - President of Finance, President & CFO [90]

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Secondary and tertiary numbers, we don't share. IMS which we have and we -- I told in the opening comments as well.

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Ashish Thavkar, Motilal Oswal Asset Management Company Limited - Associate VP [91]

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Okay. And finally, the last question on this tax, again. Since the team, tax benefit starting 2027 so would you like to guide for the next 2 to 3 years, the kind of tax rate that we could assume on a consol basis?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [92]

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This year, we'll be there between 12% to 14%. Next year, we haven't -- that effect will be -- also be going away so that we add a percent kind of, so between 13% to 15%. But I think -- we always taxing. So dynamic, we don't want to give guidance beyond 2 years. So this year, 12% to 14%; and next year, 13% to 15% is our estimate.

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Operator [93]

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The next question is from the line of Surajit Pal from Prabhudas Lilladher.

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Surajit Pal, Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst [94]

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I have 2 questions. One question is that on this currency front, since you have done mostly in INR, so if Chinese currency devalue, the realization definitely for the exporter -- Chinese exporter would be lower. So do you expect that the invoice in INR will be increased because of that?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [95]

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Values to be are also [we've been] working. We don't have any invoice in Chinese currency. We -- our export is -- mainly, it is in U.S. dollar. So I don't think devaluation of Chinese currency is directly...

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Surajit Pal, Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst [96]

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My point is not from your point of view. What I'm saying is that the Chinese guy, his realization from that perspective, will that be changed? It will be increased or decreased in that point of view?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [97]

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So I think (inaudible)

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Surajit Pal, Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst [98]

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The point is that since it is INR, so they will be benefited. They will be receiving more money in companies when they'll be converting.

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [99]

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So you're saying we should use it to negotiate to get them down on the price?

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Surajit Pal, Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst [100]

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Yes.

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [101]

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Okay. Yes, because the -- see, whereas Mr. Dubey said, we don't import a lot of API from there. So it might not be very significant to us. But that's a good point that we can try it but it's not significant.

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Surajit Pal, Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst [102]

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Okay. So that is one. Second point is that -- which is a bit of confusing in terms of trade generics in domestic front, because from large guys we are hearing there is a disruption, that is a common thing which we are hearing along the distribution level. What we are hearing, not in unison is that the kind of problem -- because one company is saying is that there are a differential pricing available of their product in the system because of GST implementation, which has happened in 2017, in July, right? So this is July, August 2019. I don't think any sales stock price or the -- in Europe, any product is sustainability at that time, mostly 3 to 4 months, maximum 6 months. So do you think that is a problem? Or do you think that there's some other problem we're talking about?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [103]

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So on -- I mean, on the company we spoke, they've seen the business model -- that all you have seen is disruption. I don't think there's any greater reason for that. So I don't think that should be confusing to anyone. It's very clear that's in the business model. And we have not. So there's no reason for us to disrupt anything.

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Surajit Pal, Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst [104]

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Okay. Okay. So what is the actual issue? That is what I wanted to hear.

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [105]

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What do you mean, sir? Whose issue?

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Surajit Pal, Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst [106]

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In trade generics, what is the issue?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [107]

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What issue, sir? Where is the issue, sir? Can you tell me?

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Surajit Pal, Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst [108]

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This is why the last year, companies are saying is that their business in trade generics is impacted because of the surplus.

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [109]

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No, other than surplus, which ones have you heard? Please educate us, sir.

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Surajit Pal, Prabhudas Lilladher Pvt Ltd., Research Division - Assistant VP & Senior Research Analyst [110]

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Yes, there are companies which I'll share after.

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [111]

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Please. If you do, then I can tell you.

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Operator [112]

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The next question is from the line Prakash Agarwal from Axis Capital.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [113]

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Just trying to understand a couple of things. One is, as per your annual report, you talked about your recent launch of evogliptin. If you could help us understand how that has picked up and what kind of incremental growth or traction you are seeing?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [114]

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So I shall answer your first question. With incremental growth, I'll understand your question again because -- so this molecule has a certain strength compared to the established player like [lina] and indiscernible] so we are basically going behind science and we are promoting largely the virtues of this molecule. And we have done massive CMEs, we are [distributed] close to around 6,000 doctors across the country. And the entire endocrinology bodies that does -- who dose to this molecule. So the reason behind establishing this molecule is pure science. So that's what we have been driving.

Now traction for growth, we are assuming that this brand will give us close to around INR 15 crores by end of the year, if everything goes right. So it may give us a traction of close to around 3 additional -- 3% to 4% growth over what we are doing now.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [115]

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INR 15 crores annually?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [116]

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Annually, yes.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [117]

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Okay. And there's also mention of -- we are looking at more such opportunities here, if you could throw some light there?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [118]

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There are not many now in the space of diabetes, there's nothing much less, sir. You are only left with the GLT2s, so -- which are patented till 2024 and '25. So right now, we have to build on productivity instead of spending more time on innovations and new launches.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [119]

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Understood. And there's also a comment on the biosimilar being the next leg of growth for us in the annual report. If you could throw some light what we plan for India and emerging market to start with. And where is the facility in terms of commercialization?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [120]

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Yes. So Prakash, I think next year, around, I think, quarter 2, we would be launching 1 or 2 products in India. And then -- so first is, we want to launch products in India and then take to emerging markets. So as you know, biotech is a long-term plan. So for the first couple of years from now, I think we'll be focusing on India. We'll try to do some emerging markets, but not very significantly. A plant is being considered in Pura. And I think by April next year, I think our plant would be ready for taking batches commercially.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [121]

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Okay. And are we disclosing the products, what kind of products we're developing in [time]?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [122]

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Not right now. We'll wait until we launch and then closer to when we are launching, we'll be far more sharing because it might be premature right now. So this -- some of them in also the arthritis space and bone health, and some could be around [oncology], typical stuff for us, which, I think, once we're closer, we'll disclose more.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [123]

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Understood. And lastly, one clarification on the MR strength. So I think last time, what I heard was moving -- adding 2,000 from 7,000 to 9,000, and the plan was to add 1 more thousand during the year to 10,000. What I heard in the call is the current strength is 10,000. So have we added 1,000 already in the quarter?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [124]

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So we have 10,000. What's your question? Sorry, I didn't understand, Prakash.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [125]

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So I think in the last call, you mentioned that we've added 2,000 people over the last couple of years from 7,000 to 9,000, correct?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [126]

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All have not been -- we must have added some of them previous quarter. I mean some of them must be -- just being completed as of now. The question was how much we have as of now. So some could be just added the last [15] also as well.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [127]

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Okay. So 10,000 is the current strength. And what is the plan for the year?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [128]

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No, I think we are done. We don't need to add anything further. This is more than enough, I would say.

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Operator [129]

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The next question is from the line of Damayanti Kerai from HSBC.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [130]

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Sir, do you have any update to share on the progress of OTC portfolio in India? Because last time, I believe you mentioned that depending on the performance of launch products in the market, will decide strategy ahead, so anything to share here?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [131]

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No, I think OTC, we are kind of going very slow. We have put it on -- if we can say, on our backburner. We are winding it down a little bit. So we don't plan to invest in advertising and above the line, things like that. So OTC, it is not a priority now.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [132]

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Okay. So we are not looking to invest a lot in this part of business, right?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [133]

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That's right. That's right.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [134]

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Okay. My second question, you said biotech plant will be ready by April next year. When we are expecting completion of indoor plant?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [135]

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Indoor plant, I think, is more or less ready. I think we'll commercialize in April -- before April. In Feb, March, we will commercialize this year. Yes.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [136]

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Sir, you mean 2020, right? March, April, around winter?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [137]

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Yes, absolutely. Yes. This fiscal year, correct.

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Operator [138]

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The next question is from the line of Saion Mukherjee from Nomura Securities.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [139]

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Sir, just one question on U.S., you have some launches, particularly pregabalin, cinacalcet very recently. Are there interesting opportunities in terms of size you see? I mean on an average, you do 5 million, 7 million, right, per product? How do you -- how would you rate some of these recent launches?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [140]

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Pregabalin, day 1 had 12 approvals and more approvals came later. So that's the order of the day, Saion, you know that very well. So as we go forward, obviously, we see more players come or some players exit. We will be there in the market for sure. So we've got our market share, I would say, commensurate with what our expectation was, also, in terms of competition. So we are there in the market.

Cinacalcet is a different volume altogether. It's our first launch, as you are aware. And so it's a different product. It's a little different discussion overall.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [141]

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But is that going to be meaningful for you?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [142]

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Now Cinacalcet, meaningful in light of what you said, 5 million to 7 million, it will probably only be in that range.

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Operator [143]

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The next question is from the line of Kunal Randeria from Antique Stockbroking.

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Kunal Randeria, Antique Stockbroking Ltd., Research Division - Research Analyst [144]

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So one question on the U.S. front. In separate products, we have seen that we are fifth or sixth entrant, but our brand got quite the interest on market share. So just trying to understand the reasons behind this. Is it purely driven by shortages or are we being aggressive on the pricing front?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [145]

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I guess the answer is basically our relationship with our customers and which allows us, even though we may not be entrant #1, it allows us a certain market share. I think that's a very general answer, but unfortunately, for a general question, that's what I can answer.

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Kunal Randeria, Antique Stockbroking Ltd., Research Division - Research Analyst [146]

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I mean okay. So if I'm being a bit more direct here, so are we, I mean, ramping up market share because of profitability?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [147]

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No, we do not do that.

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Kunal Randeria, Antique Stockbroking Ltd., Research Division - Research Analyst [148]

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Right, right. Okay. And just on the orders, solids front, we are seeing a lot more shortages in the U.S. market. So do we see any opportunities where we can exploit in the next few quarters?

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Sandeep Derjit Singh, Alkem Laboratories Limited - MD & Executive Director [149]

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From our portfolio, there is nothing right now, honestly, which is in the shortages list or where there are onetime opportunities.

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Operator [150]

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As there are no further questions, I would now like to hand the conference over to Mr. Gagan Borana from Alkem Laboratories for closing comments.

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Gagan Borana, Alkem Laboratories Limited - General Manager of IR [151]

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Thank you, everyone, for attending this call. If any of your queries have remained unanswered, please feel free to get in touch with me. Thank you.

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Operator [152]

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Thank you. Ladies and gentlemen, on behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.