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Edited Transcript of APLLTD.NSE earnings conference call or presentation 24-Oct-19 10:30am GMT

Q2 2020 Alembic Pharmaceuticals Ltd Earnings Call

VADODARA Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Alembic Pharmaceuticals Ltd earnings conference call or presentation Thursday, October 24, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Pranav Chirayu Amin

Alembic Pharmaceuticals Limited - MD & Executive Director

* Raj Kumar Shreeram Baheti

Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director

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Conference Call Participants

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* Abhishek Sharma

IIFL Research - VP & Head of Life Sciences

* Aditya Khemka

DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare

* Anmol Ganjoo

JM Financial Institutional Securities Limited, Research Division - Director

* Bharat Celly

Equirus Securities Private Limited, Research Division - Associate

* Kunal Randeria

Antique Stockbroking Ltd., Research Division - Research Analyst

* Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst

* Nimish Nagindas Mehta

Research Delta Advisors, Research Division - Research Analyst

* Nitin Agarwal

IDFC Securities Limited, Research Division - Analyst

* Prakash Agarwal

Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals

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Presentation

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [1]

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Thank you very much. Good evening, everyone. Thank you all for joining the Second Quarter Results Conference Call. I'm sure you would have got all the results by now and our press release and the investor presentation. However, let me briefly take you through the numbers for the quarter ended 30th of September 2019, and obviously, the H1 of 2019 -- '19-'20.

During the quarter, the total revenue grew by 10% to INR 1-2-4-1 crores, INR 1,241 crores. EBITDA at INR 342 crores, [each] 28% of sales, and it grew by 12% on Y-o-Y. Pre-R&D EBITDA is 41% of sales. Profit before tax went up by 10% to INR 299 crores, while the after-tax number, PAT, went up by 23% to INR 246 crores.

During the half year, the total revenue grew by 10% to INR 2-1-9-0 crores, INR 2,190 crores. EBITDA at INR 575 crores is 26% of sales, and it grew by 26% on Y-o-Y, H1 of this year versus H1 of last year, 26% growth. Pre-R&D EBITDA is 40% of sales. The net profit after exceptional items and tax went up by 27% to INR 370 crores. EPS for the quarter is INR 13.06 per share versus INR 10.61 in the previous year, while for H1, it is INR 19.63 versus INR 15.41 in H1 of previous year.

CapEx for the quarter, including capital advances, are INR 197 crores, INR 370 crores for H1. Additionally, we have funded INR 52 crores to Aleor Dermaceuticals, our JV partner. The cumulative number for the year is, for H1 is, INR 100 crores. Cumulative investment on new projects, which are yet to be commercially operational is INR 1,500 crores, including Aleor and preoperative expense. The gross borrowing at consolidated level is INR 1-4-3-2 crores, INR 1,432 crores; and company hedge INR 86 crore in cash. So we -- the net borrowing is INR 1,346 crores. Debt/Equity is still healthy at 0.48. And importantly, return on capital is 35% if you don't consider the investment on new projects and 23% for the whole company, including considering investments on new projects.

I will now hand over the discussion to Pranav for his presentation.

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [2]

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Thank you, Mr. Baheti. Yes, it was a good quarter for the international business, considering the backdrop that last year Q2 was one where we had that unique valsartan opportunity. This was driven primarily by sales growth in the United States on our base portfolio as well as some new launches. What was also exciting was the API business, which had a very good quarter this year, and they have been slowly, slowly building up the business every quarter.

Aleor, our JV for derm, was audited in September '19, and we cleared it with one [observation] . Our R&D expense was INR 174 crores in the quarter, which was, for H1, it was INR 314 crores, roughly 14% of sales. We filed 5 vendors during the quarter. We received 4 approvals in the quarter. We cumulatively have 102 ANDA approvals, including 12 tentative approvals. We launched 7 products during the quarter for the half year. And for the half year, total launches are 10. We plan to launch another 7 to 10 products in the second half of the year, and EIRs are in place for all the plants. Our new projects are progressing well. Exhibit batches were taken during the quarter at the oncology injectable facility as well as the general injectable facility. And scale up batches at Jarod are also in progress.

The U.S. generics in dollar terms grew by 24% to $74 million. The ex USA generics degrew by 31% to INR 107 crores for the quarter. This degrowth was primarily because, as I mentioned in the last few quarters, we've been having issues with serialization and the vendor, and that's something that we are correcting. We hope to get back online Q3 onwards. India business was flat at INR 391 crores.

And I would like to open up the floor for Q&A now. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We have the first question from the line of Aditya Khemka from DSP Mutual Fund.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [2]

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So sir, can you just, again, sort of help us understand the India business growth. I understand it has been reported numbers, at least, have been quite subdued for the past few quarters now. But what is it that we are doing to change this? And when do you see us coming back to at least a market growth rate, if not beating the market?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [3]

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Sure. No, a very valid observation, and we are also constantly on the job, and I've tried to explain to you in the last couple of quarters. So let me assure you business-wise, we are adding to prescribers. We are adding to the number of prescriptions. ORG growth rate was also not bad. I mean, but our primary has taken a hit largely because we have decided to clamp down on the discounts which was being offered to the stockist. So we believe that the sales needs to have a pull by the prescription rather than pushed by the stockist. So in the last couple of quarters, we've already taken a hit. Hopefully, there maybe in 1 or 2 quarters more of pain on corresponding numbers and then you'll see us back into the double-digit growth.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [4]

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Sir, when did we start reducing this discount to stockists?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [5]

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So this was -- this was being gradually done from March of this year, March '19 onwards. But I think in last -- from May '19 onwards, it has been like complete [trap] down.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [6]

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Okay. Okay. Understood. And sir, on the U.S. business side, so while the growth has been pretty healthy, if I rely on the IMS numbers, a majority of the growth seems to be coming from different combination of sartan products, olmesartan, candesartan, valsartan, losartan. So to that extent, if I were to ask you, what is the stickiness of the pricing as well as of the market share that we're getting in many of these sartan products? How would the management think about that? And how would you sort of guide investors on that front?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [7]

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Yes. So it's a good question. And both market share and the pricing, they both go hand-in-hand, right? So what the entire team at Alembic starting from the front end to the strategy and the supply chain, all the way through, what we decided is we want to maximize shareholder return in terms of what prices we get for the market share versus the capacities that we have, right? Now we are not -- and I have said repeatedly, in terms of the API for the sartans, we are not a huge player like some of peers in the industry. So we try taking wherever we can market share at whatever attractive price.

Now if there's shortage, of course, as you know, there's more opportunities in terms of pricing. It depends when the incumbents come back and what price they decide to compete at. At present, we can hold the market share; there's no issue of it. It just really depends on -- at what discount is given by the competitors and with what level you want to compete. But on a base portfolio what is happening today, we're happy with the market share, and we can increase it also if we had more capacity.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [8]

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So where are we on the capacity -- so first of all, 2 questions on that front. Are we using our own API on the sartans side? Or is it a third-party sourced API?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [9]

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No. So for the sartans, we're 100% captive.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [10]

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100% captive. So where are we on the sartan API utilization in our manufacturing?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [11]

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See, listen, most of our facilities are all multiproduct facilities, right? So it's one or the other. So we try balancing out whichever way we can. It starts with the API capacity and then the formulation, and of course, formulation of a multiproduct, but even our API is not a multiproduct. So utilizing it in the best way, we want to ensure we don't -- once we pick up a business, we don't stock-out. We don't have any issues. So what you're seeing now is what pretty much we can take currently with our capacities.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [12]

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All right. So just one last question on this front. What is your view, Pranav, on the potential re-entry of competition in the sartan space? So maybe the Chinese manufacturer who had the original issue with the API may take longer, but you would have other players who would want to fill the void, and therefore, what is the visibility on the competition in sartans as of now?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [13]

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So I think what has happened is, initially -- and it's interesting you mentioned this because last year Q2, where we have the valsartan opportunity, where the shortages were restricted only to valsartan. Now that's pretty much gone into the other sartans, and I think the shares have also swapped and the usage has also swapped. So it's pretty much across the board in all the sartans. And I don't think there's too many players who are present in every sartan. So I think everyone will have to decide what market shares and where they want to get it -- where they want to take a position. Along with this, some of our peers in the industry have also had regulatory issues. It's just a combination of both. And I think even if new people do come, I don't think prices are going to go back to where it was. I think it still remains an interesting opportunity for a couple of quarters at least.

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Operator [14]

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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 [15]

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Just reconfirming, I mean, the spike in the U.S. business is largely due to the valsartan opportunity. I missed the opening comments and apologies for that.

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [16]

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No. Actually, it's across the board for all the sartans. Valsartan is what we had last year, where we have a big opportunity. I think what we're seeing now and what they pointed out was that he's seeing market share -- we have [picked] market share, IMS market share, in most of the sartans. And that is true, I think we have seen a shortage in sartans. Apart from that, we have a few good launches as well. We have febuxostat, which was limited competition launch in the U.S.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [17]

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Okay. Now the second question was [that only] . So you talked about 10-plus launches in the first half. I mean, have they started contributing? Or we should expect the contribution from the second half and the year forward?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [18]

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So part of it is we have started contributing, but as you know, at Alembic and I have said that repeatedly that, when we get to new products, especially when there are people there, we don't build up market share right away. We wait and we slowly build up market share. If it's a day 1 launch, it's separate story and in febuxostat, which was a day 1 launch, we built up shares. We've got decent share in febuxostat. As regards to the other products, they are smaller products. They have all started contributing in whatever little way that they can.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [19]

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Okay. And how should we think about the 10 -- again, this 10-plus and the 7 launches that you alluded in the third quarter that you plan to do? So these could be like 1 million or 2 million kind of opportunities? Because I see that across the -- especially these derms as well as the recent approvals, these are like $20 million to $80 million kind of opportunity with 7, 8 players already there. So I mean, just to be realistic, how should we think about on the sales front?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [20]

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No, you're right. I think with most of these launches in the U.S. business is challenging, and most of these launches you're just getting there and see what you can do, how can you maximize your share if there's any shortage. And they are not big products but good meaningful products. There is a good positive return. And we just keep supplying and keep getting money whenever we can.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [21]

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And one last one for Mr. Baheti. In terms of the derm facility, we started expensing out the whole expenses with the launches, or with 3Q launches, we will start doing that?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [22]

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So I think from this quarter and onwards, we will start expensing out because the plant will be manufacturing commercial quantities of its products from this quarter, Q3.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [23]

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Q3 Onwards. And the injectables and all, we will start from next year?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [24]

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Yes, I think this statement remains consistent that we'll start expensing out as and when the plant gets into commercial operations.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [25]

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Okay. Which is more or so next year for the remaining target that we are doing for oncology and injectable. Would that be right understanding?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [26]

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Yes, absolutely.

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Operator [27]

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

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [28]

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Congrats on a great quarter.

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Operator [29]

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I'm sorry Mr. Mehta, you may have to come closer to the phone. We cannot hear you.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [30]

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Is it better?

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Operator [31]

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Yes. Thank you.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [32]

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Okay. Yes, congrats on a wonderful set of numbers. On the U.S. business first, I mean, there has been a spike in the Q-o-Q sales as well, like from $47 million to $74 million. Is it all because of valsartan? Or it's also -- I mean, valsartan and febuxostat? How do you kind of divide between these 2?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [33]

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Yes. So as I mentioned earlier to Prakash that it's pretty much we're seeing this across the board in all the sartans. Apart from the sartans, we saw this in febuxostat as well. We don't give product-wise growth, but there's opportunities in quite a few handful of products, about 20 -- top 20 of our products is about 80%, 85% of our sales, if I'm not mistaken.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [34]

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Okay. And in febuxostat, do we have 180-day exclusivity? Or we can expect more competition anytime now?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [35]

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As of now, I think there's about 3 people also in the market -- 3 or 4 people in the market. And let's see, I'm not sure about the competition. At some point, I'm assuming people will come. So let's see how it goes.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [36]

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But do we have the 180-day exclusivity or we don't have the 180-day exclusivity?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [37]

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Yes, we do. We do.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [38]

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We do. So obviously, people will come after 6 months. I mean, now 2 or 3 months. Is that a fair understanding?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [39]

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I'm not sure. I think some others may have exclusive -- exclusivity also, but they might not have received an approval on launch. I'm not sure on that. I can get back to you.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [40]

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Okay. Okay. Fine. Fine. Just wanted to -- I'm sorry, I missed that, the capitalized expenses part on your as well as the preoperative expenses that we booked for other facilities. If you can just repeat that for me?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [41]

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So that will be part of our -- even the presentation subsequently. But I think the cumulative investments on new projects, including the preoperative and including the investment on annual fixed assets is about INR 1,500 crores.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [42]

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But the preoperative expense is only -- that is INR 60 crores is what you are saying?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [43]

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The preoperative [for] cumulative is about INR 400 crores.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [44]

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INR 400 crores for first half?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [45]

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No, no, cumulatively I'm saying.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [46]

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Cumulative. No, no if you can just tell me for the first half, that would be helpful.

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [47]

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For the first half, just a sec. (inaudible), do you have the number ?

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Unidentified Company Representative, [48]

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Yes. INR 134 crores.

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [49]

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INR 134 crores.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [50]

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INR 134 crores, total between Aleor and the preoperative.

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Operator [51]

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(Operator Instructions)

The next question is from the line of Shashank from JM Financial.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [52]

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Yes, this is Anmol Ganjoo. So congrats on a great set of numbers.

My first question is around the domestic market. Now, obviously, sequentially, there has been some improvement, but if you were to kind of break it down in terms of price and volume, it will be helpful because as far as I understand, around 20% of our domestic basket is NELM-linked (sic) [NLEM-linked]. So there, we should have had some price increases. And also, what is the feedback in terms of some of the clamp down that Mr. Baheti referred to in his opening remarks? How has that kind of impacted? And when does it settle, frankly, because that's the only weak link in an otherwise fairly strong performance?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [53]

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So if you look at the IMS data, I think, IMS MAT growth is about 10% for the industry and it's 12% for us. But it's, for us, the primary growth number for the H1. There's no growth, I mean, it's a flat number. So you can say that's an impact on the most stringent policies which we have adopted with the trade [given] . As I said and I repeat that we are gaining prescriptions, and we are gaining prescribers. So as far as business on the ground is concerned, I mean, we are okay, we are comfortable. And I think we are gaining [on] for growth phase once this -- what do I say -- the high-base number effect is worn out.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [54]

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So you also referred to some time lag in terms of when things should settle down...

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [55]

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I think mostly in next 2 quarters, maybe third quarter would be the last quarter, probably Q4 onwards this year, you should start seeing the results. You should start seeing the growth again, but maximum by first quarter next year, surely.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [56]

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Okay. That's helpful. My second question is to Pranav. Pranav, obviously, U.S. has been very robust this quarter, and some of the factor that you alluded to, I mean, you do hint at some kind of a stickiness of this performance. Now if you look at the last year, we were tracking at around $160 million odd, $158 million in the U.S., and now if you kind of look at the 1H, I mean, we're already above $100 million. So how do you want us to -- I know it's -- things are dynamic as far as the U.S. market is concerned. But when you look at the full year, what is the baseline number that we should work with? And extrapolate some of these opportunities that we keep getting lucky with?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [57]

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It's a tough one, Anmol, but okay. Now looking at -- Q1 was about $40-odd-million, Q2 $70-odd-million. I think, at about $50-odd-million per quarter is I think that should be the base figure that, in my opinion, with the current portfolio and the situation that we're looking at.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [58]

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And I mean, you don't expect any meaningful moving parts in the U.S. pricing to kind of offer meaningful downside to this quarterly run rate, right?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [59]

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This, to be honest, in the U.S., what happens, it's such a dynamic market that there's upside opportunities as well as downside risk. It's just a matter of how you capture it and what you do with it. But as of now the way I see it with whatever visibility and heading into Q3, I think on average, the $50 million per quarter is [capturing] that as a base portfolio that we have.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [60]

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Okay. And my last question before I get back in the queue. Now, obviously, you've done a few right things as far as the U.S. is concerned. But is there any change in terms of customer behavior, which is kind of helping us do what we're doing? Is there any commentary on the end landscape with respect to what we're seeing or any other further dynamics you'd like to kind of...?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [61]

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So actually, in the U.S., I'm not seeing anything else. See, right from the beginning, I think there were 3, 4 things that we wanted to work on as a corporate, as a company, and we've been sticking to that. One is supply-chain efficiency, ensuring our plants are compliant with FDA, ensuring that we maximize shareholder value. So I think we stick to that. The buyers, like supply-chain efficiency, they don't like stock-outs. And we've just been focusing on some of those. So we're not trying to be overambitious. Whenever we get opportunities, we try to build up the business and ensure that we're nimble to capture them.

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Operator [62]

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

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [63]

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So just a couple more questions. Pranav, you mentioned that the top 20 products is 80%, 85% of sales in U.S. for you. Could you give us a narrower number? How much are top 3, top 5 products, let's say, of the U.S. business?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [64]

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So the top -- yes, I think the top 5 should be about 30%, 40% of the U.S. -- America something like that. Yes, about 30%, 40%.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [65]

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Okay. Okay. And this -- most of these top 5. -- so febuxostat, for instance, are reflected in the top 5 for the quarter?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [66]

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No.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [67]

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Okay. Okay. Fair enough. And just another question on the ex U.S. exports, so sort of seeing a consistent decline there. Is it more because of capacity getting more locked up for the U.S.? Or is it something fundamentally changing in the business there for us?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [68]

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No. So what has happened in the ex-ROW domain that has been a sore point for us in the International business, and that's something that we are working on. As you know, all -- most of these countries went to serialization in terms of the packaging. And while the U.S. was smooth, some of the ROW nations was smooth, but Europe has been a little bit of a sore point, where we had a vendor who was not up to -- I mean, who was -- who took a while getting the system ready. So we've got a backlog, I believe the business is still very good. I'm hopeful that Q3, Q4, we should see a recovery. There's no other fundamental change in the business. It's not that U.S. is eating up capacity. It's just a matter of getting this out. And the serialization for the Europe is a little more complex. It has eaten up some capacity, so throughput has been a little slowed down, but it's something that we have to sort out, and I believe we are in the process of doing it.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [69]

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And does that -- does that mean that we are unable to supply to our customers, and therefore, others who have been able to move, very quickly, on the serialization could potentially take market share? Or is everybody, your peers, also facing similar issues?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [70]

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I think the industry per se is facing this issue. So obviously, in terms of pending orders, we still have lot of pending orders. We don't like to be in the situation. But yes, I think everybody else is also getting -- having some kind of issues, though different extremes, but -- so we're still working on that, but we need to really get our act together fast.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [71]

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Fair enough. Just the one last question with your permission. On the API side, although we have seen dramatic growth this quarter, how much of our API do we consume captively? And how much do we export or rather sell outside...?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [72]

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In terms of volumes?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [73]

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What is getting reflected in the numbers is all external sales.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [74]

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That's right. But how much is internal consumption?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [75]

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Well, it will get reflected as API sales or for that matter sales in our books. Yes, Pranav.

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Unidentified Company Representative, [76]

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Yes, 35% is captive, actually.

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [77]

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So 35% of the volumes are captive, the rest are external sales.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [78]

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Understood. And same question inversely asked how much of our U.S. sales -- for U.S. sales, how much of our API production -- U.S. formulation sales, how much of our API production we use captively?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [79]

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So for the OS, oral solid dosage, is where, I would say, at this present point, we have about 80%, which would be from captive.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [80]

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80%, 8-0?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [81]

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Yes, 8-0. And the rest, the other dosage forms will be externally [behind.]

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [82]

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Got it. And lastly, sorry, one more question. On the India business, beyond the issue with the discounting of the stockist, are you facing any headwinds in terms of propaganda companies or the smaller companies incentivizing more and seeing that most of the larger companies are sort of reducing discounts, reducing freebies to the channel. Do you think the smaller propaganda companies are taking advantage of the situation, increasing discounts and taking market share? Is that a -- is there something that is...?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [83]

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So I think they have their own pockets. So in some pockets, yes, they can make an impact. But I think on an all-India basis, we are okay. I mean, we are as good or as [one label] like any other large pharma company.

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Operator [84]

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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 [85]

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So Alembic has been fairly successful in identifying opportunities in the U.S. and then capitalizing on it. So do we still see some withdrawals from some of the bigger players in the U.S.? Or has that largely stopped now?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [86]

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I think we're still seeing that. There's a combination. See, withdrawal is one and strategic withdrawal with what that we saw, I believe, last year and beginning of last year, some part of the year before that. We saw that them pruning down their portfolios. Some businesses were sold. So that's what they did. Today, I think what we're seeing withdrawal is more as the regulatory norms have become tougher, as audits have become tougher. That is one of the reasons why you're seeing [some] withdrawals.

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Kunal Randeria, Antique Stockbroking Ltd., Research Division - Research Analyst [87]

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So I mean, the bigger guys are still withdrawing? Or you see you see some of them...?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [88]

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No, I think that whatever is withdrawn, I think, that's the first phase already happened. I don't believe they are withdrawing anymore.

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Kunal Randeria, Antique Stockbroking Ltd., Research Division - Research Analyst [89]

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Right, right. And capacity constraints we face?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [90]

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Listen, we try to optimize our capacity wherever we can. We don't have a constraint as yet, but we are building. We are expanding more. As you know, the new oral solid dosage plant at Jarod will be up and ready soon. So that's going to happen, and I think we will do some incremental API investment as well.

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Kunal Randeria, Antique Stockbroking Ltd., Research Division - Research Analyst [91]

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Right. My second question is regarding sustainability of gross margins. See the domestic business is not growing as fast as you would have liked and yet gross margin is going up. It implies that incremental business is still coming at 90%, probably kind of margins. So just wondering how we should look at it?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [92]

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So I think as far as India business is concerned, though there is no revenue growth, the margins have actually improved, and I won't get into the specific numbers, but the profitability has improved, both at the gross and the net level. But I think the large incremental increase in gross margins is obviously because of the international business and because of all the opportunities that we have already discussed.

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Kunal Randeria, Antique Stockbroking Ltd., Research Division - Research Analyst [93]

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And any sort of guidance you would like to give on gross margin?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [94]

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Like I said, we did $74 million in this quarter or $70-plus million in this quarter and probably going forward. The guidance is for $50 million. Accordingly, there will be some impact, adverse impact on the gross margin also.

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Kunal Randeria, Antique Stockbroking Ltd., Research Division - Research Analyst [95]

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Okay. Okay. And last question, if I can squeeze one. So of the 10-plus kind of launches you expect in second half of the year, any Para IV or FDF kind of opportunity?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [96]

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I'd like to check that. There should be some. But listen, what you're seeing on the FDF now, the kind of filings that you're seeing with a number of people, it's not as attractive. Once in a while, you may hit that, but I'll have to check and I'll just doublecheck which other FDFs that are we expecting.

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Operator [97]

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Next question is from the line of Mayank Hyanki from Axis Mutual Fund.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [98]

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First, with regards to India business, can you give us a split? What is the split of growth between the volume and the price and new products?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [99]

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So I think largely the price -- growth rate has been about 4%, 5%, both (inaudible) baskets. And there is just small volume degrowth because of the reasons already explained.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [100]

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So are you seeing volume degrowth because of the channel or because of falling prescription rates?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [101]

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It's all because of the channel.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [102]

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Which means that probably substitution is happening in the channel at the pharmacy level. Is that is what is hurting you?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [103]

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No, no, it's not like that. See, earlier, like, I'm just giving you example. I was giving 1 script free for every 10 scripts that we get, okay? So while I was realizing only money for 10 scripts, my market was absorbing 11 scripts. Today, I have stopped that additional discounting, which is I'm realizing for those [10] scripts and I'm pushing out in market 10 scripts only, which has -- which is [not] reflected in little volume degrowth but improved profitability.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [104]

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Okay. So just (inaudible) data per se, we are not losing any prescription changes because of these...?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [105]

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Actually, we have gained prescription in prescribers as per the script data.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [106]

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Okay. And our average portfolio price hike this year till now would be about 5%. That's what you [need] , right?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [107]

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4% to 5%.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [108]

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Okay. Secondly, on the R&D front, the run rate going forward is going to be like this only or there was bunching up of R&D in this R&D activities in this quarter because of which we are seeing higher R&D number?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [109]

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We said earlier also, I mean, it's very difficult to monitor R&D cost on a quarter-on-quarter basis. We stand by our number of about INR 600 crore plus/minus R&D expense for the year. For some quarter, some -- few specific activity happen and the cost is high. Some quarter, it may be little lower.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [110]

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Okay. Got it. Third, on the API front, I would like to know that now that between 4 quarters now that our run rate has been close to -- in high -- we are running at a higher run rate of INR 180 crores, INR 200 crores since last 4 quarters now. So wanted to know 2 things: first of all, how much is this because of sartans per se? In the sense that are we externally selling off the sartans to more pharmacy peers? And second, what is the outlook for the API business from here?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [111]

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So the API business outlook remains the same, as we mentioned earlier. We continue to do business. It's not aggressive growth area for us, given -- I said they are about 10% or so. We should grow the API business. We do sell some sartans. However, on the API side, most of the growth is not due to sartans, it's due to our legacy portfolio and some of the other products that we have which we've been selling.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [112]

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Are you seeing, in the legacy portfolio, volume shift happening from, like, Chinese competitors to you now? Or how is it like? So in the legacy portfolio given that...?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [113]

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So what is happening on -- I'll tell you. So what is happening on the API business world over is, increasingly, customers are looking for good API sources. By good API sources that means people who have a good regulatory approvals and a track record who has a good -- who have good track records and supply chain. And we've just been building that up, and that's what we're trying to do for the API.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [114]

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Okay. Just further probing on that, so basically, are your old customers taking now sourcing more of that API from you? Or, are you also seeing that some of the existing formulation guy, who were not sourcing API from you, are now linking their ANDA files with you guys and then taking...?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [115]

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It's a combination of both. However, actually, a lot of our API sales are not in the U.S., it's world over; U.S. is one part of it. But unlike the formulation, which is highly towards the U.S., APIs were low. It's pretty much evenly spread out across territories. And both -- so you have existing customers who buy more and more products from us. And number two is, we have new customers coming to us as well.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [116]

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Okay. So lastly, on the U.S. sales, given that most of our improvement in the sequential improvement in U.S. sales is well spread and not just the exclusive product that we launched in July. So we would expect most of it to sustain in coming quarter as well?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [117]

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I'm -- what I'm seeing in the market now is -- and I said earlier, the $50 million per quarter or so is a base business. I expect that to continue seeing whatever limited visibility that I have and heading into Q3.

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Mayank Hyanki;Axis Mutual Fund;Equity Research Analyst, [118]

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Okay. So do you mean to say that none of the sartan opportunity, which came in Q2, it could be one-off kind of opportunity also not sustainable? Because you did say that most of it is market share gain, which would mean that a lot of it should continue in future quarters as well.

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [119]

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Well, some of it will continue. I'm just saying $50 million per quarter as a base rate, somewhere $200 million a year, that's kind of what I'm looking at going forward with the visibility I have currently. How it's going to change? I don't know, but that's what I'm looking at.

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Operator [120]

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The next question is from the line of Nirmal Gopi from IDFC.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [121]

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This is Nitin here. Sir -- Sir Baheti, how much CapEx is really left on this current phase of expansion for us?

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Unidentified Company Representative, [122]

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So we are left with close to INR 500 crores on these 4 projects.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [123]

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And that would happen over this year -- it should be done by FY '21.

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Unidentified Company Representative, [124]

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That's true.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [125]

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And on the preoperative number, you are talking about INR 134-odd-crores for the first half, that would pretty much be the operating expenses run rate when all these 4 plants become commissioned? Or how should one look at that?

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Unidentified Company Representative, [126]

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Yes. So this is meant for all the 4 plants. And I mean, continuing in H2, it would be the kind of same number. For next year, there could be bump up of 10% to 12% on that.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [127]

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And this would include averaging the depreciation interest cost also.

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [128]

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So depreciation is not part of this, right? Depreciation we'll start having it once we commercialize the activity.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [129]

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Okay. So maybe little bit of interest, but bulk of it will be op.

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Unidentified Company Representative, [130]

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Yes, primarily, Nitin, it includes the employee cost, interest cost and all the other expenses.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [131]

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Okay, sir. Basically, that should be the incremental cost that should -- and as said, it's going to be a function of as and when commercialization happens on the different -- the 3 units going forward next year?

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Unidentified Company Representative, [132]

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Yes.

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Operator [133]

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The next question is from the line of Bharat Celly from, Equirus Securities.

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Bharat Celly, Equirus Securities Private Limited, Research Division - Associate [134]

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Sir, I just wanted to understand, when we are referring to a decline of $20 million from $70 million, so what is the main reason? Is it via sartans or febuxostat we are referring to here?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [135]

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What decline are you talking about?

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Bharat Celly, Equirus Securities Private Limited, Research Division - Associate [136]

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U.S. market, we are expecting $20 million decline. So we have done around $70 million...

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [137]

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Listen, I think -- listen, you are asking a very myopic view. It's, listen, quarter-on-quarter supplies, opportunities, how it goes away. I just gave a figure of $50 million as a base portfolio. It can become $40 million. It can become $70 million depending on the timing of the dispatch when the customer wants, how it goes. So you can't just see -- it's not that it's going to decline or not going to decline. That's a base business I'm talking about.

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Bharat Celly, Equirus Securities Private Limited, Research Division - Associate [138]

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Okay. And sir, when we refer to that uloric or febuxostat is not actually among the top 5 for this quarter. So we are referring to the quarter or for the first half?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [139]

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So it was launched only last quarter. So that's why I'm saying only for the quarter.

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Bharat Celly, Equirus Securities Private Limited, Research Division - Associate [140]

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Okay. So it is not among top 4?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [141]

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Not amongst the top 4, but it is part of the top 10 or 20. That makes up 80% -- 89% of our sales.

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Operator [142]

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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 [143]

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Yes. Thanks for the follow-up. I was just looking at the March analyst meet report where we mentioned about our expectation of U.S. sales to be about 3x in the next 3 to 4 years to around $500 million. I mean, are we on track? And given the -- I mean, my only thing is that the approvals that we are seeing is like the small ones with 7 to 8 generic competitors. I'm sure there'll be bigger ones coming in. So just if you could just give broad-level highlight on that pathway of achieving that $500 million?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [144]

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Okay. So -- okay. Let me -- first of all, let me clarify to everyone. See what I said and I've repeatedly been saying is, I used to get lot of questions about what I feel about the U.S. business, especially in view of customer consolidation and the pricing and whatever is going on. At that point, we were about $160 million of sales. So I said that from $160 million, do I visualize going to $400 million or $500 million? Yes, that is a possibility because we have a smaller base.

Now is there a guidance where I see that happening? It's -- I do feel there is an opportunity. When that will happen? It's going to take 3 or 4 years because by the time the plants come on stream, our injectables come on stream, how our filings goes, there's many, many moving parts. So that's what I meant when I said that, yes, $400 million , $500 million is a potential in the long run.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [145]

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And would it be fair to think that, to start with, you will obviously have the base level products, but -- which we have seen already some approvals, but as you move year-end to ahead, we would see some complex approvals also?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [146]

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Yes, it has to happen because that is how we are going to grow. And now you're going to get there because we're setting up all this investment in terms of injectables, Onco injectables, peptides. So we'd like to see some of those complex filings first and then approvals, of course.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [147]

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Okay. So I mean, the filings would start this year, next year? Any color?

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Pranav Chirayu Amin, Alembic Pharmaceuticals Limited - MD & Executive Director [148]

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So the first -- the exhibit batches at both the injectable facilities have already taken place. We should see the first filing for the general injectable, F3, by the end of this year and the first filing for the Onco injectables in H1 of next year. Yes. But we start, of course, with the regular filings; and slowly, slowly as we build up our capability, we move to complex and other products.

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Operator [149]

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Next question is from the line of Abhishek Sharma from IIFL.

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Abhishek Sharma, IIFL Research - VP & Head of Life Sciences [150]

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Yes. Sir, just one question. On the withdrawal of the distribution -- on the promotion in India, just wanting to get a sense, is it all across the board that you have -- you were giving promotion earlier and you have withdrawn it? Or it was specific, let's say....?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [151]

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No, no, they were product-specific or in some cases stockist-specific; in some cases, institution-specific. So they were not across the board.

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Abhishek Sharma, IIFL Research - VP & Head of Life Sciences [152]

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But this kind of practices was more prevalent on the acute side or the newly started products?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [153]

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No, it's more on [product] side.

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Abhishek Sharma, IIFL Research - VP & Head of Life Sciences [154]

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All right. And I mean, the fact that you are withdrawing promotion there and still able to gain prescription, does that give you some confidence that you're gaining traction in that part of business? Is that...

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [155]

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I think so. That's why I made the statement.

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Operator [156]

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

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [157]

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Just wanted to know some -- if you can give us some color on the domestic business, especially in the industry side, are we seeing any impact of the trade-generic on domestic business for us as well as generally for the industry?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [158]

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Okay. We have been discussing this for some time, but I think I will not say that the impact was big enough for us to have an impact on our growth numbers. No.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [159]

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So we are largely not seeing? Okay. And any idea on the industry? I mean, you think that industry is getting impacted?

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [160]

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I feel it's very specific to the company or the banks. Some brands get impacted by generic more than the others. Or some companies are more prone to this impact of generics. So I think you guys know it better, and you talk to far more companies than I do. But Alembic is not much impacted.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [161]

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Okay. Okay, fine. Lastly, on the gross margins, sir, can you tell us what would be a steady state? I mean, assuming that after the (inaudible) will we be back towards 75%, 76% gross margin? Or how do I look at it? A guidance would be helpful.

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [162]

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I think last quarter or quarter before also, I had said, 60%, 70% is a good enough number at gross margin level...

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [163]

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But we are far above that, so...

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [164]

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I know, I know, but if you ask me for a long-term trend line, I think we should raise our numbers more on 68% to 70% level, yes, than at the current level.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [165]

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68% to 70%? But we are at 78% on that. I mean, what is the reason for so much of -- even for the long term, this kind of decline in -- I mean, given the way you are growing, given the traction in U.S...

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [166]

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If you look at last 8 quarters, then you will find a trend line which is closer to these numbers. In between, there is these spikes, but in U.S. or in -- for that market -- if you are in market, you will always get those opportunities.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [167]

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Yes. Okay.

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [168]

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I keep joking with Pranav that he has been lucky for the last few years. So it's okay to have it.

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Operator [169]

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Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. R.K. Baheti for his closing comments.

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Raj Kumar Shreeram Baheti, Alembic Pharmaceuticals Limited - Director of Finance, CFO & Executive Director [170]

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Yes. So thank you very much. I think it was very nice interacting with you, all of you, after a good quarter, good performance in the operational team and good interaction with you. So look forward to [me] seeing you again sometime in third week of January.

So -- and wish you all, my friends, a very Happy Diwali and coming holidays. Thank you very much.