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Edited Transcript of TORNTPHARM.NSE earnings conference call or presentation 23-Oct-19 12:30pm GMT

Q2 2020 Torrent Pharmaceuticals Ltd Earnings Call

Oct 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Torrent Pharmaceuticals Ltd earnings conference call or presentation Wednesday, October 23, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sanjay Gupta

Torrent Pharmaceuticals Limited - Executive Director of International Business

* Sudhir Menon

Torrent Pharmaceuticals Limited - CFO

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Conference Call Participants

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* Abhishek Sharma

IIFL Research - VP & Head of Life Sciences

* Anmol Ganjoo

JM Financial Institutional Securities Limited, Research Division - Director

* Anubhav Aggarwal

Crédit Suisse AG, Research Division - Associate

* Chirag Dagli;HDFC AMC;Senior Equity Analyst

* Damayanti Kerai

HSBC, Research Division - Analyst, Healthcare and Hospitals

* Hari Belawat;Techfin Consultants Singapore;CEO & Director

* Neha Manpuria

JP Morgan Chase & Co, Research Division - 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

* Rahul Sharma

KARVY Stock Broking Limited, Research Division - Analyst

* Saion Mukherjee

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

* 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 Torrent Pharmaceuticals Limited Q2 FY '20 Earnings Conference Call. We have with us on the call today Mr. Sanjay Gupta, Executive Director, International business; Mr. Sudhir Menon, Chief Financial Officer; and Mr. Aman Mehta, Chief Marketing Officer, India Business.

(Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Sanjay Gupta. Thank you and over to you, sir.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [2]

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Thank you, Raymond. Good evening, everyone, and welcome to our Q2 FY '20 earnings call. Let's start with the financial results. Q2 revenues were INR 2,005 crores, up by 6% on a year-on-year basis. EBITDA was INR 573 crores, up by 20% on a year-on-year basis, and EBITDA margins were at 28.6%, an improvement of 1% on a Q-on-Q basis and 3.3% on a year-on-year basis.

I would now like to take you through some trends in our key markets. India contributed 45% of our total revenue compared to 42% in FY '19. EMEA revenues were at INR 899 crores, up by 10% on a year-on-year basis.

Adjusting these revenues for low-margin, low-value product discontinuation in the prior period and change in sales cycle to advance financial closing process, internal sales growth stands at 13.1%.

As per AIOCD, Q2 growth stands at 12.7% against an IPM growth of 11.5%. Adjusted for discontinued products, revised growth stands at 13.9% as per AIOCD.

At the end of H1, Torrent's PCPM stands at 7.2 lakhs with an MR stamp of approximately 4,200.

Torrent continues to stand at sixth position across specialties as per the prescription data set, with 73% of the prescriptions coming from specialists.

Moving on to the U.S. market. Our quarterly run rate of $50 million was maintained, with Q2 sales of $52.4 million. Growth is driven by the momentum in the base business and certain opportunistic market-related opportunities.

At the end of Q2, we had 42 ANDAs pending approval and 6 tentative approvals in hand. As you know, we received the warning letter from our Indrad facility and that continues to be under the OAI status. We are working for resolution in an expeditious manner. Currently commercialized products are not impacted, but new approvals related to these facilities are not being received.

Brazil sales were at BRL 86 million, up 6% on a year-on-year basis. On secondary sales, the company has grown as far with the branded generics market.

In this period, we've launched one new product in -- we launched one new product in Q1 and will be launching one more product towards the end of FY '20.

Germany. Our sales in Germany were EUR 32 million, up by 5%. H1 sales were moderated mainly due to certain supply-related and civilization issues. Going forward, in H2, we expect these issues to be resolved, which would bring back a higher level of growth.

Q2 R&D spend was at INR 130 crores versus INR 136 crores in the last year. Current ratio of R&D to sales stands at 6.5%.

I would like to conclude by reiterating that we've taken the FDA's observations extremely seriously and are working diligently to ensure that our SOPs and the implementation of the same SOPs meet and exceed the expectations of our regulators.

Torrent shall continue to file ANDAs at a brisk pace, and our commercial remains focused on brand building, building relationship with specialists and improving field force productivity.

Raymond, we can open the call 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) The first 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 [2]

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Sir, first question on the India business. If you could help us break down into volume, price and new product introduction.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [3]

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Sure. So as per the ASP numbers for the quarter, our volume growth for the continued products is 3.4%. And adjusting that for the discontinued, it comes to 2.2%, and the ideal volume growth was 3.2%. Price growth was 8.4% and new introduction was 2%.

So that's just a -- overall growth of 12.7% adjusted for -- sorry, for continued products and this -- adjusted for discontinued product is another 1.2%.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [4]

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Understood. And just your commentary on the price increase, price contribution, 8%, which has historically been around 4% to 5% for peers in the industry. Would you think this would be sustainable?

Or how would we, say, talk about our outlook, like if you see 1 year out or for the full year, how do we see this business shaping up? And would -- 8% would still be a price contributor?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [5]

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There are new launches coming up in the second half of this year and in the next year, which should add to our volumes going forward. As for the price growth, it's -- they're going to depend on the competition. Only if the competition scenario permits us, it would make sense. But otherwise, the volume growth is what we'll be driving at for the next half and the next year.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [6]

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And if you could throw some light on the key launches?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [7]

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H2 has some important launches from [CapEx]. So 2 are in cardio and that is also -- one is [Dicabular] and the other one is [Vizylac]. And the third, which we mentioned earlier in the previous call is Remogliflozin which is in-license from Glenmark.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [8]

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Okay, wonderful. And sir, second question on the U.S. business, just wanted to check if there are any recalls pending for the Losartan, and we have taken an impact for all the recalls? Or there are still some pending?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [9]

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So as far as Losartan is concerned, we have no further recalls. So we provisioned for every recall, which has happened until now and we adequately provisioned. So we do not expect anything anymore on the Losartan.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [10]

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Perfect. But we are still supplying in few batches is what I understand.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [11]

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Yes, yes. I mentioned in the last quarter that we had a cautious lot. So we are observing the marketplace now before we try ramping up our market share.

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Operator [12]

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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 [13]

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Sir, on the U.S. now that Indrad has warning letter, what is your estimate in terms of the times -- the time that would be required to probably resolve this?

And second, based on your conversation with the agency, would Dahej also require a reinspection for the OAI to be cleared? Or what do you expect there?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [14]

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So Neha, as you know, Torrent doesn't have firsthand experience with warning letters before this one. So we just check with our peer companies, and it is our estimate based on these conversations that this would take between 12 to 15 months to resolve. So I'm talking about the warning letter for Indrad.

As far as our understanding goes, we think OAI would need an inspection. So we have -- we are working feverishly, speedily to remediate and invite the FDA for an inspection. And I think that would be a required step before we can get to NAI status.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [15]

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And this inspection can be -- I mean, would you be ready to invite the FDA before the end of this fiscal?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [16]

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I wouldn't like to give guidance there because we are working towards it. And when we're ready, we'll invite them. So maybe we'll update you during the next call.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [17]

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Understood. And on India, sir, if you look at the industry growth and even Torrent, the volume growth seems to have slowed to low single digits. Is there some impact that you're seeing from factors such as generic, et cetera, which is leading to this slower growth? And what gives you the confidence that this growth will improve?

And the second question on that, would Torrent evaluate entering the trade generic business?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [18]

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So the trade generic volumes are ranging anywhere between 6% to 8% is the estimate from recent reports that we understand. And even with this penetration, the branded volumes and branded growth in the IPM has been a double digit for this quarter at 11.5%. So we maintain that while trade generic penetration will increase market reach, along with the new [general] stores, branded volumes should not be significantly impacted.

And as far as Torrent entering trade generic is concerned, so far, we have not been in this space, but we haven't taken a [call it] And we are hoping to evaluate in the future.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [19]

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Okay. Understood. And my last question, just a bookkeeping question. The tax rate seemed very low this quarter. Is there any one-off there? How should we look at the tax rate for the full year?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [20]

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No. So I think -- Neha, I think, last quarter, the tax rate was roughly 23% -- 22% is what I remember, which has come down to 18% this quarter. The only thing which has happened is because of this new tax ordinance coming in, there was a reassessment, which was done on the deferred tax liability, which were outstanding at one day. And therefore, based on the estimate, whatever was not getting reversed by the time we get into the new tax regimen, to that extent, there was a recomputation done at the new rate because that is the rate at which this year, will have to get reversed.

So yes, I mean, this quarter and going forward, there would be an impact of around 3% because of that.

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Operator [21]

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

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [22]

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This is Anmol. I have a couple of questions. On the U.S., last time, the assessment that you have shared was that the continuing business should see no or very minimal impact. And we will feel a pinch in terms of the withholding of new

(technical difficulty)

And given the developments during the quarter, I know we don't have a lot of experience with these things, but what is the comprehensive assessment regarding the outlook for the U.S. and any mitigation strategies you might have in mind to mitigate the impact?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [23]

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You saw at Q1, revenues were $51.4 million and Q2 was $52.4 million. So -- and you also know that in Q1 and Q2, we've had just one approval, which was for a very small product linked to our Derma line. So essentially, what I would explain to you is that the current business is the normal ongoing business. It has several components, including opportunistic sales and as well as, let's say, increases in market share and volume increases. It doesn't have any price increases, but it has a routine average price declines factored in.

So I would say that this is a normal level of business for us. However, the U.S. market by definition is volatile, right? So I cannot kind of point you to a number for the next 2 quarters because that will depend upon what opportunities come up for taking price increases or additional market share. But on the whole, H2 should not be very, very different from H1 with a couple of caveats.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [24]

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Okay. That's helpful. But the idea being that you will be exposed to the market landscape there in terms of erosion, et cetera, but what are you trying to do in terms of trying to probably move some of the approvals, et cetera, things that you've spoken about, are those things on track? And is there a possibility of any meaningful downside on this, God forbid, if we were to kind of -- if things were to escalate even from here? Or do you think this $100 million to $200 million is pretty much in the bag on an annualized -- $200 million dollar annualized impact?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [25]

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I wouldn't use that expression, but I think from this point onwards, given that what has happened to Indrad, we do not expect any further downside. I mean it's an ongoing process with the FDA. We are working on it. We have a good line of sight based on the exchanges that we've had with the agency. And now it's a question of remediating, informing the FDA, inviting them for a reinspection and then expecting to get a No Action Required designation from the agency. So I sincerely don't expect a further adverse development at least on the regulatory side.

On the commercial side, we are fairly well entrenched with the products that we are selling. We are cost competitive. We have good market shares on most of our products. And so I don't expect, let's say, the needle to move a lot.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [26]

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Okay. That's helpful. My second question is on the domestic market. The domestic market, we have a reported number of 10% Y-o-Y growth. Last quarter, we had certain discontinuations and advancement of certain financial closing process, wherein we had adjusted the number came to 12.5% versus the reported 9.3%. This 10%, is this a like-to-like number? Or are there any adjustments that we should be aware of?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [27]

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Yes. So this quarter also what we said in the opening call is, the reported number is 10%. There is a [results] impact of 1%. And the impact of discontinued business, which we had done last year, the impact is 2%. So quarter 1, adjusted for these 2 factors were 13% and quarter 2 is also 13%. So that is the way to look at the growth for India business.

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Anmol Ganjoo, JM Financial Institutional Securities Limited, Research Division - Director [28]

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Okay. That's helpful. So we -- last time, you had said that 71% to 72% is the normalized gross margin that we should work with. I mean, this quarter, we've done even better on that pace. Would be 8.5 -- 8.4% price increase that you alluded to in the domestic market be the large driver of this? Or are there any factors that we should be aware of?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [29]

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No. So I think price increases is one factor, right, for gross margins, and I have been saying that as long as 60% of my business is into branded business, there's a price increase, which we take across all the markets in the branded generic space, right? So of course, that is one factor, which has driven.

There's no one-off in terms of gross margins, which have come in this quarter. So I would say 72 -- between 72 and 73 is now what we feel is sustainable going forward.

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Operator [30]

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The next question is from the line of Anubhav Aggarwal from Crédit Suisse.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [31]

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Three. So just one continuing from the last question. So in any particular market like India, et cetera, or any other market, did we take price increase in this quarter where sequential margin expansion happened? Because 100 basis point is quite -- is a decent margin expansion.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [32]

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Yes. No, also, Anubhav, so the price increases are taken at one point in time, right? For example, let's say, in India, we would take somewhere in H2. Brazil, we would take 1st of April. So the price increase timing would vary across the branded generic market. But your question whether the incremental 100 basis point which has come in, is because of what pieces, I really don't know how to answer that question.

The only thing I can say is that there is no one-off which has come this quarter. And the proportion of the business in terms of the branded generic versus the generic is not going to significantly change in H2. So that's the reason I'm saying anywhere between 72 to 73 is something which we feel is sustainable for H2 as well.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [33]

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Yes. But I was just asking because it's such a large number. So -- my sense was the same as what you were saying that typically companies take price increase in the first quarter in the India business. And actually, you mentioned second half. So I was wondering here.

Okay, so second question is on the other expenses. Typically, other expenses were high in this quarter. Any reason versus its last 3, 4 quarters trend?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [34]

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Oh, you're right, Anubhav. So last quarter, I think, this -- when this question was asked, I said, if you look at the historical trend on an annual basis, the other expenses have been going up in the range of 7% to 8%. And that is what we expect for this year also.

So going forward, I believe the number for other expenses should remain between INR 555 crores to INR 560 crores for the remaining quarters. That is a correct number to be looked at.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [35]

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But anything in particular was there for this quarter?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [36]

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No, not really. I think some of the marketing expenses that showed up in this quarter, which would continue the quarter 1 versus quarter 2, quarter 1 was a little lower, I would say. But the run rate of which I look at now is, it should be between INR 555 crores to INR 560 crores for quarter 3 and quarter 4 as well.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [37]

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And I had a question on Losartan now. So Sanjay sir mentioned that we are not expecting any more recalls. But when we track this drug for you on a weekly basis on IMS volumes, we clearly see that volumes are significantly coming down for us. So I just wanted to check that has that effect fully been reflected in second quarter, $52.4 million sales? Or that lower volumes reflected in IMS will reflect in the next quarter?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [38]

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No, so I think, Anubhav, what we are saying is that -- so we had discontinued Losartan, right, after the all event happened. And quarter 1 towards the end of the quarter, we had relaunched in a very cautious way because we said we want to wait and see how the whole Sartan story stands out. And only if we feel comfortable, we'll start taking more API for taking more market share in Losartan H. So we have not incrementally done anything. You are right. I mean, from IMS perspective, the volumes will show a decline.

And as far as our actual market share is concerned, it's not that great, I would say, in terms of Losartan.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [39]

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So these -- I got confused in one thing. So when IMS shows a certain volume, we are not able to segregate that. Is this the new volume that you guys have sold? Or this is still reflecting the old volume? So when you relaunched -- after getting a relaunch, is your market share what you had is largely stable or that volume is also coming down?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [40]

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No. So overall, our business on Losartan and Losartan H has nothing in common with the business that we had before. It's -- I mean, we don't give information by product, but what I can definitely tell you is that it's a much, much smaller business. And we are basically wetting -- we are wetting our feet to see how this thing plays out before we ramp up our share.

So IMS always has a lag effect or whatever you say, it doesn't correlate very well period-to-period in general numbers, but our ambitions for Losartan are very low.

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Operator [41]

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The next question is from the line of Hari Belawat from Techfin Consultants.

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Hari Belawat;Techfin Consultants Singapore;CEO & Director, [42]

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This is regarding -- a lot has been talked about the U.S. FDA. First, in March, you noted the issue for Dahej facility, then again in October for Indrad facility. What type of observations are there? I mean, is it data integrity or just some hygienic or some [engineers] or what type of observations are there from U.S. FDA?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [43]

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So I think the observations, it can be obtained from the FDA in a redacted version, which -- but the observations essentially are not related to data integrity. That is -- they're related more to procedural matters linked to process validation as well as investigations, and we are addressing the same. So I mean -- yes, there are no data integrity issues in the observation.

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Hari Belawat;Techfin Consultants Singapore;CEO & Director, [44]

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Well the market always takes some knee-jerk action, any type of observations from U.S. FDA, normally, we see the share prices going down and all these things. And I think company must be taking action now, at least, it should not come. And Dahej unit should be out of this OAI.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [45]

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Yes. I think I -- in answer to a previous question, I mentioned the steps that we are taking to get out of this position. And then it is our expectation that normal process would take between 12 to 15 months.

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Hari Belawat;Techfin Consultants Singapore;CEO & Director, [46]

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Okay. Just another linked one is, your profits -- your revenue from U.S. is reduced by minus 3% in quarter -- in Q2 FY '20 compared to Q2 FY '19. Is it because of this OAI observations? Or any other reason that you -- business in U.S. is reduced?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [47]

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No. So I think, after the OAI comes in, your new product approvals get stuck. So I think that is one of the reason why you are seeing de-growth happening as far as the existing products are concerned.

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Operator [48]

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The next question is from the line of the Nitin Agarwal from IDFC Securities.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [49]

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Sir, two things. One is on the U.S. You talked about, I mean, there has been a ramp-up in filings to NDA this quarter. You talked about acceleration filing going ahead. So what is the strategy here? Are you looking to file from the existing facilities or you're using other facility launching for the filing?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [50]

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So we have 4 formulation facilities in the Torrent universe. So one is, of course, for [OSDs], we have Indrad and Dahej. For dermatology, we have the Pithampur facility. And for liquids, we have the U.S. facility. So we will be filing from all 4 facilities in the remaining part of the year, and our targets for annual filings remain between 15 to 20 filings.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [51]

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Okay. And in terms of approvals, now after the Indrad warning letter sort of crystallize, do you now -- I mean, how should we look at new approvals across different facilities, including your partner launches over the next 12 to 18 months in the U.S.?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [52]

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So in calendar year '19, I don't anticipate any approvals. So I think, we'll start getting approvals from partner products as well as from the other facilities next year. And as soon as we have some good news on Dahej, initially, we would get of approvals that are filed from that side. So that will be the normal, I would say, sequence of events.

In terms of timing, yes, you should see, let's say, single-digit approvals in 2020 calendar year.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [53]

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Okay. That's helpful. And Sudhir, on the balance sheet side, what has been the reduction in debt that you've achieved? What the net debt which is there as of September, or September, October?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [54]

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So the reduction as far as debt is concerned is roughly INR 440 crores. Some of the major repayments are coming in quarter 3 and quarter 4. And in terms of net debt, we stand at -- net debt to EBITDA, we stand at 2.07.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [55]

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And when do you see a meaningful sort of reduction -- for reduction in our interest cost included in our numbers?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [56]

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That's what I said. Quarter 3 and quarter 4, we have a sizable repayment coming up.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [57]

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So from -- maybe from Q1 FY '20 onwards is where probably we should see some impact on our interest cost lines going forward?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [58]

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Yes, yes. So both this year, FY '20 and FY '21, there's good amount of repayments, which are happening, and that's what we have been saying that post FY '21, our net debt to EBITDA should be very close to where we've started before acquiring Unichem.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [59]

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Okay. Perfect. And lastly, on the India business, while there has been still a lot of uncertainty around why the volume growth in the market has slowed down, given the target for us, I mean, this is a large play for us, right, an important play for us. I mean, how do we look at this whole lot just slowdown in volume growth in the last few quarters? And structurally, do you see any challenges in the market to a sustainable long-term volume growth in this business?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [60]

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If you see sequentially quarter-on-quarter, the IPM, overall growth has come back to double digits. And as far as our base is concerned, which is more specialty driven, chronic and subchronic growth has also come back to double digits. So going forward, we think this growth will continue at similar levels.

Trade generics penetration right now is somewhere between 6% to 8%, but branded volume should not be significantly impacted by the trade generic. So we don't see any major structural change going forward.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [61]

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If I can squeeze in one last one. So in Germany, there has been some sort of amount of slowdown, which has happened in this year versus the growth that you were achieving sort of in the previous years. Anything we just changed apart from serialization? And how should we look at this business going forward?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [62]

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I think you should look at this business, intrinsically, last 5 years has been double-digit growth. I don't see any changes. It should be a very high single-digit or double-digit business.

Unfortunately, first half of the year, we continue to have the supply issues and the supply issues are linked to temper-proof packaging, serialization and some quality problems and -- at some of our partners.

And so I look at it as a, let's say, a temporary setback. And in terms of getting back to normal, I would guide you towards October and November made to everything to be normal again.

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Operator [63]

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The next question is from the line of Chirag Dagli from HDFC Asset Management.

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Chirag Dagli;HDFC AMC;Senior Equity Analyst, [64]

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Sir, which quarter did we start this discontinuation of products?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [65]

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Last year, first quarter.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [66]

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You're referring to the India business, right, yes?

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Chirag Dagli;HDFC AMC;Senior Equity Analyst, [67]

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Yes, sir.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [68]

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Yes, Q1 last year.

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Chirag Dagli;HDFC AMC;Senior Equity Analyst, [69]

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So after this quarter, Q1 FY '19, is it?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [70]

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Yes, that's right.

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Chirag Dagli;HDFC AMC;Senior Equity Analyst, [71]

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Okay. And so -- insofar as unique margins are concerned, how far are we in the journey to improve those margins? Are we through? Is there some way to go? I don't know if you can just qualitatively give us some perspective of how far are we versus the peak-ish margins that, that business could have achieved?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [72]

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As far as the integration is concerned, we are largely done with the cost synergies, as we've mentioned last time. Going forward, there will be only incremental improvements in the cost synergies. So we're driving revenue synergies for our key brands, the top 10 brands that were acquired. They have a lot of potential across different specialties, which we are now driving using the Torrent of specialty. So the next few months will be focused mainly on driving the revenue synergies.

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Chirag Dagli;HDFC AMC;Senior Equity Analyst, [73]

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So are we close to the pre-Unichem margins, sir, for the business as a whole now for the India Business?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [74]

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So Chirag, we don't talk about margins, please.

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Chirag Dagli;HDFC AMC;Senior Equity Analyst, [75]

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But just qualitatively, Sudhir.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [76]

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So I think it's better for you to see the margin improvement, which happened in FY '19 versus FY '18. We have said that the significant part of this margin improvement has come primarily because of the Unichem cost synergies. But from a company policy perspective, we'll not be able to talk about the margins.

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Chirag Dagli;HDFC AMC;Senior Equity Analyst, [77]

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Okay. Fair point. And in this price growth that you mentioned of 8.4%, is there a mix element also to this?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [78]

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Yes, it's possible. We'll have to see, yes.

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Chirag Dagli;HDFC AMC;Senior Equity Analyst, [79]

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Okay. And I was just looking at the cash flow statement for the first half. It seems like operating cash flow of INR 716 crores, CapEx of INR 149 crores, a CF of INR 567 crores. Is this -- is there anything which is unsustainable in this first half of cash flow?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [80]

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No, I don't think so, Chirag.

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Chirag Dagli;HDFC AMC;Senior Equity Analyst, [81]

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So this run rate pretty much is something that we should expect as maintainable, right?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [82]

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Yes. The only thing I see is, in H1, there is more release of these creditors, which should not be the case going forward. So I would say the cash flow from operations should only improve in H2.

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Operator [83]

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

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [84]

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Sudhir, you mentioned that the other expenses would remain largely range bound. Now given the remediation costs, isn't it that you would incur some additional cost because of warning letter resolution or the other impact of...

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [85]

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We're not looking at any significant cost addition because of this whole application program.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [86]

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Okay, okay. And the second, on your strategy on ANDA filings like your R&D cost is like EUR 130 crores, INR 140 crores, I mean, slightly longer term, how do you see this sustaining, I mean, if you look at next year or the year after? Is it something you think will kind of remain at these levels as you look forward to the portfolio that you're trying to file?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [87]

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So I think, in the past, we've mentioned that our goal is to keep our R&D in the range of 7% to 8%. So inside this 7% to 8% of sales, we have internal metrics as to which markets we allocate the R&D.

And in terms of priority, we allocate resources to the India market, to the U.S. market, but also we have dedicated pools of resources available for Brazilian and German markets. Besides that, there's a lot of common development across all geographies. So we have, let's say, streamlined our grid last few years, with increasing the focus on the branded generics and other markets other than the U.S. But at the same time, the U.S. projects have become more complex, so by definition, more expensive.

So all in all, I would say, you should expect R&D to remain between 7% to 8% of sales.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [88]

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7% to 8%. So in absolute terms, they're likely to go higher, right?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [89]

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Yes.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [90]

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I mean, currently, the numbers are not lower. Okay. Just one question. There's a INR 150 crore item on write-off few assets. Can you just explain what is it on the balance sheet?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [91]

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INR 150 crores. Can you just repeat the question, please?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [92]

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Saion, Can you repeat the question?

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [93]

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Yes. Under the noncurrent assets, there's INR 150 crore (sic) [INR 122 crore] right of use assets.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [94]

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Can you repeat the question?

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [95]

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Yes. If you see the balance sheet and consolidated statement of assets and liabilities, there's an item called right of use assets.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [96]

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Yes. So that's a new accounting standard, which got implemented on 1st of April, right, on the lease.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [97]

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Okay, okay, okay. That's what...

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [98]

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So what has happened, yes. You know that, right?

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [99]

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Yes, yes, yes, sir. Okay, okay. And just one last one. A few days back, there was a disclosure on the pledged shares by the promoters. Any color you want to give like what is it for and...

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [100]

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So it's not a pledge

(technical difficulty)

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [101]

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Hello? Yes. Hello?

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Operator [102]

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Participants please stay connected while we reconnect the management.

Participants, thank you for patiently holding your lines. We have the line for the management reconnected. Over to you, sir.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [103]

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Yes. Saion, are you there?

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [104]

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Yes, yes, yes.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [105]

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Yes. so what we're saying is there was a change in this takeover code regulation, wherein the definition of encumbrance has been widened to include, even if there is a non-disposable undertaking, which is given by -- even by way of a covenant or negative covenant in your loan agreements that, that should also be considered for a disclosure purposes.

So in most of the borrowing agreements, which we have, there is one covenant, which we have agreed with the lender that the promoters will continue to hold at least 26% of the share capital. So that's only an undertaking which has been given, but there is no pledge or lien which is there on the shareholding of the promoters.

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Operator [106]

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

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [107]

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A lot of my questions have been answered. Just one thing about the price increase that we have taken in the domestic business. It will be great if you can let us know whether it has been -- if we can know which kind of products have been largely taken the price increase?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [108]

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So we don't look at the 2 portfolios separately. It's the overall the total combined portfolios average, which is coming up to this number, 8.4%.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [109]

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But what I'm trying to understand, is it more opportunistic? Or this was like normal routinized price increase that you take because 8.4% is a large number, which is...

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [110]

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So Nimish, I think the price increases what we have been saying is taken based on the competitive landscape, which is there. So as long as we feel that the competition has also been taking price increases similar to us in those products, then we take price increases. However, if the competition landscape doesn't allow us to take price increases, we don't take price increases.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [111]

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So if I were to understand what you said right now, this will be to say that the industry-wide price increase is also tender or for the covered markets that we are in?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [112]

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Yes. So it's not necessary, right? I mean we cannot directly compare it with the industry because people have different portfolios and focus on...

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [113]

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No, no covered markets.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [114]

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Yes. Covered market, so it all depends upon the way you look at competition, right? I mean, let's say, if you were -- if you have leadership in certain products, then you don't mind taking some price increases in those products, right? But if you're, let's say, #3 or #4, you will be more cautious with the relevant competition what they're doing and then take a call on the price increases. So that's the way we look at price increases, Nimish.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [115]

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Okay. I won't beat it, but I just wanted to know, is this higher than the covered markets or lower than the covered markets?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [116]

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We've not analyzed it in that way, Nimish.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [117]

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Okay, okay. Fine. Just one last thing I wanted to know how many pending approvals are there from the Dahej facility as of now?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [118]

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So we don't split the facility, and I don't think we've disclosed it. So I actually gave the overall number. So as of today, we have 42 ANDAs pending approval and 6 tentative approvals. And a majority of these are from Indrad and Dahej.

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Operator [119]

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The next question is from the line of Abhishek Sharma from IIFL.

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Abhishek Sharma, IIFL Research - VP & Head of Life Sciences [120]

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Just 2 clarifications. Sir, when you say 12 to 15 months to rectification, should we look at it from the date of issuance or from the issuance of warning letter?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [121]

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No, no. So I'm not -- I was quite careful to tell you that Torrent doesn't know first-hand experience on these issues. We have learned from our consultants and from others that it should take 12 to 15 months. And when I say 12 to 15 months, I mean, as of from today from the OAI. So the OAIs were obtained in the July, August time frame.

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Abhishek Sharma, IIFL Research - VP & Head of Life Sciences [122]

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And this is the time for you to invite FDA back? Or is it the total time that you anticipate in the rectification and for you to start getting approvals?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [123]

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So it's for all the steps involved. That's what our estimate is. So the steps involved are firstly for us to respond to the FDA's warning letter or the OAI, then for us to execute upon the remediation plan, which is proposed by us. Once the remediation plan is executed, then we would invite the FDA for an inspection and then you have to schedule the inspection and subsequently, the status of the facility can change.

So when I was giving you this rough time line, I was including all the steps, and I was kind of starting with time line as the date of the OAI.

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Abhishek Sharma, IIFL Research - VP & Head of Life Sciences [124]

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Got it. And the other question was around debt. How much debt is coming up for repayment in second half, Sudhir sir?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [125]

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This should be more than INR 443 crores, which we have paid in H1, Abishek.

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Abhishek Sharma, IIFL Research - VP & Head of Life Sciences [126]

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Yes. You're quantifying that number or...

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [127]

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No. We're not quantifying that number.

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Operator [128]

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The next question is from the line of Tushar Manudhane from Motilal Oswal.

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Tushar Manudhane, Motilal Oswal Securities Limited, Research Division - Research Analyst [129]

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Sir, just on the warning letter with respect to Indrad facility. Now both are 483s more or less similar observations. And definitely, the presumption is that company would have worked on the 483s in more or less similar manner itself. But -- so still one of the facility gets escalated to warning letter while the other one can get cleared probably through reinspection. So any color on that?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [130]

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No. Actually, I wouldn't like to speculate on the reasons why the FDA chose to give us a warning letter on Indrad. I can only point out that the Dahej inspection preceded the Indrad inspection by almost close to a month. So -- and the OAI date for Dahej was 12th of July and the OAI date for Indrad was August 5. So I think based on the timing and the usual process of the FDA in terms of the number of days they take to respond or to give you a warning letter, we are -- I mean, we have noted like everyone that we have not got anything on Dahej and we've got one on Indrad.

So I would not like to speculate further as to what their reasons are. Our job is to rectify and remediate, and we are doing that for both facilities. And our expectation is that Dahej would be -- we'd been ready with Dahej sooner than what we've been ready for Indrad.

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Operator [131]

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

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

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A few clarifications. Sir, first of all, can you tell us about the outlook in Brazil? It has been very volatile over the last few quarters. So is there some element of seasonality? Or how should we look on the full year basis in the years coming?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [133]

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I think the close up data, which is equivalent to IMS or AIOCD, is showing right now that the market is growing in the branded generic space about 13% and we are also growing at 13%. However, when you look at our internal sales for the last 2 quarters, it has been mid-single digit. So the overall H1 growth is coming up to about 7%.

So I think there is a delta between the primary care -- the primary growth and the secondary growth that we are seeing. What we would -- I mean, I would expect the growth rate to be higher. What we've done is we've been deemphasizing our tender business in Brazil. So because of which, that kind of impacts the growth rate by, let's say, a couple of percentage points.

I don't know if I mentioned in the previous call that this business is extremely volatile. It accounted for about 15% of our business in Brazil and -- 10% to 15%, Sudhir, right, correct me, 10%, right? And what we have -- progressively doing is actually discontinuing this business.

And if we remove the impact of the tender business, you add a couple of percentage points to the growth rate. Going forward, I would expect that the -- Brazil is, [entrant] speaking, a double digit market -- double-digit growth market. For the regulations, we are knocking on double digit for the last few quarters. While it will remain volatile, on an annual basis, you should see a good growth rate in line with the outsourced data.

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

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In line means kind of double digit which you just mentioned similar to that range?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [135]

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Yes. Our ambition or our objective is to grow, I would say, double-digit in Brazil.

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

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Okay. And second clarification on Germany. So you mentioned there is some impact of serialization. But if I understand correctly, the deadline for serialization already passing February, right? So why we are seeing impact now?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [137]

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So what is happening is that some of our suppliers are facing challenges. So I give you an concrete example. So Germany passed a law starting in April that we have to have tamper-proof packaging. So tamper-proof packaging essentially involves a [reward] pack with certain stickers on top, which kind of prevent those boxes from being opened. Unfortunately, when we sent out the supplies in the market, the stickers were not sticking properly. And so you would have a situation with the boxes where the sticker was kind of unstuck. And that was enough for the regulator to kind of not authorize us to sell the products.

So it took us a little bit of time to remediate that with the supplier to find better quality, let's say, adhesives that will take care of it. So that is just one example. And then some of our partners were not ready with serialization on time and which resulted in delays for us to get the serialized codes.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [138]

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Sure. And lastly, I think, I had missed out the explanation you gave for a 3% kind of volume growth for India. Could you, again, please repeat that?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [139]

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So 3% growth is more or less in line with the IPM growth. In fact, it's slightly higher. IPM growth is at 3.2 and Torrent is at 3.4. So overall, I'd say, if we see the growth quarter-on-quarter, there is an improvement. So we expect the full year IPM growth to be at double digit as well. So volume growth should not be impacted by or affected too much by the trade generic in [general cities].

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [140]

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So we should be also seeing where it gets better than market volume growth for the full year?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [141]

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Not able to comment for the full year, but the trend so far has been above market. So we should not see any deviation from that.

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Operator [142]

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The next question is from the line of Rahul Sharma from KARVY Stock Broking.

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Rahul Sharma, KARVY Stock Broking Limited, Research Division - Analyst [143]

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Just wanted to ask, are there any pending ANDAs which we've got the approval and could be launched in the U.S. market?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [144]

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Yes actually. There are few which we have not lost.

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Rahul Sharma, KARVY Stock Broking Limited, Research Division - Analyst [145]

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Are they meaningful or are there...

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [146]

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I would say they are not very meaningful otherwise I would have already...

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Operator [147]

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We have a follow-up question from the line of Prakash Agarwal from Axis Capital.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [148]

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I had a follow-up. Sir, Brazil, just one clarification. You mentioned 10% to 12% is tender business, which consciously you were reducing, but -- and we are expecting double-digit in future. Is it function of new product launches? Or I mean, what gives us that confidence?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [149]

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So in Brazil, our objective is to launch 2 to 3 products a year. So this year, also, we launched [30 -- 3 program] in the beginning of the year. And then we would launch one more towards the end of the year. So new products, combined with just the volume growth of the market and pricing growth that happens every year in April, should put us, I would say, close to double-digit at least. So high single-digit, double-digit is -- and also, we have a small generic business in Brazil, so which we started developing. So the combination of, let's say, new launches, pricing increases, volume increases plus our focus on the generic business should all bring together close to double-digit growth.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [150]

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For the full year, you are saying. And first off, we have 4%.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [151]

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Sorry?

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [152]

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We are saying guiding for the full year versus 4% growth in the first half.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [153]

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I was telling you only H2.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [154]

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Okay. Understood. Fair enough. And sir, secondly, I just missed it. If you already said this Levittown facility has -- I mean, is the project on track and in terms of getting back in shape by the end of this year or beginning of next year?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [155]

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Yes. In context so some time Q1, maybe mid or end of Q1 next year, we will be starting sales.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [156]

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Understood. And in terms of, sir, volume slowdown, I mean, I think many have spoken about it, but if I see product level data that we get from AIOCD, specifically, Losartan and [Carnisha] I mean, these are specifically having high single-digit kind of volume loss. And specifically, Losartan, could it be due to the Sartan issue, which is spreading in India also, if you could throw some light there?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [157]

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No sir, our brand Losartan in India isn't affected by the Sartan issue. So the growth for the quarter for Losartan is 7%. And so the covered market growth is 2%. So this is much faster than almost all the other brands. And if you break it down SKU-wise, Losartan and Losartan H, the 2 major SKUs, Losartan is doing much better than Losartan H. And we'll also be able to get Losartan H back on track soon as well.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [158]

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And [Carnisha] sir?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [159]

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Let me get back to you separately on that.

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Operator [160]

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Next, you have a follow-up question from the line of Anubhav Aggarwal from Crédit Suisse.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [161]

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Yes, one question on the India business. So we -- adjusted growth for us is about 13%. If you look at, let's say combined, our top 5 or top 10 products, can you just give us an indication how they are growing right now? I mean what's -- if total portfolio is growing 13%, how are they growing, both value and volume?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [162]

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So if I go product-wise, if I just mentioned the top 5, quarter growth for Shelcal is 15% -- sorry, it's 10%; Losartan is 1% -- 7%; NEXPRO is 21%, Chymoral is 5%; Azulix is 18% and [Navitar] is 16%.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [163]

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Sir, this is value growth and what about volume growth in this product?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [164]

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We don't look at brand-wise volume growth. We look at it overall.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [165]

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Sir, even if you don't give me product, right, I'm just trying to understand, like these are like largest products for us, total as a portfolio, how are they growing when total company is growing at Indian Business at 13%?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [166]

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Yes. So if you break it down therapy-wise, our biggest contributor is cardio. So that's our highest therapeutic contribution overall.

So the cardio market is growing at 12% and we are on par at 12%. Our second largest contributor is gastro. Gastro market is growing at 11% and Torrent Gastro portfolio is at 19%. So we mentioned this last time also that the Gastro portfolio is doing much better than the market this year, driven by primarily our 2 major brands, NEXPRO and Veloz. So this should continue -- the momentum should continue for the next few quarters.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [167]

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I have a couple of questions for Sanjay sir. Sir, on Brazil, you mentioned we are discounting tender business. Can you just elaborate a little bit because we are surplus on capacity. Dahej is underutilize for us.

Is it that the payments are not coming on time? Or -- it will be EBITDA positive business, right? So what's the reason of discontinuing the business?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [168]

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So essentially, there's a few challenges in that business. The most challenging is actually market related. So the Brazilian government has been facing fiscal issues. And as a result of which, there are intrinsic problems of financing for the municipal, state hospitals. As a result of which, there are market-specific challenges on new business generally contracting this business up for 2 years. And what we are seeing is that the overall size of the market and the tenders has not been that great, and there is increasing pressure on prices.

So we are not stopping it like that, but we are bringing down our sales progressively, and we are also making sure that we don't take any more tenders that don't meet our margin threshold.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [169]

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Okay. Clear. And second was on the Dahej facility. Now completely followed what you mentioned about the timing that it was inspected before Indrad and where it came earlier, but just the sheer fact that the warning letter of Indrad, FDA on the outer specification observation mentioned that you have a similar observation in Dahej, does that incremental point your discussion with consultant suggest that, let's say, you would parallel-y do a rectification in Dahej and parallel-y do at Indrad, but FDA may not come for reinspection at Dahej till the time both the facilities happened.

So we have seen several other companies who have these outstanding issues. When the observation was similar, they have not come to reinspect one facility.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [170]

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Actually, truthfully, I would not like to speculate what the FDA would do or could do or will be doing. So I think I would -- as a company, it is for us to follow the instructions that we received from the regulator. And so far, our view on Dahej is that we should remediate. So we are remediating both facilities in parallel. So there is no difference on that point.

Dahej will be remediated early -- earlier, and then we would seek the facility's inspection. When they will come, what can we do? I think we have to watch out for that, and we will communicate as and when things happen.

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Operator [171]

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We'll be able to take one last question. We take the last question from the line of Neha Manpuria from JPMorgan.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [172]

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Sorry, one follow-up. Sir, you mentioned that the India product portfolio has been discontinued from first quarter of FY '19?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [173]

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Yes, that's right.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [174]

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Then, how did it -- it is still impacting sales growth, right? In which case, it is already there in our base for the previous year?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [175]

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So the base was discontinued last April, and it's slowly tapered down throughout the year. So that, in fact, would get utilized by the end of the year.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [176]

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Okay. So this impact will still continue for the next 2 quarters.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [177]

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It'll get lesser and lesser each quarter. So the last impact will be in Q4 of this year.

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Operator [178]

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That was the last question. I would now like to hand the conference back to the management team for closing comments.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [179]

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Yes. Thank you for all the participation for quarter 2. And if there's any follow-up questions, I think someone can be contacted for that. Thank you.

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Operator [180]

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Thank you very much. On behalf of Torrent Pharma Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.