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Glenmark Pharmaceuticals Y 2012 Earnings Call 9 May’12
Operator Good morning ladies and gentlemen. I am Aachal Rastogi, the moderator of this call. Thank you for standing by and welcome to the Q4 Earnings Conference Call presented by Glenmark Pharmaceuticals Limited. For the duration of presentation, all participants' lines will be in the listen‐only mode and we'll have a Q&A session after the presentation. I would like to now hand over the conference call to Mr. Jason D'Souza. Over to you, sir.
Jason D'Souza, Investor Relations Thank you, Aachal. Welcome to Glenmark's Q4 earnings call. Before we open the floor for question‐and‐answers, we'd just like to read out the highlights from the MD&A. For the fourth quarter ended March 31, 2012, Glenmark's revenue was at 10,658 million, an increase of 34%, revenue from the Generics business was at 4,685 million, a growth of 48%, specialty formulation business revenue was at 5,943 million, a growth of 28%.
For the year ended March 31, 2012, Glenmark's revenue was at 40,206 million, an increase of 36%. Revenue from the Generics business was at 16,405 million, a growth of 36%. The specialty formulation business revenue was at 23,327 million, a growth of 38%. Specialty business India, sales for the formulation business in India for the fourth quarter recorded growth of 24% to 2,681 million. So, as for ORG IMS MAT March 2012 data, Glenmark gained two rank, from 25th to 23rd.
As for ORG IMS MAT 2012 data, Glenmark's market share increased in dermatology from 8.3 to 8.4, cardiac 2.4 to 2.5, respiratory. The Africa, Asia and CIS region recorded revenues of 1,828 million, an increase of 25%. The Russia CIS region in the beginning of the fourth quarter, two separate business units were created to bring more focus to the respiratory and dermatology segment. The secondary sales gross for dermatology products is over 50%.
According to Pharmexpert MAT 2012 data, the rank for the company amongst all pharma companies in Russia is 59. In other CIS markets; Ukraine, Kazakhstan and Uzbekistan are continuing to show positive trend in secondary sales. In Ukraine, Glenmark has shown good growth in secondary sales at 83% in Q4, driven primarily by the focused brands.
The Africa, Middle East region recorded secondary sales growth of 43%, backed by strong focus on building its power brands. The units in South Africa, Kenya, Tanzania, Egypt and UAE, built further on the new products launched in the year and achieved the highest ever secondary sales performance. In spite of political instability, the Middle East and North Africa region recorded good secondary sales growth.
Asia; the Asia region recorded secondary sales growth in excess of 30% the increased secondary optic has driven by strong demand and continuous focus on power and focus brands in all important markets in the region. Levocetirizine is approved in Malaysia and Philippines in the fourth quarter. In all, 10 products have been registered in Asia region during the year and these products will drive growth in FY2013.
Latin America; Glenmark's revenue from Latin America was at 714 million a growth of 43%. All subsidiaries in the region Brazil, Venezuela, Mexico, Caribbean and Peru recorded strong secondary sales growth. During the quarter the Brazil subsidiary launched two new products. The Brazil and the Venezuela subsidiary recorded strong sales growth in the quarter.
Europe; Glenmark's Central Eastern Europe pushed in operations for the fourth quarter. Revenue was at 719 million a growth of 39%. During the quarter the Czech, Slovak unit launched five products, the Polish unit launched two products and the Romania unit launched five products.
R&D; the company has a pipeline of six NCE and NBE molecules in clinical trials including the in licensed molecule, Crofelemer.
Revamilast; Glenmark's PDE4 inhibitor Revamilast, the candidate for variety of respiratory and inflamtory disorders is progressing well in the clinics. Glenmark has obtained approval for conducting Phase IIb trials for Revamilast in asthma and RA in the UK, India and other regulatory bodies. Both studies are actively recruiting patients in these countries and dosing has been initiated.
The Phase IIb study is being carried out, we determine the efficacy and safety of the molecule and will also provide those range finding for Revamilast. In parallel to these two clinical studies, Glenmark is also conducting various other clinical and non‐clinical studies to ensure timely entry into Phase III trials.
Glenmark plans to find an IND for Revamilast in the U.S. In Q3 FY13, Glenmark intends to initiate Phase III trials for at least one indication by end of FY13.
GRC 17536, a TRPA1 antagonist has proven highly efficacious in treating inflammatory and neuropathic pain in animal models. GRC 17536 has shown good safety in the Phase I enabling GLP safety, pharmacology and toxicology studies performed. Glenmark has
completed the Phase I study in the Netherlands, single and multiple ascending doses have been well tolerated in the ‐‐ with expected pharmacokinetic profile.
Glenmark has obtained approval for Phase II proof‐of‐concept in pain indication in the UK MHRA and awaiting approval in Germany. Glenmark plans to initiate ‐‐ plans to file for a Phase I, IIa study for respiratory indications in Q2 FY13. Vatelizumab GBR 500, a monoclonal antibody is an antagonist to the GLA‐2 integrin, it has the potential to be a broadly applicable anti‐inflammatory component in diseases like Crohn's disease and multiple sclerosis. GBR 500 has been licensed in June 2011 to sanofi. Phase I study for GBR 500 has been completed in the U.S. An application will be filed in quarter one FY2013 to initiate a POC trial in ulcerative colitis in the U.S. and other countries.
GRC 15300, a TRPV3 inhibitor for neuropathic pain, osteoarthritic pain and other inflammatory pain has completed Phase I trials in the UK. Globally, this is the only reported TRPV3 specific antagonist molecule to enter clinical trials.
A development and commercial license for GRC 15300 has been granted to sanofi, a Phase IIa proof‐of‐concept study in neuropathic pain will be initiated in Q1 FY2013.
GBR 900 licensed from Lay Line Genomics, Italy is a validated and novel pain receptor system for the treatment of chronic pain. Pre‐clinical research on GBR 900 project is being carried out in Glenmark's biological center in Switzerland and is progressing well.
GBR 401 and anti‐CD19 antibody is currently under development for the target indications of beta cell leukemias/lymphomas. Preparation for Phase I submission is currently on going for GBR 401 and Glenmark had a successful pre‐IND meeting with the U.S. FDA on this molecule.
Crofelemer; Glenmark in licensed molecule Crofelemer for multiple diarrhoeal indications earlier completed Phase III clinical testing for HIV‐associated diarrhea. The trial was conducted by Salix Pharmaceuticals in the U.S. and the PDUFA date issued by the U.S. FDA, which was 5th June, 2012 has now been extended by the agency to September 5, 2012.
The pivotal study in adult acute watery diarrhoea conducted in India and Bangladesh by Glenmark have started recruiting patients, Glenmark is further working on a developmental and regulatory strategy towards obtaining approvals in Glenmark's territories. This could be the first innovative product launch for Glenmark across 140 countries, where it has exclusive marketing and distribution rights.
With respect to Napo's purported termination of the collaboration agreement, the arbitration panel granted an interim order which prohibits Napo from terminating the collaboration agreement or treating the collaboration agreement as terminated, unless and until the panel amends the order. The final arbitration hearing is scheduled for June 2012. Generics' business, U.S. formulation, Glenmark Generics U.S. registered revenue of say ‐ registered revenue of 3,434 million for the quarter an increase of 53%. Glenmark continue to accelerate its growth trajectory in the U.S., in the highly regulated U.S.
Generics market.
In FY12, Glenmark was granted 14 ANDA approvals comprising of 12 final and two tentative approvals. These were mainly in the initial high entry barrier segment of dermatology, oral contraceptives, modified release categories. During the fourth quarter Glenmark was granted final approval by U.S. FDA for five ANDAs.
During the fourth quarter, Glenmark filed three ANDAs with the FDA increasing the total number of filings to 12 for the fiscal year. Glenmark completed the launch of 12 products during fiscal year 2012 consisting a mix of semisolid preparation, oral contraceptives, extended release and immediate release items.
In March 2012, the company initiated the exclusive launch of Fluticasone propionate solution, the generic version of Nycomed's Cutivate. Under the terms of the settlement agreement, Glenmark will market and distribute this Fluticasone propionate lotion under the royalty bearing license from Nycomed U.S. for which they are entitled to ‐ exclusivity. Earlier this year, Glenmark announced that they have entered into a settlement and license agreement with ‐Pharmaceuticals, ‐‐ Pharma to resolve a U.S. patent infringement suite related to Glenmark's ANDA filing for ‐ quarter on ‐ cream.
Glenmark believes that it is entitled to ‐ exclusivity with respect to ‐ cream as the first generic company to file an ANDA for the product. Glenmark's marketing portfolio as on March 31, 2012 consist of 78 generic products authorized for distribution in the U.S., the company currently has 38 applications pending in various stages of approval processed with the U.S. FDA.
The EU formulation, the European Generics business continued to grow at a fast pace with steady strategy of product sales licensing revenue and expanding its presence to distribution partners in more countries. During Q4, the UK entity continue to add new accounts in the UK and also continue product supply in the Republic of Ireland through distribution arrangements.
Glenmark also launched three products in this quarter and two additional products in other markets through out‐licensing partners.
The Glenmark, the Germany business won tenders for two new product supplies which will start in mid calendar 2012.
Netherlands and German entity continue supplying products to existing health insurance contracts. Overall, the European business posted revenues of 363.86 million, an increase of 171% over the corresponding quarter. The Oncology Latin America business filed 11 product last year for various countries. The API business revenue for sales for the API business was at 850 million, recording an increase of 37%.
I would like to introduce Glenmark's management team which is on the call; we have Glenn Saldanha, the Chairman and Managing Director of Glenmark; we have Mr. Rajesh Desai, the Executive Director and CFO of Glenmark Pharmaceuticals; Terry Coughlin, the CEO of Glenmark Generics Limited; Sandeep Gupta, the Chief Operating Officer, Glenmark Pharmaceuticals; and Percy Birdy, Senior VP Finance of Glenmark Generics.
Before we open the call for Q&A, we'd like to read a few statements on the balance sheet and P&L. Glenmark's net working capital for this year is 120 days, this has come down from 163 days for the last year. The R&D expenses through the P&L for FY2012 was 256 crores, for the fourth quarter was 70 crores. The break up for 256 crores of R&D expenditure was; Innovative R&D was 151 crores and Generics R&D was 105 crores.
On the fixed asset schedule, the break up of the fixed asset schedule is as follows; tangible fixed asset addition 181 crores, foreign currency translation impact on tangible assets 22 crores, intangible computer software addition 7 crores, brand in‐licensed patent filings 37 crores, foreign currency translation adjustment on intangibles 103 crores.
The net debt after cash as of 31/03/2012 was at 1,924 crores as compared to 2,075 crores for Q3 FY12 and compared to 1,905 crores at 31st March, FY2011.
With this we would like to state the guidance for the next year. For FY2013 the sales ‐‐ Glenmark expects sales growth to be in the region of 22% to 25%, core EBITDA for FY2013 would be in the region of 900 crores to 925 crores.
GC improvement will be to an extent of 1% to 2% and the focus will be to reduce debt from free cash with no M&A plans for the company. With this, we open the floor to question‐and‐answers.
Questions And Answers
Operator All right sir. Now we'll start the Q&A interactive session. [Operator Instructions]. The first question is coming from Mr. Ravi Agrawal. Please go ahead Mr. Agrawal.
Ravi Agrawal Yeah. Congrats on the company for a good set of numbers and more importantly for a very good guidance. Just a couple of questions, one is on Crofelemer. Just want to understand that the ‐‐ is there a potential impact to Salix's NDA with the U.S. FDA on this Napo arbitration or is that a separate issue altogether?
Rajesh V. Desai, Executive Director Sorry, can you repeat the question Ravi, so?
Ravi Agrawal Sir I'm saying, what for example the Napo's arbitration of the court case which Napo has filed with Salix, would that have any impact on the FDA's considerations for the NDA deliberation in September?
Rajesh V. Desai, Executive Director No we don't believe that's got anything to do with ‐ I mean, the two are completely independent.
Ravi Agrawal
Okay. Second, if I could just get the MTM gain or losses for the quarter and for the full year in terms of the loans the ForEx loans?
Rajesh V. Desai, Executive Director So MTM gains for the quarter...
Glenn Saldanha, Chairman and Managing Director For the quarter the MTM gain is 35 crores.
Ravi Agrawal Yeah. And for the full year?
Glenn Saldanha, Chairman and Managing Director For the full year, the MTM there will be a loss Ravi, so it will be 152 crores.
Ravi Agrawal And where has this been taken for the quarter please the gain?
Glenn Saldanha, Chairman and Managing Director In the other expenditure.
Rajesh V. Desai, Executive Director Yeah. Actually it is ‐ it is from other expenditure because overall there is a loss so it is next to the adjusted, we cannot show separately, because it will create imbalance.
Ravi Agrawal And my final question is on the GC especially I mean on a sequential basis, is this 37, 30 odd percent kind of COGS which you have seen in this quarter just because its a residual impact or is it something which is now going to be the norm for the company I mean.
Rajesh V. Desai, Executive Director I think Ravi as Jason has stated right, we anticipate the GC to improve by 1% or 2% in the current year. The quarter was primarily because of the business mix, geographic mix in terms of sales and which has actually impacted the GC marginally by 1%. I mean, it will start going back up we anticipate in FY13.
Ravi Agrawal And it's just that there seems to be a particular volatility around that number on a quarter‐to‐quarter basis, is that because of the budgeting the wage tonne or is it because of actual cost? I mean if you see Q1 typically is, from Q1 to Q4 the number actually ‐‐ COGS actually goes up very dramatically and it's happening this year as well as happened last year?
Rajesh V. Desai, Executive Director I think Q1 this year was an exception because we had one product in the U.S. which we ended up raising prices and we made a lot of money in the first quarter which positively impacted the whole GC quite significantly. But I think I mean we feel pretty comfortable
with 62%, 63% kind of our GC going forward overall.
Ravi Agrawal Sure, okay. Thank you so much.
Operator Thanks Ravi. Now we have Mr. Krishna Kiran from ICICI Direct to ask question. Please go ahead sir.
Krishna Kiran Yeah. Thanks for taking my question. And congrats for a strong set of numbers. Sir just trying to understand your EBITDA margins. Is it possible to give a Q4 FY11 ForEx gain or loss? Because I'm just trying to understand a comparable EBITDA?
Glenn Saldanha, Chairman and Managing Director EBITDA margins. Q4 ‐‐ in Q4 FY'11 there is nothing, and it maybe the whole year.
Rajesh V. Desai, Executive Director This year we were gained actually.
Krishna Kiran I'm sorry, I could not get you sir.
Rajesh V. Desai, Executive Director So, your question is regarding previous year Q4 exchange but there was no such ‐‐ there was gain so.
Krishna Kiran Okay. Or in that last year the EBITDA level, any one offs are there? Can you just give us any one offs if it is?
Rajesh V. Desai, Executive Director Any one offs last year?
Krishna Kiran Yeah.
Rajesh V. Desai, Executive Director In the last quarter?
Krishna Kiran Yeah, last year Q4. In our expenditure maybe?
Rajesh V. Desai, Executive Director
No.
Glenn Saldanha, Chairman and Managing Director No, we did not have. But last year we changed to IFRS, just keep that in mind, right.
Krishna Kiran Okay.
Rajesh V. Desai, Executive Director So, therefore it may not be completely comparable.
Krishna Kiran Fine sir. Sir and coming to domestic business, is that restructuring in domestic business completed or?
Rajesh V. Desai, Executive Director Sorry can you repeat the question?
Krishna Kiran Restructuring in domestic business. We have done ‐‐ we said no, we are going to do restructuring in domestic business, Indian Formulation business.
Rajesh V. Desai, Executive Director So restructuring maybe of channel inventories or by way of operations. So operations is all done, channel inventory is also we had a weaker Q3 on account of some channel inventories, Q4 we've come back very strongly. So all that is over.
Krishna Kiran Okay. Sir, how we are looking at domestic formulation business? I know what the growth which you have seen during the quarter is more kind of a volume or main prices on your product launches?
Corporate Participant So a big part of the growth is coming from based on volumes, so it's about 14% to 15% is volume, 3% to 4% is on account of new products.
Krishna Kiran Okay, okay. Fine. And sir, coming to U.S. business I see a couple of other players in the derma space has issues that shortage like increasing their product prices. Have we increased any product prices?
Corporate Participant Yes, we too have increased some isolated product prices on the dermatological space. And like historically they have been extremely low, so that there has been some marginal increases across the board by all dermatological companies.
Krishna Kiran
Okay, okay. Fair enough. And sir, just one observation like we have seen employee cost on Q‐on‐Q basis. It is only because of margin ‐ or any other, because we have not seen in the last maybe two, three years lower employee cost on Q‐on‐Q basis ‐ absolute term?
Rajesh V. Desai, Executive Director So, can you just repeat that question again?
Krishna Kiran See, on Q‐on‐Q basis employee cost which is 174 crore in Q3 FY12 has become 163 crore in Q4 FY12. It is mainly because of rupee appreciation that we have paid and resulted in the lower employee cost ‐ or something related, any other specific issue?
Corporate Participant I mean the difference is very nominal, right. So it's probably because of some bonus or incentives that we paid out, last year it was, just not there this year. So we don't know the ‐‐ I don't the Q3 or doing marginal recap then we are not.
Rajesh V. Desai, Executive Director I think it's better to look at as percentage of sales for the entire year and if you see that number, that number has actually come up a little bit.
Corporate Participant Yeah, true.
Krishna Kiran Fine sir. And how much CapEx we are looking at for FY13?
Rajesh V. Desai, Executive Director CapEx would be in the range of around 250 crores is what we anticipate.
Krishna Kiran Thanks. I'll join back to queue.
Operator Thank you so much, Mr. Kiran. Now we have in line Sonal Gupta from UBI. Please go ahead, ma'am.
Sonal Gupta Hi, this is Sonal here from UBS. Good morning everyone. Just a couple of things. One was, I just want to understand what is the R&D estimate, I mean that you have for next year for FY13, R&D spent?
Rajesh V. Desai, Executive Director So Sonal we expect 6% to 7% of sales right as R&D spend.
Sonal Gupta 6% to 7% because I just want to understand because the EBITDA number that you have given about 900 crores to 925 crores and just
working roughly with the numbers looks like a 19% to 20% sort of EBITDA margin guidance. And to that extent why are ‐‐ I mean it seems a bit low to me given that we are seeing these limited competition launches in the U.S. I mean the equity rates, so why is the margin not really improving just want to understand that?
Glenn Saldanha, Chairman and Managing Director Well I think ‐ I mean Sonal I think it's a conservative guidance, right number one. Number two is from an R&D spend we are ‐‐ there is some level of offers we've kept for ourselves right there. So lets say it's very hard I mean given the business makes the complexity and the geographic breadth under which we operate, right it's extremely hard to pin point specific number in terms of potential offset. So we've kept enough of buffers for ourselves on the EBITDA side of things.
Sonal Gupta Right. And okay. So you think that we should take this sort of a conservative number and something that you will clearly achieve right?
Glenn Saldanha, Chairman and Managing Director Absolutely.
Sonal Gupta And just on in terms of the interest cost I mean you've changed it to dollar denominated debt in Q1 and still I mean if you look at on a year‐on‐year basis the interest cost has not really come down. So just want to get a sense on and because so effectively where I am coming from is that you have FX related losses which are again coming out separately which is 150 crores like you said. I mean and plus you have the interest cost not really coming down. So have you really benefited from this change to USD?
Glenn Saldanha, Chairman and Managing Director Definitely over a longer period if you'll see these, there is a big profile which changed from short‐term to long‐term. Now most of the loans are in the range of three years to five years the repayment obligations will come after say '14, '15. So that way it is benefited to us whereas certain loans are with the variable interest cost option. So that is what is reflected in the interest cost. So we are confident that it will within this coming year quarter‐over‐quarter you will see some sort of interest cost improvement, so that's definitely is other.
Rajesh V. Desai, Executive Director Sonal, the other thing that you want to keep in mind is that even through the average interest cost is the same if you have a bit on the same interest as per the last year, the rates have gone up from the extent to 3% to 4% so we have actually benefited to that extent Sonal.
Sonal Gupta Okay. And just finally on ‐‐ any thoughts on MEK mode as a product I mean I guess it sort of caught you've got lot of players than earlier, so do you think that still will be a meaningful product for you and what sort of growth do you see for yourself vis‐à‐vis your guidance for the U.S.?
Terry Coughlin, Cheif Executive Officer I think that MEK mode would be an internal product, it's still a limited competition product. There is three people or four people there now, ourselves and another ‐ our approval. By that the market has kind of isolated so far and operation still should be a decent product continuing forward. Then on the deal role guidance on the U.S. I think that there we're seeing a 20% gross year‐on‐year going into next year.
Sonal Gupta Okay. Great. Thank you so much.
Operator Thanks Mr. Gupta. Now we have Ms. Monica Joshi from Avendus Securities. Ms. Joshi, please go ahead.
Monica Joshi Yeah, hi thank you. Hi Glenn. Just some clarifications. When you say 22% to 25% revenue guidance, I would assume this is excluding license of income that you had, yeah. And when you say core EBITDA, that is excluding SGS and licensing or it's excluding only licensing income?
Glenn Saldanha, Chairman and Managing Director It is excluding out‐licensing income.
Monica Joshi Okay. So, you first...
Glenn Saldanha, Chairman and Managing Director Probably excluding out‐licensing income the base business, the entire base business.
Monica Joshi Okay. So first two files are included in this?
Rajesh V. Desai, Executive Director Yeah.
Monica Joshi As a matter on Q2 it is included, that's what ‐‐ okay. Now just some sense is that there is 57 crore increase in brand and IP. Could you throw some light on this?
Rajesh V. Desai, Executive Director Monica if you see we've inlicensed n number of brands in the Central Eastern Europe region, the Latin American region and the Western Europe region, all this put together comes to 57 crores in ‐.
Monica Joshi And these were inlicensed during FY12?
Rajesh V. Desai, Executive Director FY 2012, correct.
Monica Joshi
Okay. Now I want to just get a sense of adjusted for let's say, adjusted on the further ForEx impact. Over the last three quarters, there has been a significant slide in your operating margins, adjusted again for licensing income. I see your guidance is at 19%, 20%, but what really would it take to reach from the current 17.5% and an average of 18% in the last three quarters to go to let's say on 19.5% or 20%?
Glenn Saldanha, Chairman and Managing Director Monica, I think the 17.5% is also influenced by higher R&D spend basically, so it's more a quarter phenomenon. I think the core business has virtually no erosion in the overall margin, I mean GC may be to instead of 1%, but I think next year given the growth we are anticipating and given the performance of the firm, I mean I don't think we would significantly challenged to meet the core EBITDA guidance that Jason mentioned.
Monica Joshi Sure. But Glenn, just to get this object to be right, you had a growth this quarter too, and you didn't even have a license in ‐ so you have a very strong revenue growth. You seem to have done well on your balance sheet, so what really drives this down and thus what will help it improve going forward?
Glenn Saldanha, Chairman and Managing Director It's on account of higher R&D spend that the margin is suppressed in the quarter, like certain expenses will remain because certainly the expenses will not go in the proportion, which will help us to improve the EBITDA margin that is what we are expecting by time. And even on the GC level we have said, we are expecting almost 1%, 2% improvements in GC also, so all that will contribute to increased margins.
Monica Joshi Okay. That's helpful. Just lastly on your oral contraceptive side. Any color on where your pipeline is, what you expect in the next year or two? And how have you really seen the market evolving and your market share particularly evolving? Also your thoughts on when ‐‐ when do you expect myelin to be present in the market?
Corporate Participant So, on the overall or kind of set aside, I think last year at this time we had two or three products on the market. Today we have ten approvals, we have seven actively in the markets, three which are in the launch process. And we still have several more being filed and I would anticipate another three or four approved over the next six to 12 months.
So, given that we now have a much larger basket of products, we've gotten significant headway into the marketplace. And we've been able to achieve significant market share or 20% plus on most of the molecules. So we are doing very well with even further upside beyond those numbers on all ten to 14 that we will have in the marketplace this year.
And when myelin and others will enter the market, I don't know. They've made a lot of comments, but so far the other people today Avastin and Teva are the main competitor, endo ‐ is really the other and Sandoz have some products. But we are really ‐‐ ourselves and are really the third largest ‐ the generic player in the market. And we've been able to take advantage of growing market share. But we do anticipate the others joining at any time or over the future.
But the good thing is being there first we've been able to establish our trials and keep ‐‐ we'll be able to keep a significant portion of our market share, regards with who else comes in in the future.
Monica Joshi Very helpful. Thank you and wish you the best.
Operator Thank you so much Ms. Joshi. [Operator Instructions]. All right, I am getting the next question from Mr. Bhagwan Chaudhary. Please go ahead Mr. Chaudhary.
Bhagwan Chaudhary Yeah good morning and congrats for a very good set of numbers. I had just one question, it's again on this oral contraceptive on the U.S. part, means how much of the currently OCs portfolio is contributing to the U.S. market. And recently there was a shortage of OCs in the U.S. market, so have we got some benefit of that shortage?
Terry Coughlin, Cheif Executive Officer The first part of your question, I don't know what the exact breakdown of the actual dollar sales of percentage, its a growing percentage. Ledger is very minor, it's growing and will continue to grow. I didn't hear your second part of your question.
Bhagwan Chaudhary Yeah, that is the shortage of the ‐‐ there was some shortage of the oral contraceptives into the U.S. markets, so that in the current quarter and this very strong set of numbers from the U.S. so are these attributed to debt?
Terry Coughlin, Cheif Executive Officer Yeah, I think that some numbers in the U.S. are ‐‐ this past contributed to three different areas, one the base part of the business is doing well in growing the launch of several new oral contraceptives and ones that we had in the market, it still takes on any product launch three months to nine months to 12 months to really maximize potentials of the OCs that we had approved over this past year has helped grow ‐‐ in this quarter and obviously the exclusive launch of Q2 that will take us on of about in this past quarter.
Bhagwan Chaudhary Okay. Just one question on German, what we have received there for the this tender of two products on the Germans. So means how big two thing is this opportunity?
Terry Coughlin, Cheif Executive Officer I always too far at this, still minor comparison to everything else. However, we too have first in offers and several other tenders including ‐ tenders. So I mean this is our first year into the German market of the overall German business, it was a ‐‐ of the overall European business, it was a small percentage but you will see it growing this year, those two tenders take full stride and we get more penetration into the German market even beyond the tenders, and hopefully what the other tenders that we have made offers on that we will build some portion of those also.
Bhagwan Chaudhary Okay. And just Glenn just final question on this domestic market. They are 24% kind of growth what we were having in the current quarter so was this because of some inventory to favor destocking into the last quarter, so that benefited in this quarter or this was from?
Glenn Saldanha, Chairman and Managing Director No, no I mean IMS, if you see IMS in March right, reported us at 37%, 38% growth, right, so I mean clearly, there's been a ‐‐ we are out performing in the domestic business right, in terms of actual demand left. And that is beginning to reflect in terms of the overall growth of the domestic business.
Bhagwan Chaudhary So what do think for the FY13, will we be able to cross 25% kind of growth ‐‐?
Rajesh V. Desai, Executive Director
We are looking at 18% to 20% growth for next year.
Glenn Saldanha, Chairman and Managing Director And our guidance is conservative right. I mean, we are not sure as to how the next year we'll pan out for the industry as a whole. So, that's why we feel comfortable with the 18%, 20% upward.
Bhagwan Chaudhary Okay. Just once again I want to once again this clarification what the guidance we are providing is the 20% excluding out licensing income. So if the excluding for FY13 that's I understand but are we excluding from FY12 as well?
Rajesh V. Desai, Executive Director Correct. You have to take the base business.
Bhagwan Chaudhary Okay, okay. Thank you. That's all from my side.
Operator Thanks Mr. Chaudhary. Now we have Mr. Nitin Agarwal from IDFC Securities. Nitin, please go ahead.
Nitin Agarwal Hi, thanks for taking my question. Terry, just a couple of question. One is on the U.S. business rationalization. You were talking about the rationalization of some of the low value products happening some time in Q3. Have the process still continued to an extent in Q4 and are we done with it?
Terry Coughlin, Cheif Executive Officer Certainly, when we say rationalization, there is some products that are commodity type items that we are now focusing on as much as our entire philosophy of the niche product. However we still have several customers who need to be supported on these smaller products. So I think that we have rationalized among, if we are unable to make money, and we have been raising prices to enable us to make money and some of the products that we want. And doing that we have been able to streamline the business to make sure that we can secure the best profitability on the entire product mix as you talked to the various customers.
Nitin Agarwal But have we lost some revenues if I were to probably look at compared to H2 to H1, is there been some loss in the business because of rationalization, is it been a material sort of number?
Glenn Saldanha, Chairman and Managing Director No to insignificant. I mean what we have mainly done is, we may have launched some unit sales, but we've gained an increased pricing and so on on that basis we would not have loss any sales on any of the rationalization that we've done.
Nitin Agarwal So, I mean ‐‐ but if that's the situation because the U.S. business number, the $67 million pretty much where they were when we started the year and despite the fact if you've got a bunch of approvals, very interesting decent approvals during the year including Malarone that ‐ were launches as well as the Ocs. So when do we see the pick up in the quarterly run rate release visible in the numbers?
Corporate Participant Well, I think you've seen that continuing on to next year, I mean this year we have some different one‐off on some products being shortage in the market that we've been able to pick up some one‐time business, especially earlier in the year. We also had raised some prices earlier in the year that allowed the Q1 and Q2 to perform very well.
But I think as you go in to quarter we end and to the next three quarters, you will continue to see the increase in sales and not over 20%, again which is already conservative number growth with these new approvals taking place. But it does take as I think it's over a bit earlier a good to ‐ even 12 months to really maximize a potential when you launch a new product. Products like Cutivate and Malarone, you see the effect clearly right away, but anything that have another competitor out there even at this one, it does take one to three to four quarters to really see the full benefit and the way we do our market in to make sure that we can maximize the potential to see that effect.
Nitin Agarwal Okay. That's quite helpful. And ‐‐.
Corporate Participant We started up the year with Q1 at 55.
Nitin Agarwal Right. But what I mean from Q2 it's been sort of flattish in last three quarters.
Corporate Participant Sure, sure.
Nitin Agarwal And lastly, on ‐‐ Terry on the ‐‐ we have reduced some OCs in the market and then is there any financial impact which associate with that?
Terry Coughlin, Cheif Executive Officer And we recalled. We have reduced, we had a recall on one OC which was limited to seven lot, but had zero impact on the business, but we didn't reduce anything.
Nitin Agarwal Okay. And just a couple of other questions. On the average interest cost, what is the number that we should be looking at next year?
Terry Coughlin, Cheif Executive Officer See, 38 to 39 per quarter.
Nitin Agarwal Okay. And sir ‐‐?
Corporate Participant
Yeah.
Nitin Agarwal And on the tax rate what's the number we should be looking at for this year? How this tax rate will be playing out for next couple of years?
Glenn Saldanha, Chairman and Managing Director Actually for next year we are estimating something 14% to 15% and after that probably it may drop because of certain new projects that will go in the real revenue is earning more, so definitely we are expecting in years to this tax rate will be down.
Nitin Agarwal But sir then ‐‐?
Glenn Saldanha, Chairman and Managing Director ‐to new tax code and other, earlier we were assuming that everything will remain constant for two years then definitely taxes will be down.
Nitin Agarwal But when do this deferred tax assets begin to unwind, do you see that happening anytime in the near future?
Glenn Saldanha, Chairman and Managing Director Definitely, because most of the subsidiaries are in the growth mode, so they will be able to stabilize their revenue earnings capacity in coming years which will definitely make use of the deferred tax asset while paying the tax.
Nitin Agarwal Okay. And I think Glenn on the R&D spend, where do you see the spend going through, how do you see it in FY13?
Glenn Saldanha, Chairman and Managing Director 6% to 7%, that's right, of sales.
Nitin Agarwal Okay. So it's like about 15%, 20% growth on a current year numbers there about.
Glenn Saldanha, Chairman and Managing Director Yeah, possibly.
Nitin Agarwal Okay fine. Thanks very much.
Operator
Thanks Nitin. [Operator Instructions]. The next question is from Mr. Prakash Agarwal from RBS. Mr. Agarwal please go ahead.
Prakash Agarwal Yeah, good morning sir. On this basically on the U.S. pipeline if you look at AT approved 40 in the pipeline, just wanted to have a color on the pipeline what kind of products are we still into largely into derma and OCs, can you give us some color on the pipeline please?
Rajesh V. Desai, Executive Director Right, so on that 78, 80 approvals we have these 38 to 40 pending approval, we still have 10 which have Canada approval too, right. So, we have a few immediate release products and therefore the majority of the products are either dermatological products, modified release products or oral contraceptives.
Again over the past three years on our R&D filing side, we have really kept a strict concentration on these more niche areas in those three or four areas, so they are very unique type products.
Prakash Agarwal So are we able to share the therapeutic areas or we just talk on derma and OCs ?
Terry Coughlin, Cheif Executive Officer I think in our Investor profile, we shared the therapeutic areas of the pending ANDAs right, so.
Rajesh V. Desai, Executive Director We shared the categories of derms and OCs and the metaforce.
Prakash Agarwal Okay. And of the 12 filings again, I mean is there any focus area where we should, if you can share where have that been the maximum filings for the year, the 12 filings that you have made?
Terry Coughlin, Cheif Executive Officer I think it's a pretty good mix of a couple of paragraphs for two or three immediate released products. Again then the rest would be either modified release dermatological or contraceptives right. Just two or three of each of those categories making up of the '12.
Prakash Agarwal Okay. And on the maximum number of approvals that you have seen in the year in your history, do you see similar kind of approval run rate for next ‐ I mean fiscal '13 as well or was it a one off?
Terry Coughlin, Cheif Executive Officer I think, yeah, last fiscal year we had an extraordinary high number of approvals. This year we had 14 approvals. My best estimate would be the same type of range right, we've seen approvals come through as quickly as 16 months and as long as four years. So the FDA is still trying to put in GDUFA to streamline the approval process but there are so many different dynamics to the approval process, it's really hard to estimate. Other than the FDA estimates, there are 28.8 months for an average approval cycle but we should see a similar number approved this fiscal year that we're currently in FY13 as we saw in FY12.
Prakash Agarwal
Okay got it. And on the OC, if you look at, I mean obviously you got 10 approvals so far. So I mean do we have a basket of 15 or can you just rehighlight the OC please?
Terry Coughlin, Cheif Executive Officer I think that we have that approved I think there is another of account meant approximately 68 more that are currently filed, a few more that will continue to be filed. So, only we will have a total basket in the range of 20, 25 OC products at the end of the day.
Prakash Agarwal And that is an addressable market of?
Glenn Saldanha, Chairman and Managing Director The entire market.
Terry Coughlin, Cheif Executive Officer I mean, there is a majority of the market, I mean there you saw another 10 to 12 OCs which are a couple of million dollars for a fact, that it doesn't have a whole value. I guess ‐ trying to give the updated slide that shows the market value of all the OCs that we have.
Prakash Agarwal Okay. And any number you can share in terms of say fiscal '13 is there any target to achieve in the OC basket I mean say 20 million, 30 million something like that you can share?
Terry Coughlin, Cheif Executive Officer Again I think that we have a specific number to share how big that would be in specific dollar amount.
Prakash Agarwal Okay. Got it. And I mean obviously you have good pipeline currently with the products getting approved and launched from last fiscal those products getting ramped up now and the new launches. But if we can go product wise like what is the status on Oxycodone I mean have we received significant market share, Malarone, Calcipotriene, if you can share a couple of highlights on them?
Terry Coughlin, Cheif Executive Officer Oxycodone solution we have 90% market share on it because we are the only approved product out there. There is one company selling an unapproved product. On Oxycodone capsules, we have a 100% of that market but we are competing against the tablet. And Malarone, I mean we probably have 90 plus percentages because we are the only Generics product out there. Was another product, I missed that you asked about?
Prakash Agarwal Okay. No, what I meant I mean Oxycodone there were the thoughts that the other players in the market would go out. So that has already happened?
Terry Coughlin, Cheif Executive Officer Yeah. There is only one other player in the market who is supplying about 10% of the market on the Oxycodone solution, yes. On the care, so everyone else exited.
Prakash Agarwal Are still in it? Hello?
Terry Coughlin, Cheif Executive Officer Yes?
Prakash Agarwal Did you say all the other players are still in it in the Calcipotriene?
Terry Coughlin, Cheif Executive Officer No, we actually go on ‐‐, everyone else has exited or lost the market. On the solution there is only one of the small player in the market place.
Prakash Agarwal I mean so is it fair to assume a $10 million to $15 million kind of run rate for...
Rajesh V. Desai, Executive Director Prakash we have a lot of questions following up, Prakash.
Terry Coughlin, Cheif Executive Officer And again dollar wise, I don't know.
Prakash Agarwal Okay. I'll join back the queue.
Rajesh V. Desai, Executive Director Thanks, thanks for that.
Operator Thanks Mr. Agarwal. Now we have Ashwini Agarwal from Ashmore India to ask other question. Please go ahead sir.
Analyst Hi, congratulations on a wonderful set of results. Couple of questions, when you say that the R&D spend of 6% to 7% of revenue, that includes filings, correct?
Glenn Saldanha, Chairman and Managing Director That's right, it includes every thing, filings, it also includes legal expenses for potential FDAs and everything.
Analyst And you will be capitalizing the filing related part of the R&D correct?
Rajesh V. Desai, Executive Director Ashwini, what we are speaking about is what is getting expensed through the P&L, all of it is getting expensed through the P&L.
Analyst Okay. So this is the part that gets expensed. The other question that I had...
Rajesh V. Desai, Executive Director Yeah because the definition of filing what we said is Generics R&D, Innovative R&D, all is going through the P&L.
Analyst Okay. Because in your opening comments you mentioned that the intangibles increase had 57 crore number which is a combination of molecules that were in license and some filing expenses. Will you break that number up?
Rajesh V. Desai, Executive Director Ashwini, what we had said is that the intangibles increase that is there has happened because of banned in‐license and because of patent filings, that's what we meant there, patent filing.
Analyst Okay. All right, okay. And one of the maintenance question. The debt of 1,924 crores that you have as of the end of the year could you break that up into U.S. dollars and rupees please?
Glenn Saldanha, Chairman and Managing Director Almost let's say 80% is U.S. dollars denominated and balance is small volume capital margin is there in domestic.
Analyst Okay all right. And looking ahead it would be fair to say that looking at the kind of growth that's coming through for you in Latin America the kind of filings that you have in the U.S. and the kind of growth rates that we've seen at least in the IMS data. The revenue growth guidance is ‐‐ there is fairly high degree of certainty that you are aimed to achieve that number?
Rajesh V. Desai, Executive Director Yes Ashwini I mean we've been conservative for the most part.
Analyst Okay. All right. Thank you, all the best.
Operator Thanks Ashwini. Now we have Mr. Arvind Bothra from Bank of America. Please go ahead sir.
Arvind Bothra Thanks, Glenn. Just a small question. Very strong set of results, very healthy improvement in balance sheet, but at this juncture, what would be your key concern or maybe two or three concerns which you would like to caution your management team on. I mean where do you see lightly challenges maybe?
Rajesh V. Desai, Executive Director Well I think at this point our biggest challenge is basically on the execution, right. I mean if we are able to execute at this space and keep this momentum going, we will have a very strong year in FY13 also. So we've got all the things in the fire to continue executing, right. So I mean I think our biggest challenge is execution, we keep executing at this space and at this momentum we should have a strong FY13.
Arvind Bothra Okay. Yeah, please.
Corporate Participant No. So, I mean that's the bottom line. The primary focus now we are still continuing to drive growth, we are continuing to drive free cash generations from all the businesses. These are the two major parameter that we continuing to drive across the management team.
Arvind Bothra Okay. And the debtors which we have in the balance sheet does not include any securitized part or is there any?
Corporate Participant No.
Arvind Bothra No? Finally in the semi‐regulated markets as well as Latin markets, we have seen in the past not ‐‐ I mean for the last two quarters the growth has been very very healthy. But in the past we've seen fluctuations in terms of growth. Has the trend normalized, are we now on a very stable healthy growth part sir?
Corporate Participant So, the only geography which we think will struggle in FY13 will be Central Eastern Europe. Central Eastern Europe in FY13, we are expecting a flat Y‐o‐Y, because of some reimbursement issues and government's knocking down prices. But Latin America, ROW will continue to see very strong growth in FY13 also, so very clearly we are on very strong footing in both these geographies.
Arvind Bothra Okay. And can you just finally talk about your domestic strategy in terms of are you planning to add more field force, any new therapy segments that you are looking at?
Rajesh V. Desai, Executive Director Okay. In terms of our domestic strategy, actually I would say is we are focusing on three areas, one is to basically grow our existing business. And if I talk about some of the specifics, for example our chronic business, we expect really to grow ‐‐ outgrow the market segment.
Secondly, we added about 700 new reps last year, and actually most of them have been productive for us and we expect to gain momentum based on productivity gains in FY'13. And of course, like every year we want to launch new products and we expect around 20 to 25 new products to also fuel our growth for the next year.
Arvind Bothra Perfect. And that's it from my side. Thanks a lot.
Operator Thanks, Mr. Bothra. Now we have Mr. Anubhav Aggarwal from Credit Suisse. Please go ahead Anubhav.
Anubhav Aggarwal Yeah, hi. Thanks. And Glenn, one question on the gross margin, you earlier explained that the reduction sequentially was driven by the mix. But I just had one question, whichever geography I see from December quarter to March quarter, I only see an improvement, for example, Latin America which is a lower margin business for them the absolute sales are down in Latin America. Semi Regulated Markets which is better is up, Indian market is up, U.S. is up, so I don't understand this reason of business mix relating to reduction in gross margins.
Glenn Saldanha, Chairman and Managing Director So Anubhav, if you look at the ‐‐ it's basically the weight of the business. So, if you look at this quarter, there is a larger weight coming from the U.S. business compared to the other businesses. Now as you know unbranded generic businesses, the gross margin is low while the EBITDA is higher or at the same level. Because your cost below between GC and EBITDA is much lower compared to a branded business.
So, the weight of the unbranded business has gone up compared to the branded business, and that has driven the slight 1% reduction in the gross margin. I don't know if you are with me. At the EBITDA level, there is no real impact because the cost between the gross margin and the EBITDA is much lower for a generic business compared to a branded business.
Anubhav Aggarwal Okay. My only doubt there was, I thought that because semi‐regulated markets, the gross margin would have been significantly higher and they were much higher, so I thought that that may have neutralized, but that doesn't seem to be the case.
Second question I have on the guidance that you have given out, can you slightly help split that guidance in to what do you expect roughly on the U.S, India and Latin business? And what is the currency assumption you are making in that 20% to 25%?
Corporate Participant So we've already ‐‐ Anubhav, beyond this we won't give you business wise. I think most of during the call, we've gone through the numbers for what we think India will do and U.S. will do and some of the other businesses.
Anubhav Aggarwal But what is the currency assumption that you are assumed in that 20% to 25% number?
Glenn Saldanha, Chairman and Managing Director See, we really has not considered what today is happening. So, definitely so that will be additional to whatever it will happen it will reflect in the quarter‐over‐quarter results. But what we have ensured is this there will not be cash impact because of the currency change, that said.
Anubhav Aggarwal Okay. And sir I had another question about the interest cost. Your interest cost is up 15% quarter‐on‐quarter from December to March quarter with despite reduction in net debt what's aiding to that increase in interest cost?
Rajesh V. Desai, Executive Director Our efforts are always to push debt to the ‐‐ considering the today's circumstances it is better to have some long term debt of your book and with the reasonable cost. So in doing that, there is some reshuffling of the debt this time which has resulted in the
increase in the cost. But in the coming year, we expect that quarter‐over‐quarter you will see the improvement.
Anubhav Aggarwal Sir, can you slightly elaborate there, when you say reshuffling of debt do you mean that your more debt shifting towards the long‐term debt is that what you mean?
Glenn Saldanha, Chairman and Managing Director Yeah. Yes.
Anubhav Aggarwal So is that does essentially leading to an increase in cost. But you seem to be so...
Glenn Saldanha, Chairman and Managing Director But, we are not increasing the cost, we have certain our front payments and our other fleets are loaded in the certain quarter over. So just an upfront financial charges which has actually contributed to the increase in interest cost in Q4 Anubhav, and Rajesh has already guided that next year it will come down right, in terms of both interest cost will come down, even in terms of absolute number it will come down.
Anubhav Aggarwal Okay. And just a couple of questions on the balance sheet. Can you give us the free cash flow generation figure for the entire FY12?
Rajesh V. Desai, Executive Director Anubhav if you look at it on the reported P&L and if you address for pages in working capital, effect stats in addition and cash tax on the reported P&L that we've got, you will see that there has been a free cash generation to the extent of 300 odd crores.
Anubhav Aggarwal Correct. Okay. And Glenn what would be the launch time line of Crofelemer now expected, would it be like middle of this year, end of this year? And how ‐ what will be the roll out or a geographically I mean will you start with India and what's your plan right now in terms of let's say '13, '14?
Glenn Saldanha, Chairman and Managing Director So we are not putting out any time line on Crofelemer other than ‐‐ so the launch sequence we will start next year and what we anticipate in FY14. But in terms of launch sequence we are not putting out our plan in terms of launch sequence.
Anubhav Aggarwal And...
Glenn Saldanha, Chairman and Managing Director The filings are all going on this year.
Anubhav Aggarwal Okay. Just a last question on the inventory days. Your inventory days are down very substantially from March '11 to March '12 now. What ‐‐ which regions essentially are contributing to such a sharp decline in inventory days, almost if they are down by a month?
Glenn Saldanha, Chairman and Managing Director Across the Board, its been a conscious effort right to focus on the balance sheet and improve inventory, improve receivables across the board and that's what we've done in this year.
Anubhav Aggarwal I know in the past you have talked a lot about changing operation from the India side, but is that the same reflected in the U.S. and the other parts of it?
Glenn Saldanha, Chairman and Managing Director I mean its across the board Anubhav, and in every geography.
Anubhav Aggarwal Okay. Thank you. I am done with my questions.
Operator Thank you so much Mr. Aggarwal. The next person in line we have is Mr. Nimish Desai from Motilal Oswal. Please go ahead.
Nimish Desai Yeah. Good morning. Just a few questions. Would you be able to give us a net debt target for FY13?
Glenn Saldanha, Chairman and Managing Director No, we won't, we are not putting out any specific number Nimish.
Nimish Desai But Glenn, we should expect a reduction...
Glenn Saldanha, Chairman and Managing Director All we can say is free cash flow generation in FY13 will go towards debt reduction.
Nimish Desai Will go towards debt reduction. Okay. Second question was, I was just looking at your depreciation that number has not moved at all in FY12 as compared to FY11 I mean hardly 2 crore, 3 crore movement. So could you clarify as to what has driven this?
Glenn Saldanha, Chairman and Managing Director Actually, most of our CapEx remain under capital work in progress so which is not subject to the depreciation charges, this coming year, yes you will see depreciation charges.
Nimish Desai Okay, so coming year okay fine. And another clarification on this guidance. It was mentioned that the sales growth guidance of 22% to 25% is given excluding the licensing income for both the years FY'12 and FY'13. Is that the correct understanding?
Glenn Saldanha, Chairman and Managing Director Correct, correct.
Nimish Desai So what has been done is from FY'12 also you've removed the licensing income which was a significant portion and on that reduced number you are saying that you will grow by 22% to 25% ?
Glenn Saldanha, Chairman and Managing Director Correct.
Nimish Desai That's the way we should look at it?
Glenn Saldanha, Chairman and Managing Director Correct, correct.
Nimish Desai Okay. Okay and just two more questions. One is Glenn what I see from your current numbers and if I see two years back, the history of your operations, so what is clearly visible is that in the past few years we were growing at a very fast pace, but we were getting slightly penalized on the working capital side. Now, the growth has been sustained. Capital, sorry the working capital has come under control at the same time EBITDA margins have come off very significantly. I mean if I look at the three, four year track record.
So is there a connection between the two that sense we are trying to correct working capital, the business is kind of lending itself to lower.
Glenn Saldanha, Chairman and Managing Director I think EBITDA margins have come off only on account of higher R&D spend, okay. I mean...
Nimish Desai Okay.
Glenn Saldanha, Chairman and Managing Director R&D spend has been one of the key contributors to EBITDA margin coming out.
Nimish Desai Okay. Okay.
Terry Coughlin, Cheif Executive Officer And you want to keep in mind even the gross contributions, the material cost in this year also.
Glenn Saldanha, Chairman and Managing Director So those are the two aspects right.
Nimish Desai Okay.
Glenn Saldanha, Chairman and Managing Director Which have actually driven the margin. But I mean that is go back up, I think going from what we've clearly stated that EBITDA margins will improve from '13 again.
Nimish Desai Okay, okay. And the last question was on working capital. See you managed to control working capital pretty well in FY'12. FY'13 do we expect any further improvement or this is where it will stabilize?
Glenn Saldanha, Chairman and Managing Director Our net working capital we think will be in the same range going forward.
Nimish Desai In the same range.
Terry Coughlin, Cheif Executive Officer At least from 163 days to 120 days.
Nimish Desai Yeah that's a significant reduction and that's why I was asking this question because you're still growing the business by 22% to 25%. So it will stabilize at this level, right?
Terry Coughlin, Cheif Executive Officer Yes.
Nimish Desai Okay, okay fine. Thanks a lot.
Operator Thanks Mr. Desai. The in line we have is Binu Parambil from IIFL. Please go ahead sir.
Binu Patiparambil Yeah hi. Most questions asked, just one question on your current liabilities. Compared to the balance sheet that was given at after 2Q of this year, the current liabilities have increased sharply by about 435 crores or so. Where is that coming from?
Glenn Saldanha, Chairman and Managing Director Binu as per IFRS, the immediate long‐term liability which is 244 crores we have transferred it to other current liabilities and while we have given the debt number, we have added that other current liability in the debt number. Just to the extent of 244 crores.
Binu Patiparambil Right, right. Okay fine. Also on the tax rate, if we remove the deferred tax asset then what will be the effective tax rate for the company. I believe the deferred tax asset is coming from the prior years losses, right?
Glenn Saldanha, Chairman and Managing Director We think usually it is the practice to take on consolidation effective tax rate and if you'll compare with previous year to this year, there is a reduction of 1.85% in the effective tax rate, so which is also one of the factors which is contributing to lower tax. As far as the deferred tax, it will take out then it is difficult right now for me to explain the exact percentage. But we have also MAT credit which is also registering the tax and MAT credit in this in India we are enjoying because of our manufacturing unit exempted from income tax.
Binu Patiparambil Right, right. And finally in the opening comments you had given a break up of intangible addition one figure I heard is 57 crores for some brands and patents. What were the other items, could you see could just repeat that?
Glenn Saldanha, Chairman and Managing Director Yeah. So the intangibles breakup is computer software is 7 crores, brand inlicense and patent filings is 57 crores and foreign currency translational adjustment on intangibles is 103 crores. So this will come in three separate columns in the annual report as and when you see it.
Binu Patiparambil Okay. Thank you. I will join back the queue.
Operator Thank you so much. Now the next person is Mr. Krishna Prasad from JM Financial. Please go ahead sir.
Jesal Shah Yeah, hi. This is Jesal. Just two questions quickly, one on the dollar revenue, what will be the ‐‐ for the full year FY12, what will be the net dollar revenue?
Corporate Participant Jesal, if you apply the 48.53, what we have been saying is the ‐‐.
Corporate Participant No, we ‐ some percentage, Jesal.
Jesal Shah No, no I just wanted in terms of millions of dollars, how much would be the net foreign exchange let's say revenue in dollar terms, how much will that be?
Corporate Participant About 75% for revenues are overseas.
Corporate Participant In dollar terms Jesal it's difficult because if other than India and from API, it is everything we earn in the foreign currencies. And then in dollar term means, we have to ‐‐ we don't have right now that type of breakup available.
Jesal Shah Okay. The other question was on the total staff strength as on March end, how much is it and where do you see that going? And if you can just comment on what type of wage inflation are you seeing in the system?
Glenn Saldanha, Chairman and Managing Director The total staff strength is about 9,000 employees. We see that increasing by 10% in this year. Wage inflation, that's a tough, Jesal. In terms of the absolute wage inflation on a global basis. But it's pretty much, it averages at about 9%, 10% is what you should assume.
Rajesh V. Desai, Executive Director I think the effort Jesal is that when you look at employee cost to percentage to sales, the focus is to try and get that number down, I mean that's primarily here.
Jesal Shah Okay. Thanks so much.
Operator Thanks, Mr. Prasad. [Operator Instructions]. Now we have Mr. Kartik Mehta from Daiwa Capital Markets. Please go ahead sir.
Kartik A. Mehta Hello. Yeah, hi. Should we assume the same payout ratios for the future years, Glenn?
Glenn Saldanha, Chairman and Managing Director Well, I mean the ‐‐ because of the performance we are pretty happy with the way things have gone and the free cash flow, we are paying on Rs.2 per share this year. I mean clearly, the goal is over the next three to five years to get through a payout ratio which is at par with some of the industry peer group, I mean that's where we want to ‐‐.
Kartik A. Mehta Hello?
Glenn Saldanha, Chairman and Managing Director I don't know if I answered your question.
Kartik A. Mehta I missed the last one. So you ‐‐.
Glenn Saldanha, Chairman and Managing Director I said the goal over the next three to five years is to get to a payout ratio which is at par with the industry peer group.
Kartik A. Mehta Okay. So, would that be at the existing levels where it is in FY12 or it will be higher than that? Because the ‐‐.
Glenn Saldanha, Chairman and Managing Director Over a three to five years it's clearly higher than where we are even in FY12, I mean if you look at the peer group. I think you need to just go and check what the peer group payouts are.
Kartik A. Mehta Okay. And just one last question on the ForEx part is that, how do we hedge our U.S. exposure here in terms because almost about 80% of the debt is in the USD and that is all in fully long‐term debt, so may be you may have some component which you will pay every year, but in the sense how do you match the receivables with the debt payout that you will have every year. I am talking about non‐rupee. And in that case, I am just confused that how will the interest cost actually come down because if we are paying the lesser amount of the long‐term debt every year, or is there any restructuring of net debt on records as well, if you can please explain. Thanks.
Corporate Participant So the effort is to have a natural hedge on the balance sheet as far as possible. So, all our ‐‐ most of our dollar loans or the liabilities that we have are they some more get balanced with our dollar receivable as well, because the business has substantial amount of exports out of India. So, we do not do any of the exhausted derivatives and selling of dollars forward for next five years, and those type of things we do not do.
Kartik A. Mehta Yeah. So, no, in the sense where the average rate of realization for the dollar in FY12 is higher than FY11 are you assuming in FY13 we had the same rate because 20% to 25% revenue growth with a fall in the EBITDA margin is it fair to assume that we are assuming some of the realization may be lost because on Y‐o‐Y you will have some lower realizations on your dollar denominated or non rupee exports. Thanks.
Glenn Saldanha, Chairman and Managing Director It will, Kartik, we have already given enough information about guidance growth rate EBITDA margin, if you put these by yourself you will realize what we are talking about, it's very conservative estimate about all the growth as well as other cost factors.
Kartik A. Mehta Okay. Thanks.
Operator Thanks sir. Now we have Mr. Saion Mukherjee from Maluda. Saion, sir please go ahead.
Saion Mukherjee Yeah hi this Saion from Nomura. Couple of questions. First Glenn in terms of we have seen significant increase in innovation R&D spent, we understand that the lot of the clinical developments are being done by Glenmark in house, currently. So how should we think about licensing deals and what are the key milestones in terms of clinical development that we should watch out for, for the next 12 months to 18 months perspective?
Glenn Saldanha, Chairman and Managing Director So I mean licensing continues to be a major part of our strategy Saion and we will continue to out‐license as we consistently said
right, most of our programs going forward. If you look at the major data points I mean we anticipate we'll have Phase IIb data on Revamilast in rheumatoid arthritis coming up towards the end of Q3 early Q4 of this year.
We will have the asthma data coming out middle of next year. We will have 17536 in Phase II trial, Phase IIa proof‐of‐concept coming out later this year. We also have an asthma study which is ongoing for 17536 which will report towards the end of this year. So there is a lot of data plus the two sanofi trials, we have Phase IIa trial which is currently underway for 15300. But I think all that you will see a significant contributions coming out of in terms of data coming out this year. So next 12 months to 18 months will be pretty definitive for Glenmark in terms of our innovation work that we've been doing all these years.
Saion Mukherjee Right, see actually last year we have seen a significant increase in the quantum of licensing income size of deals have increased. Now these assets since they have moved far into clinics. Is that the trend that we should see?
Glenn Saldanha, Chairman and Managing Director Yeah.
Saion Mukherjee Because historically you have been able to more than cover the cost. Now costs have gone up. So would it be fair to assume that the deal sizes compared to the past will be higher?
Glenn Saldanha, Chairman and Managing Director Yeah. I think it depends on the phase of development. So I mean clearly Revamilast deal would be pretty ‐‐ I mean if we get good data that will be a big deal right. Because it's Phase IIb, Phase III ready right compound but molecules which are in Phase IIa if we get proof‐of‐concept in Phase IIa we have much more negotiating power. So I think it just depends at what phase the deal happens and which molecule it happens, right?
And that's what we are not able to guide towards right now because while have active discussions it's very hard to specifically pinpoint when these deals will conclude.
Saion Mukherjee Okay. My next question is will it be possible for you to share which are the geographies where you are currently making loss at the EBITDA level and if possible to share the quantum of that loss?
Rajesh V. Desai, Executive Director Right now it's very insignificant, okay. I mean virtually every geography is actually profitable and the only place where ‐‐ Central Eastern Europe we are marginally negative in this year, in FY13. I think every other geography is EBITDA positive.
Saion Mukherjee Okay.
Rajesh V. Desai, Executive Director Right.
Saion Mukherjee Okay. Thanks. And one more last question for Terry. I mean you mentioned about price increases in the derma products, I mean is there any other segment where in the market place where you are seeing price increases and also your thoughts on M&A scenario particularly on the Generic space and the recent acquisition by Sandoz what's the implication you think will be on the
Derma space?
Terry Coughlin, Cheif Executive Officer Hi. I think as price increases in the Generic industry is very tough. I think only where there is limited competition and the reason you seen some price increases on the Derm side as a lot of them were selling at significantly low prices. So barely probably covering cost, so there has been a limited competition product for some lower Derm products, price increases have been possible, right.
Saion Mukherjee Okay.
Terry Coughlin, Cheif Executive Officer Yeah and the is there possibility in other areas? Very few. Again for every person who tries to increase the price two or three trying to decrease the price of a very hard market to increase prices. You just had to be in that unique position and have some type of a advantage or there has to be a proverb in the market place. Even that has taken very hard in the market. On the M&A side, I think there is Sandoz on the acquisition of Fujairah, it allows them to become a very dominant dermatological player.
And I think that through every acquisition where there there is a Sandoz of Fujairah or ‐ of an activist, it continues to consolidate the industry. And there is also consolidation on the customer side between the chains and the wholesales and the distribution. So I think that the only thing I can say about moving forward is that I would anticipate to see continuous consolidation. And on Sandoz, Fujairah, specifically both of them have some Derm franchises. I think it rationalizes that market a little bit.
Saion Mukherjee Okay. Thanks a lot.
Rajesh V. Desai, Executive Director I think with this I think we will close the call.
Operator Sure. Thanks Mr. Mukherjee. At this time there are no further question from the participants sir. I would like to hand the floor back to Mr. Jason D'Souza for final remarks. Over to you sir.
Jason D'Souza, Investor Relations Just before we close the call, the disclaimer that we would like to mention. The document information that has been presented during the call by Glenmark Pharmaceuticals Limited, the information statements and analysis made in call describing the company's objectives, projection and estimates are forward‐looking statements and progressive within the meanings of applicable security laws and regulations.
The analysis contained herein is based on numerous assumptions. Actual results may vary from those expressed or implied depending upon economic conditions, government policies and other incidental factors. No representation or warranty either expressed or implied is provided in relation to this presentation. The presentation should not be regarded by recipients as a substitute for the exercise of their own judgment. With this, we end Glenmark's Earnings Call. Thank you very much.
Operator Thank you so much all of you. Thank you sir. That does concludes the conference call for today. Thank you for participating. You may all disconnect now. Thank you and have a great day.