Glenmark Life Sciences Ltd
NSE:GLS
Earnings Call Analysis
Q3-2024 Analysis
Glenmark Life Sciences Ltd
In the three quarters of FY '24, the company reported a robust free cash flow of INR 221 crores and a healthy cash and cash equivalents balance of INR 236 crores as of December 2023. Continued emphasis on growth is echoed by management, with a nicely shaping order book and anticipation of normalizing employee costs from an elevated 12% of revenue back to historical levels of around 9% in the forthcoming quarters. Volumes have shown consistency, and even as Q4 of last year presented an exceptionally strong performance, the order book's strength supports a strong finish to FY '24, albeit with an expectation of some softness.
The organization maintains a solid growth trajectory with over 13% growth in the GPL business, suggesting resilience across markets without foreseeing any future weaknesses. Margin enhancements are attributed to better input prices and a new CDMO business with higher margins due to mix improvements. Wholesale changes in shipping logistics from China, including potential rerouting and increased air freight, are being carefully monitored to ensure continuity in supplies to customers.
Programs like the Production-linked Incentive (PLI) scheme are expected to contribute around 1% to 1.5% to overall margins, and the GPL segment is anticipated to sustain high levels close to INR 230 crores for the full year. With growing CAPEX, asset turnover ratios are expected to gradually normalize to between 2.5% to 3%. The external business is likely to maintain its low-teen growth rate, driven by new product introductions across various markets except for Japan and Europe, which have seen a decline or stagnated respectively.
A large validation supply for CDMO has been made for filing, potentially bringing this project online next year. Revenue projections from this venture could range between $5 million and $10 million, contributing to the CDMO segment which is slated to quadruple from INR 150 crores to INR 600 crores in the next 3 to 5 years. As the generics business also grows, it's unlikely that CDMO will surpass 30% of total revenues. Prospects for the incremental capacity at Ankleshwar and Dahej indicate that OpEx is unlikely to significantly increase as the company transitions to larger production batches, supporting improved efficiency on a per kilo basis despite rising volumes.
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Ladies and gentlemen, good day, and welcome to the Q3 FY '24 Earnings Conference Call of Glenmark Life Sciences Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Soumi Rao from Glenmark Life Sciences Limited. Thank you, and over to you, ma'am.
Good morning, everyone. I welcome you all to the earnings call of Glenmark Life Sciences Limited for the quarter ended December 31, 2023. From Glenmark Life Sciences, today, we have with us Dr. Yasir Rawjee, our MD and CEO; and Mr. Tushar Mistry, our CFO. Our Board has approved the results for the quarter ended December 31, 2023. We have released the same to the stock exchanges and updated it on our website. Please note that the recording and transcript of this call will be available on the website of the company. Now I'd like to draw your attention to the fact that some of the information shared as part of this call, especially the information with respect to our plans and strategies may contain certain forward-looking statements that involve risks and uncertainties. These statements are based on the current expectations, forecasts and assumptions that are subject to risks, which could cause actual results to differ materially from these statements depending upon the economic conditions, government policies and other incidental factors. Such statements should not be regarded by recipients as substitute of their own judgment. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results may differ materially from those expressed in or implied by these forward-looking statements.
With that, I invite Dr. Yasir Rawjee to say a few words. Thank you, and over to you, Dr. Rawjee.
Thank you, Soumi. [Technical Difficulty] I wish you all a happy new year.
I'm sorry to interrupt you, sir, can you please start over because your line -- I mean, your audio broke, sir.
Okay. Okay. So Soumi, thanks. Good morning. Welcome to our earnings call. I wish you all a happy new year. Is this okay now?
Yes, sir. It's quite audible now.
Okay. So -- thank you. So as we get into the new year, just a quick overview in terms of what's happening in the industry overall. So things have picked up. Certainly, the U.S. has improved. Inflation also seems to be cooling down, which is a big positive. With respect to geopolitical issues, of course, these conflicts are not helping the situation, but it's manageable, I would say. There's an improvement from China in terms of the supply situation, and things are definitely eased. The domestic economy is also doing well. So we see a robust demand overall. This business with the Red Sea may have some impact, mainly on freight, but it also results in longer supply chain. So it will have some kind of inventory impact. We may have to stock up a little more, but let's see how that pans out. As far as our performance goes, we had a decent performance. We've had just under 6% growth on the top line. This is driven by an external business of just under 10% growth. And then GPL has been flattish this quarter. From a regional perspective, we've had solid growth in India, U.S., Latin America and ROW markets, whereas the Europe business has been flattish. Japan has reported a degrowth because of some inventory the customers that they built up in the last few quarters on account of launches. So as we guided in the previous quarter, CDMO has had a significant upturn in Q3. We've signed a new contract for a supply of API. This is a multiyear agreement and the minimum offtake commitment is about $5 million. We expect that this contract will commercialize sometime next year. And it could also lead to significant expansion with this customer. Also, with respect to other clients, we've got other irons in the fire with respect to CDMO, so -- and those are also progressing very nicely. Now before getting into the pipeline, it's important that we emphasize that even though we had a single-digit growth, the bottom line growth has been much better because of our focus on niche products, cost management and utilize -- optimum utilization of our resources. So while top line has been a little soft, right, the bottom line continues very strongly. Now in terms of product pipeline, we continue to file in various markets. So our DMF and CEP filings have crossed 500 as of December 31, again, driven largely by cardiovascular and CNS therapies. During the quarter, we added 4 new products to the pipeline with 1 high-potency API and 3 synthetic small molecules. So coming to high potency API, we now have 13 products with an addressable market of $24 billion and 3 products have been validated and 4 products are in advanced stages. Now before I conclude, I'd like to share an update on the Nirma acquisition. So we received an approval from the Competition Commission of India and waiting for some more approvals for completion of the open offer and so on. Now once these steps are finalized and deal is complete, we will proactively communicate to you, providing clear insights into our future strategy. Till then I request your patience on this subject. I have highlighted in the previous call the core strategy of GLS will remain unchanged. Any new strategy developed will only be incremental to our core approach. In closing, I am optimistic of delivering stable growth in FY '24 driven by a pretty solid order book in the external business, including CDMO business. However, we expect some slowdown in the GPL business which might lead to slightly lower growth than initially projected for the year. So with that, I'll hand it over to Tushar, our CFO. Tushar, over to you.
Thank you, Dr. Yasir. Hello, and good morning, everyone. Welcome to our Q3 FY '24 Earnings Call. I would like to briefly touch upon the key performance highlights for the quarter and 9 months ended 31st December 2023. And then we'll open the floor for questions and answers. Our revenue from operations for the quarter stood at INR 573 crores, a growth of 5.9% year-on-year, a degrowth of 3.8% on a sequential basis. This was driven by steady 9.8% growth in external business which was offset by a flattish GPL business. The gross profit for the quarter was at INR 331 crores, up 19.8% year-on-year. Gross margin for the quarter was 57.7%, mainly on account of better product mix and lower input costs. EBITDA for the quarter was at 174 crores, up 14.6% year-on-year. EBITDA margin for the quarter was at 30.4%, driven by better gross margins. As mentioned in Q2 FY '24 earnings call, employee costs remained alleviated, due to the bonus accrual based on the past performance for the management. The employee costs will remain higher for Q4 as well and then shall return to normalcy. The PAT for the quarter stood at INR 119 crores, a growth of 13.1% year-on-year with PAT margins coming at 20.7%.
Let me briefly discuss 9 months numbers as well. Revenue from operations for 9 months FY '24 was at INR 1,747 crores, a growth of 13.4% year-on-year. Gross profit for 9 months was at [ INR 983 crores ] up 22% year-on-year. Gross margin for 9 months expanded by 390 basis points to 56.3%. EBITDA was at INR 542 crores, up 17.3% with margins at 31%. PAT for 9 months was at INR 373 crores, up 16.3% year-on-year.
Moving on to the segmental performance of Q3 FY '22. Generic API revenues grew by 6.4% year-on-year to INR 511 crores, driven by strong growth in external business. CDMO business recorded strongly with revenue for -- of [ INR 355 crores ], a growth of 40.4% quarter-on-quarter and 27.2% year-on-year. I would also like to highlight that the new CDMO agreement, which Dr. Yasir alluded to in his opening remarks, improves our revenue visibility for the CDMO business in coming years. Looking at the therapeutic mix, CVS and CNS portfolio continues to lead the growth with diabetes portfolio seeing good traction during the quarter. R&D expenditure for the quarter was at [ INR 18.4 crores ], which was 3.2% of our sales. Touching up on the balance sheet and cash flow movements, starting with working capital. Working capital remained stable during 9 months at 170 days. CapEx for 9 months was at [ INR 93 crores ], and we expect to close FY '24 with a CapEx of around INR 150 crores to INR 160 crores. We continue to remain a net debt-free company. For 9 months FY '24, we generated free cash flow of INR 221 crores with cash and cash equivalents of INR 236 crores on the books, as of 31 December 2023. To conclude, as Dr. Yasir mentioned, our order book remained strong. And -- but Q4 is something that we are looking at as how it will get to. And with that, I would like to conclude my remarks, and we can open the floor for Q&A.
[Operator Instructions] The first question is from the line of Tarang Agrawal from Old Bridge Asset Management.
Am I audible?
Yes, sir, there is just background disturbance from your line, sir.
Am I audible now?
Yes, sir, you are audible.
Congratulations on a good set of numbers. I had 3 questions. One, if you could comment on the volume growth for the business for this quarter. The second question is on the employee cost, the run rate at which we are running at currently, would it be prudent to presume this to be the new base as we move to FY '25 or some part of it is [indiscernible] one time and in that sense, the real base will be lower, that's second. And third, the sense that I got from your commentary for Q4 is that probably things are not going to play out as per expectation. So if you could elaborate a bit on that.
So, Tarang, Tushar will take the employee cost piece, right? With respect to volume growth, volume growth has been pretty steady, okay, across markets, so no challenge there. With respect to Q4, we have a pretty strong order book on the external side. And like I said, GPL may come a little softer. Mind you, Q4 last year was a very strong quarter, right? We fired up all cylinders in Q4 last year. So given that, right, there's -- that situation doesn't look like it will pan out again this Q4. So yes, we do expect some softness, but we still have another 2 months to go, right? And the order book is shaping up very nicely. So I'll let Tushar take the employee cost piece.
Yes. So employee cost, if you see, it is around 12% of revenue. Historically, we were always at around 8.5% to 9% kind of range. This is only current scenario for this 3 quarters that I had -- as I had mentioned in the last quarter as well in Q2. So this higher employee cost will remain for Q2, Q3 and Q4. It should return back to our normal levels at around 9% from Q1 onwards -- is our expectation at this stage.
Doctor, just a follow-up. In terms of volumes, typically, have grown at anywhere between 15% to 20%, would that be a similar range for this quarter as well?
Yes, it's a mix of price and volume, Tarang, okay? And then...
Tarang, you can consider around 4 percentile is the price erosion that we have seen generally between 3.5% to 4%. The balance will be all volume here.
The next question is from the line of Charul Agrawal from Bank of America.
My first question is with regards to the GPL business. Like the commentary has been -- this quarter has been muted, and we expect the next quarter also to be slightly subdued. Is there any particular reason to this? And is it only a 1 or 2 quarter phenomenon? Or could it extend for longer?
So Charul, GPL has been a bit cyclical. We've seen that, and it's largely driven by the U.S. and European business, okay? And while we did see a good uptick in their U.S. business demand in the last in the last couple of quarters, this quarter has dipped a little bit. However, if you look at the 9 months, GPL is still tracking at a little over 13% growth in GPL business. So it's not bad. I mean, but I mean they're a pretty strong company across markets, right? So we don't see that this is going to be any kind of weakness going forward.
So that does not imply anything with regards to sales to GLS going down, right? This is just a temporary phenomenon.
No, no, that varies. Like I said, it's a bit cyclical. It moves up and down. But then we supply to them from, largely, the regulated markets.
Sir, my second question is with regards to the gross margin expansion that you have seen. So would it be possible to break it down into drivers in terms of what proportion of it could be improvement in input costs, what proportion could be mixed?
So if you go from, let's say, a 52% to 57%, right, that delta has been driven partly by improved input prices. And we also announced this new CDMO business, right, for which we made validation supplies. And so it's a mix where CDMO played a bigger role in -- and that CDMO -- this CDMO business also has better margins. So these are the 2 main reasons, the input costs as well as the mix improvement.
Even the Q-o-Q gross margin improvement would expect this only, right? CDMO has been slightly higher.
Yes.
Got it. But -- yes, also -- so you mentioned regarding the Red Sea disruption. So what could be the possible implications of the Red Sea [indiscernible] ? And would it only be freight cost and could that impact volumes as well? And how long do you see it at present?
See, right now, out of 3 ships that used to come to Nhava Sheva port from China, okay? Only one ship is coming to Nhava Sheva, 2 are going directly, okay? So they don't come, they don't basically reroute. These are ships coming from the far east, okay? So we -- while freight is expected to go up, right? The other impact could be that we might have to stock up an extra 15 days of inventory. We haven't reached that point, but if we have to, we will. Just to cover -- make sure that we're stocked up well for supplies. It's not happened yet, Charul, but, right, we are watchful, okay? It could happen.
And sir, this would not impact your supplies to your customers? Like you were saying that you might need to stock up for imports, but what about your exports to customers?
That's air for us -- to customers it's largely air freight. So sea freight impact us. It's just the raw materials that impact us -- sea freight impacts us on raw materials.
[Operator Instructions] The next question is from the line of Ahmed Madha from Unifi Capital.
I just want to understand the employee cost part little better. So there is roughly 40-odd percent increase in the cost. So just what is the nature of that? Can you elaborate a later more on that?
Ahmed, I had explained it in the Q2 call saw certain bonus accruals based on the past performance, which have been given by the Board, which are getting accrued over these 3 quarters, and that is what has taken this cost up. And as I also explained in my earlier comments that the employee cost is coming around 12%, which should come back to around 9%, 8.5% to 9% from Q1 onwards.
And in the gross margin, is there any impact of PLI incentive this quarter?
PLI again, has an impact of about 1% to 1.5% on overall margins -- around 1.5% on overall margins.
Just on the Glenmark Pharma business, so I think last year, we did about, I think, roughly INR 660-odd crores -- INR 690-odd crores. This year, 9 months have been good, but you are saying that you see it to be weak. But overall, say, in the next 2, 3 years perspective, should we at least maintain this INR 650 crores to INR 700 crores run rate, how should we look from the medium- to long-term perspective about this business?
See, l just answered, Charul, right, that basically GPL business is a little cyclical, but nothing alarming, okay? I mean, it's a very strong business that they have in the regulated markets, right? And that continues, and we would continue to service that business.
Okay. So we'll retain our wallet share with them, that is what I want to understand. Is this the correct understanding that we'll retain the wallet share?
Yes, yes, yes, very much.
And just question on Q4. So basically, should we sort of at least maintain the annual run rate similar to last year for GPL business?
I can't comment on that.
Last year, GPL was very high at about INR 230 crores. It will -- we don't expect it to be that high in Q4.
But just on the full year basis...
Full year basis, yes, we will -- we should be able to reach that level.
Just on the last freight cost part. So I'm just trying to reconfirm that. There won't be any sort of P&L impact but does the amount of inventories which we might need to buy, correct?
I think that doctor mentioned that the impact on inventory will be about 10 to 15 days, if at all, we have to stop it out. We are currently at about 104 days of working capital, which may go up by another 10 days, but we will see how that pans out.
The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
[Technical Difficulty]
Sir, we are not able to hear you clearly. Your voice is feeble.
Is this better?
Yes, sir. May I request you to use your handset please.
Is this better?
Yes, sir, please continue.
So firstly, on the asset terms, sir, for the last 2 years, 3 years, now it is down to 2.9%, which we used to have at 3.3%. So any comment on that?
So Tushar, actually if you see the years prior to last 2 years, the spend on CapEx was very limited. Last 2 years, we have seen a good amount of CapEx that we have done almost INR 130 crores in FY '21, FY '22 -- INR 160 crores in FY '22. We are already near INR 100 crores in the current year. And as we had also mentioned that these new assets that's come up, they don't immediately get into this 3x kind of revenue generation. Initially, it will be lower. We had also mentioned in the past that we expect this asset turns to -- somewhere come down near between 2.5% to 3% gradually because our CapEx plans are strong going forward, and that is what we are expecting.
Understood, sir. And secondly, on this ex-GPL business has been stable at about INR 390 crores average for last now 6 quarters. So any comment in terms of growth on this segment of the business?
No, growth has been good. I mean, we have been growing the external business, right, very steadily. I mean low teens. So -- and that's driven by all our markets. I mean the reason this is around 10% this quarter is because, like, we explained, Japan has degrown and Europe is flat. But the U.S., LATAM, India and ROW have been firing away because we've been introducing new products. And U.S. CDMO business is very strong. So I mean, the thing is that, overall, the fundamentals for our external business firstly have got many levers, okay, markets, products, and CDMO now coming in much better. So with all these levers, I mean, sometimes you don't fire on everything, right? But we have been growing, right? I mean, there's no challenge there.
And this -- because its exports on a constant currency terms, what would be the growth?
The currency hasn't moved much in the last year, right? I mean we're not getting any currency benefit.
In the current year, we are not getting. Last year, there were certain currency benefits. But this year, it was more like a constant currency -- more closer to the constant currency.
And just lastly, this raw material -- lower raw material benefit, any comment in terms of how long will we have this benefit continuing?
It should continue because we have diversified our sources, okay? And that has resulted in the benefit. And that's something that we would continue. So we expect it to play out. Of course, like I said, certain geopolitical challenges could impact oil prices and so on, and that will hit solvents. And so I mean, look, there is a bit of challenge there. But overall, I think we -- on the buying raw material side, we should be okay. No great challenge there.
So let's say if there is Red Sea disruption, if I leave aside for time being for the sake of discussion, this impact. So then 56%, 57% gross margin is very much sustainable, right?
See, again, I explained, right, to Charul, right. That basically, the margin improvement, if you take from roughly 52%, where we normally are 52%, 53% to 57.7%, has been largely driven by some improvement on raw materials and then CDMO business where we made validation supplies. So these things are contributing. Now the -- so we may not hit 57%, right, next quarter, that we won't, but it will be in the range.
The next question is from the line of Harshal Patil from Mirae Asset Capital Markets.
Sir, just I have one question on the CDMO business. We have just recently signed a contract and this -- as per your earlier comments, you've got the minimum offtake value at USD 5 million. So sir, any specific time lines as to when would this commence? That's question one. And question 2 would be, sir, if you could speak a bit on the project pipeline for the CDMO business because, I guess, we were expecting some 2 or 3 projects which were there in the pipeline to be going onstream over the next 1 to 2 years.
Yes, Harshal. So basically, this project should come online next year. We just made a pretty large validation supply, right, for filing. And this would be filed in multiple markets. So as soon as we start getting approvals and markets will start supplying, so it should come on next year for sure, right. As far as the pipeline goes, we have one more project, which is very advanced. We hope to sign either in late Q4 or then in Q1. I mean, it's growing very nicely. And then there's one that we have already initiated validation and filings are on, but those like 53 or 57 markets that they are going to file in and that we expect to also come next year, okay? So there will be 2 more that would come. There are further discussions also on CDMO with other -- on other projects. So those discussions are going very nicely. And let's see how that pans out. But to answer your question, I mean, it's 2 more in the pipeline that we have very clear visibility on.
And the 2 ones which are there in the pipeline would definitely have a better revenue potential than the ones we already are supplying to. I have to just get some quantitative inputs on that.
Typically -- they are ranging between $5 million and $10 million, typically, right. I mean our projects are not that big, but they are decent size, right? And you know.
The next question is from the line of Ashwini Agarwal from Demeter Advisors Llp.
Congratulations on a very strong margin performance over the quarter. Just continuing from the last participant, on CDMO, I mean if you were to think about it over the next 3 to 5 years, do you think that this piece of the business could be 30%, 35% of revenues? Or do you think generics and CDMO would grow at pretty much the same pace in the medium term?
Okay, Ashwini. Thank you, Ashwini. The thing is that see we have a pretty strong generic pipeline and the market spread, right, of the products has only been improving over time that would continue. So since generics is also going to grow reasonably well, right? And it's a pretty big chunk to begin with. In the next 3 to 5 years, right, at the rate at which we are doing things, we expect CDMO to quadruple. Okay, so around from INR 150 crores, we are likely to get to INR 600 crores. But even INR 600 crores would not get to 30%, 35% simply because the other piece is also growing well. So -- if we get to INR 600 crores, it would still be around 15%, okay, of our overall, right, 15% or even less. So let's see, I mean, if whatever visibility we have now, right, and the strike rate at which we are going on CDMO, we should definitely improve the percentage from the 7%, 8% that we are at now, but very unlikely we go to 30% unless something really earth-shattering happens, okay? Which cannot be ruled out, but I'm just going from whatever we are driving as of now with the current level of investment.
And one more follow-up on the CDMO contract that you just signed for -- which has an expected revenue line of $5 million as a minimum in 2025. Just if you could share some color on -- are you the sole supplier? Is this a technology transfer where the innovator transferred what they knew to you or you helped develop them? How sticky is this relationship? Would you continue to be the sole supplier in the foreseeable future? If you could provide some color around that.
So while we didn't do a tech transfer, and that's why the regulatory time line goes to next year, right, we did do a fair amount of customization for the -- to get the business, okay? The thing is, obviously, in our kind of CDMO play, what is important is we match the current supplier of the innovator, okay, which in many cases is the innovator itself. Okay. And they are going to stop their own manufacturing and move to us because they get a very large cost advantage. So I don't see any reason why they would continue their old supply. So yes, we would be the sole supplier once the regulatory approvals are in place.
And the other CDMO pipeline that you have is of similar nature -- where you develop on the cost, you bring down the cost and that advantage, therefore, allows you to foster a longer-term relationship with the customer.
Yes. Of the two that I said, one is heavily customized API that is already in filings, right -- in the final stage. The other -- we are in the process of doing some further sort of tweaking to get it to where the customer is now in terms of their current source.
And the last question from my side. In the past, you've often said that raw material benefits whenever they accrue need to be passed on. But this time around, some of it has flowed through to gross margin. Is this temporary? Or do you think this is sustainable, the margin gain that you had, on the raw materials side?
Ashwini the -- this raw material we'll have to see, right, depends on the pressure of the business, right? But we are under pressure, we'll have to pass on. So we won't do it as a default, right? But yes, I mean, if we have to gain a bigger market share or help our customers sustain their market share at the front end, we may pass it on, right? But since this improvement has been really broad-based across many products, right, we're not going to pass on everything.
The next question is from the line of [ Harsh ] from Bandhan AMC.
Am I audible?
Yes, sir you are audible, but be a little bit louder so that we can hear you.
Just in terms of the incremental capacity for Ankleshwar and Dahej, it's 200,000 liters and 50,000 liters, is what is given in the press release. So Yasir do you -- it means that...
Can you speak a little louder Harsh? Can you speak a little louder, please?
Is it better?
Yes, much better. Thank you.
Yes, so just in terms of it's incremental capacity for the fourth quarter, the 200,000 liters and the 50,000 liters, for Ankleshwar and Dahej, do we feel that a majority of the cost according to the commercialization is already in place? Or do you feel that incrementally, you would see a lot more cost coming forward once this gets commercialized, both the capacities.
You are talking about CapEx, or you're talking about operational cost?
OpEx -- OpEx margin.
OpEx. See, I mean OpEx is not likely to increase greatly. I mean we -- when we go with the incremental capacity we are going for bigger batches, okay, at the product level. So in that sense, on a per kilo basis, the OpEx actually improves. But since the volumes are going up significantly, right, that OpEx will scale up according to the volumes, but then with the improved batch sizes, the per kilo level, it will actually come down. So it will be sort of midway, it won't go up linearly with the increased capacity. Does that help answer your question?
Yes. Okay. Lastly, in terms of Japan, you have already highlighted the inventory situation. Anything in particular for Europe market, is there a lot more price erosion than you anticipated and which is why we are refraining from selling into European market? Or is there something else that is happening?
Europe, see, unlike other markets that have done well, our new product introduction into Europe has been a little slow, okay. This is largely because of regulatory slowdown, okay. So we are not getting approvals. Our customers are not getting approvals fast enough in Europe. And so while we have a bunch of new products to introduce, right, we've not been able to do that in Europe as well as we've been able to do it in India, LATAM and the U.S. So that challenge is there. So hopefully, once approvals come through -- newer approvals come through Europe should actually pick up well.
Okay. So the primary reason...
I mean to answer your -- to confirm, yes, price erosion in Europe is a little higher, right? So that challenge is there.
Okay. So the regulatory situation is temporary as such. But otherwise, we expect that, that should also pick up going forward?
Yes. Once we get our new products approved in Europe, right, we should see Europe also picking up pretty well. It shouldn't be a problem.
The next question is from the line of V.P. Rajesh from Banyan Capital.
Most of my questions have been answered, but just one clarification. Dr. Rawjee, when you spoke about the CDMO business growing 4x. What is the time frame you were thinking that growth will come about?
3 to 4 years.
Okay, 3 to 4 years.
The next question is from the line of Aejas from Unifi Capital.
Dr. Rawjee, I want to take you back to probably the initial few conversations you had had post IPO, where you were very articulate in explaining us that how you had migrated customers in the U.S. to address the pricing pressure challenges by moving and introducing second-generation molecules and phasing out the first-generation molecules, thereby addressing the price erosion. And you had given the example of sartans at that point of time, I remember. So Dr. Rawjee, in this journey where have we reached? And also reference to the point of Europe because you mentioned a bit about pricing pressure. So is it that those European customers, we are still in that journey? And could you speak a little bit more about this?
Yes, it's a very good question. See, the thing is this whole business of second, third gen processes, right. It's something which we have to continue to do. Because on the generic side, right, most markets have our -- customers face a lot of pricing pressure at the front end. So that is something that we continue to do and with the regulatory filings happening in a timely manner, that is something that has panned out because, see, if you look at our price erosion, right, overall in the business, it's about 5% to 6% okay? So in order to continue to deliver on margins the way we've been, this is something that we have been doing and the customers have been very supportive, right? And we continue to keep our customers competitive. That's the name of the game really. And then, of course, you come back with -- you sort of add the launch products to that -- and the launch products obviously give you better margins, right? But then the same thing applies even to the new launches, where we've got to be ready with the next-gen process to be able to keep the customers in the game, if they've already sort of entered at a good -- with a good market share. So it's an ongoing process, I mean, to continue to drive the margins and to keep our customers competitive.
Got it. And Dr. Rawjee, how many such competitors use or follow this approach? Because we've not heard a lot of companies call out this kind of process of trying to upgrade molecules and help customers. And you had extensively spoken about all those filings where you help them a lot. So which is -- who is your key competitor you face who is also following this kind of an approach and where there is competitive pressures or challenges?
So see, we have about 100 commercial APIs now, as we speak, right, okay? And there's no single competitor that we have in all hundreds of these APIs. But in any given API, we would have 1 or 2 competitors, right, in India or China that would -- we have to take them seriously, okay. The good news for us is that because we are in the regulated market space, right, the whole regulatory approval process is a pretty involved process where we've got to convince the regulators that the next-gen process is as good as the earlier process, right? And that takes some doing. So not only from a chemistry perspective, but also from overall specifications, methods, right, controls on genotoxic impurities. All this plays a big role, and so that really thins out the competition for us, because the regulators have become much more stringent with respect to genotoxic impurities. You may still heard about nitrosamine if you've been following this space. But many of our competitors fall out because they are not able to successfully address this whole business of nitrosamine. And we have been lucky or clever or whatever you want to say, but we've been sort of addressing this upfront rather than it hits our customer and then the regulator comes back with a big query. So I mean, net-net, the second, third gen process involves a lot of work, not only on the chemistry side but on the regulatory side as well. And that's why we've been able to successfully migrate our customers to the next-gen processes with not much competition. I mean the competition is there. I mean -- like I said, we take them seriously. And so I mean that's the way things are working here at GLS.
That was very helpful. And doctor one last thing. Since the time you have been listed, the CDMO business has been broadly a band. And you spoke about the breakout towards the INR 600 crores over the next 4 years. I just wanted to understand that, is it that these 2 years were seeding stages which where we were trying to establish our excellence of products with customers, and that's why you believe the scale up? Or are there any other significant growth triggers or drivers?
Aejas, you are spot on, okay. I mean CDMO does have a long gestation period. And we've got a long pipeline, right, more than 10, 12 projects that are in discussions. But by the time they bear fruit, right, I mentioned about 2 that are coming online pretty quickly, right? But there's others that are also going to follow, right? So we expect that we have a good number of projects in the next 2 to 3 years, and that's why we are very confident that we'll get to the INR 600 crores very comfortably.
[Operator Instructions] The next question is from the line of Naman Kumar Bhansali from Perpetuity Ventures LLP.
Just one question on the U.S. FDA inspection that they are going to trigger. So what are the facilities deemed for the U.S. FDA inspection and the newer ones which are coming in?
Yes. So all 3 facilities that are U.S. FDA inspected, are due for inspection going by the 3-year cycle, okay. We expect them any time at any of our facilities. And so -- it should happen any time, I mean, we are frankly hopeful that it happens soon so that we kind of over the hump there, right. But all 3, yes, I mean, they are due.
The next question is from the line of Tushar Bohra from MK Ventures.
Congratulations to the management for a steady set of numbers. Sir, first thing quickly on the CDMO strategy. Historically, and you -- as you just explained also on the call, we've been focused more on life cycle management products, right? Is there any third door to also pursue pure CDMO opportunities working closely with innovators and new molecules. Any efforts or steps in that direction?
So, Tushar, you know what I mean, I had explained this again at the time of the IPO, when we had very, very long discussions on CDMO. But basically, firstly, the gestation on the kind of projects that you're talking about is very long, okay? Because if you get into Phase I and stuff, right? I mean, clinical trials for most drugs, new drugs take anywhere from like 2 to 3 years. And then there is the approval by FDA which gets here because there's a lot of clinical data that they review, right? So it could be like a 12- to 15-month. Plus, what happens is that new products have a huge amount of attrition, okay? I mean products that are in Phase I, I mean, the chances of them becoming commercial are like 1 in 30 or 40 molecules, right? So, I mean, if you don't hit one of those, right, after doing all that work, you still don't have a commercial project, okay? So this challenge has been there for this kind of work. Whereas on the life cycle side and the specialty side, like the -- it's a much faster comparatively the gestation is much sooner. I mean, in about 1.5 years to 2 years, you can have a project going, okay, versus these early-stage projects, it takes much longer. The attrition is much higher, basically. So we stayed away. I mean, the other thing for us, right, is both our R&D infrastructure and our manufacturing platform are common. So we don't have to make any special investment for these kind of projects. I did mention to -- I think, it was to, Ashwini, right that we do a lot of tweaking, okay, in terms of customizing the APIs for the innovator. And here is where, again, it's our R&D work. I mean, our R&D -- current R&D setup is good enough to do. So I mean, we don't make very significant investments also with this approach.
So here, sir, in this -- specifically, are we developing products and then reaching out to innovators? Or are we looking at the areas where we want to target -- reach out to this company first and then take up projects on demand. How do we target new CDMO initiatives?
Yes. So we have a whole -- I mean, we have 140 APIs in our pipeline. And a good portion of them are still -- the innovator still has even after genericization the innovator still has 20% to 30% global market share, okay? And so the approach is that we sort of work with the innovator on those products and give them a nice cost advantage, right, and move the project along.
All right, sir. Just a clarification. You mentioned specialty as well along with the Pharma, are we actually targeting any specialty chemicals or areas beyond Pharma in our CDMO initiatives? Is there something...
So, Tushar, in our current pipeline of 3 commercial products, right -- now I should say 4, right? Two are of this kind specialty.
One last thing on the overall size of the business. You mentioned CDMO over next 4 years will grow INR 150 crores to maybe INR 600 crores. Overall business will maybe slightly more than double. But since your CDMO business is at much higher margin, the overall gross margin profile should move up or at least remain the same? CDMO should compensate from maybe loss of margin on the generic side? So it's good to assume that we should be at or above the current margin profile as the CDMO penetration improves?
Yes, that -- over the long term, we can expect that, Tushar.
The next question is from the line of Tarang Agrawal from Old Bridge Asset Management.
Sir, mine is a more generic question. I just wanted to get some insights from you on how the API landscape is today versus where it was, say, 1 year, 1.5 years back, both from an industry standpoint and from GLS' standpoint, as you see it today?
See, the demand environment is growing at 6%. I mean API stands at about $220 billion overall market, okay? And that is a pretty nicely growing market. For GLS, because our concentration is on the chronic areas. Again, we are very much in sync with how this is growing. So there's a lot of stuff happening now. Anticancer was one area where we were not there, but we are rapidly catching up on anticancer, right. But apart from that, CVS, CNS, diabetes, and pain are good areas. They are all chronic, right. So we continue to drive our portfolio in that direction.
And just from nuts and bolts perspective, how would you see the pricing environment in context of where it was, say a year, 1.5 years back. Clearly, your intermediate or raw mat prices have come off meaningfully. But how do you see the pricing environment for your end products overall? Has it become more aggressive or you're seeing some element of stability?
No, Tarang, it will always be aggressive. I mean it's a tough business, but it's a good business. I mean that's the way I look at it. I mean, we've always -- GLS we've always recognized that. I mean, look, pricing environment will always be there. Customers will always put pressure on pricing, and we have to respond to that, okay? We can't run away from that. So as far as we are well positioned from a technology perspective and a cost management perspective, we are good, right? I mean the world is not going to be kind to us, okay? Let me put it that way, right? We've got to be smart at it and continue.
The next question is from the line of Charul Agrawal from Bank of America.
Thank you for the follow-up. Sir, I wanted to understand more about the complex API products. Firstly, on the Dahej oncology block that had been commissioned a couple of quarters back. So what is the kind of traction that we are seeing for the oncology suppliers. And next, on the complex API [ findings ] , could you help us understand more on the time line perspective? Like when can we see them -- see some of those getting commercialized.
Okay. So as far as the pipeline for both oncology as well as the complex, right, we continue to fill the pipeline. Okay. With respect to onco, right, we've already validated 3 products, right? And 4 are like actively being -- we will be taking them into validation pretty soon and the customer interest is also pretty good. So that's going well. On the iron complexes, one has been in regulatory reviews, okay. The customer's file is in regulatory review, and that has also triggered a review of our file, okay? And we should file soon, okay, on one more -- on one product soon, and another 2 are -- we're following up with another 2 in development. So it's going well. Complex is going well, okay. And some other -- not only iron complexes, but we have other complex molecules, right, on the antifungal side also that have had very good traction more recently, okay. And that is also picking up well. So I mean, overall, I would say that this is an area that -- both these areas are something that we are aggressively pushing and we've got good uptake from customers as well.
Sir, the Dahej Oncology block so currently the capacity is being used for citing validations? Or is there any commercial supply at all from that block?
See, onco, the volumes are very small, right? So -- and in order to sort of optimize the cost on the manufacturing side, we do make a little more in the validation so that we can supply even small commercial quantities as it comes up. So we are -- right now, we are not in full-fledged commercial manufacturing, but then that onco block is not a very big burden also from the cost perspective.
Thank you. Ladies and gentlemen, due to paucity of time, that was the last question. Thank you, members of the management. On behalf of Glenmark Life Sciences Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.