Sun Pharmaceuticals Industries Ltd. (SMPQY) Q2 2020 Results - Earnings Call Transcript

Sun Pharmaceuticals Industries Ltd. (SMPQY) Q2 2020 Earnings Conference Call November 7, 2019 8:00 AM ET

Company Participants

Nimish Desai - Investor Relations
Dilip Shanghvi - Managing Director
Kal Sundaram - Director, Corporate Development
Abhay Gandhi - Chief Executive Officer, North America
C. S. Muralidharan - Chief Financial Officer
Kirti Ganorkar - Head, India

Conference Call Participants

Anubhav Aggarwal - Credit Suisse
Surya Patra - PhillipCapital
Surajit Pal - Prabhudas Lilladher
Prashant Nair - Citi
Ranvir Singh - IDBI Capital
Nitin Agarwal - IDFC Securities
Sameer Baisiwala - Morgan Stanley
Dipan Mehta - Elixir Equities
Prakash Agarwal - Axis Capital
Prashant Nair - Citi
C. Srihari - P.C.S. Securities
Hari Belawat - Techfin Consultants
Charulata G. - Dalal & Broacha
Vishal Manchanda - Nirmal Bang
Saion Mukherjee - Nomura
Kunal Dhamesha - SBICAP Securities

Operator

Ladies and gentlemen, good day and welcome to the Sun Pharmaceutical Industries Limited Q2 FY ‘20 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Nimish Desai. Thank you. And over to you, sir.

Nimish Desai

Thank you. Good evening and a warm welcome to our second quarter FY ‘20 earnings call. I am Nimish from the Sun Pharma Investor Relations team. We hope you received the Q2 financials and the press release that we had sent out earlier in the day. These are also available on our website. We have with us Mr. Dilip Shanghvi, Managing Director; Mr. Kal Sundaram, Director of Corporate Development; Mr. Abhay Gandhi, CEO of North America; Mr. C. S. Muralidharan, CFO; and Mr. Kirti Ganorkar, Head of India business.

Today, the team will discuss performance highlights, update on strategies and respond to any questions that you may have. As is usual, for ease of discussion, we will look at consolidated financials. Just as a reminder, this call is being recorded, and a replay will be available for the next few days. All transcripts will also be put up on our website shortly. The discussion today might include certain forward-looking statements and this must be viewed in conjunction with the risks that our business faces. You are requested to ask two questions in the initial round. If you have more questions, you are requested to rejoin the queue. I also request all of you to kindly send in your questions that may remain unanswered today. I will now hand over the call to Mr. Shanghvi.

Dilip Shanghvi

Welcome and thank you for joining us for this earnings call after the announcement of financial results for the second quarter of FY ‘20. Let me discuss some of the key highlights. Our overall sales for the quarter were at INR7,949 crores a growth of 16% over the same quarter last year [indiscernible] full year guidance. We continue to focus on cost savings, efficiency improvement to align our generic business with the changing industry dynamics. Simultaneously, we continue to progress on building our global specialty business. In the U.S., we recently launched CEQUA, while ILUMYA continues to gain traction. We have also initiated steps to commercialize both ILUMYA and CEQUA in other markets, either through partnerships or on our own. For Q2, our global specialty revenues were approximately INR91 million across all markets, with the specialty R&D accounted for about 24% of the total R&D spend for the quarter.

I will now hand over the call to Mr. Murali for discussion of the Q2 performance.

C. S. Muralidharan

Thank you, Mr. Shanghvi. Good evening, everyone, and welcome to all of you. Our Q2 financials are already with you. As usual, we will look at key consolidated financials. Q2 sales are at INR7,949 crores, up by 16% over Q2 last year. Material cost as a percentage of sales was 28.5% higher than Q2 last year, mainly due to higher costs for Taro and overall product and geographical mix. Staff cost was at 20.4% of sales, lower than Q2 last year, but up 10% in absolute terms, mainly due to annual increments, specialty staff cost increase and addition of Pola Pharma in Japan. Other expenditure was at 30.9% of sales, higher than Q2 last year, mainly due to the branding and promotional spending for the specialty business, and consolidation of the Pola Pharma on Sun Pharma Distributors Private Limited.

As a result of the above, the EBITDA for Q2 was at INR1,616 crores, up 12% over Q2 last year, with EBITDA margins at 20.3%. Net profit for the quarter was at INR1,064 crores, up 12.6% or adjusted net profit of Q2 last year. The EPS for the quarter was INR4.43. In terms of the variance versus Q1 FY ‘20, Q2 sales are at INR7,949 crores, down by 4% over Q1 FY ‘20 as a sequential quarter included the contribution from the onetime generic supplies to a customer in the U.S. Finance cost has come down due to debt repayment. During H1 FY ‘20, as compared to March 19, Sun, excluding Taro, has paid off debt of INR2,500 crores. However, considering cash, the net reduction is approximately INR1,300 crores.

We have seen some improvement in the overall working capital in the first half of this year, and we will continue to focus on further improving it. Now we will discuss the half year performance. For first half, net sales were at INR16,208 crores, a growth of 16% over first half last year. Material cost as a percentage of the net sales was 29.2%, which was higher than at H1 last year, mainly due to product mix. The staff cost for the first half was up approximately 9% over first last year, mainly due to annual increments, incentives and addition of Pola Pharma. Other expenses were 13.2% of sales higher than H1 last year, driven by branding and promotion for the specialty business and consolidation of Pola Pharma and Sun Pharma Distributors Private Limited.

As a result of the above, the EBITDA for the first half was at INR3,496 crores, a growth of 18% over the first half last year with resulting EBITDA margin of 21.6%. Net profit for H1 FY ‘20 was at INR2,452 crores, with resulting net profit margin of 15.1%. The reported net profit for H1 last year was after providing an amount of INR1,214 crores for the estimated settlement amount payable for the Modafinil antitrust litigation in the U.S. Excluding this, the net profit for H1 this year has grown by 22.5% year-on-year. Let me now briefly discuss Taro’s performance. Taro posted Q2 FY ‘20 sales of USD 161 million, up by 1% over Q2 last year. For the first half, sales were USD 322 million, up 2.7% over first half last year. Taro’s net profit for Q2 was USD 56 million, down by 10% over Q2 last year. Net profit for H1 FY ‘20 was USD 122 million, down by 6% over first half last year.

I will now hand over to Mr. Kirti Ganorkar, who will share the performance of our India business.

Kirti Ganorkar

Thank you, Mr. Murali. Let me take you through the performance of our India business. For Q2, the sales of branded formulation in India were INR2,515 crores, a growth of 35% over Q2 last year and accounting for approximately 32% of total sales. You would recall that we had undertaken a voluntary inventory correction in Q2 last year, which has resulted in a lower base. Hereby adjusted, for the inventory correction of Q2 last year, and on a comparable basis, our underlying sales growth for quarter is trending at 12% over Q2 last year.

Sun Pharma is the largest pharmaceutical company in India and holds approximately 8.2% market share in over INR136,000 crores pharmaceutical market as per September 2019 AIOCD-AWACS reports. As per the latest SMSRC report, Sun ranked #1 based on a share of prescriptions with 11 classes of doctors. For Q2, 12 new products were launched in the Indian markets. Going forward, our key focus areas are as follows: Retaining high brand equity with the doctors; using in-licensing as a route to launch latest generation patented products; undertaking more EBITDA’s best scientific promotion of our products; strengthening and broad-basing the prescription base; retain our leading prescription ranking in the chronic segment.

Now I will hand over to Abhay.

Abhay Gandhi

Thank you, Kirti. I will briefly discuss the performance highlights of our U.S. businesses. For Q2, our overall sales in the U.S. were flat over Q2 last year at $339 million, accounting for approximately 30% of overall sales. For the overall generics business, we have not seen any broad-based improvement, and we expect the market to remain competitive. Let me now update you on developments in our U.S. specialty business.

As indicated by Mr. Shanghvi, the Global Specialty sales are flat compared to June ‘19 quarter. While ILUMYA sales for the quarter have increased as compared to the June ‘19 quarter, seasonality in Levulan and ABSORICA has led to the flat growth. We continue to add patients and increase the doctor coverage for ILUMYA. Prescriptions for ILUMYA continue to gain gradual traction. The long-term follow-up data for ILUMYA, which was recently presented at the EADV Congress, demonstrates sustained response for patients over a 4-year period, with very good safety profile. We also continue to invest in promoting ILUMYA, including the direct-to-consumer promotion campaign, and we remain optimistic on the prospects of ILUMYA.

We have simply commercialized CEQUA for dry eye disease in the U.S. This is an important launch for us and adds 1 more product to our on-market specialty portfolio. Although it’s been just a few days into the month of October when we had launched CEQUA, we are enthused and happy with the response that we are seeing from the doctors. ODOMZO continues to gradually gain market share as we put in more efforts towards increasing prescriptions. Overall, we expect traction in our U.S. specialty revenues going forward.

I will now hand over the call to Mr. Shanghvi.

Dilip Shanghvi

Thanks, Abhay. I will briefly discuss the performance highlights of our other businesses as well as give you an update on our R&D initiatives. Let me now discuss our performance in emerging markets. Our sales in emerging markets were at $201 million for Q2, accounting for 18% of total sales. Key markets, which have done well, were Brazil, emerging Asia, India subcontinent and Sub-Saharan Africa. Formulation sales in Rest of World markets, excluding U.S. and emerging markets were $161 million in Q2, a growth of 49% over last year. ROW markets accounted for approximately 14% of Q2 revenues. This growth was driven by both organic initiatives as well as the consolidation of the Pola Pharma acquisition in Japan.

We continue to focus on developing and utilizing APIs for captive consumption and for benefits of our vertical integration. For Q2, the external sales for our API business were at INR468 crores, up by 10% over Q2 last year. Consolidated R&D investment for Q2 were INR488 crores, accounting for 6.1% of sales. Our current generic pipeline for the U.S. market includes 103 ANDAs and 3 NDAs, awaiting approval with the U.S. FDA. We expect higher R&D spending in the coming quarters for the specialty business. This R&D spending enables development of future product pipeline, including specialty and differentiated products. We also continue to critically evaluate generic R&D spend given the competitive nature of the U.S. market.

With this, I would like to leave the floor open for questions. Thank you.

Question-and-Answer Session

Operator

Thank you very much sir. [Operator Instructions] The first question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.

Anubhav Aggarwal

Yes, hi, good evening. Dilip, can you just give some idea about ILUMYA in terms of, let’s say, a couple of quarters back, you mentioned that the prescriber base was about 1,200 doctors. How is that number doing right now? Some idea will be useful here.

Dilip Shanghvi

Abhay, would you like to respond?

Abhay Gandhi

Yes, sure. Anubhav, last quarter onwards, we are giving you the global sales numbers, so we have not giving doctor-wise numbers. But clearly, significantly more than the 1,200 number that you remember from one of the earlier calls. We feel we are doing quite reasonably okay with ILUMYA and we will continue to gain traction as demands go along.

Anubhav Aggarwal

Sure. But my understanding was ILUMYA is just less than 5% of your global specialty sales or roughly of that order, so how justified is giving 100% number and not talking anything about 5% number?

Dilip Shanghvi

Well, I think it’s significantly different than what you estimate without specifically responding to the number, but if you presume that it is only 5%, then that’s not correct.

Anubhav Aggarwal

Sure. Dilip, one more question on ILUMYA. How important is to have an auto-injector form for ILUMYA and are we working towards it?

Abhay Gandhi

Can I take that question?

Dilip Shanghvi

Yes, yes, please.

Abhay Gandhi

From a U.S. context, it is something Anubhav, we would not like to do, because as we have said in multiple calls, we are in the medical benefit side of the business. And having that, I think, is one of the reasons why having our access it doesn’t put us at any disadvantage. The moment you have an auto-injector will be changing the rules of the game completely and that may actually put us at a disadvantage.

Anubhav Aggarwal

Can you just a little – elaborate on this? Sorry, I did not understand this point very well. So how does it become disadvantaged once you have autoinjector?

Abhay Gandhi

Because the moment you have an autoinjector, you are basically seeing that the patient can self-inject in their home environment. So then it does not become a medical benefit product, where essentially, the doctor has to inject the product into the patient in a clinic or an outpatient kind of an environment.

Anubhav Aggarwal

Okay, sure. Thank you.

Operator

Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.

Surya Patra

Yes, thanks for this opportunity. Sir just wanted to have a sense on your China strategy, like see is it too means the kind of full tie-ups that you have done and the kind of product development activities that you are talking about, is it to like leveraging the product development activities that you are anyway doing for a larger market or it is new R&D effort will be done for building the pipeline for China? And in the, let’s say 3-year timeframe, how big this China portfolio could be for us?

Dilip Shanghvi

Kal, maybe you can respond?

Kal Sundaram

Dilip, the line is not clear. Maybe you can answer? It’s muffled.

Dilip Shanghvi

Okay. So I think our focus is on developing a relationship with a few important players in the market, registering our specialty product as well as some of the branded products, where we don’t expect too much competition. I mean sorry, generic products for which we don’t expect too much competition. As this business builds and as we continue to get approval for this product, we expect China, even Japan, to become an increasingly important part of our future business. Most of the products that we are currently developing are for China as well as for Japan or mostly products that we are developing for the other markets. But at a later point of time, looking at the size and the importance of both the markets for us, we don’t rule out developing something specific for these markets.

Surya Patra

On the second point, sir, you in the initial remarks, you have mentioned about the higher R&D spend for the specialty segment going ahead. So can you just elaborate something on that, okay? What is the kind of thought process here? And are you talking even the China/Japan-related developments also under it?

Dilip Shanghvi

Yes, it can be Japan-related or China-related clinical studies, but also new indications for ILUMYA additional studies for establishing benefits of CEQUA, our currently marketed products. So I think the idea is to help doctors see how our products can benefit the patients more effectively.

Surya Patra

And this R&D budget will be something different than the trend currently sir or anything on that front you can clarify?

Dilip Shanghvi

So our current guidance, I think is around 8%, 9%. We for first half, I think, it’s much lower. I am expecting some pickup in the second half. Whether we will be able to touch the guidance or maybe a little bit lower, essentially because some of the studies that we were planning to be able to start have got delayed, is the reason why you see a lower number.

Surya Patra

Okay. Thank you, sir. Thanks a lot.

Operator

Thank you. The next question is from the line of Surajit Pal from Prabhudas Lilladher. Please go ahead.

Surajit Pal

Hi, thanks for the opportunity. I have one question regarding India formulation, the statement which was given Q3 FY ‘19, is that – you have adjustment of roughly around 3,150 or INR330 crores, roughly, if I’m not mistaken. Yes, INR315 crores to INR330 crores of adjustment was done in inventory level. And that’s where – that is the amount which was lower in the relationship. So if I add back that, then your actual growth which is coming is that roughly around 15% to 16%. And if I can recall the guidance, overall macro levels, even is that 7% to 9% could be the good growth for Sun’s domestic formulation business. So from that perspective, do you think this supernormal growth could impact your H2 sales?

Nimish Desai

So Surajit, I think two clarifications. First and foremost, we have not given any guidance for our India business and secondly, the INR300 odd crore number that you are referring to also is not a number that we had disclosed. In quarter two last year we had just said that there was inventory de-stocking, which impacted growth.

Surajit Pal

Right.

Nimish Desai

So these were not numbers which were disclosed by us and there is no guidance separately that we have given on the India business.

Surajit Pal

My point is that it’s not guidance per se in the strict guidance, but it was told is the 7% to 9% could be a good growth for India business. And beyond that, it will be very good growth kind of scenario. But if I assume that INR315 crores, the destocking amount of INR330 crores or INR315 crores of – do you think the faster growth would be, whatever has been reported, is much higher and could impact your rate to sales?

Dilip Shanghvi

No, I think whatever – yes, Kal?

Kal Sundaram

No, no, Dilip, the line is clear, you please continue.

Dilip Shanghvi

Yes. Maybe Kirti, you can hear, he is asking a question about second half.

Kirti Ganorkar

So just to reiterate that, as Nimish pointed out, that there was no guidance given for the India business and we maintain our overall guidance which is given at a group level for the top line.

Kal Sundaram

Okay, this is Kal here. More sort of going back to what you say some of the statements we have made in the past about India. If you look back, we always have maintained that our growth is sort of in the low double digits, to sort of low teens, et cetera. Through the best of my recollection, we have never given any guidance of a 7% to 9% being our expected growth. So I think what you say talking for – we see the 12% that Kirti mentioned for second quarter is maintaining the momentum that we had historically.

Surajit Pal

Thanks.

Operator

Thank you. The next question is from the line of Prashant Nair from Citi. Please go ahead.

Prashant Nair

Yes, I am sorry. Good evening. My first question relates to your U.S. generic sales, so the quarter-on-quarter decline, how much of that would be or other is a large part of that related to the one-time business you had or has your – the rest of the core business also declined sequentially?

Dilip Shanghvi

Abhay?

Abhay Gandhi

The one-time large business that you’re talking about actually came in Q4 of last year. So if that is what you are referring to, then in the first two quarters of this year, there is no real impact of that business. But we said that – we’ve always said that the market is competitive and...

Dilip Shanghvi

Abhay, just a moment, there was significant sailing, first quarter of this year also.

Abhay Gandhi

Okay, okay. You are looking at Q4 and Q1 put together?

Prashant Nair

Yes. Yes, that’s right.

Abhay Gandhi

Okay. That’s correct, that’s correct. That being said, yes, then if you are looking at on a quarter-to-quarter basis that will have a significant impact because that Q4 element, Q1 element of this year, was significant, yes.

Prashant Nair

Yes. So my question was, is the decline primarily related to that or have you seen any further erosion in the regular business as well?

Abhay Gandhi

No, there is no further erosion really speaking, but we always said that the market is competitive and it’s a tough environment for all players in the generic business.

Prashant Nair

Yes, fair enough. And one more question, this is more on the other operating income side, there seems to remain a reasonable spike quarter-on-quarter. So is there anything in the second quarter number which is non-recurring or this is just a regular skew that we see?

Abhay Gandhi

So, this is related to out-licensed income for the current quarter of about INR50 crores plus and the product is XIMINO, which was out-licensed.

Prashant Nair

Alright. Yes, thank you. That’s it for me. Thanks a lot.

Operator

Thank you. The next question is from the line of Ranvir Singh from IDBI Capital. Please go ahead.

Ranvir Singh

Yes, thanks for the opportunity. Just in your commentary, you mentioned generic business R&D, you are likely to review. So just wanted to understand whether you are going to increase there or curtail the revenue?

Dilip Shanghvi

No, I think we – I said rationalize. So, we will possibly be re-looking at how best to compete in marketplace by controlling the cost, both for reducing cost as well as improving productivity.

Ranvir Singh

So anything on the number of filings we are likely to do in this year or next year on generic side?

Dilip Shanghvi

No, no. There is no impact to that number by mix.

Ranvir Singh

Okay, okay. And secondly, on Japanese business, just wanted to understand the pricing environment there, so since we have started doing through Pola. So have you seen anything on the pricing side that is we have to be concerned about?

Kirti Ganorkar

I think it’s – for long-listed brands, there would be decline in pricing, yes. So the Pola portfolio is a mix of branded product and long-listed products, but the majority products are our branded products.

Ranvir Singh

So yes, so this is in range of double-digit or single-digit, how is this?

Kirti Ganorkar

Very long-listed product, I think it is public information, the impact for average industries, they are at 9%.

Ranvir Singh

Okay. And how is the mix for our own products or long-listed products and other products?

Kirti Ganorkar

As I said, for Pola business, majority products are branded products for us.

Ranvir Singh

Okay, fine. Okay, that’s it from my side. Good. Thanks.

Operator

Thank you. The next question is from the line of Nitin Agarwal from IDFC Securities. Please go ahead.

Nitin Agarwal

Hi, thanks for taking the question. Sir, on ABSORICA, the product goes off-patent or rather goes generic by sometime second half next year. So, how should we visualize – I mean, we have talked about in the past certain product management strategies on the product. So how should we see the product lifecycle beyond the second half of next year in the context?

Abhay Gandhi

So, Abhay here. Nitin, hopefully, in the quarter four of this financial year, we should be able to launch a life extension – lifecycle extension product in the market, which will make it difficult for retailers and wholesalers to substitute our product. So that is something which is on the anvil and hopefully, in Q4, we will be able to launch that.

Nitin Agarwal

And sir, do we foresee – with this launch, do we foresee a very minimal impact of the generic introduction or how should we look at it?

Abhay Gandhi

Difficult to estimate. I mean, we are hopeful that the differential that we will have, doctors will prescribe the product more than what they are doing today. And also parallelly the substitution is happening today in the market will reduce. So we have our own modeling and assumptions, but eventually how it pans out in the market is something that we wait and watch.

Nitin Agarwal

Okay. And if I could push the last one on that, is ABSORICA, a meaningful business of the specialty business right now?

Abhay Gandhi

In the context where ILUMYA is gradually ramping up and CEQUA is a literally a 2-week launch, so in the overall context of the branded business as it stands today, it becomes a meaningful contract.

Nitin Agarwal

Thanks. And if one more last thing, clearly, on the India business, two things. One is in the current quarter, was there an impact of the strong and infective season, which is there? Did that provide some tailwind to the business? And secondly, from H1 to H2 perspective is there any seasonality in our business given the acute mix, which is there in the business now?

Kirti Ganorkar

Yes, mister. As you know, we have chronic and acute business. Our acute business is more seasonal, so that impact you can see in quarter two and quarter three, yes. But as all of you don’t like that, our major business is a chronic business and actually, the small part of the business.

Nitin Agarwal

Okay, thank you.

Operator

Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Sameer Baisiwala

Thanks and good evening everyone. Sir, you have signed at least 3 or 4 China deals in the last 3, 4 months. So anything that you can share as to what is changing between now and say 1 or 2 years back is something that’s facilitating more imports over there? And second for both generic as well as specialty products, what is the sort of basic studies that you need to do and the regulatory time lines, which are involved? And sorry, one more, do you – is there a need for you to do local manufacturing or the manufacturing can be done outside of China?

Dilip Shanghvi

Sameer, many questions, so I don’t know, Kal is in China, Kal, would you be able to respond?

Kal Sundaram

I will attempt a little bit. Sameer, China as a market is changing. The government wants what they call a consistency-tested product, which means bioequivalence, bioavailability data and preferably products registered in the U.S. or registration in China. So that, by itself has opened some opportunities. But more than that – how do you say, we have so many branded products with IP protection, and China is a large market. So some of that, we have licensed out to our partners. At this stage, there is no, as a requirement, a plan for local manufacturing. And the whole thing is evolving, so it will be difficult for us to give a forecast on how big the market is likely to be, how big our sales is likely to be in China in the next few years. So if there’s anything that I’ve left out, Dilip, you can answer.

Dilip Shanghvi

Sameer, also I think for many essential drugs, China has reduced the – our sales aid for doing China study, which historically, was a requirement, that you needed to do 13 Chinese patients in China, that is now no more requirement if your lead product is listed in the medically-necessary product list. So the current – say, ILUMYA is not in that list. But other IL-23, which were approved when that list was being published are in that list. So I mean this just to give you a reference. Our ODOMZO also is in that list.

Kirti Ganorkar

There is no ratio difference than the clinical requirements are not much in China today compared to what it used to be earlier.

Sameer Baisiwala

So sir, if you need to launch Odomzo, can you start doing it tomorrow? Or do you – is there still some time lag between now and then?

Dilip Shanghvi

So we will need an approval in China. We need to submit all the [indiscernible] and the data, then they determine whether we need to do what additional studies are required. If it’s deemed medically necessary, and if there is no ratio difference in the efficacy, and they may approve the product without any clinical study.

Sameer Baisiwala

Okay, great. And so the second question – sorry, you were saying something.

Kirti Ganorkar

No, what I’m saying, it’s a process. So we have to go through that process. It’s not automatic approval, and it’s not approval, like I submit application today and they approve it tomorrow. So like a normal process, and we need to get waivers for clinical studies.

Sameer Baisiwala

Okay. And sir, the second question is regarding the easy-to-swallow launches in the U.S., I think you’ve done 3 so far. And 1 Kapspargo, if I’m not wrong, has been more than a year. So can you just talk about this? Is this going to be a whole basket that you’re trying to do maybe half a dozen, dozen and what kind of opportunity is there for these products?

Abhay Gandhi

So clearly, it meets an unmet need because roughly in the U.S., about 30% of patients in the long-term care centers do suffer from this figure. So the pick up that we are seeing of these products are significant in the LTC setup. We also see that doctors who are in the LTC setup, who have used these products, clearly see the benefit and when they go back to their practice outside the LTC environment, they continue to use. So we are looking at different strategies by which we can then expand the core of the business and find ways to grow faster. You are right none of these products will become so large that you can create a business with one product or two products. So we’re working on using the platform to create a range of products, and I think maybe in 12 months from now in market, we could have something like at least half a dozen products.

Sameer Baisiwala

Okay thanks. I will get back in the queue. Thank you.

Abhay Gandhi

Thanks.

Operator

Thank you. The next question is from the line of Dipan Mehta from Elixir Equities. Please go ahead.

Dipan Mehta

Yes sir. Thank you. Dilip, has something changed in the U.S. FDA level the way they inspecting the branch? Or any sort of changes are in taking? And then why suddenly so many Indian pharma companies are hit by U.S. FDA action, especially plants being inspected and here and there again, getting into a tender with U.S. FDA. So what is happening in the U.S. FDA regulatory front, if you can update us what are the changes taking place. And this has become a major risk for the industry, how you are dealing with it?

Dilip Shanghvi

Well, actually, I think there is a – what you call, article, which is published or circulated by Lachman Consultants, which talks about presentation made by the FDA and sharing with the audience, the data and information related to the warning letters. And as per that, they say that last year largest number of warning letters issued were to the U.S. based facilities and that is 54 number. The total number of warning letters issued to Indian companies, 17. So I think we have to look at this issue in the context of the increased regulatory vigilance by FDA, not necessarily only for India and Indian companies. What you’re talking about, multiple audits by FDA to same site, I think Indian companies buy a large number of products and as a part of their assurance to the Congress, FDA has said that they will also try and conduct as many pre-approval inspection wherever necessary. So same facility, if you have additional filings, which require pre-approval inspection, they make visit to those facilities. So I would not like you to go beyond the – I think that if you continue to be the largest filer of new ANDAs in the world, you will have large number of inspections. That is no solution to that as an issue.

Dipan Mehta

But nothing has really changed in their stringent criteria, whereby they are required kind of which we are getting more and more warning letters or the risk factor has increased on that.

Dilip Shanghvi

I mean, nothing – I mean, of course, as regulators see any kind of a risk in 1 inspection, whether in India, U.S. or in Europe. And if they feel that similar risks exist in other facilities, then they had that as a part of the inspection plan in whichever new inspection they are doing. So like that, there will be continuously changing focus of the FDA inspections.

Dipan Mehta

Perfect. Thank you very much.

Operator

Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Prakash Agarwal

Yes thanks and good evening to all Sir, first question on the India business, the 12% growth is a good number. If you could just break it into volume, new product and price and we’ve been seeing some volume growth for most of the industry coming down, your thoughts on the general trade generics and others? Is it impacting the volume growth?

Kirti Ganorkar

No, I would not like to give a breakup of how much growth is coming from new products. But we have got a decent volume growth and that volume growth, also, you can see from IMS and AWACS data, that’s in line with market.

Prakash Agarwal

Okay and your thoughts on the increasing presence of Jan Aushadhi and the trade generics?

Kirti Ganorkar

As I said, it’s not having any meaningful impact on us. That’s what I can say.

Dilip Shanghvi

No, actually, I think in the past, we’ve also indicated that Jan Aushadhi have a very useful and important role to play in improving access. And I believe that, to that extent, industry and Sun Pharma and IP and all of us are encouraging government to focus on improving access using the Jan Aushadhi. And there will be possibly some amount of impact of some of the patients preferring to buy product out of Jan Aushadhi. But as Kirti said, it is not a meaningful impact, but I think rather than looking at every issue in terms of business impact, we also need to look at patient benefit and access to medicine.

Prakash Agarwal

Understood, great. And secondly, sir, on the new launches that we are seeing, I mean, are you happy with the current run rate of launches and especially post Halol resolution?

Dilip Shanghvi

Yes, Abhay, would you like to respond?

Abhay Gandhi

I mean we have said this – as somebody running the business, I would always like to have more launches than what we get, but it’s a process, and we follow the process, and I think our overall performance as a team, all parts of the functions put together, I think we are launching a good number of products in each quarter in the generic side. So the pace is reasonably good.

Prakash Agarwal

The reason why I ask is, if you see Y-o-Y, excluding the one-off generic business, the orders that you got, clearly, I mean, it is flattish. And we saw some launches also, so what is really not – that the base business is not able to grow? Is it – there’s still some chunky products, which is seeing erosion or is it the new launches not getting the fair share, which you used to get in the past?

Abhay Gandhi

So when you have a decent size base in the generic portfolio, even if you have – and I’m making up a number of 5% kind of a decline in pricing. And that leaves a big hole for you to fill and not necessarily that the pace of launch of new products will fill up that hole very quickly. And that is sometimes the reason, in this case, also the reason why you have flattish kind of a growth.

Prakash Agarwal

Okay. Can I just add one more? Hello?

Abhay Gandhi

Yes. Go ahead.

Dilip Shanghvi

Yes. Prakash, go ahead.

Prakash Agarwal

Yes. Just on that rationalization of some of the SKUs and some of the products that we spoke about, I think, a couple of quarters back. Is that process done? And have you launched? Yes, that’s the two questions I had.

Abhay Gandhi

You are talking about the U.S. generic business, still?

Prakash Agarwal

Yes.

Abhay Gandhi

Okay. So it’s an ongoing process, which is never going to be like done. I mean, every quarter, 6 months, we will continuously look at our portfolio and look at the opportunities to maybe launch a dormant ANDA, maybe look at products where we don’t make money and whether we should rationalize. It’s an ongoing process. So I would never be able to say it’s done.

Dilip Shanghvi

Abhay, he is asking about the Lialda?

Abhay Gandhi

About what?

Dilip Shanghvi

Lialda, which is what you call, is mesalamine, we have one on store mark.

Abhay Gandhi

I heard the question as rationalization of SKUs.

Prakash Agarwal

So there was a Part A, Part B.

Dilip Shanghvi

He asked two questions.

Abhay Gandhi

Okay. Maybe I lost it, because the line sometimes goes a little blank here. Prakash, what was the question, I didn’t again understand?

Prakash Agarwal

So first, you answered partly on rationalization, which is an ongoing process, but is a large part of rationalization done is what was the first question? And secondly, on about post-approval, what are the thoughts on launching Lialda, have you launched it?

Abhay Gandhi

No, we haven’t launched it so far. We should in the near term.

Prakash Agarwal

And a large part of the rationalization, done or are you still saying that it’s an ongoing process and every...

Abhay Gandhi

It’s an ongoing thing. That’s what I said, I mean, it’s an ongoing thing. I’d never be able to say it’s done.

Prakash Agarwal

Okay, thank you and all the best.

Operator

Thank you. The next question is from the line of Prashant Nair from Citi. Please go ahead.

Prashant Nair

Sorry, I don’t have any further questions. Thank you.

Operator

Next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Sameer Baisiwala

Hi, thanks. Thanks for a follow-up. Abhay, just on ILUMYA, my guess here is – and where are the number that I have – is that they are roughly about in terms of size, the addressable size of the market is about 35,000 to 40,000 new patients on ILs every year. Does this number look broadly okay and is this going up or going down?

Abhay Gandhi

You are saying 35,000 to 40,000 new patients per year?

Sameer Baisiwala

Yes, for IL treatment? And this should be then TNF and...

Abhay Gandhi

I really don’t know how you were able to segregate between existing and new patients because, really speaking, every time you go for a new dose for any given product, you re-require a new prescription, so to say. So it’s very difficult to segregate between old and new patients. So it’s – so there is – to say that an RX is new patient is a very difficult thing to say. But yes, I mean, if you look at the growth of the market, you are like – it’s a growing market. My sense is, at least, there is a 10% kind of a growth in the overall therapy.

Sameer Baisiwala

I mean that includes DNS and others? Or this is only for IL?

Abhay Gandhi

I’m looking at total psoriasis market, total psoriasis market. And within that, of course, the IL-23s have the largest part of the growth.

Kal Sundaram

So Sameer, I think what is happening is that because of safer biologics, the overall percentage of patients treated with biologics is going up. And within the biologics, the relative percentage of patient treated with IL-23 is going up faster. If you see last quarter then in terms of prescription growth on the SKYRIZI and ILUMYA have added new patients. So overall, I think we are expecting that IL-23 will continue to be a preferred treatment option for doctors for treating psoriasis because of duration as well as for safety and overall efficacy.

Dilip Shanghvi

But does this answer your...

Abhay Gandhi

Shall we say it is significant? Because in the last 3 months, I mean the quarter 2 is actually the summer months here. So you actually see a decline in the number of patients going out to the doctors for treatment. Every product, barring ILUMYA and SKYRIZI, have declined in the quarter. So that’s an indication of acceptance of both the class as well as our product.

Sameer Baisiwala

Okay, great. No – so that answer then, would you not to add TREMFYA to this?

Abhay Gandhi

In the last quarter, they have been flat.

Sameer Baisiwala

Okay, got it. And to your point, Abhay, on autoinjector versus the product that you have sub called injectable. Two points here. I mean, because the patient has to go to a clinic, there’s additional payment for doctors, I don’t know whatever it is – or doctor staff, $200 or $300 per visit. So is that sort of an inducement for doctors to opt for non-auto-injector product? Is that a meaningful sort of consideration?

Abhay Gandhi

Absolutely no, absolutely no. I think even on a call, Sameer, we should never even say, inducement of any kind, but it’s absolutely no. I think the doctors, when I speak to doctors, and we have met and worked in the field with my team and met doctors who has [indiscernible] for example, doctors actually welcome the opportunity to be able to give the doses in clinic, A, when they start, and even for subsequent follow-up visits when the patient comes back to them, and they see the response and then gives a second dose, they’re actually able to visually see the visible effect on the clearance on the skin. So doctors love the fact that they’re able to actually sort of touch and feel the product. I think that’s the motivation for doctors to inject in clinic.

Dilip Shanghvi

Also Abhay, what it also does is improve on plans, because once a patient self administers, there is no guarantee that he will administer it himself on time.

Abhay Gandhi

So all the compliance and also the doctors seeing the impact the product has on the patient, I think these are the huge motivators.

Sameer Baisiwala

Okay, great and thanks for correcting me on this. Just one more question, Dilip, broadly, on the business model, when you talk about improving efficiencies, it’s across the whole generic network across geographies and cost optimization, which are some of the big areas. And do you think you’ve got enough and more room to improve on these over next several quarters?

Dilip Shanghvi

Yes, we have, we have. Because I think we’ve large number of new facilities, which are currently not fully utilized. So as we ramp up the volume and continue to supply to markets, I think our unabsorbed manufacturing over it will continue to fall. So I think there is opportunity for us to continuously improve.

Sameer Baisiwala

Okay, great. Thank you so much.

Operator

Thank you. The next question is from the line of Sourav Patra from Edelweiss. Please go ahead. Sourav Patra from Edelweiss your line is unmated please unmute the line from your side and go ahead.

Nimish Desai

We can move on to the next question if Sourav is not available.

Operator

The next question is from the line of C. Srihari from P.C.S. Securities. Please go ahead.

C. Srihari

Yes thanks for the opportunity. Firstly, if I understood correctly, the R&D spend on your specialty portfolio is around 20%. So going forward, let’s say, 2, 3 years down the time when the business gains traction, what is the kind of number we can look at that? And secondly, are you reading out the Pola integration cost for the first 2 quarters? Thank you.

Dilip Shanghvi

So I think the R&D spend for specialty product was 26% – 24%. But as I explained, I think in my readout that it’s because some of the studies, which should have started were not started in time, which should happen sometime in this quarter.

C. Srihari

No, I think it’s 24% of the overall R&D spend. So as a percentage of sales of the specialty portfolio, it’s around 20%, I guess. I was talking about that reason.

Dilip Shanghvi

Okay, okay, okay. No, both of that will go up. The overall percentage spend on specialty in the total R&D spend, also as a percentage of the spend for the specialty business, both of that will grow – go up.

C. Srihari

Okay. So I mean, will it be substantial or will it be around the 20% mark?

Dilip Shanghvi

I’m not able to specifically respond about the mark, but it all depends on what kind of studies we are planning and what is the speed with which we are able to enroll patients.

C. Srihari

Yes. And the second one was pertaining to the distributor’s integration for Pola. Any cost figure that you would like to mention?

Dilip Shanghvi

Where do you – where did you get this information about integration cost because...

C. Srihari

When you’re talking about other expenditure, you had mentioned that there is some cost pertaining to the integration of distributors.

C. S. Muralidharan

So what we said in the other expenses is that it also includes Pola in the current quarter vis-à-vis the previous year, Pola was not...

Abhay Gandhi

Sun Pharma Distributor, we were giving a discount to Aditya Medisales so that was not included in our expenses. Now there is no top line plus on top. And more or less, whatever we were giving to Aditya Medisales, they were spending in terms of distribution cost. So now that is directly coming into our books.

C. Srihari

Okay fine. Thank you.

Operator

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

Hari Belawat

Hello, good evening. Congratulations for achieving good Y-o-Y results during this quarter two. Yes and sir, the finance part really, achieved very nicely, INR45 crores reduction on Y-o-Y. But sir, this non-current liabilities, these borrowings have increased from INR1,522 crores to INR2,135 crores, similarly non-current total liabilities also in an increase. Then how come there will be a reduction in, I mean, total financing costs?

C. S. Muralidharan

No, the borrowing, you have to see there are 3 floor places in the balance sheet where the borrowing lies. One is long term, other is short-term, then current maturity. It also lies in the short term. What we told you is, considering all the holding buckets together. So that is the number, which we have stated. And that is the way we see it also.

Hari Belawat

Yes. Totally, including current assets and this current liabilities and this non-current liabilities, it is reduced. Do you mean that?

C. S. Muralidharan

Yes, yes. So we see borrowing as a bucket.

Hari Belawat

Okay, okay. Sir, another question is this income tax assets. In the asset part, non-current execution, income tax assets of around INR3,000 crores. Similarly, deferred tax also is INR3,000 crores around. Are we getting any return on this? And what type of these assets are there with – for income tax?

C. S. Muralidharan

So these are mainly the deferred tax assets.

Hari Belawat

Okay, even income tax assets or what are the INR3,000?

C. S. Muralidharan

For balances playing also with the government on the payment made, apart from the DT assets.

Hari Belawat

Okay. Any return on that is coming or just – it is a deposit with them only?

C. S. Muralidharan

It’s a timing difference. No, DT asset is a timing difference.

Hari Belawat

Okay, okay. Thank you, sir. All the best.

Operator

Thank you. The next question is from the line of Charulata G. from Dalal & Broacha. Please go ahead.

Charulata G.

Hi, congrats for the results. I wanted to understand where do you see the EBITDA margin going from here.

Dilip Shanghvi

Generally, we don’t guide further guidance – I mean, EBITDA. I think our guidance is restricted to top line guidance. The focus is for us to go continuously improve our performance in such a way that we continue to improve our EBITDA margins. Historically, we used to have significantly higher margins than what we have. So the focus would be to try and get as close to those margins as possible.

Charulata G.

Okay. And secondly, I wanted to get the time lines for China. By when do you see China revenue accruing into your books?

Dilip Shanghvi

Kal, you want to answer or...

Kal Sundaram

China, we have to go through a regulatory process for a number of products. So in the short term, we don’t anticipate to accrue any significant revenue in China. So depending upon the speed with which we are able to get approvals and launch, we will pick up momentum. At this stage, it will be difficult for us to say when we will start seeing significant meaningful revenues coming out of China.

Charulata G.

Okay, thank you.

Operator

Thank you. The next question is from the line of Vishal Manchanda from Nirmal Bang. Please go ahead.

Vishal Manchanda

Yes, thanks for the opportunity Sir, can you share what percentage of your pending ANDA filings would be [indiscernible]?

Dilip Shanghvi

I mean, I don’t have that detail with me.

Kirti Ganorkar

And Vishal, we don’t share the statistic.

Vishal Manchanda

Right. And could you provide a guideline on what time frame would it take for you to monetize the ANDA pipeline, say, next 3 years, the pending ANDA pipeline can be monetized or say, 80% of the pipeline can be monetized?

Dilip Shanghvi

So many of the products, I think, we may be better fit to a long expiring patent. So we may not – even though we get tentative approval, we may still be far away from market. So idea is to find a way to grow the business with new approvals and improving both pricing and the share of the existing partners.

Vishal Manchanda

And one – just final one on ILUMYA, so I was just wondering, like most of the competitors on ILUMYA have approvals in multiple indications. So that basically allows them much larger volumes. And having larger volumes also allows them to offer better rebates to insurers. So is this a position – disadvantageous position for ILUMYA to be in?

Abhay Gandhi

I mean...

Dilip Shanghvi

Yes. Abhay?

Abhay Gandhi

You can go ahead.

Dilip Shanghvi

No, no, you continue.

Abhay Gandhi

The product that we licensed from – there were certain studies which were done primarily in this indication. So that’s where we start off with, and that is the market that we are in large markets, so we still feel we can make a reasonable dent in that market. We are also investing part of our R&D budget in IITs and other studies to expand the indications. So yes, having more indications, either adjacent or in completely new areas is useful. Clearly, it does give you leverage. I’m not sure whether it’s only rebating, but clearly, from expanding the potential of the product, it does help us. And that’s what we will. Relatively – it’s a little late start for us, but that doesn’t stop us from looking at where is it that we can make a good enough dent and continue to invest and work on those indications.

Vishal Manchanda

Thanks very much.

Operator

Thank you. The next question is from the line of Saion Mukherjee from Nomura. Please go ahead.

Saion Mukherjee

Yes, thanks sir. My questions on CEQUA, you mentioned about some head-to-head study that you would like to do. Any timeline that you can share when you plan to start aAnd how long will that take? And secondly, the initial response that you got on CEQUA, even it’s an established molecule, are you expecting a faster ramp-up of sales for this particular product?

Abhay Gandhi

Again, a little bit of breaks in the question. If – I’ll repeat what I understood. I think one question you asked was head-to-head study on CEQUA, correct?

Saion Mukherjee

Yes, what is the timeline, like when you were planning to start and how long will it take?

Abhay Gandhi

I think...

Dilip Shanghvi

We are evaluating area studies. We haven’t taken a decision.

Abhay Gandhi

Yes. Yes.

Dilip Shanghvi

We want the study to start. But I think we believe that we have a product which can be potentially superior to the products which are in the market. So that is what we will try and establish in the head-to-head study. Yes, Abhay, you can respond about the second part.

Abhay Gandhi

I couldn’t hear the second part. Can you repeat?

Saion Mukherjee

Yes. I just wanted to get a feedback from you on the ramp-up rate of CEQUA, given it’s an established molecule and the response that you’re seeing initially. Is it going to be a bit different from what, let’s say, ILUMYA, which it is – which is among gradual ramp-up? And is it more like the existing patients from the status, moving to CEQUA, seeing response in the market?

Abhay Gandhi

So all very valid questions, and I – these are questions I would ask the team literally every day. The thing is, it’s just literally 2 weeks into the launch. So what we have is literally 10 working days kind of an experience in field. If my assumption, based on, say, feedback from the team and a few doctors is we are getting warehouse patients. That there are patients who are not completely satisfied with current therapy, be it existing products in the branded space or even in the OTC space. And doctors have quickly put those patients on to CEQUA, that’s my initial sense. And I think more to look forward to maybe in the next quarter. We will able to share to you a better quality data with you.

Saion Mukherjee

Okay, thanks.

Operator

Thank you. The next question is from the line of Kunal Dhamesha from SBICAP Securities. Please go ahead.

Kunal Dhamesha

Thank you for taking my question. So the first question is related to the DTC campaign for ILUMYA. So I believe we have previously suggested that DTC campaign for ILUMYA will run throughout the FY ‘20, but do we see any decrease in intensity in terms of DTC campaign, let’s say, in FY ‘21 or FY ‘22 or it will run at the same run rate that we are running in FY ‘20?

Abhay Gandhi

I think my answer remains the same. This is our first experience as a company and the first year that we have gone into DTC. So very periodically, we look at different metrics and see the impact that DTC has on the product. And during the budgeting cycle of next year, looking at different scenarios, we will take a call. So that’s how the process will be.

Kunal Dhamesha

Okay. But let’s say, on a competitor basis, do they continue at a similar level, if you have done any analysis on the that?

Abhay Gandhi

Kunal, historic data suggests that they would be doing it continuously, but I’m not privy to that information, obviously.

Kunal Dhamesha

Okay, okay, okay. And secondly, on CEQUA, I know we’re just into 2 weeks into launch. But any kind of discussions we are having with payers and how this can proceed the formulary discussions?

Abhay Gandhi

So while we were waiting for the launch of the product, we were already speaking to payers. And we started off with a reasonable access. Now that we actually have a product in market, it will be discussed as we gather pace, and we will try and improve the access from where we are to a better kind of an access for patients.

Kunal Dhamesha

Okay. And will it be with more of a commercial insurance or would it be Medicaid or Medicare, any channel or color?

Abhay Gandhi

Commercial payers will definitely be the first priority in the sense that they will be the first to quickly take a yes or no decision at certain points. Medicare is a process, and that process, I expect, will take anywhere from a year to year and a half.

Operator

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Nimish Desai for closing comments.

Nimish Desai

Thank you, everybody, for joining this call today. If any of your questions have remained unanswered, please do send them across, we’ll try to get a response to them. Thank you, and have a good day.

Operator

Thank you very much, sir. Ladies and gentlemen, on behalf of Sun Pharmaceutical Industries Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.