Cipla Limited analyst Q&A

We will now begin the question-and-answer session. Our first question is from the line of Saion Mukherjee from Nomura Securities. Please go ahead.

Just my question is on India. You mentioned 10% growth in India. Now, if I were to exclude the acquisition that you did, it looks like the growth is around 7% and you mentioned trade generics growing in double-digits. Does it mean that the overall prescription and the consumer business is trending around 5% to 6%? And if that's the case, what's the reason for the slowdown and how do you see this moving forward in the second-half?

Actually, Sa ion, the internal growth estimates for the branded prescription and the generic business are well over 11%. If you take out the acquisition, which is what we're doing, I think you have to take out from last year we had a certain tender position in one of the products we had won and that's basically replaced by the acquisition we've made. So , core business growth both on the Rx and Gx side is close to an over 11%. So , those businesses are growing stronger and much higher than market. I think on a consumer franchise , we've seen a fairly significant slowdown more because of the weather pattern. We sell a lot of the ORS product and I think we've not seen that level of sales of that product because of the weather pattern in Q2. And this result is fairly consistent with the category of beverage and with some of the other consumer products we've seen in this quarter. Having said that, I think this quarter we are looking at it bouncing back quite significantly. So, no, I think the branded growth and the generic growth is very strong in the previous quarter, it's the consumer growth which had a little bit of an issue.

The other question I had on expenses and on the margins. So , your other expenses are quite flattish quarter-on-quarter despite a seasonally sort of heavy quarter in terms of revenues and also R&D cost moving higher. So , is there anything there and how should we read this going forward?

So, I think it's a combination of two things. One is you must have noticed the improvement in your gross margin which is flowing through to your EBITDA and that's primarily because of the mix change that has happened in the favor of chronic in India as well as in North America, some of our high margin products, we've been able to do better. So, it's combination of these two things that led to improvement in gross margin and there is some bit of operating leverage that exists due to which the increase in sales, your other expenses have got absorbed. And if you are comparing to just previous quarter, the previous quarter had some recall cost sitting out there of Albuterol that we had talked about, which of course is not sitting in this quarter. That has also led to improvement if you're looking at it from quarter-to-quarter.

Overall, Saion, I think if you were to take the employee benefit expenses and the other expenses and total it between last year and this year, we're seeing about 11% to 11.5% increase. From our business perspective, I think that's roughly the range that we will see year-on-year for the expenditure to expand.

Our next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Just with respect to the product which you have highlighted to be launched in FY24 the peptide product, if you could share some market size competitive scenario for other products?

I'm sorry we can't give that detail due to the competitive nature of the product.

The market size at least?

The market size of that product could be anywhere upwards from $300 to $400 million , so, I would say the available market size for us ; pre-our entry and pre-generic pricing could be somewhere in the $300 to $400 million.

And this is after some years already?

Sorry?

This is after some generic player here already in the market?

I think there might be a player, but the market is fairly complicated.

With respect to one comment of generic filing, which Cipla is expected to do shortly , so will that be subject to litigation, would it be more like a para-IV filing?

Yes, you could expect that, it would be a para-IV filing.

Lastly, considering US$230 million, any ballpark range you would like to give in terms of the annualized run rate for the US generics?

And then post that you'll have this peptide launch. So effectively then this run rate should ideally be much better, right?

Well, yes, depending on how the peptide will scale and if it depends on when it launches within that quarter. If it launches right at the end, then the impact will be muted. If it launches right at the beginning, then obviously, there will be a full quarter impact.

Our next question is from the line of Aman Vij from Astute Investment Management. Please go ahead.

My first question is on our diabetes portfolio. So , if you can talk about how are we place d to take the advantage of the upcoming GLP -1 opportunity -- will we be participating in both the oral and injectable form, if you can talk about the same?

The first one that's probably going off -patent is like in India is likely to be S emaglutide. Liraglutide, anyway is only available as an injectable. You have Semaglutide, and then you have Teduglutide. I think we will do Sema. We definitely have plans for the oral version of the product. And if required and based on our current understanding if the market is there for an injectable, we will hopefully also try and introduce the product there.

On this part only , so oral, do we plan to file the FTF on that si de? And also, do you think this market itself for us can become like a $100 million market plus over the next five years as a company?

I think my answer was more for India. We can't give you a view of the US . I think some Semaglutide is a very exciting product, no doubt. If there are multiple players on day one, then obviously the market size will reduce significantly.

Sorry, just a clarification part on this before I move to the second question. So , you are only focusing on the India market, not US and the other markets for this opportunity?

No, I think we will focus on all markets, but our strategy is maybe a little different for each market. But in the US, depending on how many people are first -to-file, it will decide what the competitive nature of the product will be.

But, we will be also participating in US first-to-file market also, right?

Yes.

My second question is on one of the biosimilar products in osteoporosis. I think US opportunity is coming up. So, if you can talk about what is our market share in India of this product and are we looking at the US filing of that product as well?

Teriparatide itself.

No, I think what the product we sell in India for Ter i is not that large. So, I don't think we will provide too much commentary. In fact, I don't think it's a very large product for us in any case. We are not providing too much color on the US pipeline right now. I think as the launches of the peptides happen, we'll be able to give you some color on that.

Our next question is from the line of Kunal Dhamesha from Macquerie. Please go ahead.

First one is on the gross margin improvement. So, we have cited that there was favorable product mix, etc., But would you say that improving US generics environment was one of the key drivers in this quarter in our sequential gross margin improvement?

It does contribute to the improvement, but it's a mixed bag in US on certain cases, we've got volume improvement like in case of Albuterol, we've gone from 12% to about to 12.9% share . On Lanreotide there has been increase in volume and then there is price improvement in certain other products. So , it's a combination of volume and price. Overall , the gross margin improvement is on account of a price like I said in India in select products and mix has also played a role where the volume increases happened more in the high margin products.

We have mentioned that we are getting good traction with respect to several contracts in US and business development and everything . So, is that on account of lot of shortages that you are seeing or there is kind of pre -buying that is more driving that, what would be your assessment, so would it continue, let's say beyond Q3 in your sense or the activity is going to probably be muted little bit in Q4?

No, I think the shortage situation until there are new capacities that come up will probably continue. I think there's a list that the FDA puts out quite routinely about shortages in the US . At least for those product families, we are not seeing price erosion. That's why there's a balance, because there's a fair number of products that are on the shortage list for various reasons that there is an equal counterbalance to lesser price erosion. So yes, I think from a US portfolio also there has been some amount of margin expansion. The other thing is I think if you broadly look at our India business, as the ratio of chronic in our overall mix begins to increase, margins will go up in the business , because if you look at high chronic businesses in India, they operate at much higher margins than high acute business. So , as your chronic mix, the last two to three quarters, we've seen a chronic mix improving because our teams are focusing in building those therapies. I think the natural impact of this is also on some amount of margin expansion.

The second question is on the generic Symbicort filing. So as a risk management, would we be filing it from multiple facilities?

Multiple facilities would be internal or -?

Both would be internal.

Just a clarification, so we said that there were 43 crores impairment and then there was some 10 crores other charge. What was that? I just missed it.

One is one of our domestic units where we have taken impairment, which is non -operational unit. So, it was not operating since some time. That's the major part of the impairment. And the other one we constantly keep testing for impairment of intangible. So, one of the products in the US which we had acquired, we had one of the products there we have impaired the intangibles that was created when we acquired that product from the partner.

Our next question is from the line of Damayanti Kerai from HSBC. Please go ahead.

My first question is on your Advair investment which you mentioned are progressing as for your expectation. So, if there are no incremental query , hurdle, etc., is it safe to assume like these opportunities will likely come in first half of next fiscal?

Depends on the review cycle at the FDA. I think we would have finished the transfer process . After that we filed with the agency . Depends on the agency's view with respect to shortage in the market, with respect to competition and the data that they see. So, it's difficult to predict. But we are hoping that this comes as soon as it can.

But from your perspective, you are broadly done with the transfer process or a lot needs to be covered?

They are still on.

My second question is, in the US business, obviously you are seeing good pick up or good contribution from depreciated products. So, can you just broadly indicate of the total US sales, how much contribution are currently coming from the differentiated products and how does the US portfolio look in terms of profitability compared to the corporate average?

So, I think over 70%, 75% of our pipeline in the US today is differentiated. So that's a significant portion. So , we've reduced the number of filings and gone on the side of differentiating our portfolio significantly.

In terms of current profitability of the US portfolio?

EBITDA for overall US if you see, right, it's above the company average EBITDA margin today.

My second question is on India business. So , obviously, I guess you maintain ou tperformance against the broader market despite slowdown in volume. But , if we see similar muted volume situation to persist in the market, how do you see your growth look for India getting impacted in near-to-medium term or you remain comfortable that because of increasing c hronic you will always be going better than the market?

No, I think in the therapies where we are strong, pediatric , respiratory, urology, anti-infective, cardiac we will expect to grow significantly higher than market. And I think if we're able to do that, then it's easier to show the overall growth for India. So, volume this year is also the impact of the base of the previous year. I think as that begins to even out, we will probably see an expansion in volumes. See, we are sliding to a multiyear assumption of where India will grow somewhere around the 12-ish percentage range on a long-term five-year basis. We think a 12% CAGR for India is not uncommon. Actually, our numbers are quite close whether the volume is low or the price is moderated. So, if you really look at it, our YTD growth will be somewhere at least, in the branded prescription business also around 12% range. And this is happening despite volume growth being lower. There might be a year where volume growth is higher, but price growth may be lower. So overall, the 12% number will probably hold as a CAGR over the next couple of years.

So, you remain comfortable with this 12% growth? My last question if I can, can you comment on the US pricing environment? You said you saw mixed performance across products, etc., but across the market, should we assume prices are more or less stable compared to what we saw in recent quarter or there has been any change?

I think pricing in the US always there is some change quarter -on-quarter. So, there will always be some depression, but I don't think we are seeing accelerated compression and pricing in the US. I would say more or less the trend is the same.

Our next question is from the line of Neha Manpuria from Bank of America. Please go ahead.

Umang, in the last call if I remember correctly, we talked about US base of about 200, 215 and now I think you mentioned about 2 20, 225 given the momentum that you're seeing in some of your complex products. But other than that , has anything fundamentally changed quarter -on- quarter in the US or this is just improvement that you're seeing in the base portfolio that is driving this higher US guidance?

Yes, I think Neha, it's basically a slight increase in our Albuterol shares, slight increase in the share of a few other product families, and also the share increases in Lanreotide.

Is there scope to improve that further, I'm just trying to understand if there's upside to this 220, 225 number that we are mentioning?

Yes, I think on Lanreotide specifically we are looking at incremental gains that we've seen historically to play out. It's never going to be huge delta that comes in, but it would be something that creeps up over a period of time. And on Albuterol is the same , right, we used to be high , then we came back down from the beginning to go back up again a little bit. So , it will be that and then quarter-on-quarter buying patterns there's always a little bit at a 200 million base, there could be 3 -4 million here, there. So realistically from the previous quarter to this year, not so much of a delta, even though it was 215 to 230, I think some of these share increases, some of that 3, 4 million, buying pattern shift so I think you'll roughly get there.

It's not as if we've seen a material improvement in the pricing environment or a big upside from these shortage products that's driven this?

No, not really. In fact, there's also a fair amount of demand for a set of products which I don't think the industry can supply such as Budesonide, etc., where frankly whatever you can produce can be sold.

On the margin guidance, again we have raised the guidance. But if I still look at the first half run rate, we're close to probably 25 versus the guidance that we've given based on your commentary everything that you've mentioned in terms of gross margins , the India momentum, US momentum, are we expecting spend to go up, is that the reason we're being conservative on the margin guidance particularly given what we've seen in the first half or is there some other dynamic that I'm missing out?

I think , Neha, maybe I can add and then Ashish can comment . I'm not sure we will see expenditure going up. Expenditure between last year and this year is up 11 .5% to 12%. I think we may see some seasonal, we do a “Berok Campaign” in this quarter which will probably result in a little bit of delta, but that's not significant to the overall expense hypothesis. First of all, the margin we've probably seen in the last quarter is the highest we've ever seen in our company. I think it's a large portion of it is due to mix. It's a mix and possibly some amount of abatement in the cost of procurement. I would not be surprised in the future quarters if our margin is not at the same level that it was in the quarter that's gone by because the mix may change of the way our business runs. The other thing is Q4 -

Umang, to your point, because the mix in India, given a focus on chronic and the higher investment, 75% of the pipeline being complex, the peptide launch coming up , so it's not as if the gross margin comes off from here and if your costs are the same, leaving aside in the quarter- on-quarter volatility, shouldn't this quarter margin be sustainable?

Well, not really, because I think what we've been saying is that the sustainable margins the way we see it in this quarter is in the range of 24 to 25. Because if you look at the type of mix we've seen this quarter is very different, hardly any anti -infective and we know that there is some amount of anti-infective that comes in the winter months. So, we see a delta there. That's where we think our margin will be. Q4 is always, Neha, a reverse seasonality quarter for us. Some part of the margin will compress in that quarter as well.

Umang has covered it. I think if you look at the second-half, it's a combination of Q3, which we believe will hopefully continue to be strong as it has been. But Q4 is something that we are mindful of and combination of the two will probably get us to about 24% overall for the year.

Our next question is from the line of Surya Patra from PhillipCapital. Please go ahead.

About the US business, m y first question is that is it fair to believe that kind of thing that you would have seen in the Albuterol possibly that has been covered by new launches like Revlimid and all? Is that the understanding right, sir because in terms of the prescription, there is more than 20% kind of decline in Albuterol that we are witnessing?

So sorry, your question is that the market share loss in Alb uterol, has it been made up by. So, there are other products which has made-up for that loss like we talked about Lanreotide which has increased in volume and there are other Excela business as well, which has done very well in the first two quarters, which has helped us to get there.

Since after Revlimid launch, we have crossed that 12 month s period, so generally there was a kind of a term that in the 12 month s period the volume limit means whatever the volume that one need to achieve , that will be based on the 12 month s period achievement. So , from that angle, is it possible to have a sense that okay what is the kind of volume that we would be tracking there in US so far as Revlimid is concerned?

For the balance of the year H2 will more or less like Umang talked about Q2 over Q1 is not a material and significant increase. So that trend will continue for the balance year.

The second question is about the South African market. In fact, in the opening remarks, sir, you mentioned you are currently second in the private market and which has been consistently delivering double-digit growth and you are targeting to achieve the #1 position there. So, could you tell if that is achieved, then what would be the kind of scenario in terms of revenue mix, the South Africa business would be having for us?

If you look at the growth in US and in India, has been fairly strong, right? And US is about 25% roughly, I'm just talking about 25% of revenue, India is about 40%, 45% of the revenue. So, they form a significant portion and they're going at double-digit, right. So South Africa even at 10%, they will still be at par or in terms of growth with them. So, therefore, the share of South Africa will remain same even if they become #1 for us. I think the constant focus in South Africa is also a margin for us and we want to get close to company average margin. Therefore, the growth out there will always be calibrated to make sure that the margin is not compromised and that's why you've seen over last many years the shift that has happened from tender business to private market and now looking at OTC as another lever of profitable growth out there. Actor Pharma that we have acquired, which comes with a portfolio, there is a huge synergy th at sits out there to actually leverage our distribution network to push those products in. And the success that we've seen in CORYX and BRONCOL is likely to get replicated in Actor Pharma. So, OTC is another leg of growth like I said for South Africa, which will help us with both growth as well as margin.

Sir, is it possible to share that what could be the gap in terms of size, scale between the number one and the second place so far as the private market is concerned?

I think it's about ZAR200 in prescription. That's the gap that we have between #1 and #2.

About the domestic formulation s business, from the various studies what it is available that respiratory segment which generally is one of our leading segment s has seen some kind of a moderation in terms of growth possibilities because of the high base of the last period. Despite that, we have seen a kind of improved margin scenario what you are mentioning about the domestic formulations business. So, is it not right that respiratory is one of the most profitable business considering our scale and the kind of end-to-end integration what we are having?

If you look at the IQVIA data, respiratory and cardiac are the two therapies where we've grown faster than the market in this quarter . So not sure why you're saying that it's been subdued. Of course, like you have said, which is absolutely right, the margins in respiratory, because it's primarily in-house is better. So, we get the benefit of that.

So, that means once we see the revival in the respiratory, then possibly that will support the margin profile going ahead?

Yes, which we've already witnessed partially in this quarter and hopefully we'll continue in Q3.

Our next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.

Umang, just following up on the US, I think if I remember correctly for the last two quarters you mentioned that the Revlimid sales have been broadly in line with what we were in Q4 and there is almost $25-odd million delta we've done in this quarter versus Q1. So, I just want to double check, is it fair to assume that all of this $24 or $25-odd million delta which has come through versus Q4 is all on our regular business primarily driven by the non-Revlimid business?

No, no, it's a combination of increase in Revlimid as well as other products as well. I'm referring to Q4 to Q1. So, there was some increase in Revlimid as well. In Q1 to Q2, there has been insignificant increase in the Revlimid, yes.

Our next question is from the line of Krishnendu Saha from Quantum AMC. Please go ahead.

Most of the questions have been answered, but just t wo follow-up questions. In Albuterol, we had a market share of 16%, 17%, but I heard you said 12.5% or 9%. So, when do we get back to the number? And #2 another question is that the Goa plant capacity increased by 200 %, 128 million what I read. What does that Goa plant, which region does it actually related to ? If you could just tell us the plans where the inhalers are filed for, so Indore, Goa, above all, so just you can let us know with the future filings for the FDA?

I'll just take the second question first and then maybe Umang can give some color on Albuterol. The capacity that we're talking about in Goa, that's primarily for the international EMEU market. And that's where we had a n increase in the capacity. On the first question on Albuterol market share -

I think the market shifts between three versions of Albuterol. We sell one of the smallest versions of Albuterol. Every time the market shifts between these, that market share gets impacted. So , that range is always 2% to 3%. Now, we are hoping to build our share.

So, we hope to get back to 6%, 7% in the near future?

I think that fortunately or unfortunately is not completely in our control because the market buying behavior is dependent on which variant they keep. So, in the event that they decide to keep the variant, obviously, the share will go up. In the event they don't, then the share will only increase marginally as it has been doing.

If you could just talk us about the plants which are for the USFDA for the filings for the inhalers?

So, we have two inhaler plants and we are trying to file; one is Indore and one is in the US.

Our next question is from the line of Vishal Manchanda from Systematics. Please go ahead.

In the US, can you update on what's our market share in Luprolide?

We are going to increase share now because there was price listing, etc., that needed to happen. Current market share is sub-3%... actually, it's close to 1% right now, but it will be built up over a period of time.

So, it starts ramping up as we have seen in case of Lanreotide, right?

The trajectories won't be similar, but yes, we will be increasing market share.

Just one more on the sub -Saharan market. Your sales have doubled on a Q oQ basis. So, one should assume the current cost of run rate to remain stable over the subsequent quarters and what led to this doubling of sales on a QoQ basis?

SAGA is a combination of South Africa, sub-Saharan, you have CTA also sitting in that where increase of sales has happened and QCIL is also sitting there. So , we've seen some growth out there. Main growth is in QCIL, which is anyways under sale. So , we will discontinue showing QCIL from next quarter. But, of course, that is mainly tender business , so, it comes at a lower margin. So yes, that's how you should look at the SSA numbers.

Any broad sense on what could be a sustainable quarterly run rate for this market for the current year?

It's a very small contributor to our overall revenue. Of course, it's a tender dependent, so it can be lumpy as well. So, keeping that in mind, it's difficult to talk about sustainability of that. But, of course, like I said, QCIL will go away from the numbers.

What is the number that we should knock off for QCIL?

We've given those numbers in the investor deck, right , and the press release as well. So, 6,678 crores become 6,490 crores after knocking off QCIL.

Our next question is from the line of Ankush Mahajan from Axis Securities. Please go ahead.

Sir, with this year, we are launching one peptide product and except this product what is in the pipeline, will you throw some light on the pipeline of the products?

I think we've mentioned that we have four to five partnered products in the peptide range and hopefully one we will launch in the next quarter and then in the next two years we will launch the others.

Despite these peptides, what are the other products?

We have inhalation assets as well and some will be filed shortly, some are in the process of filing and then we have some other products.

So, in the initial commentary sir, it was mentioned that logistic cost has improved. So , would you throw some light on it, how it will take shape in the upcoming quarters?

We monitor our air -to-sea mix, right , of all the products that we export out of US to our geographies internationally. So, over a period of time has obviously moved in favor of sea, which has actually helped us with the reduction of overall freight. That's one factor. The second factor is that overall the air rate as well as se a rate, both have actually come down substantially ; on YoY basis, air rate has come down, close to 8% to 9% and sea rate has actually come down by almost 60%, 70%. So those are the advantages that we're getting and at least in near term we are expecting this great advantage to continue.

Our last question for today is from the line of Kunal Dhamesh a from Macquarie. Please go ahead.

So, sir, directionally, when we started the year and gave the guidance of 21 % to 22% EBITDA margin and we are currently giving guidance of 24% and if I look at the various moving parts, the biggest delta which has come from US, right. So that kind of speaks that there is improvement in pricing, there's improvement in volumes of existing product, but then your commentary is mix on pricing. So, can you throw some light because if it 's just volume improvement, it might not have led to a lot of EBITDA improvement, right, because some of these products would be low margin and we have kind of lost market share in the high margin products on a year -on-year basis. So, what explains the delta in EBITDA margin guidance improvement?

So first of all, it's a combination of US and India market, it's not just the US market, I would like to just clarify that point. In India as well, like we said, the chronic mix has gone up, right. With the chronic mix going up, which has higher gross margin that leads to better EBITDA margin as well and there is some bit of operating leverage also that we're seeing in India. Likewise, in US, certain products we have better volume albeit could be with some price erosion, but there are certain products where we have taken price actions as well. So , overall, these two geographies have driven the margin because they are a large portion of your business as well . At the same time, there are other businesses where like South Africa I talked about where the margin improvement is clearly visible between Q1 and Q2, and hopefully that trend will continue there for three and four as well.

Let's say in the current guidance of 24%, I think what we are baking in is probably a good $220 million to $225 million in US in Q3. But let's say if the trend continues in the US into Q4 as well, would it be fair to say that there could be upside to this 24%?

If the trend of buying changes, there could be an upside, but it's difficult for us to estimate that at this stage.

So right now, we are just building in Q3 because that's what we are seeing kind of good trends?

If the certainty of launches in the US improves because of the remediation we are doing at our sites and the transfers , obviously, our confidence in the margin will increase as well. So, to answer your question, there are at least three of our businesses are running ahead of their internal estimates both on the top line and also on the bottom line; one is India, the second is the US and the third is South Africa. So, there is a margin beat on account of all three that we have seen. On our emerg ing markets business, even though we are running slightly lower than the internal estimates on top line , on bottom line we are running because of expenditure control almost to the same extent. So , that is the reason that I think the margin trajectory has improved. If you look at our costs overall, the cost basis is 1 1.5% over the previous year. Realistically, in our business, we never increased more than 11 %, 12% of cost year -on-year. I think the real increment we're getting is on the margin . Also, in the previous year we had a fair amount of remediation cost built in on account of our facilities which now is reducing because a lot of the remediation is already underway.

What is the PLI benefit that we would have recognized in this quarter?

So that's part of the other operating income and it has increased versus Q1. We're not giving out the specific numbers, but there is an improvement because of the products that qualify for this thing. Just on the OPEX part just to complete the picture what Umang was saying, I think with derisking that's happening in the US, there could be marginal increase in the OPEX as well in the coming quarters.

Ladies and gentlemen, that brings us to the end of the Q&A session. I would now like to hand the conference over to Mr. Ajinkya Pandharkar for closing comments.

Thank you for joining in. If you have any questions, please e -mail us on investor.relations@cipla.com. Thank you once again and have a very good evening.

On behalf of Cipla Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.