Cipla : Earnings Call Transcript Q2 FY24

"Cipla Limited's Q2 FY'24 Earnings Conference Call"

October 27, 2023

MANAGEMENT: MR. UMANG VOHRA - CIPLA LIMITED

MR. ASHISH ADUKIA - CIPLA LIMITED

MR. AJINKYA PANDHARKAR - HEAD (INVESTOR

RELATIONS), CIPLA LIMITED

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	Cipla Limited
	October 27, 2023
Moderator:	Ladies and gentlemen, good day and welcome to Cipla Limited Conference call.
	As a reminder, all participant lines will be in the listen-only mode and there will be an
	opportunity for you to ask questions after the presentation concludes. Should you need assistance
	during the conference call, please signal an operator by pressing '*' then '0' on your touchtone
	phone. Please note that this conference is being recorded.
	I now hand the conference over to Mr. Ajinkya Pandharkar - Head (Investor Relations) from
	Cipla Limited. Thank you and over to you, Mr. Ajinkya.
Ajinkya Pandharkar:	Thank you, Zico. Good evening and a very warm welcome to Cipla's Q2 FY24 Earnings Call.
	I'm Ajinkya Pandharkar from the Investor Relations team at Cipla.
	Let me draw your attention to the fact that on this call, our discussions will include certain
	forward-looking statements, which are predictions, projections or other estimates about future
	events. These estimates reflect management current expectation about future performance of the
	company. Please note that these estimates involve several risks and uncertainties that could cause
	our actual results to differ materially from what is expressed or implied. Cipla does not undertake
	any obligation to publicly update any forward-looking statement, whether as a result of new
	confirmation, future events or otherwise.
	I hope you have received the "Investor Presentation" that we have posted on our website.
	I would like to request Umang to take over please.
Umang Vohra:	Thank you, Ajinkya. Good evening to all of you. Thank you for joining us today for our Second
	Quarter Earnings Call for the year.
	In Q2 FY24, we have continued the trend of strong performance and we have recorded our
	highest ever quarterly revenue at Rs.6,678 crores with a year-on-year growth of 15% and an
	EBITDA margin of 26%. This was made possible through double-digit growth across our core
	markets of India, North America and South Africa.
	In our One India franchise, I'm pleased to share that the franchise has yet again posted a healthy
	year-on-year growth of 10% despite a weaker anti-infective sale and a slower consumer growth
	for our CHL business. This growth was largely supported by continuing faster than market
	growth in branded prescription where we grew at 11% against the IPM growth of 10% as per
	IQVIA MAT.
	The share of chronic therapies in our portfolio has improved by 140 basis points year-on-year to
	60%.

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Cipla Limited

October 27, 2023

Trade generics consolidated its leadership position in the market despite the season which continued to be muted, Gx posted a strong year-on-year growth, supported by performance across realization, volume and a lower cost of goods.

Our generics business has embarked on a journey of constant evolution through new product introductions, leveraging partnerships with our associate company GoApptiv and deepening our distribution network.

Our priority has been to grow our big brands across all the branded prescription and the OTC businesses. In India, branded prescriptions, we have 22 brands with revenues over Rs.100 crore as per IQVIA MAT September '23. Our leading inhaler brand, Foracort, is one of the fastest growing amongst the top 10 IPM brands.

Trade generics now has seven brands over Rs.50 crores in the trailing 12 months.

Cipla Health derives its growth from five brands, which are flagship and well above Rs.100 crores in the trailing 12 months.

In North America, in this quarter, we progressed further on strengthening the core by delivering quarterly revenue of $229 million, which represents a 28% growth over last year.

Our key asset of Lanreotide has improved its market share to 20% as per IQVIA August 2023. There is generic Revlimid performed in line with Q1.

We continue to execute multiple work streams in Albuterol where market share has improved by 90 basis points to 12.9% compared to Q1 of FY24.

In our South Africa in Global Access business, we continue to outperform the market at a significant pace. We registered a solid 12% year-on-year expansion in top line led by South Africa private market where the secondary market grew at 10% versus the market growth of 4%. Private market growth was achieved through an uptick in focused therapies in our prescription business, new launches as well as solid performance in the OTC portfolio. Our aim is to reach the top position in the prescription business. In our South Africa OTC business, brands of BRONCOL and CORYX continue to gain market share. BRONCOL has now captured close to 50% market share as per IQVIA MAT August '23.

One of our most important focus areas in the past has been efficient capital allocation. Most recently, we announced the acquisition of Actor Pharma in South Africa. The market there is poised for growth in the OTC side and Actor has strong OTC brands which complement the existing offerings and have potential to grow bigger leveraging Cipla's existing marketing network.

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Cipla Limited

October 27, 2023

We also divested our stake from Cipla QCIL in Uganda and Saba Investment Limited for our business in new DMF. While it has helped us in derisking our asset base, we will continue to service these markets via our B2B market.

R&D investment has also been consistently increasing. In terms of pipeline for North America, we have made significant progress on clinical trials across some of our complex pipeline. We have three complex products undergoing clinical trials, with filings targeted in FY24 and '25. Generic Symbicort being one of them, where we have successfully completed our clinical studies. Filing for this asset is planned for Q3 of this year. In addition, we're likely to file another generic inhalation asset shortly where hopefully we can aim to be among the top filers.

On our peptide portfolio, we plan to launch one product in Q4 of FY24, while there are three, four launches planned in FY25.

Derisking of generic Advair, a partnered inhalation asset and generic Abraxane has been progressing as per our expectation.

On the compliance front, at Long Island, New York, all our units at InvaGen have recently completed their CGMP audits. While the Unit-3 inspection resulted into classification as VAI, the Unit-2 inspection has no observations by the US FDA.

We received an OAI in our Indore facility, which was audited in February 2023. We have already initiated corrective measures for observations as performed 483 from the US FDA and have made satisfactory progress as on date.

At Goa, the CAPA implementation and remediation exercise has completed. We will soon be submitting requisite data to enable the reinspection.

I would now like to invite Ashish to present the financial and operational performance.

Ashish Adukia:Thank you, Umang, and good afternoon to all. Continuing with the strong Q1 performance, we progressed further with exceptional performance across core businesses with expansion and profitability.

Coming to the key numbers for the quarter, we are pleased to report a quarterly revenue of Rs.6,678 crores, highest ever in Cipla history. The overall revenue growth for the quarter was at 15% YoY. Our ex QCIL sales stands at Rs.6,490 crores with YoY growth of 14% and EBITDA at Rs.1,690 crores or 26% of EBITDA. EBITDA margin stood at record 26% for the quarter on a reported basis. As always mentioned by me, this EBITDA margin does not include other income.

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Cipla Limited

October 27, 2023

Calibrated price actions in core portfolio across branded and generic markets combined with easing input cost, continued freight decline and favorable forex have contributed to improved operating profitability.

One India franchise further expanded its market share by growing at healthy 10% and exceptional performance in an acute-heavy quarter which was difficult for the industry due to inconsistent seasonality. This growth was supported by mix shifting to chronic portfolio, gross margin improvement and new launches.

North America yet again reported the highest ever revenue driven by traction in the differentiated portfolio with revenue of $229 million growing at 28% YoY.

South Africa grew by 9% YoY in local currency, powered by a solid performance in private market and OTC. Private market growth was supported by a strong secondary channel performance in oncology, CNS and CVS, as well as the hospital segments. OTC continue to focus on big brands as well as new launches. Our free cash flow generation and operating efficiency has helped us to drive healthy net cash position.

R&D investments for the quarter are at Rs.379 crores or about 5.7% of revenue driven by ongoing clinical trials on differentiated asset as well as other developmental efforts higher in the quarter by 13% versus last year.

Depreciation, impairment and amortization expense includes a partial impairment of a non- operational domestic manufacturing unit. And it also includes an impairment of an acquisition cost of an intangible in the form of product in the US. Both these totals up to impairment of about Rs.53 crores.

Reported gross margin after materials cost stood at 65.4% for the quarter, which is 240 basis points above last year's figures, driven by overall mix change, contribution from new launches as well as lower procurement cost on key APIs. Total expenses for the quarter include employee cost and other expenses which stood at Rs.2,631 crores, up by 1% on a sequential basis. Profit after tax for the quarter is at Rs.1,131 crores or at about 17% of sales. ETR is constant sequentially at 27.5%.

As of 30th September 2023, debt primarily constitutes ZAR720 million in South Africa with cash equivalent balance of about Rs.6,811 crores overall post payment of dividend in this quarter.

Key focus areas and growth levers in the subsequent quarters will include the focus area for One India would be to recoup the growth in the Wellness portfolio, while maintaining the market beating growth in Rx and Gx.

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	Cipla Limited
	October 27, 2023
	In North America, our focus would be to grow the core revenue, resolve the US FDA
	observations, maximize our partnered launches and also derisk assets in order to accelerate new
	launches. We will continue to derisk our key launches for FY25. Sustaining performance of Q2
	for South Africa with focus on private markets and select tender business with focus on margin
	expansion. While margins in EMEU have been very strong, the focus of H2 would be to drive
	growth in top line there. So, we are increasing our guidance on EBITDA from 23% what we had
	given earlier to 23% to 24% with bias towards the higher end. Our ROI continues to be strong
	and in this quarter on an LTM basis comes up to about 27%.
	I'd like to thank you for your attention and request the moderator to pick up the questions now.
Moderator:	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.
Saion Mukherjee:	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?
Umang Vohra:	Actually, Saion, 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.
Saion Mukherjee:	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?
Ashish Adukia:	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

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	Cipla Limited
	October 27, 2023
	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.
Umang Vohra:	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.
Moderator:	Our next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
	Please go ahead.
Tushar Manudhane:	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?
Umang Vohra:	I'm sorry we can't give that detail due to the competitive nature of the product.
Tushar Manudhane:	The market size at least?
Umang Vohra:	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.
Tushar Manudhane:	And this is after some years already?
Umang Vohra:	Sorry?
Tushar Manudhane:	This is after some generic player here already in the market?
Umang Vohra:	I think there might be a player, but the market is fairly complicated.
Tushar Manudhane:	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?
Umang Vohra:	Yes, you could expect that, it would be a para-IV filing.
Tushar Manudhane:	Lastly, considering US$230 million, any ballpark range you would like to give in terms of the
	annualized run rate for the US generics?
Ashish Adukia:	I think we're guiding to US$220 to US$225 million as a sustainable range at least for the next
	quarter going forward. We don't know what will happen in Q4 because Q3 typically also has a
	little bit of buying on account of the holiday season.

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	Cipla Limited
	October 27, 2023
Tushar Manudhane:	And then post that you'll have this peptide launch. So effectively then this run rate should ideally
	be much better, right?
Umang Vohra:	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.
Moderator:	Our next question is from the line of Aman Vij from Astute Investment Management. Please go
	ahead.
Aman Vij:	My first question is on our diabetes portfolio. So, if you can talk about how are we placed 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?
Umang Vohra:	The first one that's probably going off-patent is like in India is likely to be Semaglutide.
	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.
Aman Vij:	On this part only, so oral, do we plan to file the FTF on that side? 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?
Umang Vohra:	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.
Aman Vij:	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?
Umang Vohra:	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.
Aman Vij:	But, we will be also participating in US first-to-file market also, right?
Umang Vohra:	Yes.
Aman Vij:	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?
Umang Vohra:	So, which is the product you're talking about?

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	Cipla Limited
	October 27, 2023
Aman Vij:	Teriparatide itself.
Umang Vohra:	No, I think what the product we sell in India for Teri 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.
Moderator:	Our next question is from the line of Kunal Dhamesha from Macquerie. Please go ahead.
Kunal Dhamesha:	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?
Ashish Adukia:	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.
Kunal Dhamesha:	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?
Umang Vohra:	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.
Kunal Dhamesha:	The second question is on the generic Symbicort filing. So as a risk management, would we be
	filing it from multiple facilities?
Umang Vohra:	Yes, the idea is to file it from multiple facilities.

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	Cipla Limited
	October 27, 2023
Kunal Dhamesha:	Multiple facilities would be internal or -?
Umang Vohra:	Both would be internal.
Kunal Dhamesha:	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.
Ashish Adukia:	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.
Moderator:	Our next question is from the line of Damayanti Kerai from HSBC. Please go ahead.
Damayanti Kerai:	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?
Umang Vohra:	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.
Damayanti Kerai:	But from your perspective, you are broadly done with the transfer process or a lot needs to be
	covered?
Umang Vohra:	They are still on.
Damayanti Kerai:	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?
Umang Vohra:	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.
Damayanti Kerai:	In terms of current profitability of the US portfolio?
Ashish Adukia:	EBITDA for overall US if you see, right, it's above the company average EBITDA margin today.
Damayanti Kerai:	My second question is on India business. So, obviously, I guess you maintain outperformance
	against the broader market despite slowdown in volume. But, if we see similar muted volume

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