Cipla : Earnings Call Transcript Q2FY23

"Cipla Limited's Q2 FY'23 Earnings Conference Call"

November 4, 2022

MANAGEMENT: MR. UMANG VOHRA - MANAGING DIRECTOR &

GLOBAL CHIEF EXECUTIVE OFFICER, CIPLA LIMITED

MR. ASHISH ADUKIA - GLOBAL CHIEF FINANCIAL

OFFICER, CIPLA LIMITED

MR. NAVEEN BANSAL - HEAD, INVESTOR RELATIONS,

CIPLA LIMITED

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Cipla Limited

November 4, 2022

Moderator:Ladies and gentlemen, good day and welcome to the Q2 FY'23 Earnings Conference Call of Cipla Limited. We have with us today, Mr. Umang Vohra - M.D. and Global CEO; Mr. Ashish Adukia -- Global CFO; and Mr. Naveen Bansal -- Head of Investor Relations.

As a reminder, all participant lines will be in listen-only mode. 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. Naveen Bansal, Head of Investor Relations from Cipla Limited. Thank you, and over to you, sir.

Naveen Bansal:Thank you, Steve. Good evening, and a very warm welcome to Cipla's Q2 FY'23 Earnings Call. I am Naveen from the Investor Relations Team at Cipla.

Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections, or other estimates about future events. These estimates reflect management's current expectations of the future performance of the company. Please note that these estimates involve several risks and uncertainties, including the impact of COVID-19 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.

With that, I would like to request Ashish to take over, please.

Ashish Adukia:Thank you, Naveen. Thank you, Steve, and good evening to all of you.

First of all, I'm pleased to join Cipla Limited as Global CFO and honored to be part of company's rich legacy of "Caring For Life."

On the quarter results, I hope you've received the "Investor Presentation" that we posted on our website.

For Cipla, the last three months have been tremendous learning in terms of navigating the business amid the ongoing geopolitical headwinds, while continuing to make progress across all our strategic priorities. In a continuing volatile macro and geopolitical environment, we are very pleased to report historically the highest quarterly revenue of Rs.5,829 crores. The overall revenue growth for the quarter was at 6% on a reported basis, and a strong 12% on a COVID adjusted base of last year. We continue to service demand across all our markets and demonstrate robust commercial execution of new launches during the quarter. This was achieved despite a challenging operating environment and helped us deliver a robust EBITDA margin of over 22% for the quarter on a reported basis, and approximately 24% on an adjusted basis. On these adjustments, I'll come to later.

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Cipla Limited

November 4, 2022

Coming to key highlights of the quarter, the core revenue growth was driven by sustained momentum in One India Business and differentiated portfolio unlocking in the US. Our global inventory levels reflect our commitment to ensure the continuity of supply given the headwinds in the sourcing environment.

Our free cash flow generation and operating efficiency continue to drive a strong net cash position. Our operating margins of 22.3% for the quarter subsume the impact of sharp moderation in COVID contribution in last year's phase and geopolitical uncertainties.

As alluded earlier, the demand for COVID products is negligible in line with sharp drop in new infections. Accordingly, we have taken an inventory charge on all of the marginal COVID inventory we were carrying and we're expecting to liquidate, which is in the materials cost line item in the P&L. Adjusted for this, our EBITDA margin would have been higher by nearly 150 basis points, or at approximately 24%.

The higher R&D costs investments driven by ongoing clinical trials on respiratory asset as well as other developmental asset, is higher by Rs.61 crore versus last year, which is incremental 1% of our revenue.

Our reported gross margin after materials cost stood at 63% for the quarter, which is 165 basis points above last year's figures driven by contribution from new launches and overall mix change. As alluded earlier, reported gross margin subsumes the impact of inventory charge in the material cost line item.

Total expenses which include employee cost and other expenses stood at Rs.2,366 crores which has increased by 7.2% on sequential basis. Employee cost of the quarter stood at Rs.951 crores flat on sequential basis.

The other expenses which includes R&D, regulatory, quality, manufacturing and sales promotions, are at Rs.1,405 crores, increased by 12.3% sequentially driven mainly by higher R&D cost, which I talked about which is up 22% YoY, judicious promotional and growth-linked investments. Total R&D investment for the quarter are at Rs.335 crores of 5.8% of revenue. The absolute trajectory remains intact with assets progressing in clinical trials and other portfolio developmental efforts continuing.

Reported EBITDA for the quarter was at Rs.1,302 crores, or 22.3% as I pointed earlier. The reported growth over last year's base was 6%. On adjusting the one-time COVID inventory charge, our core operating profitability for the quarter was approximately 24% or at Rs.1,389 crores. At the current run rate, we are tracking in line with our full year guidance of 21% to about 22%. The profit after tax is at Rs.789 crores or at 13.5% of sales.

As of 30th September 2022, our long-term debt primarily constitutes ZAR720 million in South Africa and working capital of $49 million in the US apart from some of the other facilities that

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Cipla Limited

November 4, 2022

we have in other geographies, Driven by our relentless focus on cash generation and rigor in cost discipline, we continue to be net cash-positive company at the end of this quarter. Importantly, we are constantly monitoring the current macroeconomic situation and proactively addressing the risks, including any FOREX downside impacting our revenue and profit and inflation as is yet.

To close, we saw robust momentum across portfolio and geographies for H1. Growth levers in the subsequent quarters will include continued growth momentum across branded and consumer business in India and South Africa, robust traction in our North America franchise across complex portfolio and continued contribution from respiratory and peptide to product, and thirdly monitoring geopolitical headwinds, driving elevated procurement, freight costs and foreign exchange depreciation-led, translation loss in INR.

I'd like to now hand over to Umang for Business and Operational Performance. Thank you.

Umang Vohra:Thank you, Ashish, and welcome to all of you on the call. Our Q2 FY'23 performance reflects strong execution in our One India and a solid launch momentum from our differentiated US portfolio, driving our overall revenue to a multi-quarter high of Rs.5,829 crores. The reported growth is 6% and 12% year-on-year after adjusting for COVID in our Q2 FY'22 base. Ashish has already explained the numbers to you. Our core business continues to demonstrate sustained momentum despite the impact of geopolitical headwinds. I'm pleased to share that our reported EBITDA margins for the quarter came in at 22.3% and adjusted margins at approximately 24% which continues to track in line with our guided range of 21% to 22% EBITDA.

Coming to the Detailed Updates for the quarter by market. In a One India franchise, we are making strategic bold moves, transforming into a holistic ecosystem driven by new science, better reach and a digital-first approach. We are significantly investing in investments in portfolio, diagnostics, channel and digital initiatives.

Our global consumer franchise continues to witness strong traction across India and South Africa. The overall franchise now stands at 9% of the overall Cipla revenue for the quarter. There is a slide on our investor deck that captures some of these distinctive structures and winning capabilities being added to fortify our One India franchise under the Wellness theme as well.

For this quarter, the One India core portfolio deliver a 6% year-on-year reported growth despite the continued normalization of COVID contribution compared to the quarter in the last year. After adjusting for COVID products, revenue growth stood at a robust 15% year-on-year, reflecting strong demand traction across our therapies and our businesses.

The branded prescription business demonstrated double-digit growth across therapies and core portfolio driven by continued demand. The market beating growth trajectory continued for the sixth consecutive quarter with 15% growth for the quarter on an ex-COVID basis. This core

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Cipla Limited

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revenue growth is underpinned by a healthy mix of price, volume and contribution from new launches.

During the quarter, we launched eight new brands in Cardiology, Diabetes, Urology, Gynecology and Respiratory. As per IQVIA MAT September '22, we continue to maintain healthy ranks and market share in all our key therapies.

The trade generics business continues to witness strong traction across the flagship brands with steady order flow from the tier-two-to-six rural towns and the demand fulfillment across regions translating into double-digit growth over last year. Our launch momentum continued with 10 products in key therapies within the generics franchise.

Our consumer health business continues to do well and is tracking well in line with the Rs.600 crores plus annualized revenue, we alluded to previously. The transferred brands are tracking at a robust 14% growth momentum during the quarter, with the overall business delivering over 20% growth versus last year.

Coming to US Generics and Lung Leadership Franchise. The US core formulations sales for the quarter registered a high of $179 million. This is a 25% growth year-on-year. Our continued focus on driving business through strong execution of our differentiated pipeline is demonstrated by the launch of Lenalidomide in this quarter. We're committing to maintain sustainable supplies and maximize value.

The contribution of differentiated dosage forms in our North America Generics portfolio continues to expand which translated into this 15% growth over the quarterly average run rate of 155 million over the last three quarters.

Our generic market shares in respiratory products continue to be healthy. Market share for Albuterol and Arfomoterol stood at 16% and 38% respectively as per IQVIA MAT ending September 30, 2022.

Our peptide franchise continues to track well since its launch in Q4 of FY'22. Lanreotide 505(b)(2) has steadily gained market share with 4.6% share in Q1, which was last quarter moving to 9.6% in this quarter. We are tracking to our earlier guidance of reaching 15%-odd percent market share by the end of this year in this category.

On the pipeline front, clinical trials on the respiratory assets and filings on complex generics, including the peptide injectables are on track. From the launch perspective, we have geared up for some of the upcoming launches and closely working to secure our approvals.

We have proactively responded to the FDA's observations issued for our inspection of the Goa plant in August '22. As part of our business derisking practices, we had already initiated plans

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