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Cipla Ltd
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Good day, ladies and gentlemen, and a very warm welcome to the Cipla Limited Q1 FY'19 Earnings Conference Call hosted by Kotak Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Talati from Kotak Securities Limited. Thank you. And over to you, sir.
Hi. Good evening, everyone. This is Chirag from Kotak Institutional Equities. I thank the Cipla management team for giving us the opportunity to host this call. From Cipla, we have with us today, Mr. Umang Vohra, our Managing Director and Global CEO; Mr. Kedar Upadhye, Global CFO; Dr. Ananthanarayanan, Global Chief Operating Officer; and Naveen Bansal from Investor Relations team. Over to you, sir.
Thank you, Chirag. Good evening, and a very warm welcome to Cipla's quarter 1 earnings call. I'm 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 that could cause our actual results to differ materially from what is expressed or implied. Cipla does not undertake any obligations to publicly update any forward-looking statement, whether as a result of new confirmation, future events or otherwise. I would like to request Umang to take over.
Thank you, Naveen and good evening to all of you. Before we formally begin the commentary on the quarterly results, I would like to take a moment and extend a very warm welcome to Ananth to the Cipla family as the Global Chief Operating Officer. Ananth, a Ph.D. in pharmaceutical technology, has had an illustrious career in generic pharmaceuticals spanning over 3 decades. Until recently, Ananth was the President and CEO of API Biologics and the generics B2B business with Teva based in the U.S. Welcome, Ananth.
Thank you, Umang, for the warm welcome, and good evening, everyone. I am extremely excited to be a part of this great organization. I look forward very much to drive various commercial, operational and R&D initiatives with support from the entire team. I would now request Kedar to walk us through the financials for the quarter.
Thank you, Ananth, and good evening to all of you. Welcome to our earnings call for the first quarter of fiscal 2019. I hope you received the investor presentation that we have posted on the website. I'll now take you through the financials for the quarter. Let me start with the core business margins. In terms of the quality of earnings, driven by the strong performance in our home markets of India and South Africa, combined with the contribution from API business, which operates at a very healthy EBITDA margin, the consolidated EBITDA for the quarter has expanded over 18.4 percentage to sales, an increase of over 330 basis points over the sequential quarter of Q4 fiscal '18. This was planned and in line with our expectations. For the quarter overall, income from operations stands at INR 3,939 crores, which recorded year-on-year growth of 12% on a GST-impacted base of quarter 1 last year. As mentioned earlier, the growth was driven by India, South Africa and API, which was partly offset by challenges in other parts of the business, such as our Global Access business in Europe. Gross margin after material costs stood at 64% for the quarter. This reflects a number of factors, positive one being currency, adverse being Chinese sourcing, commodities and oil price-linked material cost inflation, A; B, overhead charge due to inventory reduction; and C, certain one-off write-offs which we have taken in this quarter. We know there are pricing pressures, and our tender business is getting [ accentuated ] because of this cost inflation. During the quarter, we maintained tight control of expenses. Total expenses, which include employee costs and other expenses, stood at about INR 1,789 crores, declined marginally on a sequential basis. Employee costs for this quarter stood at INR 714 crores, an increase of about 2% on a sequential basis largely due to annual increments. The other expenses for the quarter, which include R&D, regulatory, quality, manufacturing and sales promotion expenses, stood at INR 1,075 crores and decreasing 3% on a sequential basis. Total R&D investment for this quarter stands at 7% of revenues. We expect this to get ramped up in the coming quarters in line with the progress on the generic Advair trials and other programs for the U.S. markets. EBITDA for the quarter stands at INR 726 crores or 18.4 percentage to sales. This is in line with our efforts to ensure year-on-year EBITDA margin improvement. Tax charge for the quarter stood at about INR 174 crores. You're looking at a full year effective tax rate of about 28%. Profit after tax stood at INR 451 crores, impacted positively by the second tranche of the divestment proceeds of INR 85 crores recorded in Other Income with respect to our stake in Chase Pharmaceuticals, which is working on development of an Alzheimer's drug. Although deals like this in specialty area are part of our routine business operations, they are booked in Other Income line below EBITDA due to the nature of the income being sale of equity stakes. Till date we have received over INR 245 crores from this particular divestment. Our long-term debt remains at USD 550 million, which was mainly used to fund the InvaGen acquisition. We also have working capital loans of about USD 61 million, which acts as natural hedges towards our receivables. Total net debt-to-equity ratio is 0.13. Outstanding forward contracts as a hedge for receivables as of June 30 are USD 126 million and ZAR 865 million. During the quarter, we have also hedged a certain portion of our forecasted export revenues. The outstanding forward contract as cash flow hedges as of 30th June are USD 131 million. I would now like to invite Umang to present the business and operational performance.
Thank you, Kedar. I'm happy to report that our quarterly operational performance was in line with our expectations and we performed well against our key priorities. Our key priorities were around India business growth, U.S. differentiated launches, respiratory franchise in the U.S., South Africa growth, emerging markets, biosimilar filing trajectory and our quality focus, and I'll talk to each one of them shortly. On our India business growth, our India business delivered a healthy 22% year-on-year growth with both prescription and generic businesses growing strongly. As you're aware, the quarter 1 FY '18 numbers were impacted due to GST-led de-stocking in the channel and the impact of the field force transformation. We also strengthened the portfolio further with a partnership with Eli Lilly for the -- for launching Basaglar, which is insulin glargine injection in India. U.S. differentiated launches, we are happy to report that against our guidance of one limited competition product launch every quarter, we are already tracking ahead with 7 all -- 7 overall approvals in Q1, including 2 limited competition approvals, Isoproterenol and testosterone. We are already noticing early signals of a revenue buildup on these products, which has helped us improve our DTM business gross margins. We recently announced the approval of diclofenac as well. We maintain our guidance of one limited competition launch per quarter and are excited about our pipeline products coming up for approvals. With respect to the respiratory franchise in the U.S., we are happy to announce we have successfully completed the pivotal trials for generic Advair and are initiating clinical trial recruitments. In South Africa, we continued our strong performance in the market with the business growing over double the market growth of 15%. In the emerging markets biosimilar partnering franchise, we had good momentum, and we're happy to announce that we have signed the deal on Trastuzumab for Australia, Colombia and Malaysia. We are maintaining a strong filing rate with 5 new filings in quarter 1 and are tracking healthy against a target of 20% for the full year -- 20-plus filings for the full year. And we continue to operate our facilities with highest level of compliance and control. As a closure, for both Goa, Indore and InvaGen, we received the EIR for all our plants. I will now talk to you through the business performance starting with our India business. As alluded to earlier, India business recorded a strong year-on-year growth of 22% on a previous year GST-impacted base. Key therapeutic areas delivered above-market performance, which includes cardiac, respiratory and urology. Most of these therapy areas, we have grown by almost 2 to 3 percentage points above the market growth. Our top brands continue to outperform the market. 16 out of our top 23 brands grew higher than market. Our key respiratory brands, FORACORT, Sereflo and DUOLIN, feature amongst the top 50 brands in the industry. We also entered into a strategic partnership with Roche, strengthening our oncology portfolio with the launch of 3 monoclonal antibodies. We also expanded our diabetes franchise by partnering with Eli Lilly to market and distribute insulin glargine. As you know, India quarter 2 growth is heavily dependent on the anti-infective seasonal push. We are continuing to monitor the situation as it unfolds, but the season seems to be a little delayed as -- a little delayed compared to the earlier years. Our North America business delivered sales of $100 million, in line with the same quarter last year and lower by 5% versus the last quarter. As alluded to the last -- in the last quarterly call, the supply disruptions continue to impact the quarter but are resolved fully and completely behind us now. Also, we continued driving value play in the U.S. market through rationalization of select low-margin [ SBU ] categories, which also impacted the recorded sales in this quarter. Having said that, the sales from new products, including budesonide, gemcitabine, palonosetron and Isoproterenol, contribute 30% to our DTM revenues and helped deliver 300 basis points in overall DTM gross margins. This is on expected lines as we move towards a healthier product mix in the U.S. with the ramp-up of new launches and rationalization of low-margin SKUs. We continue to maintain our guidance of one limited competition launch per quarter. The SAGA region, which includes South Africa, Sub-Saharan Africa and Cipla Global Access, recorded a growth of 7% year-on-year basis when reported in USD. Our South Africa business delivered yet another strong quarter, recording a 14% growth when adjusted for animal health for Q1. As for the IMS MAT, South Africa business grew at more than double the market growth at 15% in the private bucket. We will soon be launching the first biosimilar, Filgrastim injection, from our alliance with Teva. The South African business got a significant OTC boost with the acquisition, which is pending competition commission approval, of Mirren, which is an OTC portfolio present in South Africa. The acquired business has been growing over 25% in an OTC segment and is growing 300 basis points higher than market. As part of this acquisition, we will get access to 4 key OTC brands in the cough and cold and supplement segments. We see significant synergies with the acquired business and now have access to a local manufacturing facility as well. Our Europe business declined during the quarter, largely behind one-offs in the same quarter of the previous year. Having said that, the business continues to operate on healthy margins now. We have now taken various initiatives to improve traction on FPSM in the U.K market and several other respiratory products. In emerging markets outside Africa, quarterly sales declined marginally. Happy to announce that we have received the Pharma status for our plant in Morocco. Expanding our presence in Columbia, we launched 5 new products during the quarter. We also launched Dymista in New Zealand. Our flagship program in Specialty, a Tizanidine patch for the management of spasticity, is progressing well. We're also exploring injectable formulations for several products for epilepsy indications and are in current discussions with FDA for the development strategy. The company is evaluating several opportunities in the CNS space and other areas linked to motor -- to movement disorders as well as in respiratory, with a focus to service unmet patient needs. To close, we had a good quarter with significant progress on our key priorities. In the coming quarters, our focus will remain on development of generic Advair, driving profitable growth in the U.S. through continued focus on the limited competition launches, maintaining the India performance strategy and working towards the closure of the Mirren acquisition to drive the OTC expansion in South Africa and establishing our in-license biosimilar franchise in EM. We're also seeing some challenges in various parts of the businesses due to cost escalations linked to China-sourced materials, the commodity cycle and the oil price hikes. We are working towards mitigating these challenges through various efficiency and strategic initiatives. The Global Access business has been under pressure for some time largely behind the challenge -- challenges in the funding environment and continued pricing pressure on key molecules. Despite this rebasing, the CGA business -- despite the rebasing of the CGA business, we have been able to drive growth at an overall corporate level. I would like to thank you for your attention and will request the moderator to open the session for Q&A.
[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.
Just trying to understand the India business. So very good growth. How do we look it as a full year growth number, because I understand Q2 last year was a bump up? So how do we see at 6-month and yearly basis? And the second one is on gross margins, since India has done a very good growth in absolute terms. Despite that, we haven't seen much movement on gross margins. Is it largely impacted by the China disruption and the high prices of raw materials?
Yes. So Prakash, maybe I'll take the second question. I'll request Umang to answer the first question. So in terms of the margin movement, the impact of inflation because of China sourcing and commodities and oil [ exit ] price, about 30 to 40 basis points of sales. In addition to that, we've also seen certain overhead charge because of the inventory reduction. And there have been certain one-off write-offs. So this partly impacted. But going forward in the long term, I would like to believe our margins will stay in this range unless we get really high-margin product opportunities for the U.S. So in the near term, I would like to believe margins would stay in the current range.
So we would it not improve, sir, with the improvement in the U.S. and limited competition and the U.S. depreciating currency?
Which is what I said. The benefit of currency this quarter got offset by a couple of those items that I just alluded to. Once the contribution from limited opportunities in the U.S. goes up, it will reflect in the margins.
So currently for us, from a profitability perspective, Prakash, it doesn't impact as much as it does for other players because we are almost naturally hedged with the dollar and the ZAR and every other currency in the world, and we don't have very large business in the U.S. So therefore, it has had an impact on the top line but not so much on the bottom line. Coming to India business growth, I think your first question, normalized growth for the full year will not be more than 12% to 14%, which is going to be higher than industry, but that is where the overall growth for the year will be. And you're right, quarter 2 will show subdued growth because of the base of the previous year because of the opening up the GST. So our business fundamentals will be on track. But I think because the base effect of this quarter will bring growth down a bit.
Sure. And Kedar, you said overhead charges. Can you just give some more color there?
So this is the inventory reduction-linked overheads that gets booked in the material cost line. Sorry, inventory, as you have noticed, has gone down sequentially from the March quarter, which is what we are focusing on. And the overheads get booked in the material costs [ within ] the time. But that impact is hedged, it is offset, currency.
The next question is from the line of Neha Manpuria from JPMorgan.
My first question is on the U.S. business. Sir, how much of the rationalization is still remaining? Or should I assume that most of the impact from rationalization is behind us and we should see an improvement in the U.S. revenue, particularly given the new launches that we have seen?
Yes, I think you can take 2 things, Neha. First is, we had some supply challenges, right. They are behind us now completely. The second is rationalization. The impact of rationalization will go on for the next 3 quarters in the year, but I think what we will be losing because of rationalization will be about $4 million to our base per quarter, right? So versus last year, every quarter we will see a $4 million impact on account of rationalization for the next 3 quarters. However, this quarter, we have also had the same supply challenges that we had guided even in the previous quarter call, saying that we will have this issue for 2 quarters. All of those are behind us, but I'd like to believe that the impact of that for the quarter, the amount of rationalization as well as the supply challenges, was close to almost $10 million for this quarter.
And both of them included together?
Yes. Yes.
And I've been -- because we have seen 2 good launches plus the ramp-up of the existing differentiated launches. It is fair to assume that this quarter is probably the floor in terms of the U.S. revenue?
Yes, I think that is a -- that's well said. And yes, it is the floor.
Okay. If that is the case, sir, why are we still indicating gross margins remaining in this range? Because India, even if it's with the 12% to 14% growth rate, and the improvement that we have seen from the new launches, shouldn't our gross margin probably start showing that improvement in the U.S. business, which remains key?
Neha, it will go up. Like what I said, the improvement in the margins, henceforth, will lead to our trajectory for the limited competition launches in U.S. We won't be able to quantify that now. But yes, it will go up, and -- which is linked to the launches in U.S.
Okay. And my last question on the U.S. Last quarter, we had indicated about 10-odd launches for the full year. We are tracking ahead of that. So is it fair to assume that the number of launches in this year would be probably closer to 15?
Yes, you could assume that.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
Umang, you just mentioned about supply constraint. In fact, let's say, about $5 million in this quarter. Would you -- would that imply that all of that will you get in the September quarter now?
Yes, we will.
And can you just run us through a reason that almost we lost -- we had such good products, Dacogen and budesonide, and we lost almost 2 quarters' sales. That figure seems very high. I mean, among my experience of tracking the sector, I have never seen a company losing 6 months of sales because of supply issue on 2 key products. Well, in hindsight, was there an issue you guys could not have taken care of it? What was the reason? And how are you making sure that it doesn't appear again?
See, the Dacogen is not a -- so see, Dacogen had a different issue. And Dacogen -- I'm not sure that Dacogen is the issue for the supply. The supply issues are completely linked or largely linked to a facility in the U.S. Now Dacogen has been launched, but Dacogen has to open up because then, contracts open up in the market. So as and when the GPOs begin to tender, then that's the time we will bill for Dacogen. So I don't think that is linked so much to supply. Last quarter, we had some issue of supply, but that is not the major contributor for Dacogen thing. So Dacogen is a gradual progression to when the contracts open up. The supply disruptions are largely from the InvaGen side, not from India. See, the other thing that's happening, since you raised this on the U.S., Cipla's earlier business model was completely B2B in the U.S. We used to partner with companies and they used to sell. Now of late, we have done our own filings, and our B2B trajectory is coming down slowly, right. And as a result of that, I think the -- you will find that the overall income will start going up now. And if you look at our recent launches, we have shown -- our recent launches show that 30% of our revenues are coming from [indiscernible] from the new launches that we've launched in the last 12 months. So traction for new product launches is there. We've had supply challenges, and I think that's a result why the U.S. -- I believe then the -- that we have reached the floor in terms of the U.S. earnings or the U.S. potential for sales.
That's helpful, Umang. So basically, that implies that on budesonide, at least, we are at our contracted market share, that it's a steady state now, largely for us?
Yes.
And on Dacogen, when do we see the upside in this -- so because you mentioned last time that you already have more than 15% contracted share on that. So should we start seeing that upside from September quarter? Or should we have to wait for a little longer?
With Dacogen, we will -- I think we'll stay at the share that we have right now. It will be linked to the contracts opening up, which I'm hoping that, in the next 6 months, the contracts begin to open up and we see share expansion there. So Dacogen will be that story. I think diclofenac, we have just launched or about to launch. We have gotten approval. So there will be a fair number of launches which will be coming in which will improve the trajectory of the business. Isoproterenol, also we will see a good upsurge. It's been a good launch for us.
And on Toplexil, is that an approval that you expect this year or next year for Cipla?
I'm not going to comment. I think hopefully this year.
And just could I have one question? In the segmental disclosure, new ventures have suddenly become very profitable this quarter from a big loss, which has continued till last quarter. What has changed suddenly?
Yes. So about -- there was a note made in the financials about the income that we got. So we got a second tranche for the divestment proceeds of our stake in Chase Pharmaceuticals...
Oh, that's [indiscernible].
[indiscernible] INR 85 crores. Remember earlier, we had gotten more than INR 120 crores a few quarters back. So this is the second tranche here, and that is booked in the new ventures. So that's why it is showing a profit. So you could exclude that and then recompute the run rate for the quarter.
The next question is from the line of Nitin Agarwal from IDFC.
Umang, you have been mentioning -- you made a few references to the biosimilar launches in the emerging markets. I mean, how do you see this biosimilar opportunity in emerging markets? And I mean, how easy is it to get access to some of these products? And what kind of competition do you see in these markets?
So I'd like to say it's not easy to get access to the products. So every deal, therefore, is special to us. There are a lot of people who offer it, but by the time we finish our diligence and satisfy ourselves, it is only a few who we can go ahead with it. I think we have signed, we are completing the metrics for some of our key markets like Australia, New Zealand, Colombia and Malaysia. We have deep -- we have relatively deep presence here, and we want to make an impact with the launch of biosimilars here as well as in Algeria and Morocco. The -- I think the -- each product, if I was look at -- depending on the type of product, could -- if you are first and alone, it has the potential in each country to add almost $3 million to $5 million worth of annual sales. And in some markets, it could be a lot higher than that. So some markets, we could be adding almost up to $10 million of incremental sales depending on the product. So it's related to the timing of entry and everything else. But look at our emerging market base today. We do about $70 million of emerging market sales. So even if we get 2 biosimilar products in some markets, we're almost talking about a 10%, 12% uplift. But I think that will come only after a little period of time. It's not immediate and imminent, but it -- we will start getting this into our portfolio next year onwards as of today.
And how competitive do you see these markets to be apart from the possible advantage that you will see in some cases? Do you see this to be fairly competitive marketplaces? Or, I mean, how do you see them today playing out?
So some market we don't think will be very competitive, but some markets would be competitive. So I think some markets like Algeria, Morocco, we're not sure that we will see the same intensity of competition as we see -- as we will possibly see in Australia, New Zealand or Colombia. There the intensity will be a lot higher.
Okay. And then on the U.S. business, how -- we -- in the light of the way the market has played out over the last few quarters, and I guess even the way we've been around a certain dollar number for some time now. I mean, how do you see scale-up in this business? I mean, is it -- from where we stand, a meaningful growth over the next 2 to 3 years? A 50% -- 40%, 50% growth on our current base? Is that a realistic possibility? Or it's going to be very, very dependent on the approvals that we get?
Yes, Nitin, we'll refer to -- I mean, from quarter 4 and quarter 1, I think, we refer to this, whichever issues which are over now. And I think we -- [indiscernible] looking at tracking the statistics. So while the B2B to be part of the U.S. business is getting realigned more into our DTM. How much percentage of the current quarter's revenues is contributed by new launches based in the last 12 months? So that indicator is growing for us, Nitin. And these are all high-margin launches. We also, just like 7 in the investor deck, you can see that the margin improvement, because of this percentage contribution improving, is quite healthy. So to answer your question, it is very clear headroom for us. I think where we are today, I think the headroom to improve our U.S. footprint is very high. So we are not going to give you any guidance in the percentage growth, but our trajectory is improving. You will see it every quarter henceforth.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Just on biosimilar, what is the arrangement over here in the partnership for the emerging markets?
As in what, Sameer? Is it -- is your question in terms of margin sharing or...
Yes, exactly, commercial arrangements.
I think it will be roughly at market. I'm not sure that we would give individual specifics. But usually, it will be at deals that are seen in markets right now.
Which is roughly a 50-50 profit share?
No, I think it's going to be transfer price. In some places, the transfer price might include an element of profit share. And again, transfer prices today are based on certain projections of market price, so we have a correction possibility if the market prices don't act the way we think they will.
Got it. So sir, transfer pricing would be based on cost-plus basis, is it?
Yes, Sameer, yes.
Many of these deals impact the gross margin is -- as far as unbillable gross margin to date, on many of these deals, some not. So you should take it that way. Our preference is to sign pure-play and licensing deals without too much of a profit sharing.
Okay. And is there reverse volume commitment or market share commitment on your side?
Yes, many of these deals, at times, do have. The minimum purchase commitment, we do have, but those are achievable.
Okay. And just one final on this point. When you do enter these emerging markets, is this going to be the market creation? Or is it going to be the market share from the branded?
It depends on when we -- okay, so the -- on branded, it will be conversion, Sameer, because a large section of the world on biosimilar, at least in the markets we operate in, is still tender based. So we are hoping that it will be tender-based conversion. Some places where a limited detailing is involved, we'll also try and carve out. So what we don't know today, a lot of these markets -- and if you keep Australia and New Zealand out of the overall mix, a lot of these are still self-funded. What we saw in India was huge amounts of elasticity to how people react when prices are lower. We don't know how this will play out in these markets where, again, insurance is self-funded.
Okay, got it. Very useful. And second is on the domestic business. For all the in-licensed products, what -- again, what exactly is the commercial arrangement?
Sameer, for these domestic in-licensed products you should assume that the gross margin is relatively lower than company-level gross margin.
Okay, yes. Okay, got it. Okay. And at EBITDA level, I guess, I mean, it flows through because...
EBITDA level, also it will relatively lower, but we do see that as avenues to create market. Many of these are monoclonal antibodies and innovative products. So it's very important for us to get into these kind of arrangements with innovators.
Okay. And just thinking a bit long term, say, 5 to 10 years out, and it's not only limited to biosims, it's also to chemical entities, how do you see the domestic pipeline? And do you think you would be constrained given the inability to get some of these products in-house?
So [indiscernible], Sameer, get it in-house means do it by ourselves or sell it?
Because of the patent -- because of patent restriction.
Yes. So I think our whole strategy has been around that, that if we can't -- because of the patent regime, if we can't do it, we have to in-license these products, talk to innovators early on so that they have belief in our ability to create therapies. And once we have shown them the ability to create therapies, we become the preferred partner of choice. And that's the strategy that we have used. We are unique a little bit in India because we don't pay incentives to our field. And I think as a result of this, some of our partners and MNC partners actually like this arrangement because it doesn't induce any kind of practices in the field. So I think it's a mix of a couple of items in that I think it's building the trust with the partners and showing that we can help them shape therapies, providing access to their medicines and -- as well as the governance model of Cipla.
Okay. And just on the final point on this. So 5 to 10 years down the road, Umang, do you think this will be a sizable part of your domestic business?
Yes, I'd like to believe. I'd like to believe that, Sameer -- I mean, look, we are about $1 billion now in India. Five years down, I don't think that this will be an extremely large of proportion of where we are. But at the same time, in terms of incremental growth, this will be a large share of our incremental growth.
Exactly. Okay, fine. The -- just one final for -- with your permission and which is on the FX side. Kedar, how much would be the translation impact in the P&L this quarter given your dollar loan and dollar current assets?
Yes. So actually, Sameer, on the South African side, we had a loss. So the ZAR/rupee as on June is adverse as compared to ZAR/rupee as on March. So we had a loss there, and then got offset by dollar. This is booked below EBITDA in Other Income line. That's about INR 35 crores, IND 40 crores, to [indiscernible].
IND 35 crores, IND 40 crores net loss, is it?
No, no, this is gain. That's gain on dollar offset by a loss on ZAR. So that's below EBITDA line in Other Income.
Okay, okay. But I would have thought, given your large dollar loan, you would also be carrying a lot of negative dollar translation value, no?
See, the loan and the associated investment, the translation on that, Sameer, goes to OCI, the Other Comprehensive Income line in balance sheet. It doesn't come to P&L. It doesn't come to P&L because it's hedged, naturally hedged.
The next question is from the line of Abhishek Sharma from IIFL.
Just one question, which is basically around the recent sanctions that U.S. has put on Iran, which could prohibit companies from doing business from both the countries. Just wanted to understand what is our exposure to Iran? What's our presence there? And what could be a potential impact of such a sanction?
Abhishek, we conduct our business largely through LCA. So all our business is backed by the corporate [indiscernible]. That said, there is no current exposure. It will [indiscernible] be minimal, our preference will be obviously to comply. It is a intergovernmental matter, so our preference will be to comply. We are watching the developments, and we'll see which is the best way we can handle it, but whichever way it shapes up, we will comply.
But what kind of exposure would be there currently?
So current, as I said, we are a civil [indiscernible] because we do letter of credit backed exposure, so -- sales. So that way [indiscernible] are minimal.
But revenues?
Yes, yes. Revenues per quarter will not be more than $5 million or so.
The next question is from the line of [indiscernible] from indiscernible].
I wanted information on the Advair trial. How much of R&D spend would you guide for?
[indiscernible], spend on Advair trial will scale up in the balance quarters, this quarter we have as little as of 10 INR crores. So I think that you are booked in lots of preparatory work for the trial. You will see, in the balance quarters, the spend going up.
Yes, how much would that be?
We are still in the mode to finalize the number of patients, protocol, et cetera. So at this stage, probably it's early to comment on it. Going forward, we will comment when the things become clearer.
And would you commence this trial in FY '19 or would it go into FY '20?
No, the trial will be commenced now, as we speak. It will go into FY '20 as well. It will go into FY'20.
[Operator Instructions] The next question is from the line of [ Pravisha ] from Sharekhan.
So basically, my question today is to the tax rate guidance that we've given. We have said it will be 28% for the year. So I just wanted to know why the increase? And the other is that the other income is quite high, so we have said that it includes certain other ForEx gain that's there. Apart from that, what else would be the other income component?
Yes. See, on the tax rate, as you are aware, at an industry level, this weighted reduction has come down by half compared to the past. That is one factor. Secondly, one of our parents for domestic business is completely [indiscernible] incentives as of March 18. So that [indiscernible] has gone away. I think these 2 reasons are largely why tax rate is at 28% now. In terms of other income breakout, we spoke about this income from divestment of our stake. This is the second tranche of that divestment, so that is one, and the ForEx translation gain that we spoke about. These 2 are largely contributors to the other income line.
So just to reconfirm, it was -- the divestment income was around INR 80 crores and ForEx was INR 35 crores to INR 40 crores.
Yes.
Okay. And on the tax rate, just wanted to reconfirm that will this be stable at this level for the next 2, 3 years also? Because I -- or else we have some plans wherein we would like to get it down in terms of, say, some other plans where we will be putting up our investment?
This is -- we, internally, do have various plans for mitigating tax rate increase, but this is pretty much the rate at which we see our -- many of our peers also. So while, internally, we will deploy several tools to mitigate the heightened tax rate, I don't want to comment anything at this stage now.
Next question is from the line of Vishal Manchanda from Nirmal Bang.
I have one. The [indiscernible] gel launch in the U.S., the generic version. So will you be launching this as an OPC product? Or would this be generic substitute of Voltaren?
This is a generic substitute.
So that -- hello?
Yes, it's a prescription product generic.
Okay. So it won't be promoted like a brand?
No, no.
All right. So that [indiscernible] take in the $1 million sale that you mentioned in the press release is also related to the prescription product or it includes the OPC sales [indiscernible].
No, that is largely prescription.
The next question is from the line of [ Chirag Dharti ] from [ HTFCSF Management ].
Sir, just correct me if I'm wrong. It seems from your earlier commentary that Dacogen is not yet fully optimal contracted market share reflected in Q1. This understanding is right, sir?
Yes, that is correct.
Okay. And this $110 million, if I add back what you guided in terms of the quarterly impact, this $110 million, is this in line with what you set out a few quarters back for the [indiscernible] business? Are we tracking behind it, ahead of it? Just some color because, as investors, we just see the reported numbers. And $100 million going to $110 million doesn't seem like to have achieved a non-linear kind of growth.
No, but why not. Okay, so first let me just say, yes, I think it is obviously behind because we didn't plan for supply disruptions, right, that we had from our inversion facility. So yes, the number is behind. See, you have to understand the overall U.S. context is one of price deflation. Every year, we are losing about 10 percent of our revenues in the U.S. So whatever we are launching is offsetting that. And supplies never had this type of a trajectory of products and a base of products in the U.S. So I think now, as that trajectory is coming up, the growth will only start increasing further and further.
So adjusting for this $10 million, let's say $110 million for the quarter, that was in line with what you initially [ started ]?
That's right, that's right.
The next question is from the line of Prashant Nair from Citigroup.
I just had a couple of questions, more clarifications, actually. So if I got it right, this quarter, you had a $5 million impact on U.S. sales on account of SKU rationalization plus an additional $5 million due to supply constraints. Is that understanding right?
Yes, that's right, Prashant. Ballpark, in total, $10 million both from service availability and our decisions to rationalize the portfolio.
Okay. And all the supply constraints are now behind you and should not impact from the next quarter?
Yes, yes.
Okay. And the next question is on -- so of your, say, current $100 million, $110 million run rate in the U.S., how much roughly would be the market component? And how much would be B2B component which you had earlier?
So see, approximately 65% is tied to market pressure. And that's growing. That part is growing and B2B, by design, is coming up. [indiscernible] which is holding now may not hold true go forward. So there will be a preference for the median proportion to go up.
Next question is from the line of Surya Patra from PhillipCapital.
Sir, once again, on the B2B business trend, whether the strategy now, going forward, is to eliminate that part from the U.S. revenues?
So Surya, we [indiscernible] eliminated some of these relationships will, over time, get over. Our focus is going to be on DTM. So most of the new files are going to be through DTM. That's why the growth in DTM is going to be much higher.
Okay. But the net-net impact, the falling B2B business, rising DTM business, and the price impact all together, all put together, whether the growth movement would be continued or for some time there will be a kind of stagnation in our years' business?
Initial part of the call, we explain this. You will see growth. The declining B2B is by design. And growth in DTM is linked to scale-up with the market shares of new launches.
Okay. And do I understand from the API numbers this quarter is relatively much stronger compared to the trend, so whether this is a kind of a one-off quarter from that [indiscernible] or something else here?
I think there's a base impact also, if you look at quarter 2 of the last year, the base was very high because we had supplies of [indiscernible] to Teva. So I think the issue is that API, because of the delivery model, you can never be sure of how it plays out. So the base effect of last year was low. We have grown high. This quarter will be challenging to show growth at the same level of the previous quarter. But overall year-wise, we are looking at API business to grow between 5% and 10%.
Okay. Just one last question. Since always we already used to indicate that annually there is a likelihood of 1% kind of a margin expansion, and that should continue for a few years. So whether this is the year of break from that guidance?
No, [indiscernible] we will take targets for margin enhancements. While guiding externally, obviously, we'll have to be cautious. But there are opportunities in terms of both revenue enhancement and cost leverage. But [ gracefully ], yes. But it is satisfying that we walk into a zone now, which is 18% to 20% zone, either at the lower end or at the higher end based upon the specific quarter's developments. [indiscernible], that market enhancement will continue to remain our target.
The next question is from the line of Prakash Agarwal from Axis Capital.
Just clarification, the tax rate I missed, 28% you reported this quarter, but your guidance is 22%?
Prakash, we said 28%. So full year, ETR is in that zone of 28%, and a couple of reasons we said. One is the decline in the weighted reduction of R&D. I think that's clear [indiscernible] thing. And secondly, [ internally ], one of our plans, it had a sunset clause in terms of the export -- our export [indiscernible]?
So that's how you look at the full year as well?
Yes, yes.
And secondly, on depreciation, sir, it's actually moved down. I didn't understand what's really happened.
Yes. In quarter 4 there was some incremental charge. But the subject to capitalization of our rental equipments, it will keep going up.
So this is the base? Or it can go even further down? Because we have seen, actually, a bell-shaped $2 billion, $3 billion, $5 billion, $2.8 billion, now $2.4 billion.
Yes, So I don't know whether you are referring to the depreciation part or [indiscernible] amortization part. In amortization...
We get a [indiscernible] number, sir.
In quarter 4, in amortization we had a onetime charge so that has gone away. Think [ 2 ] launches, Prakash. So each launch in the first quarter, there is an additional amortization.
Okay. So this -- more or less, this would be the base and some incremental is what I understand.
Absolutely.
Okay. And R&D, you already mentioned that this quarter 7% but it would move up. And I think it was earlier given guidance of 8% to 9%, if I'm not wrong.
Yes, Prakash.
The next question is from the line of [ Prashad Molodani ] from Motilal Oswal Securities.
So have you launched [indiscernible]?
No, we have not launched. And we have not launched in the indiscernible].
So is that due to settlement or is that due to the in-process manufacturing?
We don't comment on specifics of products, but I think most people have probably figured out that we may have settled this front.
The next question is from the line of Nitin Agarwal from IDFC.
On the overall business mix, is it fair to assume that U.S. and India will be pretty much our primary drivers of profitability at least for the next few quarters?
Also our South Africa business.
Okay, fair enough. So in terms of -- if you look at a quarterly sort of variation in new businesses, I think in Q2 and Q3 would be relatively bigger quarters for the India business, is that a fair comment?
Yes, I would -- the Q2, Q3 will be bigger quarters for the India business, but on the base of last year in Q2, it would look subdued because it was GSP led, the restocking in quarter 2 of the previous year. But absolute-wise, Q2, Q3 will be larger.
A typical seasonality for this Q4 tends to be a slightly lower quarter from an India business perspective.
That's right.
Which has implications on the overall business.
That's right. And I think we might see a little bit of re-phasing of Q2, Q3, usually as season goes away by the end of quarter 2. But I think, this year, the season has started late. So we have not seen the seasonal triggers as yet comprehensively in the first month of this quarter for the India business.
Fair enough. And lastly we've had a reasonably good quarter by way of new launches in the U.S. This is one of our slightly stronger India businesses. You've not spent much on R&D. You're still at about 18%, 18.5% EBITDA margins. Will it be necessary for us to improve or increase our R&D spends? I mean, how much lever do we have increase our reported EBITDAs going forward?
We have some [ levers ]. I think, as some of the others have asked on the call, once we start doing a lot of the limited competition launches, our margin profile will hopefully go up, which will allow us to invest more in R&D. We have also said that we are not going to take R&D higher than 7.5% to 8% of sales. We are very clear about that.
Sorry to push the point, Umang, but our revenue growth has been a little muted, right? So far say that constrains us and if you go by that framework, it does constrain us in terms of increasing our R&D spend?
Well, it constrains as our revenue growth -- see, I'd like to put it the other way. This industry that we are in has muted or declining revenue growth. I'm not sure that anyone is showing spectacular revenue growth because there is pricing pressure all across the world. And we are not immune to that pressure. So I think the subdued revenue growth, you are right, will be there. And I think the margins, we'll have to solve for that by trying to run cost programs, et cetera. We'll have to fund this R&D from what we can do from an overall cost perspective in the business.
If I can squish a last one in. So are we exploring opportunities apart from organic spend on R&D to sort accelerate some of these programs through partnering or probably getting [indiscernible] capital in? Is that something which is an option there on the table for us?
Yes, it is there.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
First one is on the U.S. [indiscernible] [ momentum ], if you could tell us about the pricing in [indiscernible]. We seem to be getting confusing messages from different places and [indiscernible] is one. You talked about a 10% number but are you seeing something incremental where things are improving? For example, Rite Aid recently said they're cutting down their guidance. So mixed messages, anything you can tell on the overall industry? That will be very helpful.
See, I'd like to believe that it's -- I'm not sure that the pricing environment has improved. I think the declines have abated, and probably that's the way to put it. We have to realize that, at least what Rite Aid has disclosed, every year they saw a huge efficiency because of some buying group forming and something else happening and prices getting marked. So a new buying group was formed, they mark the price of wholesalers and retailers and that became suddenly a one-up gain. Right now, too. Once all of that has happened in the market, you won't see those spectacular gains, which is probably why Rite Aid announced what they did. But I think the issue is we have seen it stabler, but that doesn't mean that prices are not falling.
So that alludes your comment of 10%. So that is not something that you are willing to take -- improve on at this point of time at least?
Can you add more color to that when you say they can take and move on means?
No, I'm saying when you said assume $100 million quarterly that erodes 10% percent, so that number -- is that what you will kind of...
That includes the 10%.
Got it. My second questions is on China, and you had a small 30, 40 bps impact from a sourcing perspective. Are we doing something to kind of -- in the long term is there something that we can do to kind of mitigate against some of the cost pressures? And a related question on China, given the whole tariff wars that are happening, we have seen a lot of Chinese media reports that talk about them trying to invite more Indian participation in their [ generic ] market, so any thoughts again on these 2 developments?
In terms of indigenization, [indiscernible] at least of intermediates could examine some of those plans, but those are capital-intensive plans, so in terms of short to medium-term probably nothing much. In case of local sourcing, some of the opportunities could emerge. But [indiscernible] in terms of being able to mitigate cost increase or being able to pass on as price increases, I don't think we have -- we'll be able to do much.
And on the second one, on the tariff part, are we looking to get into China? I think that's the question.
We have a plan to get into China. And that's more for the respiratory franchise, but it's still early days for that. I think the Chinese authorities are accepting [ fines ], which have clinical trials turn in the U.S. or Europe, and we will capitalize on that.
We will take the last question from the line of [ Chirag ] [indiscernible] from [ HTFCSF ] Management.
For the past couple of -- for the past few quarters, we've seen good control on costs. As we get into the next 2 years, OpEx growth slower than sales growth. Will this sort of continue as we get into the next 2 years?
Yes, [ Chirag ], I mean, that's going to be our principle. [indiscernible] for internal for performance comparisons or target setting. Revenue and margin growth being higher than OpEx growth is going to be the principle.
So there is opportunities, still there is opportunity to sort of cut...
No, we would like to believe, we would like to believe. Maybe the low hanging fruits have been all exhausted, but structural solutions are possible. And we will maintain that as a management principle.
Will this be more from fixed cost or will there be sourcing benefits there?
Probably lower sourcing benefits.
Lower sourcing. And can you quantify the size of China imports for the full year?
Not the imports per se, but like what I said, up to I think 40 basis points to sales as the impact that we have seen in this quarter. Let's see how it pans out for the balance of the year.
Thank you very much. That was the last question. I will now hand the conference over to [indiscernible] for the closing comments.
Thank you, everyone, for joining us for the call today. In case you have any follow on questions, please reach out to the Investor Relations team so thank you, and a very good evening.
Thank you very much. Ladies and gentlemen, on behalf of Kotak Securities Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.