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Cipla Ltd
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Hi, good afternoon, everyone. On behalf of Kotak Securities, I welcome you all to the Cipla Q2 Earning Call. I thank the management for giving us the opportunity to host this call today. We have with us today Sir Umang Vohra, Global CEO; Kedar Upadhye, Global CFO; and Naveen Bansal and the Investor Relations team. Over to you, sir.
Hi. Thank you, Chirag. Just as an add-on, we also have Mr. R. Ananthanarayanan. He's also our Global Chief Operating Officer -- Ananthanarayanan, yes, sorry. Good evening, and a very warm welcome to Cipla's quarter 2 earnings call. I'm Naveen from the Investor Relationship team.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 future performance of the company. Please note that these estimates involve several risks and uncertainties that could cause our results to differ materially from what is expressed or implied. Cipla does not undertake any obligation to publicly update any forward-looking statements either as a result of new confirmations, future events or otherwise.I would now like to request Kedar to take over.
Thank you, Naveen, and good evening to all of you. Best wishes for Diwali festivities to all of you, and hope you get to enjoy the week ahead with family and friends. Welcome to our earnings call for the second quarter of fiscal 2019. I hope you have received the investor presentation that we have posted on the Website.Let me start with an overview of our performance in the first half of the year and certain initiatives which we've taken over the last 2 years. The quarter 2 reported performance has year-on-year comparison issues due to the higher pace of last year across almost every market. This quarter, we also faced certain [indiscernible] challenges, which we'll talk about in the call later. Having said that, we're tracking well in the first half, with key businesses continuing to stay strong.India business maintained its trajectory, growing 9% and 13% when adjusted for [indiscernible] in the first half. South Africa continued its strong private market performance. Substantial improvement in the end market performance was visible across our DTM markets, [indiscernible] markets, and the ramp-up of the U.S. sales [indiscernible] new launches.Over the last 2 years, we also saw significant gross margin improvement across our businesses of India, both prescription and direct business, South Africa, again, both private and tender segments, in all emerging markets and the U.S. DTM business, largely due to portfolio momentum and cost optimization, along with some [indiscernible] pricing. While this helps support market expansion and growth, we also saw the decline in the U.S. B2B segment [indiscernible] performance dilution due to price erosion and [indiscernible] global access business [indiscernible] diluting the numbers.I also want to clarify the impact of the recent currency movement on our performance. While complete acquisition shows up on the top line a bit, overall [indiscernible] line [indiscernible] since we are not [indiscernible] as some of our competitors. In fact, when considered to the impact of commodity and crude price inflation and the decision in China to supply [indiscernible] for this quarter.For the quarter, overall revenues from operations are at INR4,012 Cr. On the first half, it's INR7,951 Cr [ according ] year-over-year growth of 5%. As mentioned earlier, the growth was driven by India, South Africa, and buildup of the U.S. DTM business and new launches. This was partly offset by challenges in the other parts of the business, such as our global access business in Europe.Gross margin after material costs stood at 64.8% for the quarter. This reflects the positive impact due to currency offset, partially offset by the impact of commodities inflation in China.During the quarter, we maintained tight control on expense. Total expense, which included employee costs and other expenses, stood at INR1,898 Cr, increasing 6% on a sequential basis. Employee costs for this quarter stood at [indiscernible], flat on a sequential basis. Other expenses for this quarter, which includes R&D regulatory quality, manufacturing and sales and distribution expenses, stood at INR1,185 Cr, increasing [indiscernible] on a sequential basis. This increase is largely attributable to [indiscernible] costs in certain markets [indiscernible] initiative to sell our flagship [indiscernible] ANDA filings.Total R&D investments for this quarter stood at 8% of revenue. This ramp up is on expected lines as we progress on our [indiscernible].EBITDA for the quarter stands at [indiscernible], which is 18.8 percentage to sales. If you try to link this up with the [indiscernible] financials that were published to the stock exchanges, you would have to take into account certain costs which have been factored into OpEx and R&D line [indiscernible] reimbursement [indiscernible] income. So we have given a [indiscernible] to EBITDA bridge for the difference.Tax charge for the quarter stood at [indiscernible]. We're tracking at full year effective tax rate of 28%. Profit after tax stood at [indiscernible].Due to [indiscernible] over the last 3 quarters, [ there has been a ] significant focus on cash generation, and this includes taking various strategic decisions, including closing open litigations, divestment of the noncore businesses, such as animal health, [indiscernible] investments, such as our stake [indiscernible] Chase Pharmaceutical, monetization of the [indiscernible], successful IT work [indiscernible] subsidiaries [indiscernible] stock exchange and things like that. All this effort [indiscernible] quarters. We continue to [indiscernible].Our long-term debt [indiscernible]. We also have working capital also of about $60 million, which acts as a natural hedge towards our receivables. Total net debt-to-equity ratio stands at 0.15. Outstanding forward contracts as a hedge for receivables as of 30th September are $123 million and ZAR855 million. We have also hedged a certain portion of our forecasted export revenues. The outstanding forward contract as cash flow hedges as of 30th September is $121 million.I'm also pleased to share that India ratings have continued to [indiscernible] Cipla's long-term [indiscernible] rating at [indiscernible] AAA with a stable outlook.With this, I would like to invite Umang to present the business and operational performance.
Thank you, Kedar. I wish all of you a very happy Diwali. For us, this quarter was modest in terms of both [indiscernible] topics. Very clearly, we see 3 factors that have played out. This summer -- the first factor, this summer year-on-year comparison, you would note that last year's GSP-led restocking in both quarter 2 and quarter 3 means we have a much higher pace for domestic businesses, apart from a higher base in API.Also, last year, we had a strong season that had set in relatively early compared to this year, where the acute season has actually only set in, in the last month of last quarter. This alone is a significant driver of our performance in this quarter versus the previous year's quarter.Secondly, a couple of external headwinds came together in the form of commodity, pricing and ForEx as well as uncertainty around the funded environment of our tenders -- of our global tenders. This has created a more competitive scenario and has constrained performance for the tender markets across the board.Thirdly, we've got some work to do internally from a capacity and serviceability point of view. I think we could've done better here to ensure continued supplies to our global markets. And we're realizing that we're losing value on some of these, which in the coming months will be fixed.Among these challenges, I'm happy to note the continued momentum in our businesses. Let me begin with an update of our key priorities. On growth across markets, our private market growth across market segments remains very strong, both in India, South Africa, emerging markets and U.S.. In India, our business continues to deliver market-beating growth with strong performance across therapies. While we are actively rebalancing our acute portfolio, our chronic therapies have significantly outperformed the market, growing over 21% versus the 17% market growth as per IMS in Q2.We continued our strong performance in South African private market with the business growing over double the market growth rate at 14%. In emerging markets, our key DTMs delivered double-digit healthy end market growth. We had a good momentum in our biosimilars franchise development. And we're happy to announce that we've signed a deal on bevacizumab for Sri Lanka and Nepal.For our U.S. businesses, we are pleased that the business has now started seeing a quarter-on-quarter growth of 8% versus the previous quarter, with the business delivering 108 million in this quarter. We're happy to report that, against the guidance of one limited competition product launch every quarter, we are already tracking ahead. The quarter saw the approval of 7 new products, including key markets such as diclofenac gel, albendazole and atazanavir. Recently, we also announced the approval of metoprolol, yet another limited competition asset for [ the year ].On profitability, as our growth trajectory remains healthy, our profitability metrics continue to remain strong. In our U.S. business specifically, we are noticing early signs of revenue buildup of new launches, which has helped us improve our DTM business gross margin significantly.We have chosen to play our market sustainably. And our plan is to make our businesses more sustainable by focusing on our base DTM and B2B businesses along with responsible [indiscernible]. As a result of this factor and the uncertainty around the global funded environment, our CGA business is down 54%, and the South Africa tender business is down 20%. Despite this, our profitability held up during the period, despite R&D peaking at 8% versus approximately 6.5% in the previous year.In terms of quality and compliance, we continue to operate our facilities with the highest level of compliance and control. During the quarter, we had audits at our Goa and Medispray facility. I'm happy to share that the Medispray audit got completed without any [indiscernible]. We had 2 procedural observations in Goa. We have responded to the FDA and are confident that these will not have an impact on our operations.I will now take you through a more detailed business performance, starting with our India business. Our India business remained largely flat for the quarter on a year-on-year basis due to the higher base of last year and the late onset of season in the current year. On a half 1 basis, the business delivered a healthy growth of 9% year-on-year with both prescription and generic businesses growing strongly. When adjusted for the impact of GSP, the half 1 growth stands at 13%. As for [indiscernible], Cipla continued its outperformance, growing by 14% versus the 13% market growth.Over years, we have continued our number 1 position in respiratory, urology and antibiotics. Key therapeutic areas delivered above market performance. Cipla [indiscernible] cardiology and now stands at the fourth position, growing 500 basis points higher than the market and 19%. We also continued our leadership position in respiratory with significant outperformance versus the market at 23%. Our Berok Zindagi campaign launched during the quarter is turning out to be a benchmark therapy-shaping initiative to build people awareness about the important topic of inhaler usage.In our quarter call FY [indiscernible] earnings call, we have guided for FY '19 sales in India in U.S. dollars of $1 billion. Currency has moved much higher than [ our positive ] rate of 64. However, we are targeting to reach INR6,400 Cr including our [ ForEx, GX ] and consumer healthcare business in the current year.Our North America business delivered sales of 108 million, growing 12% year-on-year. As alluded to in earlier calls, the U.S. business is undergoing a change in mix as designed with the BS -- with the B2B business coming down sharply, as no new products are getting added, and the portfolio rationalization that we had initiated. These are impacting the reported sales for the U.S. business as the new DTM product sales increased, which is 40% of the Q2 DTM revenues were contributed by new products launched in the last 12 months. This will help us [indiscernible] significant margin improvement in our DTM business, in line with our internal estimates.We maintained a strong filing rate with 5 new filings in quarter 2, taking the half 1 count to 10 against a full year target of 20-plus filings.The SAGA region, which includes South Africa, sub-Saharan Africa and Cipla global access businesses, declined 25% year-on-year in quarter 2 when reported in U.S. dollars, largely behind the rebasing of the CGA business and the slower uptake in sub-Saharan Africa and the lower tender sales in South Africa.Our South Africa business delivered yet another quarter of ZAR1-plus billion sales, with private market business growing at 14.2% on a year-on-year basis. As per IMS MAT August 18, our South Africa business grew at almost twice the market growth at 14% in the private market. As per YTD August IMS data, Cipla became the third largest pharma company in the South Africa private market with a 6.3% share.Our Europe business declined by 14% on a year-on-year basis during the quarter, largely behind supply issues related to certain products and milestone payments in the previous year on account of the FPSM launch. We are working towards structurally resolving these [indiscernible] conditions to ensure our [indiscernible] are available for servicing.In emerging markets outside Africa, quarterly sales were roughly flattish and declined marginally due to some one-offs in the previous year. We are very excited about our biosimilars franchise in the emerging markets as we move closer to signing multiple deals. We also inaugurated our facility, manufacturing facility in Morocco during this quarter.As we enter quarter 3 and quarter 4, I'm excited to see that our momentum in our private market businesses will continue, but there are also external headwinds that will impact our reported performance in the short term. These involve items around the continuing commodity in China pricing-related issues, the rebasing of the funding -- funded environment-led business, which is the tenders and other businesses in the HIV and malarial segment, and the impact of sanctions in some of our markets, which will either come up as trade barriers or against countries which would face issues in terms of currency and volatility.Despite these challenges, we will continue to invest in the health of our business. And we expect our momentum to continue. Our R&D investments are already higher by a percentage versus the previous year. And our portfolio is queuing nicely towards most limited competition assets and inhalers. We are tracking well on our target of one [indiscernible] launch per year starting next year and one limited competition launch in the U.S. every quarter.We're continuing to invest in our quality systems and maintaining a strong state of control and compliance of our plants. We're also engaged in building our capacity sustainably and balancing it for the long term, especially with regards to a sterile portfolio. This activity did take us 2 to 3 quarters, and we are working on it in earnest.We have also invested a fair amount of our bandwidth in the previous 2 or 3 quarters in evaluating multiple assets in the specialty space. We are in advanced stages of discussion on some interesting [indiscernible] assets in the institutional business space.For the next 2 to 3 quarters, our quarterly profits may not see a materially significant change from this quarter. Considering our long-term aspirations, we are preparing for the next stage and positioning our business for sustainable and profitable growth.Thank you. And with this, I would like to thank you for your attention and will request the moderator to open the session for Q&A.
Good. My first question is, throughout the call, several times, you have mentioned about general supply issues and capacity [indiscernible] impacting [indiscernible]. Could you give us specific -- with specifically around which businesses [indiscernible] got impacted and roughly what would have been the total impact on the quarter? And a follow up on that, how much time would it take for us to actually resolve this fully? When would we start seeing the full upside of [indiscernible]?
Here, we are looking at approximately INR100 Cr a quarter, which is the impact of some of our facilities. This is impacting about 1 or 2 of our facilities. And it is across markets. So it's not for any one particular market. It's across markets, and we think it's about INR100-odd Cr per quarter. These are fairly significant margin products that are impacted. So I'm not going to give a guidance on what side -- what type of businesses. But this is a fairly significant margin businesses impacted across our markets. So it's about INR100 Cr a quarter. That's one of the issues that we're facing. And it's regarding real sites. It's not at the site in [ emergent ], which is already resolved.
And so you think it's surprising that because you've been talking about resolving other supply issues that we had for the U.S. market, that this has cropped up now? It seems to be like an ongoing issue when it comes to supply disruption in Cipla at least for the last few quarters.
Well, actually, the first set of issues were more limited to our emergent facilities. This is more -- we have to pause if we have to grow. This is that line of manufacturing where we will have to take some -- and manage to continue to sustain and supply reliably. So I think many companies go through this. We are not unique. You have to take a pause for a quarter or a slightly longer period than that to rebalance your supply so that you can sustainably supply over a period of time in a strong set of compliance and controls. So I don't believe this is going to be too much longer. But at the same time, it is what we have to do. We will have to rebalance it. So it's not a surprising issue because, if I look at it, I'm not sure that I at least believe in the fact that our businesses of our sites have no supply issues at all. I don't think that world exists. There will always be some supply issue or not. The question is how upfront we are about telling you about it. And I think what we're basically just trying to say is that we've had this issue in our numbers, and it's going to be big for a quarter or so more.
Understood. And the second question, still on the second half, [indiscernible] second quarter, right, you're tracking ahead in U.S. in terms of limited competition launches. India, hopefully, the [indiscernible] seasonality [indiscernible] you should have a better third quarter. And your other markets also, you seem to indicate growth momentum being good. Intimately, one of the issues that you mentioned seemed to be worsening. What -- any reason for why we're more highlighting the headwinds significantly for second half impacting the performance?
No, I don't think we're -- we just said the commodity pricing will continue. So commodity, China ForEx-related issue will continue. We highlighted that the tender and funded environment issue will continue. Those are not going away. They were there in part of our last quarter. They're going to be there [ additionally ]. But also remember that Cipla operates in a part of the world where the U.S.-related sanctions do make a difference. And there is some impact of that that will additionally come in. So I think we're highlighting just that. And we are saying that our quarterly profits may not show a materially significant change. And if we're operating at about 18.5% [indiscernible] of EBITDA. I think we're 18.8% of EBITDA this quarter. I'm not sure that we're signaling that this is doomsday, but we're just saying that we have to be cautious about how we anticipate our future quarters.
And your next question is from the line of Anubhav Aggarwal from Credit Suisse.
Yes, just to [indiscernible] this [indiscernible] impact you talked about into sales impact [indiscernible].
INR300 Cr sales, but this is very high margin. So I would expect the conversion into [indiscernible] to be fairly significant.
Okay. So more than 50%, 60%, which…
Yes, yes, more than that.
And now for India business, are you sticking to your sales growth guidance that you talked about INR6,500 Cr thereabout [indiscernible]?
Yes, I read it out in my script. We are holding to INR6,400 Cr to INR6,500 Cr between our 3 businesses.
And just one clarity from Kedar. For this sharp increase in receivable days, very sharp increase, like almost like [indiscernible] increase in receivables, and in fact, these also extended from 75 to 90 days. What was that driven by?
Yes, so [ overall ], I think the September month billing incremental is higher than June month. So there's just that one-to-one difference. And also receivables is [ bad and hopeful ]. We also have an impact in new launches in U.S. So as you know, the [indiscernible] percentage for U.S. is a little bit skewed. The working capital cycle is a bit [ watered ]. Most of the times, you pay deductions in advance. And after some time, you collect the gross receipts from the customer. And we have got into that cycle this quarter. And we will get back to a much more decent position by December quarter.
Okay. [ That makes sense ]. So if I can just ask one more clarity. Your DTM sales have increased by $4 million to $5 million sequentially. So last quarter, when you talked about all this [indiscernible], which $4 million to $5 million sales will come back, all of that has come back in the U.S. business now?
Not all. Not all, but I think a large portion of it has come back. And if you look at our delta, just to link your question up with the receivable question, a delta of 8 million is almost a delta of I would like to believe 30-plus million on receivables because that's the value of the new -- the gross-to-netting of the new products that we're launching because we've launched 7 products this quarter as well. So if you look at the delta of the receivable increase in the U.S., that's what's probably causing that. Then you have ForEx, which would've also caused it.
Thank you. Next question is from the line of Prakash Agarwal from Axis Capital.
[indiscernible] this number, this INR100 Cr is -- this number is the tender number, or which number were you referring to?
The INR100 Cr was an answer to a question raised by someone on what did we lose on account of our capacity issue in -- and that is the number we mentioned was INR100 Cr.
Okay. Okay. So my question is actually on the tender and the possible loss on the sanctions. Are we sharing what kind of in terms of percentage -- and you said it's across the market. What kind of loss of sales are we expecting?
No, I'm not sure we're going to share that. I'd just like to tell you that, to a large extent, this is part of our numbers in some markets, and there will be some additional markets [indiscernible]. It's not just the sanctioned countries that we're talking about. We're talking about the general environment in a lot of the Middle East countries that we operate in, where there is extreme amounts of volatility and lack of liquidity. So it's encompassing not just sanction countries, but it is going even beyond that. So as a result of that, we expect a slight incremental impact quarter-on-quarter. But it's not something which is preposterously large.
And would it be fair to say that we -- these businesses are in line or a little lower than the company average margins?
No, I think -- I don't know, Kedar? On the tender side, yes, Prakash. On the tender side, yes. And that's why the overall gross margin and percentage EBITDA has held onto our historical trends.
Fair enough. And secondly, why talk about commodity and crude prices being -- or say, getting impacted now? It's been there for last 3, 6, 9 months, the China disruption, and actually started to ease off is what I understand from other companies. So are we -- were we hedged earlier, and we might see some impact now, or how to think about it?
I think consumption of the higher priced goods probably has started hitting in the P&L now. I think first quarter the impact was quite low. This quarter, the impact almost doubled compared to first quarter. And also, we spoke about this in a previous quarter as well. We've actually been talking about this for the past 2 quarters. It's not the first quarter that we've spoken about.
Perfect. And lastly, if I may, I had one more on the launches that we are doing. So we are getting good approvals. But how are we tracking on the launches? Are we able to take the fair share of the market, or are we seeing [indiscernible] pressure in the U.S. market?
No, I think our new product launches -- so we've started a little bit in the previous 1 or 2 quarters with this. But at this quarter, we've seen that -- we've seen the uptick. We are getting a fair market share by value for sure. And I think our metrics are looking good. We're feeling quite optimistic about the launch thing in the U.S. So I think we feel better about the U.S. market [indiscernible] than we did about a quarter or 2 back.
And any pricing comment with that?
Pricing, if you're asking whether the pricing environment has stabilized, I'm not sure I can say that as yet. Do I think that the overall optimism in the market has increased? Yes. But is it reflecting in the pricing number that we see today? I'm not sure I can say that.
And so I meant on the products that you are entering. Are you taking a decent record to get some market share, or are you able to [ come at this ] in the prices or how it is in the market?
I don't think we'll ever come at this similar. I think the starting point for any price-related share in the U.S. is seldom lesser than 15% to 20%. And that's the minimum.
Next question is from the line of Saion Mukherjee from Nomura.
[indiscernible] I tell you the standard part of the business, can you take us through what's the quantum, what's the size of this business? And secondly, how much more it can decline, so both global access and tender business? And I think you mentioned about South Africa tender being down. Was that for the first half or in this quarter? And is there a reason for the sudden decline there?
Yes, Saion. Emerging market business, about 1/3 of that is tender. South Africa, about 40% is tender. And global access pretty much is all tender. [indiscernible] on the South Africa, I think this was [indiscernible] this quarter. So I think first quarter, we're talking about -- this quarter, we saw certain pressure on the South African part. Global access has been pretty much continuing. I think we have [indiscernible] this trend on the portfolio. But this current portfolio is pretty commoditized. And emerging market countries, basically, we sense certain pressure. So that's how it's played out. We won't want to give at this stage how it could decline further, but I think we are happy that the private market segments across the markets are looking healthy. Market shares are up. [ Ranks ] are up. And we'll continue to focus on both private market and tender in the coming quarters.
So you're not driving for -- but how much is the revenue of all tenders and global access put together last year?
[indiscernible] specific numbers. As I said, South Africa should be about 40%, in EM about one-third, and most of the global access is tenders.
Okay. But…
This overall tenders, Saion, overall tenders for the company could be coming in at something like approximately 400-odd million or thereabouts, right? Not all of it is -- and a large chunk of it is our global access business because that is almost more than 50%, 60% of that. That depends on the funding environment for the global fund. And I'd like to believe that that environment is the same for everybody across our competition [indiscernible]. The South African tender is -- like Kedar mentioned -- is about 40% -- 35% or 40% of our business. That tender actually is -- that is the -- this is the first year we've seen that being impacted. But again, that's a funded tender by the [ government ]. So what happens is I think, when there's a liquidity issue or when the funding environment changes, those tenders get impacted.
Okay. Okay. And my second question also on the U.S., Umang, so you mentioned you see good launches coming. I'm just wondering, compared to your expectations because you're working with launches, but still, the ramp up is slower, maybe because of competition. So the kind of traction that you've seen, how much of that will you think -- or I would say that the number of new launches that you have and the revenue potential, expectation around that, has that changed over the last few quarters so you've given that there are more number of players in the products that you've launched?
So good question, Saion. I'd like to say that we look at our business in 3 parts. We look at our business in the case of emergent. We look at our business in terms of the DTM launches that we're doing. And we look at our B2B business. So what we found is that, on the DTM launches, we are possibly about 95 -- within 95% of our targets. It is not that we are much behind. So I think what we are selecting, launching, and this is showing up in the margin pull-through. In our B2B business, we have declined a lot faster than we thought we would. And the impact from that has come larger. And actually, in some ways, that's linked to the price, the general price deflationary impact in the U.S. because, when the partners see the price decline of 15%, we get a large share of that as well. So I think, in the B2B side, we've seen a fairly significant decline, possibly more than what we could have -- possibly more than what we had anticipated. And also, a large chunk of our supply is also linked to this B2B section. Supply-related issue is linked to our B2B section in the U.S.. So we've seen a much higher decline in the B2B. On the emergent side, frankly, we're now stable. We're not seeing the type of decline or anything else. I think we're stable with our business. Lastly, the portfolio substitution which is happening. So the delta that we are possibly seeing on the DTM is much higher than the 8 million that you're seeing aggregated because the 8 million had captured a fair amount of B2B that's declining within those numbers.
Okay. Then finally, Umang, you mentioned about initiating on the specialty side, where you're in advanced stages on some of the assets. I'm just wondering, can you share some details about the therapy again? What's the kind of investment that you would be comfortable doing in this space currently?
Saion, a little early. We'll talk more about it in hopefully very near term. But it's -- we're looking at the institutional space in the U.S., which could be the hospital areas, etc. We're looking at the CNS space, and we're looking at respiratory.
Okay. But one of your comments suggest that, in terms of commercializing, it should be like over the next 2 years, right? You're looking at [indiscernible].
That's right. So we're looking at a mix, but yes, 1 or 2 of some of those assets could be ones that we commercialize within 2 years.
Next question is from the line of Sameer Baisiwala from Morgan Stanley.
Umang, what's your revenue [indiscernible] for the U.S. business [indiscernible]?
What would that be? Approximately -- not -- okay top 3. Top 3. You mean the total, not just emergent, or total U.S.?
The total U.S. gaba, [indiscernible] and buproprion.
Less than -- I would say closer to 15-odd percent.
All 3 put together?
All 3, yes, roughly about 15-odd percent.
Okay. I would've thought higher. The second question, Umang, is for gaba and buproprion, is there a gain [ or not ] I would say over last 3, 6 months? Anything specific that's going on [ over there ], the market share for these 2 products? These are now your top 3.
I think gaba, there was an issue of some supply issues in the market. Bupropion, nothing that I've heard of, Sameer, nothing from our perspective. And also, just I'd like to caution you. Most of these products, both gaba and buproprion, are made in our emergent facilities. So when we were guiding saying that we had these issues with production, once the production is resumed, they'll go back [ farther ]. So I think that's probably what's happening in the market.
Okay. That's very helpful. And secondly, metoprolol XL approval, do you see that there's still a very remunerative product? What exactly can you achieve from this?
Sameer, I think it'll take -- well, I'm not sure it's as lucrative as it was -- as it would have been about 2 years back for sure because there are more number of people in the market. I don't have -- have a number in mind, but I don't want to give it. But I think it's not -- within a range, I think this could be within overall 3% to 4% of our revenues or higher.
Okay. And that's a challenging one because, if it's one -- if you're counting this as one of your [indiscernible] quarter [ complex ] for that launch, and if it [indiscernible] end up being whatever, $10 million to $15 million drug, then the definition of a complex high-value product [indiscernible].
It does. It does for sure. But then some of these, we can't predict timing. But for example, when I look at an albendazole or I look at a diclo gel, right, those are good examples of limited competition. This may not be a great example of a limited competition launch.
Okay. No, that's fine. And the next question, Umang, is [indiscernible] this year it will be challenging, and you're forewarning the next 2 quarters. But I guess in diclo, we need to look a little beyond that. And I don't want you to give us the guidance [ for next year ], but just if you can give some color of what to expect beyond this year as we get into the next one?
Kedar, would you like to…
Yes, so I think maybe some specific thoughts about the next year will be given by the May earnings call, and that may be a better time to talk about it. But I would expect [indiscernible] to emerge out of even the guidance that we would give at that point of time. I think the private market [indiscernible] for India, has been for emerging market, been for South Africa. I would expect us to outperform the market. I would expect to do [indiscernible]. And to certain extent, I think many of these launches which will happen both quarter 1, quarter 2, and many of these in Q3, Q4, I would expect some kind of annualization impact in the next year. Sameer, I would leave it there at this stage, and we could come back specifically.
[Indiscernible] would you say that it could be business as usual, both on the top line and margins, and we should really be catching -- counting on a catchup for what you are losing in this year.
I would [ seem to think so ]. But about the corrections on the tender side, unless the portfolio gets significantly rejuvenated on the global access or a few other tenders unless the portfolio gets rejuvenated, which we expect to do, we expect to start that work on. But I leave it here, Sameer, and other specifics, we'll come back later.
Your next question is from the line of Surya Patra from PhillipCapital
So just for that on the tender business and the global access business all put together, so like going ahead, do you have any sense [indiscernible] the state of this entire portion tender business, will you [ sink ] to a kind of a minimum number or something like that in the following year that it was in the -- you're looking at -- or any sense on that front?
[Indiscernible] depends on the funding environment. This year is a very -- I would say a severely constrained funding environment. I don't know what happens within the funding environment of next year. We've seen this pattern that you have some ordeals, and then suddenly, the -- it reverses because the number of [ frequents ] required goes through the roof. So I think it is what it is. And our CGA business has rebased quite significantly actually. We're almost 50% plus down. And that's a large amount because this business last year was almost $160 million for us.
Okay. All put together.
All put together. So if you can imagine the annual impact of the rebasing of this business, it's $80 million. It's not less.
Okay.
And when you look at our top line growth, it's largely on the tender side and this funded environment side that we're seeing challenges, whether it's here or in South Africa. And therefore, it's -- while the private market looks very exciting across our 3 businesses, core businesses, and some of the DTMs in the emerging market, it's very difficult to compensate when you have these type of declines happening in the tender market and the funding environment of the CGAs. The good thing out of all of this is that profitability has stayed intact. And we've managed to that. And I think we will continue to manage to more profitability and cost initiatives.
And on the [ years ] front of this, is it possible to have a sense that, out of the pipeline or for whatever [indiscernible], how is this part of the DTM portfolio, and what [indiscernible] business [indiscernible]?
So we are implementing most of the NDAs that we're filing now are for DTM business. And most of the [indiscernible] in the pipeline is also largely for DTM portfolio.
Okay. Is it fair to [indiscernible] whatever the product filing by this [indiscernible] is not part of the DTM portfolio?
In [indiscernible], in fact, it's largely DTM. Most of [indiscernible] is DTM portfolio.
Okay. And this last one question on the B2B business front, so now obviously, it is -- there is a kind of [indiscernible] plan kind of reduction in the B2B business, but going ahead, are there -- what is the future of it, whether it is going to be eliminated completely so that the profit for [indiscernible] the remaining business would be strong enough and that will, therefore [indiscernible], or what is the --
Surya, we are not seeing B2B business -- I think, by design, as we're not seeing new molecules into [ fast stream ] of our revenue, it's phasing out. I don't expect that to become zero, but I don't expect that to grow.
Okay. And [indiscernible] of the product portfolio in the U.S., is that over now, or anything strengthening on that front?
No, it's not. It's not. Largely, it's not.
[Operator Instructions] Next question is from the line of [indiscernible] from Invesco Mutual Fund.
[indiscernible] question is pertaining to the gross margins. You're seeing improvement year-on-year as well as in quarter-on-quarter basis. How much would be [indiscernible] tender basis and the [indiscernible] business? And how much could be improved [indiscernible] margin improvement between margin improvement and [indiscernible] business? Profitability has been covered.
Yes, [indiscernible] profitable. I would say most of the gross margin improvement is linked to the product mix efforts taken by us, cost optimization, and overall portfolio momentum.
Okay. Okay. And if I were to stretch this thought further, [indiscernible] keeping in mind the kind of current situation you're going through and once the business normalizes ex of tender, the delta of [indiscernible] has not currently been seen from gross margin to EBITDA because of [indiscernible]?
Should be [indiscernible].
Okay. And second question is pertaining to the sanctions, limited challenges which we come across. What is your exposure to those kind of countries in terms of revenue and in terms of [indiscernible]?
Actually, the [indiscernible] challenges relating to [indiscernible] sanction countries. I think the whole funding environment is [ priced ] across our businesses. So they are -- as we said, they are in emerging market. They're in South Africa. So it's throughout our regions. These are not only for sanction markets.
Next question is from the line of [indiscernible] from [ Quantum ] [indiscernible].
This last time when we spoke, we spoke about priorities being -- one of them being the emerging market biosimilar. Like [indiscernible]. And number 2, on Proventil, [indiscernible], please?
So on biosimilars, I think we've really had good momentum. I've really seen a lot of momentum for the emerging markets. And we actually also announced that we signed --
[indiscernible].
-- in Sri Lanka and Nepal. But the momentum is going strong. And we expect that to continue. And hopefully, we'll [indiscernible] more deals to be signed over the coming quarters.
How many new contracts should we [indiscernible] in the next year [indiscernible]?
[Indiscernible] across the countries and be several countries.
Any market size we can address to this or put a number to this?
More than 15%.
Okay. And on Proventil, if you could give me some [indiscernible], please?
The Proventil's on track. I think, originally, we had guided to say that, in half 1 of this -- of the FY 2019/'20 year, which is next year, there would be a launch. I think we're about a quarter or 4 months delayed from that, but on track.
But should we [indiscernible] to that or [indiscernible]? I don't know.
We're hoping. We're hoping.
Next question is from the line of Nimish Mehta from Research Delta.
A lot of my questions have been answered. Just two clarifications. You mentioned that the reason for high gross margin is the lower tender. Is that right, or am I missing something?
[Indiscernible]. So, Nimish, what we said is, obviously, gross margin will [indiscernible] by several factors. Both for the momentum in U.S. and business mix, and [indiscernible].
Okay. But so how do you [indiscernible]?
Yes, so mainly, I would say that large part of the margin improvement should not be attributed to tenders going down.
Okay. But so if can you then tell me what are the last [indiscernible].
Nimish, maybe we can take it offline. I think --
Okay.
-- this is also this chart on the U.S. market that we have spoken. And the [indiscernible] in that part of the segment of the U.S. is -- in fact, over 2 years, we did almost 30 percentage points. So I think all those factors are more important in the marketing.
Okay. And secondly, on the tender business, so have we seen any particular product or a set of products that got impacted [indiscernible]? And is that impact due to -- on the pricing as well as on the volumes, or only volumes?
I think it's both. Even volumes are constrained because of the funding environment. The pricing is probably constrained because there are more people bidding for the same tender. Then some of those prices have gone to irrational levels. But I do want to say that it's a factor of both, and I think it's largely around the ARV and malaria business.
Okay. But [indiscernible] funding issues have resolved [indiscernible] coming back to the [indiscernible] original levels or maybe --
I can't comment on that because these are global funded [indiscernible] funded. So I have no clue on when they will be resolved. And so that's the reason we're just being more cautious and saying that this is how we look at our business going forward for the next 1 to 2 quarters.
Next question is from the line of [indiscernible] from Goldman Sachs.
And the first one is just trying to reconcile the EBITDA number that you put out on [indiscernible] because of the other income [indiscernible]. Could you give us some color on what these items are? I remember you spoke about R&D and OpEx [indiscernible] more color on [indiscernible] going forward the next quarters?
I think our EBITDA for the quarter, there is not much nonrecurring benefit. You could take the cost, which was booked in the OpEx and R&D line. So you go by in terms of classification, as for in this, so sometimes, incomes get booked in other operating income line or in other income line. But at times, we're not going to adjust the costs which get booked for [indiscernible] income. So I think if you would refer to Page 3 of our press release, we have given a bridge from [indiscernible] to EBITDA. And [indiscernible] 18.8 percentage for this quarter. That percentage of EBITDA we should believe is a recurring percentage for this particular quarter. You would also note that multiple companies include finance income, investment income and some of the divestitures related [indiscernible] EBITDA and ForEx as well. We don't want to do that. [Indiscernible] incomes because of all these 3, 4 reasons that I said. We exclude it from EBITDA. Similarly, [indiscernible] in first quarter. Well, that has been taken out. So we are at about 18.8 percentage for this quarter, 18.4 for the first quarter.
The second question is based on the bevacizumab [indiscernible] remember a few quarters back you were [indiscernible] for bevacizumab. So is this [indiscernible] related to the trials you're doing, or is it [indiscernible]?
It's [indiscernible].
All right. All right. And final question is this point on [indiscernible]?
So I think that the numbers are driving. We've -- after we've launched it with the CPG Group in -- after we took back the position of the asset and we've launched it, I'd like to believe we are closer now towards a 10% share -- of between a 7% to 10% share. And we're continuing to grow this. The pricing is a little lower than when we started. But we're feeling quite comfortable and confident about where we can take this.
Next question is from the line of [indiscernible] from [indiscernible].
My question pertains to the EMEA business. Why is the EMEA business lagged? And where do you see it growing for the next 2 quarters?
Yes, [indiscernible], if you notice in the press release, we have grown sequentially by 6 percentage points. So I think compared to quarter 1, we have grown by almost INR100 Cr. You [indiscernible] comparison last year was a restocking quarter after the [indiscernible] implementation and [indiscernible] the fact that [indiscernible] season onset was quite delayed. That's why we are flat. But if you take [indiscernible] percentage in the first half.
Thank you.
Take last 2 questions, please?
Sure. Next question is from the line of [indiscernible] from [indiscernible].
Just trying to sort of tie in what we earlier mentioned as the [ exhibit ] for Q4 at about $125 million in the U.S.. Was this [indiscernible] in the second quarter? From your commentary is that, for most markets, Q2 has seen -- first half has seen a reasonable [indiscernible]. Then why is it that our profit guidance of similar run rate in the second quarter? What is it that you're building as declines in the base?
The $125 million, I think that we feel good about at an exit level for quarter 4. Please note that, in quarter 4, the India seasonality begins to be worse. It is the weakest quarter for the India business in the entire year. So when we're saying that we're going to come in at not materially significant change in profitability, and this quarter, we're announcing 18.8 on EBITDA. We're announcing about INR750 Cr on EBITDA. I think we're saying that we're likely to be in that range. It doesn't mean that we cannot be higher than that. It doesn't mean that we can't be marginally lower than that. And right now, we're facing multiple headwinds and the tender. If you just try and understand the tender side of our business, and we're losing almost 100 million, 120 million on a full year basis because of this. And there is an impact on profitability with it. So we…
But that is in the base, no, in the second quarter base.
There, but it will come even further because we don't know how much of the funding environment will further constrain quarter 3, quarter 4. We don't know the impact of volatility on account of sanctions that will come. So we're just cautioning everyone about it. We're not saying that, because of this -- everything is off from the business, and there is no business to run. We're -- that's not what we're saying. We're just cautioning that there is an environment of uncertainty. And we are giving you a guidance based on what we think is the best outcome in that environment.
And if Q2 push out of the season, is this business lost? When you say that the impact of season has been pushed out, is this business lost, or will we recover this in the coming months?
I think the -- so first of all, I think the season itself in my view has contributed almost INR70 Cr to INR80 Cr lower [indiscernible] in India, in our India business. And I think a large portion of this is lost because, even if the season comes in the last month, it will not last for so long because the season is driven by the monsoon and factors like that. So a large portion of that is lost. And the impact of that is almost close to INR60 Cr, INR70 Cr this quarter.
And just [indiscernible] on the U.S. business, as it stands today at this $108 million in the U.S., what is the EBITDA contribution from the business?
[indiscernible] for this quarter…
[indiscernible]
[Indiscernible]
Close to breakeven.
[Indiscernible] and the depreciation numbers, so can you split between amortization and depreciation and comment if this run rate on a quarterly basis is sustainable?
Yes, you should take the [ character ] of the split. We will share offline, [indiscernible].
Next question is from the line of [indiscernible] from [indiscernible].
Coming back to [indiscernible], you mentioned that you're doing well [indiscernible]. So can you mention how much is [indiscernible] in 4Q? And if you can broadly split that between major markets, that would be helpful.
[indiscernible] we can share [indiscernible] offline.
Okay. No problem.
[indiscernible] offline.
Thank you. So that was the last question for today. I would now like to hand the conference over to the management for their closing comments.
Thank you [indiscernible] for joining us for the call today. Wish you a very happy Diwali, and take care [indiscernible].
Thank you very much. Ladies and gentlemen, on behalf of Kotak Securities, we complete today's conference. Thank you, all, for joining, and you may now disconnect your lines.