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Cipla Ltd
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Ladies and gentlemen, good day, and welcome to the Cipla Limited Q2 FY '20 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.
Good evening, everyone. This is Chirag Talati from Kotak Institutional Equities. I thank the Cipla management team for giving us the opportunity to host this call today. From Cipla, we have with us today, Mr. Umang Vohra, MD and Global CEO; Mr. Kedar Upadhye, Global CFO; and Naveen Bansal from the Investor Relations team. Over to you, sir.
Thank you, Chirag. Good evening, and a very warm welcome to Cipla's Quarter 2 FY '20 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 obligation to publicly update any forward-looking statement, whether as a result of new confirmations, future events or otherwise.I would like to request Kedar to take over.
Thank you, Naveen. And good evening to all of you. Welcome to our earnings call for the second quarter of fiscal 2020. I hope you have received the investor presentation that we posted on our website. This quarter is quite strong for us and stable after a muted quarter 1, which highlights the inherent strength of our businesses. This quarter has seen significant recovery and stabilization of the distribution model change on the Trade Generic side. Strong growth in the Prescription Branded business in India, with seasonal reverse volume growth in Acute Therapies as well, continued momentum in the South African private market business and retention of share in key assets in the U.S. despite multiple competitive entries.Our Cinacalcet contribution in value terms has substantially normalized in the quarter, and it's quite close to measuring at the base levels. With this comment, let me come to the financials for the quarter. For the quarter, overall revenue from operations stands at INR 4,396 crores, which recorded a healthy year-on-year growth of 10%, with strong performance across our key businesses of India, South Africa and U.S. I would like to clarify that the numbers for the quarter do not include any significant benefit from the spillover that we had mentioned in the last quarter. For our India business, the net delta in the opening and closing spillover is nil. For emerging markets, it's around only $5 million or so. Gross margin after material costs stood at 67% for the quarter driven by increased share of Indian Branded business, South African Private business and our limited competition assets in the U.S. This got partially offset by the increased share of the Generics business as compared to the last quarter. Total expenses, which include employee costs and other expenses, stood at INR 2,025 crores, increased by 7% on a sequential basis. Employee cost for this quarter stood at INR 762 crores, largely flattish on a sequential basis. Other expenses for this quarter, which include R&D, regulatory, quality, manufacturing and sales promotion costs stood at INR 1,263 crores and increased 12% on a sequential basis. This increase is driven by growth investments in various parts of our business. Total R&D investment for this quarter stood at 7% of revenue or INR 295 crores. This includes charges for the ongoing respiratory trials for Advair. During the quarter, we completed the patient randomization for generic Advair in line with our targets. EBITDA for the quarter stands at INR 909 crores or 21% of sales. Tax charged for the quarter stood at INR 201 crores. We're looking at our full year ETR of 29% to 30%. I can explain the details on tax later. But this year, we propose to continue with the old regime of tax rates. Profit after tax stood at INR 471 crores or 11% of sales. During the quarter, we prepaid loan of USD 110 million, which was taken for the Invagen acquisition, almost 1 year in advance, considering our cash holdings. Our long-term rate now stands at $440 million, which is mainly used to fund the Invagen acquisition, and ZAR [ 100 million ] for Mirren acquisition. We also have working capital loans, which act as natural hedges towards our receivables. Total net debt-to-equity ratio is at 0.08 and continues to be quite healthy. Outstanding forward contracts as a hedge for receivables as of 30th September are USD 235 million and ZAR 541 million. During the quarter, we also hedged a certain portion of our forecasted export revenues. The outstanding cash flow is -- this is of 30th September are USD 168 million and ZAR 280 million.Thank you, and I would like -- now like to invite Umang to present the business and operational performance.
Thank you, Kedar. We are pleased to report strong recovery across our businesses during the quarter, with overall revenues growing 10% on a year-on-year basis. We are focused on continuing the momentum in the coming quarters. We took certain determined steps to strengthen commercial discipline, which has demonstrated resilience and strong fundamentals of our business. Let me start with some of the key highlights for the quarter. India Trade Generics. During the quarter, the change in the distribution model implemented in quarter 1 has stabilized and the business has come back strongly, highlighting the strength of our portfolio. The business recorded a quarter-on-quarter growth of over 60% on a reported basis, while the order booking was even higher. Our build numbers for the quarter were nearly the same as previous year. We are focused on continuing the journey in the coming quarters and quarter 3 should see the business growing over the previous year. On our India Branded business, the business delivered strong numbers, growing to 13% year-on-year basis. We saw robust performance across all our key therapies, which outpaced the market significantly. South Africa, our business delivered a strong performance, growing 12% year-on-year in ZAR terms. The Private Market business recovered strongly, growing at 13% in local currency terms during the quarter. As for IQVIA, Cipla continued outperforming the market and grew over 3x the market growth rate of 7%. On the U.S. generic side, the business delivered 25% growth year-on-year basis to close the quarter at $135 million. We have retained share in Cinacalcet and as Kedar has said, it has -- Cinacalcet has reduced significantly from quarter 1. In emerging markets, we strengthened our portfolio offering in focused markets. In Sri Lanka, we entered into a strategic partnership with Novartis for marketing and distribution of the Ultibro Breezhaler. We are pleased to report that we have signed a strategic partnership with Novartis effective October 1st to market the respiratory portfolio in the market. Overall, the revenues growing 10% year-on-year. We saw EBITDA growing strongly at 21%. Let me move to the Business-wise performance now.Overall, the India business, including the Generics and Branded came strongly to deliver 29% growth on a quarter-on-quarter basis. This was driven by performance across key therapies and strong seasonal triggers on the Branded side and a strong recovery on the Generic side, highlighting the resilience of the business post the distribution model change in quarter 1. We hope to continue the momentum in the coming quarters and drive growth in the business. The Branded business grew 13% year-on-year driven by performance across both our chronic and acute therapies. Seasonal triggers helped the Acute business drive over 15% year-on-year growth in primary sales. On the secondary side, Cipla continued to perform well across key therapeutic areas. Chronic Therapies continued to drive a significant share of growth for us and grew 15% as per IQVIA MAT versus 12% market growth. Amongst our...[Technical Difficulty]
Ladies and gentlemen, please stay connected. The lines from the management got disconnected.
Sorry about getting disconnected. I might repeat the sentence. We will start with Chronic Therapies in India continued to drive a significant share of growth for us and grew 15% as per IQVIA MAT September '19, which was 12% for the industry. Amongst our key therapies, in Respiratory, Cipla grew by 15% versus the market growth of 10%. In Cardiology, Cipla grew 17% versus the market growth of 12%. And in Urology, Cipla grew 15% versus the market growth of 14%. We continue to maintain our leadership position across Respiratory and Urology. 14 of the top 22 brands of Cipla continue to feature among the top 300 brands in the IPM and have outpaced industry growth as per IQVIA MAT September '19. For the North America business, despite multiple competitors launching the generic product to Sensipar, we retain good market share in Cinacalcet. We have seen fairly aggressive price reduction for the product, which was expected. In addition, on an overall basis, launches such as Pregabalin have facilitated relatively strong growth of 25% on a year-on-year basis, resulting in our numbers growing to $135 million. During the quarter, we announced the launch of Daptomycin as well. Increasing contribution from new launches has been driving gross margin expansion for the business. During quarter 2, we saw our gross margin expanded by 500 basis on a year-on-year basis. We are progressing well on our trials for respiratory products. We are currently tracking Albuterol as a launch in the early part of first half of '21, and our limited competition engine should resume in quarter 4. In the SAGA region, which includes South Africa, Sub-Saharan Africa and the Cipla Global Access business, our overall South Africa business grew strongly at 12% year-on-year in local currency. The Private Market business recovered strongly from quarter 1 to drag 13% year-on-year growth. In secondary terms, Private Market continued the momentum growing over 3x the market at 7% versus -- as reported by IQVIA MAT. With the acquired Mirren portfolio growing strongly, Cipla is the third largest player in the OTC market, capturing a market share of 6.8%. Outside of South Africa, the Sub-Saharan Africa business grew by 7%, while the CGA business declined due to lumpiness in order flows. The Emerging Markets business recorded a strong growth quarter-on-quarter to deliver $64 million and recovered from a muted Q1. Apart from the strategic partnership with Novartis, we are working towards bringing our EM biosimilar franchise to fruition, with pegfilgrastim filed in Malaysia and approval received for clinical trials of Bevacizumab in Algeria. On the Institutional Specialty business in the U.S., we plan to submit the IV tramadol NDA later in the year via our associate company, Avenue Therapeutics. We have resumed supplies of plazomicin in the market. On the regulatory front, as we shared in our stock exchange announcement, we had an inspection at our Goa plant, which ended with 12 observations. These observations are across our 10 units in Goa and none of them are either repeat or related to data integrity. We are working with the agency to address these and have submitted a comprehensive response to the agency. To close, while I'm happy with the growth reported across markets, I believe our serviceability in product families could have been better. We are focused on continuing the momentum across the key markets in the coming quarters. Some of our key priorities are to continue to drive momentum in our India business. On the Branded side -- on the Branded India business side, the coming quarters, we'll see the launch of Berok 2.0, Cipla's flagship patient-focused initiatives in respiratory, amongst other therapy-focused initiatives. In South Africa, we believe our Private Market portfolio can continue to drive strong growth. In the U.S. market, we will resume with the limited competition launches in quarter 4, and we'll be tracking our respiratory filings closely. We will manage the Sensipar Cinacalcet product for value and retain a larger share of the market. We remain focused to maintain the highest standards of quality and compliance across the facilities. We will work with the agency, the Goa resolution. 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 Saion Mukherjee from Nomura.
Sir, my first question on domestic market. So your commentary suggests that it's almost normalized as far as Trade Generics is concerned, right? From fourth quarter onwards, it could be pretty much business as normal?
Yes, Saion.
And Kedar, you mentioned about the spillover impact being nil. I remember it's around INR 60 crores last quarter because of floods, et cetera. So just what has been booked this quarter? I mean, how is it nil. Can you explain that?
Yes. I think the opening spillover got booked this quarter and then the closing spillover of an equivalent value. So the net delta between opening and closing for the quarter, Saion is nil.
Yes, but that was a specific instance of flood, right? I mean is there any issue that you faced this quarter as well which resulted in...
Yes. No. [indiscernible] [ issues ], I think the pattern of the orders and the dispatches across our depots and across a large number of SKUs that we sell in both Prescription and Generics business. Probably, I think we should get used to this level of the closing spillovers. So the net delta between opening and closing for the quarter is nil. Quarter 4, as you know, typically in the March, this gets adjusted and quarter 4 spillover, typically, is usually quite low. In the U.S...
Okay. And my second question was the U.S…
It will be there at these levels.
Okay. And then the question on the U.S., Umang, I mean, $135 million you mentioned seems to be pretty much the normal base now. So what would be the concentration of the top 3 products in our sales now?
I think the top 3, in my opinion, I don't have the exact number, but should be closer to about 25% -- 20%, 25%. And Saion, I think the $135 million, so that we are clear, does have Cinacalcet in it as well. But we have now almost reached these levels. So it won't -- there will be possibly a reduction into the next quarter on account of Cinacalcet, but we hope not by too much.
Yes, I mean, basically, I'm assuming that Cinacalcet is one of the top 3 products. I mean that would be the right assumption to make, right?
That's correct. That is right.
Okay. And including that you're saying is 20%, 25% of your total sales?
I think -- yes, it might be closer to 30-odd percent. That -- yes. Yes.
Okay. Got it. And just one last question Umang, before I join back. When you talk about no meaningful or limited competition launches, what's the size that's in your mind other than Albuterol, of course, which can be big? But in general, what's the kind of opportunity size that you're looking at?
So Saion, I would say that anything which is U.S. environment and considering our size, right, we're not a 200 in U.S. business for quarter 3. Considering our size and looking at the market, I think somewhere upwards of the $15 million will qualify as limited competition, provided you have a long-enough window. Now within this, there will be some assets which will be larger. For example, we have been public about Albuterol earlier but some will be larger. But I think in a $15 million with a 3-, 6-month limited competition or being alone in the market is a fairly significant thing for us.
Next question is from the line of Neha Manpuria from JPMorgan Chase.
First, on Albuterol, have we got any query or communication from the FDA? Or I just wanted to understand if there is any risk of a delay in the time line you have mentioned?
So Neha, the time line is already modified from our correspondence with the FDA. Earlier, we were hoping to have a launch sometime in this quarter. So the timing's already got modified. The agency is in regular contact with us. There is -- we've been receiving queries regarding the product files, et cetera. But if your question is have we received the CRL or DRL which is later than that? No, we haven't done that yet.
Understood. Okay. My second question is on the gross margin. Kedar, given quarter-on-quarter, Cinacalcet has seen value erosion and our Generic business is normalizing. The margin performance -- the gross margin performance seems significantly higher than what we were, let's say, before, even Cinacalcet had launched. So is this a normalized level of gross margin? Or is there any one-off -- any other one-off in this number?
There's no other one-off, Neha. The only thing is, as we alluded to, there could be marginal drop in the Cinacalcet level from this quarter to second quarter, I mean this quarter 3. And that could be the only impact. Other than that, depending on the mix this will [indiscernible].
So -- okay. What about -- when we look at the business, let's say, 4 to 6 quarters, what is the normalized level of gross margins, given U.S. margins are improving with every new launch that we -- that we're making?
See across the quarters, we have been in the range of 65% to 66%, Neha. And my view is we would be in that level of the base gross margin depending upon the price increase, depending upon the work that we're doing on the costs and portfolio momentum, there'll be a bias to build on it further. I would think that probably 65%, 66% is what we could end up with.
[Operator Instructions] The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
Just a couple of clarifications. First, on this product Voltaren Gel, diclofenac. So just wanted to understand, we done very...
Sir, sorry to cut you off. Can you please speak a bit louder?
Yes. So my question is on Voltaren Gel, the diclofenac version. So we have -- Cipla has maintained market shares very, very well despite 3 new entrants coming in. Just wanted to check how is the pricing environment in this product? Has -- after 3 new guys coming in, has cetirizine substantially down? Is it still the largest product for us?
Yes, it's amongst -- I would say, yes. It's a close competitor and to the largest product. And I think the pricing has come off quite significantly. But we have -- we've regained share on it.
And Umang, all of that is already reflected in this quarter?
Yes, yes. All of that is reflected.
And on Cinacalcet, when you say that sales has been marginally lower from here. So effectively, we're saying that 130-kind-of-plus base, at least we can expect from here, assuming no more [ entry comes in ] Cinacalcet.
So Anubhav, we would avoid giving specific numbers. I mean there're really [some minor] adjustment from the current levels.
Sure. And then, how big is this Mirren one? And what was the base? So let's say, when does it normalize South Africa growth for the Mirren acquisition?
So I think this year -- for the full year, we will have full 12-month reflection for Mirren. But this is cough and cold portfolio, Anubhav, in South Africa. So this is -- the growth of this portfolio is going to be much higher than the Private Markets organic portfolio that we have.
Okay. So when you report private market grew at 13%, that does not include Mirren. That's separate...
That includes Mirren actually. That includes Mirren.
So what is the growth excluding Mirren which is...
Mirren, for the full year is not beyond -- I mean $15 million or so for the full year. We can consider those numbers on a quarterly basis and then appropriately work out. I don't have those numbers handy with me now. It'll be similar or maybe 1% or 2% lower, not significantly lower. Okay.
Okay. So just to get. Mirren, you mentioned is USD 50 million for the year, right?
1-5. 1-5 not...
1-5. Okay, sure.
[Operator Instructions] The next question is from the line of Nimish Mehta from Research Delta Advisors.
Just one question on the Cinacalcet. I mean I see a lot many approvals in that product, almost [ 8, 9 ] approvals but company has launched. They're not more than [ 4 to 5 ] so any particular reason why they are waiting the launch of -- some color on that will be helpful.
First, I think Cinacalcet is, to some extent, it's also, for many players, it is some kind of a risk launch. So we would think it's probably because of that. I would imagine that, that would be one of the considerations.
I see. Understood. And if you could tell us the market share that we had in Cinacalcet that would be helpful.
Yes, we'll take it off-line.
Next question is from the line of Nitin Agarwal from IDFC Securities Limited.
Umang, on the U.S. Specialty business, how should we see the trajectory for the expense build-out as well as the expenses on payouts towards acquisitions?
So I think look, some part of the expenses are beginning to come in our base. For example, in this quarter, we've already seen expenses bunching up for the specialty launch. And I think the good thing is that the plazomicin asset is already launched in the market. This -- we've already build a fair number. It's going to take a long time to ramp up because anti-infectives take relatively long to ramp up. But having said that, it's a commercial asset. It's in the market. We don't have too large a team right now for it. We've got barely about 5 to 7 people who are key account managers selling the product. And closer to the tramadol approval, which we are going to be -- which our associate company, Avenue, will be filing, hopefully, by the end of this year. And closer to that approval, which will possibly be next year-end or early parts of January, we will have a fully staffed specialty organization. So I think there will be some expenses coming in. But the good news is that if we get tramadol approval, which we're very hopeful of, and we've got plazomicin, so we'll have 2 commercial assets already ready. So we are hoping that the time period for the specialty expenditure to result in a sustainable business proposition will not take so long. We will be able to accelerate it.
Okay. And secondly, on -- if you can just sort of refresh that. On -- from a seasonality perspective, Q3 is a decently strong quarter for us from the India business and -- I mean how does it, does this get really impacted, by the way, Q2 and 3 played out?
I think there is a seasonal pattern shift. We have seen that the anti-infective season did pull pretty much into the end of quarter 2. Usually, it's somewhere -- begins to peter off in the last month. We think, based on what we know now, that winter might come a little later. So I think there will be some pulling and -- pulling and ebbing. So we don't know if it's going to play out exactly the same way, but I think there is roughly about a month, a month or 45-day shift in just the way the monsoons came, the way the anti-infective season ran, and the way that the winter's expected to come. So there'll be some of that swing. But yes, but we really -- we don't think quarter 3 will be very different in terms of the structural foundations of the market and the demand compared to quarter 2. Of course, the anti-infective season is there. That will definitely happen.
Okay. And lastly, the ARV opportunity in the U.S. where we are partnered. I mean that's going to be a Q4 opportunity or more like an H1 opportunity for next year?
Nitin, that's more like API kind of an opportunity, not, I would say, formulation profit share kind of an opportunity. And it would depend upon the customer's schedule -- ordering schedule.
[Operator Instructions] The next question is from the line of Sameer Baisiwala from Morgan Stanley.
So just starting off on Albuterol, Umang, I've been tracking this for the last 2, 3 years, including Perrigo. Everyone has been delayed regularly. What's the scientific hurdle? Or what is the key asks from FDA on this product?
I think Sameer, there's no new requirements because, thankfully, for us and for every other player, I think the requirements, the guidance -- it wasn't as if we were shooting in the dark. The guidance has been a variable, right? The FDA has routine questions on some aspects of your study, which you have to justify, some aspects of what we are seeing in data. And I think it's part of the thing that every limited competition products such as Albuterol will take 2 years for approval at a minimum. So considering our filing, we are roughly around that 2-year time point right now. And I think [we're] probably thinking that it will take another 4 to 6 months to come.
What's the harder part over here, is it the device? Is it the drug? Is it -- what really is more difficult aspect here?
So different products within the Albuterol category have different issues. For us, I think what had happened specifically to the Albuterol [indiscernible] after, I think [indiscernible] changed the device roughly about a year back, in the sense that they inserted a drug indicator. They had added a drug indicator to the device. And therefore, we had to add some studies to show that the drug indicator behaves the same way as a product without the drug indicator. So that's the reason we are kind of a little delayed.
I see. Got it. So those with ProAir would have a different reason, I guess, et cetera.
Yes. That's right.
Got it. Okay. And second question, you are deep into Advair development. Are you thinking of other DPI products after Advair?
Yes. We will be doing -- it's a reasonable thing, Sameer, that we will at least be after 70%, 75% of the products in the respiratory space. So yes, we will be after that. We may not be the first to market, but we will be after a lot of these products.
Anything you can share where is the second product in this Q, when you get -- plan to take it to clinics, et cetera?
Well, on the DPI side?
Yes.
Yes, hopefully, by the time we exit the year, we should have another clinic started on the DPI, on a DPI product. But we also have 2 MDIs that we are likely to -- that we either have filed or are likely to file or have a partnership with another company on a fairly significant MDI.
Okay. And the second DPI, I presume, is going to be Spiriva if you can share.
We're not commenting on that, Sameer.
Okay, great. And Umang, just want to -- thinking of the domestic market, I mean I guess it's easier now to do a retrospective analysis. So over last 12 months or so what made the market go down, the growth rates to mid-single digits? And I guess now it's all back up to early double digits. And what's the outcome over here for the broader market?
So I think Sameer, my belief is that the distribution chain in India is still changing. I am not talking about the Trade Generics business. That part is a different set of issues and we've dealt with that. But it is my belief that the amount of change in the distribution side of the business is fairly significant. Between hospital groups who are buying as 1. Between pharmacies which are beginning to consolidate their buying and becoming supply partners to several independents. I think there is an aggregation and consolidation thesis, which is playing out here. And I think those changes are what are creating these timing mismatches between how companies are seeing the business and outside because if you -- I'd like to believe that core volume growth is still there in the market. And it's coming at a respectable growth rate. So I think it's probably because of the fact that we are in a cycle where the distribution systems in India are changing. And look, all of us, and Cipla included, had to respond to this. And so the traditional stockist retailer model is probably going through tweaks and edits right now.
And is it a good thing for manufacturers that the buyers didn't consolidate it or otherwise? And second, what role is GST playing in the whole distribution system?
GST's role is clear. I think that's easier to answer. GST has basically taken out a lot of the unorganized market, for sure. We -- because of the GST and the related impacts -- impact, I think the cash cycle became fairly stressed in parts of India for the distributors and the current credit environment has also not helped significantly. So a lot of the distribution players who had velocity in their business because of them being able to have a better cash conversion cycle have taken a hit. That's also impacted the pharma billing because remember pharma payables in India are largely within the 21-day period. So if the cash velocity doesn't increase, it impacts. So GST is clear. I think the impact was obviously on a large number of players exiting -- a large number of distributors and players possibly not being as interested in the market. And I think that the other actions have been around liquidity. So I think that impact on the GST side is clear. I'm sorry, what was the first part? I missed.
The fact that the distribution systems were undergoing change, so is it good for manufacturers or not that the customer is consolidating?
So any consolidation, obviously, shifts buying power a bit. Right? But -- so I think from a manufacturing perspective because it's still at a stage where it may not be more than 10%, 15% of the market, it's not showing up. But obviously, when the shift begins to happen, there is a reasonable expectation that the buyers would be a little bit more stronger in terms of negotiating.
Okay. And just to complete this point, Umang and then I'm done. On the GST side, has there been any change in terms of not the distributors, but from the freight point of view from the transfer, of course, movement of goals, et cetera?
Not really. It's become easier. And so what's happened, Sameer, is that today, a person sitting in Chennai can fulfill an order in Delhi. So the friction costs are completely removed across both Rx and Gx business. So it's become easier now for people to do, which is why the distribution model is changing because now it's not really about a distributor in Delhi who can supply a retailer in Delhi. A guy in Chennai can do it as well.
Next question is from the line of Krishnendu Saha from Quantum Mutual Fund.
Hello? Hello? Hello? Can you hear me?
Yes. Yes. Go ahead.
Yes. Just a clarification on the plant Goa. So what kind of approvals are waiting from there? And what is the current run rate from the Goa plant? Can you just let me know?
I didn't get your question. Can you repeat your question?
The Goa plant, which we have observation from -- to declare observation so I'm like -- I'm just wondering what is the filing there? What is the waiting approval? And what is the run rate from that -- current run rate from that plant?
Krishnendu, I think we'd clarified that the pipeline from Goa in the next 12 to 18 months is not as high. Some of our -- I mean incremental filings, especially West Bihar from Indore. And in terms of what we're supplying and in terms of what we were able to do in terms of site change and transfer, more than 2.5% of company revenues have single-source products from Goa.
2.5% we are seeing right now.
Only revenues. That's true. That's right.
Okay. And [do you stick to a] [indiscernible] plan that ZEMDRI and tramadol will be launching together or will be having some -- will be probably launching ZEMDRI before?
Yes. Krishnendu, commercial invoicing for ZEMDRI has begun in U.S. The invoice was rolled out. The product is available in select outlets, and we will continue to commercialize it.
Okay. So we have a sales force right now, which is up and running?
Yes. We have a key account management.
We have key account management, not really the detailing force.
Okay. And sir just on the Goa thing, what is the status of that right now: [ BI ], [indiscernible]?
We don't know the status yet. We are working with the agency to get the status. It will take some time.
Next question is from the line of Aditya Khemka from DSP Mutual Fund.
Just to sort of follow-up on a couple of clarifications. Umang, you said that the working capital of distributors has suddenly gone up, and there is a liquidity situation. But my understanding was with the implementation of GST, the working capital days of the distributors are actually come down, especially in [B] Branded Generic business. Could you clarify on that?
Yes, see I'll -- let me clarify. I mean I mentioned in the earlier conversation with Sameer. What I was trying to say was that there are fundamental changes in the distribution side of the business. You have to understand that this business has 21 days of credit. So between company and the distributors, there is barely 20, 21 days of credit. And in some parts of the country, it's less than 10 and close to between 10 to 14, depending on whether you're metro or upcountry. For this business to run and because the cycle is 21 days, there is an expectation from the distributor when he's selling it to the super stockist or to the retailer that his money also will come back in the same amount of time, right? So as a result of this, as a result of the fact that there is a credit -- there was a credit squeeze in the market, which most segments are reporting, including auto and everything else after the fact that a large share of the distribution trade changed after GST. There was a shortage of this capital, which resulted in the velocity of their business decreasing. Their natural response was, therefore, to reduce inventories because the friction costs also had reduced which is what you are alluding to that there -- they might have improved their working capital cycle. This impact came on the companies. When distributors reduce their inventory, when their cash cycle, in terms of their payments, et cetera got delayed, it would have resulted in most companies showing a little bit of sluggishness in growth.
Okay. So actually -- okay, so I misconstrued your earlier comment, okay. My fault. Okay. So the second question, I wanted to check with you was on the consolidation of buyers comment. So obviously, I understand the economics of having buyer groups and then having more volume and more bargaining power. But isn't it correct that the margins in India are actually regulated. So even if they are buyer groups, you can only sell it as 30% discount to the MRP because that's the amount of margin you are supposed to put on -- or are you envisaging that 3 years, 4 years, 5 years down the road once they become too large, they'll actually be able to bargain with you on that 30% margin and maybe ask for 40%, 45%, and you would be [really] allowed to get that?
No, I think what we're trying to give -- to some extent, I think as buying power increases, obviously, the buyers become -- are able to negotiate more. So I don't know whether this will happen in 3 years or 5 years, but it's a trend that we need to watch. There's no planning on it right now. Nothing's changing in this year or the year after that. A part of our portfolio has this and for all pharma companies, not just us. This is a structural nature of the market that margins are capped for part of the portfolio. And for part of the portfolio, which are not controlled. The margins are effectively [practice], not necessarily capped, right? So I think there is a little bit of a change. But at the same time, the government is also trying to expand the list of what they constitute as medicines, et cetera. So there are multiple shifts happening in the market. And I think one has to just be watchful of this. Aggregation of buying power does increase specialty. It will create more power with people to negotiate better things, but nothing is changing overnight in the next, I think, at least the 2 to 3 years.
Next question is from the line of Harith Ahamed from Spark Capital.
A couple of quarters back, I think you had guided for 2 inhaler filings this year. One of them, obviously, being generic Advair. Would you still stick to that guidance? Are you on track?
Yes, I [need to be] on track. So the statement was with respect to the filing of 2 inhalers. So I think for Advair as we told, the randomization of our targeted population is done. Before the end of the year, we hope to get to full analysis. And...
Early part of next year.
Yes. Early part of next year, the filing will happen.
And then -- and the second inhaler product, has the filing already been done?
It's likely to happen by the end of the year.
Okay. And then my second question is around your comment related to the gross margins where you said you've seen around 500 basis points' improvement in our U.S. gross margins. So would this improvement be materially different if we exclude Cinacalcet?
Yes. So what I said is over, I think, last 6 to 8 quarters, and in our view in the balanced view, coming few quarters as well. I think the base gross margin range for us, [indiscernible] the mix of businesses, mix of products, currency costs is likely to be between 65% to 66%.
I was referring to the U.S. gross margins. I think you made a comment that you've seen a 500-basis-points, Y-o-Y improvement there?
Yes. So I think to some extent, this is attributable to Cinacalcet. And actually the launches that we are making organically in the DTM segment, every single launch is beyond 70%, 75% gross margin as well. So directionally, every new launch enhances the margin profile. So I wouldn't get to specific numbers. But I think in Cinacalcet as well, gross margins for the U.S. business have been improving for the last several quarters.
All right. And last one from my side. Intangible assets under development, you have around INR 450 crores, and then that's increased by roughly INR 100 crores in the first half. What is this increase on account of?
See there is a deal that we did with a company to develop inhaled itraconazole. We publicly announced it in the specialty side. But the initial upfront money paid to acquire the rights of the intellectual property are being captured in that role.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
Just first one on, I think, Kedar's point at the start when you said about the tax rates and why we will continue in the same regime this fiscal. Can you just add some color, Kedar?
Yes. See our MAT balances are high enough for us. And to avoid a write-off, we would, this year, continue with the existing regime. That way we'll save cash taxes. While the reported ETR in the P&L continues to track at earlier level, the cash taxes will be lower.
So what are these -- what is the level of the MAT balances now? What do we have?
MAT balances in the balance sheet are roughly around a little less than INR 250 crores or so. So this year, for the full year, we would utilize it fully. And from the next year, our proposal is to switch it to the newer regime.
Yes. So Kedar, you think next year can be like what over 25% or 26% something like that can happen next year?
We would have our thoughts crystallized probably towards the end of this year. But directionally, I expect a 200-basis-point improvement in the ETR. It could be more also. But at this stage, we believe at least a 200-basis-point improvement in ETR is possible.
Okay, got it. Got it. And the second question is on the...Yes. Sorry.
No. This is for the stand-alone PAT.
Got it. Second question is on the Tender business. I don't think you got any color on what's happening there? If you can share something on the Tender business in Africa?
Yes. See there is a 3-year period for resetting the prices. That resetting has happened. What we are happy is we have been able to retain our volume share in the Tender. And in fact, volumes are potentially higher than what they were in the previous cycle. So we will continue to live in that regime. And I think there is a change in the product family. The Tenofovir combination would shift to dolutegravir combination gradually. That will help us on the margin side.
Got it. So Kedar, but on the pricing, is there any upcoming tender say in Jan, Feb whatever? Is there something coming up?
Well, I think a lot of Tender has been [dark] for the next 3 years. That has been announced.
Got it. So nothing will change in the pricing front. It's just now a realization of the volumes that will come.
That's correct.
Next question is from the line of Charulata from Dalal & Broacha.
My first question pertains to the new launches in the U.S. And second, I wanted you to throw some light on the H.R. 4378, regarding the withdrawal of authorized generics. Do you expect to see more withdrawals going forward?
Yes. Charulata with respect to your first question on the new launches, this quarter has seen the benefit of Pregabalin. This is from the Invagen basket. I mean that's the one, which is notable for the quarter. We are hopeful that, if not Q3, at least Q4, we'll see upcoming launches. The contribution from what we have launched in the last 4 quarters in this quarter's numbers, that continues to be quite attractive. That asset is the prominent one from that. And as the pipeline unlocks Q1 onwards of next year, we will see the contribution from new launches in the U.S. as well. We will get back on your second question offline, Charulata.
[Operator Instructions] Next question is from the line of Bharat Sheth from Quest Investment Advisors.
Congratulations Umang and Kedar on good set of number. Umang, in last quarter, you said that we could not, I mean, go ahead with the competitive launches due to some capacity constraints. So how do we see that, I mean, is playing out now? Hello?
No, I think the commentary I'd made last time was more around our hormonal sterile products, right? And we had said that there were capacity constraints and the capacity issues because of which we couldn't do. So we have made -- taken some measures, but those products are still not in our numbers. So what will we get from that will be over and above this, and it's likely that we will take about 4 to 6 months to get those numbers in.
Okay. And second thing, I mean we have several plants in India and you were looking for some kind of a consolidation to bring the efficiency. So what is, I mean, our strategy going ahead to bring down or becoming a more cost competitive?
Yes. Bharatji (sic) [Bharat], there is a opportunity. There's a potential opportunity to consolidate volumes across plants. It moves out of our network. Assign each plant to a particular region. We are examining what could be the opportunity and what could be the potential rollout plan for it. When it gets crystallized, we will communicate.
Okay. And Kedar, last question, I mean on -- you've invested around INR 1,150 crores from -- within subsidiary, of course, INR 350 crores is Cipla Healthcare. Remaining is on what account?
Bharatji, that's the repayment of the loan that we have made. So we have repaid our acquisition-related loan, 1 year in advance. That's about INR 800 crores or so. Yes. And the balance is the acquisition of the state from Fidelity in our consumer health category.
Okay. And can you give some color on where do you see Cipla health care, I mean, and when we -- we were looking for some of them in our transferring and generic product, also to OTC. So how the things are moving?
So Bharatji, I think I won't cite any specifics at this point of time. This business is growing very fast year-on-year as we have been communicating. It's almost doubled year-on-year for the last 3 years. And this year, it will grow in excess of 30% to 35% or so. So pretty well positioned, considering the consumerization potential in India.
Next question is from the line of Damayanti Kerai from HSBC.
My question is regarding one comment, I think which we made a few quarters back that you do facility upgradation. We have seen some supply disruption to various markets. So has that situation normalized now, especially for market like U.S.?
Yes, Damayanti, I think that some of the specific situations with respect to capacity augmentations, those have been addressed. And we love to be on this journey. It's -- frankly, it's a journey. Automation, digital technologies in manufacturing, some of the remediation-related items. I think it will be an ongoing journey. Some of the specific action items that we're able to have been addressed. In case of many products for the U.S., the benefit of the augmentation has also been realized. So some of the high-margin revenues that we're seeing in U.S. for products like diclofenac gel or budesonide is a result of this augmentation efforts that we undertook for the last 1 year.
Sure. So you're seeing some specific issues were already resolved, but it's ongoing process to, what you say, debottleneck and improve the capacity available, right?
That's true, Damayanti.
Okay. And also, I guess again coming back to I think one of the previous comments, which Umang made that our aim is to launch one specialty -- sorry, one complete generic product every quarter. Are we sticking to that statement?
From quarter 4, we are looking at it coming in. From quarter 4 of this financial year.
Okay. So at least one launch, we should be expecting per quarter. That's what you're saying from -- starting from 4Q.
Yes. Sometimes they get bunched because we can't predict the timing. But sometimes, we might have 2. Sometimes we won't. For example, last 2 quarters, we've not had any because the quarters before that had 2 -- sometimes 2 per quarter.
We'll take one last question now?
The next question is from the line of Vishal Manchanda from Nirmal Bang Equities.
I have a question pertaining the albuterol inhaler. Could you guide on what percentage of the U.S. prescription volumes are written by the generic name of Albuterol?
Right now, it's a belief that it's upwards of 40%, 50%. That's our belief right now.
Okay. So does that mean these generic prescriptions can be replaced by any of the brand ProAir, Ventolin and even if Cipla gets an approval for, it can be replaced with the same product?
Vishal, we'll have to test this hypothesis as we launch the market. But if it is written as Albuterol, yes, that should be the case. But we have to test this hypothesis.
Okay. And one more. So the innovator having introduced the dose counter in their product, so would that impact your AB rating on Proventil?
No. No. It will not because we will also be filing our dose count. We will -- we are already filed our dose counter application as well. So it will not. It will be AB-rated.
Okay. So but would they be having a patent on the dose counter? And would that be subject of litigation?
No. There is not. There's no patent on the dose counter. It's a widely available dose counter.
Okay. Got it. And one more related to the Tender business. Is the Tender business largely ARV? Or there is also something else to your Tender business?
About 80%, 85% is ARV in South Africa. Balance is across all other therapies split.
Okay. And on the ARV side, do we have an approval for the DLT fixed-dose combination? Or is that abated?
We do not have an approval now. We are in the process of seeking the approval.
Any time lines on when we can get that?
I wouldn't comment now, Vishal. We'll revert in the subsequent calls.
Thank you very much. Ladies and gentlemen, that was the last question for today. I will now hand the conference over to the management for closing comments.
Thank you, everyone, for joining us on the call today. In case you have any follow-on questions, you may reach out to myself or write us -- write to us at investor.relations@cipla.com. Thank you so much. Have a very good evening.
Thank you very much. On behalf of Kotak Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.