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Cipla Ltd
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Ladies and gentlemen, good day, and welcome to the Cipla Limited Q2 FY '21 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. Thank you, and over to you, sir.
This is Chirag from Kotak Securities. I thank the Cipla management team for giving us this opportunity today. From Cipla, we have with us today Mr. Umang Vohra, MD and Global CEO; Mr. Kedar Upadhye, Global CFO; and Mr. 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 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 these forward-looking statements, which are predictions, projections or other estimates about future events. These estimates reflect management's current expectations of the future performance of the company. Please note that these estimates involve several risks and uncertainties, including the impact of COVID-19 that could cause our actual results to differ materially from what is expressed or implied. Cipla does not undertake any obligation to publicly update any forward-looking statements, whether as a result of new confirmations, future events or otherwise. With that, I would like to request Kedar take over, please.
Thank you, Naveen. Good evening to all of you. I hope that all of you and your families are safe and well. We appreciate you joining us today for our second quarter earnings call for FY '21. I hope you have received the investor presentation that we have posted on our website. Resilient operations and focused execution of strategic priorities was the highlight for the quarter. We continue to applaud our employees' dedication and perseverance during these uncertain times, and we are privileged to have served the patients in India with our -- India and global markets with our in-licensed and organic product offerings in battling COVID-19. Dynamic capacity planning and coordination between procurement, manufacturing and logistics teams have enabled us to continue uninterrupted supply of medicines to our global markets. We continue to support our business partners via various initiatives and further deepen our digital ecosystem across businesses. Coming to the quarter. We saw strong execution across the board, demonstrating good demand levers across geographies. As we had highlighted in the Q1 call, we have been also able to sustain a good share of cost optimization in Q2. We have also continued the focus on cash management, leading to healthy balances at the end of the quarter. Our business and cost reimagination initiatives and rigor on operational excellence continue to drive robust performance. We are pleased to report EBITDA margin of 23.4% for the quarter. While some proportion of costs linked to resuming on ground activity has come back, we have been able to retain a good share on account of digital and efficiency initiatives. Our operating expenses continue to track a bit higher than the optimization potential of INR 400 crores to INR 500 crores against our FY '21 operating plans that we referred to in the last call. In the coming quarters, we will also be investing in growth-linked initiatives such as Berok Zindagi 3 campaign and other campaigns for consumer health products. Coming to growth for the quarter. The overall revenue grew by 15% on a year-on-year basis. Overall India business, which include prescription, trade generics and consumer business, grew 17% on a year-on-year basis. The India prescription business delivered 14% growth on a year-on-year, led by COVID portfolio, traction in chronic therapies, coupled with the recovering hospital business, partially offset by subdued seasonal triggers on the active side. The trade generics business delivered healthy growth for the quarter, driven by strong demand and high order flow. Overall, our One-India strategy continues to be on track. Our private branded market franchise in South Africa grew by 9% on a year-on-year basis in local currency and outperformed the market very significantly. The tender business there also delivered very healthy growth, up 28% on a year-on-year basis. The U.S. Generics business delivered USD 141 million in the quarter, supported by continued momentum in the new launches, which include albuterol. We are pleased to report that the U.S. business is trending very close to company level profitability in the first half of FY '21. Despite the contribution of Cinacalcet in quarter 2 of last year, we have seen very healthy and sustainable expansion of U.S. EBITDA margin this quarter. Coming to the financial performance, we would like to highlight certain specific items which are subsumed in our numbers. At a company level in the first half, the contribution from COVID portfolio was less than 5% of the revenues and EBITDA. As you are aware, there is a cap on the MEIS export incentives reimbursement scheme, and we have strong growth levers across businesses that will help offset this impact. For the quarter, overall income from operation is INR 5,038 crores. Gross margin after material costs stood at 61.4% for the quarter on a reported basis. The decline on a year-on-year basis is attributable more to the contribution of high-margin Cinacalcet last year. However, on a sequential basis, there was a 200 basis point decline, largely due to the change in product mix. Total expenses, which include employee costs and other expenses stood at INR 1,915 crores, increased by 12% on a sequential basis. Employee cost for the quarter stood at INR 821 crores, increased by 6%, driven by the increments that were announced with effect from July. The other expenses for this quarter, which include R&D, regulatory, quality, manufacturing expense and sales promotions, stood at INR 1,095 crores, increasing by 17% sequentially. This was driven by normalizing on ground activity, which is sales linked offset by strong cost optimization and digital initiatives. Total R&D investment for the quarter stood at INR 226 crores, while the percentage to sales appears a bit low, part of that is on account of healthy revenue growth accompanied by last year's adverse spends in the base. All priority projects are on track, and we expect R&D spends to increase as the respiratory assets progress in clinical trials. Reported EBITDA for the quarter is INR 1,177 crores, which is 23.4% of sales. Tax charge is at an effective rate of 28.5%. And the annual ETR is expected to be in the same range. Profit after tax is INR 665 crore or 13.2% of sales. As of September 30, our long-term debt stands at USD 275 million, this is largely towards our Invagen acquisition in the U.S. and ZAR 720 million for Mirren business acquisition and other operational requirements at the South African subsidiary. Our working capital loans stood at INR 300 crore in India, about USD 51 million in U.S. and ZAR 342 million, which act as natural hedges towards our receivables, driven by a very strong focus on cash generation we continue to be a net cash positive company as on September end. Outstanding derivatives as a hedge for receivables as on September 30 are USD 210 million and ZAR 660 million. We have also hedged a certain portion of our forecasted export revenues. Outstanding cash flow hedges as of September 30 are USD 179 million and ZAR 435 million. I would now like to request Umang to present the business and operational performance.
Thank you, Kedar. I hope everyone is well on the call. And before moving to the business and operational updates, I would like to thank our employees for their relentless commitment and perseverance during these uncertain times. I would like to start by sharing Cipla's continued response in battling the COVID-19 pandemic. We are continuing to face the uncertainties of the pandemic with strength, determination, confidence and strong patient focus to deliver what matters the most, which is our ethos of caring for life. We served more than 1.5 lakh severe COVID-19 patients with our portfolio breadth of remdesivir, tocilizumab, and favipiravir. While our 24/7 toll-free helpline offered support for COVID-19 treatment products to more than 95,000 patients, we have also offered support for post recovery of mild-to-moderate COVID-19 patients. Under the partnership with ICMR and NIV, we are also pleased to share that we have launched ELIFast, which is our diagnostic kit for the detection of IgG antibodies, against SARS CoV-2, which is COVID 2, for serum plasma patients. We will be supplementing this with new launches in the diagnostic space for COVID as well. We have successfully implemented several business reimagination initiatives, such as enabling tele-consults, virtual conferences, remote detailing and tools to improve diagnosis and treatment for physicians in a digital environment. Ensuring the safety of our employees and wellbeing continues to be the top priority for us as a company. With that, let me come to the strategic updates and the operational performance for the quarter. The strong performance for the current quarter is a culmination of relentless execution on several business and cost reimagination programs that we initiated at the onset of the pandemic. I'm pleased to see the continued effort on cost management, resulting in a significant optimization during the quarter and helping us drive the strong EBITDA margin that we have reported. In India, despite the COVID-related challenges, our One-India strategy continues to see seamless execution. Coming to our business performance in India, we continued our strong momentum and have reported market beating growth now for the fifth consecutive quarter. India prescription business grew 14% on a year-on-year basis, supported by continued traction in the COVID portfolio of remdesivir, tocilizumab and favipiravir, along with our regular core growth in the rest of the portfolio. The quarter also saw traction in chronic therapies and modest recovery in the hospital portfolio, which offset the subdued demand in our acute business. As per IQVIA July to September '20, we continued to deliver market beating growth in respiratory, where we were 29% versus the minus 3%. In the inhalation segment, we were 10% versus the market of 7%. And in urology, where we were 6% versus 3% as the lockdown restrictions continue to ease during the quarter. Cipla ranked #2 with a market share of 7.6% in chronic therapies and grew by 9%. We are confident that the momentum will continue in the quarters as we have outperformed the market across several therapies on a sequential basis. We are also excited to launch Berok Zindagi 3, Cipla's flagship patient-focused respiratory initiative on our digital platform. The trade generics business continued its healthy growth. The quality and health of the business has significantly improved, led by strength in hygiene, strong governance and review mechanisms leading to healthy tractions and margins. In our consumer health care business, we are happy to see the scale of roughly around INR 180 crores in half 1 of FY '21. While this includes a sanitizer sale, which may not continue at the same level, we see strong traction with our consumer brands post transfer from the trade generics business. We will continue to watch the evolving volume growth patterns in our core therapies as demand levers stabilize in the coming quarters. Coming to our U.S. generics and lung leadership update. The U.S. generics business delivered $141 million in the quarter, supported by continued traction in new launches of Albuterol, Esomeprazole oral suspension, the DHE Nasal Spray, and these are supporting the base business growth. In line with our commentary on limited competition launches, we launched dimethyl fumarate in Q2. We expect the momentum on new launches to continue. We have maintained robust supply of Albuterol HFA in the U.S. and pleased to inform that we have the prescription share of 84% of the Proventil market now as per IQVIA ending October 2. Across the 3 Albuterol products of Proventil, ProAir and Ventolin we have over 8% of weekly TRx market share in the total market and over 10% -- over 11% of the generic market. We continue to monitor our market share given the evolving competitive landscape in the larger Albuterol market. Our respiratory pipeline, which includes generic Advair and other complex inhalation assets is progressing well. On a half 1 basis, the U.S. business is now trending close to company level profitability. The business has seen healthy and sustainable margin expansion over last year despite the contribution of Cinacalcet in the base numbers of the last year. Coming to our SAGA, which is a South Africa and Global Access business and the emerging markets. The South Africa private business delivered strong growth of 9% in local currency over quarter 2 last year, while the tender business grew by 28% in local currency terms. We are pleased to report that Cipla was the fastest-growing corporation in the South Africa private market with new product launches forming a significant growth driver. We maintained a market share of 7% as per IQVIA MAT September '20. In the OTC space, we grew by 8.2% and maintained a strong market share of 7.2%. We also entered into an exclusive partnership with Alvotech for the commercialization of 5 biosimilar candidates in immunology and oncology. The emerging markets business has performed as per expectations and maintained scale on a year-on-year basis in U.S. dollar terms, driven by demand across all regions. The European operations grew 24% year-on-year. The growth was driven by strong end market performance and market share gains in our key direct-to-market businesses. We are happy to report that remdesivir supplies have commenced for multiple emerging markets. On the specialty front, through our associate Avenue Therapeutics, we will continue to engage with the U.S. FDA to understand the observations on the CRL for IV tramadol. We will continue to evaluate multiple options to structure our specialty investments and also further the progress of this asset with the FDA. In regulatory, we have submitted our last response to the U.S. FDA regarding our Goa site, and we'll continue to engage with the agency to comprehensively address the observations. Turning now to our outlook. We continue to monitor the evolving demand patterns across our business. We believe the underlying fundamentals of our business remains strong, which, along with the operational agility has helped the company deliver a resilient performance in half 1. We will continue to transform health care delivery for physicians in patients on digital platforms, and we are tracking our productivity metrics and the progress of our product pipeline. Our priorities for the second half of the year include strong governance around the safety, supply security, cost control and working capital management; scaling up our business across branded and generic markets of India, South Africa, U.S. and emerging markets; prioritizing key launches with focused execution and collaboration with regulatory authorities; continuing to operate our facilities globally with the highest levels of compliance and control; constantly building capabilities and talent for transformational business outcomes; and turning adversity into an opportunity by continued focus on digital adoption and cost reimagination across our business. With this, I would like to thank you for your attention. I wish you and your families well and will request the moderator to open the session for Q&A.
[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.
Congrats on good numbers. Sir, first question on India business. So you mentioned Rx business growing mid-teens. If you could help us understand what would have been the growth just the Rx ex-COVID, that would be useful?
I'm not sure we're giving that guidance, but I can just say that Rx ex-COVID is that market for most of the therapies that we have spoken about.
You mean market IPM growth of mid-single digits?
Each therapy is a different growth. So what I meant was that if you take out the COVID products, which we're not guiding to right now, I think Kedar has mentioned that overall COVID is roughly about 5% of the company numbers. Is that right, Kedar?
Yes. For the first half, correct.
Yes, so he's mentioned that in his commentary. So I think if you exclude more or less that, I think the rest of our therapy -- by therapy, we have performed mostly at market.
Perfect. Great. That helps. And secondly, on gross margins, so we have seen some decline both quarter-on-quarter, Y-o-Y. What would be the main reasons? I understand global, the share mix has changed? Would it be also these COVID-related products, global access, tender business, anything I am missing here? And what would -- should we build in going forward as well as COVID, I think, is here to stay for another 6 months?
Yes, Prakash, largely it is a mix of COVID portfolio. But as you know, while at gross margin level COVID portfolio appears a little lower than the company level, the EBITDA is, in fact, quite -- in fact higher than the company level. So yes, gross margin is largely a mix issue at a company level.
How do we see that, sir?
See, it will depend. There are multiple variables, including mix and other things, but there's nothing adverse, I would say, individually in the lines of businesses that we have.
The next question is from the line of Nithya Balasubramanian from Bernstein Research.
Congratulations Umang and Kedar on a fantastic set of results. I had a couple of questions initially on the U.S. business. So on Proventil, you mentioned that you're hitting 84% TRx share of generic preventive, which means that you're maxing out the potential there. So from here on, you really need to capture share of the "prescriptions" written as Albuterol. I'm seeing a little bit of softening in terms of your market share ramp up in the weekly TRx data. Are you finding it a little challenging from hereon, grabbing share from Albuterol prescriptions?
So Nithya, I think we are -- the latest data of October 23 actually shows us even higher in terms of the prescription capture. And if you actually go back approximately a year back, the Proventil category was somewhere around 6% or 7% of total Albuterol category. And Proventil as a category was roughly around 6% to 7%. And I think we're seeing that we are now definitely higher than 10%. So I think we're trying to do both. Of course, it will depend on how we expand Albuterol further. And from 6% to get to 9% is easier. From 9% to get to 11% is tougher. So I think, yes, but we are continuing to see the ability to supply and market more volumes here.
So just to help us understand what would it take, right? For prescriptions that are written purely as Albuterol, there is a Cipla, Lupin maybe Perrigo at some point of time. There are all your AGs as well competing for that market where which is written as a generic Albuterol. So how would -- what are some of the reasons why a wholesaler -- a pharmacist is likely to substitute it with a Cipla product rather than somebody else's?
I think I'm not -- so Nithya, I think the mechanics of the market are not very different. There are 5 consolidated or 6 consolidated buyers here. And I think if you were to broadly look at it, we believe from the data, and of course, now it's quite public and evident. We believe from the data that there is a fair -- a large number of prescriptions are written as Albuterol, right? And therefore, there is a switching hypothesis here. And I think it's not something that we control. It's clearly something that is a mechanic of the market. So as long as the -- it's a function of how each one the market participants are going to shape this market. So I think it's working on that principle, Nithya, both consolidated...
What I was trying to get at was, does this mean that from here on to grab share of that market, the pricing might actually come down because you might have to offer something?
No, I don't believe that's right. I don't think the pricing is something that we are concerned about, Nithya, because there have been people who've exited the market as well in recent times. And I don't think this is a pricing category. And also the sheer volume of this market is very high, 60 million, 65 million units. This is a very high-volume market. And for anyone to sustainably continue to manufacture at this level of high volumes is a little bit of a worry. So I think the market -- I don't think pricing is a concern for us.
Got it. A quick one on tramadol. Do you now have visibility on whether you're getting this FDA meeting and do you know when that FDA meeting is happening?
Yes. I think there is a -- we can't disclose the next steps with the FDA in particular detail. But I think our -- the Avenue will -- is in the process of obviously scheduling an interaction with the FDA and -- which is typical of any company, which will get a CRL in the specialty space. So I think Avenue is taking this discussion forward. We are conscious that they are a public company as well, and therefore, would not want to comment. But yes, there is a -- there is an interaction that Avenue would seek, if not, it has already from the FDA on next steps regarding IV tramadol.
Okay. I'm going to squeeze one more in. Kedar, did you mention that the INR 400 crores to INR 500 crores savings that you had anticipated this year, we are tracking lower than that. It's a little less than anticipated?
No, no, I said in fact more. So we're pleasantly surprised with the power of digital engine, which has started working for us in all areas of the operations, Nithya.
Any guidance on how much of this is likely to sustain going forward?
Yes. We would like to have a large part of this sustained in the coming quarters and become part of the business model actually. So I think the reimagination initiative that we have launched in each of the market, in each of the function will allow us to sustain a large part of this efficiency going forward. And let's see couple of more quarters, we'll be able to give you some precise estimate of how much has that sinked in, in our base numbers. But suffice to say that the potential to save is much higher than what we spoke earlier.
The next question is from the line of Anubhav Agarwal from Crédit Suisse.
One question on Albuterol. Just wanted to understand, Umang, why is this product still in shortage? When I look at IQVIA data, it shows me that the total units now are not higher than what -- before the generics came in, they're largely same number of units being consumed by the market right now. Whereas Cipla and Lupin have added capacity even if Perrigo has gone out, the capacity is still being added to the market than what it was before generics came in. So why is this product still in shortage?
I'm not sure...
Why is there a shortage actually?
Yes. So I don't know whether the -- I -- personally I'm not -- I personally don't believe that this product is in shortage. I certainly don't think that, that's the signal we're getting from the market. I think what may have happened is because of the fact that we had a significant competitor exiting the market recently that there might have been a little bit of, I would say, discontinuity in the market. And maybe that's the reason it went on to that list. But I believe that -- I think the market is likely to be well supplied. And what we are seeing is possibly a substitution of some of the branded players, including the authorized generic to some recent people who have come into the market, including us.
And like the question Nithya was asking, actually, that's the question, doubt, I also have that. You've been in the market now for almost 7, 7-plus months. So is it capacity constrained, et cetera, for that you could not get enough market share when Perrigo exited? I know recent last 2 weeks -- in fact, today's data also shows some market share increase for you, you are now trending 10% market share. But we would have expected you to take a higher percent in market share than some of the new guys who have taken. So are you capacity constrained? And you -- you are in the process of adding capacity. That's why you could not take it? Or other dynamics that you are a substitutable version for Proventil, not for ProAir, did that impact you taking market share?
I think it could be a mix of all of them. Because when we were approved, we didn't have any capacity. We didn't have any product which was available to be selling in the market, right? We were approved in March, and we thought we would be approved 6 months later. So for us, it was not as if we were ready for a launch or had gone through a set of CRLs that we knew there was a particular goal date that we were targeting. So we had limited stock. And based on that, we ramped up with it, right? So realistically, the 6 or 7 months that we are talking about is possibly only equates to 3 to 4 months. But one thing that I would like to say, and I mentioned this to Nithya as well earlier. Proventil as a total share of the Albuterol market was about 6% to 7% earlier. And we believe in terms of weekly prescriptions, this is now over 10%. So the market is showing the hypothesis where Proventil as a category itself can be driven out. And I think that's something that we are trying to share in the category. I -- just from my perspective, I don't think anyone's objective in the market like this would be to hog market share because these are difficult products to make and very complicated supply chain. So the day you try to hog market share in a large volume product like this, which is at 65 million, I think it's not so much pricing, but it's more your own supply chain that you have to be concerned about. And the product is attractive enough at -- even at this level of volumes.
Okay. So just one clarity on the response that you said. So should we assume, even now, going forward, your market share gains would be gradual? Or let's say, there will be a time, let's say, a quarter down the line or something like that where your capacity comes in, and we could see a step jump in market share?
We have adequate capacity. I don't think the issue is our capacity. I think the issue is how sustainable we want to see this capacity -- we want to see our production going forward. So we can produce at a much higher pace, but I would always like to keep relatively high share of inventory in a category of a market like this. So I think that is one answer. Specific to your question, I think whether the market share gains would be gradual? Yes, they could be gradual. I think if you look at our overall positioning, we've moved from -- even in the last 4 months, we've moved from almost 7% or 8% to like to believe, over 10% or 11%. And I think this could -- this type of a movement could keep happening over a period of time.
The next question is from the line of Krishnendu Saha from Quantum Asset Management.
Umang, this is on Albuterol again. If there is less price variation and the market is stable, why we do want to up our inventory? Isn't it natural for us to gain higher market share? Question one. Question two, on the South African front, we've been doing well on a quarter-on-quarter basis, but just 65% on a Q-on-Q basis and maybe 3% kind of -- whatever the number is on a Y-o-Y basis. How much of that is sustainable, if you can carry light on these 2, please?
So the second question, I couldn't hear really well. Could you just provide some...
Okay. The South African market. South African market, we've been doing well. How much of that is sustainable? And what has actually happened out there? So it's around 15% to 20% of our revenue? So how much of that is sustainable?
Yes, certainly, certainly. So I think the South African market from the way we look at it, I think it is quite sustainable. And this ability to -- we've shown the ability to continuously beat market growth now. I think we've done that, in my opinion, at least for the -- for almost 8, 9 quarters that we've been looking at it. So -- or even more than that. So I think it is sustainable. I think it's a relatively strong business in South Africa. So I don't think it's -- it's not a flash in the pan, it's a sustainable trajectory. And the first question is, why do we want to keep inventory?
Yes, because you spoke about the fact that the pricing is stable, we have capacity to produce. Inventory, you want to hold inventory. So just let me understand what is the logic, what we see out there?
Yes. Because I think this is a category of products where if you even have a blip of a missed week or 2 weeks of production, it's not easy to recover it. I mean the same linearity doesn't happen. Because these are devices and everything else. So I think the biggest problems happen when you produce too fast, right? And at the same time, don't have adequate inventory of material to produce. So I think we know out of our experience of doing Albuterol and several respiratory devices elsewhere in the world, I think we are quite clear on how we would like to manage the supply here, which is to be cautious with both our inventory as well and the flexibility in our production system to take on higher production.
Okay. It is not a bottleneck at the material level nor at the device level?
No, there is no bottleneck.
Okay.
There is no bottleneck absolutely.
And a couple of small questions. India, how much do you think is the current -- this number of INR 210 crores is sustainable going ahead for the quarter? And Kedar, if you could just throw some light on the margins going ahead for H2, please?
Yes. so Krishnendu, I think we have seen some of the orders in the trade generics business, which have got bunched up a bit in quarter 2. So to some extent, I think there could be marginal moderation in quarter 3, but demand environment continues pretty strong. So that's the thing. And the supply for COVID medicine is here to stay. And we are, like what Umang alluded, in addition to 1 site, which is captive, now we have 2 outsourced sites. And we continue to scale up manufacturing and supply for remdesivir. And that's here to stay. In terms of margins, actually, the margins of prescription business and generics business have gone up Y-o-Y. So our gross margin for most of the businesses on a year-on-year basis have gone up, which is quite healthy. So I think mix is the only thing that we have to watch for. Otherwise, there is nothing adverse. The pricing continues strong. The work on cost reduction continues strong. And except COVID, I think the mix is good as well.
How much of the cost-cutting is still to be added for H2? Or say let's put it at 1 year, how much of it is still to get?
Like what we alluded, we are quite energized by the promise of digital initiatives in each part of the company's operations. And that has allowed us to reimagine our ways of operating, and our investments are going on in that direction. And we would like to believe that we do retain a larger part of the cost control that we have seen as a inherent part of the business model itself. So let's see, a couple of more quarters, then we'll be able to come back to you with precise estimate as to how much of that has gone into base. But as I said, I think we would be able to save a bit more than what we thought we'll be able to save for the year.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Just a couple of questions. So one is for the U.S., the Tecfidera launch. Umang, is this a meaningful launch of given the competitive intensity, the prices have gone down to nothing?
I think it is a competitive launch. It is a fairly competitive launch. So I don't think it will be meaningful enough the way we had perhaps envisaged it.
Okay. Great. And second question on the India business. So if I'm not wrong, the COVID-19 drugs contributed roughly about INR 250 crores to sales in the quarter. And how much of this is sustainable? And how much of this you think is one-off? And if that's the right way to think about it?
No, I think it's the right way, Sameer. I think part of it, clearly, I don't think all INR 250 crores will be sustainable. But the more we are understanding of this of COVID now, it is going to be endemic and will continue, may not be at the same level as right now. But I think it's going to be endemic and will continue. So I would like to believe that in its worst form, I think, about 30%, 35% of this should perhaps always be sustainable. That's my sense. I think the other thing that I would probably also say is that it also depends on cases. So if cases are relatively -- if there are no cases, then obviously, there's no demand. But we've seen this pattern of cases go up and down, right? And the rest of the world is now going through a huge outbreak again. So I think it will be in response to those 2. But I clearly see, at least from a current level, at least 25% to 30% staying in the mix, at least, due to the endemic nature of this pandemic.
Okay. Great. And Umang, just on the doctor connectivity. And that was very impressive that I could see on your slide 2.5 lakh doctors that you could have or maybe unique doctors that you could connect through virtual conference for CME. It looks like what, above what 20% of India's total doctor population? So if you can talk a bit more about it. I mean, is the entire doctor fraternity now digitally connected with the manufacturers? So any thoughts on this?
Well, we're seeing -- I think it's -- it's obviously by therapy and by indication. But we've certainly tried to engage with doctors around -- especially around the time when there was no COVID -- when there was limited activities due to COVID. And I think some of that is sticking. Some of that is going back to how it was earlier, but we've seen a propensity in doctors to engage more virtually. I think it matters -- it helps their time for one. We bring them and their patients more safety. If there are not more than 10 or 15 -- usually, in a doctors chamber, there could be 10 or 12 reps waiting to meet the doctor. We are seeing with a virtual assist program that, a, the doctor has more time on their hands. They can meet the reps when they want to, even on a way to the office, if they are being driven in their car, they can have a virtual consult with a rep. So it allows them to manage their time a lot better. And at the same time, avoids crowding in a doctor's clinic. So a lot of the doctors are responsive to these changes. And I think -- I hope and I pray that this trend continues because it allows doctors to use their time better and people in their clinics to be less receptible to infections.
Okay, great. And just with your permission, final one on the -- on Albuterol, I cannot not ask a question on this. So Umang, a couple of things. If there was demand, do you have capacity to take, say, double your current sales and say, maybe move up to 20% market share? Second is, how's been the behavior of 3 authorized generics in the market? Do you think they will get more competitive? Or do you think at some point in time, they may want to exit? And third is, your take on the margins where you've mentioned the U.S. business is now trending close to the company average in the presentation. I would have thought it is going to go much higher given the Albuterol contribution?
Yes. And I think our U.S. -- just on the last point, I think the U.S. margins that we spoke about are net of R&D, it's a fully loaded margin. There's nothing -- there's no central cost that has not been taken. So it's fully loaded margin. It's at company. And I think it's good because just a year back, Sameer, we were hardly -- we were just about -- we were just about breakeven. So I think there's been a big uptick on account of Albuterol. But just specific on this, there are in as much as we think that there are only 2 generic players, there are several competitors in the Albuterol market. There are 3 AGs, there are 2 brands, and then there are 2 generics. Now one is just -- and one generic has just exited, right? So if you look at it, there are 7 players in this market. And I think one has to also understand the market in that perspective. Having said that, it's a 65 million unit market, which is a very, very big -- which is a very big market. So I'd just like to say that if you were to look at -- if you were to look at the overall capacity, yes, we have capacity to go up to 20% to 25%. Would we want to go there is a question at some point in time that we will obviously answer over a period. Now of course, there's enough flex to be able to reach a certain level of targeted share that we want to get to. But it's not something where we want to build it overnight. I think that we're pretty clear about. Because what we are also very clear out of our experience of running respiratory products in the rest of the world is that I think the sustainability of your supply and your product is more important then just how quickly you reach a targeted share. And frankly, there's enough value in this market to do it over a quarter or 2 quarters. So I don't know if I answered your question, but that's how I look at it.
No, no. You definitely did, Umang, but just your thoughts on the 3 AGs, which are there in the market?
I think they are competitive. And I think they're pretty much functioning like proper generic competitors. So we believe -- that actually, the way we look at it, that there are 5 generic players in the market already because of the 3 AG, plus it's the 2 -- plus it's the 2 generic players now. And when the third one who exited comes back, then there would be almost 7 players who are nonbrand in this market already.
[Operator Instructions] The next question is from the line of Nitin Agarwal from IDFC Securities.
Umang, we've had a fairly dramatic improvement in our cash position over the last few quarters. In the past, you've indicated that it changed a little bit of cash on the specialty side. So what about cash -- capital deployment when you go forward from hereon given the balance sheet, I guess, given the run rate it would seek, any sense from hereon?
Maybe Kedar should take this. Kedar, do you want to comment?
Yes, yes. No. I think, Nitin, these efforts on generating and preserving cash would continue. I mean, that's a key part of our internal KPI metrics now. And across businesses, we are doing good work, and that will continue. And as you would see, we still have certain debt servicing obligations on the balance sheet. There are -- there are aspects of investing in capital expenditure for development and capacity for respiratory. So I think there are multiple uses Nitin, and all that will continue.
But on a more strategic level, any specific M&A space we're looking at from a 2- to 3-year perspective?
See, M&A -- I mean, our ability to fund the large M&A continues to be there. It was always there. And either by virtue of cash on the balance sheet or by virtue of being able to raise cash at a competitive interest rate. I think the ability to fund the large M&A is always there. It was always there, and it will always be there. And subject to a strategic target being in front of us, I think that would probably be a determinant rather than saying that we have cash balance and hence let's do. So I think we would continue the governance on cash. That will be important for us.
On Truvada, has the supplies for the product started from us? Or is it going to be a relevant product supplier for us there as an opportunity?
You mean product supplies for us launching as a finished player? Finished product player or...
I said you have a partnership with the first-to-file along with, but that wasn't the case in Truvada.
Yes. So I think we have been told that first-to-filer has launched their product in the market.
The next question is from the line of Vishal Manchanda from Nirmal Bang.
Yes. In the last call, you have indicated about a respiratory asset, which is partnered. So could you update, there was a complete response letter. So has it been addressed?
Sorry, I could not hear properly, maybe it's my connection. Can you just repeat your question, please?
So in the last call, you had indicated there is a -- there is a partnered respiratory asset where you have received a CRL. So I just wanted to understand if that CRL has been addressed and responded to?
Well, it's linked to the closure of some studies that were done by the partner. So I think the moment those studies are done, the partner will give up. So around any time now or in this quarter, we are hoping that the partner will revert back.
Could you give us -- give some color on whether it's a nasal spray or it's a inhaled -- it's an MDI inhaler? And -- in terms of size, whether it's less than $500 million or greater than $500 million?
So we don't provide that level of transparency on the portfolio. But I think what I could say is, its an MDI inhalation, it's an inhaler product.
Okay. And would this be over and above the one that -- so you guide for one respiratory launch per year. So will this partnered asset would be over and above the guidance that you have?
It could depend on the timing. Could definitely depend on the timing of the launch.
The next question is from Shyam Srinivasan from Goldman Sachs.
Just this one to Kedar. You talked about gross margins being lower, but for COVID portfolio and for the overall portfolio margins being similar. So how should we look at for the second half? Because do you foresee that the gross margin should be, whatever, the 61%, 62%, but margins on the EBITDA line could not be very different. Is that how we should think about the second half?
Yes. So actually, as you can imagine, gross margins are subject to multiple variables. Primarily, mix is playing a large role for us. And as I said, COVID portfolio gross margin is lower than the company, but EBITDA level, they're higher than the company. And that will continue in the balance of the year as well. So I don't want to hazard a guess on how much mix will be there for COVID and non-COVID. But, as I said excluding COVID, most of the businesses, if not all, have seen a significant gross margin improvement on a Y-o-Y basis. And that's based on the mix in that -- those parts of the businesses as well as pricing levers as well as cost containment levers, all these levers have played out. And I think those will continue in the balance of the -- balance of the year in the second half as well. And as the proportion of some of the niche opportunities in the U.S. business, some of the chronic therapies in India business, I think if all of that improves, I think we do have strong tailwinds.
So the second one is on R&D expenses. You've said that optically, it's looking lower on a percentage basis. Are there any projects that are coming up for this to go back to 5% or 6% of sales? Or this is a level that we think we can slow -- it will be like a slow creep rather than like a step jump in terms of R&D?
Yes. I would think so. I mean, probably one should model up to, say, 1%. I don't think it can dramatically go from now to 7% immediately. But it could be rather slow, it would depend upon, I think, a bigger determinant is the high-value clinical trial, which we saw last year in terms of Advair. So I think a similar spend in terms of the ongoing respiratory projects, the quarter in which that gets figured, I think you could see some increase. But as we said, most of the key projects are on track. And on an annual basis, I think quarterly, some of these things are not fully predictable. But you could expect us to continue to invest between 6% to 7% of revenue.
Got it. Kedar, last question, again, I'm just going in line. But D&A, we saw 5% this time -- is there something suddenly changed because this number seems to be trending down? Is that something we can keep in mind?
No. I think the biggest charge there is on account of the U.S. acquisition. And as we have completed 4 years to the acquisition, some of the assets are sort of getting retired from the gross block. And that might be the reason why amortization charge is low, but depreciation could continue at this rate and depreciation could marginally go up. But amortization would come down.
[Operator Instructions] The next question is from the line of Nimish Mehta from Research Delta Advisors.
I actually missed your comment on the opportunity in Truvada. I understand we are an API supplier to Teva who has 180-day exclusivity. So is this opportunity captured now? And how big do you think this opportunity?
I think this -- for any of these -- look, I think that -- when you say opportunity capture, there is only one first-to-filer in the market right now. So like any other generic product, for us, also, this will be an opportunity when it becomes a generic. I think if your question is whether the first filer launched with our API? Yes, that is correct. And we were public about it earlier.
So I mean, did we not have any profit sharing agreement with them so as to kind of make it a very valuable product even if it is API? And my question is not just limited to Truvada, it's also I think Atripla, which probably is there, you might be a supplier. So if you can let me know about both the opportunities? And I mean, opportunity in the sense whether they are high-value opportunities or not? How should we look at it?
So they are reasonably sized opportunities. I don't think this is -- here, the full product is not ours, the competitor -- the first filer got this product, taking up the rest of the chain is with them. So it's like any other regular API product. I don't think that this is -- I mean it's a reasonable opportunity, but I can't say that this is -- this is not Esomeprazole like we had earlier.
Okay. So if I understand you well, what I understand is that Teva themselves also might be manufacturing their own API plus they might be sourcing from Cipla. Is that how we should look at? Because if Cipla is the only supplier, then it's a significantly great opportunity enough to show up on the numbers. So that's what I'm trying to understand.
Yes. I don't think Teva is manufacturing API for this, but the rest of the chain is with them. In the case of Esomeprazole with Teva, pretty much the whole product was manufactured. So I think that is the difference I was mentioning to you. And therefore -- and therefore, let me just -- if I can just complete for a minute please -- therefore -- the economics of this, therefore, are not the same economics or the profit sharing, et cetera, is not the same economics like we had for Esomeprazole. That's what I'm trying to say. So it's like a reasonable product for somebody who has a first-to-file where you are a supplier to a first-to-filer its something reasonable like that. It's not a huge curve bender for the company.
The next question is from Kunal Dhamesha from MK Global.
So I think last quarter, you provided some detail in terms of the size of the consumer healthcare business and growth in the trade generic business adjusted for the consumer health business. So can you provide the details for the quarter?
Kunal, roughly...
Kedar...
Yes, yes. Kunal, roughly, the magnitude of percentage growth remains in that same range. So the percentage growth impact for generic -- trade generics business this quarter, as I mentioned, there is some bunching up of the orders is fairly high and the consumer health care business also continues at that run rate. So both these businesses are on that trajectory. We want to avoid too many growth numbers being spoken about. Because the more granular we go, I think there will be an expectation and responsibility on us to keep talking every quarter, and we want to avoid too many growth numbers. But suffice to say that these 2 are growing very strong. And the process of consumerization is very healthy, and it's getting good traction. The early metrics of consumerization that we track for the brands, which have got transitioned look very healthy. We are quite happy with that.
Okay. And just if you can provide the qualitative color on -- if the CHS gross margins are significantly better than trade generic business? Would it be fair to assume that?
Yes, yes. I mean, I won't compare head-to-head or like-for-like because the portfolio is different and the trade generics, as you know, is more a channel business, and that is more -- the consumer health is more a consumer business. So I think head-to-head comparison is not appropriate. But going forward, we do expect each of the transition brands to have much higher gross margin, much higher gross margin pricing and demand stickiness. So all these intended objectives are being seen in practice as we transition each brand, Kunal.
Okay. Okay. And the other question is on the other expense savings, as you have alluded that you are looking at the reimagination of each business vertical. So if you can just provide which all the line items, which could be impacted by your -- this process transformation, maybe in the other expenses or in the cost of goods sold item. If you can just throw some light in terms of what kind of processes are being reimagined? Whether it's the selling process or?
So actually each function and each market is seeing this reimagination. A large part of that is in the markets where we interact with customers, so the processes where we engage with channel partners, and we engage with healthcare practitioners and patients. All of those have been reimagined to a great extent for the virtual reality of the business model. And the P&L lines where you're seeing this impact from a 4, 5 line P&L that we disclosed in other expense and people to a great extent. And within other expenses, I think there are multiple line items, which is getting impacted. And as you said, we are pretty energized with the efficiency and the speed, the simplification and the agility that this thing brings in, and we will continue on this journey.
We'll be able to take one last question. We take the last question from the line of Surya Patra from PhilipCapital.
So in fact, see about the COVID portfolio, the contribution what we have mentioned, is it possible to split between what is that for India and outside India? Or if you can give some sense that the export business is, whether it is or what times of India COVID opportunity or anything on that size, that would be really helpful? And, simultaneously is it possible to have a sense about the kind of the volume in the remdesivir side? Because we have multiple facilities that we have arranged for this opportunity?
Yes. So Surya, I think we are conscious of the feedback that we are getting from some of you that we probably are being over transparent in terms of granularity. So what -- I mean, while we are keen to engage with The Street, on a basis, which is quite candid and transparent, I think we are also conscious that multiple granular numbers do not help beyond a point. So I think suffice to say that COVID is an important part of the portfolio, but it's not that the whole growth and the whole profitability improvement has come from that portfolio. And it's split, currently the COVID portfolio is split into India and emerging markets, the international business. And the promise to grow exists in both these territories. And going forward, some of the other therapies, which had an impact, such as acute, I think they will shape up as well. So I think the way our revenue trajectory and profitability trajectory would shape up in the coming periods will depend upon how we are able to influence the growth of other therapies, which have seen a little bit of a pressure now. We are confident because lot of customer actions and lot of field action is going on there as well. So that would shape up positively. And this, in our view, also, there is lots to play here on the COVID side.
Okay. Okay. My point of -- I mean, sir, the point there for which that I was asking this question is that since there is an alliance for remdesivir let's say that is larger in so many countries. And obviously, at this current juncture, this product is also kind of a sought in product. So opportunity wise, going ahead in the subsequent quarter, possibly this portfolio can be even stronger, more and more?
That's true. And I think not only remdesivir, by the way, I think we have favipiravir, we have few other opportunities. We have recently launched under our diagnostics initiative ELIFast test, you must have seen that. So I think COVID will remain. We are conscious of our responsibility to service the needs of patients during pandemic. So it will remain one of -- we'll be occupied in servicing the COVID needs of our global patients.
Okay. My second question, sir, just on the One-India strategy. See, obviously, we have got or we have seen some benefit flowing from the COVID portfolio. But otherwise, excluding that, whether the One-India strategy has really contributed the way that we have anticipated? Or what incremental benefit that we should really be trying to achieve through these for -- in terms of growth or in terms of profitability for Indian operation?
So Surya, the synergies of One-India business between prescription, trade generics and consumer health care exists in portfolio, exists in go-to-market approaches, it exists in commercial excellence, it exists in distribution, logistics, and digital. So there are multiple avenues in which we could synergize these 3 businesses together. And all of them are playing out as we're speaking. And we will continue. And as we said, at a specific time when we are able to communicate in much precise terms, we will do that. But one example I just mentioned about the consumer business, I think it's playing out there.
Okay. Okay. So a portion of the profit margin expansion is purely from that, can we say so despite the business impact because of the COVID excluding the...
Yes, yes. One is margin expansion. Secondly, stickiness of the demand. And thirdly, some of the price improvement, which always is not possible in the channel business. I think all these objectives are being serviced Surya.
We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.
Thank you. Thank you, everyone, for being on the call. In case you have any follow-on questions, please feel free to reach out to myself or you can 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, ladies and gentlemen. You may now disconnect your lines.