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Cipla Ltd
Earnings Call Analysis
Q2-2024 Analysis
Cipla Ltd
The company has entered a phase of growth and efficiency, with their sights set on expanding core revenue, resolving regulatory observations, capitalizing on launches through partnerships, and de-risking assets to hasten new introductions. The aspiration is to bolster performance in key geographies such as India and South Africa by outperforming in wellness portfolios and pivoting to private market strategies. Specifically, in India, there's considerable emphasis on outgrowing the market with prescription and generics businesses boasting growth stronger than 11%, excluding acquisitions. There's also an intent to recoup consumer growth which witnessed a minor lull. Chronic therapy sales, particularly in India and North America, have led to a notable improvement in margins due to their higher profitability. Furthermore, plans for new product introductions, including oral and possibly injectable versions, are underway as part of their strategic expansion.
In light of recent performance, the EBITDA guidance has been revised upwards from the previous 23% to a range of 23-24%, with a tendency towards the upper end. This upward adjustment is attributed to strong returns on invested capital, which, on a last twelve months basis, hovers around 27%. The North American market has been particularly promising, showing sustained revenue within the $220 million to $225 million range. However, there is caution regarding quarter four forecasts as it involves a degree of seasonality. The company is also eyeing a significant market opportunity with the potential launch of a peptide product that could address a $300 million to $400 million market prior to generic competition.
Diversification and differentiation are part of the strategic plan, with 70-75% of the U.S. pipeline now comprising unique products. The differentiation strategy may vary by market, especially concerning sought-after products like semaglutide. However, competitive dynamics and entry of multiple market players could potentially shrink market size. Meanwhile, product shortages in the U.S. are contributing to stable prices for certain medicines. Thus, the pricing environment in the U.S. appears more or less stable with neither accelerated price declines nor significant increases.
EBITDA margins in the U.S. operations have surpassed the company average, reflecting improved financial health. While there's confidence in higher than market growth in chronic therapy segments within the Indian market, the management acknowledges variations in the product mix could influence future margins. Furthermore, the company's U.S. earnings before interest, taxes, depreciation, and amortization (EBITDA) for the period appear to be more robust than initial estimates with contributions from both U.S. and India markets. The increase in chronic medication ratio in India, with naturally higher gross margins, and selective price actions in the U.S. have jointly propelled better EBITDA margins. Despite the conservative outlook, there might be room for positive adjustments if the buying trends remain favorable and if the launch certainty in the U.S. improves.
The company has optimized its logistics by shifting a majority of shipments from air to sea freight, resulting in substantial cost reductions. Year over year, air freight rates decreased by 8-9%, and sea freight costs plummeted by 60-70%. This logistical efficiency is expected to extend into the near future, contributing positively to the bottom line. With respect to expenses, the previous year witnessed an increase of 11.5% to 12%, with expectations of continued control over operational expenditures (OpEx). However, there are indications of a marginal increase in OpEx in the coming quarters, primarily due to strategic de-risking activities within the U.S. market.
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Ladies and gentlemen, good day, and welcome to Cipla Limited Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ajinkya Pandharkar, Head of Investor Relations from Cipla Limited. Thank you, and over to you, Mr. Ajinkya.
Thank you, [indiscernible]. Good evening, and a very warm welcome to Cipla's Q2 FY'24 Earnings Call. I'm Ajinkya Pandharkar 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 about 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 confirmation, future events or otherwise. I hope you have received the investor presentation that we have posted on our website. I would like to request Umang to take over, please.
Thank you, Ajinkya. Good evening to all of you. I thank you for joining us today for our second quarter earnings call for the year. In quarter 2 of FY'24, we have continued to trend to strong performance and we have recorded our highest ever quarterly revenue at INR 6,678 crores with a year-on-year growth of 15% and an EBITDA margin of 26%.
This was made possible through double-digit growth across our core markets of India, North America and South Africa. In our One-India franchise, I'm pleased to share that the franchise has yet again posted a healthy year-on-year growth of 10% despite a weaker anti-infective sales and a slower consumer growth for our [ PHL ] business. This growth was largely supported by continuing faster-than-market growth in branded prescription, where we grew at 11% against the IPM growth of 10% as per IQVIA MAT.
The share of chronic therapies in our portfolio has improved by 140 basis points year-on-year to 60%. Trade Generics consolidated its leadership position in the market. Despite season continued -- despite the season which continued to be muted, GX posted a strong year-on-year growth, supported by performance across realization volume and a lower cost of goods.
Our generics business has embarked on a journey of constant evolution through new product introductions, leveraging partnerships with our associate company, Go Active, and deepening our distribution network. Our priority has been to grow our big brands across all the branded prescription and the OTC businesses.
In India, branded prescriptions, we have 22 brands with revenues over INR 100 crores as per IQVIA MAT September '23. Our leading inhaler brand, Foracort, is one of the fastest growing amongst the top 10 IPM brands. Trade Generics now has 7 brands over INR 50 crores in the last trailing -- in the trailing 12 months. Cipla Health derives its growth from 5 brands, which are flagship and well above INR 100 crores in the last -- in the trailing 12 months.
In North America, in this quarter, we progressed further on strengthening the core by delivering a quarterly revenue of $229 million, which represents a 28% growth over last year. Our key asset of Lanreotide has improved its market share to 20% as per IQVIA August 2023, whereas generic Revlimid performed in line with quarter 1. We continue to execute multiple work streams in albuterol, where market share has improved by 90 basis points to 12.9% compared to quarter 1 of FY'24.
In our South Africa and Global Access business, we continue to outperform the market at a significant pace. We registered a solid 12% year-on-year expansion in top line, led by South Africa private market where the secondary market grew at 10% versus the market growth of 4%. Private market growth was achieved through an uptick in focused therapies in our prescription business, new launches as well as solid performance in the OTC portfolio.
Our aim is to reach the top position in the prescription business. In our South Africa OTC business, brands of Broncol and Coryx continue to gain market share. Broncol has now captured close to 50% market share as per IQVIA MAT August '23. One of our most important focus areas in the past has been efficient capital allocation. Most recently, we announced the acquisition of Actor Pharma in South Africa. The market there is poised for growth in the OTC side and Actor has strong OTC brands, which complement the existing offerings and have potential to grow bigger, leveraging Cipla's existing marketing network.
We also divested our stake from Cipla QCIL in Uganda and Saba Investment Limited for our business in Yemen. While it has helped us in derisking our asset base, we will continue to service these markets via our B2B mark. R&D investment has also been consistently increasing. In terms of pipeline for North America, we have made significant progress on clinical trials across some of our complex pipeline. We have 3 complex products undergoing clinical trials with filings targeted in FY '24 and '25, generic Symbicort being one of them, where we have successfully completed our clinical studies.
Filing for this asset is planned for quarter 3 of this year. In addition, we are likely to file another generic inhalation asset shortly where hopefully, we can aim to be among the top filings. On our peptide portfolio, we plan to launch one product in quarter 4 of FY '24, while there are 3, 4 product launches planned in FY '25. De-risking of generic Advair, a partnered inhalation asset, and generic Abraxane has been progressing as per our expectations. On the compliance front, at Long Island, New York, all our units at Invirgin have recently completed the CGMP audit, while the Unit 3 inspection resulted into classification as VAI, the Unit 2 inspection has no observations by the U.S. FDA. We received an OAI in our Indore facility, which was audited in February 2023. We have already initiated corrective measures for observations as performed 43 from the U.S. FDA and have made satisfactory progress as on date.
At Goa, the CAPA implementation and remediation exercise has completed. We will soon be submitting requisite data to enable the reinspection. I would now like to invite Ashish to present the financial and operational performance.
Thank you, Umang, and good afternoon to all. Continuing with the strong quarter 1 performance, we progress further with exceptional performance across core businesses with expansion and profitability. Coming to the key numbers for the quarter, we are pleased to report a quarterly revenue of INR 6,678 crores, highest ever in supply history.
The overall revenue growth for the quarter was at 15% Y-o-Y. Our ex QCIL sales stands at INR 649 crores with Y-o-Y growth of 14% and EBITDA at INR 1,690 crores or 26% of the sales. EBITDA margin stood at record 26% for the quarter on a reported basis. As always mentioned by me, this EBITDA margin does not include other income.
Calibrated price actions in core portfolio across branded and generic markets, combined with easing input cost, continued freight decline and favorable ForEx have contributed to improved operating profitability. One India franchise further expanded its market share by growing at healthy 10%, an exceptional performance in an acute heavy quarter, which was difficult for the industry due to inconsistent seasonality.
This growth was supported by mix shifting to chronic portfolio, gross margin improvement and new launches. North America yet again reported the highest ever revenue driven by traction in the differentiated portfolio with revenue of $229 million, growing at 28% Y-o-Y.
South Africa grew by 9% Y-o-Y in local currency powered by a solid performance in private market and OTC. Private market growth was supported by a strong secondary channel performance in oncology, CNS and CBS as well as the hospital segments. OTC continued to focus on big brands as well as new launches. Our free cash flow generation and operating efficiency has helped us to drive healthy net cash position.
R&D investments for the quarter are at INR 379 crores or about 5.7% of revenue, driven by ongoing clinical trials on differentiated assets as well as other developmental efforts higher in the quarter by 13% versus last year. Depreciation, impairment and amortization expense includes a partial impairment of a nonoperational domestic manufacturing unit and it also includes an acquisition cost, impairment of an acquisition cost of an intangible in the form of product in the U.S. Both these totals up to impairment of about INR 53 crores.
The reported gross margin after material cost stood at 65.4% for the quarter, which is 240 basis points above last year's figures, driven by overall mix change, contribution from new launches as well as lower procurement costs on key APIs. Total expenses for the quarter include employee costs and other expenses, which stood at INR 2,631 crores, up by 1% on a sequential basis.
Profit after tax for the quarter is at INR 1,131 crores or at about 17% of sales. ETR is constant sequentially at 27.5%. As of 30th September 2023, debt primarily constitutes [ Rand 720 million ] in South Africa with cash equivalent balance of about INR 6,811 crores overall post payment of dividend in this quarter. Key focus areas as growth levers in the subsequent quarters will include the focus area for One-India would be to recoup the growth in the wellness portfolio while maintaining the market beating growth in Rx and Gx.
In North America, our focus will be to grow the core revenue, resolves the U.S. FDA observations, maximize our partnered launches and also derisk assets in order to accelerate new launches. We will continue to derisk the key launches for FY'25. Sustaining performance of quarter 2 for South Africa with focus on private markets and select tender business with focus on margin expansion.
While margins in EMU has been very strong, the focus of H2 would be to drive growth in top line debt. Our EBITDA for the year is trending in the range of -- so we are increasing our guidance on EBITDA from 23% -- what we had given earlier to 23% to 24% with bias towards the higher end. Our ROIC continues to be strong, and in this quarter, on an LTM basis, comes up to about 27%.
I'd like to thank you for your attention and request the moderator to take up the questions now.
[Operator Instructions] Our first question is from the line of Saion Mukherjee from Nomura Securities.
Just a question on India. You mentioned 10% growth in India. Now if I were to exclude the acquisition that you did, it looks like the growth is around 7%. And you mentioned trade generics growing in double digits. Does it mean that the overall prescription on the consumer business is trending around 5% to 6%? And if that's the case, what's the reason for the slowdown? And how do you see this moving forward in the second half?
Actually, Saion, the internal growth estimates for the branded prescription and the generic business are well over 11%. If you take out the acquisition, which is what you're doing, I think you have to take out from last year, we had a certain tender position in 1 of the products we had won, and that's basically replaced by the acquisition we've made. So core business growth, both on the RX and GX side is close to an over an 11%. So those businesses are growing stronger and much higher than market.
I think on the consumer franchise, we've seen a fairly significant slowdown more because of the weather pattern. We sell a lot of the ORS product and I think we've not seen that level of sales of that product because of the weather pattern in quarter 2. And this result is fairly consistent with the category of beverage and with some of the other consumer products we've seen in this quarter. Having said that, I think this quarter, we are just looking at it bouncing back quite significantly.
So no, I think the issue is the branded growth and the generic growth is very strong in the previous quarter. It's the consumer growth, which had a little bit of an issue.
Okay. Great. The other question I had on expenses and on the margins. So your other expenses is quite flattish quarter-on-quarter despite a seasonally sort of heavy quarter in terms of revenues and also R&D costs moving higher. So is there anything there? And how should we read this going forward?
So I think a combination of two things. One is you must have noticed the improvement in your gross margin which is flowing to your EBITDA, and that's primarily because of the mix change that has happened in the favor of chronic in India as well as in North America, some of our higher-margin products, we've been able to do better. So it's a combination of these three things that -- at least two things that led to improvement in gross margin. And there is some bit of operating leverage that exists due to which the increase in sales, your other expenses have got absorbed.
And if you're comparing to just previous quarter, the previous quarter had some recall costs sitting out there, of Albuterol that we had talked about, which, of course, is not sitting in this quarter. That has also led to improvement if you're looking at it from a quarter-to-quarter basis.
Overall, Saion, I think if you were to take the employee benefit expenses and the other expenses and total it between last year and this year, we're seeing about 11% to 11.5% increase. So from our business perspective, I think that's roughly the range that we will see year-on-year for business -- for the expenditure to expand.
Our next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Sir, just with respect to the product, which you have highlighted, to be launched in FY'24, the peptide product, if you could share some market size or competitive scenario for that product?
I am sorry, we can't give that detail given the competitive nature of the product.
The market size as well at least?
Well, the market size of that product could be anywhere upwards from $300 million to $400 million. So I would say the available market size for us pre our entry and pre-generic pricing could be somewhere in the $300 million to $400 million.
And this is after some players already there in the market?
If the market is a little complicated, so I think there is -- yes, so there might be a player, but the market is fairly complicated.
And with respect to one comment of generic filings which CIPLA is expected to do shortly. So will that be subject to litigation or would it be more like a para IV filing.
Yes. You could expect that -- yes, it would be a para IV filing.
And lastly, considering $230 million, any ballpark range you would like to give in terms of the annualized run rate for the U.S. generics?
I think we are guiding to $220 million to $225 million as a sustainable range, at least for the next quarter going forward. And we don't know what will happen in quarter 4 because quarter 3 typically also has a little bit of buying on account of the holiday season.
And then post that you'll have these peptie loans. So effectively then this run rate should ideally be much better, right?
Well, yes, depending on how the peptide will scale and whether it will -- it depends on when it launches within that quarter. If it launches right at the end, then the impact will be muted. If it launches right at the beginning, then, obviously, there will be a full quarter impact.
Our next question is from the line of Aman Vij from Astute Investment Management.
My first question is on our diabetes portfolio. So if you can talk about how are we placed to take the advantage of the upcoming GLP-1 opportunity. Will we be participating in both the oral and injectable form, if you can talk about the scheme?
Yes. I think the objective is that I think the 1 -- the first 1 that's probably going off patent is like in India is likely to be Semaglutide. Liraglutide anywhere is only available as an injectable. You have Semaglutide and then you have Dulaglutide. I think we will do Sema. We definitely have plans for the oral version of the product. And if required, and based on our current understanding, if the market is there for an injectable, we will hopefully also try and introduce a product there.
Sure, sir. On this part only, so oral, do we plan to file the FTF on that side? And also, do you think this market itself for us can become like a $100 million market plus over the next 5 years for us as a company?
Well, see, I think my answer was more for India. We can't give you a view of the U.S. I think semaglutide is a very exciting product, no doubt. And depending on the number of players who come into the market, if there are multiple players on day 1, then obviously the market size will reduce significantly.
Okay. Sorry, just the clarification part on this before I move to the second question. So you are only focusing on the India market, not U.S. and the other markets for this opportunity.
No, I think we will focus on all markets, but our strategy is maybe a little different for each market. But in the U.S., depending on how many people are first to file, it will decide what the competitive nature of the product will be.
Okay, but we will be also participating in U.S. first to file the market also, right?
Yes.
My second question is on the -- one of the biosimilar products in osteoporosis. If you can talk about, I think U.S. opportunity is coming up. So if you can talk about what is our market share in India of this product? And are we looking at the U.S. filing of that product as well?
So which is the product you're talking about?
[indiscernible].
No, I think what the product we sell in India for [indiscernible] is not that large. So I don't think we will provide too much commentary. In fact, I'm not even -- I don't think it's a very large product for us in any case. And U.S. pipeline, we don't -- we are not providing too much color on the U.S. pipeline right now. I think as the launches of the peptides happen, we'll be able to give you some color on that.
Our next question is from the line of Kunal Dhamesha from Macquarie.
Congratulations on the good set of numbers. First one on the gross margin improvement. So we have cited that there was a favorable product mix, et cetera. But would you say that improving U.S. generics environment was one of the key drivers in this quarter, a sequential gross margin improvement?
So it does contribute to the improvement. But it's a mixed bag in U.S. On certain cases in U.S., we've got volume improvement, like in case of albuterol, we've gone from 12% to about 12.9% share. On Lanreotide, there has been increase in volume. And then there is price improvement in certain other products. It's a combination of volume and price. Overall, the gross margin improvement is on account of price, like I said, in India as well as [indiscernible] in select products and mix has also played a role where the volume increases happened more in the high-margin products.
Okay. And when you mentioned that we are getting good traction with respect to several contracts in U.S. and business development and everything is, so is that on account of a lot of shortages that you are seeing or there is kind of prebuying that is more driving that? What would be your assessment? So would it continue, let's say, beyond quarter 3 in your sense or the activity is going to probably be muted a little bit in quarter 4?
I think the shortage situation until there are new capacities that come up will probably continue. And I think there's a list that the FDA puts out quite routinely about shortages in the U.S. At least for those product families, we are not seeing price erosion. But I think on the other -- and that's why there's a balance. Because there's a fair number of products that are on the shortage list for various reasons that there is an equal counterbalance to lesser price erosion. So yes, I think from a U.S. portfolio also, there has been some amount of margin expansion.
The other thing is, I think if you broadly look at our India business, as the ratio of chronic in our overall mix begins to increase, margins will go up in the business. Because if you look at high chronic businesses in India, they operate at much higher margins than high acute business. So as your chronic mix over the last 2 to 3 quarters, we've seen a chronic mix improving because our teams are focusing in building those therapies. I think the natural impact of this is also on amount of margin expansion.
Sure. And the second question on the generic Symbicort filing. So as of this management, would we be filing it from multiple facilities?
Yes. the idea is to file it from multiple facilities.
And multiple facilities would be internal or...
Both would be internal.
Okay. And just a clarification. So we said that there were INR 43 crores impairment and then there was some INR 10 crores other charge. Can you please throw some light, what was that? I just missed it.
Yes, sure. So one is, one of our domestic units where we have taken impairment, we are just nonoperational unit. So it was not operating since some time. So it's taken an impact, that's a major part of the impairment. And the other one, we constantly keep testing for impairment of intangibles. So one of the products in the U.S., which we had acquired. There, we had one of products that we have impaired the intangible that was created when we acquired that product from the partner.
Our next question is from the line of Damayanti Kerai from HSBC.
My first question is on your Advair and Abraxane, which you mentioned are progressing as per your expectation. So if there are no incremental query hurdle, et cetera, is it safe to assume like these opportunities will likely come in first half of next fiscal?
Depends on the review cycle at the FDA. I think we would have finished our -- the transfer process. After that, we filed with the agency. It depends on the agency's view with respect to shortage in the market, with respect to competition and the data that they see. So it's difficult to predict, but we are hoping that this comes as soon as it can.
Okay. But from your perspective, you are broadly done with the transfer proceeds or a lot needs to be covered?
They are ongoing still. They're still on.
Still on, okay. And my second question is in the U.S. business, obviously, you are seeing a good pickup or good contribution from depreciated products. So can you just broadly indicate of the total U.S. sales, how much contribution are currently coming from the differentiated product? And how does the U.S. portfolio looks in terms of profitability compared to the corporate [indiscernible].
So I think about over 70%, 75% of our pipeline in the U.S. today is differentiated. So that's a significant portion. So we've reduced the number of filings and gone from the side of differentiating our portfolio significantly.
Current profitability of the U.S. portfolio?
So I'm not sure...
EBITDA for overall U.S., if you see, right, it's above the company average EBITDA margin today.
Above the [indiscernible] okay. And my second question is on India business. So obviously, I guess you maintained outperformance against the broader market despite slowdown in volume. But if we see similar muted volume situation to persist in the market, how do you see your growth look for India getting impacted in near to medium term? Or you remain comfortable that because of increasing chronic, you will always be growing better than the market?
No, I think in the therapies where we are strong, pediatric, respiratory, urology, anti-infective in cardiac, we will expect to grow significantly higher than market. And I think if you are able to do that, then it's easier to show the overall growth for India. So volume this year is also the impact of the base of the previous year. I think as that begins to even out, we will probably see an expansion in volumes. So we are guiding to multiyear assumptions of where India will grow at somewhere around the 12-ish percentage range on a long-term 5-year basis, we think a 12-year -- 12% CAGR for India is not uncommon.
And actually, our numbers are quite close, whether the volume is low or the price is moderated, right? So if you really look at it, our YTD growth will be somewhere at least on the branded prescription business, also around the 12% range. And this is happening despite volume growth in lower. There might be a year where volume growth is higher, but price growth may be lower. So overall, the 12% number will probably hold as a CAGR over the next couple of years.
Okay. So you remain comfortable with this 12%?
Of course.
My last question, if I can. Can you comment on the U.S. pricing environment. You said you saw mixed performance across products, et cetera. But across the market, should we assume prices are more or less stable compared to what we saw in recent quarters? Or there has been any changes?
I think pricing in the U.S., always there is some change quarter-on-quarter. So there will always be some depression, but I don't think we are seeing accelerated compression in pricing in the U.S. I would say, more or less the trend is the same.
Our next question is from the line of Neha Manpuria from Bank of America.
Umang, In the last call, if I remember correctly, we talked about U.S. base of about 200 and 215 . And now I think you mentioned about 220 and 225 given the good momentum that you're seeing in some of your complex products. But other than that, has anything fundamentally changed quarter-on-quarter in the U.S. So this is just improvement that you're seeing in the base portfolio that is driving this higher U.S. guidance?
Yes. I think, Neha, it's basically increase -- slight increase in our albuterol share, a slight increase in the share of a few other product families and also the share increase in Lanreotide.
And is there scope to improve that further. So just trying to understand if there's upside to this 225 number that we are mentioning?
Yes, so I think on Lanreotide, specifically, we are looking at incremental gains that we've seen historically to play out. It's never going to be a huge delta that comes in, but it would be something that peaks up over a period of time. And on albuterol, it's the same, right? We used to be higher then we came back down now. We're beginning to go back up again a little bit. So it will be just that. It will be that. And then quarter-on-quarter buying patterns, there's always a little bit of -- at a $200 million base, there could be $3 million, $4 million here or there. So realistically, from the previous quarter to this year, not so much of a delta even though it was 215 to 230, I think some of these share increases, some of that $3 million, $4 million buying pattern shifts, I think you'll roughly get there.
Okay. So it's not as if we've seen a material improvement in the pricing environment or a big upside from the shortage products that's driven this?
No, not really. In fact, there's also a fair amount of demand for a set of products, which I don't think the industry can supply such as budesonide, et cetera, where, frankly, whatever you can produce can be sold.
Understood. And Ashish, on the margin guidance, again, we have raised the guidance. But if I still look at the first half and rate, we are close to probably 25% versus the guidance that we have given. Based on your commentary, everything that you've mentioned in terms of gross margins, the India momentum, U.S. momentum, are we expecting spend to go up? Is that the reason we're being conservative on the margin guidance, particularly given what we've seen in the first half? Or is there some other dynamic that I'm missing out?
I think, Neha, maybe I can add, and then Ashish can comment. I think the -- we're not -- I'm not sure we will see expenditure going up. Because expenditure between last year and this year is up 11.5% or 12%. I think we may see some seasonal -- we do a Berok campaign in this quarter, which will probably result in a little bit of delta, but that's not significant to the overall margin hypothesis -- expense hypothesis. I think what happens is it's -- in India, we -- first of all, the margin we've probably seen in the last quarter is the highest we've ever seen in our company. So -- and I think it's a large portion of it is due to mix. It's not so much anything that we've -- in the mix and possibly some amount of abatement in the cost of procurement.
But other than that, I don't think that there is enough. So I think in this quarter, I would not be surprised in the future quarters if our margin is not at the same level that it was in the quarter that's gone by, because the mix may change the way our business run.
Sorry, Umang, to your point, because the mix in India given a focus on chronic and the higher investment, 75% of the pipeline being complex, the peptide launch coming up. So it's not as if the gross margin comes off from here. And if your costs are the same, leaving aside the quarter-on-quarter volatility, shouldn't this quarter's margin be sustainable?
Well, not really because I think what we've been saying is that the margin -- the sustainable margins, the way we see it in this quarter is in the range of 24 to 25. There as -- because if you look at the type of mix we've seen this quarter is very different, hardly any anti-infective and we know that there is some amount of anti-infective that comes in the [indiscernible].
Understood.
So we see a delta there. And so that's where we think our margin will be. And quarter 4 is always, Neha, very, very -- it's a reverse seasonality quarter for us. So that's -- and some part of the margin will compress in that quarter as well.
Understood. Sorry, Ashish. Sorry to cut you were mentioning something.
No, no. I think Umang has covered it. I think if you look at the second half, it's a combination of quarter 3, which we believe will hopefully continue to be strong as it has been, but quarter 4 is something that we are mindful of and combination of the two will probably get us to about 24% overall for the year.
Our next question is from the line of Surya Patra from PhillipCapital.
Congratulations for the great set of numbers. Sir, about U.S. business, my first question is that whether -- is it fair to believe that kind of a dent that you would have seen in the albuterol, possibly that has been covered by new launches like Revlimid and all. Is that the understanding right? Because in terms of the prescription, there is a more than 20% kind of decline in albuterol that we are witnessing?
So sorry, your question is that the market share loss in albuterol, has it been made up by -- so there are other products, which has made up for that loss. Like we talked about, Lanreotide, which has increased in volume. And there are other -- the [indiscernible] business as well, which has done very well in the first 2 quarters, which has helped us to get there.
Okay. Okay. Sure. And sir, since we have now crossed that 12-month period for Revlimid launch -- after Revlimid launch, we have crossed that 12-month period. So generally, there was a kind of a term that in the 12-month period, the volume limit means whatever the volume that one needs to achieve that will be based on the 12-month period achievement. So from that angle, is it possible to have a sense that, okay, what is the kind of volume that we would be tracking there in U.S. so far as Revlimid is concerned?
So for the balance of the year dates to, will more or less, like Umang talked about quarter 2 over quarter 1 is not a material and it's a significant increase. So that trend will continue for the balance year.
Okay. Sir, second question is about the South African market. So in fact, in the opening remarks, sir, you mentioned you are currently second in the private market and which has been consistently delivering double-digit growth. And you are targeting to achieve the #1 position there. So could you tell if that is achieved, then what would be the kind of scenario in terms of revenue mix, the South Africa business would be having for us?
So see, I think if you look at the growth in U.S. and in India, okay, it has been fairly strong, right? And U.S. is about 25%, roughly, I'm just talking about 25% of revenue. India is about 40%, 45% of the revenue. So they form a significant portion and they're going at double digits, right? So South Africa, even at 10%, there will still be at par or in terms of growth with them. So therefore, the share of South Africa will remain the same even if they become #1 for us.
And I think the constant focus in South Africa is also a margin for us. And we want them to get to company -- close to company average margin. Therefore, the growth out there will always be calibrated to make sure that the margin is not compromised. And that's why you've seen over the last many years, the shift that has happened from tender business to private market and now looking at OTC as another lever of profitable growth out there. An Actor pharma that we have acquired, which comes with a portfolio, there is a huge synergy that sits out there to actually leverage our distribution network to push those products in. And the success that we've seen in Coryx and Broncol is likely to get replicated in Actor Pharma. So OTC is another leg of growth, like I said, for South Africa, which will help us with both growth as well as margin.
Okay. Sir, is it possible to say that what could be the gap in terms of size, scale between the number one player and second player, so far as the private market is concerned?
So I think we have given in the investor deck our market share.
Why don't you send it afterwards?
Yes, we can send it afterwards. Yes. I think it's about ZAR 200 million in prescriptions. That's the gap that we have between number 1 and number 2. So, yes.
Okay, sure. Just one last question, sir, from my side about the domestic formulation business. So from the various studies, what it is available that respiratory segment, which is generally is one of our leading segment has seen some kind of a moderation in terms of growth possibilities because of the high base of the last period. And despite that, we have seen a kind of improved margin scenario, what you are mentioning about the domestic formulation business. So is it not right that respiratory is one of the most profitable business considering our scale and the kind of end-to-end integration what we are having?
So if you look at the IQVIA data, we've actually grown faster than the market in case of respiratory and respiratory and cardiac are the two therapies where we've grown faster than the market this quarter. So not sure why you're saying that it's been subdued. And of course, like you have said, which is absolutely right, the margins in respiratory because it's primarily in-house is better, so we get the benefit of that.
Okay. So that -- once we see the revival in the respiratory, then possibly that will support the margin profile going ahead?
Yes. I mean we have already witnessed partially in this quarter and hopefully will continue in quarter 3.
[Operator Instructions] Our next question is from the line of Nitin Agarwal from DAM Capital.
Just following up on the U.S. If I remember correctly, for the last 2 quarters, you mentioned that the Revlimid sales have been broadly in line with what we were in Q4. And there is a $25-odd million -- almost $25-odd million delta you've done in the quarter versus Q4. So I just want to double check up, is it fair to assume that all of this $24 or $25-odd million delta which has come through in versus Q4, is all on our regular business primarily driven by the non-Revlimid business?
No. It's a combination of increase in Revlimid as well as other products as well. So -- and I'm referring to quarter 4 to quarter 1. So there was some increase in Revlimid as well. In quarter 1 to quarter 2, there has been insignificant increase in the Revlimid.
Our next question is from the line of Krishnendu Saha from Quantum AMC.
Most of my questions have been answered, but just two follow-up questions. Albuterol, we had a market share of 16%, 17%, but I heard you said 12.5% or 9%. So when do we get back to the number? And number two, on that and another question is that Goa plant [indiscernible] capacity increased by 200%, 128 million what I see. What was that Goa plant for which we region is it actually related to? And if you could just tell us the plants where that here is our files form so Indore, Goa [indiscernible] just you can let us know what the future filings for the FDA are for?
Okay. I'll just take the second question first and then maybe Umang can give some color on albuterol. So the capacity that you're talking about in Goa, that's primarily for the international market, the EMU market. And that's where we had a increase in the capacity. On the first question albuterol on market share, yes.
So I think the market shifts between three versions of albuterol. We sell one of the smallest versions of albuterol. So every time the market shifts between these, the market share gets impacted. So that range is always 2% to 3%. Now, we are hoping to build our shares.
So we hope to get back to the 16%, 17% in the near future?
I think that fortunately or unfortunately, it's not completely in our control because the market buying behavior is dependent on which variant they keep. So in the event that they decide to keep the variant we have, obviously, the share will go up. In the event they don't, then the share will only increase marginally as it has been.
Yes. And if you could just talk us to the plans, which are for the U.S. FDA for the filings for the inhalers?
So we have two inhaler plants, and we are trying to file, one is Indore and one is in the U.S.
Our next question is from the line of Vishal Manchanda from Systematix.
In the U.S., can you update on what's our market share in Leuprolide?
The Leuprolide, we are going to increase share now because there was price listing, et cetera, that needed to happen. Current market share is sub 3%. Actually, it's close to 1% right now, but it will be built up over a period of time.
So it starts ramping up as we have seen in case of Lanreotide?
Yes. I mean the trajectories won't be similar. But yes, we will be increasing market share.
Okay. And just one more on the sub-Saharan market, your sales have doubled on a Q-o-Q basis. So 1 shouldn't assume the current quarter run rate to remain stable over the subsequent quarter? And what led to this doubling of sales on a Q-o-Q basis?
See, I think it's a combination of SAGA is a combination of South Africa sub-Saharan. You have CGA also sitting in that which is [indiscernible], the increase of sales has happened. And QCIL is also sitting there. So the growth -- we've seen some growth out there. Main growth is in QCIL, which is anyway under sale. So we will discontinue showing QCIL from next quarter. But of course, that is mainly a tender business, so it comes at a lower margin. So yes, that's how you should look at the SFA numbers.
Any broad sense on what would be a sustainable quarterly run rate for this market for the current year?
So it's a very small contributor to our overall revenue. So -- and of course, it's a tender dependent. So it can be lumpy as well. So keeping that in mind, it's difficult to talk about sustainability of that. But of course, like I said, QCIL will go away from the numbers.
And what is the number that we should knock off for QCIL?
We've given those numbers in the investor deck, right?
Also press release.
And the press release as well. So your INR 6,678 crores becomes INR 6,490 crores after knocking off QCIL.
[Operator Instructions] Our next question is from the line of Ankush Mahajan from Axis Securities.
So sir, this year, we are launching 1 peptide product and except this growth, what is in our pipeline. Will you throw some light on the piping of the products?
I think we have mentioned that we have 4 to 5 partnered products in the peptide range, and hopefully, one will launch in the next quarter. And then in the next 2 years, we will launch the others.
And despite these peptides, what are the other products?
Yes. We have inhalation assets as well. We have our -- and some will be filed shortly. Some will be are in the process of filing. And then we have some other products as well.
So in the initial commentary sir, it was mentioned that logistic cost has improved. So would you throw some light on it? So how it will take shape in upcoming quarters?
Sure, sure. So we monitor our air to sea mix, right, of all the products that we export out of U.S. to our geographies internationally. So that mix over a period of time has, obviously, moved in favor of sea, which has actually helped us with the reduction of overall freight. That's one factor. And the second factor is that overall, the air rate as well as sea rate, both have actually come down substantially, right? On a Y-o-Y basis, air rate has come down close to 8%, 9% and sea rate has actually come down by almost 60%, 70%. So those are the advantages that we're getting, and at least in near term, we are expecting this great advantage to continue.
Our last question today is from the line of Kunal Dhamesha from Macquarie.
Directionally, when I look at when we started the year and gave the guidance of 21% to 22% EBITDA margin and we are currently giving guidance of 24%. And if I look at the various moving parts, the biggest delta which has come from U.S., right? So that kind of speaks that there is improvement in pricing, there's improvement in volumes of existing products. But then your commentary is mix on pricing. Can you throw some light? Because if it's just volume improvement, it might not have led to a lot of EBITDA improvement, right? Because some of these products would be low margin. And we have kind of lost market share in the high-margin products on a year-on-year basis. So what explains the delta in EBITDA margin guidance improvement?
No. So first of all, it's a combination of U.S. and India market. It's not just the U.S. market. I would like to just clarify that point. And in India as well, like we said, the chronic mix has gone up, right? So with the chronic mix going up, which has higher gross margin, that leads to better EBITDA margin as well and there is some bit of operating leverage also that we're seeing in India. And likewise, in U.S., it's certain products, we have better volume, albeit could be at -- with some price erosion, but there are certain products where we have taken price actions as well. So overall, these two geographies have driven the margin because they are a large portion of our business as well.
And at the same time, there are other businesses [indiscernible] talked about, where the margin improvement is clearly visible between quarter 1 and quarter 2. And hopefully, that trend will continue there for 3 and 4 as well.
Sure. And then, let's say, in the current guidance of 24%, I think what we are baking in is probably a good $220 million to $225 million quarter in U.S. in quarter 3. But let's say, if the trend continues in the U.S. into quarter 4 as well, would it be fair to say that there could be upside to this 24%?
Yes, there could be. I mean if the trend of buying changes, there could be an upside. But it's difficult for us to estimate that at this stage.
So right now, we are just building in quarter 3 because that's what we are seeing kind of good trends.
If the certainty of launches in the U.S. improves because of the remediation we are doing at our sites and the transfers, obviously, our confidence in the margin will increase as well. So to answer your question, there are two businesses that -- actually three of our businesses are running ahead of their internal estimates, both on the top line and also on the bottom line. One is India. The second is the U.S. and the third is South Africa. And so there is a margin beat on account of all three that we have seen.
And on our emerging markets business, we are running -- even though we are running slightly lower than the internal estimates on top line, on bottom line, we are running because of expenditure control almost to the same extent. So that is the reason that I think the margin trajectory has improved. If you look at our costs overall, the cost basis is 11.5% over the previous year. Realistically, in our business, we never increased more than 11%, 12% of costs year-on-year. I think the real issue in the real increment we're getting is on the margin. Also in the previous year, we had a fair amount of remediation cost built in on account of our facilities, which now is reducing because a lot of the remediation is already undergone.
Sure, sure. And sir, last, what is the PLI benefit that you would have recognized in this quarter?
Yes. So that's part of the other operating income, and it has increased versus quarter 1. We're not giving out the specific numbers, but there is an improvement there because of the products that we could not qualify for this thing, yes. And just on the OpEx part, just to complete the picture what Umang was saying, I think with derisking that's happening in the U.S., there could be marginal increase in the OpEx as well in the coming quarters.
Ladies and gentlemen, that brings us to the end of the Q&A session. I would now like to hand the conference over to Mr. Ajinkya Pandharkar for closing comments.
Thank you for joining in. If you have any questions, please e-mail us on investor.relations@cipla.com. Thank you once again, and have a very good evening.
Thank you. On behalf of Cipla Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.