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Cipla Ltd
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Ladies and gentlemen, good day and welcome to the Cipla Q3 FY' 18 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.
Hi, good evening, everyone. This is Chirag from Kotak Institutional Equities. I thank the Cipla management team for giving us the opportunity to host this call. From Cipla, we have with us today, Umang Vohra, MD and Global CEO; Kedar Upadhye, Global CFO and Naveen Bansal from the Investor Relations team. Over to you, sir.
[Audio Gap]quarter 3 earnings call. I'm Naveen. A small disclaimer before we begin this call. On this call, our discussion will include certain forward-looking statements, which are predictions, projections or other estimates about future events. These estimates reflect management's current expectations of the future performance of the company. Please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied.I would now request Kedar to walk us through the financials for the quarter.
Thank you, Naveen, and good evening to all of you. Welcome to our earnings call for the third quarter of fiscal 2018. I hope you had received the investor presentation that we've posted on our website. I'll now take you through some of the key themes, which are emerging from our financials of this quarter.Firstly on revenue trajectory, the results of the quarter you may have seen, demonstrate very strong momentum across our businesses in India, South Africa, API, Europe and Sub-Saharan Africa markets. On the core margins and the quality of earnings, this quarter they reflect improved mix and continued focus on the cost optimization. During this quarter, our core margins expanded by about 230 basis points on a year-on-year basis, associated with gross margin expansion and very consistent year-on-year decline across employee and other expenses.Thirdly, on the balance sheet health side, it's been improving consistently. Our efforts have benefited in keeping working capital investments under check and the tapering down of capital expenditure. As a result, the free cash flows are strong and have increased by about 56% sequentially and 29% on a year-on-year basis. The net debt-to-equity ratio has improved to 0.13x as at December from 0.20x as at March 2017. Net debt-to-EBITDA also declined from 0.92x at the beginning of the quarter to about 0.68x at the end of this quarter.Fourthly, on the tax side, you need to consider a couple of investments -- couple of adjustments, which I'll explain in the balance of the call, to get to the effective tax rate for the year, which is in line with what we have communicated, which is about 25%. Overall income from the operations stands at about INR 3,914 crores, which indicate year-on-year growth of 7%. If you adjust it for the impact of GST classification, the normalized overall company-level revenue growth is about 10%. Gross margin after material cost is about 65%. It improved about 300 basis points sequentially, in line with the comments that we made in the last quarter call. This was on the expected lines and is a result of better geography mix and product mix at the overall company level. As is usual to see in the quarter 4, the next quarter, ending March 2018, considering the seasonality and the geography mix, we are likely to see some moderation in the gross margins.During the quarter, we also maintained strong control on the spends with total expenses, which include employee cost and all other expenses, at about INR 1,717 crores, the decline marginally on a sequential basis. Employee cost for the quarter stood at about INR 657 crore. The other expenses for this quarter, which include R&D, regulatory, quality, manufacturing, and sales promotion expenses, they were at about INR 1,059 crores. They declined marginally on a sequential basis. Total R&D investments for this quarter are 7.6% of revenues. They are up, as we're targeting, by about 150 basis points. The increase was driven by clinical trial charges, among others.With all this, the reported EBITDA for the quarter is about INR 819 crores or 20.9% of revenue. This is an increase of about 21% on a year-on-year basis. You would notice an increase in the depreciation and amortization line, which is on account of a drop in the value of our acquired intangible asset for the U.S. generics market, due to the evolving pricing environment and delay in launching some of the products. The overall impact of this net of tax is about $27 million.Tax charge for the quarter is negative, due to the fact that the deferred tax balances for U.S. business have been suitably adjusted to give effect to the applicable tax rates in the U.S. post the tax reform. The full year ETR adjusted for this one-offs continues to be around 25%. Reported profit after tax is about INR 401 crore, which is 10.2% of sales. As mentioned earlier, if you adjust the PAT for the quarter, because of the one-offs related to change in tax rate, as well as the impairment of intangibles, the Y-o-Y growth is about 25%.Free cash flow after CapEx for the quarter is about INR 482 crores. In this quarter, we have invested INR 142 crore on the capital expenditure, which is lower compared to our historical trend and in line with our overall intent of tapering down the capital expenditure.Our long-term debt remains at USD 550 million, which was mainly used to fund Invagen acquisition. We also have working capital loan of about USD 107 million, which act as natural hedge towards our receivables. Outstanding forward contract as a hedge for receivables as of December 2017 is USD 61 million and ZAR 750 million. During the quarter, we've also hedged a certain portion of our forecasted export revenues and the outstanding forward contracts as cash flow hedge as of 31st December is USD 56 million and ZAR 125 million.With this now, I would request to invite Umang to present the business and operational performance. He's joining from another location over phone line. Umang?
Thank you, Kedar. We are progressing quite well on our key priorities for the year. Our key markets continue to deliver strong growth. India business delivered an exceptional growth during the quarter of 22%, when adjusted for GST, with both prescription and generic businesses delivering healthy growth. South Africa, API, Europe, and Sub-Saharan markets continued the strong momentum.This quarter, we saw the approval and launch of our much-awaited limited competition products, Budesonide and Decitabine. We also launched Sevelamer. However, the pricing in the market has not resulted in a sales uptick so far. We have contracted a fair share in these products already and we'll see ramp-up in coming quarters.You would have also seen our announcement of the approval of tenofovir disoproxil fumarate, which is generic for Viread. We are targeting to maintain the launch trajectory in the U.S. with a good mix of differentiated products.We remain committed towards establishing a regulated market respiratory franchise and have achieved significant milestones during the quarter in this journey. Happy to share that on generic Advair, we have commenced trials and will soon be dosing in patients. We are also targeting initiation of 2 more clinical trials for the U.S. in the coming quarters.In Europe, we have expanded our respiratory franchise with the approval of Beclomethasone in U.K. We will be the first generic player in the market. We expect to file over 10 products in quarter 4 for the U.S. FDA, taking our financial year filing count to over 20 ANDAs. Our manufacturing and R&D sites remain in a state of compliance and control.For the quarterly performance of the total revenue of INR 3,914 crores, 42% was contributed by the domestic business and 56% by the international business and the rest was operating income.I will now take you through our business performance, starting with our India business. We had a very strong quarter with the overall business growing at 15% year-on-year on a reported basis and 22% when adjusted for GST. Going forward, the growth may get moderated marginally as we saw some element of inventory buildup during the quarter, taking our overall inventory days to a normalized level now.During the quarter, Cipla outperformed the market with 12% versus the market growth of 10% and increased market share by 10 basis points to 5.3% as per the IMS in quarter 3 FY '18. Key TAs delivered above-market performance, including our cardiac segment, which grew at 12% versus the market of 7%; anti-infectives, which grew 14% versus 11%; and respiratory, which grew 14% versus the market at 12%. Derma also grew higher than market. As you are aware, we have been focusing on leveraging our commercial strength to partner with various MNCs. In the 9-month period so far, we've already launched 6 in-licensed products.Our North America business had sales of $100 million and moderately lower than what we had expected. Current quarter's numbers do not factor much contribution from the recent launches as those are in the process of getting ramped up. Our contracted shares look healthy and we are excited to build a stronger trajectory in the coming quarters. Having said that, we are taking a deeper look into a marketed portfolio at the margin level and the relative burden on our manufacturing and supply chain infrastructure, to see whether we need to intervene and rationalize a few of our selling products. The idea is to build our U.S. business with a healthy profitability profile.Coming to the market performance, as per IMS MAT December '17, Cipla is the market leader in 13 out of the 48 marketed products. We are in the top 3 position for 65% of our portfolio. Cipla has been consistently ranked among the Top 10 most dispensed generic companies in the U.S. During the quarter, we filed 2 new products and our target -- sorry, and are on target to file over 20 ANDAs in the financial year.As of December '17, we have a total of 94 ANDAs pending for final approval, including 27 with tentative approvals. Of these [ 98 ], 68 are Cipla/Invagen ANDAs, 11 are partnered and 15 are filed under PEPFAR.The SAGA region, which include South Africa, Sub-Saharan Africa and Cipla Global Access businesses, recorded growth of 11% for quarter 3 on a year-on-year basis, when reported in U.S. dollars, impacted favorably by the strengthening of the ZAR-USD versus last year. Our South Africa business delivered yet another record quarter of highest-ever quarterly sales of ZAR 1.09 billion, which translates into a 7% growth for quarter 3 versus last year.As per IMS MAT December '17, Cipla grew ahead of the market at 11.1% in the private market versus 10.3% market growth, and maintained its position as the fourth-largest pharmaceutical company and third position when tender businesses are included. Our partnering effort saw a significant boost in business development agenda with the Anmarate acquisition and a deal with iNova, leading to new launches in the South Africa market.During the quarter, we also concluded a deal with Adcock Ingram to commercialize their comprehensive over-the-counter portfolio in Uganda and expand their footprint in Sub-Saharan Africa.Our Global Access business degrew 13% over last year during the quarter, due to tender phasing and challenges in the funding environment. We are increasingly focusing on increasing the access to affordable care in various parts of Africa through Global Access and our Ugandan subsidiary.QCIL, which is our Uganda subsidiary, recorded a growth of 59% year-on-year and had its highest-ever quarterly sales in quarter 3, driven by strong tender delivery.Our Europe business continues to show strong performance with quarterly sales up 19% year-on-year basis. We are expanding our respiratory franchise and we received approval for Beclomethasone, as we mentioned earlier. We are on track to launch the product through our own front end and we will be the first generic player in the market.In emerging markets outside Africa, quarterly sales degrew marginally on a year-to-year basis in dollar terms. The quarter was challenging, given the geopolitical uncertainties in several Middle Eastern markets. On the upside, we continue to gain traction on the FPSM launch in Australia and are looking to increase our market share in the coming financial year. We're working on strengthening our business development efforts across these markets to drive future growth.Our R&D investments are focused towards building a strong growth platform for the U.S. Amongst the top 50 R&D projects, we are working on 16 Para IV filings in the area of respiratory, oncology and dermatology. These also include 15-plus limited competition opportunity.As alluded to in our earlier call, we are committed to building a strong specialty portfolio for U.S. We, at this stage, are sharing details only about our Phase 1 Tizanidine patch and that is progressing smoothly. We are evaluating multiple assets with some in advanced stages of discussion in urology and respiratory.I would like to thank you for your attention and request the moderator to open the session for Q&A.
[Operator Instructions] We have the first question from the line of Manoj Garg from Healthco.
I just have 2 questions. First on the general trajectory of the U.S. business. And then secondly, a little bit more specifically on your generic Advair R&D. So first in terms of the U.S. business, the business has been stable for several quarters here at an approximate run rate of about $100 million, which is relatively impressive in itself. But just given the number of ANDAs that you have pending, since we don't get a lot of visibility into the specific products, what's the magnitude that you think the U.S. business can grow to over the next couple of years? And then a follow-on there, Kedar, last quarter, I think you mentioned that the -- that given the margins of that business that it's not yet -- given the gross margins on that business that it's not yet able to cover the R&D expense. How large would that -- how large does the U.S. business need to grow to at current margins to be able to do that? And then I'll just ask the generic Advair question as well. So on generic Advair, what's the general timeline that we should assume where you would be ready to file? And I'm sure you're obviously aware of some your competitors having some issues with the -- yes, some issues essentially with the FDA on their product. So I guess, maybe you could help us understand what kind of feedback are you getting from FDA on that product and what the biggest hurdles are?
Umang, would you like to take the question on the trajectory and Advair?
Yes, certainly. So let me -- I'll speak to the 2 questions and then Kedar can answer the question on the margin. So in terms of trajectory, I just like to say that I can't give you any specific numbers, but I do believe that this trajectory should begin to improve quite dramatically from where we are now. I think you're right; we are at about $100 million and over the calls, we have reiterated that we've tried to absorb as much of price erosion from whatever we were trying to bring to the market, and I think as our limited competition opportunities open up, we should be able to show growth over a $100 million trajectory. So I think good reference points would be what happens in the next 2 quarters or 3 quarters as these launches come up. And on generic Advair, I think the -- at least what we've heard from the FDA is largely around discussions that you have before you initiate a trial. I think those discussions we've been having. And at the same time, I'd also like to add that very often in these trials, you sometimes realize that your pilot studies had some issues and then you have to go back and redo them, which is what we're hearing some of the -- some of our competitors having. And it's not -- the trials are not a slam dunk, it is lot of effort. I believe we are about 15 to 18 months away from filing.
Okay, that's helpful. And then Kedar, if you could help us better understand the U.S. margins.
So, Manoj, our current scale of business with the current mix of products, we are barely able to cover the R&D and the manufacturing overheads. Without giving any guidance, we would like to believe that the scale-up opportunity presented by the products which were launched in the quarter, next year the trajectory seems much better. The fully loaded profitability of large peers who are about a [ $1 billion ] in revenue, have upwards of 25%, 30% of profitability. But we have some way to get there. Having said that, as I said, next year, we are quite positive to turn that trajectory upwards.
I'm sorry. So next year you're quite positive that you should see margin improvement?
On the U.S. side, yes.
Yes. And so it seems like that would largely be a function of output from some of this pipeline.
That's true. When we talk to all of you in our May call after the annual close, we will be better placed to talk about the next year. At that time whatever I [ say ] would be more indicative.
We have the next question from the line of Kartik Mehta from Deutsche Bank.
I have 2 questions. First, Kedar, on the operating expense, there has been fairly a low increase on that, assuming that R&D cost has also increased. So how do we budget this maybe going ahead, because on a Y-o-Y basis, you guys just mentioned that R&D will increase. Ex of R&D, OpEx, other expenses, how do we look at that?
So, Kartik, there is a part of the other expenditure, which is fairly variable with sales in various markets. For example, there are data share fees in South Africa, there are sales and marketing expense in other markets. So that part will vary linearly with the revenue growth. The other part, as we have been alluding over the several quarters, we're working on a cost optimization program and we should continue to see operating leverage going forward.
And on this one itself, how should we assume R&D cost for the next 1 or 2 years, assuming that you will be filing more products and you will have something related to Advair or similar products in the respiratory space where you may need to spend more. So very specifically, R&D as a percentage of sale, where should that be?
See, from a capital allocation standpoint, the generics R&D will be largely funded through P&L and the specialty R&D largely through our balance sheet, that's the philosophy we are looking at. And given that -- particular year, if 2, 3 trials gets bunched up together, it's fair to say that we will touch about 9% or so. We are currently 7%, 7.5%. We don't see the total spend going beyond that, Kartik.
Yes. And the second one, I think Umang was alluding that there are certain products in the U.S. , or there's some scope for rationalization of the U.S. business. Could you throw some light on this -- on that comment? So which products? Will they be moved from Invagen's portfolio or anything? So what is the benchmark when you guys decide that there is a need to rationalize any product or any therapies that were there in the U.S.?
So, Kartik, this will be both from the Invagen and India manufactured portfolio and the idea is to build the U.S. business with very healthy threshold level of profitability, considering the burden on the manufacturing and supply chain infrastructure. So there is no one specific rule which says whether a product is in or product is out from the portfolio. But considering a very holistic evaluation, considering some of the burden on the manufacturing infrastructure, considering the past history of supply penalties et cetera, I think we will take a holistic call. It's not going to be very large, but we will need something to give us flexibility in the manufacturing and capacity.
So it will not be related to the pricing pressure of that product after you would have received the approval, right? It is a call purely on the supply and the manufacturing side, is that right to assume?
Absolutely. I mean, you could actually expect the set of products to be from the older portfolio, not from the recently launched portfolio, if that was your question.
That is the question. Thank you. This is very helpful.
Umang, would you like to add anything on it?
No, I think Kedar, you've covered it. I think it's a mix of products in the older portfolio where we've seen a fair amount of pricing action and where we don't see margins of threshold and profitability being hit. And it's also a way for us to juggle our capacity again, because if too many of the old products become volume chuggers for our plants, then we have less ability to bring new products in. So I think it's a mix of these 2 that will result in this exercise.
[Operator Instructions] The next question is from the line of Neha Manpuria from JP Morgan.
Just taking the last question forward, given a lot of the larger players in the U.S. are talking about exiting some of the legacy products and we are top 3 in most of our -- in the products that we sell in the U.S. Do you think that presents opportunity for us to gain volumes and is there part of a portfolio where we don't make money or is loss making, which you think would be the first that will get discontinued if we were to do a portfolio rationalization exercise?
Umang, can you take this?
Sure. So I think the -- Neha, I think we will continuously evaluate categories, where if we believe that we are the most competitive in the market, then it's quite logical that we will expect others to exit. But if we believe that the market is fairly saturated and the product is unviable, then we would also consider exiting some of those categories. So I think it's a mix of those 2 decisions. And then we'll be evaluating each product. And, I think the U.S. market today has reached a point where you have to play it comprehensively for value, because you could continue to get a lot of volume out of categories which others are exiting, but that I'm not sure is as financially wise as earlier it used to be, right. You had many options of trying to restructure your value equation on each product where the volumes -- suddenly a player exited and volume requirements went up, I think those flexibilities exist less in today's market.
Understood, sir. Second on the specialty business, we have mentioned in the presentation that we are in advanced discussion for some neurology products for the specialty business. Now that business obviously requires a lot of upfront cost, if and when we decide to get these products in our portfolio. Do you think that cost will start flowing through our P&L in FY '19, or would that be a more FY '20 type event, based on how your negotiations are going on for these deals?
So FY '20 type situation is likely. But at the same time, like Kedar outlined, we don't have the flexibility in our P&L today to pay for extensive R&D on specialty and continue the way we are doing on generic, because we don't have the flexibility of having a very large profit pool business in the U.S. as yet. So I think we will have to -- we are trying to use an inorganic approach, where we use some of our balance sheet for the specialty route and use our generic -- and use our P&L for the generic route. So I think that's how we are trying to bifurcate, but we don't have enough flexibility to route everything through the P&L today. But most of the charge is on the P&L, and when they come will be 2020-2021 period.
Next question is from the line of Anubhav Agarwal from Credit Suisse.
Umang, question on Decitabine and Pulmicort. When you mention about contractory market share, 2 things I want to check there. One, are we talking about more than 15% contractory shares there? And secondly, would they start reflecting from next quarter? Are you talking about very gradual ramp-up over that?
Yes, I can't give you specific shares. But yes, I would like to believe that both category should be higher than 15%. And I think you should see it. I think by the end of this quarter, the ramp-up should begin to show.
So it should start reflecting from March quarter itself?
Yes.
Okay. And do you still maintain guidance of 1 key approval every quarter, or we have already seen 3 approvals coming and that's what you're referring largely to?
Well, actually, they all came bunched together. We were hoping that they will spread out a bit. But yes, we are still trying to keep our guidance for 1 limited competition and obviously, now the clock moves forward to end-quarter 4 and early-quarter 1. So it will start from there and we are maintaining that.
That's helpful. And you have given a very good slate of your top 50 projects. But for the current 79 pending ANDAs that you have, excluding the PEPFAR, can you just talk about something on the complexity or medium complexity of that pipeline, because we are going to see really that pipeline coming out in next 2 years, so some guidance there will be useful.
So I don't know if we are providing that as yet Anubhav, but I think we will take this feedback what you've given and maybe when we come back in our May call, we'll try and give you more finer details on the pending ANDAs as well. So we will include this information in our press release in the May call and also talk about this going forward on a routine basis.
Okay. Kedar, one question on the Invagen write-off. We've almost written off $80 million, $90 million so far, which is almost like 15% of the acquisition cost. So are these largely some -- last time you mentioned about single-digit ANDAs, now perhaps a similar number. So when we acquired, they were 30 ANDAs and seems like we've cut -- written off value for almost 8, 9 ANDAs?
Yes, so I think what we've taken this quarter, Anubhav, is for about 3 ANDAs, and most of what we have taken is in the pipeline category. So I think what we're seeing is the existing business cash flows are fairly protected from the fair value standpoint. And the triggers are basically with respect to adverse regulatory development, which is basically postponement of the launch or a significant drop in the market share. So yes, to summarize, I think -- they are very product specific triggers. The commercial -- existing commercial business seems to be protected from a deal case standpoint.
I think, Kedar, to add, I think it would be fair to say that as we launch a product that is in the pipeline and you realize that the synergies are not -- I mean, the value that was in the balance sheet is not playing out the way we want it to, there will be an impairment evaluation the company will make. So at this point in time, since we are communicating that Sevelamer has pricing gone out of the market, it can be reasonably estimated that a fair amount of the charge is also Sevelamer.
The next question is from the line of Prakash Agarwal from Axis Capital.
Just to trying -- understand this better, the previous participant, so GAVIS this quarter, I mean write-off about -- amortization of about -- impairment of about [ $1.73 billion ]. But -- I mean how much of it -- I mean when the acquired value is already charged off?
I think Prakash, probably you refer to Invagen, because GAVIS is not our acquisition. [indiscernible] So your question was the INR 173 crore net of tax that we have charged. Can you repeat you question, Prakash?
Yes, so how much -- I mean in the past also, I think you took some impairment. So how much of the impairment has already been taken on account of GAVIS -- on Invagen, sorry?
So in total, the gross impairment that we have taken is about $110 million. Associated with this, there is a release of def tax at about 39%. So roughly around $60 million, $65 million net of tax have been impaired till now.
And this can increase given the fact that Umang just spoke about the couple of products, postponement of launch or reduced opportunity and stuff like that? Or you think at the moment this is it?
So at the moment, given the current projection, this is it. But every quarter the accounting literature mandates us to do this evaluation of what is the fair value of future cash flows vis-a-vis, what we have set up on balance sheet.
Understood. And secondly on the U.S. again. So you talked about improving market share in few of the products. But Dacogen, I see there are already 6, 7 players now, and -- I mean from a delta perspective and improving outlook in the U.S., we need more new approvals. So what kind of launches we are talking about for fiscal '19? Any color would help.
Umang, can you take the question?
Yes, certainly. So I think the -- I'm not sure that Dacogen has 6 players selling into the market today. I think there are 6 approvals, but possibly not as many who are selling into the market. I think the -- yes, we are looking -- look, we filed 30-odd products in the previous year, we are likely to file above 20 in this year. And I think bulk of those will come over the next 2 years. Some of those will be [ NC-1 ] product, which will come later. So I don't know, I think as a trajectory, as a general guidance to you, I would say, we could think about 10 to 15 launches a year.
Okay. Starting fiscal '19?
Yes.
Okay. And is there any growth number -- aspiration number that we are talking about '19-'20 in terms of U.S., which has been pretty flat and this is -- good thing is that this is despite huge price erosion. So a ballpark number would help.
So Prakash, we won't like to guide anything at this stage. Probably, you should expect us to comment more in our May call.
Okay. And lastly one comment you made on the institutional anti-malaria business. So that number had fallen down significantly, I missed that number. But I think the rebidding has happened. So what is the outlook there? Are we into the dispersibles and injectables? If you could help us in terms of what the market share we will get in the current bidding.
Umang, would you like to comment?
Yes, I think there are 2 factors at play. One is just the fact that there are a lot more people who are back into the bidding process. So if you were to look at -- lot of people had left the bidding process, because they had FDA issues in their facilities, et cetera. Now a lot of them are back in the bidding process. So there is hyper competition. I don't think we're giving details on each bid. But we are also saying that there are challenges in the funding environment, because obviously it's a lot difficult -- lot more difficult now for the global funders to -- for the global funding of these type of initiatives to happen, because America was a fairly large funder and the dynamics of that may be changing. So I think there is a general, I would say, a reboot of some of the funding, on the funding side, as well as more competition from others who were not allowed to bid earlier due to their FDA issues, coming back in on the fray. So I'm not going to say that what we rebid at and whether we won or not, but I just said it's been a lot more competitive and that's what we had indicated in our commentary.
And we are in dispersibles and injectables?
I think dispersibles and injectables will not be -- are not in the Global Access. So if your question was for a Global Access business, this is not -- our product range does not -- not these 2 products -- these 2 products are not in our range.
The next question is from the line of Ritika Jalan from Narnolia Securities.
Actually, this quarter if we are looking at the South Africa business, it has been very strong for us. Any color that whether there is a sustainable trend that we will see going forward?
If you see the market data for the private market business, we have grown much ahead of the market. And our private market business for MAT December is about 11.1%, market was around 10%. We would like to believe we will continue on this outperformance.
Okay. And what is the factor that will drive the growth?
So I think our sales force engine, as well as the tender business, which is about 35% of the total country revenue. On both sides, we continue to see growth Ritika.
Okay. And can you tell me the CapEx guidance for financial year '18 and financial year '19?
So over the years, we have been tapering down our capital expenditure. This year, we are likely to end below -- about INR 850 crores to INR 900 crores. We'll be able to share our thoughts on the next year in our May call, Ritika.
Like, till now what is the CapEx you have already spent in financial year '18?
Actually, I can come back to you. It's about -- just short of about INR 550 crores.
Okay. It means you have spent about INR 750 crores to INR 800 crores?
Possibly.
Okay. And can you give me the tax rate guidance for financial year '18 only?
So fiscal '18, full year ETR is likely to be around 25%, if you take of the one-offs that we mentioned during the call.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Kedar, just to come to the PBT impact for INR 173 crore impairment charge, which I think you said is net of tax, I should use the same 39%, works out [ to INR 83 crores ]. Does it look okay?
That's true. So [ INR 283 crores ] is the gross impairment Sameer, and about INR 90 crores is really is in def tax. So that is the INR 174 crore.
Okay, super. The second question is, how big is the Beclomethasone in the U.K. market?
It's a much smaller asset, Sameer. It's about $10 million to $15 million in size.
Okay, got it. And Umang, just on your comment on the late -- advanced stage discussion on the specialty assets, neurology and respiratory, I mean -- so you are looking at buying out a Phase III sort of molecules, is that what you have in mind?
Well, yes. We are trying to look at Phase III, late Phase II, but -- and I think we are in that hunt for both respi and neurology. We have some internal programs, but they will take time to get there. So I think we want to accelerate our entry there. And we are clear we are going to do it through our balance sheet, not so much through our own funding -- P&L funding.
Okay. And these are necessarily NCEs and so maybe multiple of $100 million deal sort of a thing?
Yes. And I think we will do 1 or 2, Sameer. And then after that wait for -- we'll have to also create a sales force infrastructure. So I think we're trying to accelerate our journey. It's something that will play out in the next 2 years or so.
Okay. And just one final one. On Tizanidine patch, you completed Phase 1A. So what's a road going forward and when do you expect NDA submission?
So we will do a Phase II shortly and we should be commencing that in about a little bit of time and then there will be a Phase III. So this is not a very extensive long trial. As we're seeing it right now, potentially a filing sometime around '21 end.
The next question is from the line of Abhishek Sharma from IIFL.
Just on the specialty foray, when you say that it's going to be routed through balance sheet, just wanted to understand what would be your preference, would it be -- for capital raising -- would it be debt preference or equity preference?
Right now, I think we are quite flexible. We would like it to be more debt. As it is our balance sheet has the potential to take on a little bit more debt. And I don't think we are talking significantly high amounts at this stage. And I think our balance sheet has the ability to take the leverage there. We may be slightly innovative, we could be thinking of a private equity partner as well if the investments required are fairly large. So at this stage, we are quite flexible and if it's an asset in the [ INR 100 crores, INR 200 crore ], then we can pick it up with our balance sheet strength.
And this capital raising would essentially be linked to the deal that you're doing, or are you looking to create some gunpowder there that if a deal comes across then you would do it?
No, I think it will be linked to the deal. I don't think we are going to take debt and wait for the deal to happen, because while we are saying we are looking, these are also highly unpredictable and they are very value-centric deals. So we might bid for an asset, but for people who want to sell the assets, don't think that it's at that value, then you don't get it. So it's a [ 1-0 ] game, so it will be linked to final purchases.
The next question is from the line of Nitin Agarwal from IDFC Securities.
Kedar, on the overheads, you talked about the operating leverage possibility still being there. I mean, you've done a pretty credible job in terms of controlling these costs, despite increasing R&D costs over the last 2 years. I mean how should we sort of mentally visualize these SG&A and staff cost, ex of R&D going forward, in terms of a run rate basis?
Yes. So I think there will be an inflationary impact on a large part of these spends. But, yes, there are opportunities. I think there are specific ideas in manufacturing cost base, there are specific ideas in quality-related cost base, repairs and maintenance or administration-related costs. I think we do have several of the ideas, which have not been fully yet implemented. So without giving you a specific number-based guidance, we will be focused on it in the coming year as well. But as I said, a part of these spends is more spread linearly with the sales of respect to market and balance is where the operating leverage will work out.
And on that, on the non-U.S. export business, I mean how do we look at that piece now? It has been a relatively less focused piece, there has been a lot of focus on the U.S. But I mean over a 5-year period, which are the pieces that are focus areas for us on this non-U.S. footprint?
So the non-U.S. export business, Nitin, largely comprises our businesses in Middle East, business in countries like Australia, Myanmar, Vietnam. While many of these countries we continue to be ranked in top 5 and we are growing well, but they're not as high scale to see a reflection in Cipla's overall P&L. And Middle Eastern markets, we have alluded to some of the geopolitical uncertainties. So probably our focus will continue to be on the U.S. market, if that was your question in terms of growth. Structurally, some of these markets may not have a linear growth pattern over the years.
And if I can squeeze in last one. Umang, on the domestic market, with government sort of focused on low-cost healthcare and all of these things going forward, I mean how do you foresee the domestic -- the regulatory situation, price control regulatory situation in the domestic market going forward? Are there any valid concerns that one should have on this space going forward?
No, as a trend, I think, 2 trends would happen. I think the healthcare insurance should increase -- should allow more families who were not able to afford their own healthcare, to be able to offer care to their families in the near India. So I think there will -- there should likely be a volume expansion and healthcare penetration in India becoming deeper. But I also do believe that the government has been quite consistent with what they believe should happen, and that is that they would like to keep price controls in the market. So I think we can expect both trends to happen. I think we can expect possibly more robust volume growth. But we could also expect price control to continue.
The next question is from the line of Manushi Shah from Research Delta Advisors.
Yes, I wanted to know that how many new products are launched by Cipla in the domestic market in the past 6 months.
Manushi, we can come back to you with the exact data.
Okay. And just one more question. Can Prezista launch in U.S. be expected in next 2 years, or is it after that, just a rough timeline?
Yes, at this stage probably we wouldn't comment on new launches.
Okay. And just one more. The 20 products which you talked about for next year filing, so how many of those will be complex injectibles or just normal injectibles?
Yes, I think maybe all these questions Manushi, the Investor Relations team will come back to you separately.
The next question is from the line of Mehul Sheth from Phillip Capital.
One question on depreciation side. Even after adjusting this INR 174 crore of one-time expense that you have taken, it's -- depreciation expenses are around INR 349 crore. So is it now a new base that we can consider going ahead?
Mehul, you need to adjust actually INR 285 crores from the amortization and depreciation line. At the gross value of impairment, there has been an associated release of def tax in the tax line, which makes it INR 174 crores on a net basis. So what you have to adjust is about INR 285 crores in the depreciation line.
That's including, okay. And also one question on interest expenses. So it is like INR 9 crore in the quarter, so any specific reason, means, why sudden fall?
So, I think we have repaid some part of our backing credit; that's why it is low. But as a trend, you should probably take an average of 9 months rather than this quarter's number. Chirag, can we take last 2 questions, please?
Sure, due to time constraints, we will able to take the last two questions. We'll take the next question from the line of Saion Mukherjee from Nomura.
Just one question. Do you have an update on Albuterol MDI file, and can we expect this launch next year?
Yes. Saion, our discussions -- we know that the FDA is looking at the file. There has been an inspection at the site at which Albuterol was to be made. We also believe some clinical trial sites have been inspected. And we are in communication with the FDA on their responses to our file. So the FDA is actively reviewing it. We hope to hear from them about next step soon.
Okay. And Umang, just on Advair generic, companies have faced issues with the PK profile. So is it fair to assume that you crossed that hurdle and therefore you are going to start the trial?
Yes, we'd like to believe that -- on that, we've been able to do it, and now it depends on the trial. And having said that, I just want to say that there is a fair amount of risk in these trials as well. Fluticasone is known to be a very, very troublesome molecule. So we are into the trial period. But yes, I think on the PK side, we believe that we have crossed that hurdle.
The next question is from the line of Charulata from Dalal & Broacha.
I wanted to know whether there is any more impairment that has not been taken in this quarter, will be taken in the next quarter?
Charulata, we spoke about it in the early part of the call. As we launch each product, quarter-by-quarter, we will have to continue to do this evaluation of carrying value versus fair value and take appropriate charges.
Yes. And the second question pertains to improvements in gross margin sequentially. What is the reason for that? Is it mainly because of good SMI?
So, there have been 2 factors, is largely behind the improvement in the mix. This is a respi season for our prescription business in India and respi is relatively higher margin compared to other therapies. So that has helped. What has also helped is the global fund business. That has been lower this quarter. And the gross margin of that business is relatively lower compared to other. So these 2 things [ are well ], apart from the cost and other things that we're working on.
Okay, fine. And in case of [ ARB ], are you seeing a reduction in the volume because of the changing treatment patterns?
Yes. So what we've seen in this quarter is an impact of various environmental issues, some aspects in the funding environment, our own execution matters. So I think collectively, all of that has resulted into our 13% decline. We will have to continuously keep a watch on this business, work on improving the cost base, the economics and the portfolio in the coming quarters.
Thank you very much. We will take that as the last question. I'd now like to hand the conference back to the management for any closing comments.
Thank you, everyone, for joining our call today. In case you have any follow-up questions, please feel free to write to the Investor Relations team. Our contact details are available on the last slide in our deck and I think most of you have my contact as well. So, thank you so much for joining us. Thank you. Goodbye.
Thank you very much. On behalf of Kotak Securities that concludes this conference. Thank you for joining us ladies and gentlemen, you may now disconnect your lines.