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Cipla Ltd
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Good day, ladies and gentlemen, and welcome to the Q3 FY '19 earnings conference call of Cipla Limited hosted by Kotak Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Mr. Chirag Talati from Kotak Securities Limited. Thank you, and over to you, sir.
Hi. Good evening, everyone. This is Chirag from Kotak Securities. I thank the Cipla management team for giving us the opportunity to host this call today. From Cipla we have with us today, Mr. Umang Vohra, MD and global CEO; Mr. Kedar Upadhye, Global CFO; Mr. R. Ananth, Global COO; and Naveen Bansal from the Investor Relations team. Over to you, sir.
Thank you, Chirag. Good evening, and a very warm welcome to Cipla's quarter 3 earnings call. I'm Naveen from the Investor Relations team at Cipla. Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections or other estimates about future events. These estimates reflect management's current expectations of the future performance of the company. Please note, 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 statements whether as a result of new confirmations, future events or otherwise. I would like to request Kedar to take over.
Thank you, Naveen, and good evening to all of you. Welcome to our earnings call for the third quarter of fiscal 2019. I hope you have received the investor presentation that we have posted in our website. Let me start with an overview of the quarterly performance. For quarter 3 performance, was on expected lines as the challenges that we alluded to in our last quarterly call played out. This quarter saw the full impact of normalization of our business in Middle Eastern markets and the rebasing of tender business in the global access business. The internal challenges, which we referred to in our last call, they are being addressed on war footing, and they are in advanced stages of getting resolved. During the quarter, we saw strong performance in select lines of businesses across our focus markets. While the high based effect for India business creates comparability issues for primary sales in the financials, we're happy to report very strong traction on the secondary sales accompanied by increase in market share for the quarter toward 5.4% as per the IQVIA report. South Africa private business continued to drive strong momentum, growing almost 4x the market as per market data. The U.S. business saw strong sequential and year-on-year growth on the back of scale up of new launches. As we enter FY '20, we believe some of these challenges will subside and hence, our overall outlook will remain -- continues to remain optimistic. With that, let me take up the financials for the quarter. For the quarter, overall revenues from operations stands at INR 4,008 crores. On 9 months, the revenue from operations is at INR 11,958 crores, which recorded year-on-year growth of 4%. As mentioned earlier, the growth was driven by build of the U.S DTM business with new launches, which was offset by challenges in other parts of the business such as emerging markets and global access status.Gross margin after material cost stood at 64% for the quarter. The quarter's gross margin numbers are impacted by certain one-time low margin trends of business in South Africa and for liquidation of inventories, thereby avoiding, [ indiscernible ] Coming quarters. During the quarter, we continue to maintain price control of expenses. Total expenses, which include employee costs and other expenses stood at INR 1,837 crores, declined 3% on a sequential basis. Employee cost of this quarter stood at INR 718 crores, flattish on a sequential basis. Other expenses, which include R&D, [indiscernible], quality, manufacturing and sales promotion expenses stood at below INR 1,119 crores, declining 6% on a sequential basis. Total R&D investment for this quarter stood at 7.5% of revenues. This is on expected lines as we progress on our key U.S. assets as well as the Advair clinical trial program. With all this, EBITDA for the quarter stands at INR 720 crores, which is over 18% of sales. As such, for the quarter, it's INR 126 crores. We're tracking at a full year effective tax rate of 28%. Profit after tax is at INR 332 crores, which is over 8.3% of sales. As you are aware for the last 2 years, we have focused on cash generation. Our efforts in this [ rationing ] include taking various strategic decisions, including closing and settling open litigations, investing noncore businesses, ensuring that past investments are rectified through IQ or other means, and monetization of dormant NDA's dossiers and industrial property. Our long-term debt remains at USD [ 527 ] million, which was mainly used to fund the Invagen acquisition. We also have working capital loans of about $60 million, which acts as a natural hedge towards our receivables. Total net debt-to-equity is quite healthy at 0.14. Outstanding forward contracts as a hedge for receivables as of 31st December 2018 are USD 43 million and ZAR 396 million. During the quarter, we also hedged a certain portion of our forecasted export revenues. The outstanding forward contracts as cash flow hedges as of 31st December 2018 include USD 208 million and ZAR 175 million. With this, I would now like to invite Umang to present the business and operational performance.
Thank you, Kedar. Welcome to everyone on the call. Let me start with the key highlights for the quarter. The U.S. business continued its strong trajectory growing 18% year-on-year and 10% sequentially. We maintained our strong quality and compliance record with inspections across Kurkumbh and Invagen, which included a minor -- which ended in minor and procedural operations. We already received the EIR for Invagen for the recently concluded USFDA PAI and GMP inspection at Goa. We have received some observations, which we deemed procedural, which we will submit a response to the observations within the stipulated time. Our R&D pipeline is progressing as per planned. Our Respiratory trial program is on track, and we are expecting to file 2 products next year and have one launch every year, starting next year. As you would've seen, we recently announced the approval of Medroxyprogesterone Injectable, and we are tracking well on our guidance of one limited competition asset per quarter. The quarter delivered continued growth across our branded markets. Though reported numbers are lower for some of our private market businesses, as per IQVIA quarter 3 '19, our India business grew 12% year-on-year versus a market growth of 10%. In South Africa, our private business grew thrice the market at 9% as per IQVIA MAT December '18. Our emerging market Biosimilars franchise is continuing to expand, and we've signed new deals of Bevacizumab and Trastuzumab for multiple markets. From last quarter's call, you would note that this quarter played out as expected and per our commentary to you in the last call. We believe we are bottoming out and crossing over the period where high base levels in the previous year due to GST or one-offs resulted in subdued performance. The current quarter and YTD numbers represent multiple headwinds as I explain below. Some of -- most of which will probably not be in existence post the end of quarter 4. Over the last days of quarter 2 and quarter 3, our India business stayed largely flat with a strong prescription growth and an improvement in market share. We now look forward to coming back to double-digit rates on the quarters ahead. Also, post GST, the India trade had destocked significantly, and our YTD numbers almost include the impact of nearly 6 days of lower primary sales. With the lower crude and stabilization of China commodities, procurement cost have now reached a point where they are beginning to abate. The current quarter includes the full impact of normalization of the Middle East business. Our commitment to the patients in these countries stay solid, and we will continue to examine avenues to show continued business. For the South Africa tender and CGA, the CGA component has completely rebased, and South Africa will rebase in the next 2 to 3 quarters. There is growth in our private market in South Africa and in other sectors, which can absorb this reset as a new tender with a 3-year clock setsin.The quarter numbers are soft considering certain one-time low-margin sales both for SA and CGA tender business, which ensured the liquidation of inventories to avoid a subsequent hit. At a company level, the impacts of these sales is almost 150 basis of sales in gross margin. Let me move to the quarterly performance now. In India, reported numbers are largely flat year-on-year due to the one-time restocking impact in quarter 3 FY '18 and destocking this year in trade. Adjusted for this, the reported growth would be 6%. We're also noticing trends of inventory normalization in certain pockets. Having said that, we remain optimistic of our growth in India in quarter 4 and expect it to be strong on a year-on-year basis despite the seasonality kicking in. Our efforts on prescription, generation and therapy focus have resulted in strong market share improvement across our key therapies from quarter 1 to quarter 3 of '19. Respiratory Inhalation market improved by over 200 basis points; Urology improved by 30 basis (sic) [ basis points ]; and Cardiology by 30 basis (sic) [ basis points ]. We are pleased to note that the Chronic segment is increasingly becoming the growth driver for business. In quarter 3 as per IQVIA, Cipla gained the rank to become the #2 Chronic segment in India, growing 19% versus the market growth of 13%. 15 Cipla brands of the top 22 brands that feature among the top 300 of the IPM have outpaced the IPM growth in quarter 3 FY '19. We are happy to report that our award-winning BerokZindagi campaign has become a benchmark initiative to build public awareness. We are on track to achieve a target of INR 6,300 crores to INR 6,400 crores on the domestic business, which includes the branded trades, generics and the consumer health care business. For the U.S., we are happy to report that in the second quarter in a row, our U.S. business delivered both sequential and year-on-year growth. The business grew 18% year-on-year to $118 million despite a heavily moderated contribution from the B2B segment, which is only at 10% of the total sales of the U.S. business now. I'm also pleased to report that North America business reported a positive post R&D EBITDA during the quarter, and is poised to scale up further in the coming quarters. This was driven by an improvement in gross margin as our DTM launches came down. We continue to maintain our exit guidance rate of $120 million to $125 million. We also continue to do well on our guidance of one limited competition launch every quarter, and we'll maintain this as we progress. We are progressing well on our trials and targeting to file 2 respiratory products in the U.S. launch one -- and have one launch every year starting with the next year. The SAGA region, which include South Africa, Sub-Saharan and Cipla's Global Access business declined 20% year-on-year in quarter 3 when reported in US dollars, largely behind the rebasing of the CGA business, which degrew 48% in the quarter, in line with our commentary in the last quarter. Our South Africa private market continued its strong trajectory going 4x the market at 9.1% as per IQVIA (IMS) MAT December '18. We believe our private market business in South Africa remains fundamentally strong to consistently drive growth for the future. During this quarter, the South African tender business have seen some softness as we referred to earlier. As the new SA tender section, our private market will absorb this impact. The emerging markets business declined 19% on a sequential basis, largely attributable to the higher shipments made in last quarter before certain sanctions were expected to set in. In line with our strategy to consolidate a base, we divested our French-West Africa business. As alluded to earlier, we believe the impact of emerging market uncertainties and sanctions have largely played out. We continue to maintain a good momentum in expanding our Biosimilars franchise in emerging markets. On the specialty business, we expanded our portfolio into the CNS space by signing a deal with Concert Pharmaceuticals for an exclusive worldwide license to develop and commercialize a novel GABA (A) receptor subtype-selective modulator. Based on Concert's initial preclinical and clinical evaluations, Cipla intends to develop 354 for the treatment of spasticity movement disorders. The product will have a strong commercial synergies with our existing pipeline product offer, Tizanidine Patch.To close, we believe the challenges we referred to in the last quarterly call have played out, and our business is bottoming out and has surpassed the high base effect of last quarter, quarter 2 and 3. So overall, while the financial year has been challenging operationally, we remain bullish as we enter FY '20. While India's seasonality will hit in quarter 4, we target double-digit growth for this. In the U.S., we remain focused driving to the $120 million to $125 million sales trajectory level for quarter 4. With several limited competition approvals like budesonide, diclofenac, isoproterenol and metoprolol, we now have a proven track record of getting strong and differentiated approvals in the U.S. We had indicated the launch of one product -- differentiated product and then delivered on that. Recently, we also announced the approval of Medroxyprogesterone, a limited competition asset for us. South Africa private market business, including the Mirren OTC portfolio will continue to significantly outperform the market as the South Africa tender resets. On the operation side, we have made very good progress towards capacity debottlenecking. For some of our key impacted products, we have significantly improved throughputs to ensure our teams across businesses can fulfill orders and build inventory. There's also been a strong focus on derisking important products with alternate sites and plants.We have continued to maintain a strong pipeline of launches across markets including roughly about $150 million to $200 million in [ VMP view ] of U.S. launches, and we are continuing to operate facilities with the highest level of compliance and control. I would like to thank you for your attention, and I'll request the moderator to open the session for Q&A.
[Operator Instructions] The first question is from the line of Neha Manpuria from JPMorgan.
Sir, on the India business. So we maintained the guidance but usually if you look back, our fourth quarter does tend to be seasonally slow. What changes in this quarter for us to maintain our guidance for -- and indicate double-digit growth for fourth quarter?
So I think Neha, we've seen a fair amount of destocking for our products in the channel, largely for the Acute portfolio of Cipla. And this is a portfolio that has not been growing. If you really look at our numbers, Chronic and -- which includes Respiratory and our new launch Diabetes and Cardio is actually growing very fast. We don't have an issue of destocking there. But at Acute, we've had this issue and as result of that we've lost, as we mentioned, about 6 days of sales, so I think we're still confident. The quarter 2 and quarter 3 had base effect. We know we're slightly behind competition in terms of performance in quarter 3. From an India perspective, the 6 versus 10 or 11, but I think we are confident of quarter 4.
Okay. So it's more normalization of the 6 days of sales lost?
Well, I don't think we're going to recover it in the next quarter, but it will stay at the same level. So we won't lose anything incrementally.
Okay, understood. And my second question is, in the opening remarks, you mentioned about 1.5 percentage -- or 150 basis points impact from some -- selling down some inventory in South Africa. I couldn't catch that clearly, so could you just repeat yourself, sorry?
Neha, this 150 basis point impact for the quarter is because of certain pricing-related discounts that we had offered in the quarter, both on the South Africa tender and on Global Access business.
In the current quarter?
Current quarter, yes. And I think as we grow the 9 months, [ be it in terms of ] liquidation of some of the inventory that we have built earlier at lower prices, roughly around 150 basis point PAT in gross margins we have seen.
Okay, understood, and this should not continue. Pretty much all of this pricing discount is done for the tender market because you also indicated that the South Africa tender business was soft in this current quarter, so I'm a little confused.
I mean, it is largely done because the inventories are quite normalized now, especially for the Global Access business. But I think there could be variations once a while, but this is largely done. And on South Africa, Neha, the tenders are now, new tender which has floated, which will start getting serviced only sometime around quarter 2 of next year. There, the prices are lower but there, I think our private market business and the Mirren acquisition will help us offset that impact.
Okay, one last -- sorry, sir.
So I'm saying largely from the access business, the business is rebased. The South Africa tender business will go through a little bit of compression, but we are hoping that the private market will offset that.
Okay, understood. And one more, if I may squeeze in. You actually are tracking to achieve $120 million, $125 million exit. Next year, we have a good pipeline, plus we will ramp up a lot of the products that we've launched. How should we look at growth for the U.S. business in FY '20 in terms of run rate?
So Neha, I think our thoughts of the next year, probably we'll be able to share between the May earnings call. You're right, largely, the current base, which [ we matured ] $118 million, at fourth quarter very high confidence of $120 million to $125 million. That will get demonstrated. I think our thoughts on the next year, we'll share with you in the May call.
The next question is from the line of Anubhav Aggarwal from Credit Suisse.
Umang, you mentioned about South Africa tenders. On the pricing, they are lower, but how about volumes? Have we able to renew most of the volumes we have?
Well, yes. To answer, yes. I think we are also hoping that the allocation could be slightly higher also in terms of volumes. So -- but we've been able to get roughly the same amount of volumes so far in terms of an award. General performance has always resulted in us being able to supply more than what has been allocated.
Okay. And just for the U.S., can you just roughly explain about this [ VALGAN ]. I missed the reflect about 30% market share. So most of these [ VALGAN ] benefits has already reflected in this quarter or we're yet to see what part of it could reflect at this quarter 4?
So it's already reflected in this quarter. It's, in fact, we're clocking now at 35%. We've actually gained market share.
Okay. And just one clarity on this. You mention about capacity constraints last quarter in that INR 100 crores kind of impact. Where is it reflected in this quarter? I mean, because [ EMs ]
Top line.
Yes, I know, but which geographies is it reflected?
All across. It's across our geographies because it's specific to a couple of plants and into -- with Cipla, most of our plants supply all markets. It's not sequestered for U.S. separately and India separately. So the impact is reflected in top line across markets. And it's now at the stage where in quarter 4, we are hoping that it will be lower, and quarter 1 -- at the end of quarter 1, hopefully this has reached -- it will reach a very stable share of -- I would say, it will be very stable, post that.
The next question is from the line of Chirag Dagli from HDFC Asset Management.
Just a couple of clarifications. Are you saying that your gross margins would have been higher by 150 basis points on an overall basis for 9 months had these -- some of these inventory clearances would not have been?
That's right, Chirag. The impact of inventory liquidations and some of the tender pricing. Had that not been there, the gross margin would have been higher by 150 basis points in itself. But as you know, gross margin is a function of several variables across geographies and across clients. So yes, if you've taken this particular item out, gross margins would have been higher by 150 basis points.
So this -- we should begin in FY '20, right? I mean, at some level, this has to benefit if this doesn't return.
Has to. Something goes up, something comes down. That's what I said probably the next year's thoughts, Chirag, we'll share, in a quarter from now when we meet again for a call.
Okay. And did you indicate that the B2B business is now for the quarter just 10% of U.S. sales, sir?
Close to, yes. That is right.
And this -- say 4 quarters backwards, how much?
Upwards of 25.
25.
About 2.5 or 3 years back, the whole U.S. business was B2B only, practically.
I understand, sir. I understand. And there was some comments you made on NPV of R&D, sir. I'm not sure if I got that. What exactly was that? Umang, you made some comments in your opening remarks.
I think we are saying that we have got -- we have a launch pipeline, which is roughly targeting at about $115 million of NPV. And look, our NPV is calculated over a 3-, 5-year basis, right? Once is every year, so what we try and do is we keep adding to our pipeline at that rate, every year because that provides a little bit of stability to growth.
$125 million every year is what you're saying?
Yes. As an NPV, we try to act to our pipeline.
The next question is from the line of Kumar Gaurav from Kotak Securities.
This is Chirag. Umang, on and off, we keep on hearing chatters about you leaving the management and the management instability in the company. Can you really address us about these issues, and tell us about how you're looking -- how the management team is looking at the coming from the next 3-, 5- year point of view?
I think several of the one-on-one interactions have had this question coming to me directly, but I'm happy to address this on the call today. There's been a little bit of turbulence in the sense that there was one gentleman who left from the management team, and then also [ Priyadarshi ] has decided to leave. But I think these are natural in our course and journey. We finished one wave of our transformation over the past 3 years and there's a new challenge now for the next 3 years. So people will -- some people will leave, some people will come. Ananth also joined us 6 months back, so I think the person -- people who come new bring new thinking, new perspectives, new energy and help us reset where the business is. As for myself, I'm very much here and looking forward to the next couple of years of strong growth, next couple of years of repositioning Cipla to be an innovation company. And so right now, there is no truth to any of that rumor and they're all very much here, the management team is very committed to building Cipla to a greater future.
The next question is from the line of Shariq Merchant from Quest Investments.
My question is on the North America business. In your earnings presentation, you called out Invagen, which -- where you're expecting the $223 million campaign of last year falling closer to $200 million this year on to pricing challenges in the U.S. Now given that you'll are still sitting on close to [ $318 ] million of goodwill on your books. How often do you deal with it the goodwill amount and when do you decide to maybe evaluate? Is it on a quarterly basis or annual basis? Or if you could throw some light on how we should think about this?
These are factors. Accounting standards require us to revisit goodwill at least once a year. And we have been doing it every year, we'll keep doing it, the goodwill because of Invagen -- it's actually common because our DTM business and Invagen business is integrated. There is a very significant degree of closeness in manufacturing, R&D and pharmacovigilance. So part of the goodwill is attributable to the whole U.S. business as such. Till now, we are comfortable with the value of goodwill that we are carrying and yes, we'll keep doing the impairment testing every year.
But a part of the goodwill will also be attributed to specific drugs in your pipeline, right? So do you believe that there could be some challenges when you maybe evaluated in the fourth quarter?
I think goodwill is actually -- and strictly, the goodwill, which we're carrying on balance sheet is up in [ entity level ], and what we call the cash generating unit level attribution of that asset. You're probably referring to the intangible assets. Intangible assets are...
No, I'm referring to the goodwill that is carried on the subsidiary books of Invagen. That's the one that you all disclose annually?
Correct, correct. So that goodwill as I said, is more an entity level asset. And that includes the benefits of all the assets which we are carrying and the future synergies of the platform that we've acquired. What is probably subject to treatment assessment and possible risk is product level intangible. And that also we keep checking quarterly for any triggers, and once a year annually again, for impairment.
Okay. So that is also checked quarterly, so maybe that's not -- it's not only done, Q4.
Intangibles is more frequent. Goodwill is once a year.
All right. And my second question is on the South Africa business. So the private market you called out is growing at 1% to 2%. Is that -- do you believe that these are challenges that the market is facing for a longer period of time? I'm not talking about Cipla, specifically. I'm talking more at a market level than the private market. What are your thoughts on how we should look at the market growth going forward?
So I think the numbers you are talking about are -- it helps if you were to look at it over the past 4 quarters. The overall market growth has slipped down by about 500 to 600 basis points, and that's largely to do with the appreciation of the Rand and the movement in the currency. Because of that -- the government has a set pattern in which it allows price increases. So the fall in the market has been because companies have not been allowed to price -- to pass on these prices, which is why in new start of the year, this is about 8% or 9%. We're ending the year in about 1% to 2% for the market growth, right? And I think what's happening now is that those prices are getting reset again for the next year, and I think the market should hopefully start picking up growth going forward. But despite this, Cipla's performance has been very strong. We've actually grown almost 3, 4x market for the past 3 to 4 quarters because of our execution. And now, with the -- which is [ IGP ] strong about the private market being able to offset the tender outcome that we are seeing in the next year.
Okay. What would be the quantum of price increase allowed for CY '19 or FY '20?
So it could be in the range of about 3% to 3.5% or so or thereabouts, which actually in the past year, reduced to almost 1% or less than 1%. And if you -- it was in the year before that, almost 5%.
Okay. And normal volume growth for the market will be in the 4% to 5% kind of range?
That's about right. That about right, yes.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Umang, just your thoughts on CPN-101. What are the key time lines, milestones that you're looking for this asset?
So Sameer, where it is right now, it's in phase. We will start hopefully, our Phase II study, the dose finding study will start sometime around the end -- around this quarter end. And then from there, I think we will move to a Phase III. So right now, we are not seeing it as a launch before 2021 or mid-2022.
In calendar years?
Yes, yes.
Which means filing by end of 2020?
That's how we're seeing it right now.
Okay. Okay. And what kind of outlook what you have for the studies [ going ]?
So this will not be much, Sameer. I think we're looking at roughly about $20 million. The sample sizes are not that large. So we -- it will be about roughly about $20 million. The only thing that I would add -- sorry, I want to correct the statement I made. The filing will not be end 2020. It will be end 2021. So the launch will be probably 2022, mid-2023, so I got 1 year wrong on that. And the cost will be roughly about $20-odd million.
Okay. Great. And on CTP-354?
That's just come in -- Sameer, there is -- we need to make sure there is something that we are checking into the drug from a toxicity profile perspective. The drug had a tox signal, which we believe was species specific. So we're just trying to make sure that if we can cross that bridge, which is approximately the next 6 to 9 months and will cost us about $1.5 million or $2 million, if we cross that bridge, then I think this is a fantastic drug. If we are not able to cross that bridge, then this product will obviously not be in the pipeline going forward. So we think that there is a species specific tox effect, which is what we're trying to look at.
So Umang, what data do you have so far on this?
It's got a Phase I, and we've got tox studies in certain species. And because it's a GABA (A) receptor, we're quite well aware of how this would work. It's basically got a similar action as any of the other GABA (A) receptors, so it's pretty potent. It's just the tox signal that we've seen in some species. And the Phase I that we have, which is a small Phase I, seems to suggest that the drug is a promising one to take. But we need to confirm that this drug is indeed what we think it is and has a species effect, so we'll spend the $1.5 million, $2 million to get there. And if we get there, then we'll develop this further. If not, then that's fine. Then it will have to -- we'll have to see what to do with the drug.
And further on post the tox check, what would be the development time frame for this one in the NDA filing?
It will probably not be a product that we will be able to file before '23 or '24.
Okay. So it's a full fledged Phase II, Phase III
It's a full fledged drug. Yes.
The next question is from the line of Nitin Agarwal from IDFC Securities.
I was just following up on the previous questions. On the specialty business, I mean, how -- and on a broad basis, how are you looking at R&D cost outlay or investment outlay towards the specialty programs over the next 2 to 3 years?
Yes, we've given guidance on this that we will not want to spend more than 1.5% on R&D going forward, in some of these assets. So I think that's the max that we can do from a P&L perspective. It will probably start -- the real expenditure will start coming in as our Advair trial cost begins to easen out by the end of next year. So overall, we might not see too much of an uptick on R&D as we see it today. And then also we're saying that we will probably try and acquire some IP as again spend all the money through our P&L as well. So if there's an advanced asset, which is in Phase III, et cetera. We might end up picking that up closer to the launch of the tizanidine and other asset that's upfront. That's in the pipeline.
So you said 1, 1.5% of R&D spend toward specialty assets?
Off sales will be probably specialty spend. And we'd like to cap it at that.
That's the P&L money, Nitin.
Right.
Balance, probably about $2 million to 3 million over the next 3 to 5 years in the balance sheet side. That's for acquisition of assets in organic, largely.
Okay. And on that front, on the inorganic front, barring looking at specialty assets, are there any other inorganic sort of agenda which is there for us?
We have been looking at targets, bait for certain select therapies in India, certain country entry strategies for emerging markets, certain assets for U.S. businesses, but -- and we'll keep looking at it. We do have borrowing capacity based on strategic equipment, I think that will continue but selective.
The next question is from the line of Tushar Manudhane from Motilal Oswal Securities.
So just on trade receivables having sharply higher over March 2018? Anything in particular there?
So I think this trade receivables for us. Our base in U.S. was a little low. And as you make new launches, our [ U.S ] reductions, the gross to net reductions come in. So I think every company in its growth base for U.S. market has invested additional amount in receivables subject to new launches, so that has happened for us also. And you would have noticed that between March to September, most of that increase has happened. Because in September to December, we have been largely flattish. We are also examining ways to see whether some of this would be addressed to factoring, some of this could be done through receivable sales programs. So we keep examining that but yes the answer to your question is largely because of the U.S. business.
Okay. And now that the U.S. business is at [ AUM ] if you can just help us understand, whatever incremental revenue now comes in, how much will that affect in terms of EBITDA?
Incremental revenue will be margin accretive because most of these are DTM launches based on in-house manufacturing, largely. So you could expect that additional gross margin benefit because of incremental sales is very high. You have to also keep in mind a little bit of Advair trial investment which comes in. So this is post R&D EBITDA which we're talking about. There are several variables. We'll keep updating you how this progress is in the coming days.
But on a ballpark figure like incrementally let's say $1 of revenue to how much of EBITDA, post R&D including that of Advair?
I would digress from giving away the granular details at this stage. We'll update you as things move forward.
The next question is from the line of Chirag Dagli from HDFC Asset Management.
Sir, it seems if I sort of do some basic math based on your guidance that for the quarter, post R&D U.S. is now EBITDA breakeven. It seems that the U.S. is a 55% kind of gross margin business. And incrementally, the growth on this business, that kind of profitability should flow to EBITDA. Is this understanding right?
That's right, Chirag. Subject to any money that we will need to invest in R&D. I don't think there is any incremental SG&A, that will also invest for the U.S. business. We just sort of keep in mind how much the R&D budget goes up.
I understand. I understand. So is it fair to say that FY '19 -- so this INR 1,200 crore R&D, is this largely spent on genetics because respiratory trials haven't started as yet, meaningfully.
This is not true.
It's about -- [indiscernible] 80% is on R&D. About 4/5 of the total R&D is on U.S. Balance is for all non-U.S markets.
And within...
The trials are on for Respiratory for Advair.
So from here on, the run rate will not increase. Is that -- at least from a spend standpoint.
Run rate will -- I think marginally might increase. But [ spending-wise ], we would want to keep it flat.
Right. And just one clarification, sir. You said, quarterly, INR 100 crores of sales impact due to the supply constraint?
That's right. I think last time we alluded to that. That applies should over and above the basic tolerance are impacting us by about INR 100 crores per quarter, that's right.
Is there any specific market that this is impacting, sir, or across the board?
Yes, this is across the board. Nothing specific to a market as Umang mentioned earlier because there are some specificities that cater to multiple markets.
So then in FY '20, we should assume that this -- some of these will scale back, right, I mean, come back?
That's correct.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
Just looking at the other segments, emerging markets and Europe, I missed some of the comments at the start. Emerging markets, I think you talked about Middle Eastern markets, specifically. So can you just clarify what's the reason behind the weakness, sir?
Middle Eastern. Your opening remarks was on emerging markets in Europe. Can you provide some commentary on the growth and the weakness?
Yes. So Europe, for us, seems to be showing some good pick and will continue to, and we'll see Europe starting to do better. Emerging market, of course, we do have this impact on the Middle East, and that will continue to have its impact as well as the impact that we had from some of the markets with Venezuela.
Okay. So is there any risk in terms of either receivables or any write-downs you mainly have to take in these markets, Venezuela or Middle East?
No, we don't have to pay the write-offs, but probably some of the receivables will go up.
Do you want to kind of quantify how much that number would be?
I don't think it's material. To a large extent, it might be -- we might see some aging go up, but it's not material. Most of those are secured. So we want to be secured most of the receivables. So it's not going to be material to our numbers. I think what Ananth was trying to highlight was that in quarter 3, we had a fairly low emerging market base because quarter 2 had, on account of these -- the sanctions, the Middle East had -- there was probably buying that happened more in quarter 2 versus quarter 3. And now, I think in quarter 4, hopefully, that will stabilize a lot more, and that will continue. And the receivables will go up because the base will be going up. So quarter 3 base is $53 million, now $55 million. Quarter 4 base may be slightly higher than that, so that will automatically take receivables up.
Okay. Just back on Europe again. Your presentation have talks about Respiratory franchise expansion. I'm just curious how -- we had like a launch [indiscernible] some time back, but how is it doing now? And how much would Respiratory be today as a percentage of say Europe business?
It's doing pretty well. We're very happy to report that it's doing well, and we'll continue to keep tracking that. That's been a good positive moment and a positive progress. I'm not sure we declare as a percentage, how much that would specifically be at this time.
[Operator Instructions] We'll move to the next question just from the line of Anubhav Aggarwal from Credit Suisse.
Can I have one clarity when you mentioned on liquidity -- liquidation of inventory and selling some of that at a discount. Just quick numbers on that. That numbers are just like -- almost like quantum to be INR 150 crores plus. Is that quantum significantly off or it's in the range?
So it's in the range, I think, and that's the 9 months period I referred to. And it's both liquidation of inventories at a price, which is lower than the cost. Some of the write-offs that we have to take because of shelf life expiry then certain pricing discounts that I report too. All put together, ballpark it will be in that range.
So INR 150 crore, INR 200 crore, all taken in this quarter for the 9 months inventory, which we accumulated?
No, I think 150 basis point, both in this quarter and 9 months period. I think INR 150 crores is a number more for the 9 months. It's not as high to take all of that in this quarter, Anubhav. It's about 150 basis points of sales on a YTD basis.
Okay. So what I was trying to do was -- from a gross margin that you said that if you adjust for it, gross margin for the other business should be higher by 150 basis points. And that's what I was trying to adjust that. Assuming that gross margin on the other business, which you're talking about 30%, 35%, that's what I was trying to do the calculation and the number was going up to be of that order of INR 150 crore. So maybe I can take offline this.
We can take it offline. The math is logical, I don't know about the way you did it, but I think -- I mean, probably a little more accurate number it will be 150 basis points, either for this quarter or for 9 months period.
But broadly, in terms of value, he's not very off. he's not very off. But you're right, so on a 9-month basis, that is roughly the impact we've taken. Because I want to go back, the last call and a couple of calls before, we had a fair amount of stock because the global fund changed their ordering pattern. And as a result of that, a lot of companies, including us, had a fair amount of stock, which was created for which there were certainly no orders. And these stocks began to date and age, and they had to be liquidated, which is -- and we are glad that we are pretty much at the end of it now.
The next question is from the line of Nimish Mehta from Research Delta Advisors.
I just had one question. You mentioned about the input cost increase mainly because of the [ subscription ] in China. So has that kind of come from them? Or how do you see that then? And what is the point of increment?
I think incremental impact of this cost increase either because of China sourcing for commodities. It's roughly at a [indiscernible] about 50 to 60 basis points of sales. It is more plateaued now, Nimish. We are not seeing that it is started easing, but it has plateaued, which means increment increase were not seeing. But it's not come down as well. We are hoping that -- the reverse case in the next year. We have heard about some [indiscernible] being removed on a couple of molecules et cetera. So let's see how that paths out. But it's about [ probably ] level, 60 to 70 basis points, plateau.
Okay. For the 9 months [indiscernible]you are talking about right?
Yes, yes.
The next question is from the line of Ritika Agarwal from Quest Investment.
So my question is on domestic business. So how are we seeing [ the rich cost, M&A and CTCO ] impact on our India portfolio?
Ritika, as you're aware, the methodology for pricing in India regulated is a market-based pricing. So we've always experienced cases that where you reduce your prices for an inclusion of a drug and [ the elements ] are there, usually your future price increase gets capped to WPI because of inclusion of [ NLAM ]. But beyond this, there's nothing to sort of mitigate as such. You have to comply with the regulations in India and some of the work, which we're doing especially in [indiscernible] shipping initiatives, be it for Respiratory or for other clusters. That helps us price volume growth, which is in our hand. That's where we are approaching, the [ NLAM ] issue for India market.
Okay. And my second question is on the emerging market. So out of 52 countries, 13 countries we have DTM approach. So how has that strategy been delivering in the emerging market? How are we taking it going forward? How are we -- how is that strategy regarding entry into the China and the [ delivery ] markets?
I think we'll continue with that approach. The DTM that we are presenting, we are now outperforming in all the markets that are present in the DTM and therefore, our focus will continue to be to build on the momentum. And the strategies that we have, that focus, will continue to stay.
[Operator Instructions] We'll move to the next question, which is from the line of [ Christopher ] from [ Partners ]
Just wanted to get an update on your comment on market such as Yemen.
Sorry, your question was not clear. Can you please repeat your question?
So just wanted to get your update on market like Yemen?
So Yemen market has seen a little bit of currency volatility. As a company, we are conscious of the -- our responsibility to service the patients in that market, and subject to our risk assessment as to how much exposure should we take on inventory, receivables and other assets we continue to supply. In quarter 3, our primary billing substantially was reduced, which is what we said in our initial opening remark. And we look forward to the market returning to normalcy.
The next question is from the line of Saion Mukherjee from Nomura.
Can you just help me with the Global Access numbers and tender numbers approximately which are there for the quarter in the sense they would have come down significantly from previous years.
We were tracking more $150 million sign 2 years back and this year, we should track half of that. On a full year basis, we'll be probably half of what we're tracking 2 years back. And last part of this drawback actually is happen in pricing, which means the contribution to gross margin on EBITDA has been severe. And to some extent, we have been able to mitigate this because of growth in other businesses.
So this is a Global Access number right?
Yes, that's a Global Access.
And next year, how much will that be? It will fall further?
Yes. Subject to our stance on products portfolio and the [ little of term ] which is happening away from our daily combination to [indiscernible] combination, it could change. But unlikely that it will grow significantly here upwards.
Okay. And second on the CapEx that you've done for 9 months and the plan this year and next year if you can share.
CapEx is substantially lower if you see the cash flow statement. 9 months capital expenditure is quite low, and that reflects our ability to really redeploy existing capital investments made over the last several years. And we will continue to keep the same stance on capital productivity. In rupees crores, softly, I would think that our -- operational [ propping ], we will probably need about INR 600 crore to INR 700 crore of routine CapEx. This year has been low. In 9 months, we have done only seen INR 70 crores globally. But next year, it would increase subject to small [indiscernible] investments that we are required to make.
So, INR 600 crores to INR 700 crores maintenance plus some expansion [ expense. ]
Yes, INR 700 crores would probably factor everything.
The next question is from the line of [ Hali ] from [ Tech Financial Consultants ]
The question is, your revenues have gone up by [ 22% ] whereas your EBITDA and CAT margins are on a very low side, minus 30% and minus 17%. Some of the reasons you've told is the API prices from China is affecting. But what are the other reasons for so low of your profitability?
Yes. I think most of the compression has happened in gross margin this quarter. So if you analyze, I think either year-on-year or sequential numbers, there is a compression in gross margin and that we refer to some of the operations in the tender part of the side, largely. I think expenditures is in control. Be it people cost and other expenses, I think that is in control. The compression on the gross margin side has led to this, and you always see this operating leverage playing out. The sort of decline in EBITDA is usually much higher than the decline in sales. So increase in EBITDA is also higher than increase in sale. So I think probably there's a quarter where negatively leverage just played out along with this cost margin pressure.
Okay. And what is the reason for interest cost going up because from IND 9 crores year-on-year basis. Now it is INR 44 crores. I don't think so that was increased to that extent. It has increased from INR 4,100 crores to INR 4,538 crores, but as to why this increase in interest response was so high?
No, part of the interest is because of the rupee depreciation. because all of our -- large part of our debt, most of our debt has in -- denominated in dollars. So that has come in. Other than that, I think the pace of [ rate ] itself is not high. In fact, net debt has improved compared to last year.
I think what you should clarify -- what is the Forex element in the [ 45 ]?
I think we could come back to you offline with the Forex impact on the interest component for the quarter.
[Operator Instructions] We'll move to the next question, which is from the line of Harith Mohammed from Spark Capital.
Umang, you did mention about 2 Respiratory filings targeted for the next year. Could you provide some color on those 2 assets? Is one of them Advair? And some color on the second one. Is it a inhaler product that you're targeting?
Yes. So it is Advair -- one is Advair, and we are hoping that we'll get the clinical trial results which will allow us to file. It is not a easy product to get the clinical outcome on. So we're hoping that, that's one. The second one is also an inhaler product. I do not want to comment about it at this stage because of the confidentiality that we are doing competitively on this product.
Okay. Second question is on the 68 ANDA spending approval. Are there any nasal sprays filings that you've done already?
So I can tell you, I don't want to confirm how many a nasal spray, whether they are pending or whether they are filed. All I would like to say is that nasal sprays is part of our portfolio.
But have you filed for them already? Could we expect...
I don't want to comment on that specific at this stage. I think that category is also highly competitive. So at this stage, yes, is it is part of our portfolio. And if we have not filed within the year, I'm sure we would have done filing for that. So it is there in our portfolio, and we don't want to comment on the exact plan.
Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to the management for closing comments.
Thank you, everyone for joining us on the call today. In case you have any follow-on questions, feel free to reach out to me or Kedar. We'll be happy to respond. Thank you.
Thank you. On behalf of Kotak Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.