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Cipla Ltd
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Ladies and gentlemen, good day, and welcome to Cipla 4Q 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, Mr. Umang Vohra, MD and Global CEO; Mr. Kedar Upadhye, Global CFO; and Mr. Naveen Bansal from the Investor Relations team. Over to you, sir.
Thank you, Chirag. Good evening, and a very warm welcome to the Cipla's Q4 and FY '18 earnings call. I'm Naveen, from the Investor Relations team at Cipla. Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections or other estimates about future events. These estimates reflect management's current expectations of the future performance of the company. Please note that these estimates involve several risks and uncertainties that could cause our results to differ materially from what is expressed or implied. Cipla does not undertake any obligations to publicly update any forward-looking statements, which as a result of new confirmation, future events or otherwise. I would now request Kedar to walk us through the financials for the quarter and the full year.
Thank you, Naveen. Good evening to all of you. Welcome to our earnings call for the fourth quarter of financial year 2018. I hope you have received the investor presentation that we have posted on our website. During financial year 2018, our focus remained to deliver on our key priorities, despite multiple headwinds, which included the destocking impact of GST in India, challenges on the funding environment for our Global Access business and pricing pressures in U.S. We are pleased to see that India and South Africa, 2 of our key businesses, have performed well during the year and are set for another strong growth in FY '19. We also saw the much-awaited approvals of our complex generics pipeline for the U.S. in the year demonstrating our capabilities to develop a strong regulated market franchise. The efforts on cost containment and efficiency improvement remained a key theme throughout the year, and it will continue to be in the future as well. All of this has culminated into helping us deliver margins ahead of our guidance. The year also saw significant improvement in cash flows by keeping working capital investments under check and tapering down of the capital expenditure.Let me start with some of the overall financial highlights. In terms of the core margins and the quality of earnings, as alluded in the last earnings call, Q4 is characterized by moderation in margins for us due to reverse seasonality effect for Indian business. While the seasonality in business had some impact during the quarter, the underlying gross margin profile for various businesses remains solid and healthy. EBITDA margin for the quarter also saw impact of several onetime costs related to sales and distribution, employee recruitment and engagement and further litigation-related expenses, which I'll explain in future. Adjusted for this, our Q4 EBITDA trajectory was healthy.Secondly, we also retained our focus to continuously improve the balance sheet health. Our efforts have resulted in keeping working capital investments under check and also tapering down of the capital expenditure. During fiscal '18, we invested about INR 750 crores on capital expenditure, quite low compared to our historical trend, and almost INR 300 crore lower than last year. As of March '18, the net debt-to-equity is at 0.14 and net debt-to-EBITDA is quite healthy at 0.72.For this quarter, overall income from operations stands at INR 3,698 crores. When adjusted for the impact of classification of GST, the normalized overall company level growth stands at 5% on a year-on-year basis. For the full year, the normalized growth stands at 6%, which was driven by strong performance in India, South Africa, Sub-Saharan Africa and API businesses, which was partially offset by challenges in the Global Access business.Gross margin after material cost stood at 64% for the quarter, improving by about 75 basis points on a year-on-year basis. During the quarter, we also ramped up our investments in areas of future growth and increased focus on building strong [ capabilities ] through hirings in the areas of quality and regularities. Total expenses, which include employee cost and other expenses, excluding the exceptional items, stood at INR [ 1,811 ] crores, increasing by almost 3% on a year-on-year basis. Employee cost for this quarter stood at INR 699 crores, an increase of 6% on a sequential basis. Other expenses, which exclude the exceptional item, include R&D, regulatory, quality, manufacturing expenses and sales and promotional expenses, which stood at INR 1,112 crores, which increased about 5% on a Y-o-Y basis. These expenses include certain onetime costs related to sales and distribution for approximately INR 45 crores, INR 50-odd crores. Total R&D investment for this quarter stood at 7.6% of revenues. The increase was driven by clinical trial charges related to Advair, among others. EBITDA for the quarter before the exceptional item is INR 557 crores or 15.1% to sales. The exceptional item pertains to a provision towards estimated DPCO overcharging liabilities for the products which are not covered in the ongoing court cases. Tax charge for the quarter is INR 46 crores. Full year ETR saw the benefit of the U.S. tax reforms. Adjusted for this one-off, the ETR continues to be around 25%.During this quarter, we've absorbed 3 exceptional charges impacting overall PAT. These are as follows: I spoke about the -- a overcharging liability under DPCO of INR 78 crores, which is an exceptional item line; there is also loss due to disposal of our subsidiary in Yemen, that's about INR 51 crores, largely linked to the adverse currency movement, that's in other income line; and certain onetime sales and distribution cost about INR 45 crores, INR 50-odd crores in other expense line. Profit after tax before exceptional items, about INR 220 crores for the quarter. Our long-term debt remains at USD 550 million, which was mainly used to fund the InvaGen acquisition. We also have working capital loans of about $66 million, which act as natural hedges towards our receivables. Total net debt-to-equity ratio is 0.14. Outstanding forward contracts as a hedge for receivables as of March 31, '18 are $93 million and ZAR 785 million. During the quarter, we also -- we have also hedged a certain portion of our forecasted export revenues. The outstanding forward contracts as cash flow hedges as of 31st March, 2018 are $141 million and ZAR 25 million. I would now like to invite Umang to present the business and operational performance. Umang is joining at a different location as compared to our office, Umang, are you on the line?
Yes, I am Kedar.
Yes, yes.
Thank you, Kedar. Welcome to all of you on our call. This financial year, our focus remains on strengthening our portfolio and deepening our presence in priority markets. We are happy to announce that we have achieved significant progress on our key priorities and almost exceeded all of our expectations on these priorities.I'd like to start with growth in key markets. Key markets continue to deliver strong growth. India business delivered an adjusted growth of 11%, with both prescription and generic business showing strong momentum. South Africa, API, Europe, and Sub-Saharan markets continued strong momentum. The U.S. business saw launches of key products where we are seeing increased traction. We guided to an EBITDA range of 16% to 18% this year. Our performance in key markets coupled with relentless focus on cost and efficiency improvement helped us deliver the full year margin ahead of our guidance range. We've reported EBITDA at about 18.6% in this year compared to a guidance range of 16% to 18%. Our filing trajectory continued to be strong. The filing rate was about 24 new filings during the year, including almost 7 that were filed as NCE-1s. In our launch performance, we're beginning to see the impact of limited competition products. We've launched budesonide, we've launched decitabine. Sevelamer was launched 3 quarters back. And the authorized generic version of Aloxi has been launched as well. We are targeting to maintain one limited competition launch in the U.S. per quarter. Our respiratory pipeline, there has been good progress. We remain committed towards establishing a regulated market respiratory franchise and have achieved significant milestones during the year. The year saw the initiation of the clinical trials for generic Advair and groundwork for 2 more trials in the near future. We are targeting one sizable respiratory inhalation launch in the U.S. every year, starting next year with Albuterol. In Europe, we have expanded our respiratory franchise with FPSM, beclomethasone and the launch of IPRAVENT. Our quality focus has stayed strong. We continue to operate at facilities with highest levels of compliance and an all-time audit readiness. During quarter 4, we had an FDA inspections at our Goa and our Indore plants. We have seen 4 product approvals from Goa since March '18 and since -- 6 since the inspection. Inspection at the Indore plant concluded with 3 procedural observations that have been responded to. I will now take you through our business performance, starting with our India business. We had a very strong quarter with overall India business growing at 13% year-on-year on reported basis and 21% when adjusted for GST. On a full year basis, the India business grew at 6% year-on-year on a reported basis and 11% when adjusted for GST. This factors a significant destocking in Q1. We continue to outperform the market in our key therapeutic areas.Our North America business delivered sales of $105 million from products and a licensing income of $11 million on top of that for the year. The improvement in sales trajectory is driven by the full impact of quarter 3 launches, on Pulmicort, Dacogen. The normalized last quarter sales could have been higher by $5 million to $7 million, which implies a quarterly run rate of $110 million, but we were impacted by product recalls in certain products as well as our [ Project MIMPA ], which is rolled off in trying to reduce the amount of manufacturing footprint needed for the business. Most product issues are already resolved, and we're continuing the supplies in the market. The quarter was also impacted by supply issues that then continued to impact quarter 1, but will get resolved by end of May. As we alluded to in the last quarterly call, we are cautiously evaluating our marketed portfolio from a value progression and have taken various steps during the quarter to give up volumes in select product categories. This will help us build a healthy profitability profile in the business and release the burden on our manufacturing and supply chain infrastructure. This can have a marginal impact on our revenues, but will drive profitability in the coming quarters.Cipla continues to remain in the top 10 dispense generics in the U.S. During the quarter, we filed 14 new products taking the full year ANDA filing number to 24. In addition, Cipla launched generic Aloxi palonosetron in late Q4 and has contracted a competitive market share. As alluded to earlier, we target to maintain our limited competition launch trajectory with one such launch every quarter. The SAGA region, which includes South Africa, Sub-Saharan Africa, and Cipla Global Access business, recorded a growth of 6% in FY '18 on a year-to-year basis when reported in USD. This was impacted favorably by the strengthening of the ZAR/USD versus the previous year. Our South Africa business delivered yet another strong quarter recording a 16% growth and adjusted for animal health divestiture versus in the local currency. As per IMS MAT -- IMS MAT March '18, South Africa business grew at 10.7% in the private market versus 8.4% market growth. Our Global Access business de-grew 54% over last year during the quarter, due to tender facing and challenges in the funding environment. Our Europe business continues to build strongly on a profitable trajectory. While quarter 4 saw a decline on the year-on-year basis largely due to onetime benefits in the same quarter last year, the full year saw a 4% year increase with considerable improvement in profitability. We continue to build a strong BPM business in the U.K. and has expanded our respiratory franchise with the launch of IPRAVENT. In emerging markets outside of Africa, quarterly sales remained flat year-on-year basis, in dollar terms. We also launched a front-end in Columbia this year. We have been working on strengthening our business development efforts across these markets to drive future growth. We are targeting 6 biosimilar deals across 4 key emerging markets by the end of this financial year. We have already filed 2 biosimilars in Algeria, expect 1 approval over the next 1 year. We will also file at least 1 biosimilar in Australia by the end of the year. These filings and approvals will help us drive significant growth in emerging markets over the medium and longer term. As alluded to in our earlier calls, we are committed towards building a strong specialty portfolio. The development of tizanidine patch is progressing smoothly. As you are aware, we monetized our first specialty investment last year with the divestment of our stake in Chase Pharmaceuticals to Allergan. During this quarter, we received a part of the milestone payment. As we enter FY '19, we continue to operate under various challenges across our markets. Having said that, our existing diversified global footprint and strong pipeline allows us to aspire for market-beating growth. FY '19 will be another year of strong focus in execution to deliver on this priority. In terms of margin expansion in our internal budgets and target market -- sorry target margin expansion driven by ramp-up of new launches in the U.S. and a continuous improvement in our operational efficiencies. For our India and South Africa business, we will continue to maintain leadership position targeting above-market growth and continuing to funnel high growth and strategic therapeutic areas of respiratory, oncology, cardiovascular and HIV, respectively. We will ramp up our U.S. business. It's poised for good growth during this year as we ramp-up on our key differentiated launches. The reported growth may be a bit moderated due to the volume rationalization that we alluded to earlier. We are targeting our sizable respiratory inhalation launch in U.S. every year starting next year with Albuterol.In terms of R&D, we will continue to invest significant resources behind building a strong pipeline to drive sustainable growth with over 20 targeted filings in FY '19. This year, we'll also see higher investments towards clinical trials for key respiratory assets and a focus on building a pipeline of specialty assets. We will continue to ensure quality and compliance at our manufacturing facilities, and this is a nonnegotiable agenda for us. I would like you -- to thank you for your attention to Cipla. I will request the moderator to open the session for Q&A.
[Operator Instructions] The first question is from the line of Manoj Garg from Healthco.
I have a few. One, so it seems like there is a lot of moving parts, lot of moving expectations within the U.S. market. So I was wondering if you would be willing to provide a general guidance number similar of what you've done for the Indian market in fiscal '19? Two, on generic Advair. Those manufacturers that were in the first wave have all received CRLs. I was wondering if you could speak about what you have learned either from the FDA or indirectly from those CRLs to adjust your own program? And then lastly, three, just want to better understand the logic of raising the INR 2,000 crore in equity while your stock's at a -- near a 12-month low, and then just what the purposes would be for that total INR 4,000 crore raise?
Manoj, thank you. I'll take questions first and question three. I'll request Umang to answer question two. In terms of the domestic business, we're pretty on a strong footing Manoj. In quarter 2, quarter 3 and quarter 4, to targets we have set for ourselves internally, we have exceeded them. Growth is in healthy double digits. Prescription trends, some of our productivity of the field force, I think that looks pretty healthy. So all the health parameters for a branded business in Indian market and the generics nonprescription market, we are quite confident. That's the reason we said it looks like that we have set for $1 billion consolidated revenue for domestic market in FY '19. That's a little bit of our overview for our India market, that's an answer to your question one. On question three, Manoj, if you recollect last year, we had taken an enabling resolution to raise funds about INR 2,000 crores for debt and INR 2,000 crores for equity. We are just carrying forward that resolution, in case we need funds for our inorganic initiatives.
Yes. And I'd like to take question two, which is your specific question on generic Advair. Look, so I think we have to think about what people are getting as comment letters in 3 buckets. One is where people have had a genuine problem in the clinical trial for this product. And I think there have been one where or at least 2 players where we've seen that the clinical trial outcomes are not linear to their expectations. And I think if you have a situation like that you have to go back and repeat your trial. There is no other option. So I think it comes back to what we've learned from that, as you know, the right trial protocol, the right sample size. And I think, this -- the 2 actives in Advair have a history of being notorious in terms of just -- in terms of getting an outcome that you want, which is fluticasone and salmeterol. So we've dealt with this in a limited way when we got our Europe approval. But every product is unique and different in its own way. The second category that comes out in this is generally where you have a problem with your drug or your device and it could be a CMC problem, and I think quite a few people have got comments like that. The fact that we've had experience in this product that we've got, we've been selling this in India, we've been selling this in Europe now, adds to our confidence, and we are humble about the challenge ahead, but we are also, at the same time, fairly confident about what we can accomplish with Advair. And the last one is really the regulatory guidance, and this is something that you have to learn while you're on the go. We've become a little bit more informed based on what we've heard on Albuterol from the agency. And that's guiding our thinking on how the agency wants to think about further inhaled products in this category, but this is something that like others, we will also learn as we go ahead. But we've -- based on the intelligence in the marketplace, we're beginning to gather what the FDA is looking for, in terms of filings, and I think that's a continuous journey that we are updating ourselves.
Okay. That's really helpful color from you, Umang. Kedar, just really quickly two follow-ups. So on my question one, I was really looking for -- if you would be willing to put out some sort of guidance on the U.S. business similar to what you've done with India, because there's just a lot of moving parts that are specific to your business in terms of new launches, new therapeutic areas and portfolio optimization, so just putting them all together is difficult. So I was wondering if you would -- you could assist in that. And then third -- and then back to three, so if I'm hearing you properly, the purpose of the INR 4,000 crore raise is just general operational?
Manoj, I guess you have answered your question yourself. I think the determinants of the U.S. sales are varied and very tough for us to precisely estimate on a quarter-on-quarter basis. So we would desist from giving any guidance, but you should watch us for scale-up in some of the complex generics launches that we have already made and unlocking of the pipeline in the coming quarters.
The next question is from the line of Saion Mukherjee from Nomura Securities.
The first question is regarding the other operating income. I think you mentioned about $11 million or some onetime income this quarter. Can you just explain that? And even adjusted for that, this number looks higher. So if you can give some color?
Saion, in the other operating income line, we book several items. This include export incentives, sale of services, certain sale of ANDAs that we rationalized at our end, and there is technical know-how, the licensing fee, there is scrap sales. So all this add up -- these are not exactly secular on a quarterly basis. They move up and down. This quarter, the only unique item is some patents and licenses that we sold to a U.S. party, that's about $11 million. But otherwise, I think you should probably take a quarterly average rather than looking at this quarter per se.
Okay. On the U.S. revenues, would you say that the Pulmicort numbers are fully there or there is scope for that to increase in the coming quarter?
Saion, both Pulmicort and Dacogen, there is scope to increase. I think we referred to some of the serviceability issues in Umang's speech and couple of recalls as well. So I think the revenues in quarter 4 are not fully reflected with the market opportunity that we could service. As we are speaking, the serviceability issue are getting addressed. So June quarter's could reflect some of these challenges as well, but in the subsequent quarters, you will see the benefit of share coming in.
Okay. Great. And...
Umang, do you want to add anything?
No. I'd just say that, I think we're -- if I were to just look at Saion, where we are in terms of our contracted share, on Pulmicort, I believe, we have reached our contracted share. And it's an issue of the customer pull in. So I think Pulmicort will recover nicely in quarter 1. Dacogen, we had a supply issue. We had to hold back some supplies in the market, which is now resolved, since then. So both Dacogen and budesonide should see an increase in our revenues in quarter 1. We've had some supply issues for other products, which probably, we are -- as we're beginning to rationalize our portfolio, those will continue still in quarter -- pretty much in this quarter as well.
Got it. And Umang, you mentioned about Albuterol launch. Just wanted to clarify, you're talking about Fiscal '19 as launch for Albuterol?
Yes, next year, not in this year. Well, typically, could be quarter 4, but we don't want to guide for that. It'll be probably be in the next year.
Okay. Fiscal '20. Okay. And any time line for the Advair trial and filing at this stage?
So I think we will file -- so the trial will start I think we've -- Saion, we're not guiding for that right now, but unlikely that it will be a current year filing.
Okay. And just one last question. Kedar, you mentioned Global Access down 54% in this quarter. Can you share the number for the full fiscal year, fiscal '18?
[ We're down ] about $110 million or so for the Global Access business.
In FY '18. And how much was it in FY -- last year?
It was little bit higher than $145 million or so, but we could get you the exact number, Saion.
The next question is from the line of Neha Manpuria from JPMorgan.
So first on the gross margins, while I understand you mentioned that there is some reverse seasonality in India. But given that we had some bit of contribution from Dacogen and Pulmicort in the quarter, I'm surprised by the quarter-on-quarter erosion in the gross margin. Especially, we had certain one-off items in the -- with milestone payments, which would indicate that probably the margin is even lower. Anything you would call -- want to call out there?
Neha, the benefit of decitabine in the current quarter was very low because of the recall that we referred to. In our view, the underlying fundamentals for each of the business gross margins are solid, they remain healthy. We don't think there wasn't as much and there has been seasonality and there has been some business mix, product mix issues. I think, they are at -- we are within the secular range that we have always been seeing for Cipla.
And ideally, this range should improve as we -- as the launches -- large launches, the 3 big launches sort of ramp up, and we also see monetization of unlocking of our pipeline as you said?
Yes. Not to quantify, but [ rationally ], yes, Neha.
Okay. And my second question is given Perrigo CRL -- the CRL that Perrigo received, have we also seen issues on our filing for Albuterol? And I know Umang mentioned that this could be FY '20, but any challenges that we are seeing there?
Well, let me try and take that. I think, when you say challenges, I don't think we have the challenges of the clinical study and what we saw in the study. That's not a challenge for us. I think the -- there have been some regular correspondence that needs to be answered to the FDA, which we are in the process of doing. And we are quite confident that we should be able to do it in due course. So no -- nothing which we believe will stop us right now.
Okay, okay. And my last question Umang, on Advair. GSK has been reducing these -- sales expectation for Advair. You've seen a bunch of CRLs. But it's still uncertain as to who would be #1, #2 there for generic launch. But do you think it's a much smaller opportunity as we start trials for this versus what we had expected couple of quarters back? And as you look at your [ overall ] portfolio perspective, does it still make sense to invest in Advair?
Yes. I think that -- let me answer first by saying, yes, because 2 things have happened, Neha. When we penciled in our market entry, we said we would be fourth or fifth, right? And we also that the opportunity would not be as large as the $4 billion that it was. So we had assumed some decline. And in our view this was to be a good, 50,000 million opportunity and it would continue for some time, right? Now 2 things have happened since then. The first thing is that the market is, I wouldn't say shrinking. I would say, the market is shifting to Breo, right? So that's one. And the second is, I'm not sure whether we'll be fourth or fifth or we couldn't be even better than that, right, depending on where everyone else because 1 or 2 of the players are back again to the starting board on the clinical trial, which is where we are today. So having said that, that's when one item. The second thing that I would just urge everybody to watch out for is that I am not sure that once this product becomes generic that there won't be a managed care play here because I think the shifting to Breo is happening because Breo is at a certain price, which may be the same as Advair. But when there is generic Advair, I'm not so sure that it will be possible to probably continue to shift patients of Advair onto Breo. So my guess is that we -- you could see an expansion in volumes in the Advair segment.
The next question is from the line of Nitin Agarwal from IDFC Securities.
Umang, on the -- with all this increase in R&D plans for next year with a couple of clinical trials around delivers and all starting up. Given the fact that our top line growth still is not going to be in very high-double digits, probably in early single digits -- or early double digits that we -- with the guidance you suggested. I mean, how do we see the R&D cost ending out for us?
I think we are very clear. We are not going to allow R&D to go more than 8% because we can't afford it. So I think we are very clear about where R&D is going to head. So it will be not higher than 8%.
Which is almost near the levels where we sort of finish the year at...
Yes, I think we...
In the percentage terms?
Yes, we finished this year about 7.1%, 7.2%, it's going to be roughly the same, and we will be up to 8% on whatever the incremental revenue that we get.
So are we looking at some partnership [ financing ] strategies? Or are you think -- this is -- the growth is going to be enough to take care of the incremental R&D needs?
Yes, we think so. We think the growth will be enough to take care of the incremental R&D, at the same time, we look at if we can derisk it a bit more, we can because we'll have 3 or 4 clinical trials going on for respiratory programs in this year.
Okay. And Kedar on depreciation now, what is the base number that we should go with on the depreciation amortization line going forward?
I think you should take current quarter's base because there is not much exceptionality for this quarter. So especially, for Invagen, I think as the new products are coming into the market, that part of the intangibles do get into amortization. So I think pretty much current quarter is the base. And obviously, it could go through the cycle of reduction and increases based upon the completion of the life and new products getting launched.
And the last one, Kedar, on the seasonality in Q4, I mean, barring the India business, which sort of comes off a bit in Q4, what is -- what are the other sort of elements that we should watch out for because we've had a pretty sharp Q-o-Q change variation in the EBITDA profile for the business? I mean, are there any other factors, which come into play in terms of any lumping up of expenses and staff cost of expenses towards the end of the year?
Yes, see, if you're referring to EBITDA margins, I think those 2, 3 elements that I referred to that -- those have had an effect. In terms of gross margin, our API business is very healthy. And the API business gross margins are much higher than the company gross margins. So I think there has been mixed impact, Nitin, in quarter 4.
The next question is from the line of Anmol Ganjoo from JM Financial.
I have two questions. One is that $1 billion domestic sales, I mean, that builds a fairly sharp uptrend in the domestic growth rate relative to what has been observed in last -- in past 3, 5 years our growth has been 6%, 7%. And sorry, 8.5% CAGR, and I think $1 billion business is what's we're doubling of that. We'll be growing 13%, 14% if that number was to materialize. Just wanted to understand what gives the confidence in terms of having putting drivers in last 12 to 18 months, which would signal such a sharp acceleration in the domestic growth trajectory?
Umang, can you take this? Yes. So I think probably we all lost Umang's line. So Anmol, we referred to some of these factors that we have worked on in the last couple of years. I think there are several Indian switches helping us deliver this above-market growth. I think starting from our transformation from a geography-based structure to a therapy-based structure, then some of this in-licensing deals that we have signed with companies like Novartis and Roche. And add to that, the fact that the productivity of the field force we have been working as well and some of the initiatives to reach patients to a expand therapy, to have some of the therapy shipping initiatives, so quite confident to reach 13%, 14%. And many companies are in that zone, so it's not a zone which is outside the realm of possibility. So we're taking that as a challenge.
That's helpful. Kedar, second question is that in the light of some of the investments regarding R&D and some of the other cost pressures also that the business should entail. Do you -- and the fact that we have over delivered on our EBITDA margin guidance for the full year, do you think this is pretty much a ballpark that we should work with from an FY '19 perspective?
So I would desist from giving a specific guidance, but we believe that our opportunity in optimizing costs, improving the business mix and squeeze out efficiency coupled with the monetization of the U.S. pipeline, I think we do have opportunity for margin expansion, and that's what we have guided to. We are not quantifying at this stage, but we'll work towards it.
Okay. And my last question before I get back into the queue, slight repetition of the previous question. We've seen quite a few times that fourth quarter outside of the domestic seasonality that we see, there is also cost lever pressures which come in. How should we be looking at margin progression throughout the FY '19? So do we build a similar trajectory that FY '19, also Q4, we should see a fairly sharp dip in margin profile because that seems to be the trend in last 4 out of 5 years?
No, no, that would be fair because that's how the business book mix would operate. So as you know, in quarter 2, we have heavy acute season in India, in quarter 3, we have a very heavy respi season in India. And accordingly the margins will get played out. So either be the impact of dominance of each [ therapy ] within the Indian business coupled with the scale-up of the launches in the U.S., there are multiple factors, so it would be tough to precisely give you an idea how it will pan out quarter-on-quarter, but I think quarter 3 to quarter 4 drop is pretty much the reality. I think over the years for us that has played out. So I think good to factor that, good to model it that way.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Kedar, just on EBITDA margin outlook for fiscal '19 and beyond, I know said that you won't quantify it, but two questions over here. Is this going to be the meaningful substantial? And second, -- which is like more than 150, 200 basis points? And second is, when you say better revenue mix, what exactly are you referring to? Because I think, India continues, South Africa continues, U.S. continues to have complex. So what's that revenue mix change that you are expecting in fiscal '19?
Yes, so 2 reflections for me. One is, see, we are in that zone now. I think few years back we were at sub-14%, now we are at a zone of over 18% to 19%. So I think each incremental percentage point is obviously going to be very satisfactory, and that's how we are going to work towards. We believe there is some element of cost efficiency that we could work on, which will give us that leverage. And the numbers do not reflect as much U.S. leverage. So when we refer to revenue mix, I think probably the non-U.S. geographies are contributing in full, is that portion of the U.S. that incremental contribution of products like Dacogen, which will contribute to margin improvement.
Okay, okay. So basically, it's U.S.-led revenue mix that you had in mind when you said?
That's true, that's true.
Okay. And then just on the U.S. part, Umang mentioned that there was a slip of about $5 million to $7 million in revenues because of supply constraint, if I'm -- I heard you -- heard him correctly. Now does this take into account everything, including Pulmicort, Dacogen or that is over and above that?
It's pretty much all the reasons, which we referred to. I think all combined probably, we have a feeling that we could have gone about $7 million more in this quarter. And as we are speaking, some of this is getting addressed. So by June probably, we should be in full in terms of supply.
Okay. One final question, Kedar, from my side. If we look forward revenues, I know you gave a qualitative color. But on an overall basis, are we looking at 15%, 20% that type of a zone or 10% to 15%? I mean, some color over here would be very helpful.
Yes, Sameer, I think it's very tough. Corporate level revenue growth guidance is very tough. I think what all -- what we're saying is, I think, in India market, we'll continue to outperform. In South African private market, we'll continue to outperform. U.S., we are going to have healthy double-digit growth. Balance pieces of emerging market, API, Europe, et cetera, are not predictable as much. And what's probably we do not have fully visibility is the funding environment for our access business. So how it adds up we'll have to see. I think that's going to be interesting. But in terms of ability to forecast, we are in greater control for India, South Africa and U.S. business.
Okay. Just a follow-up on this Kedar, with your permission. So when you say you'll do double-digit in the U.S. on a base of give or take, $400 million, $420 million, that we are looking at $40 million, $50 million incremental, I'm assuming this is a net. Now when you talk about 1 complex or niche launch every quarter and plus other me-toos, incremental $40 million, $50 million doesn't seem to tie up with that. You almost are implying $10 million, $15 million as your definition of -- or even less of a niche product.
Yes, Sameer, so as you know, there's an absolute sales in U.S. as a function of your erosion and the timing of launches, pricing and share and everything. So in the past, you will see in some of the limited competition launches, have not lived up to the promise. So we are living at this at the current stage and let's see what happens.
The next question is from the line of Surya Patra from PhillipCapital.
Kedar, just one clarification. First of all, the licensing income what you have mentioned about $11 million, whether that is added to the U.S. revenue? Or it is separate of that?
No, no, it is not part of U.S. revenue. It is excluding that part of licensing income.
Okay. And regards the inorganic -- sorry, the margin trend again. So since last few quarters, like 7, 8 quarters, you have been saying that okay, you will be maintaining at least 100 basis point kind of expansion Y-o-Y and that has been happening. So considering the R&D spend or I think R&D spend for next financial year-end, the visible challenge is also in U.S., though there are opportunities in U.S. alongside. But still this 100 basis point kind of expansion is a kind of a possibility for FY '19? Or it can be....?
So we're not -- we do not want to guide anything at this stage for fiscal '19. See, some of these challenges that you referred to, Surya, are not new. We'll live through those day-by-day, but we are also excited by the opportunity now across all markets.
Okay. And one more on the biosimilar trend. So you have already mentioned about it. But if you can give some sense that okay, what is your thought process about it and how you want to scale it up the operations and what all that you are currently doing and achieving on this front?
Umang, are you on the call?
Yes, I'm on the call. I'm on the call. I'll take this.
I think the question was on biosimilars...
Yes, I got, I got it.
Road map for future in what form and shape you are thinking about it?
Yes, got it, Kedar. So I think here, what we are doing is each biosimilar outcome in each market is a binary outcome. So some markets will get $5 million of revenue, some markets will get $10 million, it really depends on how big the innovator is. So we have a set of markets in the emerging side of the world where we believe we are competitive to play. And I think some of those markets we are trying to play, we've file the products, we've closed the deals. So I think as these products begin to unlock, you could have a trajectory in the emerging side of the world, which could be between $3 million to $5 million to $10 million per product, as it unlocks per country.
Okay. Something on the pipeline, sir?
I think you could expect that most of the mAbs which are going off patent recently would be covered, so could expect Trastuzumab, Bevacizumab, Rituximab.
And as you have already mentioned that it is largely about the emerging market and known...
That's right, that's right.
Yes, okay. Just last one question on the inorganic growth you see considering this fundraising plan and all. So are we still considering something like inorganic growth in any of the market given that the ongoing challenges, you might possibly get a better deal?
No, actually, we are not in the mood to deploy too much of capital into the U.S. side of the world today because I think that market doesn't -- the capital that's being deployed is largely through our P&L and whatever little through our balance sheet. But we could -- and the resolution we've taken is more enabling, doesn't mean that we will be doing these INR 4,000 crores. As and when they become available, we will be hopeful, but we will not buy it unless we see a synergy value in the transaction.
The next question is from the line of Naveen Baid from Aditya Birla Money.
I joined the call a little late. Can you just give a little bit more color on what was the exceptional item this quarter?
Yes, Naveen, can we take it off-line, please? You could get in touch with the Investor Relations team, and we could explain the background of the item.
The next question is from the line of Nimish Mehta from ResearchDelta Advisors.
Two questions. One, again on the margin side, and Kedar, if we get to adjust for the onetime $11 million that you're talking about, you're actually talking EBITDA margin to drop on a Y-o-Y basis, which also would adjust for the seasonality in the Indian business, in the domestic business. So I'm trying to gather, I mean, you were talking about an underlying EBITDA margin of much higher than what you just reported. So some color on what do you think could be the underlying EBITDA margin or the gross margin would be for the future?
Yes, so Nimish, we referred to the business mix issue. And as you know, from a pecking order standpoint in Cipla, emerging market business, after API, is one of the highest in percentage terms. So as we have a lower mix of some of those businesses, and if you do not have adequate contribution from products like decitabine, I think this kind of behavior happens. As we said, there is no fundamental dilution in the margin profile, it's purely business mix, and it's purely sequential dip in the Indian business revenues.
And is it fair assume that on the businesses that we have, have not seen any significant erosion in margin on a Y-o-Y basis?
No, no.
Okay. Second, just a clarification. You were talking about Albuterol launch. We are talking about generic Proventil, am I right? Or we are talking about generic Proair?
We are talking about generic Proventil.
Generic Proventil. And I guess, there is no Para IV filing which is required, is that a fair assumption?
Yes, that's fair.
Okay, fine. Lastly, you're talking about a TAD on this product in Q4 FY '18, if I remember well. Any update on that, on that TAD or have you seen any delay in that? Something on that could be helpful.
On TAD or what?
On Proventil. I may be wrong...
Yes, we have received our observations from the FDA already. We're about to submit our revised package to them, and then they will review it. So it depends on what TAD they will set now.
Okay, understood. If I squeeze one more. Just if you can let us know the number of new launches you made in the domestic market and that is excluding [indiscernible]?
Yes, Nimish, those are mini ramps. Some of the in-license have been really high value. The IR desk will get back to you on the exact number of launches.
7 [indiscernible].
Some ballpark will be helpful and then I can obviously follow-up with that.
In fiscal '18, there were lot of organic launches as well, I think. We'll come back to you.
The next question is from the line of Alok Dalal from CLSA.
Umang, what led to the supply issues in the U.S.?
So it's 3 items. One was that the new product scale up that we had to do for new launches that we were to do. That was more on our India sites. The second was in the U.S., we had an issue around the product that we are trying to rationalize on account of we want to reduce the manufacturing load in the U.S., and therefore that led to some amount of issues. And then we had a quality issue on 1 or 2 products, which led to us not being able to[Audio Gap]fairly sizable products for us in the U.S., but most of them are back now. They're all back. I think all these issues are more or less resolved or will be resolved in the next 1 week or 2 weeks. And then, I think we will have[Audio Gap]the same even this quarter, we might have some of an impact, but I'm not so concerned from a long-term perspective whether this begins to impact us at all or not.
Okay. And do you see any major market share loss because of these issues?
I'm not sure if we'll have market share loss. I think on the new launches, we are pretty much back to where we want to be. Our contracted share is now beginning to show where we want to be. On the ones that we were out for a while due to the -- due to our manufacturing footprint optimization, those, we roughly got back. On quality, where we lost a little bit of share, that's fine. I think we'll be able to claw it back because those are fairly concentrated markets. So I don't think anybody will be able to step up to take all of our share.
And how about you reading the overall industry dynamics now in the U.S.?
I -- look, I think for the right product, the U.S. is still a great opportunity, right? So when I look at what Aurobindo could do out of Sevelamer, what I look at -- even what we are able to do out of budesonide, I think the dynamics are right, but you have to have the right product and it's a question of timing. I do think that the rating erosion environment, I would like to believe, is settling a bit. I think we're probably reaching the bottom end of this, and I think it's beginning to settle. Because frankly, there is not too much lead and too much more room to where it can go. So I think it's settling a bit, I think we will begin to see some good launches that are coming up, not just for us, for other players as well. And hopefully that begins to restore confidence in the U.S. opportunity.
Okay, great. And then last question, you mentioned about investments in specialty products. So the marketing infrastructure that you will need to create for that, that cost will hit you some time in fiscal '20, is that fair to assume?
Yes, it's not in the next year. It's not in the next year unless we buy some existing company, it will come in FY '20.
FY '20, all right.
We'll take one last question, please.
We'll take the next question from Sameer Baisiwala from Morgan Stanley.
Just, Umang, to tie up with the previous speaker, for the U.S. market, what's the future for the wrong products? You talked about the right products. But me-too generics also when you see that the industry leaders Teva, Sandoz, everyone is exiting, even you are also exiting, someone has to supply those volumes. That's one. And second, is your engagement with the customer changing? Do you see a difference versus 1 year back and now with them?
No, actually, with -- so good question, Sameer. I think with the customer -- let me answer the customer question first. We're not seeing any difference in engagement. On the other hand, what we are hearing from customers is that a lot of people are walking away from products, we need sustainable suppliers. So I think the customers really want longer-term more sustainable supply. And I think those conversations are happening as we speak. I think in terms of your first part, we are exiting product categories that we believe we are not competitive. So I would hate to be in a product category, where I have a 10% gross margin. And if I'm ever out of stock, I get hit by a penalty, which basically negates everything that I own -- that I earn on it for the full year. So my list of 10% where I may be uncompetitive may be very different than Teva's list of 10% where they are uncompetitive, right? And I think there was a while whether generic industry operated with the principle that you should load your plants if it's running because you amortize your cost base. And today, I think the question people are asking is, why do you want to load yourself on your [ plant ] base if you can do with one shift less and your overall margin mix improves. And I think that's the type of deliberation that we are having. We are not exiting categories where we will be one among the 5 or one among the 4 to supply. We are exiting categories where we are one among the 12, and we are uncompetitive. So if we exit, Teva exit, somebody else exit, there are still going to be 8 players in that market. So it improves a bit, but it's largely driven by where we believe we have a competitive cost position and where the product is frankly meaningful to us.
Okay, great. This is very helpful. And just on second question, on India market. Are you seeing the impact of government's initiative on Jan Aushadhi? Do you see this expanding more and more pharmacies and what it can do to your India business?
No, I'm not sure at -- even at our level or even at the level of the Indian Pharmaceutical Alliance, which is an organization which represents multiple companies, I don't think they're seeing the full-blown effect of the Jan Aushadhi score -- stores. I think the idea is working with the government to make sure that there is success that they see in the Jan Aushadhi. Right now, I don't think the Jan Aushadhi is a very well penetrated into the market volume as yet.
But can it hurt your future India growth?
Well not in the immediate term, from how it is running right now, not in the immediate term.
Due to time constraints, that was the last question. I now hand the conference over to the management for their closing comments.
Thank you, everyone, for your interest in Cipla and for attending our call today. In case you have any follow-up questions, you can write to us at investor.relations@cipla.com. Thank you so much, and have a good evening.
Ladies and gentlemen, on behalf of Kotak Securities that concludes this conference for today. Thank you for joining us, and you may now disconnect your lines.