CIPLANSEQ4 FY22May 10, 2022

Cipla Limited

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Management on call

Umang Vohra

MANAGING DIRECTOR AND GLOBAL CEO, CIPLA LIMITED

Dinesh Jain

INTERIM GLOBAL CFO, CIPLA LIMITED

Naveen Bansal

INVESTOR RELATIONS TEAM

Key numbers — 40 extracted

Rs. 5,260 crore

o the key highlights for the last quarter and full year FY22: Overall revenue for the quarter was Rs. 5,260 crore, recording a year-on-your growth of 14%. As you are aware, reverse seasonality kicks in during qu

14%

ear FY22: Overall revenue for the quarter was Rs. 5,260 crore, recording a year-on-your growth of 14%. As you are aware, reverse seasonality kicks in during quarter 4, which impacts the overall bus

12%

he full year was also at 14%. Excluding the COVID portfolio, the core revenue growth was a robust 12% for the quarter and for the full year. For the quarter, our One-India business across branded pre

21%

-India business across branded prescription, trade generics and consumer health recorded a robust 21% growth over the last year, and 15% adjusted for the COVID portfolio. We crossed the $1 billion mi

15%

cription, trade generics and consumer health recorded a robust 21% growth over the last year, and 15% adjusted for the COVID portfolio. We crossed the $1 billion milestone in our domestic-branded pre

1 billion

a robust 21% growth over the last year, and 15% adjusted for the COVID portfolio. We crossed the $1 billion milestone in our domestic-branded prescription business, driven by the sustained growth across ou

Rs. 10,000 crore

gies, helping us drive strong growth across the 3 businesses, which are now tracking close to the Rs. 10,000 crore mark. The strong equity of our brands amongst the patients and physicians is reflected in the hig

160 million

ssed in parts of our portfolio. Our U.S. core formulation sales stood at a multi-quarter high of $160 million, driven by strong traction in respiratory assets, as well as a contribution from the peptide port

Rs. 200 crore

operating margins for this quarter subsume the impact of certain onetime charges to the extent of Rs. 200 crore, which I shall explain a little later; business mix due to reverse seasonality; elevated procurem

Rs. 45 crore

estments driven by the initiation of the clinical trials of one respiratory asset which is almost Rs. 45 crore higher than the last year. Adjusted for these onetime charges, the core operating margins remain

18%

n the last year. Adjusted for these onetime charges, the core operating margins remain healthy at 18%, delivering a growth of 20% over last year quarter 4 with continued expansion in base business pr

20%

r these onetime charges, the core operating margins remain healthy at 18%, delivering a growth of 20% over last year quarter 4 with continued expansion in base business profitability. The

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Guidance — 20 items

Dinesh Jain

opening

“We have sustainably invested in our core electronic and acute portfolios to build high-quality formidable branded franchise with power brands which have shown a healthy CAGR of 13% over the FY18 to '22 period on the chronic side of our portfolio.”

Turning now to our outlook

opening

“As we mitigate these challenges over the next 3 to 4 months, we expect the business trajectory to improve given the upcoming complex launches expected in the second half of this fiscal.”

Umang Vohra

“And I think it will be for us, big brands becoming bigger.”

Umang Vohra

“But if it is non-COVID, I think we will be showing growth much higher than market.”

Anubhav Aggarwal

“So, just to ask the other way, and maybe I missed out in your comments earlier, what's the expectation for the margin for next year?”

Anubhav Aggarwal

“Or you think even without Advair you can do 22% plus margin for next year?”

Umang Vohra

“So, I don't think I'd like to give a commentary on market share, et cetera, but I'd just like you to know that it is well on track to what we have as an internal goal.”

Neha Manpuria

“And Umang, on the R&D expense, now that we have 1 respiratory asset in trial, how should we look at the expense for next year?”

Saion Mukherjee

“And you expect on this non-COVID base to grow next year?”

Umang Vohra

“We expect to, yes, we expect to grow on the non-COVID base.”

Risks & concerns — 11 flagged

Please note that these estimates involve several risks and uncertainties, including the impact of COVID-19, which would cause our actual results to differ materially from what is expressed or implied.

— Naveen Bansal

Thanks Umang, for the introduction Over the last 24 months we have made significant progress across all our strategic priorities while navigating the uncertain trajectory of the pandemic.

— Dinesh Jain

Our operating margins for this quarter subsume the impact of certain onetime charges to the extent of Rs.

— Dinesh Jain

Apart from the one-time charges above EBITDA, our PAT for the quarter includes the impact of the following 2 items: Nearly Rs.

— Dinesh Jain

Our elevated inventory levels reflect our commitment to ensure availability of medicines and de-risk any business interruptions due to the global supply chain disruption.

— Dinesh Jain

Our operations in some of the emerging market geographies are facing currency headwinds, the impact of which is also baked in our Q4 numbers.

— CGA

And Umang when you mentioned like COVID and non-COVID, I mean, the growth rates that you mentioned, so you consider only the products which are exclusively used for COVID or you also include the impact of the products which got sold higher during COVID.

— Saion Mukherjee

And just lastly on gross margins, while even after adjusting for the COVID-related inventory, there is a sequential improvement in gross margin despite having cost pressures or raw material cost pressure.

— Tushar Manudhane

The challenge is that as maybe Saion was also asking earlier in the conversation, so what we've done is we've specifically looked at only the COVID products.

— Naveen Bansal

So, those factors do play out in our overall numbers, and therefore it becomes difficult to then split our numbers with COVID, without COVID from a pure play standpoint.

— Naveen Bansal

I think, Saion, it will obviously depend, I think creating an opportunity in India now for an acquisition is now difficult.

— Umang Vohra

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Q&A — 14 exchanges

So, my first question is on outlook on the India business. While we are seeing robust growth with COVID, without COVID, just some outlook would help given that we are on a good base.

Umang Vohra

I'm sorry, I had a problem following the question. Could you repeat it again, please? Maybe the line was bad. So, just wanted some outlook on the India business. How is it looking? I mean given the strong growth we have seen with and without COVID, I understand there would be COVID-related therapeutics which had also helped growth. How do we see growth outlook for India business in particular? So, we are quite clear, I think we would like to see very high growth, better than market for the non-COVID portfolio. And I think our business momentum is very strong across all the 3 businesses. And I

Umang, one question on the other expenses actually. So, you talked about the adjustment. But even after doing that, roughly about Rs. 40 crore adjustment that you talked about, other expenses seems to be higher by Rs. 100 crore in this quarter versus the run rate that you are doing. Any particular reason that you call out -- you want to call out for? Because you're not calling that as an extra, so is that the new base now?

Umang Vohra

No, I don't think it's the new base, Anubhav. I think what we are looking at, we've only taken the Rs. 200 crore for the calculation of the 18% margin, which is the inventory write-offs. We haven't even taken the R&D or anything else into that computation. It's just the inventory charges and the exit charges that we added back. I think the expenses are higher because in quarter 4, particularly our India business had more expenses than usual. And I think this was on account of quarter 4 for us is a respiratory quarter. And the fact that we were not able to spend it in quarter 3 on account of CO

Umang, you mentioned in your opening remarks that U.S. also saw contribution from the peptide asset. Last call you had mentioned sort of a sustained increase in market share over time. Post the launch that you've seen over the last 2 months, has there been any change? Or would you change your market share expectation and the time line for ramp-up on the product?

Umang Vohra

No. I mean, we are not changing any of our expectations from the product. And I think our plans largely remain on track. So, it would still be a gradual increase in market share? Yes. And what could be the fair market share for a product like this in your view? So, I think we have an internal estimate. I'm a little hesitant to give it out right now because the product is fairly competitive, and matters of this product are also kind of subdued in some way or the other. So, I don't think I'd like to give a commentary on market share, et cetera, but I'd just like you to know that it is well on tr

Umang, just one question on India. Can you share what's been the growth in trade generics in this fiscal year, FY22 over FY21? And any dynamics there? Is it acute, chronic, what kind of products are driving the growth in trade generics?

Umang Vohra

I don't know if you're giving segment-specific, but I put it this way, that our highest growth probably was in our consumer business, followed by our branded prescription business in the last year. And I think trade generics was also significantly comfortable in double digits. That's what I would put it, is higher than market. And the portfolio there I think is more acute, more acute, more pain category rather than chronic, and we are building the chronic franchise. And Umang when you mentioned like COVID and non-COVID, I mean, the growth rates that you mentioned, so you consider only the prod

Umang, could we get an update on generic Revlimid? Are you still looking at launching in the second half? And would you be in the next wave of launches?

Umang Vohra

Bino, yes. The first wave has already formed and there could be exclusivity linked to some spends with another player. But yes, amongst the people who will launch in half 2, we are hoping to be in that wave. For the strengths for which already the exclusivity is getting over, you will be in….. That is correct. And just one follow-up on Advair. I believe Teva got an approval recently of late. Have they launched and how has the market changed if they have launched after that? I think what the intelligence we have picked up is that there has been a very limited launch by Teva, but we are aware th

Umang, did you say that the impact because of higher cost of procurement and freight is just 50, 70 basis points in Q4?

Umang Vohra

Broadly on a full year basis, yes, Sameer. And I think on quarter 4, yes, it could be in the same range. Just looks a fair bit lower because considering what other companies are saying, and I'm seeing across the sector like including chemicals and other sectors is a few hundred basis points I would have thought the way the inflation is raging. Well, no, 1 minute, Sameer. I'm only talking about procurement and freight, I'm not talking about overall inflation. In an overall inflation and people costs on some of the promotional materials, all that is over and above this and extra. Not including t

So, this is continuation on Lanreotide actually. So, last time you mentioned that you need to reach out to a lot of clinics in order to address this market. Just trying to understand, in the last 3 months, you've been in the market, let's say, what percentage of clinics that you want to address? I'm just trying to understand what's your progress over there. It's like 10% of your clinics that you want to address, you reached out already 20%, you reached out already something that we can track just to get a sense of how this opportunity is panning out for you guys.

Umang Vohra

Anubhav, I won't be able to give you specifics. We have a list internally of who are the big decile prescribers, et cetera, which clinics are the ones where this happens. That data is available. So, you would attempt your outreach to those clinics. But beyond that, I'm not sure we'll give the level of detail that you're seeking on this question. All I would say is that we are on track with what we had as our own targets. So, just to get a sense, let's say, a good launch, would you say that by end of this year, if you think that double-digit market share is possible for you guys? Or you think t

Yes. Nithya, I think what we are guiding to is also a fair amount of cost increases that are going to likely to happen. So, both as designed from our side on account of higher R&D as well as on account of the procurement and freight that we spoke about. So, I think cumulatively, if you look at it, like-to-like between the 2 years, I think that cost delta would almost be close to 200 to 250 basis points. So, we are trying to offset that through the business. Nithya Balasubramanian: Second one on Lanreotide, who is the key influencer here? This is the doctor or the clinic or is it the GPO?

Umang Vohra

I think it's the clinics where the administration happens. I would think the clinics would be the influencers. And within the clinics, you have doctors, you have clinics which are associated with the chains and clinics which are associated with GPO franchise. So, I would imagine it's the -- the nodal point in the clinic. Nithya Balasubramanian: So, I'm just going back to a question you answered for me in the last earnings call which you said you might not require any additional commercial infrastructure. I'm just thinking, GPOs are obviously a very concentrated bunch, but your clinics should b

Sir, just on Advair, so as you responded in the call about, it's been 3 to 4 months that there has been no query spending on this product. Have I heard that right?

Umang Vohra

I don't think. I think this is the usual process. You receive questions from the FDA and then you answer them, then the FDA takes time to review it. So, we got a last set of questions about 4 months back, which is in line with how we've seen most products. And you've responded to all of them as of now? Yes. That is correct. And would the inspection would be subject to resolution of the all queries and then subsequently you will get the inspection time line or that can happen parallel? I'm sorry; I could not hear you. I lost you because there's a lot of noise. Could you repeat, please? The insp

Umang, my question is a little bit longer. If you look at our presentation, in U.S. we say incremental opportunity to add $300 million to $500 million by FY25. Now some of the pipeline products which we understand is like one of the respiratory on which the clinical trial started, there was another partnered respiratory product, and we have Revlimid and Advair. But other than the existing pipeline, do you think we need to probably add more through some inorganic acquisitions so as to get to this number? Or the existing pipeline based on what is happening at the back end is good enough to give

Umang Vohra

Dinesh. I think he had addressed this to you. Sir, was it regarding like M&A? So, I'll repeat my question. Go ahead. Please repeat. Yes, I'll repeat my question. My question is that in our presentation, we say by FY25 in U.S. there is incremental opportunity to add $300 million to $500 million. Now if I divide it in 2 parts, one is based on the existing pipeline of products which are in R&D or in clinical trial, do you think they are sufficient enough to help us grab this $300 million to $500 million opportunity or would you say that probably we would need some acquisitions also in terms of so

The first question I had was, could you sort of quantify what was the total contribution of COVID to the India revenues? I mean, like absolute contribution as a percentage.

Umang Vohra

Dinesh or Naveen, can you quantify that? Thanks, Umang. So, Sonal, at this point in time, as we've alluded in earlier earnings calls, we're not quantifying the exact number. But what we have done is we've given the full year growth numbers with COVID and without COVID. So, maybe we would request you to refer to that number. No. But the thing is that both numbers have in the base also COVID revenue, right? That is right, Sonal. The challenge is that as maybe Saion was also asking earlier in the conversation, so what we've done is we've specifically looked at only the COVID products. But the anc

So, Umang, on the M&A front, what kind of opportunities you're seeing in India, particularly given the valuation that we have seen? I mean, are you looking at small bolt-on acquisition? Are you sort of even open to do some large acquisition? How should we think about the opportunity and what Cipla wants to do on the M&A front in India?

Umang Vohra

I think, Saion, it will obviously depend, I think creating an opportunity in India now for an acquisition is now difficult. What we’ve realized is it's only assets that people have made up their mind that they want to sell. Those are the type of assets that are in the play. So, for us, I don't think there is a limit, anything that could be Rs. 200 crore in sale is also attractive to us as a portfolio. Anything that could be Rs. 500 crore in sale is also attractive to us as a portfolio. It has to fulfill a strategic need. And I think we have to see over a period of 10 years, considering the way

So, Umang, just did you say that you'll be filing one peptide injectable in fiscal '23?

Umang Vohra

Yes, should be. And also, for the respiratory filings, can you just quickly summarize how many are in clinicals and how many have been filed? Filed and not on market? Yes. I'm assuming your question is to the U.S. That's right. So, filed and not in market are 2. To be filed in clinic is 1. And hopefully, there'll be another in clinic later this year. And one final, Umang, from my side. You mentioned about the India business. You mentioned 4-year CAGR for chronic 13% and acute 5%. So, is it possible for you to just broadly tell us what's the volume component and what's the price increase compon

Thank you, Faizal. Thank you so much, everyone, for joining us on our earnings call today. In case you have any follow-on questions, please feel free to reach out to us. We wish you a very good evening ahead. Please take care.

Management

Speaking time

Umang Vohra

Moderator

Sameer Baisiwala

Dinesh Jain

Saion Mukherjee

Anubhav Aggarwal

Tushar Manudhane

Naveen Bansal

Neha Manpuria

Sonal Gupta

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Opening remarks

Naveen Bansal

Thank you, Faizan. Good evening, and a very warm welcome to Cipla's Quarter 4 FY22 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 event. These estimates reflect management's current expectations of the future performance of the company. Please note that these estimates involve several risks and uncertainties, including the impact of COVID-19, which would cause our actual results to differ materially from what is expressed or implied. Cipla does not undertake any obligation to publicly update any forward- looking statement, whether as a result of new confirmation, future events or otherwise. With that, I would like to request Umang to take over, please.

Umang Vohra

Thank you, Naveen. Good evening to all of you, and thank you for joining us on the call today. I hope that all of you and your families are safe and well. We appreciate you joining us today for our fourth quarter earnings call for the financial year 2022. I hope you received the investor presentation that we have posted on our website. As you are aware, after a successful 6-year stint, Kedar Upadhye has moved on from his role as a Global CFO. I sincerely thank him for his partnership in spearheading some of the most successful reimagination initiatives in finance and strategy during his tenure. I wish him very well for his future and his career ahead. I would also like to welcome Dinesh Jain, who is on our call, and has been appointed as the Interim Global CFO by the Board. Dinesh has had an illustrious career with Cipla of close to 3 decades across several domains of finance.

Dinesh Jain

Thanks Umang, for the introduction Over the last 24 months we have made significant progress across all our strategic priorities while navigating the uncertain trajectory of the pandemic. Our company recorded the highest revenue and achieved several major milestones in our One-India and U.S. business, pivoting the business on an accelerated growth and margin trajectory. In FY22, we continued the strong momentum across India, U.S. and other key markets, while continuing investments in portfolio and several other growth-linked initiatives. Coming to the key highlights for the last quarter and full year FY22: Overall revenue for the quarter was Rs. 5,260 crore, recording a year-on-your growth of 14%. As you are aware, reverse seasonality kicks in during quarter 4, which impacts the overall business mix for the quarter. Despite that, we've been able to drive strong double digit revenue growth through focused execution and maintaining a high serviceability across our markets. The revenue gr

Coming to the U.S. generics

The U.S. core formulation sales were at $160 million for the quarter and full year revenue stood at $594 million. In FY22, we have taken significant strides in transforming our portfolio footprint, adding more complex products and sensing our direct-to-market operations. Our respiratory franchise, including albuterol and Arformoterol is ramping up sustainably with 21% growth for the quarter and 28% for the full year. On the pipeline front, our Advair file is under active review, and we are hoping for a H2FY23 launch. As mentioned earlier, we have initiated clinical trials on the respiratory assets during the current quarter. And filings in the complex generics, including peptide injectables shall continue in FY23. Coming to our SAGA business, which includes South Africa, Sub-Saharan Africa and

CGA

The overall SAGA region grew by 8% on a year-on-year basis in dollar terms. The private business reported a robust 17% growth over the last year for the quarter in local currency terms. The growth continues to be diversified across base business and new launches. We continue to maintain our third position with a market share of 7.5% in the overall market. In markets outside South Africa, the CGA business has witnessed strong order flow in one of our key products, while the Sub-Saharan business-maintained scale over the last year base driven by continued order flow. Our international markets include emerging markets in Europe, and the business navigated very strong geopolitical headwinds to maintain scale at $385 million for the full year and a 4% growth for the quarter. Our DTM franchisees have delivered strong double- digit growth, which helps us offset the emerging market for its volatility and the muted B2B demand in Europe for the quarter. The business continues to track high margi

Turning now to our outlook

We have established a strong threshold for revenue and operating profitability in FY22 with core margins trending in the 21% to 22% range. Geopolitical crisis, which is contributing to the current inflationary environment has driven up procurement and trade expenses over the last year's cost base. We are monitoring these trends closely and working on plans to mitigate these in the coming quarters. As we mitigate these challenges over the next 3 to 4 months, we expect the business trajectory to improve given the upcoming complex launches expected in the second half of this fiscal. Our near-term priorities include: Focus on monitoring and monetization of our respiratory filings and launches across geographies to accelerate our global lung leadership journey. Active advancement on innovative consumer-centric products to accelerate the augmentation of our global consumer wellness franchise across India and South Africa. Continued execution on our branded market portfolio, including peptide

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