CIPLANSEQ2 FY23November 4, 2022

Cipla Limited

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Management on call

Umang Vohra

MANAGING DIRECTOR & GLOBAL CHIEF EXECUTIVE OFFICER, CIPLA LIMITED

Ashish Adukia

GLOBAL CHIEF FINANCIAL OFFICER, CIPLA LIMITED

Naveen Bansal

HEAD, INVESTOR RELATIONS, CIPLA LIMITED

Key numbers — 40 extracted

Rs.5,829 crore

olitical environment, we are very pleased to report historically the highest quarterly revenue of Rs.5,829 crores. The overall revenue growth for the quarter was at 6% on a reported basis, and a strong 12% on a

e highest quarterly revenue of Rs.5,829 crores. The overall revenue growth for the quarter was at 6% on a reported basis, and a strong 12% on a COVID adjusted base of last year. We continue to servi

12%

29 crores. The overall revenue growth for the quarter was at 6% on a reported basis, and a strong 12% on a COVID adjusted base of last year. We continue to service demand across all our markets and d

22%

despite a challenging operating environment and helped us deliver a robust EBITDA margin of over 22% for the quarter on a reported basis, and approximately 24% on an adjusted basis. On these adjus

24%

deliver a robust EBITDA margin of over 22% for the quarter on a reported basis, and approximately 24% on an adjusted basis. On these adjustments, I'll come to later. Coming to key highlig

22.3%

n and operating efficiency continue to drive a strong net cash position. Our operating margins of 22.3% for the quarter subsume the impact of sharp moderation in COVID contribution in last year's phase

150 basis point

cost line item in the P&L. Adjusted for this, our EBITDA margin would have been higher by nearly 150 basis points, or at approximately 24%. The higher R&D costs investments driven by ongoing clinical trials on

Rs.61 crore

y ongoing clinical trials on respiratory asset as well as other developmental asset, is higher by Rs.61 crore versus last year, which is incremental 1% of our revenue. Our reported gross margin after mater

ell as other developmental asset, is higher by Rs.61 crore versus last year, which is incremental 1% of our revenue. Our reported gross margin after materials cost stood at 63% for the quarter, wh

63%

which is incremental 1% of our revenue. Our reported gross margin after materials cost stood at 63% for the quarter, which is 165 basis points above last year's figures driven by contribution from

165 basis point

ur revenue. Our reported gross margin after materials cost stood at 63% for the quarter, which is 165 basis points above last year's figures driven by contribution from new launches and overall mix change. As al

Rs.2,366 crore

e material cost line item. Total expenses which include employee cost and other expenses stood at Rs.2,366 crores which has increased by 7.2% on sequential basis. Employee cost of the quarter stood at Rs.951 cr

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Guidance — 20 items

Ashish Adukia

opening

“At the current run rate, we are tracking in line with our full year guidance of 21% to about 22%.”

Umang Vohra

opening

“We are tracking to our earlier guidance of reaching 15%-odd percent market share by the end of this year in this category.”

Umang Vohra

opening

“At this stage, we do not expect any material impact to our planned launches for FY'23.”

Umang Vohra

opening

“To close, adjusted EBITDA margin of approximately 24% for the quarter tracks above our 21% to 22% guidance range.”

Umang Vohra

“Tushar, I think the reporting universe numbers are still to come out, but I guess what you're referring to competition, I think if you are first-to-file on this product, and two companies are, obviously, the share allocation will be high.”

Umang Vohra

“And subsequently, if at all, any revision in the EBITDA margin guidance for second half?”

Ashish Adukia

“So, we don't give the gross margin guidance, but EBITDA margin, we have given the guidance, that will be in the range of 21% to 22%.”

Umang Vohra

“I think our sense at this point in time is that there will be repeatability at least for this year.”

Umang Vohra

“And as we get closer to next year, we'll be able to give more guidance.”

Umang Vohra

“So, on Advair update, as we had mentioned, we were looking at it in the second half of the year of this fiscal year and I think we are sticking pretty much to that guidance today.”

Risks & concerns — 13 flagged

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

— Naveen Bansal

In a continuing volatile macro and geopolitical environment, we are very pleased to report historically the highest quarterly revenue of Rs.5,829 crores.

— Ashish Adukia

Our operating margins of 22.3% for the quarter subsume the impact of sharp moderation in COVID contribution in last year's phase and geopolitical uncertainties.

— Ashish Adukia

As alluded earlier, reported gross margin subsumes the impact of inventory charge in the material cost line item.

— Ashish Adukia

Our core business continues to demonstrate sustained momentum despite the impact of geopolitical headwinds.

— Umang Vohra

Our reported numbers in dollar terms also subsumed the adverse impact of a depreciating euro, the British pound and other local currencies against United States dollar, which is offsetting the healthy double-digit secondary growth across our DTA markets.

— Umang Vohra

We continue to monitor this volatile operating environment for currency and demand headwinds and are proactively exploring options to mitigate risks and protect them.

— Umang Vohra

Tushar Manudhane Given that in second quarter, we are already at 24% and it's not a full quarter impact of the niche product launch?

— Ashish Adukia

Flat or there could be a little bit of a decline or anything.

— Umang Vohra

Are we going deeper and how difficult is it to grow that business from the base we are?

— Neha Manpuria

So, does it present some kind of risk in the future to the overall India business profitability?

— Damayanti Kerai

What we're seeing is that, on the procurement cost, there has been some pressure, but we're seeing a trend of stabilization out there.

— Ashish Adukia

So, when you philosophically looking at the US business trajectory for us over the next three to five years, how are you approaching this does a business get to a point from whereon incremental sales growth begins to become a challenge, and how we look to sort of tackle that at maybe a point two, three years down the line?

— Nitin Agarwal

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Q&A — 13 exchanges

Tushar, I think the reporting universe numbers are still to come out, but I guess what you're referring to competition, I think if you are first-to-file on this product, and two companies are, obviously, the share allocation will be high. Tushar Manudhane And just secondly, given that this was just maybe a month kind of a launch for a limited competition product, and we are already tracking 64% gross margin, so if you could just share the outlook for the second half FY'23 on the gross margin front? And subsequently, if at all, any revision in the EBITDA margin guidance for second half?

Ashish Adukia

So, we don't give the gross margin guidance, but EBITDA margin, we have given the guidance, that will be in the range of 21% to 22%. So, we will stay with that margin. Tushar Manudhane Given that in second quarter, we are already at 24% and it's not a full quarter impact of the niche product launch? So, what I'm saying is 21% to 22%, it is for the full year, that's one, and second, there is also seasonality quarter-on-quarter which we have to take care of. Tushar Manudhane And just lastly on Lenalidomide, just if you could share some color in terms of the kind of price erosion that would have

Just one clarification. First on, the inventory write-off related to COVID, it is largely done or we have some bits left?

Ashish Adukia

This is all done, all COVID-related inventory has been taken into the books. Another clarification on Revlimid. So, I heard one saying on, obviously, the competition has FTF understood, but for us, would it be well spread across the quarters to come by or is there a front-ended stuff, or it is back-ended for us, just a little color will help? I think our sense at this point in time is that there will be repeatability at least for this year. And as we get closer to next year, we'll be able to give more guidance. So, it's also linked to how players come into the market, etc., and the settlements

Yes, I think we were at four last quarter, we are at nine, close to 10 this quarter. We are assuming an actual progression trying to get as close as possible to the guidance we gave, which was around 15%. And I think as we mentioned earlier, this is a very gradual ramp up product. So, I think, we will assess this closer to when we reach this goal of 15%.

Kunal Dhamesha

Can you provide some color on our launch of the Leuprolide Depo Injection, what is the addressable market size? What are our expectations there? Any field force requirement? Let me answer the last one because I think that's easier, we already have an infrastructure that we created for Lanreotide and we are hoping that infrastructure will be able to support Leuprolide. Obviously, Leuprolide is not a single brand market, there are almost two, three brands in the market with three players. So, we will be launching the product anytime now. I think it will also ramp up slowly, just like Lanreotide

Just on the EBITDA guidance, given the 24% margin that we're doing in this quarter adjusted for one-off, and second half does seem to be seasonally strong in India, we'll have Revlimid contribution, Advair coming through, any reason for keeping our guidance at the '21 to 22%, I mean, just trying to understand if you're planning higher investment, higher R&D, any color there, please?

Ashish Adukia

First of all, 24% is adjusted for the COVID provisioning, right. So, if you look after that, it's 22%. Then, Q3 is expected to be a quarter where some of the therapies does well, but Q4 is generally a more muted quarter in comparison to others. So, looking at all those things, the full year guidance is somewhere around in the range of 21% to 22%. And just on R&D we've already seen a fair bit of increase in this quarter. As we are progressing on respiratory assets, should we expect a further increase from the run rate that we're doing in the quarter? So, you will have this run rate continuing f

My first question is on the kind of cash flow that we are likely to see from the Revlimid. So, generally, say Cipla is known for generating strong free cash flow and now on the top of that this Revlimid cash flow is likely to be kind of really robust. So, given that our investment towards the specialty projects or about product development, are we going to see any kind of meaningful change to our developmental pipeline, strategic growth initiatives and all that, could you give some color on that, sir?

Ashish Adukia

So, let me cover the cash flow first, and then I'll hand over to Umang to talk about some of the strategic initiatives. So, on the cash flow this quarter, of course, we did well. I think the couple of things that we need to bear in mind is that this was a dividend paying out quarter. So, some of the cash that we generated went out there. And the other is that with the launches in the US, etc., so there was an increase in the debtors. So, of course, that cash release will happen over this quarter and the next. So, that's broadly on the cash flow. On the strategic priorities, of course, we are c

My first question is on India business. So, can you broadly give split between the branded generic and then other components which is the trade generics plus consumer health business? And second part of that question is we have seen very strong growth in the trade generics part. So, does it present some kind of risk in the future to the overall India business profitability?

Umang Vohra

I think if you were to look at our overall growth rates… so we don't give you specific by line of business, but I think what we are seeing is that, if you were to look at the consumer business of roughly 650-odd crores and split that into quarters, that's roughly what our consumer business will show you and that this business is growing the fastest right now. If you were to look at our trade generics business and our branded business, both are growing… the branded business is almost 60% to 70% of our India business, and that's growing at the same rate as perhaps the trade generics business. So

One on Leuprolide. So, you have approval for the 22.5 make, which is about 40% volumes of Lupron. Now, given that you're a 505(b)(2), how do you look at your target market, do you look at the other strengths as well as fair game, do you also look at the other brand as the game, so how are you defining the target market, and should we expect to see some of the other strengths as well?

Umang Vohra

As of now, it's just a single strengths launch. You could calculate the addressable market by looking at the 22.5 strength across the two brands. I think that's one way to look at the market and then take a phased some kind of a B2 type share uptake for modeling purposes. Quick one on the partner asset, Umang, any updates there when are you expecting the partner respiratory asset to be launched in the market? I think there were some questions that the FDA had, which I believe the partners responded to. So, since based on the regulatory thing, it's another nine month time period. So, this was r

Just two quick ones. One is on Advair, just to understand better, once approval comes through, is it the LRx, which will be more critical, or we have chance to take share from the other players as well? And how fast is the ramp up in market share, if you could guide what is the expectation there?

Umang Vohra

I think it's logically should be from both sources. But we are also cognizant of the fact that the brand still holds over 40% share in Advair. So, obviously, the share should start converting from there. But also, there would be some amount of share that we take from existing players. I think because there are three players in the market, I think over a period of time the share would come. So, we're not guiding specifically. But the share uptick would come in due time. And do you expect competition to pick up there as well, I mean, more players or it would stay less competitive for some time?

My question is related to the US market. When we expect to file the next inhaler asset, that is currently under clinical trials?

Umang Vohra

I think towards second half of next calendar year. Would you like to highlight what is the addressable market of this particular product? I don't think we will give that level of detail. You have alluded that $180 million number in US, that is more or less sustainable. So, are you comfortable with this number even after let's say Revlimid comes down maybe a few quarters away? We also have other launches. So, they should hopefully be able to offset this. And I think what range we are guiding to is $175 million to $180 million as the new base.

So, one of the branded players in Albuterol market is going to stop marketing. Do you believe that would offer us more opportunity in that product or any dynamic change because of that?

Umang Vohra

Are you referring to a change that is being made by one of the innovators for a climate-friendly version or what? Not really. They said they would stop marketing that product in a way that they would cut down on the field force for that product. I'm not sure we've heard that. Do you know the name of the company? Sorry, we've not current with this. So, Teva yesterday in – Oh, you are talking about ProAir? Yes. So, I think basically from how we understand, Teva has an AG also to the same product that they sell which means they will move the whole market generic. But then, if they stop marketing

Just on this guidance of US business of $175 million to $180 million, need to clarify, you're not assuming any revenue from the upcoming respiratory launch in Q4.

Umang Vohra

This is we have guided towards what is the new base for us. In a yearly cycle for Revlimid, the revenue booking would be more front-loaded like assuming September or October is the start of the year for Revlimid? I think it is following how any regular generic product is launched, no difference. Maybe last one on Albuterol, can you share how pricing has behaved in last one and a half, two years, and how it has been in line with your internal expectations, so it has been more than that, can you share something over there? We have obviously witnessed competition, and therefore there is some eros

Umang, On the US business, I think, with the new base that you've created, and with the growth that is expected to come through with some of the newer launches, we're getting to a about $1 million plus quarterly revenues. I mean, a point where most of the other competitors have typically started to face growth issue at some point in their growth trajectory. So, when you philosophically looking at the US business trajectory for us over the next three to five years, how are you approaching this does a business get to a point from whereon incremental sales growth begins to become a challenge, and

Umang Vohra

I think, Nitin, we are not going to be any different or immune from what is an industry phenomena. So, I think at some point in time, as we become larger, our growth will also not be as high as we have seen in the past. I think we have a base effect, plus, we have two things for us going for us right now; one is a very smaller base compared to the other company; and the second is that we have made some pipeline choices, which probably have helped us, including respiratory and the peptide. So, I think at some point in time, the base becomes larger, but the pipeline choices will continue to hope

Thank you, Steve. Thank you, everyone, for your attention in joining us for the earnings call. In case you have a follow-on questions, feel free to reach out to the investor relations team. Thank you and have a good evening ahead.

Management

Speaking time

Umang Vohra

Moderator

Kunal Dhamesha

Ashish Adukia

Prakash Agarwal

Neha Manpuria

Surya Patra

Ritesh Rathod

Damayanti Kerai

N Balasubramaniam

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Opening remarks

Naveen Bansal

Thank you, Steve. Good evening, and a very warm welcome to Cipla's Q2 FY'23 Earnings Call. I am 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, including the impact of COVID-19 that could cause our actual results to differ materially from what is expressed or implied. Cipla does not undertake any obligation to publicly update any forward- looking statement, whether as a result of new confirmation, future events or otherwise. With that, I would like to request Ashish to take over, please.

Ashish Adukia

Thank you, Naveen. Thank you, Steve, and good evening to all of you. First of all, I'm pleased to join Cipla Limited as Global CFO and honored to be part of company's rich legacy of “Caring For Life.” On the quarter results, I hope you've received the “Investor Presentation” that we posted on our website. For Cipla, the last three months have been tremendous learning in terms of navigating the business amid the ongoing geopolitical headwinds, while continuing to make progress across all our strategic priorities. In a continuing volatile macro and geopolitical environment, we are very pleased to report historically the highest quarterly revenue of Rs.5,829 crores. The overall revenue growth for the quarter was at 6% on a reported basis, and a strong 12% on a COVID adjusted base of last year. We continue to service demand across all our markets and demonstrate robust commercial execution of new launches during the quarter. This was achieved despite a challenging operating environment and

Umang Vohra

Thank you, Ashish, and welcome to all of you on the call. Our Q2 FY'23 performance reflects strong execution in our One India and a solid launch momentum from our differentiated US portfolio, driving our overall revenue to a multi-quarter high of Rs.5,829 crores. The reported growth is 6% and 12% year-on-year after adjusting for COVID in our Q2 FY'22 base. Ashish has already explained the numbers to you. Our core business continues to demonstrate sustained momentum despite the impact of geopolitical headwinds. I'm pleased to share that our reported EBITDA margins for the quarter came in at 22.3% and adjusted margins at approximately 24% which continues to track in line with our guided range of 21% to 22% EBITDA. Coming to the Detailed Updates for the quarter by market. In a One India franchise, we are making strategic bold moves, transforming into a holistic ecosystem driven by new science, better reach and a digital-first approach. We are significantly investing in investments in port

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