CIPLANSEQ2 FY22October 26, 2021

Cipla Limited

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12analyst exchanges

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Management on call

Umang Vohra

MANAGING DIRECTOR & GLOBAL CHIEF EXECUTIVE OFFICER, CIPLA LIMITED

Kedar Upadhye

GLOBAL CHIEF FINANCIAL OFFICER, CIPLA LIMITED

Naveen Bansal

HEAD, INVESTOR RELATIONS, CIPLA LIMITED

Kawaljeet Saluja

KOTAK SECURITIES LIMITED

Key numbers — 40 extracted

10%

Coming to the quarter, we are pleased to report historically the highest quarterly revenue with a 10% YOY growth. Our continued trigger on cost and operating efficiency while continuing our focus on

22%

nuing our focus on growth linked investments have helped us deliver robust EBITDA margin ahead of 22% for the quarter. We expect these efficiencies to continue in the coming period as well.

to highlight certain specifics. At a company level the contribution of COVID was little more than 5% for this quarter, adjusted for the same revenue growth of the company is at a strong trajectory o

Rs. 5,520 crore

s in the order confirmation from clients. But the quarter overall income from operation stands at Rs. 5,520 crores. Gross margin after material cost stood at 61.3 for the quarter, while the gross margin was in l

100 basis point

he quarter, while the gross margin was in line on a year-on-year basis, the sequential decline of 100 basis points is attributable to change in mix on account of normalization in the COVID portfolio and normaliz

Rs. 2,157 crore

hat I referred to early. Total expenses, which include employee costs and other expenses stood at Rs. 2,157 crores, increased by 3% on a sequential basis. Employee costs for the quarter at Rs. 878 crores. It d

expenses, which include employee costs and other expenses stood at Rs. 2,157 crores, increased by 3% on a sequential basis. Employee costs for the quarter at Rs. 878 crores. It declined by 1% on a s

Rs. 878 crore

ood at Rs. 2,157 crores, increased by 3% on a sequential basis. Employee costs for the quarter at Rs. 878 crores. It declined by 1% on a sequential basis. The other expenses which include R&D, regulatory, qu

sed by 3% on a sequential basis. Employee costs for the quarter at Rs. 878 crores. It declined by 1% on a sequential basis. The other expenses which include R&D, regulatory, quality, manufacturing a

Rs. 1,279 crore

other expenses which include R&D, regulatory, quality, manufacturing and sales promotion stood at Rs. 1,279 crores. They increased by 6%, largely driven by sales linked variable expenses that we incur for variou

gulatory, quality, manufacturing and sales promotion stood at Rs. 1,279 crores. They increased by 6%, largely driven by sales linked variable expenses that we incur for various geographies. Total

Rs. 274 crore

ble expenses that we incur for various geographies. Total R&D investment for the quarter is about Rs. 274 crores, or 5% of revenue. All priority projects continue to be on track, and we expect R&D spends to re

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Guidance — 20 items

Kedar Upadhye

opening

“We expect these efficiencies to continue in the coming period as well.”

Kedar Upadhye

opening

“EBITDA percentage of 22% ahead is in line with our guidance and includes inventory provision deemed appropriate for the COVID inventory that we are carrying.”

Kedar Upadhye

opening

“All priority projects continue to be on track, and we expect R&D spends to respond to the clinical trial program going forward.”

Umang Vohra

opening

“We expect to offset some of these headwinds with traction and new launches in the subsequent quarters.”

Umang Vohra

“I do not think two years will be significant at all because some of the products we are after are going to be launching after four years or five years.”

Foram Parekh

“Okay so then we can assume that the new launches in Albuterol would continue to mitigate the price erosion going forward?”

Kedar Upadhye

“Yes, our attempt will be to stay in line with what we spoke.”

Kedar Upadhye

“There are headwinds, but there are tailwinds as well and as I said, I think improved pricing discipline, mix improvement whatever we could do on addressing cost base, I think all these levers are available for us to stay within our guidance.”

Anubhav Agarwal

“And the second question is on the margins expectation for next year.”

Anubhav Agarwal

“I am not asking for guidance there, but if let us say, Advair approval for us get delayed for whatever reason, right.”

Risks & concerns — 6 flagged

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

— Naveen Bansal

Gross margin after material cost stood at 61.3 for the quarter, while the gross margin was in line on a year-on-year basis, the sequential decline of 100 basis points is attributable to change in mix on account of normalization in the COVID portfolio and normalization of the API profit share with some inventory provisions that I referred to early.

— Kedar Upadhye

I mean, it becomes difficult to sort of give quarter-by-quarter guidance or estimate on the gross margins because it is subject to several variables in revenue top line costs our activities.

— Kedar Upadhye

Sure, and in that case, would you just like to, you know, can you provide, let us say some more detail on a couple of, you know, headwind or tailwind, which you see which could impact the profitability?

— Kunal Damesha

And the biggest headwind is the commodities inflation.

— Kedar Upadhye

But is it major data that you will have to do that there is a risk that you may not be able to come by September 22?

— Anubhav Agarwal

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Q&A — 12 exchanges

My first question is on the gross margins. I mean you had a good growth across India, and you know South Africa all the branded generic market, which has very good gross margins. In US you have good market share across key products. Just trying to understand what has led to, you know, marginal dip in the gross margins? Has the increase in raw material led by China or other factors affecting us, and what is the outlook on the same?

Kedar Upadhye

Yes Prakash, there is some escalation on the Chinese source items, which was there actually in first quarter as well. And some of that last year as well. I think incremental to the quarter is the provision that I referred to. Some of the COVID inventory we had to adjust based on the recoverability. So that is the only thing, which is incremental to the quarter, Prakash. How much is that? Sorry I missed that? So about, maybe you should take somewhere 80 to 100 basis points. So, this is non-recurring is what you are saying? Yes, I mean every quarter we will have to sort of keep making an assessm

First on the biosimilar fronts we have good number of products now which are like kind of out license, but if you could throw some light in terms of the overall investment, which we would like to do in this segment in terms of manufacturing or product development?

Umang Vohra

I am sorry, could you repeat your question please? So, we have a decent number of products in terms of out licensed in the biosimilar space. We would like to understand like if there are any thoughts on the investment in this segment in terms of manufacturing and or product development? See, we have recently announced a JV for the regulated markets in the world, and overall biosimilar development. So that over a period of time, I think the costs will come in for that, and the objective is to take a few products to the market. The rest of the partnerships we have are more commercial partnership

Sir, I just wanted to know like Ex of Albuterol, what would be the price erosion in our base portfolio in North America region?

Kedar Upadhye

It is not cross the historical percentage. It is still I mean if I recollect it used to be mid to high single digits. So, at an overall portfolio I think it is still at that level. But product by product the trends could vary, and I think the price erosion in my view and my experience is always a product-by-product metric which plays out. While we may mathematically add up at overall business level, that is not how it plays out in reality as you can guess. So, I do not have any evidence to say that it is either significantly reduced or significantly gone up compared to the historical erosion p

Umang, just couple of questions. One is on the Albuterol. I think 18% market share you mentioned out of the generic suppliers only, right? Not of the total market because IMS on the total shows 15%?

Kedar Upadhye

Yes, we have mentioned Anubhav. On the slide, we have mentioned 18.2 is between authorized generics and generic generics. In the total market, it is little less than 15%. You are right, Anubhav. Sure. Sir, just two observations there. One is that the brands are not losing market share. So, there are still about all brands put together still about 20% share for some time now and second Cipla's share has been it is good share at 15% but been around this 15% now almost for more than a quarter or so. Can you just comment on both the observations when will Cipla start to show increasing share and w

So, the first one is on the other expenses. On a sequential basis if I exclude the R&D, the other expenses have gone up by around Rs. 67 crores. But do you think that the Rs. 1,000 crores run rate which we have in this quarter, that is the run rate which will continue? Or do you see some more costs coming back as, you know, now things normalize because I think July was also slightly impacted by COVID. So, any color would be helpful on that part?

Kedar Upadhye

No, I think on the cost with respect to the detailing work, which is happening in India, some of the field activities in international markets and all other activities in the plants and depots, etcetera. I think current quarter builds most of that. This quarter sequentially has gone up, which I refer to in my section is all because of the variable sales linked expenses. So, we do have some sales commissions and fees like, you know, commercial fees. The increase is all on account of this variable sales linked expenses. And that part will be trending appropriately with the sales level. In my vie

First question on the respiratory. So, we have seen obviously you are the sector is doing well in terms of achieving their long derivatives in the global market. With domestic delivering strong over 20% kind of growth. And Albuterol is also doing great. So, in the global market is it the cost advantage that is helping us achieving part aspiration and in the domestic market or in the emerging market this strong growth is it also currently influenced by the COVID related aspect, and it may subside subsequently? If you can clarify on these two aspects of respiratory?

Kedar Upadhye

I think let me put it this way. The first is there is a technical barrier to respiratory. I think in most emerging markets we have crossed it and recently in the launches in US also we are showing that we can do that. And of course each launch is different. Each product is different. So, we have to stay humble because it is not a carte blanche that, you know, you have launched an MDI so you can launch a DPI. So, we are well aware of that and are working expeditiously to launch these. So, one is the technical ability to get a product, to get a robust replicable product, and to get it approved.

Yes, certainly. I think on Abraxane, you know, we are in communication with the agency and the review of our file and the questions that are we being asked. I think we are responding to that. On your second question was on the respiratory pipeline. I think progress is pretty much on track with how what we communicated last time. And we will be introducing more products into the clinical trial as well. Meanwhile, the review of the files that we have already filed are ongoing. Nitya Balasubramayam: Umang, on generic Abraxane do you have TAT date from the FDA?

Umang Vohra

The TAT date is there, but the TAT date it is consequential and inconsequential in some way. It is consequential for our own review, but there is a market formation date, which is probably more important in the case of that product. Nitya Balasubramayam: And I presume the Goa facility inspection is also a critical path? Yes, that is correct. For Abraxane, the inspection has to happen because it is from the Goa facility. Nitya Balasubramayam: On the respiratory pipeline, I think Umang, you had mentioned a partnered asset which you are already filed. And two other assets which was supposed to be

Umang, two questions. One is on Albuterol. You know in recent times have you seen a price based activity increasing? I mean pricing based competition, you know, that being a bigger strategy for your company is coming through and leading to heightened pricing erosion in the overall space versus what you have seen in the initial days?

Umang Vohra

Well, there has been more entrants, certainly. I mean from the time we came in, there is also been another competitor. I think we see normal price erosion on Albuterol, not something which is destabilizing the market. If that is your question. No, what I really meant is, so is it leading to a situation where our say a pricing depression versus the volume increase sort of netting itself out in terms of our ability to get incremental absolute dollar increases on our contribution for the product? Yes, actually where we are, we are very happy with how the overall value monetization for us has happ

Yes, my question pertains to the Antiretrovirals. Do you expect a degrowth now onwards?

Kedar Upadhye

No, I think we should be able to hold on to the current base. For the quarter, we explained there was some bit of a delay in order confirmation from some of the tender based agencies. But we do not expect significant decrease from here. We should be able to hold on to the current base. Okay, that is for SAGA? Yes, I was referring to CGA, which includes ARVs largely. Okay and what about ARVs in India? See ARVs in India in fact is doing well and we do not carve that out separately. But there we have won, you know, couple of high value tenders and that is going fine. Okay, and can you give the va

Just taking the previous Nitin's question. So, Umang, when you are referring to a strong second half next fiscal you have in mind Revlimid, Abraxane and Advair in mind?

Umang Vohra

Yes, I mean those would be our pipeline products Sameer, yes. I had that in mind. And these are sort of, you know, looking at their progress or settlements, its regulatory progress, or settlements etcetera they are heading towards that second half next fiscal sort of time zone? That is correct, yes. And just on biosimilars your JV with Kemwell. If you get the share, you know, what would be Kemwell's role? Is it only product development or would they also be doing commercial scale manufacturing? And second is, is it limited to respiratory biosimilars? And if so, then what about onco and immuno

Question one is an aberration. The comments that you mentioned so, is it that we have to do any data on that we do the data or is it just some questions which we need to respond, and you can still launch by September timing which you have the settlement?

Kedar Upadhye

No, I think we have to respond to some questions as well. And obviously you know some of those questions means we have to redo some of the data etcetera to respond to it, which I think we are doing on average. But is it major data that you will have to do that there is a risk that you may not be able to come by September 22? No, look I do not know whether we are confirming a September date or not, but I just know that most of these launches will happen in the second starting quarter two quarter three because the product is also, I mean the settlement terms are confidential for each party. So,

Thank you everyone for joining us on the call today. In case you have any follow-on questions, do write to us on Investor Relations@Cipla.com or you can reach out to either myself or Ankit from the Investor Relations team. Have a good night ahead. Thank you so much for joining us.

Management

Speaking time

Umang Vohra

Kedar Upadhye

Moderator

Sameer Baisiwala

Prakash

Anubhav Agarwal

Nitin Agarwal

Tushar Manudhane

Foram Parekh

Surya Patra

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Opening remarks

Kawaljeet Saluja

Thank you, Stanford. Good evening, everyone. On behalf of Kotak, I thank with Cipla management for giving us the opportunity to host their 2Q FY22 earnings call. From Cipla, we have with us Mr. Umang Vohra - Managing Director and Global CEO. Mr. Kedar Upadhye - Global CFO and Mr. Naveen Bansal from the Investor Relations team. I now hand over the call to the management team for their opening remarks. Over to you, Naveen.

Naveen Bansal

Thank you so much, Kawal. Good evening and a very warm welcome to Cipla's quarter two 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 expectation of the future performance of the company. Please note that these estimates involve several risks and uncertainties, including the impact of COVID-19 that should 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 confirmations, future events or otherwise. With that, I would like to request Kedar to takeover please.

Kedar Upadhye

Thank you, Naveen. Good evening to all of you. We appreciate you joining us today for the second quarter earnings call for the financial year 22. Before I begin, I hope that all of you and your families are safe and well. These are also festive times ahead. And I have always believed that pharma is amazingly complex sector, and you all keep doing amazingly good work. A lot of hard work during the course of the year. I am always impressed by your commentary and your direct and indirect push to management teams to improve the performance. So, I wish that you know you get to spend decent time with your family during this festival days ahead. Coming to the quarter, we are pleased to report historically the highest quarterly revenue with a 10% YOY growth. Our continued trigger on cost and operating efficiency while continuing our focus on growth linked investments have helped us deliver robust EBITDA margin ahead of 22% for the quarter. We expect these efficiencies to continue in the coming

Umang Vohra

Thank you, Kedar. I would like to wish all of you and your families a good health and I hope that everyone is safe and well. We continue to support the government efforts on ensuring availability of our COVID and other life scaling products. We are pleased to see the robust vaccination rates in the country and are happy to report that 89% of our colleagues across our operating geographies have taken at least one dose and 59% have been fully vaccinated. Coming to the strategic updates and operational performance, I am pleased to see continued delivery reflected in the robust performance for the quarter driven by our branded markets of India and South Africa, supported by the unlocking of our respiratory franchise in the US and traction in emerging markets despite geopolitical headwinds. Our EBITDA margins for the quarter came in at 22.2% and continue to reflect our commitment to maintain the trajectory in FY22 despite significant moderation in the contribution of Covid versus the previo

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