Cipla : Earnings Call Transcript Q4 FY24

"Cipla Limited

Q4 FY '24 Earnings Conference Call"

May 10, 2024

MANAGEMENT: MR. ASHISH ADUKIA - GLOBAL CHIEF FINANCIAL OFFICER - CIPLA LIMITED

MR. UMANG VOHRA - MANAGING DIRECTOR AND

GLOBAL CHIEF EXECUTIVE OFFICER - CIPLA LIMITED MR. AJINKYA PANDHARKAR --HEAD INVESTOR RELATIONS - CIPLA LIMITED

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	Cipla Limited
	May 10, 2024
Moderator:	Ladies and gentlemen, good day, and welcome to Cipla Limited Q4 FY '24 Earnings Conference
	Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an
	opportunity for you to ask questions after the presentation concludes. Should you need assistance
	during the conference call, please signal an operator by pressing star then zero on your touchtone
	phone. Please note that this conference is being recorded.
	I now hand the conference over to Mr. Ajinkya Pandharkar. Thank you, and over to you, sir.
Ajinkya Pandharkar:	Thank you, Sagar. Good evening, and a very warm welcome to Cipla's Q4 FY Q4 Earnings Call.
	I'm Ajinkya Pandharkar from the Investor Relations team at Cipla. Let me draw your attention to
	the fact that on this call, our discussions will include certain forward-looking statements, which
	are predictions, projections and 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 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. I hope you received the investor presentation that we
	have posted on our website.
	I would like to request Umang to take over.
Umang Vohra:	Thank you, Ajinkya, and good evening to everyone. Thank you for joining us for our fourth quarter
	earnings call for financial year 2024. In FY '24, we recorded our highest ever revenue and
	EBITDA, including major milestones across our flagship businesses of One-India, North America
	and South Africa. Our One-India revenue reached the threshold of INR10,000 crores, North
	America crossed $900 million and South Africa reached the top spot in Prescription business in
	the country.
	To make this journey sustainable, we are continuing our investments across the complex pipeline,
	the CapEx, the big brands and the operations. I'm pleased to share that we finished this fiscal with
	significant progress in our top priorities. Our first priority, we continued market-leading growth in
	our focus markets. Our One-India business posted a healthy growth of 10% for this year, propelled
	by traction in the Branded Prescription and Trade Generics, while Consumer Health was impacted
	by seasonally slower market.
	Our Branded Prescription business continued to outpace the market growth in this quarter with
	Cipla growing 100 basis points ahead of the market as per IQVIA Q4 FY '24. This performance
	was largely backed by respiratory and cardiac therapies, which grew 10% each, respectively.
	Chronic therapies now have a share of 61% in the portfolio, higher by almost 100 basis points
	year-on-year and grew at 10% year-on-year versus IQVIA MAT March '24.
	To improve our offerings, we were adding a niche set of innovative products like inhaled insulin,
	plazomicin, et cetera in our portfolio. We have a pipeline of similar assets which are currently
	under various stages of development.

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Cipla Limited

May 10, 2024

In this fiscal, our Trade Generics recorded a double-digityear-on-year growth, further consolidating its leadership position in the market. Strong execution in key therapies, deepening distribution network in Tier 2-6 cities and 40-plus new launches as well as technological interventions were the key drivers for the growth this year.

With a view to consolidate our distribution channel, we recently changed our model to increase the direct touch points, which will help us with improved trade visibility and will position us closer to the market. We are confident that this change will help us unlock the immense potential in the Trade Generics market in India. The consumer health franchise was flat year-on-year in a year adversely impacted by seasonality while operating profitability continues to be sustainable. Recent improvement in the demand cycle and inorganic investments will help this business scale up further in the upcoming fiscal.

In North America, we reported an all-time high annual revenue of $906 million, which was 24% growing over the previous year. The performance was led by traction in differentiated portfolio and sustained demand for the base business. In Lanreotide, we have scaled the product to achieve a market share of 20.8% as per IQVIA Feb '24, which itself is a benchmark in the 505 (b)(2) market.

In Abuterol, our market share was in the range of 12% to 13% at the end of the year. We have a strategy in place to improve this market share by a few more percentage points. The market share has already increased to 15.5% as per the prescription data for April '24. Overall, we continue to be one of the fastest-growing among the top 5 companies. Recently, we achieved a leadership position in the pharma prescription for the South Africa market as per IQVIA MAT March '24. Here, again, we recorded 11.2% year-on-year growth in secondary versus a market growth of 2.1% as per IQVIA MAT March '24.

In OTC, we have fastest growth amongst the top 5 players in the market and aspire to be ranked #2 in the near future. Our second priority has been about investing in the future organically and inorganically. Our organic investments have been focused towards investing in R&D, primarily for our U.S. markets. In Respiratory, we have filed 5 assets, including Symbicort and generic QR with launches expected within 3 years. Further, we are targeting to file 2 respiratory assets with significant revenues in the next 12 to 15 months. In peptides and complex generics, 12 assets are already filed with most launches in 2 to 4 years.

As alluded earlier, we strive to launch 4 peptide assets in FY '25. We are also working on several 505 (b)(2) opportunities in complex ANDA products, which are currently under development and will be key to our future portfolio. For organic partnerships and investments, we have been very mindful of the choices to allocate capital. Earlier this year, we invested in Actor Pharma, which stands fully integrated as on date and is expected to help accelerate our South Africa OTC portfolio in FY '25.

Recently, we entered into a marketing and distribution partnership with Sanofi to expand the reach of CNS portfolio in India. In line with our focus to enhance our chronic portfolio. In Cipla Health,

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Cipla Limited

May 10, 2024

we entered into a brand acquisition for the cosmetic and personal care business of Ivia Beaute Private Limited, which includes their flagship brand Astaberry to bolster our India OTC portfolio.

During the year, we disinvested our QCIL portfolio and focus on allocating our capital to other growth projects, while we continue to serve Africa through our Global Access business. In the past year, the U.S. FDA audited 3 of our facilities based in the U.S. and issued either a VAI or 0483 observations. Our new facility in China, which has capabilities in manufacturing respules for local markets as well as the U.S. also cleared the U.S. FDA audit with 0483 observations. We expect to start supplies of the respules to U.S. from China a strong amount in the second half of FY '25. Meanwhile, a Goa Unit 5 unit cleared GP audit by the MHRA U.K. earlier this year.

Recently, 2 of us the Patalganga and Kurkumbh also underwent the U.S. FDA audit. The Patalganga facility was issued with six 483 observations and the Kurkumbh audit ended with 1 observation. We await the official classification for both the sites.

In Goa, we have now finished remediation equities and are ready for the U.S. FDA while at indoor, we are focusing on getting the plant remediated. I would now like to invite Ashish Adukia to present the financial and operational performance.

Ashish Adukia:Thank you, Umang. I would like to now present key financial highlights for the quarter and financial year 2024. To clarify, the numbers are adjusted for QCIL disinvestment, which was completed earlier this year. We are pleased to report our quarterly revenue of INR6,163 crores with a healthy Y-o-Y growth of 10% driven by our focused markets. As a result of this quarter, we ended the year at INR25,455 crores with revenue growing 14% Y-o-Y. The EBITDA margin for the quarter stood at 21.4% versus last year of 20.45%, almost 100 basis points improvement. And for the year, the EBITDA margin was 24.5% as against last year of 22.2%, again, 200 basis points beat.

Gross margin after material costs stood at 66.7% for the quarter, which is 192 basis points over last year. The gross margin for the year is at 66% higher by 200 basis points Y-o-Y. Expansion and profitability is largely due to favorable mix, calibrated price actions across branded and generic portfolio and impact of easing cost inflation. Total expenses for the quarter include employee cost and other expenses, which stood at INR2,797 crores, higher by 6.7% on sequential basis.

Annually, the expense were INR10,572 crores, higher by 13% Y-o-Y. R&D investments for the quarter are at INR444 crores or 7.2% of revenue against our yearly average of 6% to 7%, driven by product, filing costs and developmental efforts higher in the quarter by 19% versus last year. Overall for the year, the R&D investment stood at INR1,571 crores or at 6.2% of the revenue.

Profit after tax for the quarter is at INR939 crores at 15% of sales, ETR at 25.8%. Full year profit after tax stands at INR4,106 crores at 16% of sales and ETR at 27.1%. Our capital investments for the year were INR1,315 crores, out of which 70% was invested towards growth and improving our capacities and capabilities while the balance was deployed towards maintenance and sustainability.

Free cash generation and operating efficiencies has resulted in a healthy cash position, as at the end of the year, the gross debt on our balance sheet is INR559 crores, which also constitutes the

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Cipla Limited

May 10, 2024

	lease liabilities and working capital facilities. Cash equivalent balance as on the date stands at
	INR8,267 crores.
	Looking forward, our key focus areas for FY '25 will be growth for One-India led by Rx, where
	our aspiration continues to grow higher than IPM backed by chronic portfolio. Efforts in Trade
	Generics will be channelized towards smooth transitioning to the new operating model for a long-
	term benefit. This may have an impact for a quarter, but over the year, we hope to recover.
	Cipla Health should be backed by -- on its growth trajectory after a difficult year impacted by
	seasonally slower demand. In North America, the aspiration will be to grow our top line, Y-o-Y,
	primarily backed by commercial execution of existing portfolio and new launches. We remain
	focused on resolution of U.S. FDA observations, derisking our product launches. We would
	continue to explore inorganic partnerships and acquisitions. Growth in South Africa supported by
	private and select tender business with priority on margin improvement.
	In EMEU, the top priority is to improve top line while margins are maintained at a sustainable
	level. ROIC continues to be very healthy at around 31% for the last year. We aim to deploy
	INR1,500 crores in capital investments to enhance our manufacturing capability and improve
	sustainability.
	EBITDA margin for the full year is expected to be up 200 basis points over last year, which should
	result in the range of about 24.5% to 25.5% to EBITDA margin. I'd like to thank you for your
	attention and would request the moderator to open for the questions.
Moderator:	The first question is from the line of Saion Mukherjee from Nomura.
Saion Mukherjee:	Sir, can you explain the dynamics in the Trade Generics segment. You talked about some
	restructuring on the channel? What exactly is that? And what's the impact you expect in the first
	quarter here? And secondly, what's the total contribution to the One-India number from the Trade
	Generics and given that many players are focusing on that in this segment, what's the -- if you can
	comment on the dynamics you're holding here.
Ashish Adukia:	Sure, we are on Trade Generic, okay, the model change that we're talking about is that we used to
	earlier have a sole CFA agent, which used to earn the commission and they used to handle the
	collections as well as inventory, et cetera. And now what we have done is that, that converts into
	only a marketing agent, okay? So it will only be a commission, and we'll directly deal with the
	stockist underlying that sole agent.
	So we will have direct connect with the stockist now. Now this requires a little bit of administrative
	changes, et cetera due to which there can be some hiccups in the first quarter as we transition with
	the Direct Connect. But over a period of time, like I said, it will ease out to normal growth. On the
	second question, this split, we usually -- we don't give that split. It's the same split as both have
	grown trade carriers slightly higher than the Rx market. So the split is broadly same as it has been
	in the previous year.

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	Cipla Limited
	May 10, 2024
Umang Vohra:	Yes. Maybe I can add, Ashish, just a couple of points. So Saion, the attempt is to move closer to
	the trade in generic. We'd like to actually consolidate distribution across our Rx and Gx, and we
	think that by us taking the operation over, we will be able to make closer to trade and that's the
	change that's happening in Gx.
	I think that your question is how much is it going to be an issue in the quarter. It's not significant
	enough for us to get concerned, right now. There might be some impact as and inventories get
	reshaped, but not significant for us to be worried about. I think on your next question, just very
	quickly on the generics business is also a branded business. You have to fundamentally understand
	this. medicines don't sell as paid generics as Gx, Rx, they sell as still branded GX. And I think the
	dynamics of that business are still highly dependent on the brands you sell.
	So as long as there's brand saliency, competition may impact you, but our thesis of big brands
	going bigger continues to shape the trajectory of that business.
Moderator:	The next question is from the line of Kunal Randeria from Axis Capital.
Kunal Randeria:	Sir, my first question is on your inorganic investments. So while you get the door open and you
	want to be judicious about it, few years back we have made some forays in semi-specialty products
	like IV tramadol, prednisone. So while I understand it didn't work out, are you still keeping your
	options open? And if so, perhaps you would like to maybe tell us which kind of assets you would
	be interested in and the amount that you'll be comfortable investing?
Umang Vohra:	Ashish bhai, maybe you can answer that.
Ashish Adukia:	Sure. See, I think with India, we are fairly comfortable with the growth, et cetera, that is available
	in the market. So we can make a large acquisition in India to make sure that in the white spaces,
	the therapies, et cetera, which is our focus areas where we're not a leadership position, we'll go
	ahead and we can make large acquisitions out there.
	When it comes to U.S. portfolio, partnership or in-licensing, products, et cetera. There, I think it
	won't be a large acquisition, and it will be a lot focused on product where there is some
	differentiation available, either it could be supply constraint or lower competition due to many
	reasons. I would be interested in such opportunities out there so that it has a longer life in the
	market. Umang, if you want to add, please go ahead, yes.
Umang Vohra:	No, I think what you've covered is great. I think that's very elaborate. Thank you.
Kunal Randeria:	Sure. And my second question, with so many players coming in Trade Generics in India, how do
	you see this market shaping up? Because at some point, it will cannibalize -- it had already started
	to cannibalize the branded market for the industry. So it's just your thoughts on how the market
	will shape up in the next 2 to 3 years?
Umang Vohra:	Actually, I have a different view on this. And let me offer it. We don't see more than a 20% overlap
	between what sells in the Tier 2 to 6 cities in our generics business versus what sells in these cities

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	from our Rx or Prescription business. There is very little of the Prescription business that filters
	down to Tier 2 to 6 towns.
	And therefore, we believe that the generic business, as penetration of healthcare deepens, is only
	going to expand in volumes. It's not going to decrease. Having said that, and as I mentioned earlier
	to Saion, the business is still a branded business. And the salience and relevance of brands is very
	important. So the older the brand and the more current of therapy, the business will continue to
	grow. And over the last 2 years or 3 years, we have been diversifying ourselves away from a pure
	chronic orientation in this part of the business.
	So we feel competition is good. It will drive definitely growth higher, but we don't see this business
	as cannibalizing the branded business in any way -- the Branded Prescription business in any way.
	That's number one. Number two, we think the market is big enough to drive further penetration
	through the competition activities; and three, businesses, which have been historically present and
	have large branded franchisees because that's essentially what the generic business is, are actually
	on a firmer ground compared to some of the newer entrants.
Moderator:	The next question is from the line of Nitesh Dutt from Burman Capital.
Nitesh Dutt:	I have a question on the manufacturing strategy of our India business, both the Prescription and
	Trades and Generics side. So what percentage of the manufacturing is currently being done in-
	house and what percentage is outsourced and will you be maintaining the same mix going forward?
	And second, also I want to understand if the -- for the outsourced portion, is that fragmented across
	a lot of suppliers or consolidated amongst a few top players?
Umang Vohra:	So I'll try and give you an answer. I think the -- we have a larger share of the Prescription business
	manufacturers in Cipla facilities than the generic business. I think we have strategic partnerships
	with a lot of people, some of whom consolidate with us. And typically, it's easier to consolidate
	manufacturing in sales in U.S. than it is in injectable facility than it is in dermatological facilities.
	So I think we have a strategy of consolidating facilities here, but in-house facilities supply a much
	larger share of our Prescription business than the Generic business. But in-house facilities supply
	both businesses as of today.
Nitesh Dutt:	So it's just possible to give any number on what percentage might be getting outsourced and what
	is getting manufactured in-house?
Umang Vohra:	So I can give that to you. The only issue is that it varies quarter by quarter. And the reason for that
	is that it's seasonal. So when you see a huge amount of the respiratory season, most of that comes
	from in-house. When you see a season, which is more chronic-heavy, again, a large portion of that
	comes from in-house. So I think it's difficult to give you a picture other than just perhaps say that
	a large share of our -- a larger share of our prescription business comes from in-house than the
	Generics.
Nitesh Dutt:	Understood. And sir, finally, the government has been placing a lot of emphasis on cracking down
	upon some of the smaller CMOs, et cetera, and focusing on stricter implementation of schedule

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	Cipla Limited
	May 10, 2024
	and norms, et cetera. So can it impact our procurement strategy or contract manufacturing in any
	way? Consolidation or increasing the procurement cost?
Umang Vohra:	No, it's a great question. I think by and large, the industry and the IPA is moving to facilities that
	have as a minimum WHO approval. So that's the first step that started happening. So if there's a
	facility that at least have WHO approval, it's going to be preferred. If it's got an approval, which
	is WHO plus Europe plus something else, then obviously, that's Gold standard. It starts getting
	closer to Gold standard. So that's 1 that most companies are now looking at and this will hopefully
	push the standard of manufacturing in the Indian diaspora.
	The second is a more heightened oversight of quality, including release tests, et cetera, at these
	facilities, where most companies are now adding a lot of requirements and more spontaneous
	quality checks, including audits by -- including unannounced audits by other respective companies.
	So I think those are the 2 models that perhaps are immediately impacting the industry, but I think
	that's -- I'll leave it at that.
Moderator:	The next question is from the line of Kanha Agarwal, who is an Individual Investor.
Kanha Agarwal:	Sir, why is there an increase in the other expenses for the quarter versus Q3?
Umang Vohra:	I'll request Ashish Bhai to answer.
Ashish Adukia:	That has manufacturing cost, that has SND, that has even CSR sitting out there. So it has many
	items out there. So R&D also is sitting there. So there's increase in R&D because of one of the
	filings also that we have made. So it's due to this combination of reasons that we have an increase
	in the cost out there.
Kanha Agarwal:	We should subside in the next quarter?
Ashish Adukia:	Yes, absolutely. It will -- so quarter-on-quarter, this can change. But if you look at the entire year,
	it is going to be in line with the sales growth, and we maintain the percentage that discipline is
	maintained.
Moderator:	Next question is from the line of Damayanti Kerai from HSBC Securities and Capital Markets
	India Private Limited.
Damayanti Kerai:	My first question is you mentioned in your presentation 12 assets were filed in peptides and
	complex generics, which would likely see launch during FY'25 to FY'27. So just want some more
	colour on like the market opportunity for some of these critical assets and whether these will be
	manufactured in-house or you'll be getting it done through CMO.
Ashish Adukia:	Yes. So peptides -- all of our peptides is manufactured by our third-party partners. And on market
	opportunities, there are some of them that can be large opportunities like in case of our current
	portfolio, but there's a long tail as well.
Damayanti Kerai:	Okay. So mix of some significant assets plus smaller assets here?

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Ashish Adukia:	Yes.
Damayanti Kerai:	Just coming back to U.S., with $900 million of base now, you mentioned like you will sustain
	growth, but whether for that new launches like your Abraxane, et cetera, should come in? Or you
	believe current portfolio has significant headroom to sustain growth from this $900 million base
	even for FY '25?
Umang Vohra:	I think we -- Go ahead, Ashish. Go ahead.
	Okay. So yes, I think the -- we think the current portfolio has opportunity within the set of products
	because as we mentioned, we think Albuterol can be slightly higher in share. We think that
	Lanreotide can still increase its share. And so I think there is a fair amount we can build out of the
	current portfolio, but also from new tranches. I think the step function jumps in growth will come
	more from new launches. So we will have a very normalized growth rate from existing portfolio,
	but the new launches will add the step functions to it. So both -- the answer would be both.
Damayanti Kerai:	Okay. That's helpful. And my final question is any update on Goa plant from FDA side when they
	would likely come? And do you still expect Abraxane to potentially see launch in this fiscal year?
Umang Vohra:	So the timing of Abraxane is going to depend on Goa inspection. We've earlier -- Goa is the earliest
	path for a launch. I think so -- that can happen earlier part of the year. There's a good chance for
	Abraxane to visit this in the later part of the year, maybe not. So it's all linked to the Goa inspection.
	We think the Goa inspection from our last inspection, we will be completing roughly about 2 years
	in July, August of this time frame. So that would -- around that time or beyond that is probably the
	time to expect reinspection.
Damayanti Kerai:	Okay. So most likely in the first half of this fiscal, if FDA visits the unit, then there's a good chance
	of Abraxane will come this fiscal year.
Umang Vohra:	Yes. I mean I would say that, but I think we -- please keep in mind that inspection needs to happen,
	then there is a 90-day process post inspection for a company to respond and then the EIR comes
	and then the asset has to be approved. So you just factor that time line, it's very sensitive to when
	the plant is audited.
Moderator:	The next question is from the line of Surya Patra from PhillipCapital India Private Limited.
Surya Patra:	My first question is about the potential business opportunities in the specialty areas. Earlier, we
	have already talked about biosimilar alliance and spending towards CAR-T kind of therapies,
	mRNA. So is there any update on that side or are we seeing any kind of meaningful progress on
	those front as a growth driver for our future business?
Umang Vohra:	Happy to answer on that and Ashish can add. So we are beginning to see -- to make choices on
	capital allocation in that side and it's not so much with the perspective of the next 1 to 2 years, but
	really the transition of medicine that's happening where biological sciences are perhaps becoming
	more and more relevant in the field of pharmaceuticals. So we are now in the process of setting up
	an mRNA lab in Germany. That process has started. We have recruited a few members of the team.
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	Biosimilar asset is now hopefully going to enter Phase I soon, which is an asset that is likely to
	launch around the 2030 time frame. And that's 1 asset that we are working on, and there are a few
	other. And on CAR-T, we are evaluating what we can do in that space as well.
	So this whole area, along with our investment in Stempeutics is the new area of science which will
	become relevant 5, 7 years later in the area of medicine. And I think we want Cipla to have a
	chance to be able to play a formidable role, just like it does in the chemistry side of the world, but
	also to play that role in the biology side of the world.
Surya Patra:	My second question is on the, let's say, since it is the fourth quarter full year call that we are
	discussing. So can you give some sense Respiratory as a portfolio what would be its revenue share,
	let's say, for U.S. and for your Global business? And since our developmental pipeline is also
	focused around it. So let's say, over the next 3- to 5-year period, what is the revenue mix that you
	would like to have from this respiratory portfolio?
Ashish Adukia:	See, overall, if you look at our Respiratory across global revenue, it should be somewhere around
	circa 30%. That's the kind of share that we have and in the U.S., it's the respules, it's Albuterol,
	these are the key products that we have, Arformoterol. These are the key products that we have in
	Respiratory and then, of course, we talked about Symbicort QR and some of the other products
	also that we are working on.
	So Respiratory is certainly -- we are leaders out there. And the whole idea is to retain and grow
	that leadership in all the markets that -- where we are selling these products.
Surya Patra:	Sir, just an update or a clarification rather, in terms of the Lanreotide, see, we have certainly seen
	a kind of study progression. But is there any risk that one should think about the pricing situation?
	Or is there any risk to the current pricing that you are having for Lanreotide?
Ashish Adukia:	So it's a 2-player, broadly a 2-player market as we see it. So depending on the other players, the
	prices may vary. But we look at it as a total value that we have and the whole idea is to actually
	grow that value this year.
Surya Patra:	Okay. On your permission, sir, just one clarification. So what is the update on the inhalation line
	that you are trying to set up in U.S., whether it has been set up already?
Ashish Adukia:	Yes. No, that's underway. So like this was part of our derisking plan to actually set up these lines
	in our Fall River facility. So basically, our InvaGen facilities that we have across 2 locations. And
	one of them will be more focused on inhalation -- in the inhaler assets that we have, which we are
	filing for the approvals. This is part of the derisking, it's very much on track as we speak.
Surya Patra:	Sure, sir.
Umang Vohra:	Ashish, can I maybe just clarify a little bit more on that. So 2 lines, as Ashish mentioned, the first
	is in line for MDI, which -- where we have already taken reg batches for several assets, right? And
	the line has been approved by the FDA, and it's -- the plant has gone through an audit possibly 2

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