Ladies and gentlemen, good day and welcome to the Cipla Limited Q2 FY21 Earnings Conference Call hosted by Kotak Securities Limited. 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 call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Talati from Kotak Securities. Thank you, and over to you, Sir.
Hi, good evening, everyone. This is Chirag from Kotak Institutional Equities. I thank the Cipla Management team for giving us this opportunity today. From Cipla, we have with us today Mr. Umang Vohra, MD and Global CEO, Mr. Kedar Upadhye, Global CFO, and Mr. Naveen Bansal from the Investor Relations team. Over to you, sir.
Thank you, Chirag. Good evening and a very warm welcome to Cipla's Quarter Two earnings call. I'm Naveen from the Investor Relations team at Cipla. Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections, or other estimates about future events. These estimates reflect management's current expectations of the future performance of the company. Please note that these estimates involve several risks and uncertainties, 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 information, future events, or otherwise. With that, I would like to request Kedar to take over, please.
Thank you, Naveen. Good evening to all of you. I hope that all of you and your families are safe and well. We appreciate you joining us today for our second quarter earnings call for FY21. I hope you have received the investor presentation that we have posted on our website. Resilient operations and focused execution of strategic priorities was the highlight for the quarter. We continue to applaud our employees' dedication and perseverance during these uncertain times, and we are privileged to have served the patients in India and global markets with our in-licensed and organic product offerings in battling COVID-19. Dynamic capacity planning and coordination between procurement, manufacturing, and logistics teams have enabled us to continue the uninterrupted supply of medicines to our global markets. We continue to support our business partners via various initiatives and further deepen our digital ecosystem across businesses.
Coming to the quarter, we saw strong execution across the board, demonstrating good demand levers across geographies. As we had highlighted in the Q1 call, we have been also able to sustain a good share of cost optimization in Q2. We have also continued the focus on cash management, leading to healthy balances at the end of the quarter. Our business and cost reimagination initiatives and rigor on operational excellence continue to drive robust performance. We are pleased to report an EBITDA margin of 23.4% for the quarter. While some proportion of costs linked to resuming on-ground activity has come back, we have been able to retain a good share on account of digital and efficiency initiatives. Our operating expenses continue to track a bit higher than the optimization potential of INR 400-INR 500 crores against our FY21 operating plans that we referred to in the last call.
In the coming quarters, we will also be investing in growth-linked initiatives such as Berok Zindagi 3 campaign and other campaigns for consumer health products. Coming to growth for the quarter, the overall revenue grew by 15% on a year-on-year basis. Overall, India business, which includes prescription, trade, generics, and consumer business, grew 17% on a year-on-year basis. The India prescription business delivered 14% growth on a year-on-year, led by the COVID portfolio, traction in chronic therapies, coupled with a recovering hospital business, partially offset by subdued seasonal triggers on the acute side. The trade-generic business delivered healthy growth for the quarter, driven by strong demand and high order flow. Overall, our One India strategy continues to be on track. Our private-branded market-based franchise in South Africa grew by 9% on a year-on-year basis in local currency and outperformed the market very significantly.
At the end of business, there also delivered very healthy growth of 28% on a year-on-year basis. The U.S. generic business delivered $141 million in the quarter, supported by continued momentum in the new launches, which include Albuterol. We are pleased to report that the U.S. business is trending very close to company-level profitability in the first half of FY21. Despite the contribution of Cinacalcet in Q2 of last year, we have seen very healthy and sustainable expansion of U.S. EBITDA margin this quarter. Coming to the financial performance, we would like to highlight certain specific items which are subsumed in our numbers. At a company level, in the first half, the contribution from the COVID portfolio was less than 5% of the revenues in EBITDA.
As you are aware, there is a cap on the MEIS export incentives reimbursement scheme, and we have strong growth levers across businesses that will help offset this impact. For the quarter, overall income from operation is INR 5038 crores. Gross margin after material costs stood at 61.4% for the quarter on a reported basis. The decline on a year-on-year basis is attributable more to the contribution of high-margin Cinacalcet last year. However, on a sequential basis, there was a 200 basis point decline largely due to the change in product mix. Total expenses, which include employee costs and other expenses, stood at INR 1915 crores, increased by 12% on a sequential basis. Employee costs for the quarter stood at INR 821 crores, increased by 6%, driven by the increments that were announced with effect from July.
The other expenses for this quarter, which include R&D, regulatory, quality, manufacturing expense, and sales promotions, stood at INR 1,095 crores, increasing by 17% sequentially. This was driven by normalizing on-ground activity, which is sales-linked, offset by strong cost optimization and digital initiatives. Total R&D investment for the quarter stood at INR 226 crores. While the percentage to sales appears a bit lower, part of that is on account of healthy revenue growth accompanied by last year's adverse trends in the base. All priority projects are on track, and we expect R&D spends to increase as the respiratory assets progress in clinical trials. Reported EBITDA for the quarter is INR 1,177 crores, which is 23.4% of sales. Tax charge is at an effective rate of 28.5%, and the annual ETR is expected to be in the same range. Profit after tax is INR 665 crores, or 13.2% of sales.
As of 30 September, our long-term debt stands at $275 million, which is largely towards our inorganic acquisition in the U.S., and South African around INR 720 million for inorganic business acquisition and other operational requirements at the South African subsidiary. Our working capital loans stood at INR 300 crores in India, about $51 million in U.S., and South African around INR 349 million, which act as natural hedges towards our receivables. Driven by a very strong focus on cash generation, we continue to be a net cash-positive company as of September end.
Outstanding derivatives as a hedge for receivables as of 30 September are $210 million and around INR 660 million. We have also hedged a certain portion of our forecasted export revenues. Outstanding cash flow hedges as of 30 September are $179 million and around INR 435 million. I would now like to request Umang to present the business and operational performance.
Thank you, Kedar. I hope everyone is well on the call. And before moving to the business and operational updates, I would like to thank our employees for the relentless commitment and perseverance during these uncertain times. I would like to start by sharing Cipla's continued response in battling the COVID-19 pandemic. We have continued to face the uncertainties of the pandemic with strength, determination, confidence, and strong patient focus to deliver what matters the most, which is our ethos of caring for life. We serve more than one and a half lakh severe COVID-19 patients with a portfolio breadth of Remdesivir, Tocilizumab, and Favipiravir. While our 24x7 toll-free helpline offered support for COVID-19 treatment products to more than 95,000 patients, we have also offered support for post-recovery of mild to moderate COVID-19 patients.
Under the partnership with ICMR and NIV, we are also pleased to share that we have launched ELIFast, which is a diagnostic kit for the detection of IgG antibodies against SARS-CoV-2, which is coronavirus 2 in the serum plasma of patients. We will be supplementing this with new launches in the diagnostic space for COVID as well. We have successfully implemented several business reimagination initiatives, such as enabling teleconsults, virtual conferences, remote detailing, and tools to improve diagnosis and treatment for physicians in a digital environment. Ensuring the safety of our employees and well-being continues to be the top priority for us as a company. With that, let me come to the strategic updates and the operational performance for the quarter.
The strong performance for the current quarter is a culmination of relentless execution on several business and cost reimagination programs that we initiated at the onset of the pandemic. I'm pleased to see the continued effort in cost management resulting in a significant optimization during the quarter and helping us drive the strong EBITDA margin that we have reported. In India, despite the COVID-related challenges, our One India strategy continues to see seamless execution. Coming to our business performance in India, we continue our strong momentum and have reported market-beating growth now for the fifth consecutive quarter. India prescription business grew 14% on a year-on-year basis, supported by continued traction in the COVID portfolio of Remdesivir, Tocilizumab, and Favipiravir, along with our regular core growth in the rest of the portfolio.
The quarter also saw traction in chronic therapies and modest recovery in the hospital portfolio, which offset the subdued demand in our acute business. As per IQVIA's July to September 2020, we continued to deliver market-beating growth in respiratory, where we were 29% versus a -3%. In the inhalation segment, we were 10% versus a market of 7%. And in urology, where we were 6% versus 3%, as the lockdown restrictions continued to ease during the quarter. Cipla ranked number two with a market share of 7.6% in chronic therapies and grew by 9%. We are confident that the momentum will continue in the quarter as we have outperformed the market across several therapies on a sequential basis. We are also excited to launch Berok Zindagi 3, Cipla's flagship patient-focused respiratory initiative on a digital platform. The trade-generics business continued its healthy growth.
The quality and health of the business has significantly improved, led by strengthened hygiene, strong governance, and review mechanisms leading to healthy tractions and margins. In our consumer healthcare business, we are happy to see the scale of roughly around INR 180 crores in H1 of FY21. While this includes a sanitizer sale, which may not continue at the same level, we see strong traction with our consumer brands' portfolio transfer from the trade-generics business. We will continue to watch the evolving volume growth patterns in our core therapies as demand levers stabilize in the coming quarters. Coming to our US generics and lung leadership update, the US generics business delivered $141 million in the quarter, supported by continued traction in new launches of Albuterol, the Esomeprazole oral suspension, the DHE nasal spray, and these are supporting the base business growth.
In line with our commentary on limited competition launches, we launched Dimethyl Fumarate in Q2. We expect this momentum on new launches to continue. We have maintained robust supply of Albuterol HFA in the US, and pleased to inform that we have the prescription share of 84% of the Proventil market now, as per IQVIA ending 2 October. Across the three Albuterol products of Proventil, ProAir, and Ventolin, we have over 8% of weekly TRx market share in the total market and over 10%, over 11% of the generic market. We continue to monitor our market share given the evolving competitive landscape in the larger Albuterol market. Our respiratory pipeline, which includes generic Advair and other complex inhalation assets, is progressing well. On a H1 basis, the US business is now trending close to company-level profitability.
The business has seen healthy and sustainable margin expansion over last year, despite the contribution of Cinacalcet in the base numbers of the last year. Coming to our SAGA, which is a South Africa and Global Access business and the emerging markets, the South Africa private business delivered strong growth of 9% in local currency over quarter two last year, while the tender business grew by 28% in local currency terms. We are pleased to report that Cipla was the fastest-growing corporation in the South Africa private market, with new product launches forming a significant growth driver. We maintain a market share of 7% as per IQVIA MAT September 20. In the OTC space, we grew by 8.2% and maintained a strong market share of 7.2%. We also entered into an exclusive partnership with Alvotec for the commercialization of five biosimilar candidates in immunology and oncology.
The emerging markets business has performed as per expectations and maintained scale on a year-on-year basis in US dollar terms, driven by demand across all regions. The European operations grew 24% year-on-year. The growth was driven by strong in-market performance and market share gains in key direct-to-market businesses. We are happy to report that Remdesivir supplies have commenced for multiple emerging markets. On the specialty front, through our associate Avenue Therapeutics, we will continue to engage with the US FDA to understand the observations on the CRL for IV Tramadol. We will continue to evaluate multiple options to structure our specialty investments and also further the progress of this asset with the FDA. We have submitted our last response to the US FDA regarding our Goa site, and we'll continue to engage with the agency to comprehensively address the observations.
Turning now to our outlook, we continue to monitor the evolving demand patterns across our business. We believe the underlying fundamentals of our business remain strong, which, along with the operational agility, has helped the company deliver a resilient performance in the first half. We will continue to transform healthcare delivery for physicians and patients on digital platforms, and we are tracking our productivity metrics and the progress of our product pipeline.
Our priorities for the second half of the year include strong governance around the safety, supply security, cost control, and working capital management, scaling up our business across branded and generic markets of India, South Africa, U.S., and emerging markets, prioritizing key launches with focused execution and collaboration with regulatory authorities, continuing to operate our facilities globally with the highest levels of compliance and control, constantly building capabilities and talent for transformational business outcomes, and turning adversity into an opportunity by continued focus on digital adoption and cost reimagination across our business. With this, I would like to thank you for your attention. I wish you and your families well, and I'll request the moderator to open the session for Q&A.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask questions may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask questions, please press star and one. The first question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah. Thanks for the opportunity. Good evening and congrats on good numbers. So first question on India business. So you mentioned RX business during mid-teens. If you could help us understand what would have been the growth, just the RX ex-COVID, that would be useful.
I'm not sure we're giving that guidance, but I can just say that RX ex-COVID is at market for most of the therapies that we have spoken about.
You mean market IPM growth of mid-single digit?
Each therapy is a different growth. So what I meant was that if you take out the COVID products, which we're now diving into right now, I think Kedar has mentioned that overall COVID is roughly about 5% of the company numbers. Is that right, Kedar?
Yeah. For the first half, yeah.
Yeah. So he's mentioned that in his commentary. So I think if you exclude more or less that, I think the rest of our by therapy, we have performed mostly at market.
Perfect. Great. That helps. And secon
dly, on gross margins, so we have seen some decline both quarter on quarter, YOY. What would be the main reasons? I understand global share mix has changed. Would it be also these COVID-related products, global access, tender business, anything I'm missing here? And what should we build in going forward as well as COVID, I think, is here to stay for another six months?
Yeah. Prakash, largely, it's a mix of COVID portfolio. But as you know, while gross margin level COVID portfolio appears a little lower than the company level, the EBITDA is, in fact, quite higher than the company level. So yes, gross margin is largely a mix issue at a company level.
How do we see that, sir?
So it will depend. There are multiple variables, including mix and other things, but there is nothing adverse, I would say, individually in the lines of businesses that we have.
Okay. Thanks, Rajan. Thank you.
Thank you.
Thank you. The next question is from the line of Nithya Balasubramanian from the Bernstein Research. Please go ahead.
Congratulations, Umang and Kedar, on a fantastic set of results. I had a couple of questions initially on the US business. So on preventive, you mentioned that you're hitting 84% TRx share of generic preventive, which means that you're maxing out the potential there. So from here on, you really need to capture share of the "prescriptions" that are returned as Albuterol. I'm seeing a little bit of softening in terms of your market share ramp-up in the weekly TRx data. Are you finding it a little challenging from here on, grabbing share from Albuterol prescriptions?
Nithya, I think the latest data of October 23rd actually shows us even higher in terms of prescription capture. And if you actually go back approximately a year back, the Proventil category was somewhere around 6% or 7% of total Albuterol category. And Proventil as a category was roughly around 6%- 7%. And I think we're seeing that we're now definitely higher than 10%. So I think we're trying to do both. Of course, it will depend on how we expand Albuterol further. And from 6% to get to 9% is easier. From 9% to get to 11% is tougher. So I think yes. But we are continuing to see the ability to supply and market more volumes here.
So just to help us understand, what would it take, right, for the prescriptions that are returned purely as Albuterol? There is a Cipla, Lupin, maybe Perrigo at some point of time. There are all your AGs as well competing for that market where this is written as a generic Albuterol. So what are some of the reasons why pharmacists are likely to substitute it with a Cipla product rather than somebody else's?
I think I'm not so Nithya, I think the mechanics of the market are not very different. There are five consolidated or six consolidated buyers here. And I think if you were to broadly look at it, we believe from the data, and of course, now it's quite public and evident, we believe from the data that there is a large number of prescriptions that are written as Albuterol, right? And therefore, there is a switching hypothesis here. And I think it's not something that we control. It's clearly something that is a mechanic of the market. So as long as it's a function of how each one of the market participants are going to shape this market. So I think it's working on that principle, Nithya. So it's consolidated.
Sorry, what I was trying to get at was, does this mean that from here on to grab share of that market, the pricing might actually come down because you might have to offer something?
No. No, I don't believe the price. I don't think the pricing is something that we are concerned about, Nithya, because there have been people who've exited the market as well in recent times. And I don't think this is a pricing category. And also, the share volume of this market is very high, 60-65 million units. This is a very high-volume market. And for anyone to sustainably continue to manufacture at this level of high volumes is a little bit of a worry. So I think the market. I don't think pricing is a concern for us.
Got it. Quick one on Tramadol, Umang, do you now have visibility on whether you're getting a type A meeting and when that type A meeting is happening?
Yeah. I think there is, we can't disclose the next steps with the FDA in particular detail, but I think the Avenue is in the process of obviously scheduling an interaction with the FDA, which is typical of any company which will get a CRL in the specialty space. So I think Avenue is taking this discussion forward. We are conscious that they are a public company as well and therefore would not want to comment. But yes, there is an interaction that Avenue would seek, if not, it has already from the FDA on next steps regarding IV Tramadol.
Okay. I'm going to squeeze one more in. Kedar, did you mention that the 400-500 gross savings that you had anticipated this year, we are tracking lower than that? It's a little less than anticipated?
No, no. I said in fact more. So we are pleasantly surprised with the power of digital engine, which has started working for us in all areas of the operations in India in company.
Any guidance on how much of this is likely to sustain going forward?
Yeah. We would like to have a large part of this sustain in the coming quarters and become part of the business model, actually. So I think the reimagination initiative that we have launched in each of the market and each of the functions will allow us to sustain a large part of this efficiency going forward. And let's see a couple of more quarters. We'll be able to give you some precise estimate of how much has that sunk in our base numbers. But suffice to say that the potential to save is much higher than what we spoke earlier.
Thank you so much and all the best.
Thank you.
Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Yes. Good evening. One question on Albuterol. Just wanted to understand, Umang, why is this product still in shortage? When I look at IQVIA data, it shows me that the total units now are not higher than what before the genics came in. They're largely the same number of units being consumed by the market right now, whereas Cipla and Lupin have added capacity. And even if Perrigo has gone out, the capacity is still being added to the market than what it was before genics came in. So why is this product still in shortage?
Why is it in shortage, actually?
Yeah. I personally don't believe that this product is in shortage. I certainly don't think that that's the signal we're getting from the market. I think what may have happened is because of the fact that we had a significant competitor exiting the market recently, that there might have been a little bit of a, I would say, a discontinuity in the market. And maybe that's the reason it went onto that list. But I believe that I think the market is likely to be well supplied. And what we are seeing is possibly a substitution of some of the branded players, including the authorized generic, to some recent people who have come into the market, including us.
Like the question Nithya was asking, actually, that's a question in mind I also have that you've been in the market now for almost seven plus months. So isn't capacity constrained, etc., that you could not get enough market share when Perrigo exited? I know recent last two weeks, in fact, today's data also shows some market share increase where you are now turning 10% market share. But we would have expected you to take a higher % of market share than some of the new guys who have taken. So are you capacity constrained and you are in the process of adding capacity? That's why you could not take it? Or other dynamics that you are a substitutable version for Proventil, not for ProAir, did that impact you taking market share?
I think it could be a mix of all of them because when we were approved, we didn't have any capacity. We didn't have any product which was available to be selling in the market, right? We were approved in March when we thought we would be approved six months later. So for us, it was not as if we were ready for a launch or had gone through a set of CRLs that we knew there was a particular goal date that we were targeting. So we had limited stock, and based on that, we ramped up with it, right? So realistically, the six or seven months that we are talking about possibly only equates to three-to-four months.
One thing that I would like to say, and I mentioned this to Nithya as well earlier. Proventil as a total share of the Albuterol market was about 6%-7% earlier. And we believe in terms of weekly prescriptions, this is now over 10%. So the market is showing the hypothesis where Proventil as a category itself can be driven up. And I think that's something that we are trying to shape in the category. Just from my perspective, I don't think anyone's objective in a market like this would be to hog market share because these are difficult products to make and very complicated supply chains.
So the day you try to hog market share in a large volume product like this, which is at 65 million, I think it's not so much pricing, but it's more your own supply chain that you have to be concerned about. And the product is attractive enough even at this level of volume.
Okay. So just one clarity on the response, as you said. So should we assume even now, going forward, your market share gains will be gradual, or let's say there will be a time, let's say a quarter down the line or something like that, where your capacity comes in and we could see a step jump of your market share?
We have adequate capacity. I don't think the issue is our capacity. I think the issue is how sustainable we want to see this capacity we want to see our production going forward. So we can produce at a much higher place. But I would always like to keep a relatively high share of inventory in a category of a market like this. So I think that is one. That is one answer. So specific to your question, I think whether the market share gains would be gradual, yeah, they could be gradual. I think if you look at our overall positioning, we moved from even in the last four months, we moved from almost 7% or 8% to, I'd like to believe, over 10% or 11%. And I think this type of a movement could keep happening over a period of time.
Okay. Thank you very much.
Thank you. The next question is from the line of Krishnendu Saha from Quantum Asset Management. Please go ahead.
Yeah. Thank you for the question. Umang, just on Albuterol again, if this price with this list price evolution in the market is stable, why would we want to hold inventory? Isn't it natural for us to gain a higher market share? Question one. Question two on the South African side, we've been doing well on a quarter-on-quarter basis. So we don't track quarter-on-quarter, but just 65% on a Q&Q basis and 83% on a whatever the number is on a YoY basis. How much of that is sustainable? Put some light on these two things. Thank you.
So the second question, I couldn't hear very well. Could you just provide some?
Sorry. So the South African market, we've been doing well. How much of that is sustainable and what has actually happened out there? So it's around 15%-20% of our revenue. So how much of it that is sustainable?
Yeah. Certainly, certainly. So I think the South African market, from the way we look at it, I think it is quite sustainable. And this ability we've shown to continuously beat market growth now. I think we've done that, in my opinion, at least for almost eight, nine quarters that we've been looking at it, or even more than that. So I think it is sustainable. I think it's a relatively strong business in South Africa. So I don't think it's not a flash in the pan. It's a sustainable trajectory. And the first question is on preventive. Why do we want to keep inventory?
Yeah. Because you spoke about the fact that pricing is stable. We have capacity to produce inventory. You want to hold inventory. So I just try to understand what is the logic, what we see out there?
Yeah. Because I think this is a category of products where if you even have a blip of a missed week or two weeks of production, it's not easy to recover it. I mean, the same linearity doesn't happen because these are devices and everything else. So I think the biggest problems happen when you produce too fast, right, and at the same time don't have adequate inventory of materials with you. So I think we've now, out of our experience of doing Albuterol and several respiratory devices elsewhere in the world, I think we are quite clear on how we would like to manage the supply here, which is to be cautious with both our inventory as well as the flex in our production system to take on higher production.
Okay. It is not a bottleneck at the material level or at the device level, so it is a purposeful going forward.
There is no bottleneck.
Okay.
There is no bottleneck, absolutely.
A couple of small questions. India, how much do you think this number of INR 210 crores is sustainable for going ahead for the quarter? Kedar, if you could just throw some light on the margins going ahead for H2, please. Thank you. That's all my side.
Yeah. So Krishnendu Saha, I think we have seen some of the orders in the trade generics business, which have got bunched up a bit in quarter two. So to some extent, I think there could be marginal moderation in quarter three, but demand environment continues pretty strong. So that's the thing. And the supply for COVID medicines is here to stay. And we have, like what Umang alluded, in addition to one site, which is captive, now we have two outsourced sites. And we continue to scale up manufacturing and supply for Remdesivir. And that's here to stay. In terms of margins, actually, the margins of prescription business and generics business have gone up YOY. So our gross margins for most of the businesses on a year-on-year basis have gone up, which is quite healthy. So I think mix is the only thing that we have to watch for.
Otherwise, there is nothing adverse. The pricing continues strong. The work on cost reduction continues strong, and except COVID, I think the mix is good as well.
How much of it is the cost continues to be added for H2? Let's put it one year. How much of it is still to be added? Sorry.
Like what we alluded, we are quite energized by the promise of digital initiatives in each part of the company's operations, and that has allowed us to reimagine our ways of operating. And our investments are going on in that direction, and we would like to believe that we do retain a larger part of the cost control that we have seen as an inherent part of the business model itself, so let's see a couple of more quarters, then we'll be able to come back to you with precise estimate as to how much of that has gone into base, but as I said, I think we would be able to save a bit more than what we thought we'll be able to save for the year. Thank you.
Thank you. Thank you for attention.
Thank you. Bye.
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Thank you so much and good evening, everyone. Just a couple of questions. One is for the US, the Tecfidera are launched. Umang, is this a meaningful launch or, given the competitive intensity, the prices have gone down to nothing?
I think it is a competitive launch. It is a fairly competitive launch. So I don't think it will be meaningful enough the way we had perhaps envisaged it.
Okay. Great. And second question on the India business. So if I'm not wrong, the COVID-19 drugs contributed roughly about INR 250 crores to sales in the quarter. And how much of this is sustainable and how much of this you think is one-off? And if that's the right way to think about it.
No, I think it's the right way, Sameer. I think part of it clearly, I don't think all 250 will be sustainable. But the more we are understanding of this of COVID now, it is going to be endemic and will continue. May not be at the same level as right now, but I think it's going to be endemic and will continue. So I would like to believe that in its worst form, I think about 30%-35% of this should perhaps always be sustainable. That's my sense. I think the other thing that I would probably also say is that it also depends on cases. So if cases are relatively if there are no cases, then obviously there's no demand. But we have seen this pattern of cases go up and down, right? And the rest of the world is now going through a huge outbreak again.
So I think it will be responsive to those two. But I clearly see a, at least from a current level, at least 25%-30% staying in the mix at least due to the endemic nature of this pandemic.
Okay. Great. And Umang, just on the doctor connectivity, and I thought it's very impressive that I could see on your slide two and a half lakh doctors that you could have, or maybe unique doctors that you could connect through virtual conference for CME. Looks like about 20% of India's total doctor population. So if we can talk a bit more about it. I mean, is the entire doctor fraternity now digitally connected with the manufacturers? So any thoughts on this?
I think it's obviously by therapy and by indication. But we've certainly tried to engage with doctors, especially around the time when there was no COVID, when there was limited activity due to COVID. And I think some of that is sticking. Some of that is going back to how it was earlier. But we've seen a propensity in doctors to engage more virtually. I think it helps their time, for one. It brings them and their patients more safety if there are not more than 10 or 15. Usually, in a doctor's chamber, there could be 10 or 12 reps waiting to meet the doctor. We're seeing with the virtual assist program that, A, the doctor has more time on their hands. They can meet the reps when they want to, even on the way to the office.
If they have been driven in their car, they can have a virtual consult with a rep, so it allows them to manage their time a lot better, and at the same time, avoids crowding in a doctor's clinic, so a lot of the doctors are responsive to these changes, and I think I hope and I pray that this trend continues because it allows doctors to use their time better and people in their clinics to be less susceptible to infections.
Okay. Great. And just with your permission, final one on Albuterol. I cannot not ask a question on this. So Umang, a couple of things. If there was demand, do you have capacity to take, say, double your current sales and, say, maybe move up to 20% market share? Second is, how's been the behavior of three authorized generics in the market? Do you think they will get more competitive, or do you think at some point in time they may want to exit? And third is your take on the margins where you mentioned the US business is not trending close to the company average in the presentation. I would have thought it went much higher given the Albuterol contribution.
Yeah. And I think our U.S., just on the last point, I think the U.S. margins that we spoke about, our net of R&D, it's the fully loaded margin. There's no central cost that has not been taken. So it's a fully loaded margin. It's at company. And I think that's good because just a year back, Sameer, we were just about breakeven. So I think there's been a big uptick on account of Albuterol. But just specific on this, there are in as much as we think that there are only two generic players, there are seven competitors in the Albuterol market. There are three AGs. There are two brands. And then there are two generics now. One is us and one generic has just exited, right? So if you look at it, there are seven players in this market.
And I think one has to also understand that market in that perspective. Having said that, it's a 65 million unit market, which is a very big market. So I'd just like to say that if you were to look at the overall capacity, yes, we have capacity to go up to 20%-25%. Would we want to go there? Is a question at some point in time that we will obviously answer over a period. Now, of course, there's enough flex to be able to reach a certain level of targeted share that we want to get to. But it's not something where we want to build it overnight.
I think that we're pretty clear about because what we are also very clear out of our experience of running respiratory products in the rest of the world is that I think the sustainability of your supply and your product is more important than just how quickly you reach a targeted share, and frankly, there's enough value in this market to do it over a quarter or two quarters, so I don't know if I answered your question, but that's how I look at it.
No, no. You definitely did, Umang, and thanks for this. But just your thoughts on the three AGs, which are there in the market? I mean, how is it?
I think they are competitive. They are competitive, and I think they're pretty much functioning like proper generic competitors. So we believe that actually, the way we look at it, that there are five generic players in the market already because there are three AGs plus there are two generic players now. And when the third one who's exited comes back, then there would be almost seven players who are non-brand in this market already.
Okay. Great. Thank you so much. Very helpful.
Thank you. Before we take the next question, we'd like to inform participants that in order that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we request you to rejoin the queue. The next question is from the line of Nitin Agarwal from IDFC Securities. Please go ahead.
Hi. Thanks for taking my question. Umang, we've had a fairly dramatic improvement in our cash position over the last few quarters. In the past, you indicated that you've changed a little bit of track on the specialty side. So what are the thoughts about cash capital deployment when we go forward from here on, given the balance sheet, I guess, given the run rate, to keep getting something from here on?
Maybe Kedar should take this. Kedar, do you want to comment?
Yeah, yeah. No, I think, Nitin, these efforts on generating and preserving cash would continue. I mean, that's a key part of our internal KPI metrics now. And across businesses, we are doing good work. And that will continue. And as you would see, we still have certain debt servicing obligations on the balance sheet. There are aspects of investing in capital expenditure for development and capacity for respiratory. So I think there are multiple uses, Nitin. And all that will continue. All that will continue.
But on a more strategic level, any specific M&A space that you'll be looking at from a two- to three-year perspective?
See, M&A, I mean, our ability to fund the large M&A continues to be there. It was always there. And either by virtue of cash on the balance sheet or by virtue of being able to raise cash at a competitive interest rate, I think ability to fund the large M&A is always there. It was always there. And it will always be there. And subject to a strategic target being in front of us, I think that would probably be a determinant rather than saying that we have cash balance and hence, let's do. So I think we would continue the governance on cash. That will be important for us.
In the field, one next question. On Truvada, has the supply for the product started for us? Or is it going to be a relevant product supply product for us as an opportunity?
You mean product supplies for us launching as a finished player? Finished product player or is?
I thought we had a partnership with the first two filers. Is that also the case on Truvada?
Yes. So I think we have been told the first two filers have launched their product in the market.
Okay. Thank you.
Thank you. The next question is from the line of Vishal Manchanda from Nirmal Bang. Please go ahead.
Yeah. Hi. Thanks for the opportunity. In the last call, you had indicated about a respiratory asset which is partnered. So could you update? There was a Complete Response Letter. So has that been addressed?
Sorry. I could not hear properly. Maybe it is my connection. Can you just repeat your question, please?
So in the last call, you had indicated there is a partnered respiratory asset where you have received a CRL. So just wanted to understand if that CRL has been addressed and responded to?
It's linked to the closure of some studies that were done by the partner. So I think the moment the studies are done, the partner will give us. So around any time now or in this quarter, we are hoping that the partner will give us back.
So could you give us some color on whether it's a nasal spray or it's an MDI inhaler? And in terms of size, whether it's less than $500 million or greater than $500 million?
We don't provide that level of transparency on the portfolio. But I think what I could say is in the inhalation, it's an inhaler product.
Okay. And would this be over and above the one? So you guided for one respiratory launch per year. So will this respiratory partnered asset would be over and above the guidance that you have?
It could depend on the timing. Could definitely depend on the timing of the launch.
Okay. That's all from my side. Thank you.
Thank you. The next question is from Shyam Srinivasan from Goldman Sachs. Please go ahead.
Hi. Thank you for taking my question. Just this one for Kedar. You talked about gross margins being lower, but for COVID portfolio and for the overall portfolio margins being similar. So how should we look at for the second half? Because do you foresee that the gross margin should be whatever, just 61%, 62%? But margins on the EBITDA line could not be very different. Is that how we should think about the second half?
Yeah. So actually, as you can imagine, gross margins are subject to multiple variables. Primarily, mix is playing a large role for us. And as I said, COVID portfolio gross margin is lower than the company. But EBITDA level, they're higher than the company. And that will continue in the balance of the year as well. So I don't want to hazard a guess on how much mix will be there for COVID and non-COVID. But as I said, excluding COVID, most of the businesses, if not all, have seen a significant gross margin improvement on a Y-o-Y basis. And that's based on the mix in those parts of the businesses, as well as pricing levers, as well as cost containment levers. So I think all these levers have played out. And I think those will continue in the balance of the year in the second half as well.
And as the proportion of some of the niche opportunities in the U.S. business, some of the chronic therapies in India business, I think if all of that improves, I think we do have strong tailwinds.
Got it. Thanks, Kedar. The second one is on R&D expenses. You've said that optically it's looking lower on a percentage basis. Are there any projects that are coming up for this to go back to 5% or 6% of sales? Or this is a level that we think we can slowly it will be like a slow creep rather than like a step jump in terms of R&D?
Yeah, I would think so. I mean, probably one should model up to 7%. I don't think it can dramatically go from now to 7% immediately. But it could be rather slower creep. And it would depend upon, I think, a bigger determinant is the high-value clinical trial, which we saw last year in terms of Advair. So I think a similar spend in terms of the ongoing respiratory projects, the quarter in which that gets triggered, I think you could see some increase. But as we said, most of the key projects are on track. And on an annual basis, I think quarterly, some of these things are not fully predictable. But you should expect us to continue to invest between 6%-7% of revenue.
Got it. Kedar, last question. Again, I am just going line by line. But D&A, we saw 5% this time. Is there something subsequently changed? Because this number seems to be trending down. Is that something we will keep in mind?
No, I think the biggest charge there is on account of the US acquisition. And as we have completed four years to the acquisition, some of the assets are sort of getting retired from the gross block. And that might be the reason why amortization charge is low. But depreciation could continue at this rate. And depreciation could marginally go up. But amortization would come down.
Thank you. Before we take the next question, we request participants to please limit your questions to two per participant. The next question is from the line of Nimish Mehta from Research Delta Advisors. Please go ahead.
Yeah. Thanks for the opportunity. I actually missed your comment on the opportunity in Truvada. I understand we are an API supplier or supplier to Teva who is 180-day exclusivity. So is this opportunity captured now? And how big do you think is the opportunity?
I think for any of these, look, I think that when you say "opportunity captured," there is only one first-to-filer in the market right now.
So like any other generic product, for us also, this will be an opportunity when it becomes a generic?
I think if your question is whether the first filer launched with our API, yes, that is correct. And we were public about it earlier.
So I mean, did we not have any profit-sharing agreement with them so as to kind of make it a very valuable product, even if it is API? And my question is not just limited to Truvada. It's also, I think, an Atripla, which probably is where you might be a supplier. So if you can, yeah, let me know about both the opportunities. And I mean, opportunities in the sense whether they are high-value opportunities or not. How should we look at it?
They're reasonably sized opportunities. I don't think this is where the full product is not ours. The first filers got this product. Pretty much the rest of the chain is with them. So it's like any other regular API product. I don't think that this is. I mean, it's a reasonable opportunity. But I can't say that this is not an Esomeprazole like we had earlier.
Okay. So if I understand you well, what I understand is that Teva themselves also might be manufacturing their own API, plus they might be sourcing from suppliers. Is that how we should look at it? Because if Cipla is the only supplier, then it's a significantly great opportunity enough to show up on the numbers. So that's what I'm trying to understand.
Yeah. I don't think Teva is manufacturing API for this. But the rest of the chain is with them. In the case of Esomeprazole with Teva, pretty much the whole product was manufactured with Cipla. So I think that is the difference I was mentioning to you.
And therefore the.
Therefore, let me just, if I can, just complete for a minute, please.
Yeah. Sorry, sorry.
Therefore, the economics of this therefore are not the same economics as other profit-sharing, etc., is not the same economics like we had for Esomeprazole. That's what I'm trying to say. So it's like a reasonable product for somebody who has a first-to-filer where you are a supplier to a first-to-filer. It's something reasonable like that. It's not a huge curvebender for the company.
Thank you. The next question is from Kunal Dhamesha from Emkay Global. Please go ahead.
Thanks for taking my question. So I think last quarter, you provided some detail in terms of the size of the consumer healthcare business and growth in the rest generic business adjusted for the consumer health business. So can you provide the details for the quarter?
Kunal, roughly yeah, yeah. Kunal, roughly the magnitude of percentage growth remains in that same range. So the percentage growth, in fact, for the US generics business this quarter, as I mentioned, there is some bunching of orders, which is fairly high. And the consumer healthcare business also continues at that run rate. So both these businesses are on that trajectory. We want to avoid too many growth numbers being spoken about.
Because the more granular we go, I think there will be an expectation and responsibility on us to keep talking every quarter. And we want to avoid too many growth numbers. But suffice to say that these two are growing very strong. And the process of consumerization is very healthy. And it's getting good traction. The early metrics of consumerization that we track for the brands which have got transition look very healthy. We are quite happy with that.
Okay. And just if you can provide the qualitative color on if the CHL's gross margins are significantly better than the generic business? So did we fare better in there?
Yeah, yeah. I mean, I won't compare head-to-head or like-to-like because the portfolio is different. And the trade generics, as you know, is more of a channel business. And the consumer health is more of a consumer business. So I think head-to-head comparison is not appropriate. But going forward, we do expect each of the transition brands to have much higher gross margin, much higher gross margin pricing, and demand stickiness. So all these intended objectives are being seen in practice as we transition each brand, Kunal.
Okay. Okay. Thank you for that. And the other question is on the other expense savings as you have alluded that you are looking at the reimagination of each business vertical. So if you can just throw light with all the line items which could be impacted by this process transformation, maybe in the other expenses or in the cost of goods sold item, if you can just throw some light in terms of what kind of processes are being reimagined, whether it's the selling process or?
So actually, each function and each market is seeing this reimagination. A large part of that is in the markets where we interact with customers. So the processes where we engage with channel partners and we engage with healthcare practitioners and patients, all of those have been reimagined to a great extent for the virtual reality of the business model. And the P&L lines where you're seeing this impact from a four, five-line P&L that we disclose in other expense and people to a great extent. And within other expense, I think there are multiple line items which are getting impacted. And as we said, we are pretty energized with the efficiency and the speed, the simplification, and the agility that this thing brings in. And we will continue on this journey.
Thank you. We'll be able to take one last question. We take the last question from the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah. Thanks for taking my question, sir. So in fact, see, about the COVID portfolio, the contribution what you have mentioned, is it possible to split between what is that for India and outside India? Or if you can give some sense that the export business is whether it is or what ties to India COVID opportunity or anything on that side that would be really helpful. And simultaneously, is it possible to have a sense about the kind of the volume in the Remdesivir side? Because we have multiple facilities that we have arranged for this opportunity.
Yeah. So Surya, I think we are conscious of the feedback that we are getting from some of you that we probably are being over-transparent in terms of granularity. I mean, while we are keen to engage with the street on a basis which is quite candid and transparent, I think we are also conscious that multiple granular numbers do not help beyond a point. So I think suffice to say that COVID is an important part of the portfolio. But it's not that the whole growth and the whole profitability improvement has come from that portfolio. And it's split. Currently, the COVID portfolio is split into India and emerging market, the international business. And the promise to grow exists in both these territories. And going forward, some of the other therapies which had an impact, such as acute, I think they will shape up as well.
So I think the way our revenue trajectory and profitability trajectory would shape up in the coming periods will depend upon how we are able to influence the growth of other therapies which have seen a little bit of operation now. We are confident because a lot of customer actions and a lot of field action is going on there as well. So that would shape up positively. And in our view also, there is lots to play here on the COVID side.
Okay. My point for which that I was asking this question is that since there is an alliance for Remdesivir, let's say, that is for larger so many countries. And obviously, at this current juncture, this product is also kind of a southeast-based product. So opportunity-wise, going ahead in the subsequent quarter, possibly this portfolio can be even stronger more and more.
That's true. That's true. And I think not only Remdesivir, by the way. I think we have Favipiravir. We have a few other opportunities. We have recently launched under our diagnostics initiative, ELIFast test. You must have seen that. So I think COVID will remain if we are conscious of our responsibility to service the needs of patients during the pandemic. So it will remain one of we'll be occupied in servicing the COVID needs of our global patients.
Okay. My second question is just on the One India strategy. See, obviously, we have got or we have seen some benefit flowing from the COVID portfolio. But otherwise, excluding that, whether the One India strategy has really contributed the way that we have anticipated or what incremental benefit that we should really be trying to achieve through these in terms of growth or in terms of profitability for Indian operations?
Yeah. So Surya, the synergies of One India business between prescription, trade generics, and consumer healthcare exist in portfolio, exist in go-to-market approaches. It exists in commercial excellence. It exists in distribution, logistics, and digital. So there are multiple avenues in which we could synergize these three businesses together. And all of them are playing out as we are speaking. And we will continue. And as we said, at a specific time when we are able to communicate in much precise terms, we will do that. But one example I just mentioned about the consumer business, I think it's playing out well there.
Okay. Okay. So a portion of the profit margin expansion is purely from that, can we say so, despite the business impact because of the COVID excluding the.
Yeah. One is margin expansion. Secondly, stickiness of the demand.
Okay.
And thirdly, some of the price improvement which always is not possible in the channel business. I think all these objectives are being serviced, Surya.
Thank you very much. We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.
Thank you. Thank you, everyone, for being on the call. In case you have any follow-on questions, please feel free to reach out to myself or to our investor relations team at investor.relations@cipla.com. Thank you so much. Have a very good evening, my friend.
Thank you very much. On behalf of Kotak Securities Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.