Ladies and gentlemen, good day and welcome to Cipla Limited Q3 FY 23 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. Ankit Bhembre from investor relations team, Cipla Limited. Thank you, and over to you, Mr. Bhembre.
Thank you, Tanvi. Good evening and a very warm welcome to Cipla's Q3 FY23 earnings call. I'm Ankit Bhembre 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 confirmations, future events, or otherwise. With that, I would like to request Ashish to take over.
Thanks, Ankit, and good evening to all of you. I hope you've all gone through the presentation that we've uploaded on our website. This quarter we actually witnessed strong performance across all our core businesses with expansion in the profitability despite increase in the R&D investments. The quarterly performance reflects the same momentum in our branded markets and contribution from our differentiated launches in the US. This was amidst the challenging macro environment and SAGA missing our internal estimates. While procurement cost remains escalated, freight cost has improved sequentially, responding to lower rates and improving logistics mix, which is quite reassuring. Coming to the highlights of the quarter. Overall, we are pleased to report a quarterly revenue of INR 5,810 crores.
The overall revenue growth for the quarter was at 6% YOY on a reported basis and a COVID-adjusted basis, in comparison to last year, a strong 11% growth. Our One India franchise grew in healthy double digits on an ex-COVID basis, and the North American business reported the highest ever quarterly revenue, driven by traction of the differentiated portfolio, including market share expansion in key respiratory and peptide injectable products. Our free cash flow generation and operating efficiency continue to drive our healthy net cash position. Our reported ROIC for the trailing 12 months stood at 19.7%, which was towards the higher end of the range that our long-term target of 17%-20%. In line with our expectation, EBITDA margins stood at robust 24+% for the quarter on a reported basis.
The reported EBITDA growth is 13% YOY and 24% if adjusted for COVID in the base year. Our EBITDA margins for the quarter subsumes the impact of lower than anticipated SAGA performance, a higher inflationary market and a higher R&D outlay. Higher R&D investments was driven by ongoing clinical trials on a respiratory asset as well as other developmental efforts, including a contribution to biosimilar JV. Total R&D expense was higher by INR 100+ crore versus last year, which is incremental 1.75% of our revenue and part of our profitability business plan. Our reported gross margin after material costs stood at 65.5% for the quarter, which is 450 basis points above last year's figures, driven by contribution from new launches and overall mix change.
Total expenses, which include employee costs and other expenses, stood at INR 2,398 crore, increased by about 1.4% on sequential basis. Employee costs for the quarter stood at INR 949 crore, which was flat. The other expenses, which includes R&D, regulatory, quality, manufacturing, and sales promotions, are at INR 1,450 crore, increased by 3.2% sequentially, driven by, like I said, R&D expense, also followed up with judicious promotional and growth-linked investments. Total R&D investment for the quarter are at INR 363 crore, or 6.2% of revenues. The absolute trajectory remains intact with assets progressing into clinical trials and other portfolio developmental efforts continue. We expect our absolute R&D investment to inch up gradually from these levels in the coming quarters.
Tax is at INR 801 crore or at 13.8% of sales. For the quarter subsumes one time charge of reversal of deferred tax asset as we revisit our plan for one of our subsidiaries. The adjusted PAT is INR 876 crore, which is more normalized or 13.1% of sales. The adjusted growth rate over last year is 20% and adjusted CTR would be 27.5%, which is more normalized. As of the 31st December 2022, our long-term debt primarily constitutes 720 million ZAR in South Africa and working capital loan of about $29 million in the US. Driven by our relentless focus on cash generation and rigor on cost discipline, we continue to be net cash positive company as of December 2022.
To close, we saw robust momentum across portfolio and geographies for the year till now. Our growth levers in the subsequent quarter will include continuing market-leading growth in India across all three categories of prescription, trade generics and consumer health. Full year operating profitability in line with our guidance of 21%-22%. Robust traction in North America portfolio with continued contribution from respiratory and peptides. Incubate and drive growth in stable geographies in international markets with focus on growth, core markets and managing the growth in EM markets. We continue to monitor the geopolitical headwinds that have ebbed but still continues. I would now like to hand over to Umang to talk about the business and operational performance. Thanks.
Thank you, Ashish, and good evening to all of you. Welcome to our call today evening. We are pleased to report another strong quarter of performance which demonstrates robust commercial execution and continued investments in our portfolio and growth-oriented initiatives. Our Q3 FY23 performance reflects continued momentum across our businesses of One India and US, and has a moderation of the SAGA region coming in lower than our internal estimates. Developmental efforts on delivering a robust future pipeline, investment in capacity creation and high rigor and compliance, including our de-risking efforts, continue to be our top key focus areas. To accelerate our innovation journey, we also invested in a critical partnership this quarter to support development in therapies, which are future innovation levers for Cipla. During the quarter, we initiated our investment into a JV focus towards building the biosimilar pipeline.
We also partnered with Ethris GmbH for the development of mRNA-based therapies. This fast-tracks Cipla's participation in cutting-edge healthcare solutions to patients. On our journey to build the consumer health franchise in India and South Africa, we continue our growth driven by new launches, category innovation and actionable consumer insights. Our India consumer franchise grew by 14% year-on-year in INR terms over the last year after adjusting for the acquisition we made in Q2 FY23. The global consumer franchise, including South Africa, now stands at close to 9% of overall Cipla revenue for the quarter. We're expecting the India consumer franchise to be nearly INR 1,100 crore by the end of this year. Coming to detailed updates for the quarter by market, our One India segment.
The One India core portfolio delivered 11% year-on-year growth after adjusting for the COVID contribution in last year base. The double-digit growth reflects solid traction in big brands as well as contribution from launches in the focused chronic categories during the year. Our branded prescription business demonstrated double-digit growth in chronic therapies in the core portfolio, driven by continued demand. The market-leading growth trajectory continued for the seventh consecutive quarter, with the 11% growth significantly higher than the market growth rate. The core revenue growth is underpinned by a healthy mix of price volume and contribution from new launches. As per IQVIA December 2022, we continue to maintain healthy ranks in market share in key therapies for the quarter.
Our growth in respiratory, cardiac and antidiabetic therapies outperformed the market and the overall chronic share has expanded by 240 basis points over last year and now stands at 60% of mix for the quarter. We now have more than 21 brands which have revenues greater than INR 100 crores in the trailing 12 months as compared to 19 in the corresponding periods, previous period as per IQVIA December 2022. Our trade generics business continues to witness strong volume traction, strengthening our leadership in the trade generics segment in India. The revenue growth for the quarter reflects a steady order flow from the tier 2-6 and rural towns and demand fulfillment across regions, translating into sustained scale-up in our flagship brands. We launched over 10 products and therefore the launch momentum continued in key therapies such as cardiac, antidiabetic and injectable dosage forms.
Our consumer health business continued to deliver consistent growth across anchor and emerging brands, translating into the growth we had mentioned earlier. We now have four brands in well-entrenched categories, scaling up over INR 100 crores in revenue on a trailing twelve-month basis. Coming to our US generics and US generics portfolio. The US core formulation sales for the quarter were the highest at $195 million, registering a robust 30% growth on a year-on-year basis. This is the tenth consecutive quarter of growth, demonstrating an increasing share in our respiratory peptides and differentiated launches like lenalidomide. The sales of lenalidomide incidentally are marginally lower than the previous quarter. We continue to keep market well supplied and focused on maximizing value from all our new launches.
Our peptide franchise continues to track well, with Lanreotide steadily gaining market share of 14.1% as of November 2022 end. We are on track to achieve our 15% guidance in this category. We have also launched Leuprolide Depot during the quarter, which expands our peptide franchise further. We continue to maintain this launch momentum in the next fiscal and after. Our generic market shares and respiratory products have witnessed expansion in the last 12 months, driven by sustainable supplies and competitive cost position. The total market shares for Albuterol and Arformoterol stood at 18% and 39% respectively as per IQVIA week end, December 31, 2022. On the pipeline front, clinical trials on respiratory assets and filings on complex generics, including peptide injectables, are on track.
From a launch perspective, we have responded to the queries on the Advair file and are working closely with the US FDA on the approval. We have been proactively communicating with the FDA on the go observations as remediation efforts continue at the site. We continue to focus efforts on de-risking our key assets from the site and we'll share material updates as the situation evolves. We believe our North America franchise will witness continued growth on the back of new launches. Coming to our international market business, we continue to drive superior local market growth and navigate a challenging operating environment and ForEx volatility.
While the excluding COVID growth in INR terms is 6% for the quarter, our reported USD numbers subsume the adverse impact of depreciating local currencies against the US dollar, which is offsetting the healthy double-digit secondary growth we are seeing across our DPM markets. Coming to our SAGA region, as alluded earlier, the South Africa private business is recovering from a reconfiguration of supply and an evolving business mix between private and tender. In secondary terms, the strong demand continues for our South Africa private business, which outperformed the market growth. We continue to maintain our third market position with a market share of 7.7, and the business did come in lower than our internal estimates this quarter. Our EBITDA margin of over 24% for the quarter tracks well above the 21%-22% guidance range for the full year.
We expect our overall quarter four margins to moderate with seasonality. We are encouraged by and committed to maintain the high strong launch momentum in the coming fiscal and continue investments in developing a robust pipeline across the categories of respiratory peptide, complex generics and biosimilars. We are committed to accelerating our return on capital employed, which is currently tracking closer to 20%. Turning now to our outlook. Our near-term priorities include accelerating growth in our One India engine with a sharp focus on building big prescription brands across chronic therapies, driving accessibility to trade generics as well as our global valence franchise. Sustainable scale-up of our U.S. formulations business, driven by maximizing contribution from complex launches, and maintaining the high serviceability of our product families.
Continued execution on branded and generic portfolio, brand building portfolio interventions and launch excellence across our DPM and emerging markets. Continued cost focus, calibrated pricing actions and other interventions to navigate inflationary procurement, trade and other cost elements, and maintaining a consistent upward ROIC trajectory. Continued rigor on regulatory compliance across manufacturing facilities and implementing globally benchmarked ESG practices. I thank you for your interest in Cipla and your attention, and will 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 a question may press star and one on their touchtone 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 a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Saion Mukherjee from Nomura Securities. Please go ahead.
Yeah, thanks. Hi, Umang. On the US, if you can give some color on the growth trajectory. You mentioned Revlimid was lower this quarter and you expect growth to sort of come back or growth to continue in the quarters ahead. If you can just give more color, what would drive it, Revlimid and other products? Also on Advair, what's the status? Is there a new target action date? Any particular, you know, timeline that we can look forward to?
Certainly, Saion. I think let's start with Advair. Our target action date is hopefully the first week of April. I think we've, you know, we're quite looking forward to being able to bring the product to the market. It's the first week of April. I think what last quarter we had guided to a base of about $185 million-$190 million. Quarter four typically, quarter four calendar and quarter three fiscal typically is a quarter in the U.S. where buying is always a little stronger and the U.S. has had a, you know, pretty strong flu season.
I think some part of that is there in our numbers, for Q3. Overall, I think from this base of 185 to 190, we could all add new launches as they come along, and we certainly have a good pipeline of launches coming up in the next year.
Okay, thanks. My second question would be, you know, the challenges in South Africa and Sub-Saharan Africa. You're seeing lower tender business in South Africa, and also what's the, you know, concern in other markets in Africa, and how should we think about next quarter and the year ahead in this region?
Yeah. I think the South Africa business issue is more around tender as well as on private. Private, what's happened is, though we are growing faster than the market, the overall market growth has also shrunk. I think this is a post-COVID readjustment that's happening in the supply chains there. I think stock levels of customers are falling a bit to accommodate this. I think the supply chain is getting reconfigured a bit. My guess is this is the worst is probably in our numbers over the last 2 quarters, and I think we begin to see a resumption to the normal from quarter 1 of the next year.
Okay. Thank you.
Thank you. The next question is from the line of Kunal Dhamesha from Aquarii Group. Please go ahead.
Hi. Thank you for taking my question. First on the India business, while our reported growth is only 2%, and you have said excluding COVID is 11%, can you just, you know, give some color on what was selling in the Q3 of FY22? Because as far as I remember, we did not have a lot of COVID during that period. You know, what was the contribution in that particular quarter or something you can help me with?
Navin or, Ashish, do you wanna take that?
Sure. The previous quarter of last year, quarter three, had COVID sitting there of almost INR 200+ crores. You know, that I just wanted to address first. If you remove that, then the growth is 11% in quarter three. This growth has come across to actually your chronic therapies as well as in respiratory, where we've grown much faster than the market, which is our core health. Both in chronic as well as, including that in respiratory, we've actually grown. That's why you see that reflection in the gross margin improvement as well versus the earlier quarters.
Okay. Is it fair to say this INR 200 crore was more of a product that was supplied to China and then whatever COVID-related provisioning we took in quarter two was also kind of more or less related to those because the end market sale of those products were already low?
Sorry. Let me clarify. The INR 200 crore was the COVID sales in India previous year in quarter three. That's the reassessment of base that, you know, if you remove that and then look at the figures, then it's a 11% growth. I'm not too sure. There is no the inventory provisioning that we did on COVID, if that's what you are referring to, that was done over quarter one and quarter two of this year.
That was our inventory or that was the inventory which got, basically reversed from Sandoz?
No, no. That was our inventory that we were carrying in anticipation of COVID continuing. It was across both, API and different products as well. The core directly related to COVID treatment. Yeah.
Okay. Okay. Perfect. Second one, you know, just on the Advair, when you say we had queries and we have submitted it, can you just, you know, provide some color on when did we submit these queries and these queries came in as a CRL or information request? What was the nature of those queries?
Well, I think it was a minor query letter. The minor query letter was responded. The new goal date is, you know, as I mentioned in the first week of April.
Okay. Typically, if it's the inspection is not required, then the tag date is generally four months, which means you would have responded somewhere in November. Is it fair assessment, November or start of December?
I'm not sure we'll give that level of detail, but, you know, you could do the math around it. Yes.
Okay, perfect. Thank you.
Okay.
Thank you. The next question is from the line of Krishnendu Saha from Quantum AMC. Please go ahead.
Yeah. Hi. Can you hear me?
Yes.
Yes.
Hello. Yeah. I just had a couple of questions. Advair, I believe the tag date has been shifted a couple of times. Just trying to understand if, is there a chance that? What happens if the tag date is shifted again and again? I just want to get a feel of that.
Sorry to interrupt you. Sir, your voice is sounding a little muffled. Sir, if you can speak through the handset mode.
Yeah, yeah. I'm speaking handset itself. Can you hear me now? Hello?
Better. Yes.
Yeah. I'm just wondering that for Advair, the tag date has been shifted a couple of times. So what happens if come April things are not went through? I'm just worrying on that. Just on the presentation, I see Brovana gaining market share, but the 10 player market, is it.
Still, important. Do we make money on that? If you could throw some light on that too. That's it.
No, look, if the FDA continues to have queries, obviously the tag dates still will keep shifting, right? The FDA has to be satisfied with what we've responded to this.
Yes.
All we know is that we had a major and, now we have a minor.
Thank you.
This is the second cycle of review. I believe this should hopefully result in, you know, if nothing else goes wrong, this should hopefully. You know, we feel we are closer to an approval. You know, Brovana, you know, it is our ambition to keep our shares in the market well supplied and our shares high in the respiratory category because it's a higher profitability category. You know, whether it's Brovana or it's Albuterol or, you know, Budesonide, we'd like to maintain high shares on those categories in this market.
Okay. Just the last question. You spoke about Goa plant having a couple of important filings from there. Besides Abraxane, how many filings would you like to ship out from there?
No, I think we are only in the process of doing Abraxane and one more. I don't think there is anything significant. Just for your information, the plant has been in that situation just pre-COVID, right?
Yeah. Yeah.
Uh, so...
Yeah. If I can squeeze the last one. This plus $15 million incremental revenue on a, this, you know, maybe on a quarter-over-quarter basis, nothing to look at. Is it largely due to has Revlimid had a huge contribution with that or it's like you're okay with it?
I'm sorry. Are you saying is Revlimid higher in the in the 195 versus the previous quarter?
Yeah. Yeah. With the $15 million incremental revenue, is Revlimid a fair contribution or it's?
Revlimid is lower than the previous quarter.
Okay.
Revlimid in this quarter is lower than the previous quarter.
Basically the last three, the molecules, the three molecules which you've outlined, those are the ones which have gained the market share. That is what bringing the fillip of $195 million for the quarter.
Right. That is it.
Right. Thank you. Thank you for that. Thank you. That's clear. Thank you.
Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Good evening. Just trying to understand Revlimid better. You mentioned it is lower contribution, going forward, we see Natco coming in March again with higher shares. How do we see I mean, is this going to ramp up in the upcoming quarters for the next few quarters, or how should we think about it?
Well, I still think that the market, at least for the next one to two years, is still going to be a market where the generics would, you know, all generics added together may not possibly be able to satisfy the full demand of Revlimid as it exists today in the market. I'm not sure that there should be intense competition in this segment despite people getting higher allocations or entering into the market.
Okay. With our market share increasing with the time gap, it's fair to say that there could be ramp up from the current levels.
I can't comment on that. I cannot comment on that because that is subject to a, you know, that is part of an agreement with a branded company. I can't comment on that right now.
Okay. Okay. Fair enough. In terms of understanding the U.S. run rate, you mentioned, barring the flu season, you know, Lanreotide as well as another, you know, peptide product had contributed. You seem to be cautious for Q4, and Q4 typically is a softer in terms of margins also. With this kind of U.S. run rate, would it be fair to see, you know, margin expansion unlike previous four Qs?
I think we are hoping to be higher than the previous fourth quarters of the previous years, that's for sure. It's not gonna come as a margin profile similar to this quarter.
Okay. Lastly, on the gross margin side, we should assume the sales mix to be a major contributor. As you said, Revlimid is lower. Since tender business is lower, that's the key contributor for the gross margin improvement. Is that right understanding?
I think maybe, Ashish, you can take this one.
Yeah. It's a combination of 2, 3 factors out here. You know, product mix is one, so there is more respiratory, there's more products that are high margin. Tender is also playing a role out here. There is also ForEx element that helps us in the margin in this quarter versus the previous quarter. There are many factors that play a role there. There was a provisioning that we took for COVID inventory in the previous quarter-
Okay.
which is absent in this quarter. It's combination of all these factors which has led to better gross margins.
Okay. Perfect. Great. Thanks and all the best.
Thank you. The next question is from the line of Shubham Goyal from Motilal Oswal. Please go ahead.
Hello.
Yes, we can hear you. Please go ahead.
Yeah. I just wanted to ask that, going forward, considering all the deals and stuff that is planned, what is like the kind of projection that you have for like the next two or three years?
Projections for?
Like the future, like a few months from now to a few years from now.
In terms of R&D or in terms of, in terms of what?
In terms of business, like in how do you expect the business to be growing?
I think on India, we do expect to have a, you know, growth higher than the market, like we've had in the past 8 quarters, 7-8 quarters. In the US it is gonna respond to how the product launches come. We have a, you know, we'd like to believe that between respiratory products, et cetera, we do have a good pipeline. On the emerging side, I mean, South Africa will readjust from, you know, the current quarter as we sequence, it should be back, in the quarter 1 of next fiscal, it should be back. I, you know, I think it's, we'll see a reasonable growth going forward.
Okay.
Shubham, do you have any further questions?
No.
Thank you. The next question is from the line of Shyam Srinivasan from BNP Paribas. Please go ahead.
Yeah, thanks for the opportunity. Just one question on the U.S. sales. I mean, earlier we, when we were around $500 million, we were guiding for like $800 million-$900 million, and now we are already closer to that. I think, you also mentioned that coming beyond $800 million-$900 million, it becomes a challenge to grow in the U.S. market. How should we look at this market now for us, I mean, from a $95 million, let's say in the next 2-3 years, I mean, what will be the key drivers on this space? Thank you.
We have a good line of sight that leads to the, you know, to the level of numbers that you're looking at. We're currently, you know, somewhere around the INR 700-ish mark, you know, on a 12-month basis. You know, from here, we think that we can get to the, you know, to the INR 900 million mark over a period of time. I think from there, we are actively building the pipeline to see what best we can do. There is evidence now, at least in the market, that companies can grow higher than that value. You know, we are also investing in pipeline. We've also got our biosimilars engine firing, more respiratory product trials happening.
You know, we are still, we're very quite optimistic about the U.S. market, and we can see growth in this market even beyond the, you know, $850 million-$900 million mark.
Okay. Got it. That's helpful. Then, another question on margins. I mean, we have been guiding for 21%-22% EBITDA margin. Now, considering the fact that we are already around 22%+ and probably the share of revenue will keep on increasing in the next two years, I mean, how should we look at the margin profile over the next couple of years?
Yeah, I mean, our intention is to grow margins year-on-year. I think the pace of growth, as we've said earlier, that since we've reached the level of, you know, the 21%-22%, now, I think the objective is also to reinvest back in the business and to try and see if we can increase the margin profile further from here, because we'd like to invest back to grow business faster, which is the direction we are on.
Okay. Got it. That's helpful. Thank you. Thank you so much.
Thank you. The next question is from the line of Damayanti Kerai from HSBC Securities. Please go ahead.
Hi, thank you for the opportunity. My first question is on Advair. You said that in first week of April, do you see like FDA re-inspection will be required for the facility?
The according to us, the PAI inspection is over, right? Now if the FDA does have to audit Indore in the interim, that's a different, that's a different issue. The PAI inspection for Advair is over.
Okay. Up to FDA, like they might need to re-inspect the plant before the final approval comes in. That cannot be ruled out, right?
It can't be ruled out, but it's not our understanding. At least the correspondence we have from them, this was not a precondition.
Okay. That's clear. My second question is on gAbraxane. Have you got any updates to share after the Goa update in previous month?
No, no update. I think, as we said, we are also trying to de-risk the product, we do not have a new update.
In most case, we assume this could be a potential second half FY24 launch if everything goes per the plan.
Yes. Towards the later half of the second half of FY 2024, that's the correct assumption.
Okay. My last question is on the SAGA and FGS segment. I think you obviously mentioned some of the issues there, but this segment has been very volatile over I'll say some time now. How should we see sales or like business performance moving ahead in coming quarters?
You see all the markets which have economies which are responding to the current goals, you know, global situation, whether it's in, you know, markets in the Middle East, to some extent Europe, as well as South Africa, the economies in Europe as well as in South Africa. Some readjustment happens because of the dollar, especially if the market is a self-pay market, it also responds to the economic situation. If you look at South Africa, market growth has reduced, right, over the base of the previous year. Obviously, you know, the global situation does not help. However, our business has always outgrown the market growth, right? I think that will continue going forward.
We had some issues in terms of just the market readjusting the amount of supply it needs for its growth, and I think that's currently happening. As I mentioned, I think the worst is over, from a growth perspective over the last two and a half quarters. From quarter one of next year, we expect things to be. When I say quarter one of next year, it's quarter one of next fiscal. We expect things to be, you know, pretty robust again.
Thank you very much.
Yeah. Just to add on SAGA's specifically, if you see how the business is transitioning into lower tender and higher private. In FY19 or so, we used to be probably about 30% tenders, 70%, private, which is now a 80-20 kind of a split in favor of private. That's also supported by new introductions that we're doing. I think the volatility has come due to the supply issue that we talked about, which hopefully, from, you know, next year onwards, we should see it going away. The advantage of growing faster than the market, though market is actually slow, but the fact that we are growing faster than the market, those benefits should be more visible, you know, over next couple of years.
That's helpful. My last question, if I may. Umar, can you comment on the pricing scenario for agricultural market? Has it changed meaningfully compared to previous quarter?
No. No, no meaningful change to the previous quarter.
Prices are largely stable, right?
Yeah. In the sense that the prices adjust during the year, there's no doubt about it, right? I think since your question was specific to versus the last quarter, no.
Okay. Thank you. I'll get back in the queue.
Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please go ahead.
Yeah. Thank you for this opportunity. Congratulations for the good set of numbers. 2 questions. First is the point-of-care device that you have introduced. In fact, we have been seeing kind of a better performance driven by the One India policy or One India approach in the domestic formulation side. Now this device introduction, do you consider this is a complementing factor other than the other aspect, or it is just a one-off kind of introduction that is how we should see?
Ashish, can you take that?
For sure. I think, you know, diagnostic and devices, while it is nascent, it continues to be one of our legs in our strategy. Okay. Going forward, I think it can grow into a business as well. So that's how we are looking at it. It's at a very nascent stage as we speak, but we want to improve our touch point with patients and actually service the patients from every possible ways, right? Therefore devices and diagnostics are some of the legs that we have identified as, you know, future legs for ourselves.
Okay. Second question is on the gross margins improvement only. You have clarified about it, obviously. If I see that, if it is a kind of a normalized kind of a gross margin situation, then I think this seems to be one of the best gross margins over last 4, 5 years, excluding the phase of this COVID. How sustainable this gross margin scenario for Cipla and or how should we see really for the future? Going ahead, the production, the product mix is likely to improve towards the complex product more and more. Whether it is a kind of permanent phenomenon or it is just a one-off quarter specific scenario.
quarter you had the benefit of seasonality, and this is probably one of the best quarters of the year as well. I think if you see a little bit long term, you've seen that we've got partner products, et cetera, as well. And that is the idea of having partner products is to actually go to the market much faster and tap the potential that exists and share the capability. That of course, in partner products there will be lower margins, right? So, you know, it's fair to say that we'll be able to maintain the margin. To grow the margin, it depends on how many launches we are able to successfully do in the U.S.
Okay. Okay. Just one, sir. On the mRNA Ethris, means they will... Or the acquisition, partial acquisition of the Ethris. It looks like that that's an interesting platform technology that you are getting access to. Because of that, possibly you can have multiple product opportunity using that technology platform.
Hence possibly complement your lung leadership program. If you can elaborate a bit on the, on the, intent front relating to F-three in mRNA facility.
Yeah. I think, in terms of you've probably answered the question yourself. I think in terms of technology, it is something that goes along with our core strength of respiratory and lung leadership. This is an inhaled technology, and therefore the whole idea is that if there is an existing capability that exists, we have invested in that, and the whole idea would be to actually commercialize that in our core markets through partnerships.
Okay. It is a futuristic project. That is how one should see.
Absolutely. Yeah.
Okay. Thank you, sir.
Thank you. The next question is from the line of Parvati from Course Five Eyes. Please go ahead.
Hello, am I audible?
Yes.
Yeah. Thanks for taking my question. just wanted to know, like, do you have any plans to file generic Spiriva in the U.S.?
We are not gonna comment on that. I'm not gonna comment on that, please.
Okay. Yeah. One more question. Could you give some clarity on the respiratory assets for which the clinical trials are ongoing? Like, could you reveal the product?
Well, we're not gonna reveal it. Yes, it's a product like Advair.
Okay. Yeah. Thank you.
Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.
Thanks for taking my question. My first question is on the R&D. Actually, you know, you did mention that R&D would inch up gradually. We just wanted to get a sense on the guidance for next year. You know, would it be in the historical range that you've given or would it be, you know, much higher than that given the respiratory trials?
No, I think it'll remain at what guidance we've been giving, which is about 6%-7%. Because, you know, the focus has always been complex R&D, and that's what we have. I think what I meant also was that this quarter there were certain clinical trials due to which the expenses had also gone up. Just keeping that in mind, there was some increase.
Understood. In which case, given, you know, the commentary on the strong growth in the U.S. that you're expecting, if I look at the percentage of sales, we're not talking about too much, a very large increase in R&D, probably 150 basis points. Should we not be seeing a material increase in, you know, EBITDA margins versus what we've been reporting for the last two or three quarters? Any reason for, you know, us to say? I understand we're reinvesting back into the business, but, you know, should there not be a step-up in margins as we see U.S. grow from current levels?
Yeah, I think overall, if you look at EBITDA margin guidance that we've been giving, it's a mix of many things, right? In the U.S., there is price erosion that you constantly witness, and you make it up with new launches. On an overall basis, we expect the margins to be maintained. I think that's what the endeavor is. Then, like I said, the new launches are both self as well as in partnership. You have to look at margins of both and in combination to arrive at overall U.S. margin.
Okay. When you say margins to be maintained, it's maintained at what we have been reporting?
Yeah.
Okay. second question, Umang, just a clarification on Lanreotide, because we're already, you know, close to the market share, you know, target that we've been indicating. Is there scope to improve market share further in the next year? Are we constrained by, you know, certain doing supplies, et cetera? From a revenue perspective, you know, was this product in line with what we'd initially expected at launch?
Yes. I think this is in the current trajectory is in line with our expectations. You know, market shares could expand from here. You know, these products are not like generic.
Mm-hmm.
-share expands significantly in 1 quarter. We see some expansion, but, you know, it is completely in line with, our expectations.
Understood. Thank you so much.
Thank you. The next question is from the line of Bino Pathiparampil from InCred Capital. Please go ahead.
Hi. good afternoon and congrats on a great set of numbers. Umang, a follow-up on Revlimid. you know, if I remove Revlimid revenues from this 3 Q numbers, 3 Q US revenue number, would the US revenue number be higher than the 1st quarter level when there was no Revlimid?
Sorry, repeat your question. If you remove Revlimid from this quarter numbers...
would the U.S. revenue be higher than one Q of this year where there was no Revlimid?
Of course.
Second, you know, coming to Abraxane, you know, Protexad launched. After that, I believe, HPT Labs has got an approval. Have they entered the market and any other competitive scenario that's changing while you shift the manufacturing?
you know, I'm not sure if at least till the last update that was given to me, we believe that HPT had not entered the market.
Mm-hmm.
However, I think there is some pre-existing relationship that two or three market players have by virtue of an AG agreement. We are not sure whether the AG stocks are completely liquidated or not, so I'm limited by my understanding of that right now.
Understood. And lastly on leuprolide, you know, apart from the AbbVie product, you know, there are a couple of other products in the market, one from Tolmar and one from Accord as well. Would you be competing against all of these and possibly taking share from all of these, or is it only from AbbVie?
You know, I think the market pulls from each other. Exact amount of how much it would pull from which particular type, we are not aware right now.
Okay, practically these are all the same product, right?
technically they're not, but, because even I think in administering the products look different and probably feel different too. I think it's. I think they will pull from each other, but, I'm not sure exactly to what proportion.
Understood. Your primary pull would be from AbbVie or would it be spread around?
We do have a target to go after, but at this point, you know, we're just being as open as possible in terms of where we could get shares.
Okay, great. Thank you. Thank you very much.
Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Hi. Thank you, and good evening, everyone. Umang, is it possible for you to give us a broad guidelines over next 15 months, what could be the, you know, complex launches in the US? I mean, we know there's Advair, there is, potentially Abraxane. I think you've mentioned one peptide product by September, if I'm not wrong. Anything else that you want to add to this?
Sameer, there are a few other products, but at this point we're not sure we'd like to provide that visibility and not because of any other reason, but because we're just trying to figure out what the likely dates for these products would be based on most recent, you know, correspondence with the FDA.
Okay. Okay. There are more complex other than these three, that's what you're saying. The timing is unclear.
At the same time, let me also say that the last, these 3 would probably be the larger ones in the game.
Okay. No, that's very helpful. Umar, the second question is on Revlimid. If the market does remain undersupplied by generics over the next couple of years, then is there any risk to pricing or the same pricing is going to hold?
Well, Sameer, I think that every year on generics there's always a little bit of a pricing drag. Right? Having said that, I'm not sure in Revlimid we may necessarily see a huge drag as more people enter, like we've seen with regular generic classes. There would be, you know, I don't think it would be unfair to expect that there would be some amount of erosion. I don't think it's gonna behave like a regular generic product at all.
Okay, great. For Lanreotide, 22.5 mg, I think three-month depo, you are the, probably the only generic. Did it contribute materially to Q2 number? The second is, how would the market share ramp up be, more or less like Lanreotide or different or much faster?
I think the Lanreotide version would be something similar. You know, give or take a quarter here or there. I think that could be a, probably a curve that could be a little likely. Again, we have to keep in mind that Lanreotide was the only available product. Whereas for the others, you know, we have 2 or 3 brands in the market right now on the, on the Lanreotide's side. Having said that, I think the trajectory should be slow, slower than a regular generic, just probably like an Lanreotide.
Okay, great. One final question, Umar, if I may. is on Ethris. For EUR 50 million, what's the sort of percentage stake you have taken, if you can share? I saw the pipeline, it looks like all of them are discovery stage, pre-clinical type. it looks like a, you know, even the science is sort of, untested, you know, unverified. How are you thinking about taking this forward?
Yeah. I think that the platform they have developed, the area that they're researching is the delivery through an inhaled route, right? Which appeals to us significantly. Now, having said that, you know, there's always risk involved in discovery of. They have a couple of products which we believe will also could move faster in their pipeline. I think it is our belief that their technology is pretty sound in terms of what we've seen and analyzed so far. I think we have about... I don't know if you have been public with this stake, Ashish. Have we been?
No, we've not.
Okay. it's, you know, I would say it's a minority stake, Sameer. You could pencil that in. we, you know, the objective is to have the ability to bring these products in India and introduce them in India as an Indian brand.
Okay, thank you very much.
Thank you. The next question is from the line of Nikhil Mathur from HDFC Mutual Fund. Please go ahead.
Yeah, hi. Good evening. My question is on the overall One India business. Can you share the overall One India business? What is the share from chronic and acute split in nine months this fiscal? If the growth overall is 12% in One India, what is the chronic and acute growth that the company is tracking in nine months, FY23?
The split of acute and chronic. Chronic is about 60%, and this is on the prescription side that I'm talking about. Chronic is 60% and balance is acute.
What are the growth levels you're tracking in both chronic and acute?
Growth levels in.
In nine months of FY 23.
About 6% roughly. That's kind of a number for anti-infectives.
Okay. In the prescription business, if I'm getting this correctly, 60% is chronic, 40% is acute. 40% acute business has grown by 6%.
Yeah. Your chronic is all double digits, right? 10%, 11%.
Mm-hmm.
Like respiratory can be somewhere around 17% is what we showed on our slide as well.
Right. My question is tied to, let's say the respiratory segment. It seems that this fiscal year the growth is pretty strong. In anti-infectives also, Cipla might be at 6%, when we see the data from other companies, ex-COVID, the growth is looking pretty strong this particular fiscal year. Pre-COVID, there were some challenges on the acute side, on growth front. Just wanted to understand, is there some sort of risk building up, let's say in FY24 of an adverse base in India because acute and specifically respiratory portfolios doing pretty well this year?
I'm not sure that. I'm not sure that I would. Let's try and understand your question. Is your question on whether there is excess stocking in the market? I don't think there is, considering just how the India system operates and our review of secondary data. If your question is will the incidence of anti-infective and respiratory drop in the next year, I mean, that's. I'm not sure we can predict that.
Okay.
It's very seasonal, and it links to your pathogens and disease favor. I'm not sure we can predict that actually today.
Sure. One more question on the margin front. I think there was a comment made on some costs also easing, whether it's raw material, packing materials, freight costs have eased frequently in this quarter. On the journey of cost normalization across these three heads, which is raw material, packing and freight, where are we in terms of normalization on, let's say on a scale of zero to 100, are we close to reaching the peak normalization that possibility or are we still far away from what the normalized cost should be across these three heads?
Sure. No, see, I think it's a constant endeavor for us to keep bringing down the freight cost. There are two levers. One, of course, the freight cost. The rates itself has come down and moderated. The second is that you change the mix, right? The air and sea mix. For that requires you to do your planning of supply chain very accurately so that you can, you know, use the sea route. It's a constant endeavor. I think there is still room for us to improve further because we still have an air mix. And that will continue as a journey. You know, we are reaching a point where I think there will be some optimization that should happen.
What about API prices and raw material cost? What's the outlook on this?
On the procurement cost? On the procurement cost also we've seen some stabilization, but some of, you know, it's difficult to say because China is still evolving from the supply situation. Can't say for sure what the next year contracts would be. The cost increase that we saw earlier in the previous year seems to be ending.
Okay. Got it. Sure, sure. Thanks a lot.
Thank you. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Hi. Thank you for taking my question. Umang, you mentioned about the biosimilar, you know, initiatives that you've undertaken during the year. Can you highlight if there's any more incremental developments on that account?
We have two products that are in development. One more that's been selected, which will be going into development. We're also now steadily ramping up the team. Kemwell is a partner and they're doing the manufacturing, so I think they're pretty satisfied. Most of the programs are in line with our internal targets.
What would be the timeline for these regulated and unreg market launch or non-reg market launches for these products?
Non-reg could happen in the next 3-4 years, because I think the patent estate for some of these would be 4 years out. reg markets would still be 5-6 years out.
Secondly, on, you know, in terms of, the significant cash that you have and the cash generation that's happening in the business, I mean, what are your thoughts on utilization of these proceeds or this cash, you know, this cash which is there on the balance sheet, given the fact that you're gonna keep accruing cash at the rate the way business is going at this point of time?
I think we have also signaled we are open to acquisitions. We will look at the right acquisition. India is a market we're very interested in, as well as, you know, the CapEx program could go up a little bit in the next one to two years. The board would always discuss the ability of the company to pay some cash back to shareholders with higher dividends or other manner. Effectively, this is only our second year of surplus cash. It's not that we have been having surplus cash for a long period of time.
Right. I mean, on M&A India, you rightly mentioned, but beyond India, what would be our strategic objectives from a, from an M&A perspective?
We keep looking at opportunities at across the globe in the international market as well as, you know, selectively in the U.S. as well. I think it's to fill the gaps that we have rather than anything else. In terms of, you know, if I have a $, then the proportion allocation to India would be high because continues to be a growth market, and we are keen to grow share out there.
Okay. Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to management for closing comments.
Thank you, Tanvi. Thanks, everyone for joining our earnings call. If you have any other follow-on queries, please do reach out to investor.relations@cipla.com. Thanks and have a good evening.
Thank you very much. On behalf of Cipla Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.