Cipla : Earnings Call Transcript Q4 FY23

"Cipla Limited

Q4 FY '23 Earnings Conference Call"

May 12, 2023

MANAGEMENT: MR. UMANG VOHRA - MANAGING DIRECTOR AND

GLOBAL CHIEF EXECUTIVE OFFICER - CIPLA

LIMITED

MR. ASHISH ADUKIA - GLOBAL CHIEF FINANCIAL

OFFICER - CIPLA LIMITED

MR. NAVEEN BANSAL - HEAD-INVESTORRELATIONS -

CIPLA LIMITED

MR. AJINKYA PANDHARKAR - INVESTOR RELATIONS

TEAM - CIPLA LIMITED

Page 1 of 19

Cipla Limited

May 12, 2023

Moderator:Ladies and gentlemen, good day, and welcome to the Cipla Limited Q4 FY '23 Earnings Conference Call. We've been joined by: Mr. Umang Vohra, MD and Global CEO, Cipla Limited; Mr. Ashish Adukia, Global CFO, Cipla Limited; Mr. Naveen Bansal, Head, Investor Relations, Cipla Limited; Mr. Ajinkya Pandharkar, Investor Relations team, Cipla 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 conference, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Ajinkya Pandharkar from Cipla Limited. Thank you, and over to you, sir.

Ajinkya Pandharkar: Thank you, Dorwin. Good evening, and a very warm welcome to Cipla's Q4 FY '23 earnings call. I'm Ajinkya Pandharkar from the Investor Relations team at Cipla. Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections or other estimates about our future events. These estimates reflect the management's current expectations of the future performance of the company.

Please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied. Cipla does not undertake any obligation to publicly update any forward-looking statement, whether as a result of new confirmation, future events or otherwise.

I would like to request Umang to take over.

Umang Vohra:Thank you, Ajinkya. Good evening to all of you and I appreciate your joining us today for our fourth quarter earnings call for financial year '23. I hope you have received the investor presentation that we've posted on our website. I'm pleased to share that we continue to make significant progress across our strategic priorities. In fiscal year '23, we recorded the highest ever revenue and EBITDA, including several major milestones in our One India and U.S. businesses, pivoting our business on an accelerated growth and a strong margin trajectory.

We also continue to invest capital across multiple growth initiatives, including investments in the complex pipeline in new science into our big brands and expanding our consumer portfolio among others. I would like to cover some key themes that have played out in our financial performance for the last year. One of the key themes is delivering market-beating growth in our focus markets of India, South Africa, United States and some of the large emerging markets. Our India branded prescription business delivered sustained momentum across all our therapies, achieving 13% excluding COVID year-on-year growth while the IPM growth was 8% as per IQVIA at March '23.

Importantly, our overall share of chronic therapies expanded year-on-year by 300 basis points to 59% of the total portfolio, an 80 basis points increase in the market share from -- in the market

Page 2 of 19

Cipla Limited

May 12, 2023

share for the chronic therapies from 7.5% to 8.3%. We do not expect the NLEM pricing impact to influence our growth significantly as it will be balanced via allowed price increases and continued volume growth. This business has consistently posted market beating growth for 2 consecutive years as per IQVIA.

In South Africa, Cipla grew at a 3-year CAGR of 8.9% faster than the market, which is growing at 4.4%. Our focus continues on driving market-leading growth and increasing our share in the market of South Africa. I will cover the U.S. market subsequently. Within India, the other focus area for us has been growing our big brands across all our businesses. In India branded generic, we now have 21 brands featuring in the top 300 brands and which are over INR100 crores of sales as per MAT March '23. In our trade generics business, we have 8 brands that are above INR50 crores of sales and are much larger in volume terms catering to the length and breadth of the country.

Cipla Health has successfully transitioned and consumerized some of the existing brands into megabrands with sales of over INR100 crores. This has been achieved through leveraging brand strength to its maximum deepening market penetration, significantly higher consumer-oriented packaging and positioning. Our India consumer franchise is already tracking at INR1,000 crores plus on an annual basis, and we expect the EBITDA margin to move closer to mid-teens in FY '24 and grow sustainably from there on.

I'd now like to talk a little bit about our U.S. market. One of our core themes has been to broaden our pipeline in this market. We are pleased to share that our U.S. business has crossed $200 million for the first time in this quarter. The full year for this business stood at $733 million, growing over 23% from last year. This has been achieved through our pipeline and execution.

We had announced a peptide pipeline earlier in FY '23, and this has added a new muscle of institutional capability and portfolio, which we aim to further enhance. Our lead asset of lanreotide now has 17% share in this market.

While launches are a focus area for all markets, noteworthy of the 50-plus launches in India, trade generics market and the 32 brands launched across multiple therapies in South Africa. This new leg of revenue in South Africa is likely to offset the reduction in the tender business and the margin pressures we have seen recently.

We continue to invest in growth franchisees. In line with our strategy to continue our focus on expanding our One India franchise towards the higher share of chronic therapies, we recently signed a perpetual license agreement with Novartis for Galvus and its combination brands, which, as per MAT March '23 IQVIA had reported sales of nearly INR270 crores. This will be a strong strategic fit to strengthen our IBDs portfolio.

We also entered into a strategic partnership to market and distribute Scapho, a human IgG1 monoclonal antibody used for the treatment of psoriasis. In Cipla Health, we acquired Endura MASS, a renowned nutritional supplement, which has a niche positioning in this market. While we continue to invest in brands, we also focused investments in enhancing people capabilities

Page 3 of 19

Cipla Limited

May 12, 2023

in the field force. In -- over the last 2 years, our field force in India has grown by over 800 people.

Our R&D investment continues to increase. In terms of pipeline, we've made significant progress on initiation of trials across some of our complex products. On the pipeline front, we have 3 differentiated products undergoing clinical trials with filings targeted in FY '24.

Our last but most clinical theme has been to derisk our U.S. portfolio. Our U.S. supply continues to be well diversified across all our sites and partner sites in -- and partner sites from our partners. On our compliance front, at Fall River, Massachusetts, we recently completed the CGMP audit, which resulted in 0483 observations. We have approval to produce our respiratory assets in this facility. Respiratory assets are being derisked to this in-house facility.

For Indore, we expect classification by mid-May. However, we do not see any risk to commercialize product portfolio. Generic Advair is already being derisked to another in-house facility. Remediation efforts are ongoing for our Goa facility, and we expect a CAPA completion by end of Q1. Reinspection is required for plant clearance, which is being targeted for quarter 3. Our generic Advair file is now solely dependent on the facility approval, having cleared all other questions from the agency. We have already commenced the derisking process for this product, as I mentioned earlier, to our other in-house facility. The value stays intact as no new generic is expected before we launch.

Nanopaclitaxel is being used, as I mentioned earlier, to a partner CMO site, and exhibit batches are being taken. We expect to be able to supply from 2 sites by fiscal year '25. We don't see any change to the value of this product as well as there are clearly no generic launches till date.

With this, I would now like to invite Ashish to present the financial and operational performance.

Ashish Adukia:Thank you, Umang. This quarter, we witnessed strong performance across all our core businesses with overall expansion and profitability. The quarter reflects our consistent performance in One India with better than market growth and our performance in our differentiated product launches in U.S., which was done earlier this year.

Coming to the key financial highlights for the quarter. Overall, we are pleased to report a quarterly revenue of INR5,739 crores, with full year revenue closing at INR22,753 crores. The overall revenue growth for the quarter was at 9% Y-o-Y on a reported basis and on ex-COVID basis, a strong 14% growth. And for the full year, the same number on a Y-o-Y growth stands at 5% on reported and 11% on ex-COVID basis.

Our One India franchise further expanded its market share in a traditionally weak seasonal quarter by growing at healthy 16% on an ex-COVID basis on back of extended countrywide flu season. The North America business reported a highest ever revenue driven by traction in the differentiated portfolio with revenue of $733 million, growing at 23% Y-o-Y.

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 about 24%, which is over our long-term range of 17% to 20% that we've talked about earlier. In line with our expectation,

Page 4 of 19

Cipla Limited

May 12, 2023

EBITDA margins stood at 20% plus for the quarter on a reported basis, whereas we ended full year at robust 22%. This EBITDA margin is not including other income. Our EBITDA margins for the year subsumes the impact of lower-than-anticipated SAGA performance, a high inflationary market and a higher R&D spend and certain COVID provisioning. Adjusted for COVID, the margin for the full year stood at 23%.

Higher R&D investments driven by ongoing clinical trials on differentiated assets, as well as other developmental efforts, including contribution to biosimilar JV was higher in the quarter by 15% versus last year and is part of our profitability model. Our reported gross margin after materials costs stood at 64% for the quarter, which is 480 basis points above last year's figures, driven by contribution from new launches and overall mix change. As you may recall, last year, we had onetime COVID charge of inventory provision in quarter 4, which had impacted the reported gross margins.

Total expenses for the quarter, including employee costs and other expenses, which stood at INR4,565 crores, up by 3.7% on a sequential basis. The other expenses, which includes R&D, regulatory, quality, manufacturing and sales promotions are at INR1,537 crores, increased by 6.1% sequentially, driven by judicious promotional and growth link investment. Total R&D investment for the quarter are at INR371 crores, about 6.5% of revenue and were 15% higher, like I said, on a Y-o-Y basis. R&D expense for the full year stood at INR1,344 crores, which includes material cost, depreciation, etcetera, etcetera.

Profit after tax for the quarter is at INR526 crores or 9.2% of sales, adjusting for onetime impairment charge on account of divestment of certain noncore assets in Africa and Middle East, adjusted PAT stood at INR708 crores, which is 12.3% of sales. The adjusted growth rate over last year is 436 basis points and adjusted ETR, effective tax rate, is at 24%.

Full year PAT is at INR2,802 crores while adjusted PAT is INR2,984 crores to 13.1% of sales. As of March '23, our debt primarily constitutes ZAR 720 million in South Africa. We have repaid our working capital loans of about $50 million in the U.S. given the interest cost environment.

Turning now to our outlook. We established strong threshold for revenue growth and operating profitability with core margins trending in the 22% range.

To close, we saw robust momentum across portfolio and geographies for FY '23. The growth levers in the subsequent quarters will include continued market beating growth across One India, prescription, trade generics and consumer health. Full year operating profit in line with our guidance of about 22%, which includes continued investment in R&D programs.

Robust traction in our North America franchise across complex portfolio and continued contribution from respiratory and peptide products, creating a more resilient business through de-risk portfolio and supply. And lastly, incubate and drive growth in stable geographies in international market.

I would now like to thank you for your attention and will request the operator to open the Q&A.

Page 5 of 19