Expect 10-15 launches in the US this year: Cipla

The ongoing restructuring at Cipla, India's fifth-largest drugmaker by sales, has pulled down the profit by 69 percent in the fourth quarter (Q4) of FY16, said Umang Vora, Global COO, Cipla. Net profit for Q4 of FY16 is Rs 80.87 crore, compared with Rs 260 crore a year earlier. Vora said that initiatives are underway to normalise operations and the management is committed to making its EBITDA trajectory more sustainable in FY17. Vora pins up hopes on the US business for improved EBITDA margins substantially. Despite margins pressure, Cipla has made heavy investments in its R&D, with a major chunk dedicated to the US developments, he said. It plans to invest in respiratory, oncology, HIV products, Vora added.  The company expects 10-15 launches in the US this year. Vora expects the FY17 base business margin to be around 15-16 percent and EBITDA at 20-22 percent. Below is the verbatim transcript of Umang Vohra’s interview with Ekta Batra, Latha Venkatesh & Reema Tendulkar on CNBC-TV18. Ekta: I wanted to start with the restructuring of Cipla? What analysts are little concerned about is that the restructuring for Cipla has gone on for quite a while. If it was in management changes, it was some amount of changes which had taken place in the company itself when can we see normalised operations for Cipla going forward and the sustainability in terms of margins? A: It is tough question to answer I have to admit it but let me say this I think the initiatives are under way. You will appreciate that large companies don’t change overnight and they take, these are we are talking about 25,000 people in an organisation. I would say this that the management team is committed to making the EBITDA trajectory a lot more sustainable. In many ways the last quarter we have reported is not truly representative of what Cipla is, what Cipla’s trajectory is going forward. I would just advise everyone to begin to form their expectations etc out of our next couple of quarters. However the transformation is underway. The biggest leg of this transformation journey has started well which is to size up our business in the US. We just bought a company and we are adding two filings there. Most companies who are our peers actually have very large US businesses which operate at EBITDA margins which was significantly higher than every other business they have in their mix. Cipla will take a couple of quarters but transformation exercise is well underway and it does take time. Latha: You guided for mid teen topline growth and 15-20 percent operating profit growth over the next three years. Can you give us a more near term guidance as well say for FY17? A: We are not wanting to give any guidance for specific year and that is because we are also building the US and the US has its own vagaries in terms of product approvals and things like that. At this stage I think Cipla is more comfortable giving a medium-term outlook. That is the guidance that we have given going forward. So, I am not so sure we are going to give FY17 guidance. It is always going to be medium-term as far as Cipla is concerned. Ekta: What is your guidance at least on the US business because you are working with a base of around USD 300-400 million right now. You are aggressively ramping up your filings as well as your research and development (R&D) expenditure. So, give us the sense in terms of what the US business is going to look like may be in a year from now and how much will that contribute in terms of your total margin picture as well? A: Our margin picture should improve quite substantially because of the US business undoubtedly so. We are not guiding to specific segments and geographies at this point in time. We are choosing to invest despite the margins pressure we are choosing to invest very heavily in R&D and a large portion of this R&D is for the US. It is in the areas of respiratory products, in the areas of oncology products and it is in the area of past filings have been made in the HIV. So, from the time we make a filing to the time we get an approval the general time period is approximately two years. So, a lot of the filings that we are making now will begin to show trajectory two years later. However, a lot of the filings that we have already made will begin to show up as launches in this year. We have guided to that as well, we are expecting about 10-15 launches in the US this year, some of which have going to be limited competition opportunities. Latha: One can understand bonus and wage related one-offs but inventory one-offs would not that also recur and more importantly, your explanation that a higher R&D spend is a one-offs? In a business like yours that would be a constant wouldn’t it? A: If you were to look at our business about a year back our R&D spends was between 5 and 6 percent and if you were to look at our business today we are almost doing it in a 0.5 percent of R&D. The slice that you reference is quarter to quarter comparison. We are not necessarily mentioning that this is an explanation for the performance but it is just giving you a perspective that despite the pressure we are continuing to invest about 8-9 percent on R&D going forward. The inventories write off you are not going to see subsequently. These are items that have come this year. They are also related to several markets that we are choosing now to operate through a different model. So, it is more a course correction type of a thing as against usual type of a write off. Ekta: Can we assume at least for FY17 that your base business margins would be between 15 to 16 percent odd? A: Yes you could. Latha: An EBITDA growth of 15-20 percent? A: This is exactly what we hinted in our analyst call. Ekta: The other thing that I wanted to quickly touch upon was what is happening with the Indore facility? If you could also confirm with us that the InvaGen facility all the observations are closed so that means that the 483 issues stands resolved at the InvaGen facility and there are no outstanding 483 your are supplying from that facility? A: You are right. The InvaGen 483 has been closed. We even received the product approval for the product that we launched this quarter. So, InvaGen 483 is a resolved. Indore 483 is the last response went out to the Food and Drug Administration (FDA) sometime in May. It will take some time to come back to us. We remain committed and we are fairly confident about the response we have made. However, like I always say the FDA is the best judge and at this point in time we are waiting for the next directive from the FDA. Ekta: Any more recent inspections that you could possibly throw some light on for us and any USFDA updates that we could hear from you besides Indore as well as InvaGen? A: We have largely been inspected in most of our facilities into 2015 and early part of 2016. So, every facility of our goes through an inspection calendar set by the USFDA and we are largely compliant with that calendar. So, our last inspections were in 2015, I think we could expect next set of inspections coming up in 2017 end of 2016. Ekta: What about the inhaler launch in the US because now we are seeing competition pick up as well. So, the obviously the opportunity seems to be getting diluted at this point in time. We heard Lupin also possibly entering into the market of filing for the inhaler opportunity in the US. Where does Cipla stand when it comes to its plans there? A: I don’t know where competition is, we keep hearing about them in various phases of trial etc. I would just say that respiratory has been a very large forte for Cipla, a very large business in India in respiratory and we have been doing this work for the past 15-20 years. We may not be first in our filing, we may even not be first in our launch but we will certainly have a product which is deemed substitutable and AB rated by USFDA. You can expect to hear more news of this. We have guided to one metered dose inhaler (MDI) filing this year. We have guided to initiation of clinical trials for a dry powder inhaler (DPI) product. We are well underway with our journey and we are pretty confident of being able to launch some of these products in the US in the years ahead. Ekta: I wanted to touch upon the domestic growth because that has in fact exceeded expectations. It was 15 percent odd. You have recovered from what has been dismal quarters of domestic growth in the past couple of quarters. What is a steady rate for the domestic growth and what would possibly be the impact on Cipla on account of the FDC ban that we are hearing about though there is a stay order right now? A: Yesterday at the analyst call we spoke about it, happy to reiterate some of these items. The domestic growth saw a bump up in quarter four but if you look at our quarter three numbers it was not that high. So, if you look at them both together Cipla would be growing at about 14 to 16 percent growth in domestic. That is higher than market. Therefore our goal is to grow Cipla higher than market growth. It could be in the range of about 14 to 16 percent on a sustainable basis going forward. There is a lot of near term pressure through government pricing controls as well as the FDC ban. We have said this is an impact of roughly about 2-3 percent on Cipla revenue.