US, India will continue to outperform going ahead: Cipla

In an interview with CNBC-TV18, Kedar Upadhye, Group CFO of Cipla spoke about the results and his outlook for the company.

December quarter was a good quarter for us. Q4 is relatively weaker for us, he said.

During Q3 we have launched two limited competition products. As we scale up this product next year, we could see operating leverage kicking in, he added.

Speaking of research and development (R&D) expenditure, he said that it has been below 4 percent which is not sustainable and we have taken up to about 7 percent this year. There will be an upward bias considering that two-three clinical trials are coming up, said Upadhye.

The home markets - India, US and South Africa – will see continued outperformance compared to the respective markets growth in comparable therapies, he further mentioned.

We have a very heavy abbreviated new drug application (ANDA) pipeline as well which is getting monetised, he said.

Expect to deliver significantly more in the coming quarters, Upadhye added.

Below is the verbatim transcript of the interview:

Q: Could you tell us the margin performance in particular. What kind of guidance can you give this market?

A: The December quarter was a good quarter for us. I think what happened is Indian prescription business had higher mix of respiratory therapy which is relatively higher margin for us and our global funded business was lower this quarter. So both higher margin business contributing higher and lower margin business contributing lower and that has benefited.

There has been significant work done towards last eight quarters in Cipla from the operating leverage standpoint to work on various cost optimisation initiatives be it in people, be it in repairs and maintenance, be it in all line items in operating expenditure. So all of that has helped.

We had alluded that Q4 is relatively weaker for us because of India business going down, which is expected but yes, satisfactory journey till now.

Q: You have achieved margins of around 19 percent odd. I know you cannot give a specific guidance but I want to stretch on the kind of operating leverage that we could probably see from the US business into FY19 and also your plans in terms of probably moving away from low margin products there?

A: That is true. During the quarter we have launched two limited competition products. One is a generic version of Budesonide and other is Decitabine and both of these have not seen much contribution during this quarter, so as we scale up this product next year, we could see operating leverage kicking in.

We said on the call (conference call) yesterday that we are examining some of the relatively low profit products especially where there is very high burden on manufacturing infrastructure and if it makes sense then we will probably rationalise if there are any opportunities to take up the price but that is not going to be very high quantum. I do not think that is going to be more than 1 percent at company level. So that is part of usual year-on-year process in the company to rationalise the portfolio of low margin products.

Q: Your India business grew very well this time around, almost 15 percent growth. North America for everyone has been a tad bit weak but going forward where do you see the maximum potential coming from?

A: Between the home markets; we call the Indian market, US geography and South Africa are home market for us and these three will see continued outperformance compared to the respective market’s growth in comparable therapies. I think the potential to growth, to answer your question, is on all these three markets.

Q: I was interested that your research and development (R&D) expense has increased considerably. How do you expect this to give returns in FY19? In particular I wanted to know about some key milestone achievements?

A: Historically if you recollect, our R&D expenditure has been below 4 percent which is not sustainable and we have taken it to about 7 percent this year. There will be an upward bias considering that two-three clinical trials are coming up but I do not think it will cross 9-9.5 and that too in a period in which all the two-three trials get bunched up. In my view that is an appropriate investment and from retail standpoint all these products will get launched from FY20 onwards but we have a very heavy pending abbreviated new drug application (ANDA) pipeline as well which is getting monetized as we are speaking.

Q: What is your outlook on pricing pressure in the US?

A: In the Q1 of this fiscal we had seen heavy pricing pressure and after that from sequential standpoint it has not been very high but as part of our operating plan we do factor pricing drop in high single digits.

Q: If you have to strategize or prioritize markets going forward in terms of where US stands, India stands and your other markets such as Africa and even your antiretroviral (ARV) tenders. What would be a priority for us probably in the next one-two years?

A: Three markets; the US, Indian business and South Africa are our priorities. We have very significant emerging market presence and that at a company level is very high margin, probably the growth may not be as high from those markets but these three home markets are very crucial.

Q: Coming back to the point you were making about growth that you are expecting. It has been around USD 100 million per quarter for the past six quarters. Given the kind of recent approval that you have got. What kind of average run rate can you do in the US business going ahead?

A: I would be shy of giving any guidance but you should expect us to deliver significantly more in the coming quarter. There would be quarter-by-quarter enhancement in the run rate of revenues for US markets.

Q: You have spoken of a desire to build a specialty products. Can you outline some plans, goals and numbers?

A: We have an in-licensed product which is completing phase 1A and we are in search of opportunities in the Central Nervous System (CNS) and respiratory phase as well. You should expect Cipla, in the coming quarters, do well.