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Edited Transcript of CIPLA.NSE earnings conference call or presentation 7-Aug-19 11:30am GMT

Q1 2020 Cipla Ltd Earnings Call

Mumbai Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Cipla Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kedar Upadhye

Cipla Limited - Global CFO

* Naveen Bansal

Cipla Limited - IR Executive

* Umang Vohra

Cipla Limited - MD, Global CEO & Director

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Conference Call Participants

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* Abhishek Sharma

IIFL Research - VP & Head of Life Sciences

* Anubhav Aggarwal

Crédit Suisse AG, Research Division - Associate

* Charulata Gaidhani

Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst

* Chirag Talati

Kotak Securities (Institutional Equities) - Senior Analyst

* Krishnendu Saha;Quantum Mutual Fund;Analyst

* Kunal Dhamesha

SBICAP Securities Ltd., Research Division - Analyst of Pharmaceuticals

* Neha Manpuria

JP Morgan Chase & Co, Research Division - Analyst

* Nimish Nagindas Mehta

Research Delta Advisors, Research Division - Research Analyst

* Nitin Agarwal

IDFC Securities Limited, Research Division - Analyst

* Prakash Agarwal

Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals

* Ritika Agarwal;Quest Investments;Analyst

* Saion Mukherjee

Nomura Securities Co. Ltd., Research Division - Head of India Equity Research

* Shyam Srinivasan

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Surya Narayan Patra

PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst

* Ujwal Shah

Quest Investment Advisors Pvt Ltd. - Equity Analyst

* Vishal Manchanda

Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Cipla Q1 FY '20 Earnings Conference Call, hosted by Kotak Securities Limited.

 

(Operator Instructions)

 

I now hand the conference over to Mr. Chirag Talati from Kotak Securities Limited. Thank you, and over to you, sir.

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Chirag Talati, Kotak Securities (Institutional Equities) - Senior Analyst [2]

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Good evening, everyone. This is Chirag from Kotak Institutional Equities. I thank the Cipla management team for giving us the opportunity to host this call today. From Cipla, we have with us today, Mr. Umang Vohra, MD and Global CEO; Mr. Kedar Upadhye, Global CFO; Mr. R. Ananth, Global COO; and Naveen Bansal from the Investor Relations team.

 

Over to you, sir.

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Naveen Bansal, Cipla Limited - IR Executive [3]

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Thank you, Chirag. Good evening, and a very warm welcome to Cipla's Quarter 1 FY '20 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 group. Please note that these estimates involve several risks and uncertainties that could cause our 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.

 

I would like to request Kedar to take over.

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Kedar Upadhye, Cipla Limited - Global CFO [4]

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Thank you, Naveen, and good day to all of you. Welcome to our earnings call for the first quarter of financial year 2020. I hope you have received the investor presentation that we have posted on our website. Overall, numbers for the quarter reflect some challenges in the business environment and several one-offs, including some cutoff issues. This quarter saw the impact of change in distribution patterns playing out significantly for our trade generics business in India. This was on expected lines and as we had planned and commented in the last quarter. This has resulted in [degrowth] in our generics business because of this conscious change, which has an impact of about INR 200 crores. On the prescription business side in India, we saw deferral of dispatch to July. This is in line with our sales cutoff practices for the quarter. This affected our prescription business year-on-year growth of about 5 percentage points.

 

On the emerging markets side as well, which quarterly numbers were impacted by the deferral of these dispatches. Part of this was because of the monsoon situation towards the end of June and runway closures at the airport. This will be recovered in the next quarter. Overall, the higher cutoff has deferred sales to the extent of about INR 150 crores in these 2 businesses.

 

In South Africa, while the tender softness got played out as expected, we continue to deliver on our market trends for the private market business. In the Sub-Saharan region, due to the pending [claims on] certain receivers, we took a conscious call to delay acceptance of certain orders, which partly impacted the delivery of the revenues by the region.

 

In the U.S., excluding the contribution from Cinacalcet, the base business grew year-on-year. Including the contribution from Cinacalcet, the business has grown impressively by 61% year-on-year. Despite all these challenges and revenue [developed] for the quarter, the performance was benefited by contribution from Cinacalcet, as I mentioned. And hence, the profitability was maintained at very healthy levels with EBITDA growing 25% on a year-on-year basis.

 

Driven by significant cash flow generation and focused efforts, our net debt-to-equity ratio is now at 0.06. While the quarterly numbers appear subdued because of all the factors, we expect most of this will normalize over the coming couple of quarters. The underlying businesses and the order flow show encouraging signs across our key markets, and we will remain focused to resolve from all these transient issues.

 

With that, if we come to some of the financial numbers. Overall, income from operations for the quarter is INR 3,989 crores, which recorded Y -- year-over-year growth of 1.3%. Gross margin after material cost stood at 70% for the quarter driven by contribution from Cinacalcet. During the quarter, we maintained tight control on expenses. Total expenses, which included employee cost and other expenses stood at about INR 1,888 crores, which declined 4% on a sequential basis.

 

Employee cost for this quarter stood at INR 756 crore, an increase of 6% partly due to annual increments. Other expenses line, which includes R&D, regulatory, quality, manufacturing and sales promotion expenses, are at INR 1,132 crores, decreased 9% on a sequential basis.

 

During this quarter, in other expense line, there is an accrual of about INR 40 crores which was delayed collections from a customer. Total R&D investment for this quarter stood at 6.5% of revenues, which is INR 261 crores. We expect this to ramp up in the coming quarters in line with the progress of the generic Advair trials and other development programs. EBITDA for the quarter is about INR 905 crores or 22% of sales. Cash tax is about INR 192 crores, which is 29% of sales. We're looking at full year effective tax rate of 29% to 30%. Under the metric of profit after tax, we have reached INR 478 crores or 12% of sales.

 

Today, we also announced that in a mutually agreed and planned transition, Cipla Limited and Eight Roads have signed the definitive agreement for Cipla Limited to acquire the minority stake of Eight Roads in our consumer health care subsidiary, thereby, giving Cipla Limited 100% ownership interest of the Cipla Health Limited. This development comes in lieu of Cipla's growing focus on consumer-facing products and the high potential of synergy between CHL and Cipla in-house portfolios.

 

Our long-term debt is at USD 550 million, which was mainly used to fund the Invagen acquisition about 3 years back; and ZAR 100 million for the acquisition done for Mirren assets in South Africa. We also have working capital of about USD 19 million and ZAR 320 million, which act as natural hedges towards the receivables. Total net debt to equity, as I mentioned, is about 0.06. Outstanding forward contracts and hedge for receivables as of 30 June are $175 million and ZAR 564 million.

 

During the quarter, we also hedged a certain portion of our forecasted export revenues. The outstanding forward contracts and options of cash flow hedges as of 30 June are USD 147 million and ZAR 25 million.

 

At this time, I would now like to invite Umang to present the business operational performance.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [5]

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Thank you, Kedar. Though this quarter had multiple transitional impacts playing out in most of our markets, I believe the fundamental strength of our business remains strong.

 

Let me highlight some key milestones we achieved this quarter in line with our long-term aspiration of building multiple levers for growth: one, secondary performance in private markets. Cipla India continues strong secondary performance across key therapies, outpacing the market significantly in respiratory and cardiology. IQVIA (IMS) MAT numbers suggest that they are growing in both therapies at 14%, which is significantly higher than market. South Africa private business continues to outpace the market. It grew by over 2x the market at 7.3%. On the U.S. generic side, Cinacalcet continued to drive significant growth in the market. We also received 2 approvals this quarter in Ambrisentan and Pregabalin. Excluding Cinacalcet, our base business also showed respectable growth versus the previous quarter. Our respiratory trials continue to be on track for generic Advair.

 

On the specialty business, as you would have read in our press release, Cipla acquired the rights to ZEMDRI, which is IV form of plazomicin from Achaogen in a Chapter 11, U.S. Bankruptcy Code auction of the Achaogen assets, will increase in approved product in the U.S. and be Cipla's first commercial specialty asset. We believe this transaction will have strong commercial synergies with IV Tramadol, which results showed -- which showed positive results in the Phase III trials. Cipla has been a leading industry voice in the fight against Anti-Microbial Resistance and ZEMDRI further underscore Cipla's commitment to this [commercially].

 

Consumer business is a growth driver for us, and our consolidation of this business is an indication of that. Starting this quarter, as Kedar mentioned, our transaction with Eight Roads, the consumer business will see significant amounts of interest and effort in the consumerization story in India.

 

On the emerging markets side, we have signed definitive agreement to form a manufacturing JV and opened our office in China. China is a crucial part of our future emerging market road map, and we are at a critical juncture in establishing a respiratory franchise in the market. We will also explore routes to add on quality products to our portfolio in the future. Despite all this volatility, the profitability for the quarter was maintained at healthy levels.

 

Let's move to the detailed business performance now. In India, for the quarter, the business reported a year-on-year decline of 12%. This decline was due to a change of distributor in the generic side of our business. As we had guided in the last call, this is a result of a conscious call taken to prepare our distribution system for the post-GST environment where we normalize our inventory levels and derisk our distributor concentration to maintain the long-term health of the business. We noticed patterns of consolidated buying in the channel, which may have caused disruption, and hence, our actions on channel have led to a derisking of the business. We expect this business to normalize fully in quarter 3 and get back to healthy growth thereafter.

 

On the prescription side, we recorded a deferral of dispatches in July in accordance with our cutoff procedures of almost INR 60 crores, impacting the business growth by 5 percentage points. On the secondary side, Cipla continued to perform well across key therapeutic areas. Product therapies continue to drive a significant share of growth and grew at 14% as per IQVIA versus the 12% market growth. Amongst the key therapies in respiratory, Cipla grew by 14% versus a market growth of 9%. In cardiology, Cipla grew 18% versus the market growth of 12% in cardiology. We continue to maintain our leadership position across respiratory and urology. 10 of the top 22 brands of Cipla that feature in the top 300 brands in IPM have outpaced the industry growth. Cipla's proprietary breath-actuated inhaler Sereflo Synchrobreathe has touched INR 11 crores in the first year of launch.

 

In the SAGA region, which includes South Africa, Sub-Saharan and Cipla Global Access business, our South Africa private market continued its strong secondary sales growth trajectory, growing over 2x the market at 7.3% as per IQVIA (IMS) MAT June '19. The primary growth for the quarter is expected to normalize over the year. The acquired portfolio of Mirren in the OTC space delivered over 10% growth. As mentioned in our earlier call, Cipla South Africa has started delivering with new tender supplies, and as we expect our tender business to be rebase accordingly in the coming quarters. Outside of South Africa, we have held certain supplies contingent around the visibility of receivables.

 

In the North America business, including Cinacalcet, the business grew 61% year-on-year to USD 161 million during the quarter. If normalized for the sales of Cinacalcet, the base business also grew year-on-year. The quarter saw the approval, as we mentioned, of 2 assets, Ambrisentan and Pregabalin. In line with our strategy to increase share of new launches, in Q1, including Cinacalcet, over 45% of the sales were contributed by products launched in the last 12 months, which also led to our gross margin expanding by over 10 percentage points. We are progressing well on our trial for respiratory products and are targeting to file 2 products in the U.S. this year.

 

The emerging markets business has recorded one of the highest quarterly run rates in last year quarter 1, driven by a onetime tender opportunity that we had in Venezuela. Due to this high base of last year, we believe the numbers are not comparable on a year-to-year basis. The quarterly delivery also got impacted by deferral of dispatches to the first week of July on the revenue recognition side and the continuing challenges in the Middle Eastern markets. We continue to watch global developments. Recently, we announced our partnership with Alvotech on adalimumab for select emerging markets. We also signed another deal to in-license certain assets for emerging markets, including the territories of Australia and New Zealand. We expect these to be significant growth drivers in the near term.

 

On the regulatory front, we received our EIR for our Kurkumbh plant which was audited in April. Recently, we were also inspected at our API plant in Virgonagar in Bangalore. The inspection ended with 7 observations, none of which are either repeat or related to data integrity. We will respond to the agency within the stipulated time.

 

To close, we have identified very clear near- to medium-term priorities for our key markets. In India, our focus will be to drive further growth in chronic portfolio in the large key patient-focused initiatives in respiratory. We are working towards driving improved execution on the acute side by focusing on micro markets. We expect the business to drive above-market growth in the rest of the year. On the generic side, post the channel destocking, we believe this business will get back on a growth trajectory by quarter 3. In South Africa, while the tender business softness will [kick in], we believe our private market portfolio can deliver significant delta to drive growth in the overall business. And for the U.S. market, we will resume our limited competition launches in quarter 3, with some meaningful launches coming up.

 

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have the first question from the line of Saion Mukherjee from Nomura.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [2]

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On the domestic business, there seems to be a lot of moving parts. Can you just indicate what's the growth for the promoted business?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [3]

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So the promoted business has been impacted by a cutoff of sales. Is this Saion?

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Unidentified Company Representative, [4]

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Yes. Saion.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [5]

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Yes. Saion, it's been impacted by cutoff sales because we received higher orders towards the end of the quarter. And as per revenue recognition, we've cut it off. I think if you adjust for that, we have very strong growth. However, the bigger issue is linked to our Gx business and in the Gx business, we have had almost a churn of over 100 distributors linked to this business because we realized that there was some destabilization happening of our distribution chain. So we've had to churn some distributors, and as a result of that, we've shown the growth that we've had.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [6]

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Yes. I mean if I -- I mean if I do rough math, right, the strong order numbers you've disclosed, it seems that the branded generates, promoted business has grown in low single digits. Would that be a right assessment?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [7]

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I think you're roughly there. It has grown in single digits. You're roughly there.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [8]

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And I mean any reason for this? Because I know you are seeing good growth numbers reported by IQVIA or the AIOCD. I mean why is it that growth in low-single digits as compared for...

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [9]

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I don't think IQVIA or AIOCD has shown good growth. They've all basically said that volume growth is 0. Our competitive landscape has also shown high single-digit growth. I don't think we're seeing growth significantly in double digits across the reporting universe. As against that, we are in single digits, may not be high digits, but I think it's our base is probably a little different than the others. So I would expect us to get back in quarter 2, quarter 3. And then on a YTD basis, I think it would be different.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [10]

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Okay. And then my second question is on the U.S. So you mentioned in your remarks that even adjusted for Cinacalcet, there is a growth quarter-on-quarter in the base business. Can you maybe take us through like what drove this Q-o-Q improvement in the base? And going forward, how you see Cinacalcet playing out, given that there are more players in the market now?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [11]

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So Saion, just to be clear, the growth that we had mentioned was Q1 -- it was last year Y-o-Y. So we've seen our base business grow Y-o-Y, and we have seen Cinacalcet grow by -- because it was not there last year. On a quarter-to-quarter basis, we are marginally in line because we've not had any meaningful launches. But the base business is marginally in line with what we had in the previous quarter.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [12]

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Okay. Okay. And how do you see Cinacalcet going forward?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [13]

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So Cinacalcet is now a competitive market. I don't think we will see the same levels that we have booked in this quarter.

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Operator [14]

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We have the next question from the line of Prakash Agarwal from Axis Capital.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [15]

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I'm just trying to understand gross margins better. So since you know the Sensipar Cinacalcet is similar, what you mentioned Q-on-Q, so is it largely due to the trade generic business going down? Would that be correct to understand it?

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Kedar Upadhye, Cipla Limited - Global CFO [16]

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Yes. There is some benefit of the business mix because of the gross margin of the trade generics business is quite low compared to company average. Also EBITDA is much higher than the company average. So partly business mix, partly it's Cinacalcet contribution. These are factors for this -- couple of the factors, Prakash.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [17]

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Okay. And in your opening remarks, you mentioned INR 200 crore trade generics realignment, right? So if you add that INR 200 crore and the INR 60 crore, we are getting 4.5% overall growth for the overall India business?

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Kedar Upadhye, Cipla Limited - Global CFO [18]

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Yes. I think the 2 factors for India that we have been commenting: one is the cutoff issue, which is about INR 60 crores to INR 80 crores for India, with a separate impact on the emerging market business, that is one; and secondly, there is trade generics impact of INR 175 crores to INR 200 crores.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [19]

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Yes. So I mean that's what I said. So if we add that -- these 2, we are getting 4.5% kind of growth.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [20]

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At overall Cipla level.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [21]

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Yes. Overall India business.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [22]

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Yes.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [23]

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Yes. Okay. Understood. And lastly, on the U.S. business, I would have assumed like Q-on-Q, there could be some improvement given the fact that we had a host of launches. And you would have a full quarter kind of impact. Would it mean that Sensipar would have Q-on-Q loss here, given the fact that some pricing, because you said that it's normalized and the competition has come in. So while our other base business would have improved, Sensipar would have come down a bit. Would that be correct understanding?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [24]

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I think, broadly, the scenario numbers have not changed much between the quarters. I think what has happened is that the base business is largely in line and the launches we have seen, they are not what we call limited competition launches. So this quarter, we've not had a limited competition launch, but we are likely to have some of these launches coming up in quarter 3. So they will probably be bunching up a bit together as against last year, where we said that each quarter will have a limited competition launch.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [25]

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Okay. And your guidance on R&D, 7% to 8% remains, right? I mean because you made a mention that going forward, because of the trials that we want to start, would that be the correct -- the 7% to 8% guidance still holds?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [26]

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Yes. That stays, Prakash.

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Operator [27]

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We have the next question from the line of Anubhav Aggarwal from Credit Suisse.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [28]

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Umang, just trying to understand last year, you did about INR 1,420 crores in trade generics. Can you do that number this year? Or will you be short of that?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [29]

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Well, I think we are hoping to show growth. But I think it will largely pan out on what happens in this quarter, right? And I think this quarter, we are hoping to come back to at least last year levels. But it's early days in the quarter, and we are -- we're working towards that. And if that happens then I think may not be difficult for us to show growth, quite honestly.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [30]

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And just trying to understand what happened. So as I understand, so were you not getting the money in time? Because once you sell this quarter, you sell it, right? So what do you mean by destabilization happening and you had to churn out...

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [31]

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Yes. Let me explain that. See, what has happened in India, especially on the generic side, which is a more trade incentivized side, right? That's the generic business. So what happens there is that if you have -- if the stock that people are carrying are a different -- have been obtained by them at different prices. And with the GST, they begin to cross-sell. And that begins to destabilize the distribution channel. So as a result of that, we've had to churn almost 100 of our distributors, who were accounting for a fairly significant share of our business.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [32]

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And so you are very sure that the, let's say, the stock that the end chemists were carrying was not very significant?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [33]

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No. No, the chemists don't carry significant stocks in this business at all. It's pretty similar to the Rx side. But you have to imagine that because this business is more Tier 3 and Tier 4 towns, the trade and the channel carries a lot more stock than the end chemist, because the stocking potential of this business in Tier 3, Tier 4 towns is far lower. And therefore, what we found was that as this stock buildup was acquired by different distributors at different prices, there was a little bit of instability, a fair amount of instability in the trade channel on account of this.

 

And then we had to cure this instability because it was beginning to affect the distributors who had genuine demand around the areas that they were selling. And that is what we have done. We have almost churned the distribution mix here and this mix was almost contributing to 50% of our sales. And those distributors now, the churned distributors are obviously not with the system. There are new distributors who've come in. And for those distributors to ramp up, it will take time.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [34]

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Okay. Okay. Understood. And one clarity on this Ambrisentan that you got approved, is this a meaningful product? And how much market share (inaudible) is related?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [35]

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Unfortunately, not a meaningful product. It is not so many people who have launched, but it is still not a meaningful product.

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Kedar Upadhye, Cipla Limited - Global CFO [36]

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Anubhav, a clarity on your earlier question. I think the growth that we referred to in the generics business will be applicable for subsequent quarters, not in the - what we have lost is probably difficult to recover now.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [37]

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Yes. Yes. That's clear. And just can I ask you on that, there is no receivable issues, right? So let's say...

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Kedar Upadhye, Cipla Limited - Global CFO [38]

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No. In fact, the receivable profile has improved.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [39]

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Okay.

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Kedar Upadhye, Cipla Limited - Global CFO [40]

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Receivables as of June is much better than what it was in March.

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Operator [41]

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We have the next question from the line of Neha Manpuria from JPMorgan.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [42]

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So just once again, on the India issue, so we are saying that the INR 2,000 crores that we lost -- INR 200 crores that we lost because of the trade generics, is essentially destocking. And now we are hoping that this normalizes with the churn in the distributors.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [43]

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No. I don't think we're saying it's destocking, Neha. It's a lot more than that. The generic business is a business that fundamentally works through channel and trade. So it is a business where the velocity of what you put in is impacted. If you don't put in anything, there is no velocity in the business, right?

 

Now in this business, because it's very difficult to estimate the demand coming out of Tier 3 and Tier 4 cities, a lot of the -- the way the demand is satisfied is through what exists in the channel. What had happened in this business is as -- it's not so much about destocking. It is that different distributors over the year have been sitting at a different price -- different acquisition price. And so even if the inventory levels are perhaps normal, there was instability in the chain because GST has removed friction cost and our goods can move through the city.

 

So today sitting there, I could be buying goods that have been sold in Bangar or buying goods that are being sold in Kerala. And if I'm sitting here, if I'm a distributor, my margins are always not high to do a trade business, right? The entire distribution trade business in stock, its level happens at 10% margin, right?

 

So I think there is an issue with just the different price points that were existing in this market as well as, perhaps, you're right. A fair mark-up -- a fair amount of stock level that were there on this side of the business. So we've had to -- effectively, what we had to do is bring the stock levels down so that the incentive -- and make sure that the stocks which were aligned at different price points are liquidated in the market. So that going forward, there is not too much of this instability that can be caused in the distribution chain.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [44]

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Okay. Understood. Sir, if I look at the entire India Rx business in that case, that business, on a normalized basis, can still grow double digits?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [45]

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It can grow. It can grow, and we're wanting it to get there. And hopefully in quarter 2, we will be there.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [46]

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Okay. And my second question is on EM. We also saw deferral of dispatches there. If I heard your opening comment correctly, it was due to some rains towards the end of June. So it's fair to assume that this is not related to any supply disruption or any issue on a manufacturing front. Would that be correct?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [47]

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Correct, Neha. It is not due to any manufacturing and quality challenges. This was -- especially these deliveries got bunched up towards the last week of June, and we had the monsoon issue and runway closure, et cetera. So I think we will recover this in quarter 2.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [48]

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Okay. And sorry, on South Africa, once again, the private market that -- should that normalize from second quarter? Or would it take a couple of quarters for us to normalize the private market performance?

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Kedar Upadhye, Cipla Limited - Global CFO [49]

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Neha, private market performance is expected to normalize in quarter 2.

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Operator [50]

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We have the next question from the line of Nimish Mehta from Research Delta Advisors.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [51]

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I want to understand on the distributor, you mention that the price -- pricing of the product is different for some of the products, which is what we had assumed. So we know the reason -- either the price is different because, like, [under absorption only]. How did it happen to be different? That is one. Second, now that distribution has been churned out, how will this be ramped up in future?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [52]

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Nimish, the issue was not pricing. The issue is demand rate. Just to clarify, the MRP is always the same for every product. It is never different. So the MRP doesn't change. The cost at which distributors pick up this product depends on which quarter, which distributor has bought, because this is a trade business, right?

 

So therefore, at some times in the quarter, we -- the prices that distributors are buying at is different. And as a result of that, there is instability in pricing environment. That's what we meant. The MRP is never different. The MRP is always the final MRP that goes to the patient.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [53]

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And then does the realization to the company also change or that is constant?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [54]

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That can change. That can change depending on -- it's like an incentive or a bonus you give back. It's like a bonus slab, it's like an incentive slab.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [55]

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Okay. So this -- going forward, you will not do it this? I mean the kind of bonuses that you might have given.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [56]

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No. This business always has bonuses. This business is always a trade business. So it has incentivization to the trade. It's just that because of the fact that the GST environment created this amount of stress, that there is no friction cost in terms of goods moving across, which is why this has happened. And going forward, it is our intention to bring this level of stocking down in the market so that people are not sitting also with different price points.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [57]

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Okay. And about the ramp up, do you think it will happen because the distributors are down, like, I don't know how the ramp will increase, I'm trying...

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [58]

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So I think what happened is that there is a churn in distributors. So the new distributors will take up time to ramp up because they have to also pick and sell into their pockets. The old distributors have taken down their stock levels, because we have not invoiced anything to them right now. We're invoicing to the new people, so which is why the new people we want to only invoice after the stock levels are fairly down in the market.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [59]

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Okay. Understood. And lastly, on the U.S. side, last quarter or maybe sometime last year, we received approval for Depo-Provera injection. That has not yet been launched so either -- I mean what is the reason on its launch (inaudible).

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Unidentified Company Representative, [60]

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I think we're the strongest.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [61]

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So I think this is linked -- it's linked to our capacity in one of our units, which also manufactures another product for us in the hormonal space. So we are hopeful that as we build up enough stock of the other hormonal product that we will eventually get around to launching medroxy.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [62]

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When is it completed, the expected launch time? And is this an important asset? (inaudible)

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [63]

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It is an important asset, but so is the other asset that we have in the marketplace.

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Nimish Nagindas Mehta, Research Delta Advisors, Research Division - Research Analyst [64]

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Any time line you can provide for launch of this product?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [65]

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I'm not sure we want to comment on that right now, please.

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Operator [66]

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We have the next question from the line of Kunal Dhamesha from SBI Capital.

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Kunal Dhamesha, SBICAP Securities Ltd., Research Division - Analyst of Pharmaceuticals [67]

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So first question is on the domestic market. So we have a INR 60 crore to INR 80 crore impact on the branded business that has happened in this quarter. So that should come back in quarter 2? And then the trade generics business will ramp up gradually, is what you are saying?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [68]

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That's what we are saying.

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Kunal Dhamesha, SBICAP Securities Ltd., Research Division - Analyst of Pharmaceuticals [69]

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And then secondly, on emerging markets, due to this deferral of shipments, how much revenue was impacted, which is expected to come back in quarter 2?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [70]

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Kunal, both the revenues are accounting cutoff, they will get booked in quarter 2 in respective regions.

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Kunal Dhamesha, SBICAP Securities Ltd., Research Division - Analyst of Pharmaceuticals [71]

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Okay. Okay. So for emerging market, how much was in the revenue impact because of the deferral, I think, of (inaudible) business?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [72]

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It's about [$14 million] in emerging markets.

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Kunal Dhamesha, SBICAP Securities Ltd., Research Division - Analyst of Pharmaceuticals [73]

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Okay. Okay. And sir, branded business would come back, INR 60 crores to INR 80 crores and trade generics would grow in [next quarter]?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [74]

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Correct.

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Operator [75]

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We have the next question from the line of Abhishek Sharma from IIFL.

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Abhishek Sharma, IIFL Research - VP & Head of Life Sciences [76]

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Just a couple more on the trade generics thing. Well, just wanted to understand, was there any front-loading in terms of your distributors loading up on stock before they went out of the system?

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Kedar Upadhye, Cipla Limited - Global CFO [77]

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Abhishek, we -- the kind of visibility that we have into secondary than consumption for our prescription business, we do not have that for the trade generics business. So it's very difficult to answer your question. What we are estimating is by virtue of churning the distributors that we are in channel now, there is that destocking which is happening now. It's very difficult to answer your question whether there was a front-loading. We don't believe so. But since we do not have visibility, we don't want to comment on it.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [78]

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On the back end of our business, we don't believe so, because when we look at the 4 quarters in the past on the generic business, we don't think that there is an -- there is a front-loading as per 1 quarter or 2 quarters, it's not like that. There is a pattern of predictability in this business. But it's very difficult to say what is -- and I think the problem is really the distributors, the churn in the distributors. Because obviously, in 1 quarter, we haven't invoiced almost 100 distributors and that is the issue.

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Abhishek Sharma, IIFL Research - VP & Head of Life Sciences [79]

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Yes. I got that part. And I was also wondering, in terms of distribution debt, since you said Tier 3, Tier 4, is there enough distributor debt in terms of you being able to switch from one distributor to the other? Because many of these would have grown with you. They have become bigger now. They would have been smaller earlier. And you will now be starting with smaller guys. So what's their ability to sort of penetrate the market that you are in?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [80]

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So that's a good question. It is -- this trade is also linked to the financial credibility and capability of a new distributor. So I think that's where you're going. That's a good question. I think that's the reason why we are saying that we probably think that only in quarter 3 we will begin to see growth in this business. But your question is addressing exactly the root here, which is saying that if the older distributors were more and had grown with you, a new one will not immediately take their place. So I think where you're going is correct.

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Abhishek Sharma, IIFL Research - VP & Head of Life Sciences [81]

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And the ones which have churned out, they will eventually move to other trade generic suppliers and that would -- is it fair to assume that they would pose some sort of a competition to you?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [82]

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Yes. They were already -- see, most of these also stock multiple companies' products. They just don't stock Cipla's in the Tier 3 and Tier 4 cities. So they're either already with others or they will get there. They're either already with other players or they will get there. So I think it's -- we have taken this call depending and looking at the business practices that they had. But I think this is where we are.

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Operator [83]

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We have the next question from the line of Surya Patra from PhillipCapital.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [84]

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Couple of things. In fact, on the U.S. business front, since there is a likelihood of that we would be seeing a meaningful decline in the Cinacalcet revenue next quarter onwards, and also you have indicated that there are a couple of potential important product launches that you will be seeing in the subsequent quarters, so any growth outlook that you would like to share here for the U.S. business?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [85]

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Surya, I think your observation on Cinacalcet is right. I think there have been multiple competitive launches. So the pricing got pegged to a level where the usual competitive generic product gets to. So you should expect a significant drop in Cinacalcet revenue in quarter 2 onwards. As far as base business is concerned, we would not like to comment at this stage. Our [outlook] is to get back to what we were delivering earlier, growing.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [86]

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Okay. And regard the margin scenario, so like this quarter margin, obviously, I think you have benefited because of the kind of a better product mix, better market mix and all that. So this seems like a kind of a peak quarter for the year, possibly. And subsequently, the kind of the -- the impact on the -- because of the (inaudible). Again, reversal of the business in the emerging market as well as in the cleared market or the generic market that we should be seeing. So what should be the kind of margin scenario that you're developing for the subsequent period then?

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Kedar Upadhye, Cipla Limited - Global CFO [87]

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Surya, there are several moving parts, as you know. I think you should certainly factor normalization of Cinacalcet, normalization of the business mix. One good thing is the emerging market, which is high -- is the highest gross margin geography for us. That will come back because of the steady cutoff scenario. I think there are 3, 4 moving parts. You should model based on those 3, 4 moving parts.

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Surya Narayan Patra, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Pharma Analyst [88]

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Okay. Just on the IAS 116 section, any meaningful impact that you are seeing in the other external leases this quarter?

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Kedar Upadhye, Cipla Limited - Global CFO [89]

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If you're referring to the leasing standard, (inaudible) have gone up by about INR 25 crores, but the [area] is lower than what we could have been by about INR 5 crores. So for the overall (inaudible).

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Operator [90]

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We have the next question from the line of Ujwal Shah from Quest Investment Advisors.

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Ujwal Shah, Quest Investment Advisors Pvt Ltd. - Equity Analyst [91]

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Just wanted to know a sense about the limited competition drugs that you mentioned. So are we expecting 2 or 3 products to get bunched up in 3Q? Is that what you were trying to indicate?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [92]

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So we expect that to be in Q3, Q4.

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Ujwal Shah, Quest Investment Advisors Pvt Ltd. - Equity Analyst [93]

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Q3, Q4?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [94]

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Yes.

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Ujwal Shah, Quest Investment Advisors Pvt Ltd. - Equity Analyst [95]

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Okay. Sir, and a bit more on the emerging markets. How are you seeing the scenario, especially in the Middle East, considering that we have been having some issues over there for quite some time and that has been impacting the performance over there. Do we see that emerging market growth rates to improve in the coming quarters for the normalized business? Or do we see challenges to persist over there?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [96]

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So we continue to see geopolitical challenges in the Middle East region. At this point, it's difficult to predict what it would be, Q3 or Q4. We keep a close watch, and we are hopeful. But at this point, difficult to comment on. It is challenging.

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Ujwal Shah, Quest Investment Advisors Pvt Ltd. - Equity Analyst [97]

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Sure. Sir, and in terms of SAGA business, sir, considering we have been outgrowing the market on the private side and Mirren also growing at around 10%. Do you think these are a bit softer numbers for this quarter? Or do you assume that this is more of a normalized rate that we should figure in going forward?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [98]

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These are softer numbers. This quarter is a very soft quarter for SAGA.

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Ujwal Shah, Quest Investment Advisors Pvt Ltd. - Equity Analyst [99]

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Any particular reason for it, sir?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [100]

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No. I think because the tender versus the private, is the link to the tender offtake versus the private market progress indeed and how they offset each other.

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Ujwal Shah, Quest Investment Advisors Pvt Ltd. - Equity Analyst [101]

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Sure, sir. And lastly on our API business, a lot of people are now focusing more on the API side and considering for us also, it is one of the best margin businesses. What is the outlook for API business? Are we trying to focus more on that piece going forward?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [102]

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So we -- API continues to be equally important part of our business. There is no specific additional focus. It continues to be important. It's a good business. And we're doing pretty good with some of these lock and switch style customers on the products. That will continue to grow the way currently it's growing.

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Operator [103]

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We have the next question from the line of Nitin Agarwal from IDFC Securities.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [104]

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So on this specialty product that you acquired in the U.S., how should we look about the commercialization aspects of it going forward? I mean are we going to do it ourselves? What kind of cost does it entail? Can you start with that, please?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [105]

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So I think we are going to likely consolidate this with tramadol, because if you have 2 assets, there is -- so we're saying it's already commercial. The asset is already commercial. We are running it in a KAM model right now, Key Account Management model. So product is continuing to reach the trade, right? And we have made provision for that. However, if we really want to grow this product, we will be launching it, along with tramadol, pretty soon, in the next 1 year or so, a little more than a year, by end of next year. And we'll be making plans for that. And that will entail a field force, et cetera, that we will need to build up.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [106]

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And currently, does it have any meaningful revenues, this product?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [107]

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No. Currently, the revenues are not meaningful. It's just been launched.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [108]

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And when you look at the other aspects of our specialty portfolio, can you just sort of help us understand what is the broader sort of thought process in terms of -- are there any specific therapy areas we're looking at? Because most of the other companies that you've seen have been either be moving away from specialty or they have pretty defined focus on the therapies they're looking to focus on. And how are we looking at our specialty strategy in the U.S. now?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [109]

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So we have 2 areas that we are pretty bullish about. The first is on the inhaled delivery of certain drugs, whether they are antifungals or they are antibiotics, et cetera, because Cipla believes that on respiratory and inhaled delivery, we are distinctive compared to some of the other players. So that is one area, which is why we have the asset, we've partnered an asset called Pulmazole, which is an inhaled itraconazole that goes to the lungs for a disease called aspergillosis. So that's the first. Second is on institution. We're trying to look at that as a channel. So I think we are therapy agnostic. We could be selling an antibiotic; we could be selling also a drug which is produced for pain like tramadol. Both of those now are in our pipeline, both tramadol and ZEMDRI. And here the institution is the customer as against the therapy or a doctor, right? So those are the ones. And then we have the CNS category, which we still have 1 asset in. We are looking at what we can do in that space. So we have these 3 as shortlist for our specialty journey.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [110]

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Okay. And so in term of commercialization aspect, you said it's going to be about a year, more like FY '21, second half or thereabouts, where costs will begin to come through?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [111]

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That's right. And that's more only on the institutional side. Because on the other ones, we are still far away from a perspective of an approval.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [112]

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Right. And secondly, on the consumer health business, just keen to understand why did we -- what was the reason for buying out the minority partner at this stage? And what value would they have added, really speaking for ourselves, over the last 3, 4 years they have been around? So I think given our scale and size, getting a partner would -- financial consideration wouldn't have been the issue for us, right, in terms of getting a partner on board?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [113]

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Yes. I think there is -- first of all, I think the outcome is a good outcome for both. I think Cipla sees a fair amount of potential in the consumer side of the portfolio. And quite honestly, some of those products are available with us. And I think it's not as if this consumer business will now go out and get new products and make -- and buy these products from outside. They could also expand the list of products that are available in the Cipla stable. So I think that is the reason why we have taken this bet on consumer, and we believe the timing is right for this, considering the potential and the synergy of this business with the main Cipla business.

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Operator [114]

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We have the next question from the line of Krishnendu Saha from Quantum Mutual Fund.

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Krishnendu Saha;Quantum Mutual Fund;Analyst, [115]

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Just a small one, if I may, from a very layman's point of view. This is about our Indian business, tender business. GST was eliminated 2 years back, (inaudible) sales like 1.5, 2 years. So just trying to understand why the whole stocking, maybe I'm missing something. If you can just give me some [headwind] explanation about the whole thought process that you see.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [116]

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See, the business has -- the trade business in India and actually distribution in India has changed significantly in the last 1 to 1.5 years. You have aggregators who are buying on account of these pharmacies. There are aggregators who are buying for major hospital groups. And then you have consolidators. So you have consolidators buying from main groups. And then you have aggregators. And also the number of distributors coming in and out of this chain is also -- the volatility of that has improved. Now if you look at a branded prescription business, we don't have this impact there. This is not on the branded prescription business. The impact is more on the generic business, which goes through many hands and many chains in the Tier 3 and Tier 4 cities. So it's not like the branded business, where you will sell here now and it will reach the stockists and distributors and metros, et cetera. So it's not a one-stop chain. This is a multiple-stop chain when we go to Tier 3 and Tier 4 cities. So that is the reason, because of the GST, because of dispensing of full churn in the trade, both in terms of transparency, both in terms of even other items, in terms of how sustainable these people are. Because credit is also a big issue in these parts of India. So the whole chain has gone through a churn. What we noticed was that a couple of -- that some part of our distribution chain was effectively destabilizing the rest. And that is the decision we have taken, to not be with a few of these people. That is our decision.

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Krishnendu Saha;Quantum Mutual Fund;Analyst, [117]

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So would it entail some stock write-off? Or is that -- no.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [118]

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We don't expect any stock write-off. We don't expect any receivables issue to impact that. In fact, as Kedar mentioned, our receivable situation is a lot better. Our stock position is a lot better. So we don't expect any of that impact here. It's just a conscious decision to move away from a few distributors who we thought were destabilizing our market.

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Krishnendu Saha;Quantum Mutual Fund;Analyst, [119]

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Okay. I notice on the U.S. side you referred to 3 or 2 launches, could you attribute a market size to that, please?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [120]

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I mean they're not meaningful.

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Krishnendu Saha;Quantum Mutual Fund;Analyst, [121]

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A small player in the group level within the market? Would that be right?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [122]

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Yes. There are 2, 3 player, but I think there is a fair amount of pricing that's eroded in each of those market segments.

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Operator [123]

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We have the next question from the line of Shyam Srinivasan from Goldman Sachs.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [124]

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Just the first question on some of the remarks made. Umang, I think you talked about the Indian domestic market, and excluding all this trade part, is still growing very slow. What do you think from the industry perspective, what is the reason for this slow growth, like 6%, 7%?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [125]

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Look, so I -- look, I can give a guess, but most industry people are -- you'll probably be more -- the answer would be more refined, if you pick it from multiple people. Let me see it from our lens. Okay, so we have a INR 1 lakh crore market. If you look at what's happened in the recent 2 years or 3 years, there is (foreign language), which is a scheme run by the government, which is now -- they are reporting about $50 million. So at the equivalent pricing, that $50 million in our side of the trade is almost close to, let's say, about INR 2,500 crores to INR 3,000 crores, right? So that's 3% of the market now where some growth is coming from.

 

Then if you look at all the e-pharmacies and the buying groups that have emerged for hospitals and otherwise, that's another, in my belief, roughly about INR 3,000 crores to INR 5,000 crores. So you've had almost INR 8,000 crore to INR 9,000 crore worth of buying pattern that has changed in the industry which otherwise was an industry that was growing at 10%. Some of this has been substitution demand. Some of this has come because the industry is not growing faster. It's growing at the same pace. In fact, it's probably slowed down. The impact of this is going to be felt on the regular retail trade, right? And that is the impact we are seeing. So our analysis is that there is growth in the industry, but it is coming from different pockets now, in different sources of buying than from before. So that -- however, most of these comments are for the branded prescription buying market, it's not for the generic. The generic is a different thing, and we've explained that earlier. So this is the branded side. So that's why growth -- if you were asking me why growth slowing, I think growth is slowing as a result of this, and it will possibly take a while for the trade to stabilize, both in terms of pharmacies to mature and how they buy, as well as from a perspective of the (foreign language) and how quickly it expands.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [126]

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And so I think the government has talked about increasing this (foreign language). Do you think the threat will remain, at least in the next...? Sorry.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [127]

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Yes. So I think you're right. I think that the -- right now, the entire impact of all of this is coming in the last 2, 3 quarters. So if you look at the AIOCD or at the IMS numbers, I think they are showing that volume growth is slowing. So I think there is impact of this right now. But I do think that the industry will still record a fairly significant volume growth. May not be as high as the 14%, 16% growth that we used to see, but I would not be surprised if the industry can continue to grow 8%, 10%.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [128]

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Sure. And my second question is on, I think, Europe. Now 2 quarters in a row, we have seen good growth. I think you've given comments in the presentation about FPSM actually increasing market share. So what's the outlook on the European business? And yes, if you can help us on that.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [129]

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So it will continue. I think you're right. We're seeing good trends and market share pickup. We are very optimistic about it, that will continue.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [130]

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Okay. Okay. And last question is on the China JV. If you can share us what are your plans there right now? Is it because of all the CFDA changes that are happening? And how meaningful could China be for us, say, 3, 5 years?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [131]

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Yes. I think China will be very meaningful for us in 3, 5 years. And yes, with all the changes that are happening, I think it's the right time for us to be looking at China. And respiratory is an area where we feel we have a strong advantage. The Chinese market brings in a huge potential there, as well as oncology. So it's important that we are able to set up the right manufacturing capability in China to cater to the Chinese requirements.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [132]

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Just one follow-up here. Some of the challenges that one has noticed in China so far has been getting approvals and long approval times. Some of the products have taken 4, 5 years to get approval. These are all products, obviously. But have you seen anything changing meaningfully from an approval time line or some commitments from the FDA there that this is going to be shorter?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [133]

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So I think there is a positive movement from the CFDA to make it move faster. But more importantly, there will be certainly advantages in being able to file from China using a Chinese facility. And that's one of the reasons why for us the timing is right now.

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Operator [134]

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We have the next question from the line of Vishal Sharma (sic) [Vishal Manchanda] from Nirmal Bang.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [135]

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With regard to the China market, would you need to be local participants (inaudible) there for you to get that approval?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [136]

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Could you repeat your question, please?

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [137]

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With regard to the China market, would you like -- would you need to be local [bio-products buyers] there?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [138]

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We will have to evaluate the regulatory guidance, most likely, yes.

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Kedar Upadhye, Cipla Limited - Global CFO [139]

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I think he's asking do we [have to use] local bio-products.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [140]

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Yes, yes. We have to do local bio-products. There are requirements that come up for the product there. And obviously, we need to do it and meet those.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [141]

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Sir, does that mean that filings are in line for these [specs] from 1 to 2 years from now?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [142]

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So we are continuing to file from India while continuing to set up this facility, make registration batches and file from there. So it will be continual from here. And then as the facility gets ready there, we will do the registration batches and file from there.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [143]

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Okay. And second, with regard to the trade generics market in India, has the overall distributor strength gone up as we go through time?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [144]

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Yes. Our eventual attempt would be to not link it with the number of distributors, but reduce, avoid the concentration. I think that's the key issue that we are facing.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [145]

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So overall distributor strength remains the same? Is that correct?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [146]

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More or less, yes.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [147]

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Okay. And lastly, the increase in noncontrolling interest [you have seen]. Could you explain that? Significant increase.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [148]

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Is that in P&L?

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [149]

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Yes.

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [150]

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Yes. So that -- as you know, we have 2, 3 associates where we accrued a profit or loss for the respective business. So in some of those businesses, there has been a movement in this quarter.

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Vishal Manchanda, Nirmal Bang Securities Pvt. Ltd., Research Division - Research Analyst [151]

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For this quarter, the noncontrolling interest is almost -- I (inaudible) for the last few years?

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Kedar Upadhye, Cipla Limited - Global CFO [152]

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Yes. So it's unlikely that it will recur. We would like to believe that's one-time, pertaining to a transaction during the quarter.

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Operator [153]

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We have the next question from the line of Ritika Agarwal from Quest Investments.

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Ritika Agarwal;Quest Investments;Analyst, [154]

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So I'd like you to explain to the previous participant that the prescription growth is now coming down for the [Rx] segment, the branded segment. And we all have challenges in the Gx segment as well, which will be expected to normalize by Q3. So overall, India business, how do we see growth for this year and the next 2 years?

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Kedar Upadhye, Cipla Limited - Global CFO [155]

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With some of these issues, especially cutoff and the generics distribution chain, are transitory in nature, okay? That's what we clarified. We are quite hopeful of the overall India business, be it generics or prescription business trajectory. The key question is the trajectory, is it double-digit percentage at the market level or is it 8% to 10%. I think let's watch out for it.

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Ritika Agarwal;Quest Investments;Analyst, [156]

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Okay. Okay. Sir, my second question would be on the South Africa SAGA beat. So any clarity on what is the price increase announced for the private market for FY '20, which was 1% in FY '19?

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Kedar Upadhye, Cipla Limited - Global CFO [157]

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It's more or less at the same level, Ritika. The percentage price increase of the private market is significantly moderated over the years. At one time, it was beyond 5%. Now this is not beyond 1%.

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Ritika Agarwal;Quest Investments;Analyst, [158]

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So similar levels to FY '19, at that level. Okay. Sir secondly, also we -- so in this quarter, we saw CGA business again coming down by 38%. So -- and SAGA by 17%, so how are we seeing for the full year, the SAGA piece and the next 2 years' growth?

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Kedar Upadhye, Cipla Limited - Global CFO [159]

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Certainly, it depends on the flow of orders for Global Access business. It's difficult to comment as a full year trend, but I think the business has got rebased, especially for pricing. So all the triple combinations that we used to sell in the past, the pricing has got significantly rebased. So I think that is a permanent shaving-off which has happened, and that is a model for the full year. Volume-wise, I think we will -- we have seen that if it meets our profitability ratio, we continue to participate in the global fund business.

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Ritika Agarwal;Quest Investments;Analyst, [160]

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Right. Sir, for the SAGA, how are you seeing the full year and the next 2, 3 years?

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Kedar Upadhye, Cipla Limited - Global CFO [161]

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So I think SAGA, there are 2 factors. Private market business, some of the challenges we said this quarter is unusual softness. We hope that comes back from quarter 2 onwards. The tender business this year is the end of the 3-year cycle, and that's what we had alluded in the past, that after the 3-year cycle gets over, [year-over-year] price discount, which we have given. But year-over-year we could retain our volume market share in the tender market.

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Ritika Agarwal;Quest Investments;Analyst, [162]

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Sir, would we be able to do flat for SAGA market for FY '20, like said in earlier calls?

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Kedar Upadhye, Cipla Limited - Global CFO [163]

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We -- Ritika, we avoid giving precise financial guidance. Let's take it quarter-by-quarter.

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Ritika Agarwal;Quest Investments;Analyst, [164]

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Sure. Sure, sir. Sir, my last question would be on the ZEMDRI product that Cipla has acquired from Achaogen. So any idea on how many more products we are looking at an approximate size so as to nullify the additional spend for tramadol? Or is this product enough for us for that additional spend?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [165]

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Yes. As of now, for the institutional business, we believe this is enough, but we could keep scanning for the opportunities. It's very tough to comment how many more products we could get for the institution business, we would like to get that business to scale.

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Ritika Agarwal;Quest Investments;Analyst, [166]

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And sir, any number or any guide, any direction for how much can ZEMDRI be for us, like what would the potential peak sales or something would be?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [167]

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Ritika, we wouldn't at this stage like to comment on the potential of the product.

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Operator [168]

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We have the next question from the line of Neha Manpuria from JPMorgan.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [169]

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Yes. My question has been answered, thank you.

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Operator [170]

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We have the next question from the line of Charulata Gaidhani from Dalal & Broacha.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [171]

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My question pertains to India generics. How much is the contribution of generics to India business?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [172]

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Charulata, for the last full year, it was around 22%, 23%. This quarter, it is 16%.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [173]

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Okay. And how much is chronic in India?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [174]

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It's -- I mean depending upon the classification methodology of IMS, it's about half-half each for us.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [175]

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Okay. And how big is the sales force?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [176]

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In total, the number of medical representatives is about 6,500.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [177]

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Okay. Right. My second question pertains to the progress of Advair trials. Can you throw some light on that?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [178]

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They are on track. We are on track, it continues to progress, and we are on track.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [179]

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Okay. By when do you expect some data?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [180]

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So we are likely to file this asset at the end of this fiscal year.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [181]

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Okay. Fine. And also, one last question. Have the tender supplies for ARV begun?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [182]

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Yes. They are on constantly. And I think it's been going on for a while, but they are at far significantly lower prices right now than before.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [183]

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Okay. So would be impacting profitability?

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Umang Vohra, Cipla Limited - MD, Global CEO & Director [184]

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I think it's baked into our numbers already.

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Operator [185]

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Ladies and gentlemen, due to time constraints, that was the last question. I would like to hand the floor back to the management for closing comments. Please go ahead, sir.

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Naveen Bansal, Cipla Limited - IR Executive [186]

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Thank you, everyone, for joining us on the call today. In case you have any follow-on questions, you can reach out to myself or write us investor.relations@cipla.com. Thank you so much, and have a very good evening.

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Operator [187]

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Thank you, gentlemen. Ladies and gentlemen, on behalf of Kotak Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.