Cipla Limited (CIPLA) Earnings Call Transcript & Summary

Hello, and welcome to the JPMorgan Healthcare Conference. I am JPMorgan's India healthcare analyst, Neha Manpuria. It is my pleasure to introduce Mr. Umang Vohra, the CEO and Managing Director of Cipla, who will be taking us through a presentation. Thank you so much for taking time to do this presentation with us, sir. And over to you for the presentation.

Thank you, Neha, and welcome all of us -- everyone on the call today. I know that these are better times -- that we will have better times where we could meet in person, but I'm happy to take you through the Cipla story over the last 2 to 3 years and what we're looking forward to in the future. So if you were to go to -- I think, the slide decks are with all of you. I'm just going to call out the first slide is the slide which is about Cipla when it was established. So we're -- just as a quick summary for people who don't know too much about Cipla. We're the second largest company that sells inhalers in the world. We're the second largest company with revenues in India. We're second -- the third largest in South Africa and the tenth largest pipe prescriptions in the U.S. We also export out of India to emerging markets, and we are the first largest -- we are the largest exporter to the emerging markets. So that is a little -- a quick snapshot of Cipla. If you were to go to the next slide, this is really a reflection of the numbers. The slide is about our EBITDA and the financial metrics. And you can clearly see that in the last 3 to 4 years, there's been a pretty robust expansion of both the EBITDA percentages. The net debt, essentially, we are now a cash-positive company and a very meaningful expansion in the ROIC. And I think a lot of this has come out of focus on execution. It's come about making the right choices about markets and geographies that we invest in as well as a couple of decisions regarding how we treat innovation and how much we can fund it. So that's really the snapshot of the financial performance over the past couple of years at Cipla. We're really proud to make sure that we live our credo of caring for life. And I think what we've been able to do with COVID by introducing various therapies, being the first to bring remdesivir into India, being the first to launch the entire COVID portfolio range as well as making sure that in our factories, our employees and our partners and associate companies are safe. And a heartfelt thanks to all and each and every one of Cipla employees for making sure that the company continued to progress during the whole COVID crisis. So that was Slide 3. If we go to Slide 4, and I'll come back to the slide right at the end of the presentation. This slide is a snapshot of what we believe are areas that Cipla has wanted to develop, areas where we believe there will be tremendous value creation. If you look at this, right at the top is our lung leadership aspiration. We are #2 in the -- in a set of players who sells devices. GSK has that position at #1. We would like to attain that leadership, and we are humble about it. It's not something that will happen in a year's time, but I think we're well underway into getting into that ambition. This will also mean we will launch new innovative products with our own respiratory capability, technology and devices. And a part of this story is also about unlocking the story of complex generics in the U.S. Respiratory is a big part and a big pillar of that, and we'll talk a little bit about the U.S. on the next slide. We're also trying to make sure that we deliver market-leading growth in all the key geographies. So you saw our #2 position by revenue in India, the #3 position in South Africa. All of this has happened because we're growing faster than market, and we continue to intend to do so. We've also got several markets in the emerging side of the world where we have pretty dominant positions in terms of market. So the focus on execution gets combined with market leadership and execution in market to deliver superior returns. We're also beginning to lay the blueprint of getting into certain new geographies, like we think our advantage in being able to bring respiratory technology will play out well. And I think those 2 markets are China, where we're actually building a site; as well as in Brazil, where our strategy is a little bit more institutional in terms of specialty injectables as well as some other products. We've seen in the last 10 months an acceleration of how digital can change business models. It's still early days, but we hope to make this a part of our strategy. And therefore, we think there is a fair amount of unlocking that can happen to the introduction, the digitization of processes and the introduction of digital in the way that the company works. And we're certainly trying to treat that even further. And of course, we want to make sure we have very strong compliance. So we have a very strong blueprint for making sure that our ESG scores improve over time and that we leave the planet to be a better planet than what we inherited. And of course, all of this is going to result in a consistent expansion in ROIC. Like we've seen in the past, we hope to replicate some of this in the future. And at the end of the presentation, I'll come back summarizing some of these themes. I think the next slide is about our U.S. business. This might be Slide 5 or 6 in your presentation deck. And we're really excited about the prospect of being able to add almost $300 million to $500 million of revenue. At our size of somewhere between $500 million to $600 million, this is fairly significant. This basically indicates that over the next 3 to 4 years, we will be doubling our footprint in the U.S. And this is going to come out of, obviously, the inhaler and the respiratory franchise, but we've also got some nice partnerships and products fairly in development on the peptide injectable space as well as what comes out through [indiscernible] challenges, some of which we have demonstrated in the past of being able to unlock like Cinacalcet and several others. So we see a lot of synergy. We see it as a huge focus on execution. All of this can go away if the execution is not tied, and that's what we're focused on, in being able to drive this -- being able to drive this growth. And on the next slide, again, talking about the U.S., you'll be able to see that the pipeline is nicely diversified from what was earlier focus on oral solid to now a focus on respiratory combined with oral solid. So we've got about 30% of our portfolio already, which is in respiratory and injectables, and that's only going to increase further as we go. So we've seen respiratory sales up increase, and you see that on the slide. We've seen a 20% CAGR in the last 3 to 4 years, and this will probably only go higher as we introduce new assets. We've got 8 products under development on the respiratory side, 2 of which are going to get into clinics very shortly. I can come back to the U.S. later if anyone has any doubts, and feel free to reach out to us, but we're very excited about this opportunity. Coming back to our largest market, which is the one -- which is our India market. And we have 3 businesses servicing the market. We have a consumer business that services it. We have a prescription business, which is our largest. And we have the generic business, which is #1 in India. And I think the beauty is that all these 3 businesses combine synergistically in terms of being able to offer a right portfolio, in being able to offer the clout that we can bring in distribution as well as taking the access card and going deeper and penetrating deeper into India. And that's what our One-India strategy is about. And the One-India strategy is really about trying to grow the chronic franchisees faster. It's about trying to consumerize our businesses in India, which have the potential to consumerize as well as trying to grow this disproportionately faster with the right focus on productivity and EBITDA. And that's our entire One-India strategy. We've already seen an expansion of almost 300 to 500 basis points of EBITDA under entire One-India framework as well as we're beginning to see synergies across the 3 businesses as brands move from our generics business to our consumer business. And if you go to the next slide, we're talking about our prescription business. And in the prescription business, as you can see, we enjoy leadership positions in the asthma and the inhalation space, in Urology. We are now #4 in cardiology, trying to expand that even faster. And among the chronic categories in IPM, we hold the rank of #2. So it's a relatively strong business. The business should grow faster. We have 19 brands among the top 300 and good brand franchisees with revenue potential. Revenues in India, when they cross INR 100 crore, which is roughly close to $15 million, they consider big brands. And we certainly have a fair number of them. So we're trying to expand our depth in portfolio. This is the mother business of Cipla, and the goal is to keep beating market growth here and -- if you look at the business in totality. On the next slide, we're talking about our wellness aspiration. And some part of -- a large part of this wellness aspiration is being able to consumerize parts of our business like the vitamin segment, the pain segment, like a segment which is around lozenges, which lend themselves to consumerization. And it's our goal that at Cipla today, the consumer side of our business is today less than 5%. We want to make this almost 12% to 15% in the next 3 to 5 years. And I think that's our goal. These businesses typically are more sticky. They create more value, and the transitions are -- and multiple transitions are fairly significant in the businesses here. So we have this aspiration for India as well as for South Africa. And in India, the business is growing at 30%. It's already almost $50 million plus on size. We are hoping to take this much bigger as we will in South Africa as well, which is the second place where we have a consumer -- a very solid consumer business. So consumer -- creating a consumer potential in the business is a strategic aspiration for Cipla, and we're well underway into doing that. And in the next slide is really about a generic and the consumer business. We've spoken a little bit about this. But I think one of the things that is important to highlight is how our brands have shifted from one business to the other, and our consumer business today sells almost -- I'd like to believe 6 brands that have shifted and eventually will sell close to 12 brands that would shift. And this would add tremendous clout to the ability to scale -- in our ability to scale the consumer business going forward. The next slide is about our South Africa and the Global Access business. We call it SAGA. And in SAGA, as you can see, this is a really strong business, probably growing more than 40 quarters higher than market. We're at rank 3 here. I think Aspen and Adcock are #1 and #2. We are #3. We are growing relatively fast. You can see leadership positions in respiratory and CNS and #2 positions clearly in cardiology and some of the other therapies that are listed on the slide. We expect to continue to grow above market growth, and the target is to take that growth almost 200, 300 basis points higher. We have a nice advantaged portfolio in HIV and the rest of the portfolio, and I think that lend to SAGA being a very significant portion of our business. And coming to the next leg of our business, which is emerging markets in EU. Again, the focus on creating new -- 2 new markets, but also growing the depth of our business. We've got solid partnerships here. We operate in almost 60 markets, and the focus is really trying to develop these markets going forward. So we believe this forms a nice hedge to our businesses and a great -- offers a great diversification slate for our businesses across the world. Digital has been a very, very strong part of our story in the last 12 months. And it's -- we have several digital initiatives ongoing. There are initiatives which basically start from how people are inducted into the organization, all the way into automation and quality and manufacturing and the digitization of data as well as outreach initiatives to patients. And we believe that digital story can unlock significant potential in terms of the business profitability going forward. And it's early days, but we've tried to set up a transformation office. We have a digital advisory board, and we are well underway into this journey. We'd like to reimagine our business being more digital in the future. And I think -- we'd hope that the industry takes -- we hope that the entire industry changes in the segment. Compliance is integral to us. We're talking about this in the next slide. And you can clearly see we've got -- we're audited by several authorities. We also have several facilities that have -- of course, the last year has been one where the FDA has not visited. But we've been under the scrutiny of compliance through various audits by various authorities, and our record has been satisfactory. And of course, we have 1 site, which is under a warning letter, which we are hoping to remediate as soon as the COVID restrictions lift. ESG and its compliance and governance is a very strong part of what Cipla does, and we've been winning some awards on the integrated reporting that we've done. And this is also getting exercised through -- this is also getting recognized through the various governance initiatives and the amount that the Board is putting together in trying to make Cipla more well-governed organization in the past 3 to 5 years, and will continue in the future. And our ESG road map -- ESG map is very clear that by 2025, we want to be a company that is carbon-neutral. We want to be water-neutral. We want to have zero waste to landfill and also drive stewardship in antimicrobial as well as making sure that safety is the top of the entire agenda for the company. And if you look at what we're looking forward to, of course, the ROIC expansion should continue. We have seen a bump-up in this year, but our long-term target is to stay in the 17% to 20% range, which is quite significant because if you look at where we were a couple of years back, we were about 7% or 8%. So I think there's been strong movement here. Cost controls are important in the business being exercised as well as trying to look at the right decisions from a capital allocation and capital strategy mix. So I'm coming to the last slide, which is we're recapping our priorities. It's really about expanding, becoming -- expanding in the lung leadership area, trying to become the #1 seller of devices across the world, offering new innovative solutions in the lung space. This is a science that Cipla knows relatively well, and through this, maximizing the value of opportunity in the U.S. The second is obviously maintain market-leading growth in India and South Africa to above market, also create a consumer business that can be 12% to 15% of our overall revenues in the markets of India and South Africa and create an execution model for our emerging markets business, where we believe that we would be able to take this business significantly higher and offers a great diversification thesis to our story as well as move the needle on digital, create more productivity in the organization, more profitability and continue to stay high on compliance and lead to ROIC expansion of about 300 basis. So that is what I wanted to tell you in a summary and a snapshot, and thank you for taking time and being with us and being part of the Cipla story.

Since we have some time, if I could ask you some follow-up questions based on the presentation and investor queries that we usually get. First, there were 2 points that I wanted to pick up from your presentations. The ROIC expansion that you've mentioned from the 17% to 20% number, if you were -- you briefly mentioned cost control and capital allocation, obviously. But could you give a little more color on what would drive that ROIC? How much of that is dependent on that incremental revenue opportunity that you talked about, the $300 million to $500 million? And what incremental investment would be required to get to that 17% to 20% number?

So I think, Neha, the part of the ROIC story is cost, but part of it is making -- for example, we are diverting a fair amount of our capital on respiratory. right? And I think that's one of the areas where when you have focus in the organization, your metrics begin to respond to that. So I would think a large portion of the $300 million to $500 million will contribute to ROIC expansion. In fact, our story this year has also been helped by some launches that we've had in the U.S., and it's a clear reflection of that. And we like this category of respiratory because eventually, even if you have 4 or 5 players, the market kind of stay stable as compared to some of the others. Now it's no slam dunk to get products approved, so we have to be humble to the challenge of execution here. But I think it's -- that's the whole model. So my guess is a lot of it, 60%, 70% of it's going to come from the new launch momentum and about 20% to 30% will come out of focus on cost.

Is it fair to assume that the other businesses like your emerging market business or India market are probably at peak returns from where we are? So is growth more important there to maintain that return?

Yes. That's a great question. I think we are at very healthy returns in India. We're at very healthy returns in some of our other markets like the emerging side of the world. And there are agendas just to try and make sure that we stay at that level but also push the top line growth higher. So I think that's where we want to go. Now you might see some expansion here, but realistically, from today, this year's case, I think we've seen a bump-up because of obviously the COVID environment. But our objective is to really try and push revenues up higher in that section of the business.

Since you've mentioned respiratory, I know we are at the -- you're in a silent period, so I won't ask specific questions for the quarter. But in terms of Albuterol, post-Albuterol, if you could give us some color on what our pipeline looks like over the next 3 years in terms of what we have filed -- what we are planning to file. Any color there is appreciated.

So we're public about the fact that Advair is filed. We're public about the fact that we have a para IV challenge on -- a para IV filing on QVAR, right? We're also public about the fact that we have a partnered asset, which we've not named, with another generic company. These are 3 that probably you will see as launches in the next -- my guess is 1.5 to 2 years. Within the next 1, 1.5 years, you'll begin to see launches here. That's next for respi. And the regular respules, et cetera, will keep coming, regular respiratory products. I think beyond that, it's really the rest of the assets, I think most of what's in the public domain, we will be after. But that's our -- that's probably the pipeline, Neha, as we look at it.

And I think the other area that you mentioned was injectable, too. We've seen pretty much every company, every generic company, starting to focus on injectable. Do you think -- and usually given injectable ramp-up tends to be more gradual than your oral solid. By when do we see that as being meaningful opportunity? Is that 2 years away, 3 years away?

So we don't have a goal for injectable like I do for respi. For example, today, I can tell you that my aspiration is to create a fair amount of revenue out of our respiratory capabilities. In injectables, I don't think we would be a company like Fresenius, which is so deep, that we worry about it overall from a portfolio. But we have a nice selection of 4 to 5 key injectables that we think would create value in the long term. My guess is these will begin to unlock in the 0 to 2-year time period, you could begin to see some unlocking. A lot of the work and development is done, right? Some perhaps are even filed. And I think it's really about making sure that we execute on these going forward.

Umang, in FY '21, we did benefit from the COVID portfolio. But then before COVID, we had put the One-India strategy in place. If you could -- I know it's difficult to judge how the strategy is playing out. But in your assessment, has the strategy worked as per your expectations? And what is the end plan here? I mean what do you see One-India strategy achieving for us? Would it be market-beating growth, deeper penetration in certain therapies?

I think it's a mix of all. I kind of sense that we are 60%, 70% of what we set ourselves out to do on the One-India strategy. And I think there are reasons why there is 30%, 40% that we can't do, because they are outside the realm of our current operation. So if you really look at it, getting into patient services is very difficult, right? But that's an area we do want to go to, right? And that element is still being worked on. But if we were to look at brand shifting, our consumer business has already shifted. We've shifted a huge number of brands to consumer side of the business, and they have now gone into closer formats. They're not just in chemist stores, they've been refurbished. So that's working. What's working is deeper distribution penetration. That's working because our generic business is obviously clearly moving faster than what we target for. I think what's working is the focus on branding within the prescription business. And some of our key brands are moving faster than market, which is what we wanted to show. So I think there's a fair amount of heft in portion. There will be more that we will unravel, strategies about a year old. But I'm quite pleased with where we are. I think we can do a lot more.

The one point I missed on the U.S. is to ask you, I didn't see it in your presentation, U.S. specialty. Post the CRL to Avenue, how are you assessing your plan for the U.S. specialty market?

So to a large extent, the specialty strategy will obviously be linked to tramadol, right, because I think that was the lead asset. And we've not included it because I think we have to get through the process where we respond to the CRL. And after that, it will be relatively clear. So our partner company in Avenue is going through that, and we don't want to comment on their behalf. They're public. They're a public company as well. And they are in silent period and this is fairly stock-sensitive, so we don't want to make a comment at this stage, Neha.

Understood. And on your balance sheet, you're a net debt company now, will generate massive cash flow given the strong launch momentum that we have had. In terms of capital allocation priority, would you -- would this be mostly organic growth? Or are you open to BD opportunities and where would that be focused on?

So we would be open to BD opportunities. We would be open to acquisitions, which are manageable to digest that -- we would be open to that. The question is -- I think the bigger issue is would you find something to do, right? I think the question. The 2 markets that we are most bullish about, of course, are the that home market in India and the U.S. If we can add some pipeline here, this will be great because we look at our business as just still being a little smaller than most of our competitors. So I think those would be 2 areas we would be open to look at it, but I don't see huge capital allocation that we'd be making to acquisitions.

Understood. And one last question, if I may. The COVID vaccine opportunity. I know we are not in the development part of the vaccines. But is there any way you think Cipla can participate in it, the distribution or given we have a strong institutional business? Your thoughts there.

So we'd be happy to participate in. I think if there is an opportunity, we would be very happy to participate in it. We've given it some thought. I don't think we have anything on the ground as yet, but we would be happy to participate in this.

Thank you so much for your time, Umang. I appreciate you taking time to do this virtually, and hope to see you live next year.

So do I. Thank you, Neha. Bye-bye.

Thank you. Thank you all for joining.