Lupin Limited (500257) Earnings Call Transcript & Summary

So Anubhav, we don't have an exact split right now, but the largest number would be from Nagpur, followed by, I believe, Indore Unit 2 and then Somerset, Goa is basically in the 20-odd kind of number.

So sir, Nagpur, we will be taking APIs from the Vizag facility or from the Tarapur facility?

So from -- it would be a mix. So the newer ones would be from Vizag and the older ones would be from Tarapur, but we also have Dabhasa. A lot of the APIs would come from Dabhasa as well.

Okay. But -- okay, to simplify how many launches you're looking to do next year, assuming we don't get clarity on any of the facilities that we have an idle site right now?

So we have 15-plus launches that we are expecting, Anubhav, which, of course, there are few that are major. But 15-plus without assuming any clearance of these sites. Then we'll have an upside, hopefully. I mean, if we can clear Goa and Somerset, it could be close to 30.

Okay. And in this 15, are you already expecting albuterol. So what's the timeline you are expecting for albuterol?

Yes, we're expecting albuterol as part of the 15, and we are hoping that for the top of the fiscal year, we get approval. And we have responded to the FDA in November and have had some communication back and forth. We hope to get approval first half of the fiscal year.

Okay. That's helpful. Now just 1 question that in the U.S., sales this quarter, they were -- we had a flattish sales sequentially. Now we did have Levo ramp-up market share, not substantially, but at least 1% market share ramp-up is we saw. Seasonally, sales was stronger, some Tamiflu was there. Why it was flattish sequentially?

So actually, we didn't have much in terms of ramp-up of share in Levo. We really saw our share pick up at the end of the quarter. So really started to see the impact in January in terms of revenues. And the flu season products, I think we had impact both in Q2 as well as Q3. A large number of the customers start stocking up for flu season in August, September. So...

And Tamiflu was basically flat between Q2 and Q3.

That's right.

Okay. Okay. I just have 1 more question. On SOLOSEC, what are we thinking different now? Because I was surprised, even last quarter, see typically...

Sir, this is the operator. I'm so sorry to interrupt, but requesting you to please speak a bit louder, sir. Next question is from the line of Nitin...

No, Anubhav, we could hear you.

That's okay. If he wants to join back, in a little bit.

Nitin Agarwal from IDFC Securities.

Sir, on the U.S., now, Vinita, how are we looking at the U.S. business? Because in the changed dynamics, are we -- there are -- when you look at the peer set, people are kind of tweaking their strategies. Either people are looking to go towards -- more towards a volume-oriented play or be little more focused towards specialty -- I mean, towards fewer but high-value assets. How are we looking -- I mean, looking -- how are we looking to -- looking at U.S. from a slightly long-term perspective, from a U.S. generic perspective for ourselves?

So a few areas that we are focusing on in, one, we started a whole journey on complex generics a couple of years ago and believe that we are at the cusp now of bringing a number of these products to market, starting with the inhalation products in the next year. We feel on the base business, which has, of course, gone through a lot of pressures over the last couple of years. There has been a fair degree of stabilization at this point. So feel pretty good about the base business that we have on the generic front, especially 25 products that are -- where we have a very strong position from a vertical integration standpoint as well as market share. So we feel pretty good about growing our base business itself based on the position that we have created as well as the supply chain agility that we have built in. And then, I mean, the material growth drivers are really going to be the complex generics, starting with inhalation, albuterol next fiscal year. And then into biosimilars, pegfilgrastim and Spiriva in the following fiscal year. So it's a combination of building on the strong foundation that we have in the base business and implementing the complex generic products on the generic side of the business.

Vinita, on the base business, we've seen -- there've been multiple companies in the sector who have sort of benefited a whole lot from the shortage situation, which the sector has been throwing up in the U.S. We don't seem to have gained much, despite we having a reasonably strong -- as you mentioned, a reasonably large base portfolio. Is there any particular reason which has prevented us from...

Actually, we have not, in this particular quarter. But if you look in the last 4 quarters, we have picked up share in our base business in the older products, wherever we had the opportunity. And we, again, picked up position in products where we could supply long term and not just gain from short-term opportunities, short-term windows. We have actually grown our share over the last 4 quarters.

Next question is from the line of Aditya Khemka from DSP Blackrock.

Could you just talk a bit about the domestic business? I mean, this quarter was looking at your pure revenues and growth, et cetera, this quarter seemed to be a little -- for the market overall, whereas our revenue seems to have grown only 9%. So what is it exactly that we are facing as a challenge in the business?

Sure. So the India formulation sales as some of the tender business that we take as well. But if you take the pure India branded formulations that grew by 10.6% in this quarter. We feel very good about -- we've always talked about 12% to 14%. We feel good about the number. I think it's come down probably 1% or 2% from what we had originally guided. And I think that's a function of GDP as well. I think there is a lot of exciting stuff that we're doing in India. I think as we did our budget a couple of days ago, which almost sounded like a strategy exercise because that's the number of things that we're doing in India. Just in the last year, we launched 3 new divisions. There's 1 more division that we're launching this quarter. We are adding people as well. There's a whole bunch of initiatives around patients, around doctors, around just the relationship management as well. There's a lot more analytics that are now starting to get available in India, which were never available before. So I think one of the things that we're rolling out in the next 6 months is a real effort versus return kind of assessment on an ongoing live basis, right? We've never had that. I think we've worked in a very -- in the same way as we worked for many years so far in India. A lot of that is changing. So very excited about India. I think the reach is increasing as well in terms of the representatives that we are adding. I think we are using areas like telemarketing to reach a wider populous. And I think in areas like inhalation, in diabetes, in cardiovascular, we have the best portfolios that you could imagine. And I don't think anybody, for example, in diabetes has a better portfolio than Lupin does. And there's a lot of room to grow. It's still a very fragmented market. So the Lupin story is going to be about, obviously, enjoying the market growth rate, but also taking market share. And I think that's something that we've done. In the course of the last 5 years, in the top 300, we had 2 products. We've moved to 9. We were #9, we have moved to #6. And I think there's a lot more room to grow in this market. There's a bunch of measures that we have for growth. And I think a lot of them also start falling into the domain of providing healthcare services, not just pure pharmaceutical.

Great. So could you quantify what percentage of our revenue comes from tenders? And are these standards like state and government tenders? Or are these like those state-generic tenders that you get from certain payers?

I think the only part we need to call out there is the TP business that we would do, the global institution business that we do, which gets sold in India as well. That's the one which comes into the numbers. Then the lion's share of this is the India business. But typically, there's lumpiness around the tenders. Now we fold the OTC business that we have into this as well. That's a single-digit kind of growth. The -- specifically, in this quarter, the tender part, actually, de-grew. So it may actually -- it makes the numbers...

Brings the number down.

Brings the numbers down. But the India business, the India-branded business is the number that we keep tracking closely. And like I said, that is firmly in the 10-plus percent range.

Okay. And just a query on the overall margin profile. So I mean, there have been a few questions on this. But even if you include your other income, the margin profile of 14% EBITDA, if you benchmark it on a -- against some of the companies of your size and profile seems to be extremely depressed. And now we don't have the luxury of larger products in U.S. like we used to have the metformin franchise, et cetera. So -- and you have, in the past, spoken of your cost initiatives, but it doesn't seem to reflect in the numbers, right? So what are the timelines that you as management are running with about achieving those cost objectives? What is the -- so that 18% EBITDA margin that we keep talking about, 18% to 20% EBITDA, even that number isn't really close to the benchmark that the rest of the industry of your size operates. So where are we really lagging when it comes to EBITDA?

So I think -- maybe I can answer, Vinita can add, but I think -- and why are we at 18% to 20%, first of all. I think we're at 18% to 20% because, first of all, we are seeing tepid growth in markets like U.S., specifically in the U.S. generics front. We are investing heavily in specialty. So there's a full burn rate going on, on SOLOSEC. And we are investing ahead of the curve on R&D. As you've seen on R&D, our spend is amongst the highest. And I think -- why is it the highest? It's because we have multiple meds on inhalation. We have complex injectables. We have a few select biosimilars going on as well. We feel very good about our portfolio. We feel very good about the R&D that we are doing. Obviously, we are very cognizant of the SOLOSEC burn that and I think we are very attuned part of the things that Vinita talked about even in the last 3 months was a new leadership team, a new head that we brought in for the specialty business. People like Alan that we brought in on the corporate development side are also extremely strong on the specialty side. And obviously, our focus is on building the -- building that part of the business. So I think there's more than commensurate burn happening on the specialty side. I think generics is at a low as far as the profitability is concerned because of the R&D spend that goes into that business as well, obviously, by itself. And if you were not to spend the R&D, there's a very high level of profitability. So I think it's -- that is a function of the R&D spend that we are doing. I think these I would call out as the big elements. And as we look and as we go forward, we obviously expect growth in generics. So not just in the complex generics, but in oral solids as well, we expect growth in the next 1 year, 2 years, as the case may be. We'll see the inhalation portfolio starting from next year, not just in the U.S., but products like Fostair in Europe as well. We see injectables. We've launched the first of our injectable in December, obviously, it's small, but again, the intent would be to build it forward. And then we've still not delivered from areas like Nanomi, so I think we are very happy with some of the progress we've made, but we still need to make filings, get approvals. So there's a lot of stuff that we are investing in right now, which we are not getting return on. But we could optimize that to make sure that if we were to bring that R&D percentage down by 3% or 4%, that will go to the EBITDA line. But I think we'll be cutting our long-term future, short. We see inhalation as a major growth driver in the future. We see biosimilars, even though we are only taking select opportunities, but we see biosimilars as a very solid growth driver as well. And on the third level, the injectables. We feel good about specialty, right, but we are also cognizant of the fact of the burn, right? So I think we're obviously looking at what is the best way to optimize that as well. So I think that's the reason why we always said that we'll stay at this 18%, 20%. We are also very cognizant of the fact that we were at 30%, remember at one point of time. So obviously, there's a slow steady creep, which will get us close to that kind of number. That's going to take 5 years. But I think the idea would be to basically improve by 1 or 2 percentage points each year, especially as the business takes off again, specifically, U.S. generics and the specialty.

Right. And these 4 other regions that we have APAC, EMEA, LATAM and ROW, just to get a sense on the overheads. How many of these 4 regions do we have our own personal foot soldiers promoting our product?

So in all these regions, so let's just start with APAC, in Australia and Philippines, we have our own onshore presence. Japan, obviously, is new. As far as EMEA is concerned, particularly U.K. and Germany and then South Africa. And then in LATAM, Brazil and Mexico.

Yes.

Okay. So you have your own foot soldiers in all of these regions basically.

And the other part in North America, Canada, we have our own team as well. But these -- this isn't right. I think we always called ourselves a transnational company. I think the idea was to go deep in select markets rather than go wide across.

Fair enough. Just 1 last question, if I may. On the number of MRs. So could you give me a sense of how many MRs you have in India? And what's the sort of trajectory that you expect there for the next 2 years?

So about 5,500 medical representatives, but if you take the entire sales team, it's more than 7,000. And the intention is to add anywhere from 300 to 500 each year.

We take the next question from the line of Shashank Krishnakumar from JM Financial.

This is Anmol. So my question is to Vinita. Vinita, you spoke about we're reaching an inflection point where a lot of our complex generic initiatives come to fruition. How vulnerable is -- are some of the assets to the regulatory situation currently? I mean, as we move closer to monetization, what do you worry about the most in terms of either an asset or a facility? And what are the vulnerabilities in the path of commercialization or monetization of these? Anything you want to call out would be...

I mean, they vary by platform. Obviously, some are more proven than others. Inhalation is a big bet for us. We believe that the agency is very keen on getting products to the finish line. But we have to still travel ourself up. We have to get product approvals to start monetizing it. So obviously, we are working very closely with the agency to make that happen. And you mentioned facility. Facilities, of course, is make or break. So obviously, we feel we are very cognizant of that as well. But as we look at some of these areas right now in the near term, you look at inhalation, which is important part of our growth driver in the next year -- next couple of years. And specifically look at the product filings, whether it's albuterol in the U.S., Fostair in Europe, Spiriva in the U.S. and the facilities they are from like Pithampur Unit 3, which has gone through FDA inspection, gone through European inspections, and we feel good about the ability to get approved for these products and supply out of there. Likewise, on the biosimilars front, which, again, is a material growth driver in the next couple of years, we have received approval in Japan. We have received approval in Australia. So expect that we should be able to get product approval also in Europe and then U.S., of course, for pegfilgrastim and other products in the future. So there have been, of course, the last couple of years, a lot of learnings along the way as we get closer to this point. But we feel good about our ability to be able to monetize this investment and this pipeline over the next few years.

That's helpful. And my second question is to Vinita. Sorry, if I sound repetitive, but ending this year with an 18% EBITDA margin and then looking north from there, we'll have some implicit assumptions in terms of operating leverage coming through or some of the remediation cost going away, regulatory situation at some of the sites improving. Some of the markets picking up and some cost being taken out structurally. So if you could just probably call out some of these drivers, so which take us back to 18%-plus margins on a sustainable basis. That will be really helpful because as of now, the road -- I mean, I'm not saying that you guys won't be able to do it, but it doesn't look that easy.

So I'll tell you what, I mean, Nilesh, of course shared earlier and I will just add to it. I mean, so if you look at the full year this year, we have achieved 18.5% so far, and we expect to be at that 18% or so level. And if you look at that 18%, it's really based on no material product addition so far. I mean, we'd hoped to get a good part of Levo into the year. We'd hoped to get albuterol in the year. But Levo is ramping up only now. Albuterol is delayed. SOLOSEC has taken a little bit longer. So obviously, if you look at the year, at least from one of the major growth driver, the U.S. and the major products from the U.S., we've had a few delays and are starting to see the benefits of these in the current quarter and the quarters to come. So that is on the one side. The second area is cost optimization efforts, which we've been working pretty hard over the last 1.5 years. We'll have some impact again in the coming -- in this quarter, but it's really a more material impact in the next fiscal year. So as we look at the next couple of years, I mean, certainly, we expect our EBITDA go up year after year and get to that mid-20s in the next 3 to 4 years. And it's a combination of really getting -- executing on our pipeline on the generic front and getting operating leverage on the specialty front as well as driving cost optimization.

I think just to summarize, I think the SOLOSEC burn will come down in the next year. The generic profitability will go up in the next year. India profitability will go up in the next year. R&D will basically stay flattish. And then obviously, the cost optimization measures will be taken as well. I think it will still probably stay in the 18%, 20% for the next fiscal, but hopefully, at the higher of that. And then, we'll obviously take it thereafter.

And also, just to clarify, the 18% to 20% that we are looking at is on operational basis. As you understand, the current year's base also includes income from every licensing so to cover that.

Next question is from the line of Prashant Nair from Citigroup.

Just a couple of small questions. So firstly, what would your effective tax rate be now that the intangibles are off the book going forward, where should we see that settling down?

Sure. So during the course of the year, we had talked of in the mid-40s or 44%, 45%. I expect that by the end of the year, it will still be in that range, around -- it will be in the 45 -- 44%, 45% range. But for the next year, we -- still we -- it will be less than 40%.

Okay. And just the second question, can you break down this quarter's U.S. revenues between generics and branded?

Yes, of course. So we are doing about, like I said, around $182 million that you said around on the -- on generics and brand was about $4.5 million.

Next question is from the line of Dheeresh Pathak from Goldman Sachs.

Yes. For the Philippines sales, which is reported in the press release, like this press release, it mentioned a different amount versus what was mentioned for Q2 FY '20 last press release. So last time when you reported Q2 FY '20, you mentioned that INR 440 crores in the local currency. And now you are mentioning it as a very high number which is $609 million. So is there some other statement?

I think we'll -- yes, I think we'll get back to you. We'll get back to you.

And the other thing, just continuing with what other participants have highlighted and also what you've been articulating towards that cost optimization measures and we are doing -- we are not seeing that benefit. For instance, in this quarter, when you are restating your numbers for the Kyowa divestment, there is -- you lost the sales and the gross profits associated with that business, but the other expense that should have gone down because of that business, you are not seeing that benefit in other expenses. So if you look at your September '19 and June '19 other expense, is at a much lower level versus what you are reporting for the December quarter. If you just work it out based on numbers which you are highlighting, at least INR 120 crores of quarterly other expense reduction should have been there just because of the Kyowa divestment. I mean, R&D is not sequentially up that much. So remediation and promotional -- I mean, can you just explain that why are we not seeing for efforts...

So -- yes, so I'll explain. So you are -- while you are looking at the -- so you are looking at the INR 1,220 crores versus the INR 1,240 crores, is that...

No, I was looking at the numbers, our pre-restatement and post restatement after Kyowa.

Kyowa goes through all the lines, so it's difficult to call out.

Right. I don't think there was INR 120 crores worth of expenses quarterly being carried in Lupin on the Kyowa account. But I think that's some of the restatement lines with that.

Yes, in some restatement. Like we said, the -- I mean, the INR 1,137 crores to INR 1,240 crores because if you are looking at sequentially, that number is standing out. That is on account of restatement. INR 1,137 crores looks lower, and that's why the delta looks much higher. But yes, there has been -- like we said, this quarter has got lumpiness on account of both sales promotion, higher sales promotion activity in some of the branded generic markets and a higher investment in R&D and the one-offs on the remediation, which we believe will go away in the near future. So INR 1,240 crores is not the number, which is a reference point. It is INR 1,200 crores, it would be lower, right? So yes, I think that's...

Sorry, R&D, the -- sequentially R&D has not gone up, why are you calling out R&D as a reason for higher other expense sequentially?

Sequentially, R&D has gone up from...

No, no, let me clarify, sorry. The comparable -- so the number that you are seeing, INR 435 crores, and that thing you are comparing that with the INR 422 crores, but that included Kyowa, right? So INR 422 crores that you are seeing now excludes Kyowa. So on a comparable basis, R&D has gone up.

What is the comparable R&D expense for the September quarter?

So I would say that...

About INR 20 crores up.

INR 20-plus crores. Yes, yes.

Sorry, say that again.

It will be more than INR 20 crores, closer to INR 25-odd crores.

Okay. And just to -- I mean, you should also give us some milestones that you are looking to achieve in your specialty business and a time frame that you are looking to achieve them, beyond which then you need to, like, for example, Gavis, you are writing off, right? And at the time of acquisition, we had over 3x change. But for SOLOSEC and other specialty, where you are investing in, at least as shareholders, we should understand what milestones and in what time frame you want to achieve them, after which then you should have a critical evaluation of whether that money is being well spent.

Yes. So at this point, we really consider it really a launch phase, still in the first 2 years. And we are seeing some silver lining from the efforts that we have made, especially the recent changes over the last 3 to 6 months. So to really take the current run rate as an indicator of what the product is likely to do will be incorrect. We are fairly committed to building a specialty business. Obviously, our very objective in making sure that month-after-month, quarter-after-quarter, we see improvements and are working towards it. At the end of the day, if we don't see that our promotion efforts have the right response, obviously, we will start optimizing the P&L wherever it makes sense. But at this point in time, we are seeing promotion responsiveness from the reps as well as the other promotion efforts that we are making. And we continue to believe that we'll be able to grow the product to a good scale to help build our women's health business.

Sure, sir. We take the last question from the line of Krishnendu Saha from Quantum Mutual Fund.

Just a broad question on the U.S. plant side -- plant issues and all. Just to understand, if we get the approval for the 2-plus, we launch 30 products. So on that note, for the last 2 years, how much have we spent? And how much opportunity lost for us has been there, could you just quantify for that? And how much in the Indian revenue is for the DPCO related?

So on the -- I think the opportunity loss is quite in line with what we talked, basically, it's about $40 million, $50 million a year from the 2 facilities. That remains the number because I don't think we are talking about day 1 or day 181, launches getting impacted. We are just talking about good, regular, oral, solid products that have got held back on account of the compliance issues. We haven't talked separately about the remediation efforts. But those expenses, while they are lumpy in this quarter, year-on-year, they are actually down. So those expenses are actually on the decline.

Sir, like how much -- the last 2, 3 years, how much would you spend $100 million, $50 million? Like at least send a gauge, sir.

No, I wouldn't throw a number out like that. But I think it's too many lines that this kind of stuff would go into. What was your question on the DPCO?

How is the Indian revenue in the DPCO right now?

About 23% of our products are controlled right now.

And Nilesh, one more question on the -- understanding the Indian front, we've got a high number of in-licensing products from -- for the Indian business like 40, 45, if I'm not mistaken, like, I could be off a couple of. So our strategy over there is to keep on building that pipeline. And what therapy focus is -- what -- how do we capture or retain the market share over there? Sir, how will -- a little bit of more flesh on the Indian side, if you can give us? Give me...

Sure. So I think on the India part, obviously, we've taken a lot of pride in building our in-license portfolio. That's not at the cost of building our own portfolio. One of the things that we identified in the last 2 years was to build out a lot more of our own portfolio as well, right? So you want to get the best of both worlds. You want to be able to do the in-license products, but you also want to be able to maximize the offering of products that you could do yourself. We've not done a good job of that in the past. But I think we've started working on that now. Obviously, as patent expiries hit and different other products are an opportunity to launch, we try to maximize our chances on that as well. So we would do that as much as possible. And we found that innovator companies are actually quite reasonable when it comes to that as long as we are doing adequate justice to their portfolio. But I think in-license will remain an important part of our business. But I think a lot of it was through the diabetes and cardiovascular products that we launched over the last 3 years. Going forward, we see in-license as important, but we don't see that many big products in these categories. And so we would see oncology products, we would see specific products, but we wouldn't see that much of this big in-license products. Those we would expect to make up from our own pipeline.

How much do you expect the volume growth for us for the Indian business?

So the volume growth is usually about 3% or 4%. And then on top of that is the new product -- new launches that we do, and the rest of it comes out of price increases.

And last question from my side, the in-licensing, I mean, we got, so when do we expect the next -- what is the timeline for the next opportunity for us over there? Any timeline over there?

Sorry, could you repeat your question, please?

The in-licensing income which we got last year.

The licensing income, so we don't see a milestone in this current fiscal, in FY '21. We -- the next milestone we see would be in FY '22. And I think both of those projects are moving along nicely. We have regular reviews, which have started as well. But we -- just in the nature of the development, we don't see anything in FY '21. We see the next milestone in FY '22.

And how big could that '22 number be? Any -- what is the significance of '22 in the whole scheme of things?

And there will be a significant number. Again, we've not called it out as a specific one, and really no sense in talking about it till we hit that milestone. Obviously, we'd love to come and talk about it when we do.

Sir, you may please go ahead with your closing remarks.

Yes. Thank you, everyone. I hope your questions were well answered. Just in case you have some residual doubts in your mind, you could contact Arvind or Rajiv to get your questions sorted out, and look forward to seeing you again next quarter. So thank you, and good luck.

Thank you.

Thank you. On behalf of Lupin Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.