Lupin Limited (500257) Earnings Call Transcript & Summary

Hello, and welcome, everyone. Welcome to Lupin's Q2 FY '21 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference over to Lupin management. Thank you, and over to you, sir.

Thank you, Aditya. Good evening, friends. This is Kamal Sharma, and I welcome you to this earnings call for Q2. I have with me Vinita Gupta; Nilesh Gupta, who you know well; Ramesh Swaminathan, Arvind Bothra and also Vishal Rathi, along with some of the other co-hosts of this call. As you would have seen from the results that we have had a relatively good quarter, this one, where you see a growth of 9% Q-on-Q in the revenue line and a growth of 14% in the EBITDA line. Also the profit before tax has grown by 32%. Although year-on-year the revenue line and the EBITDA have been more or less flat, revenue line has been slightly low at 1% and the EBITDA line is flat. But what is happening in this quarter to see is that there has been growth all around in all our geographies. Just to walk you through all the financial details, I will now request Ramesh to take that up and thereafter the floor will be open for you to ask any questions. Thank you very much. Over to you, Ramesh.

Yes. Thank you, Dr. Sharma. And friends, welcome to a good set of numbers as compared to our recent past. This quarter, we saw a rebound in several ways. Sales for Q2 were INR 3,781 crores compared to INR 3,468 crores in Q1, a growth of 9% and a 1% decline over the same period last year. But I think you should also remember that last quarter -- last year, we had an NCE licensing income. And if you were to knock that off, sales were actually up by 2.9%. U.S. sales grew by 15% sequentially, USD 180 million vis-à-vis $157 million in Q1. And the reasons for the growth were essentially launch of albuterol, but we also saw generic -- the in-line generics going up in Q2. The India region saw a de-growth of about 0.1% year-on-year due to COVID impact on demand, especially for acute products. We're seeing growth in the market now, and we expect Q3 to be much better than Q2. De-growth in the acute products sharply reduced in Q2 as compared to Q1. However, we continue to outperform the market in focused chronic therapy areas as in the case of antidiabetics and cardiac. H2, we expect to grow by 6% to 8% overall, at least the full year to be around down that percent, 6% to 8%. API sales showed de-growth on quarter-on-quarter due to lower volumes in some of our key products. We've seen price stabilized at Q1 levels. Customers have shown strong growth year-on-year at 22.5% due to improved pricing as well as favorable products as compared to Q2 of last year. Sales for EMEA grew by 30.4% quarter-on-quarter due to pickup in demand in all markets as well as the launch of Etanercept in Germany through our partner, Mylan. Sales in growth markets grew by 8% quarter-on-quarter due to pickup in demand in most markets, led by Mexico and Philippines. Coming up to the gross margins. Gross margins were up at 63.5% as compared to 62.9% in the previous quarter. This is coming from an overall business mix improvement led by America, of course, slight moderation on the freight rates and, of course, the fruits of continuous improvement programs that we have been pursuing for the last several quarters. There's, of course, no significant impact because of ForEx in Q2 vis-à-vis Q1. And a very important development during the course of this quarter was on the employee benefit line. In Q2, we closed at INR 685 crores vis-à-vis INR 793 crores in the first quarter, obviously, a reduction of well over INR 100 crores, and this was led by, in fact -- in the last quarter, we actually had specialty restructuring, and there were some COVID-linked incentives, but we obviously took a lot of steps to contain the overall costs and the benefits are there for you to see in Q2. We expect this to continue, though, of course, we do believe that Q3 would be slightly higher led by increments which would be declared. In terms of manufacturing and other expenses, this is something that came up on various calls that I've had with investors over the last several hours. I'd like to say that manufacturing and other expenses in Q2 was INR 1,186 crores as compared to INR 958 crores, an increase, of course, but the increase was driven by ForEx essentially, because of ForEx losses because of higher R&D spends and, of course, sales promotion expenses. There are also certain onetime costs contained in here, and we believe that our focus on SG&A expenses will continue, and you would see this bearing fruit operating leverage really clicking in, in Q3 and Q4. In terms of ETR, we've taken a number of steps as could be seen in the results itself. There has been tremendous improvement. The full year ETR, we believe, would be around -- in the mid-30s, a little around that. If you look at the EBITDA margins, which is the most important thing, we believe that we have delivered tremendously on our promises. And the reasons for that are pretty [indiscernible] gross margins as well as the improvement that we saw on the manpower line. And of course, I explained to you the manufacturing and other expenses. We believe that the -- we would deliver on the promises we made. If you recall, I guided for 19% to 20% at the beginning of this year, but I also said that because of COVID, things are a little fluid. We now believe strongly that going forward, there would be a tremendous improvement in EBITDA. You would perhaps see that we would see Q4 at around 18.5% and over time, we'd be back to the 20% to 22% that we were always known for in the past. With this, may I hand it over to the floor for perhaps questions from your end?

[Operator Instructions] I will first request Nikhil Mathur to ask your questions.

Am I audible?

Yes, yes.

Yes. Yes. So the first question I had was on the other expense line. Now if I look at other expense that has been recorded this particular quarter, they are broadly in line with what it was pre-COVID and it is also on a quarter-on-quarter basis, whereas what we have seen in certain other peer set of yours is that the other expense line has seen quite a bit of rationalization, especially in this COVID environment. So can you throw some light why there's some divergence between what's happening at Lupin and probably at some of the other companies out there?

I think I answered this at the outset itself. There was, of course, a higher component of R&D expenses. There's also a normalization when it comes to field operations in India and other parts. There are certain one-off items which are contained in there, and there's, of course, partnered products in America. So there's an element of that. So all of this actually were contained in this line, and that's the reason why you find that it is what it is.

Okay. Does this line item have anything to do with still some remediation costs that might be ongoing or they're completely over now?

Sorry, second part of the question?

Does this line item still have certain remediation costs for the plants which are still yet to be inspected or that is completely over now?

A large chunk of that is more or less done. So we are now waiting for the inspection to happen. The FDA doesn't really believe in virtual audits, so to speak. So it isn't because of that. So we think it's over, expenses on account of that, that is.

Okay. Okay. And another question I had on the U.S. part of the business. Now I imagine that Glumetza was launched sometime towards the end of the quarter. Albuterol also came in towards end of August, 1st week of September. So isn't it the way it functions is that you might have shipped inventories worth, say, a couple of months or 1 month or even 3 months for that matter and the numbers would have been a bit better than what have been recorded? Or the inventory that have been shipped for albuterol or Metformin are pretty much taking care of the month in which they have been launched?

Yes. So it was at the tail end of the quarter, tail end of August and September and not really supplying a couple of months' worth of inventory, like a typical launch. And it's -- we're ramping up our supply of albuterol and so are continuing to supply additional product in this quarter and would expect that by Q4, we'll be at a very good level with albuterol supply. So no multiple months' worth of revenues that you see in this quarter. Likewise, in Glumetza generic launch, relaunch, we were very pleased to relaunch in September as we promised and have been able to gain share. There was a disruption in the marketplace at the time that we relaunched much like when we had to recall the product, and we're again ramping up share there.

The next question is from Nithya Balasubramanian.

So a couple of questions on the U.S. business. So last quarter, you had mentioned that the flu products hadn't performed well. Can you update us on whether that's picking up in sales? Is that reflected in Q2 or not yet?

Actually, Q2 was the lightest from a flu product standpoint, Nithya. It was -- tends to be the lightest just given the seasonality, and we haven't seen really the flu season kick off in a major way. We are tracking that very carefully, hoping that in Q3 we're going to see an upside from the flu products. So I'd say all of the anti-infectives, Tamiflu and the cephalosporins, azithromycin, all were down versus Q1. But really, the other in-line products had a very strong performance. And then addition of albuterol as well as relaunch of Glumetza also helped us grow Q2.

So albuterol, if you can tell us a little bit about what the pricing environment is looking like and how -- if you can give us some color on your market share since you have been able to launch the product.

Yes. So it's very early days and as I mentioned that we are ramping up supply of the product to meet the demand, we see a very strong demand at this point in time, in particular, given the changes in the marketplace with Perrigo having recalled their product. There certainly is a gap -- demand-supply gap at present. So we're trying very hard. Our team is working very hard to meet the demand as much as we can. And the pricing is holding up, as you can imagine, again, given that Perrigo is out of the market, and we are the only 2 generic now to ProAir on the market. So pricing is holding up.

If you can share with us what is the discount level compared to the brand pricing prevailing now.

Yes, I won't want to comment on pricing, in particular.

Fair enough. Just one last one on the manufacturing and other expenses. So Ramesh, you had mentioned that there are some onetime costs in the number. If you can help quantify what that is and -- so that we can understand what would be the new level.

No, it's actually not a very significant amount. It's about INR 10 crores to INR 15 crores. But we can also take it off-line.

[Operator Instructions] Next question is from Neha Manpuria.

This is Neha from JPMorgan. I have 2 questions. First, on the India business. Given our strong presence in chronic and our opening remarks about our outperformance in chronic, could you explain the reason for the muted growth that we witnessed in the India market, some color there? And a follow-up question on India. Ramesh, did you mention 6% to 8% growth for the second half or for FY '21?

Second half. Maybe I can take the first part. So you're right. So I think compared to our peer set, the proportion of sales that we get from chronic is perhaps the highest. Obviously, we've had strong sequential growth. The year-on-year growth is flat. The chronic part has actually done fine. The acute is, even sequentially we only had 2% growth. I think the -- on the acute side, our feeling is that the bigger brands have done better. And other than that, people who don't have a very large acute portfolio such as ours have not fared well in this market. Again, like Ramesh shared, we believe that the market is bouncing back and it certainly has in September and in October. We see probably in the second half market growing 4% to 5% year-on-year. And on that backbone, we believe that we'll grow 6% to 8%.

Understood. My second question is on -- Ramesh, on the operating margin guidance that you mentioned, 18.5% by fourth quarter, could you just highlight some moving parts on what would get us there? Because you seem to indicate a higher employee cost, other expenses, I understand. Again, R&D remains a moving factor. So what essentially would be the key driver to take it to the 18.5% number in the fourth quarter? And I'm assuming this includes other income.

Yes. So Neha, as you would recognize, it's actually a function of several things. Firstly, on the product front. So we'll have the full measure of albuterol coming in, and it's a flu season. So obviously, America will perform much better, Tamiflu and a host of other products as well, cephalosporins and the like. We expect normalization on the freight front as well. Of course, there's continuous improvement on the -- with various initiatives on the gross margin. So we think that gross margins could -- tend to be a little higher than what it is to date. And when you come to the manpower parts, so whilst I said that there would be a slight increase in Q3 and that will sustain in Q4 also, it's just that it's coming out of increment. So you don't expect a radical shift really. It will be tens of crores, so to speak. It will not be huge, so to speak. And of course, there's a tremendous focus on costs, especially when it comes to in fact sales and promotion expenses and the like. So all of this will certainly bear fruit, and we think that we should be programmed for something around 18.5% as a run rate going forward for Q4.

I'll just add, Ramesh, that on the manpower cost, just to put it into perspective, we've been able to reduce it to 18% of net sales and should be able to sustain that going forward.

Next question is from Kunal Dhamesha.

This is Kunal from Emkay Global. So the first question is, again, on the EBITDA margin guidance of around 18.5%. So what kind of flu season have you built in? Have you built in a similar flu what you have seen in the last 2 years? Is that the right or fair assumption to make in your guidance of 18.5% margin?

So actually, the major driver there is more albuterol ramp-up and the other product launches as well as flu season products kicking in. But we are assuming that the flu season is a little bit late. So -- but given the albuterol ramp-up plus the in-line products ramp-up, we are still in the process of ramping up levothyroxine. And we have other new product launches in the next -- this quarter as well as next quarter. I mean we have tacrolimus, mycophenolate and our partnered products, posaconazole, another one in our partnered products, dimethyl fumarate that we are planning to launch shortly here in the next couple of weeks. So it's a combination of all of those, including some increase in the flu season products.

Okay. And second, I wanted an update on the status for Spiriva in terms of any TAT date that we have got. And when does the 30-month stay expire? Have you heard anything from FDA on that product?

Yes. We are in constant dialogue with the FDA on the product, and we're on track with all of the reviews from the agency. I mean, as you know, the product launch date is not until June of '22. So we feel pretty good to be able to get approval in time. And also [ are hearing ] so far that there has been no other company that has made progress on the development front. So feel pretty good about our position.

Next question is from Damayanti Kerai.

Damayanti, you're on mute.

Am I audible?

Yes.

Okay. Okay. So first, a clarification on the staff cost front. So Ramesh, you mentioned in your opening remarks that last part of the decrease, which we have seen in second quarter, was due to restructuring in the specialty business. So I assume that's related to SOLOSEC front, and it should be structural change, right?

We also had some expenditure reduction in parts like Brazil and the like. There was also some income coming in because of the CARES Act in America. So all of this actually brought the staff cost to the levels that it did. So as I said, it could bounce back slightly. But as Vinita correctly pointed out, we would think that the -- there will still be a 200 basis points reduction vis-à-vis the previous year.

Okay. So 2Q broadly serves as base going forward with some increment in line with business growth, right?

Business growth and, of course, increments, et cetera, which would be accounted for normalization of that and so on.

Okay. And my second question is, can you share some update on your injectables portfolio because you always mentioned that it will be one of the critical growth drivers for your U.S. business. So if you can share some update and how do you see this part of the business shaping up in the next 3 to 4 years from now?

Sure. We made tremendous progress on the injectable portfolio. I'd say from a business growth driver within the next 3 years, right now, the inhalation products will really drive the next year or 2. The injectable products will also start. We have kind of focused around 4 areas. We have our iron colloid products, peptide products. We have our depot injectables out of Netherlands. And we have our partnered products, in particular, with the liposomal products that we licensed from ForDoz. We have made progress across each of these areas in the last couple of months and quarters. I would expect us to launch first one of our peptide products, ganirelix in particular, that we're getting ready to file this fiscal year. That will come in the next -- as soon as we file, 12 to 18 months, I would think. So it would -- we would hope that it's launched in the next fiscal year. And then our iron colloid products as well as -- will follow that. And then both the Nanomi depot products, paliperidone and risperidone as well as the liposomal products, doxorubicin and AmBisome, will be in year '24, fiscal year '24 to '25. So that's roughly the evolution from a launch perspective. We also have on the injectable side kind of where we -- there's a good synergy with biosimilars. So we have the pegfilgrastim product that is progressing very well in development. We hope to file that later this fiscal year. And the commercial strength that we have started to build on the institutional front is something that we leverage across both biosimilars as well as injectables. So I'd say in the next 2 years, really the peptide products plus pegfilgrastim will start contributing.

Sure. So would I understand in near term, it will be more on the portfolio buildup and any sales which we should expect meaningfully coming to our numbers should be starting most likely after FY '23, '24 timeline, right?

Yes, that's right.

Okay. If I may just squeeze in one more. Can you just provide an update on biosimilar Enbrel launch in the Europe? So which all other countries you will be targeting in near term after Germany? Have you launched in any other market after Germany?

Yes, it has been launched in October in Finland and one more -- Croatia. And in the next couple of months, in the fiscal year, we expect to see the product launched in France and Belgium as well. So there is a full plan to launch it across all of the key markets.

Next question is from Prakash Agarwal.

Yes. This is Prakash. Hello?

Yes, Prakash. Go ahead.

Yes, we can hear you.

My question is on Somerset. So I understand that the inspection is done. If at all you can confirm that. And do we expect the resolution of OAI? Or what is our current understanding? If you can comment there.

Sure, Prakash. So the inspection is not done. It is still ongoing. So we will not speculate, obviously. And it has been a little bit longer, the inspection, because of the fact that through COVID, it's been a little bit of a challenge. We actually had a COVID case, which led to a hiatus of 2 weeks. But we're very pleased that through this challenging time, the FDA has made time to come inspect our facility, and we'll hope for a positive resolution.

Perfect. All the best for that. Secondly, on the U.S, if I heard that correct that you're expecting a ramp-up more so from Q4 on albuterol, not the current quarter when it's really in a sweet spot given Perrigo's withdrawal. So what is the key bottleneck in terms of ramping up? Is it the -- I mean, the compound, I think you had enough time to prepare that? Is it the bottling? Or what really goes into that, that it takes time. And also seen from your -- the competitor Cipla also took time. So is it product related? Or is it like other vendor related? If you could help us. And that's how why you think Q4 would be more appropriate in terms of ramping up?

Yes. So I would hope, at least we're working towards doing more also in this quarter. So you will see a little bit of a ramp-up, but we'd like to be at a different level with the product just given the demand, the current market situation. And that we expect to meet really in Q4. It is a complex supply chain, especially with third-party vendors on the components for the device. And that is -- I mean the lead time is a little bit longer. But our team has been working very hard to ramp up, and we'll see some benefit of that in Q3 as well.

Okay. Perfect. And lastly, on levothyroxine. So I understand in your commentary, you've talked about ramp-up. But if we see the market share in Bloomberg, IMS, market share has been more or less stable or very marginally up. So we had this -- all the RLDs in place and the expectation that it would move up. And why we still think that it will continue to move up? And what is the current bottleneck?

Yes. So we have grown share a little bit, like you noticed, a couple of percentage points. I mean it's really from the 12% level to just over 13% level in the last couple of months in this last quarter. Or if you look at the share in terms of generic share, we have 16% share at this point in time. The reason I say we expect a ramp-up is we believe there is really more of a potential even with our existing customers to get additional pull-through versus what the forecasted demand, what the demand has been. So we're working closely with them to try to maximize that. And we haven't -- we're not done yet. We are still working on gaining additional share on the product. And so we'll continue to work towards it. But in the near term, we see the potential of really growing share just like we've grown in the last couple of months. We picked up really some small accounts that added to a couple of percentage points. But in the next couple of months, we expect really to have better pull-through with our existing customers itself.

[Operator Instructions] Next question is from Shyam Srinivasan.

Can you hear me?

Yes.

Yes.

This is Shyam from Goldman Sachs. First one, on the presentation, you talked about a quality action plan launched in July 2020 on the regulatory side. So what is this? And if you can give us some kind of -- what are the things that we are trying to achieve through this?

Sure. I can take that. So the quality -- the global quality action plan is really an overall transformative plan to address quality actions that come out anywhere. So it could come from an FDA inspection. It could come from any other inspection. It could come from an internal audit. And the idea is really, how are we implementing corrective plans fully. So it's basically a broader, deeper transformation being driven across the company and also ensuring that any actions that we take are assessed and then addressed across the company, across all our sites. It covers every part of the quality system. And it's just something that we believe comprehensively addresses any issues that agency or any other body finds out or that we feel that we need to address as well. So this is something that we had planned to launch last year. It was deferred. We finally launched it in July. And it's something which is very rapid. The idea is what are all the pending issues. So for example, one of the sets of issues that we had, obviously, was investigations. So what are the actions around investigations and how are they -- how is it being addressed across the company, making sure that all sites rise to exactly that same level across. So an overall management tool as well, but also something to just make sure that the right priorities get addressed on an ongoing basis.

And just some follow-up on that. The presentation also talks about desktop audits have been done at Dabhasa and Pithampur. Just some of the learnings that we have seen of that. I'm trying to tie it to Ramesh's point that FDA may not be doing desktop audits. So if you can just reconcile that.

So we've had other regulatory agencies like DGA do desktop audits, which are really -- so I think it depends on the inspector. It depends on the agency as well. So we've seen some people do a much more virtual kind of interaction, some people happy with just more of a document kind of review. As you know, the U.S. FDA does not have an approach aligned for remote kind of inspection there. There's been document requests. We've had a couple as well. A lot of other companies have had as well. I think those go more in the line of PAIs for facilities that are otherwise already compliant or even for new facilities for that matter. So I think it's a little bit all over the place. I think some of the regulatory bodies are just choosing to expand -- to extend GMP certifications. Some of the others are choosing remote interactions as well. We personally felt that the remote interaction was extremely effective. And like Vinita said, we'll love to see how we can engage with U.S. FDA to move some of our OAI or warning letter facilities ahead.

Right. Last question is on the top line guidance if there is any -- I know you have talked about India growing second half, but if you could kind of at least qualitatively tell us how should we look at the rest of the business, including growth markets, API, some sense on the top line.

Ramesh or Vinita, you would like to...

I can take on that question. So as I was saying, things are normalizing very fast across various markets. If you look at America, we hit $180 million. But we think going forward, it will be in the vicinity or slightly more. Q3 and Q4 would certainly be one up on Q2. If you look at India, as we said, we expect Q3 and Q4 to be certainly much better. And we expect -- we said that the growth would be about 6% to 8%. If you look at markets, the emerging markets, we talk about Philippines, Philippines is still a little under the radar because there seems to be a bit of a recession out there. But Australia, Mexico, Brazil, all normalizing very fast. And of course, there is Europe. Europe performed particularly very well in Q2. We expect that momentum to be sustained across Europe as well as South Africa. So we have, as Vinita said, we have NaMuscla ramping up. So we do expect overall growth rates to be around -- it will be in line with the respective region's potentials, but certainly, upward of 10%, I would say, for the company as a whole.