Lupin Limited (500257) Earnings Call Transcript & Summary

Hello, everyone. Welcome to Lupin Quarter 1 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the Lupin management. Thank you, and over to you, sir.

Hello. Can I take it up now?

Yes, sir.

Good evening, friends. This is Kamal Sharma. I welcome you all to this earnings call. Just to open the call this evening, I would say that the present quarter has been kind of a mixed quarter for us. On one hand we were very happy to receive research income of $50 million. On the other, we have had a few unanticipated events on the operating side. And that's why I felt that this has been a bit of a mixed quarter. But for the coming quarters, the prospects of business remain promising, especially going by the ramp-up that we're going to see -- we are seeing currently in complex generics and the growth of the India business, which has been very promising for us. With that, we do feel that in the coming quarters, we would have a lot more promising performance as discussed with all of you. To give you the details of various parameters, I will hand it over to our CFO, Mr. Swaminathan. Thank you.

Thank you, Dr. Sharma, and good evening, friends. Friends, I trust that you and your families are all keeping safe. In a quarter that has impacted by pressures in the U.S., we are pleased to deliver 22.2% growth year-on-year and 12.7% growth quarter-on-quarter, bolstered by $50 million milestone received from BI in this quarter. Business without the milestone income grew by 11.4% year-on-year and 2.8% quarter-on-quarter. Quarter-on-quarter growth was driven by our India business that grew 27.2% and growth markets that recorded 9.7% growth. The Indian market grew 39.2%, including COVID therapies and 32.4% excluding these. The acute market grew 52.5%, and we grew 45.4%. The chronic market grew 19.4%, and we grew 22.6%. HCP attendance is back to 90% levels and patient footfall is 77%. Our call average is 9.6. We see high teens growth in India for the year overall. U.S. revenues were down sequentially due to competitive pressures on base business products, famotidine, in particular, because there was new competition which had entered. Albuterol, of course, there was spacing, transition from spot buying to long-term contracts. And there's, of course, this element of failure to supply due to supply chain issues that cropped up last year and that we have settled with our customers currently. Albuterol is ramping up nicely. And based on our commitments, it is on track to get 18% to 20% market share with a major pickup in Q3. Brovana AG has been a successful launch in the quarter, and we expect to contribute to growth in the current year. We remain committed to grow our U.S. business, both with our in-line products as well as ramp-up of albuterol and Brovana to continue above-market growth in India and, of course, ensure growth in every part of the business. And of course, we feel extremely good about our NCE efforts, and we are exploring ways to better fund the path forward, including a potential spin out. When I come to margins, gross margin as a percentage is down to 63.9% due to change in reporting of partnered products in the U.S. Royalties on partnered products were reflected in SG&A, manufacturing and other expense line and is now reflected in the gross margin's line itself. On a net basis, partnered products are EBITDA accretive. Gross margin was also impacted by change in sales mix insofar as India vis-à-vis America is concerned. And the U.S. margin has been lower, again, driven by increased competition and slower ramp-up of albuterol. While the quarter's profits were bolstered by Boehringer Ingelheim MEK program [indiscernible] despite a tough operating environment, we see substantial roof of growth. Employee cost was up versus -- vis-à-vis Q4, primarily due to increments in India and higher sales incentives for [ IRF ] given the significant higher sales in this quarter. Q4 last year was also significantly lower given certain incentive reversals in India. Amongst our peer set, we're the only ones who are able to bring down the manpower costs down as an absolute number in FY '21. We intend to maintain tight control on this line while ensuring growth for the future. Manufacturing and other expenses were down 8% quarter-on-quarter, and this is partly because of the reclassification of partnered products loyalty, as I spoke before, into COGM as well as the lowering of expenses across various clients, say, for promotion expenses, which went up because of increased business, especially in India. R&D expenses were 9.7% of sales, and we expect to hold this number tightly without losing out on opportunities. EBITDA without NCE income and ForEx loss stood at 14.3%, a level that we are not happy with at all after the EBITDA improvement that we have delivered through the quarters last year. We see meaningful uplift in the second half and remain focused on our journey of expanding margins through driving strong double-digit revenue growth and optimizing on costs while ensuring the safety of our people and the highest standards of compliance. While we see our business, in particular, in the U.S. improve quarter after quarter based on albuterol and Brovana ramp-up and stabilizing base business, we embarked on excluding additional optimization efforts across our manufacturing and supply chain, including tackling idle [indiscernible] costs for product categories where the demand has dropped. We are looking at finding solutions for areas like specialty, biosimilars and NCE, including spinouts. While we are not happy with our performance, we remain committed to improve our business throughout this fiscal. We expect revenues to grow double digits, both in India and other parts, including America, and EBITDA to be 17% to 18% in the second half, which is lower than our earlier guidance of 19% to 20%. We see meaningful bounce back in the second half, driven by increased sales in albuterol, higher base in India and growth across various markets. With this, may I open the floor for discussions.

[Operator Instructions] First question is from Mr. Kunal Dhamesha.

So first question on the EBITDA margin guidance that we have given. So I think I probably misheard. It's 17% to 18% in the second half or it's for overall FY '22?

We believe that the second quarter would also be a tough quarter for us. So we expect, in fact, the EBITDA margins to kind of ramp up in the second half. So we're saying about 17% to 18% is what we will be reaching in the second half of the year.

So overall, then FY '22 would be somewhere around 16%, 17%? And that would exclude the $50 million income, right?

Yes, that is correct.

Sure. And in terms of the albuterol, when we say that we continue to hold our target for 18% to 20% market share, is it the market share of the entire albuterol market? Or is it part of the generic albuterol market?

It's share of the entire albuterol market.

And where would we be currently?

We're right now roughly, based on the weekly, between 12% to 13%.

12% to 13%. Okay. Sure. And when you say that there was some settlement related to the failure to supply. So where that settlement has been recorded, in which line item in P&L?

It's been netted off from the sales itself.

So you would have supplied some quantity, which -- for which you would not have received some money. Something like that?

It's something like actually saying that there will be a penalty paid for the -- our inability to kind of supply in the past. So to that extent, it's netted off.

Sure. Yes. And lastly, if I can squeeze in. In terms of specialty in the U.S., the SOLOSEC, what would be our current investment from P&L after the rationalization of the costs?

Yes. Roughly $20 million in terms of EBITDA burn.

Next question is from Mr. Prakash Agarwal.

Am I audible?

Yes.

Couple of questions. So one is, what I hear or what I understand the signal right is, albuterol scale-up from 3Q. So I understand in Q4, you had mentioned that -- what the understanding was that you have got some stocking done and all and there is some normalization in Q1. But why signaling 3Q and not Q2?

So Prakash, we actually moved strategically from onetime buys because of our limited supply through Q4 into more longer-term contracts. And it's just the phasing of those contracts. Customers already had stock, and they are phasing in our products. So it's already started based on that 18% to 20% contracted business, but it's just a buildup...

Okay. And would the pricing be any different versus the short-term versus long-term contracts?

Yes. The long-term contracts are higher volume, a little bit lower pricing, but still very profitable, very high margin.

Okay. I understand that. And you think this opportunity remains a 4-player, 5-player kind of market, and you don't expect anything in the near to medium term, like, calendar '23 -- '22 is where we see more competition coming up. Is that a possibility?

Yes. We're not seeing any additional competition coming up. We haven't heard anything new from Perrigo on the ability to get back in, of course, tracking it very closely. So nothing in the next 12 to 18 months that we can see.

Got it. And secondly, on U.S. FDA issues around, we are hearing some companies seeing audits. Are we somewhere near to that? And is our CAPA plan fully done for the 3 plants, [ now 4 ]. If you could update there, please?

I can take that. So Prakash, as you know, we've told FDA that we're ready for our Goa Pithampur Unit 2 and our Tarapur sites. The status really remains the same. We don't have visibility at this point of time. We are aware that a few audits have started now. We believe they are mostly being conducted by the FDA India office. We've had remote interactions more for regular surveillance kind of inputs. But right now no particular traction on these 3 sites. Obviously, our goal is to remain in a state of readiness for imminent inspection at any point of time in these 3 sites.

Okay. And a quick one, if I may, on Brovana. Why -- AG, we had a filing? So what's the background here?

Yes. We were able to really get the authorized generic. That's allowed us to get into the market much earlier. And before any of the other competitors, it's proven to be a very successful launch.

No. But I mean I understand gross margins and EBITDA margins are in the range of 15% to 20% for AG, whereas we could have a long tail. So what's the -- I mean -- the cash flows you are seeing is much superior in AG versus -- I mean what's the logic here?

Both cash flow as well as margins. Margins are EBITDA accretive with our AG.

Next question is from Saion Mukherjee.

Am I audible?

Yes.

So on the U.S., the decline that you have seen quarter-on-quarter, you mentioned 3, 4 reasons for that. Can you just help us understand like how much each one of them contributed to this sequential fall of $20 million, $25 million that we have seen?

Yes. Please go ahead, Vinita.

Ramesh, please go ahead.

Yes. So I would say that there are 5 reasons why gross margins fell a bit versus, of course, famotidine as, obviously, there are 2 more competitors in there. obviously, we lost market share. And of course, the prices came down as well. We spoke about albuterol. We're getting into long-term contracts, moving away from spot purchases, and that's the reason why there has been a slower ramp-up. The third is, as a result, in fact, of course, royalty accounting. So we moved it away from manufacturing and other expenses into the COGM line itself. And to that extent, we actually have lower gross margin for that, and that's about 1.3% you could say. And there is, of course, this component of FTS, the failure to supply bit. And that being there actually brought down the salience of America in the overall scheme of things. So that means the margins, which should be higher, which are generally you attribute to America is lower. So that meant that the India business salience went up. So this is -- the mix actually contributed to the overall margins being lower.

Ramesh, I was just looking at this fall that has happened. How do you quantify this? I mean out of this $20 million, is it like $10 million famotidine or albuterol? I just wanted to get a sense of the major components of this quarter, this fall in U.S. revenues.

The margin?

Not the margin, the revenue number itself like from sequential EBITDA.

So we're not going to quantify by product, but I would say top down, it is albuterol, FTS, famotidine and a couple of other baseline products also like metformin and levothyroxine that saw pricing pressure because of additional competition. That is top down.

Okay. And Vinita, just on pricing pressure. So we are kind of hearing multiple things from multiple companies. What is your take on this? Why are we seeing this sudden increase in sort of -- it feels like there is a spurt in pricing pressure. I mean we are at a time when you see a lot of inflationary pressures in general, freight costs are high. So what is the economics working out in your base business? And what is your take on what's happening in the marketplace as far as general pricing environment is concerned?

Saion, the pricing environment has been tough, especially in the last couple of months. One major event was Econdisc broke out of the WBAD consortium to independently run their GPO and open their whole portfolio to a bit. So that really got companies aggressive from a pricing standpoint. Second, because of the FDA slowdown of inspections and, therefore, approvals, we've seen more competition on existing products than approval of new products. And third, I'd say, some of the new wave companies that have gotten in, whether it's Alkem, Alembic, others, they have gotten more aggressive in trying to get share at pretty low pricing. So it's a combination of a couple of different things. And overall, just given the challenges that also our customers have this past year because of COVID, they've been trying to really make up for it in terms of the losses that they had, the margin loss they had by trying to really gain on the generic front. So that is, I mean, the pricing dynamic. But overall, as we look at our product mix, when we look at the last couple of quarters before this Q1, mainly with the ramp-up of new products that offset all the products, one feels pretty good about the ability to continue to increase both revenues and margins. Of course, this quarter, there's been a few unanticipated events. And also, I would say that from our perspective, transition on albuterol, that has taken a little bit longer. I'll be fairly confident of the ramp-up.

Okay. Just Vinita, I mean, if you exclude famotidine and the dynamics around albuterol, the other base business, what has been a year-on-year price erosion or quarter-on-quarter price erosion, approximately?

4%, 5%.

That's year-on-year?

That's right.

Okay. And just one last question from my side before I join back. In the opening remarks, there was a mention about possibility spinning off of NCE research, biosimilars and specialty. I just wanted to get a sense of what you're thinking here? And Vinita mentioned around $20 million annual impact on EBITDA from specialty. Can you quantify for biosimilars and NCE research as to how much of a drag is that on your EBITDA?

So each of them are roughly around $20 million, $25 million, totaling around $65 million with the NCE being at 25% to 30%, depending on how we progress our pipeline. So $20 million each in specialty as well as on the biosimilars front.

Okay. And anything on your timelines on what you're exactly thinking? Are you trying to raise capital here separately? And anything you can share on your plans here?

Sure. So on the oncology front, in particular, we have created Lupin Oncology in the U.S. with the idea of really bringing in third-party investors, mitigating our spend, our goal. And over the next 12 to 18 months looking to find ways and means of raising additional capital as we progress our pipeline. We have 2 programs, our lead programs that are going through IND-enabling studies there. So the thought was, as we file INDs in the next 12 months, that will be the right time for us to do a major capital raise around the oncology assets. So that is on the oncology front.

Okay. And anything on biosimilars...

We request you to get back in the queue as well because we have a lot of questions, yes? The next question is from Mr. Anubhav Agarwal.

One question, Vinita, is on famotidine, to start with. Now whatever was, let's say, earlier level for us, after 2 players entering and price erosion happening, how material this will be a product for us? Would you say this will be less than 5% or just around 5%? I'm not asking for number, but just trying to get a sense because I don't want to see another quarter where there is a [ down message ] and everybody gets surprised.

Yes. So I won't say -- I don't want to quantify the number. That is really sharing competitive information, but it is a material product for us, Anubhav, not as big as it was. We certainly did not expect 2 competitors. We were expecting one competitor to come in, but I was surprised with the second, but have retained 60%, 65% share on a very profitable basis. So it continues to be a material product for us.

Sure. And now if you look at our quarterly sales, famotidine really started ramping up for around 4Q '20, 1Q '21 quarters for us. So if I subtract from $172 million albuterol, let's say, just assume some number or supply that effectively, and if I were to take off famotidine as well, our base business has been completely significantly impacted more than 4%, 5% that you have mentioned about it because $172 million, let's say, give and take, you minus 15 for albuterol, you minus another 10 for famotidine, then our base business should have declined significantly more, right, let's say, a year back or, let's say, 4Q '20 level, of course, there's no growth, but I see a decline -- massive decline there.

That's right. We did see a base business decline over the last year, especially related to our supply challenges.

And when you see this, let's say, $172 million number, I'm just -- which quarter, for example? I'm just trying to get a round sense. Where do you see this business getting about $200 million mark? Would it be like second half next year? Or do you expect earlier than that?

We're hoping Q3 onwards.

No, no, Q3 of this year or when do you have Suprax launch next year, that's the Q3 you're talking about?

No, we're thinking Q3 of this year.

And that would be largely driven by albuterol ramp-up? Or is there any other product -- you've mentioned performance in the past, but is there any other big launch that you expect?

It's largely due to albuterol ramp-up, Brovana contribution as well as increase in in-line product share that we have taken back again. So it's largely -- so it's a combination of in-line products plus albuterol as well as Brovana. In terms of material product launches for the rest of the year, Sevelamer is one that we are planning to launch that looks promising to us. But -- and we have a couple of other launches that are smaller. Major contribution is still albuterol, Brovana and our in-line products.

Just one last clarification. In this quarter, average market share of albuterol, which would have been reflected in your number, what would you say? Because IQVIA now shows you around 13% plus. So what would have been a number which would have been reflecting in this quarter? I'm not -- yes, I'm just asking a percentage market share number, which would have reflected.

Yes. So the percentage market share, like you said, the IQVIA numbers, the 13% is where we are at in terms of the prescription pickup. But when we look at the contracted share with our customer base, the long-term contracts, it's in the 18% to 20% range, but it's building up. This quarter does not -- revenues don't reflect it because we had some phasing of one of our wholesalers bought in the last quarter and switching into the longer-term contracts, which started at the tail end of this quarter, this past quarter. So that's why you don't see the impact of the 13% or so within the quarter. I don't know if that was clear.

Yes. Sure. I was expecting that would this quarter have reflected more like 7%, 8% share which IQVIA shows? Or you were saying that you already had 13% share, but it was under the transition. That's why it's not [ probably reflected ].

It's really under the transition from an inventory standpoint from the wholesalers versus our customers, longer-term customer.

Next question is from Harith Ahamed.

Yes. My first question is on SOLOSEC. We recently had an approval for an additional indication there, which is trichomoniasis. So does this materially change the revenue profile of the product? How should we think of the opportunity here? And on the commercialization plans for this additional indication, would we be incurring incremental SG&A for this?

So we're very pleased to get the indication approved. However, we have been very tight in terms of controls on our spend. From a marketing standpoint, within that -- those controls, the team did a stellar job of putting together a full new campaign that they launched around the trich indication. And so it was just launched a week before last. It was a successful launch, and we are hoping that we see an uptick from this launch over the next couple of weeks, certainly in the rest of August and September. We are very keenly looking forward to the uptick in scripts from SOLOSEC and believe that this is really the material inflection that will determine how much we continue to invest in the product.

Got it. And my second question is on the respiratory pipeline. On Fostair, we've announced approval in U.K. Just wondering what are the plans for the rest of Europe? Do we have launch timeline for the remaining geographies in Europe? And on generic Dulera, we filed last year. So any time lines you could share around this product and the patent situation or the -- with respect to the brand?

Yes. So on Fostair, very, very pleased to get that approval, and we are gearing up to launch it. It's actually being manufactured at Coral Springs, as we speak, to launch the product, hopefully, later this month. And then the rest of Europe, we have plans in place and partners in place to launch in Germany, France, Italy and Spain. And that will happen in the next fiscal year. So this fiscal year, we intend to maximize really the U.K. market. The rest of Europe is going to be next fiscal year. On Dulera, we still have -- we have a CRL pending from the agency, but really strong communication going on with the agency in terms of our filing and what additional information they need -- data they need from us. We expect to respond to that CRL later this fiscal year. I mean our priority was really -- we were -- we had filed one strength first and the high strength later. So our priority was first to file the high strength and then prosecute both together. So we intend to respond to the CRL later this fiscal year. There is no patent on the product. So the hurdle -- there is no IP hurdle on the product.

Next question is from Nitin Agarwal.

Vinita, on the biosimilars business, what are the thoughts now for our peg filing? I presume FDA inspection would be required. Now since -- any visibility on that? And then where do we go beyond peg now?

Yes. So very excited with the peg filing and the FDA accepting the file. We do believe the inspection will be required. But just based on what Nilesh said, the FDA started doing inspections through the local office in India. We hope that they can get to Pune to inspect our site sooner rather than later. And depending on the timeline of the FDA inspection, we hope that we are in a position to launch pegfilgrastim in the U.S. next year. Beyond pegfilgrastim pre-filled syringe, we're also working on the on-body [indiscernible]. So that is making good progress in terms of development [indiscernible] file it in the next fiscal year just based on the current timelines. But again, that would be an attractive product on the biosimilars front. And beyond the 2, I mean, we have ranibizumab that is progressing in our Phase III study. I mean it's slowed down a little bit because of COVID in terms of recruitment but still progressing. And the other -- we have other programs like denosumab and -- which come in later, EYLEA, which follows ranibizumab on the [ ophthalmic ] front that we are working upon beyond pegfilgrastim and ranibizumab.

And where is the carving out of this piece, I mean, how does that...

Sorry, can you repeat your question, Nitin? I didn't catch it fully.