Lupin Limited (500257) Earnings Call Transcript & Summary

Welcome to Lupin Limited's Q1 FY '26 Earnings Conference Call. I'm Ravi Agrawal, Head of Investor Relations for Lupin. Thank you for your participation in the call today. [Operator Instructions] Please also note that this conference is being recorded. I now hand over the conference over to the management. Thank you, and over to you.

Thank you, Ravi. Hi, friends. I'm very pleased to welcome you to our Quarter 1 Fiscal Year '26 Earnings Call. I have with me here, Nilesh, our Managing Director; and our CFO, Ramesh; and of course, Ravi online as well. We look forward to sharing with you our highlights for the quarter as well as outlook for the year ahead. We are delighted to begin the fiscal year on a very strong note with continued double-digit growth in both revenues and profitability. Our margins have shown further improvement, rising by 330 basis points year-over-year, even as we increased investment in R&D by 150 basis points during the same period. Looking ahead, we are confident that this growth momentum will continue and reaffirm our EBITDA margin outlook for the fiscal year at 24% to 25%. The first quarter marked a significant milestone for our U.S. business. We successfully launched Tolvaptan with sole first-to-file exclusivity, resulting in our highest U.S. revenues since quarter 4 fiscal year 2017 when we had the Glumetza and the Fortamet franchise. And this is despite additional generic competition in albuterol. Our ability to seamlessly launch Tolvaptan through specialty distribution channels stands as a testament to the strong execution and commercial capabilities we have built in the U.S. We are confident in our ability to sustain growth in the U.S. market in the mid- to long-term with a strong pipeline across complex product categories such as injectables, respiratory biosimilars and 505(b)(2) products targeting brand sales of $150 billion. We expect complex products to really drive a significant portion of our growth and future business. Additionally, we remain focused on expanding our specialty business, both organically and inorganically. Coming to India region, we reported growth of 7.8% year-over-year. Within this, our India Formulations business recorded growth of 8.6% during the quarter, in line with IPM growth. While key therapies like cardiac, GI and VMS grew ahead of the market, and we've also increased our chronic share from 64% last year to 65% this quarter, LOE on certain in-licensed brands in the diabetes segment have had a negative impact on our growth rates. I'm particularly heartened by our respiratory franchise performance, which grew 18.5% as against the category growth of 12.2% during the quarter. Also on an MAT basis, the volume growth has been 2.8%, double the volume growth in IPM during this period. During the quarter, we successfully completed the transfer of our OTC Consumer Healthcare business into a 100% owned subsidiary called LupinLife Consumer Healthcare. We believe that this separation will allow the OTC business strategic flexibility to capitalize on the rapidly growing OTC market in India, while enabling the company to sharpen its focus on core strengths in the prescription drugs business. We are confident that our India Formulations business will continue to outperform the market, propelled by our extensive portfolio of innovative and in-licensed products as well as the broad reach of our 10,000-plus people sales force. The introduction of new products will be pivotal to our growth with more than 80 product launches planned over the next 5 years. As a major player in the cardiac and diabetes segment, GLP-1 products will remain a core part of our India strategy over the next couple of years. In addition, we are deepening our presence in GI, aiming to establish this as our fourth major therapy area. We're also focused on expanding our presence in oncology and CNS segments going ahead. Turning to other developed markets. We achieved a 17% year-over-year increase with Europe serving as a key growth driver, recording an impressive 28% increase for the quarter. These markets now account for 13% of our total sales, up from 11%, 2 years ago. Looking ahead, we remain optimistic about sustaining this momentum, led by a robust pipeline of complex and specialty products going ahead. Our R&D expenses as a percentage of sales stood at 7.9% for the quarter. We are especially encouraged by our recent FDA approvals for generic Victoza and glucagon, which highlight the progress we are making in complex injectables. We take pride in being the first Indian company to secure approval for a GLP-1 product for the U.S. market. Nearly 70% of our R&D investments are directed towards complex and specialty products. We have a robust pipeline with over 60 product filings planned for the U.S. market alone in the coming years. Our position in inhalation is expanding rapidly, not just in the U.S., but also across India, Europe and other international markets. In the complex injectable space, our focus is on developing depot injectant, peptides, iron colloid products as well as 505(b)(2)s. We've also established a strong model in biosimilars outside the United States and are well positioned to enter the market in the U.S. On the Specialty side, we are advancing a substantial 505(b)(2) pipeline and enhancing our portfolio with value-added medicines such as long-acting injectables, oral solids, IUD implants and green propellant-based products. These initiatives will require increased investment as we have indicated previously, and we anticipate R&D spend to be between 7.5% to 8.5% level in fiscal year '26. On the compliance front, during the quarter, our Nagpur Unit-2 site received its EIR, while there were some observations in the 483 issued for Pithampur Unit-2 and Unit-3 sites. We are confident of addressing the observations effectively and would like to reiterate that we are committed to ensure that all our sites are fully compliant with the FDA and other regulatory agencies around the world. Before I hand it over to Ramesh for a more detailed performance analysis, I want to reiterate our optimism regarding our future growth trajectory. The recent approvals for generic Victoza and glucagon and the expected approval of generic Risperdal Consta marked the beginning of our journey in complex injectable space, which will further strengthen our complex portfolio in the U.S. Looking ahead to fiscal year '27, we expect to bolster our momentum with key launches from a biosimilars pipeline in the U.S. as well. Our ongoing commitment to build a leading global specialty business, leveraging both in-house innovation and strategic acquisitions. We are confident that our focused investments in R&D, patient-centric approach to building specialty brands and continued efforts in driving efficiencies will drive sustainable growth in the years ahead. With this, I will hand it over to Ramesh.

Thank you, Vinita. And friends, I welcome you all to our Q1 FY '26 earnings call. This has been yet another quarter of consecutive double-digit growth across the top line and profits. I'm particularly pleased to highlight our EBITDA margins have expanded by 330 basis points year-on-year to 26.6% during the quarter despite 151 basis points increase in R&D during this period. Diving into the numbers. Sales for Q1 FY '26 came in at INR 6,164 crores as compared to INR 5,514 crores in Q1 last year, a growth of 11.8% year-on-year. Amongst the key markets, the U.S. grew by 24.3% year-on-year. India region has grown 7.8% and other developed markets have grown 17.4% during the quarter. Our GMV business grew by 16% year-on-year. The U.S. business. In the quarter, the U.S. business recorded sales of $282 million, a growth of 22.3% year-on-year and 12.8% quarter-on-quarter on a constant currency basis. As Vinita mentioned, this quarter was a pivotal one for the U.S. with the successful launch of Tolvaptan with sole exclusivity. This was offset by low generic single-digit price decline in our base products and anticipated impact of new generic competition in albuterol. We are continuing to execute on our strategy to improve our profitability in this segment with yet another quarter of strong profitability business from this business. On the longer term, we remain confident of consistent delivery of profitable growth through an increasing share of complex products in our portfolio. Coming to India, the India region business grew by 7.8% year-on-year during the quarter. Within this, the prescription business grew by 8.6% year-on-year during Q1 FY '26, in line with IPM growth. Chronic share being repeated was higher at 65% with key segments like cardiovascular, GI and VMS growing ahead of the IPM growth. The share of in-licensed products is only around 6.2% as compared to around 12% in FY '25, which also has a positive impact on our profitability going ahead. In so far as developed -- other developed markets are concerned, revenues in our other developed markets were INR 775 crores, representing a growth of 17% year-on-year. This growth was led by 28% year-on-year increase in Europe. Other emerging markets grew by 5.2%, with strong growth in South Africa, offsetting tempered performance in LatAm and Philippines. Coming to various aspects of the P&L. Other operating income at INR 105 crores has increased by INR 18 crores as compared to the first quarter '25. Gross margins. Coming to the profitability. Gross margins continued their upward trajectory with Q1 FY '26 gross margins at 71.3%, up from 68.4% in Q1 last year and up from 69.7% in Q4 FY '25. This 290-basis points year-on-year improvement is driven by multiple factors, which includes better product mix, tailwinds on the input cost front, lower share of in-licensed products, increased volumes and other cost improvements and efficiencies which we have undertaken over the last several quarters. Employee benefit expenses at INR 1,083 crores increased 11.5% year-on-year from INR 971 crores in Q1 FY '25, translating to 17.6% of sales, similar to Q1 last year. This change is largely attributable to higher costs due to regular annual increments and business growth during this period. Q1 FY '26 manufacturing other expenses came in at INR 1,772 crores, increasing 10.9% year-on-year from INR 1,598 crores in Q1 FY '25 and INR 1,688 crores in Q4 FY '25, translating to 28.7% of sales versus 29% last year. The expenses are mainly high due to higher R&D costs and higher volumes in the normal course of business. R&D is at INR 484 crores at 7.9% of sales as compared to INR 350 crores, which is 6.3% of sales in Q1 FY '25 with almost 70% of our R&D directed towards complex portfolio. For the full year, as earlier indicated, we expect R&D to be [ about ] 8.5%. EBITDA, excluding ForEx and other income, EBITDA was INR 1,641 crores vis-a-vis INR 1,286 crores in the same period last year, an increase of 27.6% year-on-year with a margin of 26.6% versus 23.4% last year in the same period. On a quarter-on-quarter basis, margins have expanded by 340 basis points. This margin expansion is on the backdrop of higher gross margins and a lower fixed cost during the period despite a higher R&D. As previously guided, we expect full year EBITDA margins to be in the range of 24 to 25 basis points -- 24% to 25%. Whilst we expect business to continue to exhibit robust performance, overall margins will be tempered by higher R&D spends and lower PLI in FY '26 vis-a-vis '25. And so far as the ETR is concerned, it was 13.7% for this quarter. However, for the full year, we expect the ETR to be around 19%. And so far as the balance sheet is concerned, we're still working on operating working capital, which is, of course, standing at INR 7,287 crores as of 30 June against INR 6,821 crores as of 31 March, which translates to 106 days of working capital against 110 days in the previous quarter. Net cash at INR 1,239 crores as against INR 310 crores on 31st March '25. Whilst we focus on increased cash generation for our business, we'd like to highlight that we continue to explore strategic allocation of our capital to address the long-term vision of the company. On the ESG front, we are pleased to report continued progress in Lupin's environmental, social and governance performance, as demonstrated by our sustainability ESG ratings. This exposure has notably improved from a classification of severe risk in 2019 to a medium risk in 2025. Additionally, through the Lupin Foundation, we are possibly impacting lives of 22,400 individuals by enhancing access to health care and promoting livelihood opportunities. With this, we open the floor for discussions.

[Operator Instructions] So the first question is from Kunal Dhamesha.

Congratulations on a good set of numbers. First question on the top line growth outlook. I think we have provided outlook on R&D EBITDA margin, but if you could also provide our expectation for the overall top line and -- as well as U.S. And then a related question is, Tolvaptan contribution in Q1, whether it was a partial contribution or a full quarter contribution?

Yes. So, top line growth for the year, as we have guided earlier, we expect strong double digit, both for the company and for the U.S. And Tolvaptan, we launched in late May. So, it was partial quarter. Also, we didn't have -- since it's a specialty product, there was not too much of channel stocking ahead of the launch.

Sure, sure. That's helpful. And second one on the India business. The overall India business growth seems to be lower than our Formulation business. So, has the adjacency, which is a small part of the business, has that kind of impacted or there was a tender business last year that has impacted the growth? How should we think about it?

Yes, it's primarily the tender business. It's the institution business, which is impacted. And as we've discussed before, that's lumpy. But by and large, I think we're in a good place on the global institution business as well.

Okay, sure. And one more, if I may. What would be the current drag from the adjacency business like diagnostics, et cetera, in this quarter, particularly?

Yes. So, the impact on our EBITDA would be close to about 1% really. We are still evolving and coming up very nicely. So, the long term, obviously, looks very alluring to us. But clearly, they are still loss-making at this stage.

The next question is from Vivek from Citi.

So, sir, can you help us understand how to look the U.S. sales in FY '27, right? In '26, it is going to be good because you launched, Tolvaptan et cetera. But in '27, there may be a cliff as products like Tolvaptan, Mirabegron, et cetera, that may not be as big as they are in '26. So, how to look overall sales in '27, especially for the U.S.? And what are the specific products, if you would like to highlight, that can help you mitigate these -- the impact of decline in these products?

Sure. I mean so there are many moving parts right now. I mean, on also material products like Tolvaptan as well as Mirabegron. Right now, there are no other tentative approvals on Tolvaptan, and it's a specialty product that requires named patient REMS program. So, we expect substitution to be very different compared to a simple oral solid generic. That's number one. Two, with Mirabegron, there are -- depending on the outcome on litigation as well as the trial of some of our competitors later this year, there are multiple scenarios that can emerge. So, we should have better clarity about that more at the end of this fiscal year. Certainly, in the second half of the fiscal year, we should have better clarity on the competition for products like Mirabegron. Third, I would say that we have a number of new growth drivers. We are very excited with the buildup of our injectable pipeline portfolio with the approvals of significant products like glucagon and liraglutide. We have a goal date for Risperdal Consta in September. So hopefully, the quarter after that, we will launch Risperdal Consta. So, the injectables start becoming a growth driver for us at the second half of this fiscal year, building into fiscal year '27. And fourth, I would say that biosimilars is starting to look pretty promising as an opportunity, just given where things are in terms of access to market in the U.S. And from our perspective, we have pegfilgrastim that we will hope to receive approval for this year. We are making good progress on the OBI pegfilgrastim. So, we would expect that, hopefully, to be filed and also get approved in fiscal year '27 or '28. And fiscal year '27, we also expect in June '26, we have the goal date for ranibizumab that we filed a few months ago. So, we expect both OBI as well as ranibizumab to potentially come to market in fiscal year '27 and building into fiscal year '28 as well. So, while some of the exclusive products, we will have additional competition impact, we think that some of the products are more sticky than others. And we remain very optimistic about growth prospects. Certainly, for the company overall, we expect a very high single-digit growth for the next fiscal year and hopefully double digit as well based on the efforts our team has undertaken.

And I'll just add, perhaps there might be some volatility amongst quarters and the like, but one is playing for the long term. And clearly, we see secular growth over a period of time -- over an extended period of time, given our focus on a number of differentiated products, 505(b)(2)s and the like.

So, basically, in FY '27, you are aspiring to be like a high single-digit plus growth on '26, right, if I'm correct?

For the company as a whole.

Yes. And just one clarity on pegfilgrastim on-body injector. So, have you filed or yet to file this product? Which product that you are expecting first, right, the normal pegfilgrastim or the OBI one?

I'm interested primarily in the OBI, although the pegfilgrastim approval will come sooner. We hope to file this during this fiscal.

Okay. Just one more question I have on cost front, right? Last year, the company saved close to around $50 million. So, it would be great actually if you can highlight what are the targets for the next couple of years, especially in the areas, segments where the company is working on as far as improvement in the cost structure. I was -- actually I'm just trying to understand, again, margins for the '27, right? '27 is -- you have guided 24% to 25%, but is it possible if the margins in '27 can dip on the base of '26 or you can still maintain margins in '27 on the base of '26?

The fact is we are playing for continuous margin expansion. And this is on the back of implied buoyancy on the top line. And we did indicate that next year also, we would grow at least single-digit numbers. But the focus on various items of cost is [indiscernible]. And you would appreciate, it's there for -- the evidence is there to see. And that will kind of provide for margin expansion going forward as well despite, in fact, the kind of increases that we are seeing on the R&D front. So, we are pretty optimistic about this.

The next question is from Saion Mukherjee of Nomura.

Vinita, I mean, one question is on this whole tariff scenario. We may see an announcement in the near term. How are you assessing that? Any color you can provide given the kind of products that you have or other mitigating measures that can be put in place? Basically, broadly, trying to understand how you see the impact, let's say, if you have 10% or 15% kind of tariff being put on generic pharmaceuticals?

So, Saion, it's, of course, hard to predict, but -- where this lands, based on the outcome of the 232 investigation. But I'd say that, from a mitigating standpoint, the strategies that we have considered is: one, wherever we can, where we have price flexibility, price increase to offset the impact of tariff; number two, products where we have the ability to tech transfer into the U.S. certainly in the 2 sites, both New Jersey as well as Coral Springs, we are looking at a potential to transfer those products; and we're also considering some IP transfers that, of course, will have a capital gains impact, but overall will really benefit us, especially on high-value products where transfer the IP to the U.S. and contract manufacture in India. So, a combination of all of those measures, we expect to be able to mitigate a good percentage of the impact of tariffs. And if it's 10%, 15%, I think it should be fairly manageable in any case. I mean the question is, is it 25% or the 150% to 200% kind of numbers that have been floated.

And you should also remember at the end of the day, generics is all about access to medicines in so far as the population is concerned. So, they would also be very conscious of whatever measures that they take so that it doesn't impact them too much, considering the availability of products and the like in recent times.

Okay. Okay. That's helpful. And the second question is on Specialty. You're thinking about it for a while now. Given the changes that we are seeing in the U.S., particularly with respect to the pricing environment, is that changing your thought process around how you should be thinking about going about building the Specialty business globally and in the U.S. in particular?

So, strategically, our focus has really been in niche therapy areas where we can really add value. So, areas like respiratory and I think now niche respiratory products or products that are not large asthma COPD products that -- where we compete with big pharma, plus like rare neurology products like NaMuscla. I mean we're actively developing NaMuscla for the U.S. as well as other geographies, Europe included. And so, we expect that the impact of MFN and all of the price reduction measures is likely going to have more of an implication for the large value categories where there is material spend from a government standpoint and a payer standpoint. And given our strategy is more on niche products, we believe that we will be in a better position than large brand companies in any case.

Understood. If I can ask you, Vinita, on NaMuscla, if you can update us on the time line for the U.S. and the market opportunity?

Yes. So from -- so we are in active recruitment right now for our Phase III study for U.S. and Europe. We expect that the product will launch in the U.S. in fiscal year '29. And we believe that there's a market opportunity of between $100 million to $200 million.

The next question is from Kunal Randeria of Axis.

Any update on semaglutide filing plans in Canada?

No. I think from a near-term perspective for the markets that open, we really have a partnered model. So we have a partnership in place that will get us into the market. But our internal injectable filing is a little bit later due to the hurdle patent in the U.S. and other major markets.

Sorry, I meant Canada, semaglutide in Canada?

So that will come through partnered, like Vinita said.

Okay. Got it. Just to clarify on Mirabegron patent litigation. There are, I think, 2 patents under active litigation, right? And in one of the patents, I think the outcome depends on what one of the other competitors, how their litigation goes. So is there a likelihood of this drug facing competition by November itself?

Well, so it's hard to predict, I would say. It really would be hard to predict. And anybody who's going through litigation in the fall this year also has potentially looking at the time line of our February trial, which is going to be material for the product.

The next question is from Damayanti of HSBC.

I hope I'm audible.

Yes.

Okay. So my question is on your injectable portfolio buildup. So first, have you launched glucagon and lira in the U.S.? And are these products completely in-house or you are engaging with some partners as well?

So we have launched glucagon yesterday and plan to launch liraglutide by October. And we manufacture the products in-house in Nagpur.

Okay. So why like we are waiting till next few months for lira launch?

That's the time it takes to really do the validation and get launch qualities together.

Okay. And how do you see liraglutide market in the U.S. given the market in general has moved to the new gen therapies, right, your sema and tirzepatide, et cetera. So do you think this market is still attractive?

We believe it's attractive because it's $0.5 billion plus and the very limited number of players right now. And as the product gets more affordable with additional competition, we would expect that there is some share that the product should take from the overall class. Definitely, the portion that is price sensitive.

Sure. So from sales buildup perspective, we should assume by FY '27, say these 2 products are coming in FY '26 and hopefully, Risperdal Consta also comes through. So you have 3 key products in your portfolio to start with and then assuming it will take a few months to build out, et cetera. So FY '27 onwards, we can assume these to be a significant contributor in the U.S.

That's right.

Okay. My next question is on your EBITDA margin. So Ramesh, you mentioned there was some 1% drag due to adjacency in India. So similarly, can you quantify if there are other such drag on margins, which are right now due to some investment or scale up, which are underway and then you expect these things to go away in a few years or few quarters?

So what I actually meant was that the adjacencies are costing us some monies because essentially, they are still evolving, essentially the digital business, the diagnostics business, the API, CDMO business and the like. So clearly, because there is time for them to evolve, they are all start-ups, so to speak. Clearly, they would evolve to a size, the critical mass and they would start making profits, so until then. But for example, the diagnostics business is expected to kind of breakeven next year. So that pathway has been very well set.

Okay. My next question is on your inhalers portfolio. So on Tiotropium, have you seen any meaningful market share than what we saw last quarter?

It's been at a similar level.

So what is actually stopping you to gain more market share? Or you have already reached the upper limit and then we might not see market share gain from here. What are your thoughts on Tiotropium market share gain?

Yes. The team is additional efforts around offsetting some of the cost to patients, especially in the Medicare, Medicaid covered patients. That's where we don't have a strong share. I mean we have a really good share of the commercial covered patients, 50% plus. But the Medicare, Medicaid is where we are starting to see some benefits, but it's not showing in the numbers as of yet. But we hope that in the next couple of quarters, that builds up.

Okay. So going ahead, we might see more market share gain on the Medicare channel. But on the commercial channel, you are broadly maybe at optimum level. Is that the way to look at this at this point?

Yes.

The next question is from Neha Manpuria from Bank of America.

My first question is on tolvaptan. Vinita, I think you had mentioned that based on contracts that we have in place, we should be able to get to about a 25% market share on tolvaptan. So is that still the case? Or have you seen additional traction on the specialty contracts and that market share could be higher?

So it is hard to predict. I mean right now, we've got a good ramp-up within the specialty channel, but it's still building. The conversion is still taking place. So I think that what you see is the impact of a couple of months of starting to build the share, but we should be able to see more of an impact in Q2 and Q3.

So the full contracted share will probably reflect exit of second quarter or third quarter? Would that be a fair assumption?

Yes.

Okay. And given that there is no tentative approval for tolvaptan, is it fair to assume that we could probably have a longer tail for tolvaptan versus, let's say, a usual FDA product?

We're hoping. If we had estimated that we'll have additional competition in 6 months. But if we don't see it or if it's limited, 1 instead of 2, perhaps there is more of an upside. And in any case, even with additional competition, we expected a longer tail given that it's a specialty product, it's the specialty channels and the physicians don't like to change patients over and over again to a new product.