Zydus Lifesciences Limited (ZYDUSLIFE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '20 Post Results Conference Call of Cadila Healthcare Limited. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Ganesh Nayak COO, and Executive Director of Cadila Healthcare Limited. Thank you, and over to you, Mr. Nayak.

Welcome to the first earnings call of 2020, and I wish you all a very prosperous year ahead. We have with us Dr. Sharvil Patel, Managing Director; Mr. Nitin Parekh, Chief Financial Officer; Mr. Harish Sadana, Chief Strategy Officer; and Vishal Gor, Senior Vice President, Corporate Finance. During the third quarter of FY '20, we posted a consolidated revenue of INR 36.4 billion, up by 8%, adding INR 2.7 billion over INR 33.7 billion reported in the previous quarter. On the back of this increase, consolidated EBITDA grew to INR 6.93 billion, up 11% on a sequential basis, adding a delta of INR 676 million over the previous quarter. Overall, we expanded our EBITDA margins by 50 basis points to 19.1% against 18.6% registered in Q2 FY '20. The resultant consolidated tax for the quarter was INR 3.74 billion, up 18% on a sequential basis. Our India geography, comprising of human health, consumer wellness and Animal Health, has grown by 24% on a year-on-year basis, registering a revenue of INR 13.7 billion. On a comparable basis, our business in India in the Indian geography grew by 7% during the quarter. The U.S. geography, comprising of generics and specialty, registered a revenue of INR 16.8 billion, up 16% on a sequential basis. Our rest of the world business, comprising of multiple emerging markets, grew at 18% year-on-year during the quarter. On a sequential basis, the business grew by 21%. Now let me take you through the operating highlights for each of our business lines. Starting with our human health business in India geography. Our strategy of restructuring our India formulations business between mass and specialty has started showing signs of some early successes. Further, the execution focus started by revamping our sales operating system has also shown good progress. As a result of these initiatives, our branded human health business grew by 9.6% on a year-on-year basis during the quarter. As per the [ Avax ] data, the business grew by 12.1% during the quarter, outperforming the overall Indian pharmaceutical market growth of 9.5%. In terms of therapeutic performance, our gynecological, gastrointestinal and pain management portfolio grew better than the market. Getting into specifics, our gynaec portfolio grew by 10.1% versus the market growth of 7%. Our gastrointestinal portfolio registered a growth of 9.5% vis-a-vis the market growth of 8.1%. While the growth in the pain management portfolio was 15.2% as against the market growth of 9.7%. Our cardiac portfolio grew at 10%, which was in line with the market. On the brands front, our pillar brands having annual sales in excess of INR 500 million each continued to grow in double digits, with 11% growth during the quarter. Mid-sized brands having annual sales between INR 250 million and INR 500 million also grew in double digits, with 14% growth during the quarter. Overall, our human health business is showing good promise, and we intend to maintain this momentum in the coming quarters. On the consumer wellness front, Zydus Wellness business posted sales of INR 3.24 billion during the quarter, up 129% on a year-on-year basis. The focus during this quarter primarily was on scaling our go-to-market model to double our direct reach, integration of supply chain operations, including CFA consolidation, and also the upgradation of our ERP system with implementation of SAP and the S/4HANA in line with the requirements of increased scale and complexity. We are happy to report that we could finish these initiatives in time to ensure that we are ready for the upcoming season across the value chain. Our Animal Health business bounced back during the quarter as the business grew by 9.1% year-on-year to INR 1.4 billion during the quarter, after going through a couple of quarters of muted performance. Now let me take you through the performance of our U.S. formulations business. As mentioned earlier, the overall business grew by 16% on a sequential basis. The growth was driven by market share gain in some of the key products, increase in the sales of Oseltamivir on account of the flu season and launch of new products during the quarter. During the specialty -- excluding the specialty portfolio of Sentynl, the business grew by 17% on a quarter-on-quarter basis. According to the latest IMS, we are now the fourth largest generics company in the U.S. in terms of prescriptions. We launched 9 new products during -- including our Daman launch in the U.S. during the quarter. We filed 14 additional ANDAs with the USFDA, taking our cumulative number of filings to 386 and received final approvals for 6 new products and tentative approvals for 2 new products from the USFDA during this quarter. Coming to our emerging markets business, we launched 3 new products in Brazil and 1 new product in South Africa. Major brands of all the key markets grew in double digits, which contributed to the overall growth. Our biologics portfolio continued its momentum and recorded a sale of INR 737 million during the quarter. Now on the operations and compliance front, we continue to take all the remediation measures necessary to address the observations raised by the USFDA in the warning letter issued to our Moraiya formulations facility. And we have also send them the periodic updates to brief them about the actions which have been taken by us against the commitments made to them. As shared with you earlier, we have already initiated site transfer of all our injectable products from Moraiya to Liva and expect the same to be over by the end of FY '20. We continue to maintain our successful track record of regulatory compliance at our other facilities. During the quarter, our topical formulations manufacturing facility, and one of the API manufacturing facilities completed the USFDA inspections without any observation. Coming to the inspections done by other regulatory authorities, one of the API manufacturing facilities successfully completed the WHO audit, while the biologics Finland Finnish facility completed the audit by the Mexican authority, COFEPRIS, for 4 products during the quarter. Now this concludes the business review, and I would request Dr. Sharvil Patel to take you through the progress and initiatives in our innovation program.

Good evening. In line with our strategy to focus on innovative products and technologies, we continue our thrust on taking our lead [ NC ] molecule, Saroglitazar Magnesium to additional indications. In fact, just a day before, we received the approval from the Drug Controller General of India for the use of Saroglitazar Magnesium in the treatment of type 2 diabetes mellitus. In the month of December 2019, we filed a new drug application of this molecule with the DCGI for nonalcoholic steatohepatitis, NASH, indication. This is the first NDA filed with any regulatory authority across Asia, and only the second across the globe for NASH indication. Recently, the committee of the 29th Asian Pacific Association for the Study of Liver has selected the abstract of the study of saroglitazar in NASH for an oral presentation. In the month of November 2019, we made a presentation of saroglitazar in NAFLD at the American Association for the Study of Liver Disease, AASLD, Boston, as a molecule achieved statistically significant improvement compared to placebo in its primary end point. The paper was selected as a part of the best of NAFLD and NASH debrief given by the AASLD. For our other novel molecule, Desidustat, we have initiated a Phase III clinical trial in India, targeted at the treatment of anemia in dialysis-dependent CKD patients. Recently, in the month of January 2020, we entered into a licensing agreement with the China Medical Systems Holding Limited, CMS, for the development and commercialization of Desidustat in Greater China for the treatment of anemia in CKD patients who are not undergoing dialysis as well as those who are on dialysis. On the biologics front, we initiated preclinical studies for one biosimilar, and submitted an application to the Department of Biotechnology for conducting preclinical toxicity for one more biosimilar drug during the quarter. Talking about vaccines, we have submitted the dossier to DCGI for obtaining the marketing authorization for the pentavalent vaccine during the quarter. We have also received regulatory permission to conduct Phase I clinical trial for the hep A vaccine and the hepatitis E vaccine during the quarter. Coming to our 505(b)(2) and in-licensing initiatives, we have developed a portfolio of innovation-driven 505(b)(2) molecules and products. The portfolio comprises of novel concepts offering incremental innovation and fulfilling unmet medical needs. Our focus is to address these medical needs, enhancing patient ease and offering better treatment options to physicians. There are more than 15 products in the different stages of development with a focus on neurology, pain management, dermatology and orphan diseases. We are targeting to submit 1 NDA every year post-2020. Our first NDA is likely to be ready for submission by December 2020. During the quarter, we have submitted a pre-IND request for 1 more molecule. During the quarter, we also entered into a -- into 2 co-development and licensing agreements for 1 an oral oncology product and 1 injectable product. Subject to approval, we will get exclusive marketing rights for both of these products. Thank you, and now we will start with the Q&A session. Over to the coordinator for the Q&A.

[Operator Instructions] We have our first question from the line of Hari Belawat from Techfin Consultants.

This is regarding acquisition of Heinz India, this was in January '19. It was acquired at a total cost of something like INR 2,575 crores. What is the status of that? Is it fully integrated in the group? One. Second thing is, does the consolidated results also include this? And what is the turnover and profitability of this section, this division of Heinz?

So the integration largely is completed. Now the final stages of sales force integration is ongoing. The results, obviously, include the revenues of -- the consolidated revenues of Zydus Wellness as well. And their revenues are -- the sales revenues are in the range of 300 -- INR 300 plus cores.

Okay, okay. How much is -- good margin is available in this acquisition?

Yes.

See, actually, we have a separate telecom for Zydus Wellness Limited. And I mean, in this conference, we just briefly make a reference to that, but detailed questions, we can take it off-line.

We have next question from line of Aditya Khemka from DSP Mutual Fund.

Sir, on the India business side, so once now that you've got the diabetes indication for saroglitazar, what should we expect from the product? I mean, diabetes, molecule wise, is a pretty crowded space, there is gliptins, there is oral antidiabetics, et cetera. So where does saroglitazar fit in the scheme of things? And what is your expectation from the product?

So the -- it's not going to be the first-line treatment for diabetes. So as a second-line treatment, it will compete with the whole pioglitazone market and also, to some extent, the DPP-4s.

Right. So do you have like a number as to how big that market is in India, the second-line treatment for diabetes?

Oh, it's -- I would hazard a guess, but it is in more than INR 1,000 crores. But it is significantly larger. I mean -- I don't have the exact number right now, but it will be at least, I mean, it will be significantly larger. I can ask Vishal to give you that market price.

No problem, sir. I'll take it later. On the U.S. business this quarter, so this $30 million incremental revenue we have seen in third quarter versus the second, fair to say all of this is coming from Tamiflu and seasonal products like Tamiflu?

No.

So has there been a growth in our base business because of incremental launches?

Yes. In fact, in my statement, I did make a mention that this increase has come from volumes, some new products as well as products like Oseltamivir, where we have sold more.

Yes. So I'm just trying to get a sense of, Ganesh sir, as to how much is coming from both these halves. Is it like equally divided? Or is it tilted more towards Tamiflu than the base business or otherwise?

See new products -- okay, new products have given us 1% growth over the previous quarter, and rest of them are equally distributed between these 2. And before somebody asked this question, over the previous quarter, the price erosion has been 1.8%.

1.8%, okay, that's helpful. And one last question on the cost side. So if I see the growth in the other expenses and employee cost, so employee cost is growing at 18% Y-o-Y this quarter. And you have a 26% inflation in other expenses also. What's driving such a high amount of expenditure? And I mean, is this like a growth that we normally would sustain?

So other expenditure as well as HR cost include cost related to Heinz acquisition in terms of their HR cost and their other expenditure. Also, we have, during the current year, capitalized, commercialized Zydus Technology operations, which results are consolidated with our results as 100% subsidiary. Reason is that our other expenditure, last year same quarter because of lower performance of India business, we had curtailed some of the expenditure, which now because we are in a good growth trajectory, we have spent those marketing-related and other spends.

And on the HR, because Heinz was not there as part of last year, obviously, we would see a growth on HR cost.

Yes. So just one small clarification on that, sir. So Heinz is a highly seasonal business where 2 quarters give you a bulk of your revenue. And I'm assuming a sales force of Heinz or the promotional ad spend on Heinz would also be seasonal in nature. Is that not a correct assessment?

There is some seasonality, but for Complan, it is throughout the year. And last 2 quarters, as a percentage of sale, it looks larger because the revenues are lower, but the sale -- the cost -- I mean, the A&P is higher on Complan.

We have next question from the line of Kunal Dhamesha from SBICAP Securities.

This is related to the China situation. So I would like to know what is our vertical integration in terms of API for our pharmaceutical business, and does it differ between geography to geography in terms of U.S. It might have a higher integration versus India business?

So on a broad basis, on the API front, we don't have any significant exposure to China because a lot of our APIs are backward or sourced not from China. So we don't see a major impact on API on account of the disruption that may happen in China. And for most of the critical businesses like U.S. and India, in terms of size and scale, there should not be an issue because of API, but we are still evaluating on the intermediate sourcing of many of these because they will, in the future, may get affected.

Okay, okay. So even if, let's say, we don't have API issues, we might have intermediate issue, if the supply is not there for maybe how much days? Any indication there?

We are okay up to 60 days. We have -- Depending on the molecule, but we have covered for some longer. But at least for the next 60 to 90 days, we have a cover.

We have next question from the line of Surya Patra from PhillipCapital.

Just wanted to know, sir, the U.S. business growth, see, I believe last quarter that you had mentioned the volume growth on the base business front was around 22% or something like that? And similarly, you are maintaining that? The growth -- volume growth momentum even this quarter is remaining strong. So is it possible to say what is the kind of volume growth that you are talking about YTD as well as this quarter?

So I can -- so I don't have the exact number on the volume, but the volume growth continues for this quarter also. But I don't have the exact volume. I have the value growth, but not the volume growth.

Okay. Sir, just what I was trying to understand from that question is that are we getting -- is it hard the integrated operation -- hence, the cost advantage which is supporting us in playing a kind of important role in the U.S. market, which is currently cost conscious? And if that is the case, then for that reason, are you maintaining the filing momentum significantly strong compared to your peer group?

We continue to see strong volume growth in the U.S., and we -- our strategy is to continue filing aggressively for the U.S. market. And I think it's an opportunistic market. So we are building both, I mean, capabilities in terms of filing and also in terms of risk-mitigating by having multiple clients being able to service demand. So that will continue, and we see volume growth continuing in the U.S.

Okay. But whether the cost advantage that you're really -- on the costing front that you are significantly better compared to the competition or something that sort of advantage that you're enjoying or anything on that side? And if that is the case, then what is...

We have good volumes in the U.S., which helps us being competitive in terms of cost.

Okay. And sir, can you share something on your level of integration towards API level?

So our effort is that we have at least close to 50% of whatever we sell in the U.S. in terms of value we produced ourselves. So it's an ongoing journey. We are continuously trying to second source many of the products. Over 5 new sources using Zydus' products. So our strategy is to have around 50% of value-driven out of product [indiscernible] manufactured by us.

On APIs?

Yes.

And do you have any thought process about integrating backward to intermediate levels also? Or are you currently having, at least for few set of product, or are you currently integrated for any chunk of your APIs to intermediate?

We -- as a strategy, we do have a very good relationship with our KSM suppliers. Sometimes, we have more than 1 KSM intermediate supplier. And we are creating a network of 10 KSM suppliers who would work in a strategic manner with our company. So that's our current plan.

Okay. Sir, second question on the domestic formulation business, say -- in fact, we have in the recent past has restructured our overall domestic business into the mass segment and the specialty segment with an intention to really, say, do better or outpace the industry growth. So are we still in that process of restructuring? Or what -- because even this quarter, we are seeing a kind of a number which is slightly lower than the industry growth.

So this quarter, we have not grown below industry growth. We have grown faster than industry. If you look at the [ Avax ] data. So I don't know where you get that data from. Also, I think restructuring is over in terms of our strategy. So now it is only execution, and we can't -- we have grown better than market.

In fact, I had mentioned it in my opening talk that against the market growth of 9.5%, we have grown at 12.5%. So from where did you get this?

Okay, my mistake then.

[Operator Instructions] We have next question from the line of Neha Manpuria from JPMorgan.

First, on R&D, we are tracking north of 8% in the last 2 quarters. This quarter, even, given the high base. So how should we look at that? Is the current quarter number more reflective of how much we will spend, given the progress you're making in the innovative pipeline and generic otherwise?

So our year-to-date is currently still below 8%. We are at 7.8%. So we should be in the around 8% level only.

Even for next year, sir?

Yes. So for all our current R&D expectations, we will be around. And I have always said that if we have to do a large Phase III trial for saroglitazar, then we would be looking at how do we plan for that work. But currently, with our current expectations, we should be in -- around 8%.

Understood. And can I have the net debt number for the quarter, sir?

Net debt number?

Yes, so net debt for the quarter was INR 6,432 crores.

Understood. Okay. And lastly, on Moraiya, when do we expect to invite the FDA for a reinspection?

So by May and June, we would complete our remediation in terms of what we have committed to the FDA. And currently, we are on track to do so by May and June. So I think I would say the earliest, it would be the third quarter of the FY '21, where we could expect an FDA audit.

We have next question from the line of Prakash Agarwal from Axis Capital.

Just on the U.S. API sales as well as emerging market sales, there seems to be a strong traction. How much of these is sustainable?

So emerging market -- so both our emerging markets are on track in terms of its growth. And we expect a double-digit growth to continue in the coming year as well. And API also, I -- API -- what are the first business you said?

U.S., sir. I mean, U.S., Mr. Ganesh said, there is a part of it is Tamiflu also. So I'm just trying to understand this run rate of INR 235 million, how much of it is sustainable? Or can we grow from this base also on a Q-on-Q front?

See -- yes, INR 235 million is sustainable. And if you're talking about the future, we are expecting growth between middle and high single digit.

On the U.S.?

Yes, only for the U.S.

Yes. And the API also -- quite a big jump in API in emerging market. So is there a one off there? Or these are like a sustainable base of what you have achieved in this quarter?

See in the emerging markets, we were not getting approvals in Brazil, which we have started getting now. So in the last quarter, year-on-year, we have grown at 81%. And even over the preceding quarter, we have grown at 21%. And this is in spite of the fact that our Sudan is still not bearing sales. So answer to your question is, yes, it is sustainable. Why such a high growth or good growth is because we have got approvals in places like Brazil, which is a large market. And also South Africa has done well.

Okay. And API, sir?

On API, Prakash, API, you'll have to see the year-on-year YTD growth because YTD, the growth is about 2.5%. So there was some timing effect also.

So I think this quarter's API outside growth is not representative of the full year.

Okay. So we expect a double-digit growth in this segment going forward?

In API?

Yes sir?

We'll be around low -- I mean, 8% to 10%, not higher on an external API.

And secondly, on the gross margin side, we have seen good sustainability of 64, 64.5, 65. This is despite -- U.S. has done well, all the business geographies have done well, but India has come down. So is there a one off there? Or again, this is sustainable? That would be helpful.

What? I didn't get the second part when you said India has come down.

So on a Q-on-Q front, if you see, India has actually come down a bit, given the Q2 is normally the highest quarter for us. So from INR 977 crores to INR 910 crores, which is, I would understand that this is the highest gross margin business. So I'm just trying to understand...

So I think a large part of it is, obviously -- large part of it is driven by the U.S. and obviously, the other businesses like in Animal Health, emerging markets, all have also grown well. So -- but I would say still a good amount is driven by the U.S.

Okay. And lastly, on the cost front, where we see -- you spoke about this saroglitazar for diabetes also. So is the footprint ready and the cost is already baked in, in the past few quarters? Or we are going to ramp up our MR, the separate divisions are being formed? Is it done? And -- or is it going to happen in terms of cost scale up?