Zydus Lifesciences Limited (ZYDUSLIFE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Post Results Conference Call of Cadila Healthcare Limited. [Operator Instructions] I now hand the conference over to Mr. Ganesh Nayak, COO and Executive Director. Thank you, and over to you.

Good evening, ladies and gentlemen. Welcome to our post results teleconference for the quarter ended September 30, 2020. We wish you and your family are safe and healthy during these times. For today's call, we have with us Dr. Sharvil Patel, Managing Director; Mr. Nitin Parekh, Chief Financial Officer; Mr. Harish Sadana, Chief Strategy Officer; and Mr. Vishal Gor, Senior Vice President, Corporate Finance. During the quarter, the spread of COVID-19 continued unabated across the globe, and in turn, continued to impact the economy and businesses across countries. However, we now consider it as the new normal. And by use of technology and newer methods, we continue to endeavor to improve all facets of our business beyond pre-COVID levels. Coming to business in the India geography, our human health business and consumer wellness business witnessed an improvement in demand vis-à-vis the preceding quarter on the back of the nationwide Unlocking strategy adopted by the government. This trend of improvement is likely to further pick up pace in the coming quarters. Our animal health business in India posted strong double-digit growth of 20% on a year-on-year basis during the quarter. Our U.S. formulations business continued normal operations as it was not impacted significantly by the COVID outbreak. Business continued to grow in double digits on a year-on-year basis. During the second quarter of FY '21, we posted a consolidated revenue of INR 38.2 billion, up 13% year-on-year. Consolidated EBITDA grew to INR 8.63 billion, up 36% on a year-on-year basis. Our EBITDA margins improved significantly during the quarter and went up by 370 basis points to 22.6% from 18.9% registered during Q2 FY '20. Consolidated PAT, including exceptional items for the quarter, was INR 5.62 billion, up 73% on a year-on-year basis and up 24% on a sequential basis. In line with our commitment to deleverage, I'm happy to inform you that we have significantly reduced our net debt by INR 27.1 billion in the first 6 months of FY '21, which is a 40% reduction from the March '20 net debt position. Our net debt as of the 30th of September 2020, stood at INR 40.3 billion against INR 67.4 billion as on the 31st of March 2020. Our India geography, comprising of human health, consumer wellness and animal health business, grew by 11% on a year-on-year basis and registered revenues of INR 15.83 billion during the quarter. The U.S. geography, comprising of Generics & Specialty portfolio registered a revenue of INR 17.09 billion. The generics business grew by 21% on a year-on-year basis and 6% on a quarter-on-quarter basis, driven by volume expansion. Our emerging markets business grew by 8% on a year-on-year basis and posted sales of INR 2.36 billion. The business grew by 12% in constant currency terms. Now let me take you through the operating highlights for the second quarter of FY '21 for each of our business lines. Starting with our human health business in the India geography, the pharmaceutical market in India has moved to positive trajectory and in line with the market performance of our business also improved during the quarter on the back of steady improvement in demand amidst various unlocking measures undertaken by the government. Overall, our human health formulations business posted sales of INR 10.87 billion, up 11% on a year-on-year basis. On the therapy fronts, we gained market share in the gynecology, pain management, anti-infectives, anti-diabetic and hormones portfolio during Q2 FY '21, vis-à-vis the corresponding quarter of the previous financial year. We have maintained our ranking in the key business of gynecology, respiratory, pain management, cardiology and anti-infectives during the quarter. In the current evolution of prevailing challenges, the trend of improvement, which we have experienced during the current quarter, is likely to further pick up pace in the coming months. As the Indian economy is gradually opening up with necessary safety measures amidst the pandemic, the quarter gone by saw a revival in growth for our consumer wellness business. The business registered a growth of 9.3% in gross sales on a year-on-year basis. During the quarter, we successfully completed equity fund raising of INR 10 billion through the preferential issue and the QIP route. We extend our sincere gratitude to all the investors for an overwhelming response to the QIP issue of Zydus wellness, which was oversubscribed 3x. Proceeds of the issue were used for redemption of nonconvertible debentures leverage to the balance sheet. Our animal health business in India saw a significant improvement in the performance during the quarter as the business posted a sale of INR 1.6 billion during the quarter, with a growth of 20% on a year-on-year basis. The growth was driven by good demand and the strong equity that our brands have in the market. This led to a marked improvement in the profitability of the Animal Health business. On the U.S. formulations front, business continued to remain the largest contributor to the consolidated revenues with a 45% share in total revenues during the quarter. During the quarter, we relaunched doxycycline injections from our injectable manufacturing site of Liva near Baroda after site transfer from Moraiya. This is the second injective transfer approval from the manufacturing side of Liva. Today, we have filed 3 site transfer applications for the injectable products from Moraiya to Liva. We also saw 6 -- we also launched 6 new products during the quarter. We received approval for 10 new products, including 2 tentative approvals and filed 5 additional ANDAs with the U.S. FDA during the quarter. Our cumulative filings include 69 filings for injectable products, including that of our partners, and our cumulative approvals include the approvals for 53 injectable products. Our new products approvals during the quarter include receipt of final approval for Doxorubicin Hydrochloride Liposomal injection. This is the first approval for a complex injectable, which has been developed in-house. Our API business registered sales of INR 1.6 billion during the quarter, with a growth of 52% on a year-on-year basis. On the operations and compliance front, we have completed the remediation measures, which were required to be taken to address the observations raised by the U.S. FDA in their warning letter issued [ Coria, ] and we are reaching out to the U.S. FDA for next steps. Operations at most of our manufacturing facilities attained normalcy during the quarter and no significant impact of COVID was observed on the functioning of our plants. This concludes the business review. I would now request Dr. Sharvil Patel to take you through the progress and initiatives of our innovation program. Thank you.

Good evening, everyone. I hope you and your family continue to remain safe and healthy during these difficult times. To begin with, let me give you an update on the various projects initiated by us in different areas of drug discovery and innovation targeted towards the COVID-19 virus. As you know, we have already completed Phase I clinical trials for our COVID vaccines ZyCoV-D. We haven't observed any safety concerns. Cellular and humoral immune response studies are under progress, along with the neutralization antibody testing. For Phase II clinical trials for COVID vaccine, we have already completed enrollment and dosing of all [ 1,000 ] subjects. Immunogenicity evaluation is going on at present. From a partnership perspective, we are making conscious efforts to collaborate with various multinational organizations for their COVID-19 vaccine programs to make such vaccines available for India and other emerging markets. We will share more details as and when further development on these fronts happen. We have also initiated development of our recombinant measles vector construct expressing spike protein of 2019 nCov, which is a SARS-CoV-2 during the quarter, which is a second vaccine candidate for COVID-19. On the NCE research front, during the quarter, we have initiated a few programs targeted at treatment of COVID-19. Our preclinical development is about to be completed for ZYIL 1, a small molecule NCE positioned for management of critically ill COVID-19 patients. A Phase II clinical trial for desidustat in the management of COVID-19 is ongoing at present in Mexico. Coming to our biologics. Recently, we have completed a Phase II clinical trial for a pegylated interferon alpha-2b in moderate COVID-19 patients who will be given either a subcut injection of pegylated interferon alpha-2b at a dose of 1 microgram -- milligram per kg, along with a standard of care in the test arm or a standard of care in the reference arm. Each arm has had enough subjects. In the arm receiving the pegylated interferon alpha-2b, there was a reduction in virus load and also alleviation of symptoms faster than the standard of care. The drug is well tolerated without any safety issues. The observation from this study has been recently submitted to the DCGI, and further discussions are on. We have also received regulatory permissions in India to conduct Phase II clinical trial of adalimumab for COVID-19 indication. We have also developed a cocktail of monoclonal antibodies directed against the spike protein of the virus, SARS-CoV-2, that causes COVID-19. Both the antibodies are neutralizing in nature and directly inhibit the ineffectivity of the virus by preventing its attachment to the ACE2 receptor expressed on the host cell membrane. We plan to complete animal toxicity studies by February of '21 and initiate clinical trials immediately thereafter. In addition to the projects mentioned above, we have recently also launched remdesivir injection in India and emerging markets, which is indicated for the treatment of COVID-19. We launched this product at the most economical price, providing greater access to the therapy and making it more affordable for patients. With this, let me give you an account of progress made, thus far, on different R&D projects other than those targeted to COVID-19. On the innovation front, on the NCEs, our saroglitazar magnesium successfully completed Phase II clinical trials for PBC indication in the U.S. The results of the trial would be presented at the late-breaker oral presentation at the American Association for Study of Liver Diseases on 16th of November 2020. We have also initiated Phase II clinical trial for saroglitazar magnesium for NASH and F2/F3 fibrosis in the U.S. and after we receive the feedback from the U.S. FDA. During the quarter, we submitted the report of 6-month biopsy results in 16 patients to the U.S. FDA. Patient enrollment is ongoing at present in the U.S. for Phase II clinical trial of saroglitazar magnesium for NAFLD and PCOS indication. We expect the enrollment to be over by quarter 4 of FY '21. In Mexico, an 18-month paired biopsy randomized for NASH indication is complete, and the results of the study will be available again in quarter 4 of FY '21. We completed Phase I clinical trials in Australia for our NCE molecule targeted treatment for malaria during the quarter. On the biologics front, patient recruitment has been completed for one of the Phase III clinical trials of rituximab in India during the quarter. And on the emerging market front, doses of adalimumab, bevacizumab, trastuzumab and [ pegfilgrastim applied ] with the regulatory authorities of different countries of the emerging markets. On the vaccines front, we completed Phase I trials for Hepatitis E vaccine and have received regulatory permission to conduct preclinical tox studies for one more vaccine during the quarter. On the 505(b)(2) and specialty initiatives, at present 9 products are under different stages of development. During the quarter, we submitted 1 pre-IND meeting request for 1 project and a pre-IND meeting request for 1 more project from our specialty portfolio. We also are planning to file an NDA for one of our products in the pain management area during the current financial year. Thank you, everyone, and we can now move forward to the Q&A session. Over to the coordinator.

[Operator Instructions] The first question is from the line of Neha Manpuria from JPMorgan.

My first question is on the India business. These are very strong recovery, both quarter-on-quarter and year-on-year. Could you give us some color on what drove this improvement year-on-year, particularly was it driven by COVID portfolio? Any color there would be appreciated.

So on the India business, we have had -- as I said in the last couple of years, we have had very important launches in the chronic spaces. And we were the first few to launch some of the gliptins and other molecules, and they have done very well. So on the overall, the chronic portfolio has registered a very strong growth. The acute portfolio still remains weak, but it's improving sequentially. And because of that, we have seen better traction in terms of overall India growth. So we have done a little bit better than market during the quarter.

So if I'm not -- correct me if I'm wrong, the market was pretty much flat to slightly positive, versus our growth seems to be 11% year-on-year. Is this entirely driven because of the COVID portfolio? Or is the contribution from [ important ] product launches, COVID-related launches?

The COVID portfolio obviously forms a part of some of the growth, but also the specialty cluster has registered a strong double-digit growth.

Okay. Understood. And so just taking this forward from a point of view first, how much normalization in marketing activity have we seen in the India market? And therefore, to what extent, is it reflected in our cost base? How should we look at normalization of marketing activity versus operating costs?

So because the large part of our expenses are related to the working of the sales representatives, so that all has normalized and we -- that has come back to normal in terms of overall spend. The marketing activities are still limited because, obviously, access to doctors is still not fully there. So we are not at fully completely back in terms of our full marketing activities. But marketing is always done in terms of, obviously, results that we get. So depending on what we are seeing, we are focusing on activities on certain types of portfolio, which is yielding us results. But I think, going forward, if the demand, again, comes back to a normal level, we would see some increase in marketing activities, but that will be a function of, obviously, growth. But overall, fixed expenses are back to normal, largely.

So only the marketing portion of it will pick up as things normalize?

Yes.

The next question is from the line of [ Anita Jartera ] from [ BNK ] Securities. As there's no response, we take the next question from the line of [ Rana ] from Centrum Broking. As there's no response, we take the next question from the line of [ Praful Bohra ] from [ Systematic Shares. ] As there's no response, we take the next question from the line of Nimish Mehta from Research Delta Advisors.

On the U.S. generic side, can you just let us know what is the outlook on the base business in terms of pricing? And also if you can let us know how Lialda has been performing for us now that there is some more of competition?

So on the base business, continues to do well, and the pricing is stable. So early, and obviously, it changes quarter depending on the quarter. So right now, everything is, in the base business, has grown in terms of volume, and we have stability there. Lialda, we are still holding good market shares because of the complexity of the molecule and the sourcing of -- for the materials. So we continue to see good traction on it and with limited supply in the market.

Understood. Finally, if you can given that there are 2 products that we understand where we already have an approval, and the products are also settled from a litigation perspective, but [ we have yet not launched total thing or ] brand name and [ any results. ] So if you can let us know when is the launch time likely to be, that will be great.

Which 2 products?

One is [ phenol. ] I mean generic is [ cyproheptadine ] hydrochloride. And the second one is [ viatol, ] the generic [ in this 1,000 RVs uncheck. ]

So unfortunately, I won't be able to give you immediately. But if Vishal, you have with you the details, you can, otherwise, we can connect back with you on that.

Sure.

Okay. No problem. I mean, my question was because we feel that this can be a probably low competition product for you. So okay, you tell me probably off-line coming from Vishal.

[Operator Instructions] We take the next question from the line of Damayanti Kerai from HSBC.

I have a question regarding the production of [indiscernible] performance [ in the ] [indiscernible] [ and some 50% reduction sounded much from that level. ] So I understand those products, which [ are confirmed that cap and ] potential sales is 1 of the major contributor products.

Your voice, is it cracking and so we are not able to understand much. So can you speak a little softly or maybe away from the mic because it's very breaking.

Is this better now?

A little better. If you can just be a little softer on the voice.

Okay. Sir, my question is regarding the debt reduction part. As you mentioned in your opening remark, 40% reduction from the March level. So what we understand, the proceeds from QIP and preferential share would have played a bigger role. But we have seen around like more than [ $350 million ] kind of debt reduction. So at the same time we have seen a significant improvement in the cash and equivalent holdings also. So if you can just elaborate a bit on like what is the [indiscernible] [ or ] the debt reduction, which has happened significantly in last 6 months?

My CFO can take it. If they are not able to, then I'll explain. So we can't hear you, Nitin, Vishal, anybody? Now we can hear you.

[indiscernible]

No, the question is related to debt reduction. What has led to beyond the QIP? What has led to the good amount of debt reduction?

[ INR 1700 plus. ] As we have shared, about INR 1,000 crores is [ contributed by the ] equity raising [ that is ] wellness. The remaining is all internal [ accruals. ] So as you know, in the 2 quarters, we have [ entered ] enough cash to repay the debt to the tune of about [ INR 1,700. ]

So I would say also a good working capital management with -- had led to less number of days and better receivables also has also helped. So overall, cash management has been very good since last quarter. We've been talking about that we have set up a cash management office and with better management of that, better realization on products. Obviously, some lower costs because of COVID. And all of that has led to much better improvement in terms of our overall cash, which led to a good amount of debt reduction.

And what's your debt reduction target in general?

So we will continue to look at that actively. And I think we are still seeing some good quarters ahead. So we will continue our endeavor on reduction of debt. Immediately, obviously, we have achieved a significant milestone. More importantly, we will continue to update you as and when we feel is the right time.

Final question from my side. [ On the ] response you [ want ] back from FDA for your request on the Moraiya plant inspection?

No. Generally, it's -- we don't get immediate responses, but we know that our responses are under review. And the FDA has communicated to us that they are inactive. So that is the only update we have as of now. And we are hopeful that with the exhaustive responses that we have sent, we will move towards resolution of the warning letter.

The next question is from the line of Prakash Agarwal from Axis Capital.

Congrats on good numbers. So my first question is on the R&D side. So we talked about various R&D initiatives, both from COVID-related vaccines, NCE, injectables. So how do we think our R&D spend is going to be for the H2 as well as next year?

So other than saroglitazar, we believe that currently, we will be around 7% to 8% of revenues in terms of R&D spend, and we should be comfortable with that. Look, there are 2 large items. One is obviously the saroglitazar further clinical trials, which will not have a short-term, I mean, impact in the next 6 months. However, on the vaccines front, there may -- if we -- once we start the large Phase III, there may be some larger spends, but we still believe that we would be around 8% to sales for the next 2 quarters.

Okay. And what are the dates in terms of Phase II and going into Phase III, if all goes well?

So Phase II, we have, as I said, we have finished enrollment for the vaccine. We will have a readout by end of November. And immediately, we would apply for a Phase III permission. And we should -- we do plan to start our Phase III in December, which will -- and again, that whole recruitment will take, again, another 2 months. So by March, April, we should have Phase III data also.

Perfect. Great. And secondly, on the U.S. side, so last time, we had spoken about in-licensing of new products. So I mean these would be starting -- I mean, these are development or these are already in development, and we have come in between? And what is the amount spend, if you could talk about that a little bit.

So product-wise, I will not have all the details. But as I said, we have actively a portfolio of 10 to 11 products, which are in the in-licensing phase. Some have already been -- a couple have already been filed. A couple are in the late stages of filing. And obviously, some are in the stages of taking batches and putting on stability. So they are in different phases. Some are also just next for approval, and we are in-licensing them. So there are all different stages of cycle. And in terms of breakup, I can maybe later on share with you because I don't have the breakup of each and every molecule, but I think they are starting -- none of them are at very early stages, barring maybe very -- maybe one. Most of them are in stages of either taking executing batches or filing.

Okay. No, I'm trying to understand like we already have a very rich pipeline across various dosage forms and segments. So would these be differentiated in some manner which we don't have already? Or how should we think about it?

Yes. So they're all different. Some of them is where we may have missed first to file, and we have been potentially be able to in-license that F2F. Some are where there is a source issue. So there are very fewer unknown so very few sources of multi API, and we have been able to partner on that. And some are to do with complexity in terms of the plant needs dedicated lines and dedicated facilities, which some of the partners do have. So they are all differentiated, and 1 or 2 of them are where we don't basically -- we have a gap in portfolio, and we have been able to in-license them.

Okay. And these are multiple parties?

Yes, there are more than a few parties, yes.

Okay, perfect. And last one on India side, would there be element of generic [ element ] also in this 11% growth? I mean, clearly, you mentioned chronic is double digit. There is also a COVID-related remdesivir, which is great. What would generics, which is about, I think 10% of your portfolio would have [ led ] the growth? Or that was also muted?

Generic was more muted. So if we remove generics, the growth would be better.

The next question is from the line of Saion Mukherjee from Nomura.

Sir, can you throw some light on the growth that we have seen in the API business and also on the animal health? I mean, the growth has been strong. Just wondering how sustainable you see this number?

Yes. So on the animal health side, we have very strong brands in the market and I think very good customer outreach. So that has helped us gain momentum. Also with the -- we believe that with the rural economy reviving faster, we have seen better traction for our businesses related to livestock. And that business has really outperformed because of the good brands that we hold there. And the poultry business is also coming back on track. So actually, we believe this growth momentum will continue because one of the business is on track, and the other is reviving. So the business growth, we believe, should continue in a fairly good double-digit manner. And then also the favorable product mix has also helped us improve margins. So both aspects have overall helped the business really outperform. On the API front, we are not a very large player in terms of third parties. We are seeing good traction on the API front. And the API business will continue to actually drive good double-digit growth going forward from the external point of view. Also, it contributes very meaningfully to the internal business. So both ways, it has done very well, in term of being able to produce large quantities. Like 1 example also, if you just say, [ for it is ] only for [ internal ] consumption, but remdesivir was something that we developed very quickly and we could launch it and that too at much better pricing in the market to make it affordable. So credit to the API team that they were able to turn it around faster. And there are multiple other examples which we are seeing, both from the NDA point of view or some COVID-related portfolio point of view.

Okay. And sir, my next question is you booked an export incentive around 45 crores, 50 crores a quarter. What's the outlook here? And what this number would be going forward, in your view?

I would ask Vishal or Nitin to answer that.

So the government has currently discontinued the MSME scheme, which would have effect [indiscernible]...

Excuse me, this is the operator. Sir you're sounding a little distant and your voice is echoing.

Yes. So hello. Am I already on?

Yes.

Yes. Yes. So the government has discontinued the MSME scheme, which will impact the export benefits which we get. However, government has already announced a new scheme, the mechanics of which are being worked out by the government in consultation with the industry. Hopefully, early next year, next calendar year, the government will come out with a new scheme. And we believe -- so we are here to see the fine print of that scheme. But we believe this is only a temporary phase, and we should be having -- we should not be having any large gaps between the current scheme and the next scheme or rather the income, which we generate from the current scheme into next scheme.

But in Q3, this number would fall significantly, right?

Yes, yes. Yes, because for Q3, government has said export will probably be down [ to ] INR 2 crore for the period.

The next question is from the line of Girish Bakhru from Bank of America.

Great sort of numbers. Quickly on remdesivir. Sharvil, any comments on how we see situation currently? Is there still significant gap between the demand and the supply?

So I believe that there is now obviously a good amount of suppliers who are available on remdesivir. We are currently still the lowest priced product to patients. So we believe -- so we are still seeing very good demand for it because, obviously, that becomes the first choice in terms of the product. So we are seeing still good demand, and we haven't really done any large exports. So we believe there's export market, some of it also may come up in the future. So we are building -- to May, we are still building for full capacities and produce as much as we can to sell. And so far, we are okay, if I say, for the month now and going forward for the next 1 or 2 months. Beyond that, we'll have to wait. But because we are the most affordable brand, we believe we will continue to see a good uptake on it.

And when you say export opportunity, how soon can one actually see a possible export opportunity from this product?

So some we'll see starting from October. So we are already starting to see some, but we are building on to more opportunities there.

Right. And the second question was on the vaccine. I mean you commented that possibly March, Phase III data will be there. Is there still a possibility of emergency use approval before March based on what Phase II data comes out? Or do you think that approval is sitting likely after March?

It's a tough one to answer. I believe we would be submitting a Phase II and Phase III protocol by end of November. And I think I can give you more clarity then. But I think it will be the regulator's call to take whether they will approve any vaccines for EUA. And if they do, then there would be a few -- more than a few vaccines that will get approved, but it's very difficult to say today whether that will happen. So if that happens, then we would be there also in the last quarter. But if not, then it will be April quarter where more vaccines will come up after full Phase III.

And based on your assessment with the developments that have happened with global trials with AstraZeneca or Pfizer, I mean, would you still say that your DNA platform has, let's say, better relative safety or efficacy? Is there a possible comparison that you can draw at this stage?

So some of the advantages of our vaccine are 3. We don't have any infectious agent as part of the delivery platform technology. So when we know that all of these vaccines will be more than a single dose, and we don't have any active infectious agents present in our vaccine, which are in some of the other platforms. So that is 1 part of the safety. The second is DNA vaccines have a very clear pathway, both by the WHO and the U.S. FDA in terms of what needs to be done for the safety and efficacy. So at least it's a known pathway that we all are following. Third is because of the -- it's a highly scalable platform. So that would help us in terms of building for scale and also finding potential third-party manufacturers. And most importantly, because of the technology, it provides us a product that will be stable at 2 to 8 degrees. So in terms of cold chain regulations and shelf life, we would have a better -- we will be very good at it, and that would be an important thing from the logistics point of view because both in terms of shelf life as well as cold chain, this is a much more stable platform compared to some of the others. So all of these will add benefit to it. And also because it is scalable, I think something which is important for developing markets is cost. And I think we should be fairly good on cost also in terms of affordability. The other last part is the platform in terms of delivery because it is an intradermal application, there should be a much easier administration. The need for training is far limited because it's not an IM injection, intramuscular, but only an intradermal injection. So the whole health care professionals of the community, which the government will be using, it will be far more easier to train them or for them to be able to administer these doses.