Zydus Lifesciences Limited (ZYDUSLIFE) Earnings Call Transcript & Summary

Welcome to Zydus LifeSciences Limited Quarter 1 FY '23 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I'll now hand the conference over to Mr. Ganesh Nayak, Executive Director of Zydus LifeSciences. Thank you, and over to you, sir.

Good evening, ladies and gentlemen. Welcome to our post results teleconference for the quarter ended June 30, 2022. For today's call, we have with us Dr. Sharvil Patel, Managing Director; Mr. Nitin Parekh, Chief Financial Officer; Mr. Arvind Bothra, Senior Vice President, Investor Relations; and Mr. Alok Garg, Senior Vice President from the Managing Director's office. I hope you would have gone through the quarterly results, investor presentation and the press release, which are available on our website and also filed with the stock exchanges. First of all, let me quickly run you through the Q1 FY '23 consolidated financial performance. We registered revenues of INR 40.7 billion, up 2% year-on-year. Excluding COVID-related revenues, the growth was 11% on a year-on-year basis. EBITDA for the quarter stood at INR 8.33 billion, down 14% year-on-year. EBITDA margin for the quarter stood at 20.5%. Net profit for the quarter was INR 5.18 billion, down 12% year-on-year. We remain vigilant on managing our costs well and improving efficiencies across the value chain to meet our aspirations of achieving 20% plus EBITDA margin for FY '23 as we aim to grow across all our key businesses. Before I dwell into the operational highlights, I would like to draw your attention to key points related to our 2 key geographies, namely India and the U.S. Our India geography, which comprises of the formulations and the consumer wellness businesses now accounts for 46% of the total revenues and grew 12% year-on-year adjusted for COVID-related revenues in the formulations business last year. Our U.S. formulations business, which accounted for 40% of the total revenues, grew double digits on a sequential basis, aided by volume expansion in existing products and new launches. Now let me take you through the operating highlights for the first quarter of FY '23 for each of our business lines. Starting with our formulations business in the India geography, the branded business grew by 9% year-on-year, excluding revenues from COVID-related products, generics portfolio and divested products. Overall, the business recorded revenues of INR 11.3 billion, down 17% year-on-year on a high base. Secondary sales growth remained robust for the period, signifying healthy demand trend. We gained market share and improved ranking in our core therapies in the cardiovascular, gynecology, respiratory and pain management therapeutic areas during the quarter on a Y-on-Y basis. Lipaglyn is now ranked as the 66th largest brand in the Indian pharmaceutical market during the Q1 FY '23, improving by 13 positions versus Q4 FY '22. Lipaglyn is our first indigenous new chemical entity launched in the market. We continue to retain our leadership position in the nephrology segment, while in oncology, we gained multiple ranks and are now amongst the top 2 players in India. Our consumer wellness business recorded revenues of INR 6.9 billion, up 18% year-on-year. Timely onset of summer and improved distribution reach helped us re-recruit the consumers for summer heavy brands like Glucon D and Nycil. This helped us achieve double-digit growth in these 2 marquee brands. Now let me take you through the performance of our U.S. formulations business. We recorded revenues of INR 15.6 billion with a 10% growth on a sequential basis. Price erosion during the quarter was almost entirely neutralized by volume share gains in the base portfolio and launch of new products. We received 7 new product approvals, including 1 tentative approval and launched 8 new products during the quarter. Approvals for the quarter include 1 first cycle approval. We filed 8 ANDAs during the quarter, including 3 filings which are designated as CGT, which is competitive generic therapies. On the emerging markets front, the business maintained its growth momentum and recorded double-digit growth. Overall, the business posted revenues of INR 3.2 billion, up 14% year-on-year. The growth was broad-based across most of the geographies. The U.S. FDA inspected our Moraiya formulations facility between the 26th of July to the 5th of August 2022, which concluded with 4 Form 483 observations None of the observations were related to data integrity. The company will submit its response to the regulator within the stipulated time. We have put up a new oral solid dosage facility in the Ahmedabad SEZ, SEZ2, to cater to the requirements of the U.S. market. During the quarter, we successfully completed the qualification and took the first exhibit batch from the facility. Now this concludes the business review. I would now request Dr. Sharvil Patel to take you through the key drivers across businesses and initiatives in our innovation program. Dr. Sharvil Patel?

Thank you, Mr. Nayak. Good evening, ladies and gentlemen. It is a pleasure to have you all on the call today. As we continue to evolve as an innovation-driven life sciences company, our focus remains on building businesses with sustainable growth on a long-term basis. We continue to invest resources organically and inorganically in their pursuit and endeavor to enhance shareholder value in the process. Let me share with you the strategic direction for 2 of our large businesses, which is India geography and the U.S. geography. As mentioned earlier, our branded formulations business in India grew by 9% year-on-year. In the near term, we aim to grow in line with the market. In the medium term to long term, we intend to outperform the industry growth substantially. This will be achieved by expanding our presence in chronic therapies, introducing new molecules in focused therapies, expanding the presence in institutional segment and leveraging our innovation pipeline, including the IP-protected novel molecules and biosimilars. We will leverage digital technologies to improve our decision-making and to optimally utilize our resources to expand reach and availability, thereby improving the health outcomes for our patients. The consumer wellness business regained its growth momentum driven by strong traction seen in its marquee brands. We aim to consolidate our position and sustain the momentum by expanding the distribution network, launch of new variants to meet consumer preferences, and in turn, emerge as a formidable consumer wellness company. The U.S. formulations business witnessed healthy rebound highlighting our strength in execution. We look forward to commercialization of our differentiated pipeline, supported by our business development efforts. Our specialty portfolio is likely to scale up over the medium to long term, and we want to become a niche and a sustain -- and want it to become a niche and a sustainable growth pillar. Our philosophy to invest in people to build the businesses has received external validation as well. We received 2 noteworthy recognitions recently, the first being the most preferred workplaces by Marksmen in association with Economic Times and India Today; the second being amongst the best workplaces in the biotech and pharmaceutical industry 2022, by The Great Place to Work. With this, let me talk to you about the material developments on the innovation front. On the NCE research front, as you are aware, our Phase IIb/Phase III global clinical trials for saroglitazar magnesium to evaluate its efficacy and safety in patients with primary biliary cholangitis, which is PBC and its Phase IIb global clinical trial of the molecule for the NASH fibrosis indication are currently going on for the U.S. market. During the quarter, we completed the hepatic impairment studies in NASH and normal PBC patients, the results of which will be submitted in the near term. Clinical trials of saroglitazar magnesium in the U.S. are ongoing for indications of PCOS and NAFLD also. We completed the Phase Ib trial for desidustat in the United States for chemotherapy-induced anemia in cancer patients. The pre-IND meeting with the U.S. FDA is scheduled in the current quarter to seek for further guidance. During the quarter, we completed recruitment of patients for our Phase II clinical trials of ZYIL1. The molecule is targeted at Cryopyrin-Associated Periodic Syndrome, which is CAPS, a rare indication. We are planning to initiate a global pivotal clinical trial for this molecule in the near term. This marks our third NCE in our global development. On the biotech space, we received market approvals for the drug substance of biosimilar Adalimumab from the Russian Regulatory Authority. We continue to file new products in many of our emerging markets and want to enter new markets through partnerships to ensure long-term sustainable growth for this business. On the specialty front, our wholly owned subsidiary, Sentynl Therapeutics, incorporated commenced commercial supply of Nulibry during in the quarter. Recently, Nulibry received positive opinion from the Committee for Medical Products for Human Use, the CHMP, for Nulibry for the treatment of patients with Molybdenum cofactor deficiency type A. The brand also received Industry Innovation Award 2022 from the National Organization for Rare Disorders in the U.S. Sentynl continues to run various programs to expand awareness and early diagnosis of the Molybdenum cofactor deficiency type A and Menkes disease, both of which are life-threatening pediatric genetic disorders. Thank you. And now we will start with the Q&A session. Over to the coordinator for the Q&A.

[Operator Instructions]. First question is from Neha.

My first question is on the U.S. business. We saw a very strong growth quarter-on-quarter. I know in the opening remarks, you mentioned volume and new launches. If you could give us a little more color on what you're seeing in Asacol? And in terms of the volume expansion, are there any one-off product suppliers that we have seen? Or is this a sustainable base that we should grow?

So we don't have any one-offs in these overall numbers. We did see a sequential growth on the business because we continue to gain volume share on the base portfolio and also the new launches helped. So despite the pricing pressures that do continue in the U.S. because of base volume growth and new product introductions, we were able to deliver on this growth. And going forward, I think we are currently at a sustainable base, which we hope to grow forward.

And is it fair to assume, sir, that the Asacol pressure that we were seeing through last year that is stabilized now?

Yes. So there was no pressure on Asacol. It was just an inventory real -- look, I mean the inventories would have been high during COVID, which could have normalized, but Asacol has been steady in terms of its share.

Understood. My second question is on the cost. If I were to look at our employee cost or even SG&A ex R&D, there seem to be a fair bit to increase quarter-on-quarter. Not so much in the G&A, but more on the employee cost. So I'm assuming there's some amount of increment? Or is this the base that we should be looking at? And on the SG&A, has our SG&A spend [indiscernible] booking spend in India fully normalized?

So on the employee cost, Neha, basically, Q-on-Q, we don't to make a lot of sense and possibly year-on-year make sense because in April, we give increments and incentives including onetime performance rewards. So about 8% impact is on account of increment and performance bonuses only. And about 2%, 2.5% impact is because in the last quarter, that is Q4 of 2022, we had actual gain because on a yearly basis, they're [ exercise ] done or twice in a year or so. So in September, again, it will be done. So that is the reason about 2.2% change occur because of that. And about 1.5% is due to new recruitments also.

Understood. And this new recruitment would be in India, sir?

Yes. Across, but largely in India.

Got it. And my last question on the India business. I know there was COVID base, but our decline seems to be higher than some of what our peers have reported. In the ex COVID base, are we seeing improved traction from the initiatives that we have taken in India, give some color there?

So I think for us, as we have also stated, we -- last year, corresponding quarter, we had a significant sale of COVID-related portfolio, which obviously largely driven by remdesivir. But without that, we have had a 9% year-on-year growth. And if you look at the latest [ AVX ] data also for July and all, we are tracking better than market. So I think we are on track to grow as per market in terms of our current efforts. And the key drivers from whatever work we have done in terms of our earlier initiatives continues, and we're seeing some traction there. But as we go forward, our efforts on institutional business, our efforts on the chronic segments that we want to leverage and more importantly, our strong IP-protected business that we are trying to create all will drive sustainable growth for the domestic business for us.

Next question is from Surya Patra.

First question on the kind of the gross margin [indiscernible]

Mr. Surya, sorry. Your voice is not clear.

Is the audible now?

Yes, you can go ahead.

So on the gross margin front, I just want to [indiscernible] in that. So what are taking of [indiscernible] is it while the domestic-branded business has performed well. [indiscernible] is it that the volume gross in the U.S. market, to some extent, have a [indiscernible] is that the reason? [indiscernible]

Mr. Surya, your voice is not clear. We are not able to get that. Surya? Your voice is not clear to us. Can you try to get back on the line. There's some disturbance in the line that we are not able to hear it properly.

Next question is from Prakash Agarwal.

I just missed one comment on the U.S. business. There is a sequential improvement. Is it like volume has improved or we had some good launches? If you could elaborate that? That's my first question.

So the growth in the U.S. is both. We had a base business volume growth and a new product growth also. So it's a combined effort.

But anything you want to call out in terms of any new product which would have contributed? Because most of the other companies have reported a sequential decline with double-digit erosion in the base business. So did we experience that? And if not, what is our base business erosion? And what are the key new launches we had, which contributed?

So [indiscernible] I mean, we saw an overall growth of 8% quarter-on-quarter on our U.S. revenue, and this was mainly driven by volume growth. There was a price erosion of the impact of 2.5%, which was offset by new launches.

Okay. Fair enough. And how do you see the remaining 9 months for us on the U.S. side?

So our current best estimate, we believe, is that currently, we're at -- our base business is currently on track, and we believe we can grow from that. We can believe is the current base that we have. And we'll improve on the run rate as we continue forward in the coming quarters. And we do have some important launches that are also phased 1 or 2 quarters.

And second question is on the complex injectables. In the past, we have spoken that the second half of fiscal '23, '24, we should start seeing this. What is the update on that? How many filings we have? And when do we start seeing the monetization?

Yes. So I think when I'm talking about the U.S. business, which is -- which we believe can continue to grow. It is also backed by our launches on the injectable side. In terms of very large complex injectables, the process of approval and launch will be obviously much later on. But with the current portfolio, we are seeing still good traction in terms of growth.

Sharvil, question was on complex injectables. Are we still under like development and due for filing by end of this year? Or -- what is the update there?

We're still -- we continue to file complex injectables every year, and we have a pipeline of at least another 5 to 6 molecules which are highly complex, which we still hope to file, but we are filing 1 to 2 complex injectables every year.

Okay. Fair enough. And lastly, on the margin front, I mean I understand there has been an inflation, understand freight and everything is very high. Is there an outlook you're sharing on the margins, adjusted margin at 18.5%?

We already talked about 20% plus margin for the year.

So I think last time I had given an idea that we would believe that we will be 20% plus margins. We hope to sustain these margins by FY '23 by optimizing all our efforts that we are doing. Also between quarter-on-quarter, obviously, it's a question of product mix -- sorry, business mix that happens. But we are still confident that our 20-plus percent EBITDA margin, we should be able to deliver for FY '23.

And this is core margins, today is 20.5% or 18.5% as per you?

20.5%.

20.5%.

Okay. This is reported margins you are saying?

Yes.

Yes.

Next question is from [ Kashish Thakur ]. Okay. We'll go on to the -- Kashish?

Can you hear me? This is Vinod.

Okay. Vinod, yes. You can go ahead.

Just an update on a couple of questions, a couple of products in the U.S. Any further update on Revlimid launch? You already have a tentative approval? Are you looking forward to launch in the coming quarter?

Yes. We are looking forward.

Okay. And the second, you -- I believe you have a settlement to launch generic Trokendi in coming January. Is that correct? Are you looking forward to launching that?

So I think every product, but when we come closer to that, we will talk about those launches because I think it will be a little too early. And I mean not good to talk about them right now.

Great. No issues. You've got a final approval for Jardiance, I guess, a couple of weeks back -- or a week back. Would you confirm if you have a first-to-file exclusivity in there? Is it shared? What is the outlook there?

I don't have the immediate update, but I can get back to you whether we have any exclusivity or not.

Okay. Great. Great. One final, if I can add that. In Moraiya facility, in the other facility, you got an approval, although you had some 483 observations without a reinspection. Would you be able to -- would you think you will get an approval for Moraiya without reinspection despite these 3, 4 observations that you have gotten?

So I think observation -- linking observations to a reaudit is not the right thing. I think in -- when we had our observations that were there for Liva that were addressed in an appropriate manner in a stipulated time. And the facility was found to be acceptable in terms of a [indiscernible]. And we continue to get our approvals. Moraiya, we will respond in the stipulated time that we have with the agency and work with the agency for whatever will be the next steps. But I think to link observations to a reaudit is not the right way to look at it.

Next question is from Vishal Manchanda.

On your Adalimumab biosimilar approval in Russia, could you share what's the market size there and some color on the competition?

So we are the first -- I mean, on competition model, we will be the, I think, either the 1 or second generic in that market. So there will be 1 more generic maybe. And in terms of size, I don't have it with me, so maybe we can give you once we find out because the data is -- we don't have all that data, but we'll come back to you with what is the market opportunity size in for Adalimumab.

Okay. Would this be a tender opportunity? Or you would need this -- you would need to promote it and hence, you would need a partner in Russia?

No, it would be sort of a tender opportunity.

Okay. And do you think it's going to be meaningful?

From our emerging markets business point of view, yes.

And any other geographies where you would be expecting biosimilar approvals on the emerging market trends?

So I think our next big market opportunity we're looking is for the Latin American markets, where we could -- where we believe the opportunities could be sizable, and there we are also expecting 2 to 3 approvals.

So is Brazil one of them? Or you would look at Mexico, Colombia and other markets?

On the immediately basis, Mexico, Colombia, Venezuela markets.

Okay. Okay. And just one on Lipaglyn. Is the growth on Lipaglyn primarily on account of the liver indication approval that you got last year?

So I think that is added to the growth. So we have 2 indications. But yes, the [ lipid ] indication will be the strong growth driver going forward.

And there is still large headroom there in that indication?

Yes, yes. It's a very large INR 4,000, INR 5,000 crores plus market. So is a good opportunity.

Okay. And any color that you would like to share on desidustat launch in India? That has happened?

Yes. So the launch has already happened, and we are tracking. As for these type of products we are tracking, prescription and patients to make sure that we are able to provide the treatment options that they desire and follow through with them. So the initial beginning is good, but it's still very few very early days, but the interest from the medical community is very good because this is a replacement of an injectable product with -- which can tremendously benefit in terms of both patients on dialysis or not on dialysis.

Would you also be able to target the iron sucrose market with this product, desidustat or just the [indiscernible]?

It's mostly the [indiscernible].

Next question is from Sriman.

I think they will have to unmute, Sriman.

Yes, Sriman, please unmute yourself.

Dr. Sharvil. Can you hear me?

Yes.

Yes. Dr. Sharvil, I just want to know, we had an agreement with Korean company Enzychem Lifesciences? So are we getting any revenue on the technology that you have transferred to them?

We are currently getting -- we aren't getting any revenue. We are in the phase of tech transfer, which then will be followed by a regulatory inspection in their facilities and then potentially launch in the markets that they are targeting.

Okay. But initially, it was told that 80 million doses will be manufactured somewhere in 2022. So are we still in the process of transferring the technology only?

The technology transfer has happened, but it will have to go through a WHO approval process. So once that happens, then the -- so I think on the immediate basis, I doubt if they'll be able to produce so many doses this year. But once they are through with some of the other regulatory approvals, maybe they can, but it's a very fluid situation. But at least they are continuing with the regulatory status filing.

Okay. So the revenue, the -- whatever the revenue that we are going to get is only based upon the production or irrespect of the production?

No, based on the production and sales.

[Operator Instructions]. Next question is from Sameer Baisiwala.

This is Sameer from Morgan Stanley. I dialed in 5 minutes late, so I may have missed it. But Sharvil any thoughts on the potential Asacol HD competition?

So I think, again, it's always difficult to predict. But as per our latest understanding or estimate, we believe the competition may not be there before quarter 4 of this calendar year, but that would be our best estimate.

Okay. And in the context of Revlimid, you said that you all set to launch next quarter. Are you referring to 2Q fiscal or 3Q fiscal?

So we will be launching as and when the approval is there. So we have a tentative. We will be obviously waiting for a final approval. And then at the -- and once -- and we will launch in the next wave that is planned for. Exact dates and months I can't give you, but it is in the near term.

Okay. Wonderful. And Sharvil, you mentioned that there are some more high-value launches in the second half. Anything that you can share on that?

So I think it's difficult to give a product-wise detail, but it is a combination of products that we want to launch, which will be important for -- in terms of our new product launches other than Revlimid.

Okay. And finally, how does fiscal '24 look like for U.S. pipeline?

So we continue to file 30 plus -- 30 to 35 plus ANDAs in the U.S. We believe we have a pipeline that -- through which we will launch 30 to 35 new launches every year. And so we are still very -- from our current expectation point of view, still very buoyant about the next couple of years for U.S. launches. And we have also obviously factored in the incremental competition that will come with Asacol. But with what we have planned, we hope that we'll be able to grow our business despite that in FY '24.

You'll grow your business despite the Asacol competition in fiscal, you said '23?

Fiscal '24. And '23 also. But fiscal '24.

Okay, it is then the full year impact would be there. Okay, got it.

Next question is from Divyang Shah. Divyang, please unmute yourself.