Zydus Lifesciences Limited (ZYDUSLIFE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to our post results teleconference for the quarter ended September 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, let me quickly run you through the Q2 FY '23 consolidated financial performance. We registered revenues of INR 41.3 billion, up 10% year-on-year. Excluding COVID-related revenues, the growth was 15% on a year-on-year basis, driven by our key markets, namely India and the U.S., both of which grew in double digits during the quarter. Reported EBITDA for the quarter was INR 8.2 billion, down 9% year-on-year. However, Adjusting for the COVID-related inventory provision during the current quarter, the EBITDA margin stood at 22.6%, which is an improvement of 210 basis points on a sequential basis. Profit after tax for the quarter was INR 5.2 billion. And excluding the impact of COVID-related inventory provision, as mentioned above, exceptional items and profit from the discontinued operations, PAT for the quarter stood at INR 6.1 billion, up 15% on a sequential basis led by improved EBITDA margins. We remain confident on our ability to achieve 20% plus EBITDA margins for the current fiscal backed by growth visibility across our key businesses, coupled with various cost optimization initiatives. With this, let me take you through the operating highlights for the second quarter of FY '23 for each of our business segments. Our India geography, which comprises of formulations and consumer wellness business accounted for 43% of the total revenues during the quarter and grew 11% year-on-year adjusted for COVID-related revenues in the formulations business last year. Coming to the formulations business in the India geography, the business registered an improvement in growth during the quarter as it grew by 11% year-on-year, excluding revenues from COVID-related products and divested brands. H1 FY '23 growth for the business was 11% as well, excluding revenues from COVID-related products and divested brands. We gained market share and improved ranking in our core therapies, namely cardiovascular, vascular, gynecology, respiratory and gastrointestinal during the quarter on a year-on-year basis. Overall, we grew faster than the market during the quarter on account of higher growth in therapeutic areas mentioned above. Notably, our first new chemical entity Lipaglyn consolidated its position in the market further and is now ranked as the 56th largest brand in the Indian Pharmaceutical Market during Q2 FY '23, a gain of 10 positions versus the first quarter FY '23. Our consumer wellness business recorded revenues of INR 4.2 billion, up 12% year-on-year. Growth during the quarter was led by Glucon D, Nycil and EverYuth brands. While the business continued to deliver double-digit growth, gross margins were under pressure during the quarter on account of pricing pressure in key inputs. We continue to implement price hikes at a portfolio level to mitigate pressure across on margins which is likely to recover over the coming quarters. Now let me take you through the performance of our U.S. formulations business. The business accounted for 43% of the consolidated revenues during the quarter with sales of INR 17.1 billion and grew by 10% on a sequential basis. We launched 10 new products during the quarter, including the generic Revlimid, which is lenalidomide, which aided the growth momentum. We received 15 new product approvals, including 2 tentative approvals during the quarter. On the emerging markets front, the business continues to maintain its high growth momentum as it posted revenues of INR 3.3 billion, up 24% year-on-year, excluding revenues from COVID-related products. The growth was broad-based across most of the geographies. The business grew during the quarter despite the challenging political and economic scenario in some of the emerging market countries. 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. Thank you.

Thank you, Dr. Nayak. Good afternoon, ladies and gentlemen. It is a pleasure to have you all today on the call. We continue to direct our efforts and resources towards the focused execution in 2 of our largest geographies, India and U.S., with an aim of sustained value creation for all stakeholders. All our key businesses sustained the growth momentum and delivered a robust performance during the quarter. Our formulations business in India continued to steadily improve on growth metrics, registering a steady double-digit growth ex-COVID revenues in line with the market. While this has been a near-term target, we intend to outperform the industry growth sustainably in the medium to long term. We will continue to leverage our innovation pipeline to -- pipeline, including the IP-protected novel molecules and biosimilars to focus on volume expansion through strategically directed marketing efforts, brand building and improved distribution, including the new age channels. With the impact of COVID-related disruptions behind us, the consumer wellness business maintained the strong growth momentum and posted a double-digit growth during the quarter. However, there were challenges in forms of higher input costs and slower pickup in rural demand, which impacted the profitability. We continue to expand our distribution network and broaden our product properties to drive additional growth going forward. We are pleased to see the fruits of our continued R&D efforts, aiding to steady growth in the U.S. formulations business, supported by new launches, including generic Revlimid during the quarter. Also monetization of our internal pipeline, along with our BD&L efforts will be the key drivers of our U.S. generics business. Our specialty portfolio is likely to scale up over the medium term and become a niche and sustainable growth pillar as well. It is heartening to see the impact of our innovation products on patient health outcomes, which has enabled affordable treatment options with easy access through our comprehensive distribution network. This has enabled commercial success of our innovation products. Notably, Lipaglyn sustained its momentum and is continuing to add newer patients and has improved its rank in the IPM every quarter. Bilypsa, which is the only available treatment for NASH indication continues to display robust growth consistently since launch. On the biologics front, we launched Ujvira, which is our first ADC, antibody drug conjugate biosimilar of KADCYLA last year. The molecule has gained significant traction in the first year of launch itself and is one of the leading brands of our committable oncology franchise. With this, let me talk to you about some material developments on our innovation efforts. On the NCE front, during the quarter, we submitted the results for the hepatic impairment study of saroglitazar magnesium in NASH and normal PBC patients to the USFDA. The heparin impairment studies of the molecule in cirrhotic cholestatic patients is ongoing and which is likely to be completed by end of FY '23. We achieved a position, a positive proof of concept in our Phase II trial for our NCE ZYIL1 and NLRP3 inhibitor in patients with cryopyrin-associated periodic syndrome, which is called CAPS, which is a rare lifelong auto-inflammatory condition. The study demonstrated rapid clinical improvement in remission within days and CAPS patients with flare-ups were treated with in ZYIL1. We received regulatory approvals in India to initiate Phase II clinical trials for our anti-malarial drug candidate ZY19489. We also commenced a Phase IV clinical trial of desidustat in patients -- in India in patients with chronic kidney diseases induced anemia. The trial will enroll 1,000-plus patients, half of them being on dialysis-dependent and the remaining half being independent of dialysis. On the specialty front, our wholly owned subsidiary, Sentynl Therapeutics Incorporated received marketing authorization in the EU for Nulibry for the treatment of molybdenum cofactor deficiency type A. It is the first and only treatment in Europe to treat patients with the MoCD Type A and we are looking forward to successful commercial partners to launch Nulibry in the EU. On the regulatory compliance front, I am very pleased to share that earlier this week, the USFDA issued us an EIR with a voluntary status -- a VAI status for our Moraiya formulations manufacturing facility, which was earlier in our warning letter. The inspection now stands successfully closed. The USFDA has also inspected our new animal health formulations facility located in Ahmedabad SEZ between 23 September to 29 September 2022, which concluded with 2 Form 483 observations. We submitted other responses to the FDA in the month of October. We are proud of our manufacturing quality teams for their proactive approach to sustain quality excellence. We remain committed to invest in the requisite resources to build a strong corporate quality culture. This will strengthen our position as a reliable supplier of products that conform to the highest standards in the world and other markets. Thank you. And now we'll move over to the Q&A session. Over to the coordinator for the Q&A.

[Operator Instructions] First question is from Prakash Agarwal.

First question is on Moraiya. So congrats on the approval. But how do we see this approval, have we been able to transfer most of the important files? Or does this give opportunity to launch a new set of products? You've talked about a couple of niches also coming out from this facility, if you could update how should we look about on the outlook? .

So we still have some important launches that are still from Moraiya. Obviously, the whole transdermal franchise is going to be important in terms of the commercialization of that. Also, there are some small molecules like softgel and others, which were filed out of Moraiya, which will see some positive traction going forward. So all in all, I think the resolution of that will only help us add to the overall business mix of the U.S. going forward.

Okay. But I mean, does this change your approval, scope launch guidance of 20 to 30 products every year? Or how should we think about it?

Yes, if we get through approvals, Moraiya has, I think, close to 30 pending approvals. So yes, we would see an uptick in the number of approvals.

Okay. Fair enough. And secondly, on U.S. sales and linking it to gross margins, I mean -- so one on the U.S. sales, if you see the Q-on-Q movement versus other peers, it has been a little softer. Is it like well spread out in terms of development opportunity? Or how should we think about it? I mean, it doesn't seem to be upfronted like other plays.

Yes, it is not upfronted. We have a well spread out plan for Revlimid. And currently, it is better than our estimates in terms of what we have been able to do on the product.

No. So what I understand is this quarter and the next quarter are the 2 big quarters where most of the companies would be booking because NATCO would have the double-digit market share starting March. So would that be a fair understanding? Or it is even -- spread out even further also the March quarter?

I think for us, it will be spread out beyond the March quarter also.

Okay. Okay. Fair enough. And lastly, on gross margins and EBITDA margins. So adjusted for this ForEx as well as your COVID-led inventory, EBITDA margins are flattish despite Revlimid. So have we started to look at some costs coming down, both in terms of import and other operating expenses or inflation still is at elevated levels? Some color will help.

See, I think we have maintained that we believe that we will comfortably be above 20% EBITDA margins. And with the kind of product launches, we can see some improvement there. On the cost and other front, we continue to obviously look at various opportunities. Maybe on the inflation, I think, maybe Nitin Parekh, if he wants to add something.

So Prakash, while we have calculated ForEX gain and so on that is on the income side, you can understand there are certain expenses also including the imports and other expenses, where also there is a negative impact, which currently, we have not separately competed and made available, but the gain is to be considered on a net basis, that is one. Plus there are certain input costs, which have started easing out. And the result of that, you would see in the ensuing quarters.

The next question is from Bino.

Hello. Can you hear me?

Yes.

Okay. Great. So just a follow-up on Revlimid. When you say it is well spread out, so in the last quarter, which is reported, you had less than a month of sales. So if I roughly assume that coming quarter will have 3x of whatever sales you booked in last quarter. Is that an okay assumption? Or is it far away?

No, I think because there's a limited market share, we have divided the market share. So it is not a monthly market share, but we just divide the overall market share that we have received.

In the quarters?

Yes.

Okay. And continuing with U.S., there is this product, Trokendi XR in which I believe there is a settlement to launch sometime soon. Can you give some time line?

Yes. So we will launch -- sorry, we are planning to launch the Trokendi XR in quarter 4 of FY '23. And it will be an important launch for us.

Right. And one product Myrbetriq in which you've got a final approval recently. Any time lines regarding the launch of the same?

The timelines are yet not finalized.

Finalized, okay, okay. And just one if I could add. Regarding this hepatic impairment study that you talked about, what sort of study is that? Is it a safety study or any efficacy study?

It's a safety study. It is to improve the label claim when we finally look for a PBC NASH approval. There are challenges with some molecules with this, and we believe our product is much superior to that. So the studies are there to demonstrate that there are no safety concerns for this molecule or products in this class.

The next question is from Kunal Randeria.

Sir, your R&D is quite diversified across NCEs biosimilars besides the normal 30 to 35 ANDA filing that you do? So this around INR 1,100 crores R&D budget, is it possible for you to split how much you would be spending across these different R&D verticals? .

So I think broadly, we have said right about 2/3 of R&D investment...

In generics.

Is in generics, biosimilars and all those put together. And about 1/3 of this is in the current NCE programs that we're running. I think going forward, we will see maybe a mix which is more driven towards NCEs, but that's the current mix.

And on an absolute basis, how do we see R&D in the next 3 years because I mean, saroglitazar and all the other products should be entering into late phase clinical trials?

Yes. So I think there will be definitely growth in our overall R&D expenses. Currently, we are comfortably in that 7% to 8% as a percentage to -- R&D as a percentage to sales level. Maybe in the next 3 years, we'll review, but surely it will go up, but maybe we'll still be in the 8% to 8%, around the 8-plus percent range.

Sure. And just one more from my side. So I guess you would be launching about 25 to 30 products annually. So maybe if you can give some granularity in terms of how many injectables you expect, let's say, in FY '24, how many transdermals and how many normal overall [indiscernible] products?

So I don't -- we don't -- so it's a very fluid situation. So it's very difficult to give dosage wise. But I've always stated that with the kind of portfolio that we have, including all of the 3 that you stated. We would see a robust number of products launched in the U.S. and which will look also, we believe, add to significant growth for the U.S. business.

[Operator Instructions] The next question is from Neha Manpuria.

Sir, just to understand the U.S. business, you've given we have launched 10 products in the quarter, did the base business erode higher than what we have seen in the last year because Asacol does not seem to be showing any erosion, so any color there on the base business?

No, I don't think we have seen any critical base business erosion in the U.S. in the last -- in this quarter.

So has it been high single digit like we've seen or...

To mid single digit.

Sorry, sir, I missed that.

Mid single digit.

Okay. Got it. And my second question is on the R&D that you mentioned. Did I hear correctly that the R&D spend for the next year could be 8-plus percent?

Yes.

Yes.

Okay. And in that context, I know we -- our U.S. run rate will improve going forward. How should we look at the margins from the 20-plus percent that we would do this year?

I think we will see a good improvement on that.

Yes. But I think by -- when we have the close of this particular year, would have better visibility in terms of the products to be launched next year and should be in a position to give more accurate guidance.

Next question is from Bino.

Just overall on the animal health business. So I'm not quite understanding our strategy there we sold in the animal health businesses which we had, and now we again have an animal health [indiscernible] where you certainly had a recent approval. So what are we trying to do with the animal health side of the business?

So this business is our export -- I mean, the business targeted towards U.S.A. We have filed a lot of ANDAs as they call them as the regulatory submission. And our facility that was built for those has been inspected, and now we are looking forward to a closure of that inspection and then launch -- commercial launch of these products.

Okay. So earlier animal business, which we sold had no sales in the U.S.

Just for your clarification, what we sold did not have any business in U.S. We are starting new animal health business in U.S. with our dedicated facility, which was inspected recently.

It's a new business.

It's a new business.

Next question is from Nitin Agarwal.

Sharvil, on the Moraiya plant, by when do you see the approvals begin to come through from this facility? And how many of [indiscernible] approvals do you expect over the next 12 months?

So approvals, I believe, generally effort, we have seen that in 2 to 3 months, we start seeing approval. So that's what we hope and it could be anywhere from 20 to 35. So I can't exactly say how many numbers, but 20-plus approvals are possible.

And on the transdermals, I mean, transdermals approvals are just right now a function of the approval process getting started or there's something else which can hold back these approvals from here on?

So largely, it is for the facility CGMP, and there are a few queries that have also been answered in the latest round. So majority of them are for facility clearance.

And if you can just refresh our memory, how many transdermals have you filed from this site?

5.

Okay. And from a market perspective, in terms of -- because if file it long back, how many of them are -- where the market is still interesting to you from a site perspective of this 5?

We will be launching immediately 4, and then we're doing 1 site transfer. So overall, all will be launched.

Okay. And secondly, on Asacol HD, how is the dynamics deal in the market? And what are you now pensioning in for competition?

Currently, as I keep on adding, our best estimate is we don't see any immediate competition over the next 3 to 6 months is our best estimate as of now.

The next question is from VIbha.

I just wanted to know, in case I just joined the call a bit late. So please excuse me if I'm repeating a question. I just wanted to know what are the COVID-related product-related write-offs? And is this vaccine related? And how much is it?

So there is a product -- there are materials related to COVID vaccine, which we wanted to earlier use. But now since the vaccines are not required, we thought certain materials may not be utilized, and therefore, you run write-up. Also some other products which we are selling during COVID times, their inventory, we now took a call that this will not be saleable since there is no demand, and therefore, we have provided -- made a provision for them.

Right. So what's the -- in case I missed it, what's the amount of the provisions?

So total INR 120 crores in this quarter. And earlier, we had [indiscernible] in the previous quarter.

Next question is from Harith Ahamed.

I hope I'm audible.

Yes.

So one of your competitors recently received approval for another modified release mesalamine product, which is Pentasa. So is that an opportunity for us as well? Do we have a filing...

We have already launched -- Pentasa are you talking? No, no, no.

Yes.

We are also working on Pentasa.

Okay, okay. And on the vaccines front, can you give some color, the ex-COVID vaccine part of the vaccines business. What's the current size of the business? And how should we think of scale up in this business over the next 2 or 3 years?

So currently on our vaccines business. Currently, our current business is only limited to private market vaccines, which we are selling, which is our flu vaccine and the typhoid conjugate vaccine. We -- going forward, I think as I said, the important vaccines will be us participating in the prequalification of 2 -- 3 vaccines, one is which is already rabies followed by MR and typhoid conjugate. So these 3 vaccines will become part of the global vaccines, which the tenders are not before '24, '25, '26. So there is some time away. And before that, we have to get prequalified also for this. So I think the major uptick for this is '25 -- when we come to '24, '25 where we'll see an uptick on the volumes and business. Till then obviously, we are going to participate in the private market and the India public market through our MR and typhoid conjugate vaccine and the rabies vaccine.

Got it. And last one on saroglitazar. Can you refresh us on the time lines for both PBC and NASH indications in terms of filings? And the hepatic impairment study that you talked about, does that change any of the time lines in any way?

No, the hepatic impairment studies don't change any time lines. They are only -- we are doing those studies to improve our -- have a better superior label claim is what we hope for. We are -- a current estimate for finishing the trial and submission is calendar year 2025 for PBC indication. And the NASH indication is a much longer run out trial. So that is '27 kind of submission, '27, '28, not before that.

And then a related question on saroglitazar again. How has been the response to our launch for NASH indication in the India market? I see that we have a separate brand for the NASH indication. So how is that shaping up?

The momentum of the brand is very good for both the indications. Ideally, the largest now indication going forward will be the NAFLD indication. And -- but we are seeing very strong market share -- I mean, gains in that particular subtherapy. And overall, the brand is performing extremely well. And as I always said, we aspire to make it into the top 25 brands of India very soon. That is going to be our endeavor in the short term. But this definitely will become the top selling -- one of the top-selling brands for the company as well in India.

The next question is from Rashmi.

I think she'll have to unmute.

Yes. Am I audible now?

Yes.

Sir, on Nulibry, I think the commercial shipment has already commenced. So how was the response during the quarter? And if you can give update on the market opportunity for this particular product, the addressable market size and all?

So Nulibry is a rare -- this disease, the orphan product, there had already been existing patients who were taking this in Europe. So that -- with this marketing authorization, we'll be able to continue and look for new patients as we are able to find partners. And in the U.S. also, we are sourcing for new patients. But this is an extremely rare disorder, and these -- the patient numbers are going to be in the single to double-digit kind of numbers. But the value proposition is there. So that is the current plan. So yes, I think it's going to be a steady build up, but it is going to be a very sustainable sticky business. And more importantly, I think we would have brought a solution for one of the rare diseases where there are no current lines of treatment.

And sir, when you say that you have seen a mid-single-digit price erosion in the quarter in the U.S. business. Was that on a quarter-on-quarter basis?

Annualized, it is that.

Okay. So if you...

Quarter-on-quarter 5% would be a big disaster.

Quarter-on-quarter, sorry, I didn't get it.

No, it's not -- it is annualized, not quarter-on-quarter.

Can you update on quarter-on-quarter price erosion?

So low single-digit.

Okay. And ex-Revlimid with the help of launches and all might have offset the price erosion. So ex-Revlimid, can we consider that the base business was more or less flattish on quarter-on-quarter basis, excluding Revlimid sales?

It was slightly softer, and then more to do with timing.

The next question is from [ Avnish Khara ].

So I just wanted to pick up from the question of an earlier participant regarding the COVID provisions that you made. So it was INR 140 crore last quarter and INR 120 crore this quarter. But is this the total inventory been written off? Or is it possible that we'll take some more provisions in the future quarters?

So first to correct, it was INR 40 crores, not INR 140 crore last quarter and INR 120 crore in September quarter. So together, it is INR 160 crore.

And there won't be any provision in the future quarters, right, it's completely been written off?

Yes, yes. Whatever was to be written off, it is written off.

Okay. Great. Also on the transdermal pipeline that we have. So I just wanted to understand is there any difference in the pricing erosion dynamics of that segment of the business? And can you throw some light on if there is going to be any difference in how we are marketing those products or something?

No, it's the same channel of marketing, so there's no new channel. So the same teams and the same network is there. And currently, as I said, for those all products, the margins are still attractive.

The next question is from [ Dhruv Mehta ].

Am I audible?

Yes.

So my question was related to Revlimid. So we have missed our sales like there's a slow ramp-up. And so what is the indication for the whole year? And do we see any fresh competition during the year? That's my question.

So 2 things. One is, we don't -- we haven't missed any estimate on Revlimid. Whatever we have estimated, I think we would do better than that estimate. And it is -- as I said, this is not going to be only for 1 quarter, but go on for a couple of more quarters. So it's not a one-off business.

Okay. And sir, what about any fresh competition during the year?

No, it's a very limited quantity launch. So it's -- there's -- the competitive scenario is not relevant for the moment.

Next question is from Vibha.

There's some confusion, not confusion, maybe there's not so much clarity on the direction of pricing in the U.S., not way in particular. But I just want to get a general idea of how the market is expected to behave? There was some expectation during the last quarter that from this quarter onwards, it will be better. Do you see that? And how does it look going forward? And second, as I have also the logistics costs come down post-COVID and after all the Ukraine crisis, et cetera, the geopolitical upheavals that happened. So are the logistics cost for -- I'm talking about overall not for Zydus in particular. But do you see that, that is kind of normalized now or it's still pretty high?

So the logistics cost, to answer to your second question, have come down across as an industry for pharmaceuticals. So that's happened. With respect to price erosion, I think we always -- I mean, there will always be a very competitive intensity in the U.S. So we believe that single-digit price erosion is something that we all build for in terms of our future planning.

As there are no further questions from the participants, I now hand the conference over to the management for the closing remarks.

Thank you very much. I wish all of you a very happy Christmas and a very happy New Year and look forward to interacting with you again during our next quarterly results in the month of February. Thank you, and have a nice evening.

On behalf of Zydus LifeSciences Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines and exit the webinar. Thank you.