Zydus Lifesciences Limited (ZYDUSLIFE) Earnings Call Transcript & Summary

Welcome to Zydus Lifesciences Limited Quarter 3 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I 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 December 31, 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 Directors office. I hope you have gone through the quarterly results, investor presentation and 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 Q3 FY '23 consolidated financial performance. We registered revenues of INR 43.6 billion, up 20% year-on-year, led by a robust growth across businesses. Our key markets, namely India and the U.S. also registered double-digit growth during the quarter. Reported EBITDA for the quarter was INR 9.6 billion, up 27% year-on-year and 17% quarter-on-quarter. EBITDA margin for the quarter stood at 21.9%, which is an improvement of 130 basis points on a year-on-year and 220 basis points on a quarter-on-quarter basis. EBITDA margin expanded in spite of a 180 basis points increase in R&D investment on a sequential basis as well as a certain onetime REMS setup costs during the quarter for an upcoming U.S. launch. EBITDA margin for the 9 months of FY '23 stood at 20.7%. Profit after tax for the quarter was INR 6.2 billion, up 24% on a year-on-year and 19% on a quarter-on-quarter basis, led by improved EBITDA margin. We are confident of sustaining the growth momentum across our key markets led by strong product pipeline and focused execution efforts. Now let me take you through the operating highlights for the third quarter of FY '23 for our key business segments. Our India geography, which comprises of the formulations and consumer wellness business accounted for 40% of the total revenues during the quarter and grew 13% year-on-year. The India geography continues to deliver double-digit growth in the current fiscal, adjusted for COVID-related revenues in the formulations business last year. The formulations business in the India geography sustained strong momentum and posted revenues of INR 12.3 billion, up 14% year-on-year. Excluding revenues from COVID-related products and divested brands during Q3 and for the first 9 months of the current fiscal, the business delivered a robust growth of 16% and 12%, respectively. Overall, we outpaced the market growth during the quarter. We gained market share and improved our ranking in the gynecology, antidiabetic and nutraceutical portfolio during the quarter on a year-on-year basis. Our first new chemical entity, Lipaglyn, continued to expand its reach by growing its patient base by 45% in 2022. It has now benefited almost 1.5 million patients since its launch. The brand was ranked at the -- as the 59th largest brand in the Indian pharmaceutical market during Q3 FY '23, a gain of 35 positions versus Q3 FY '22. Our consumer products business -- consumer wellness product business recorded revenues of INR 4.1 billion, up 8% year-on-year. Inflation, which hurts margins -- which hurt margins over the last few quarters, is cooling down in key inputs, except milk, where it still remains high. However, we have taken appropriate price increases to counter this, the impact of which will be reflected from the next quarter. Now let me take you through the performance of our U.S. formulations business. The business accounted for 46% of the consolidated revenues during the quarter, with sales of INR 19.3 billion and registered a robust 13% growth sequentially. Growth during the quarter was mainly led by volume expansion in our base portfolio as well as seasonality. The business delivered sequential growth during each quarter of the current financial year, which is a healthy sign for business momentum. We launched 6 new products during the quarter. Recently, in the month of January '23, we launched topiramate extended release capsules, the first generic player to launch the product. We filed 9 additional ANDAs and received 14 new product approvals, including 3 tentative approvals during the quarter. Approvals for the quarter include the receipt of final approval for Estradiol Transdermal system twice weekly. It is the first transdermal product approval from our Moraiya site. On the emerging markets front, the business continues to deliver double-digit growth as it posted revenues of INR 3.1 billion, up 15% year-on-year, excluding revenues from COVID-related products. The business maintained growth momentum on the back of robust performance across key markets. During the quarter, we filed our first ANDA from the newly-constructed oral solids formulation manufacturing in our Ahmedabad SEZ, known as SEZ 2. 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. Thank you.

Thank you, Dr. Nayak, and good evening, ladies and gentlemen. It's a pleasure to have you on the call today. We are pleased with our quarter 3 FY '23 performance, particularly with the fact that the India and the U.S., the 2 largest geographies for us, continue to deliver robust performance, led by the different strategic initiatives and focused execution. We remain committed to investing in our future to drive sustainable and profitable growth by building a diversified portfolio of differentiated products in generics, complex generics, biologics and NCEs. Over the last 2 years, our various strategic initiatives in India formulations business that includes focused brand building initiatives, intense marketing efforts, keeping patients' need in the mind, expanding distribution reach, leveraging digital platforms and driving our innovation pipeline of novel molecules and biosimilars, have enabled the business to deliver steady double-digit growth in the current fiscal year. Our aim is to outperform the market growth over time. Our U.S. formulations business, too, delivered good performance in all quarters so far, driven by timely launches of new products and volume gains in existing products. Our wide product pipeline and focused BD&L efforts lend good visibility on new products, which are critical to offset the impact of pricing erosion in the base portfolio and boost growth prospects in our U.S. generics. Our nimble and agile supply chain and a network of regulatory compliant manufacturing facilities equip us to capitalize on opportunities, which keep arising in the U.S. generics market. Going forward, we remain focused on adhering to highest quality standards across our manufacturing footprint and to monetize our deep product portfolio in the U.S. generics business. We are taking calibrated measures to build out our specialty business over the medium term. Our goal is to improve the health outcomes for patients in dire need of therapies to treat the rare and orphan diseases. On the innovations front, we continue to make steady progress, which help us move further in our mission to improve the patient's health in an affordable manner. Lipaglyn first NCE continues to improve its rank in the IPM with the addition of new patients. Bilypsa, which is the only available treatment for NASH indication has picked pace as it addresses an unmet medical need. Our biosimilars portfolio has made the treatments affordable and accessible for patients and average strong volume growth consistently. With this, let me talk to you about some material developments on our innovation front. On the NCEs front, as you all know, saroglitazar magnesium is currently undergoing a Phase IIb/III clinical trial for PBC indication for the U.S. market. During the quarter, we also received approval from the Ministry of Health of Spain, Iceland and Argentina to conduct our Phase II/Phase III clinical trials for PBC indication. This will help us recruit patients faster and complete our trials on a given time. So far, 54 patients have been enrolled for the clinical trials of saroglitazar magnesium in the U.S. for polycystic ovary syndrome and nonalcoholic fatty liver disease indications. Currently, it's the only ongoing trial in the world for PCOS and NAFLD indications. We initiated Phase II clinical trial in India for ZYIN489 (sic) [ ZY19489 ] a novel potential single-dose cure and cure for anti-malaria or cure for malaria and antimalarial drug candidate. Coming to our biologics and vaccines pipeline, we initiated clinical trials in India for biosimilars of 2 monoclonal antibodies in the oncology space during the quarter. We continue to add more programs to build a robust biologics pipeline to aid future growth. We have also received approval from DCGI to initiate Phase II clinical trial for one of our vaccines during the quarter. On the specialty front, our wholly-owned subsidiary, Sentynl Therapeutics, launched an early access program for NULIBRY to improve global distribution network for the product and, in turn, expedite delivery of life-critical medications to the patients across the world. We filed a new drug application for one of our products in the areas of metabolic disorder through the 505(b)(2) route. Thank you, and now we can start the Q&A session. Over to the coordinator.

[Operator Instructions] So the first question would be from Saion Mukherjee.

Yes, am I audible?

Yes.

So I just wanted to understand the domestic business growth. We have seen good growth now for some time. In your commentary, you mentioned about market share gain in some of the areas like gynecology, diabetes, nutraceuticals. But the bigger segments that you have, cardio, anti-infectives, so I'm just wondering how the growth has come without those segments delivering, if you can give some more color? Just want to understand sustainability of this growth. And secondly, on your innovation molecule, particularly saroglitazar, how should we think about the penetration of the molecule? You've got approval for various indications here. You mentioned 1.5 million patients. So what's the kind of peak level of patient volume and revenues that you're looking from this product? How should we think about that?

So I think on the overall side, first, the important thing is the secondary sales have shown a good double-digit growth and have grown faster than the market. So I think overall, we have shown strong growth. The other market shares on other therapies is not that we are down or anything, they are nearby to the levels of what the market growth has been, but we are talking about where we have significantly gained share. With respect to saroglitazar, saroglitazar, as already said, is doing significantly well. It has jumped almost 40-plus ranks to become the 59th product, and we believe -- as I had always said, that we believe this product will become the top 25 products of India in terms of its capacity and can grow beyond that. It's just a very initial days. We have got full indications of NASH and NAFLD now, and that will allow us to significantly expand the patient base. So the product is growing very well and contributing well to the growth and the overall volumes of the business. And as a strong patient-assisted program that we run on saroglitazar, so that is helping us track the effectiveness of the molecule, which will continuously aid to the further growth of the product.

Sir, just one clarification, if I can ask. My understanding is that this product is materially big in the diabetes and associated indication. And for the liver diseases, NASH and fatty liver, it's not very large. Is that understanding correct? And incrementally, is that going to change, particularly fatty liver being a bigger indication? How should we think about that?

So there are 2, 3 indications. One is the -- I mean if it works in the overall metabolic syndrome. So if you first take the fats and triglycerides, it has a tremendous impact on that and the earlier indications were for patients, who were diabetic and who had dyslipidemia. So that is definitely a good market, but the prescription size, prescription length and duration of that indication sometimes is not as long. With the indication of NASH and NAFLD, you -- the prescription period is very long in terms of treatment protocols. You have to go for years of treatment to reverse NASH and NAFLD. So that is one important aspect of this. And if you look at competing molecules, they are significantly larger currently, and these are not even a good indication for them. So we believe that the NASH and NAFLD is a very big indication in India. There's a high amount of undiagnosed patients in this area. We run the largest number of fibroscans in the country now. and we want to even double that down. So with the strong level of diagnosis that we are running, we believe that the patient pool is quite significant. And early on, we are seeing good traction on this.

Sir, my second question would be on the U.S. There's a good growth quarter-on-quarter. Now you mentioned about some expenditure on an upcoming launch. You are putting some money on the REMS program. So if you can share some color on that launch, is that significant? And in general, given the seasonality, et cetera, and contribution from Revlimid, how should we think about U.S. numbers for the coming quarters?

So the U.S. numbers, we believe, for the coming quarters will continue to be strong with the launches of new products and specific to the REMS that is an important REMS program that we have initiated because we believe we will have a launch in the coming year. And for that, we had to go and pay for that REMS. So those -- that has a good business plan and a good growth potential for that REMS program product. And with topiramate, Trokendi launch also, we'll see further value addition to the U.S. business. So I think overall, the business will track well quarter-on-quarter going forward, at least for the next 2 to 3 quarters.

The next question is from Tarang Agarwal.

I have 2 questions. One you spoke about -- for the U.S. business, you spoke about volume expansion. So was it perhaps because of the current flow conditions in the U.S.? Or you see the overall market to be improving in terms of channel having destocked? That's one. The second is in terms of biosimilars, you've got a broad portfolio, but the portfolio, the timing seems to be restricted to India and lesser regulated markets. So how should we see your journey here in terms of trying to approach the developed markets? That's it for me.

Yes. So first to the U.S., the seasonality of the portfolio is only [ $5 million ]. So the overall contribution is not significant, but it is there. The overall growth, as I said, has been driven from all 3 areas, the new products, the base business, both have contributed meaningfully to the growth of the business and higher run rate that we are now running. With respect to biologics and biosimilars, always our strategy has been in India/some emerging market plan. And currently, we are tracking extremely well on India. And overall, the business is in good health in India, both in terms of, obviously, our business in terms of revenue, but also profits. And going forward, once we get more approvals in developing countries, we would see that number increasing. So our strategy is only linked to these 2 geographies, the rest of the world and India, and that is where we want to build for it. And we have a lot of plans for more launches, at least 2 to 3 new launches coming up over the next 2 years. So the portfolio, which is currently 14 will continue to expand.

The next question is from Neha Manpuria.

Sir, we saw an increase in the R&D spend in the quarter, which I understand is related to the progress on the pipeline. As we make more progress on the trials for saroglitazar, how should we see this number? Could this trend up further? I know it's within our guidance range of the 7% to 8%. But from -- on an absolute basis, how much could it trend up further as we make progress?

So R&D -- for the R&D spend, we believe that our investments will remain in that 7% to 8% range for FY '23. The lumpiness of this quarter is just -- I mean, R&D spend are not even all throughout the year. So you do see that. But our guidance for the current financial year remains intact. Going forward also, we have said that our R&D spend will be around 8% to 9% maximum in the medium to long term. But currently, we are comfortable at the 7% to 8% R&D spend range.

Understood. And thereafter, probably in the 8% to 9% range?

Much later, probably, we'll see -- I mean, it's very difficult to predict 2, 3 years down the line. But at least short term, we are looking at around 8%.

Understood. And my second question is on the REMS onetime cost that you mentioned. Would it be possible to quantify that? How much of the other expenses increase is because of this REMS cost?

It's $8 million.

$8 million? Understood. And we don't see this -- this is just a set up cost. We don't see this recurring.

There is a recurring, but it's not significant. This is mainly the setup cost.

The next question is from Bino Pathiparampil.

Congrats on a good set of numbers. Just one question on this 505(b)(2) that you filed. You say that it's for a metabolic disorder. When you say metabolic disorder, are you talking about the diabetes obesity sort of things? Or is it a genetic and some deficiency sort of disorder?

So we have a portfolio in this. We already had filed 1 product earlier, and this is the combination products that we are filing. So we will be -- in this franchise, we will have maybe around 3 filings total. So this is a second filing.

Okay. And is it like a peptide or something?

No, it's a small molecule.

Next question is from Kunal Dhamesha.

Congratulations on a good set of numbers. First, just 1 clarification. I think as far as I remember earlier, we were pursuing NASH indication for saroglitazar in U.S. as well. So is it still continuing? Or we are kind of pivoting more towards NAFLD?

So currently, the trials in the U.S. are the most immediate ones are PBC trials, which we believe are the near-term ones. And we are still continuing with the Phase II trials for NASH. And as we progress on the key milestones on NASH, we'll come back to you. But we are also testing for other indications like PCOS and NAFLD also, but the NASH trial is ongoing.

Sure. Perfect. And on the PBC trial, when do you expect in terms of readout or if you can share any progress in terms of the enrollment, et cetera, where are we currently?

So we hope to finish enrollment in the next 2 quarters, if everything goes right. And then after the follow-through, we hope early -- late '24 or early '25 filing, if we are able to achieve that time line.

Okay. Perfect. Perfect. And the second question on the same thing. Like earlier, we were thinking about having a strategic partner. So is that still on the cards for these kind of specialty R&D? Or we are going to do it on our own?

So our current strategy on saro for PBC is to do it on our own. But as we move forward and as we evaluate our time lines and competitive intensity, we will take an appropriate call. But currently, we are preparing for our own launch for saroglitazar.

Okay. Perfect. And last, if I may, on the Revlimid side, would you -- I'm not asking for a number, but on a qualitative or directionally, would the quarter 3 numbers be better than quarter 2 for us? Or how should we think about it? And whatever trend we are seeing right now, contribution, would that continue for the, let's say, next 2 quarters?

So quarter 2, quarter 3 was similar. Quarter 4, we'll see higher numbers.

Okay. Perfect. And that is because of some player coming out of exclusivity, et cetera? Would that be the case?

No, it's the way there is our market share volume plan. So accordingly, we are able to taking more share.

The next question is from Damayanti Kerai.

Am I audible?

Yes.

Okay. Great. My first question is on your topiramate XR launch. So you are the first one to enter the market. So how do you see this opportunity in terms of competition over next 2, 3 quarters?

So it is very difficult to estimate. But currently, we are alone in the market, and we still believe -- we hope that we still have the exclusivity, but we are not seeing any immediate launches. So currently, we remain exclusive.

So you launched in January. So 6 months, you believe you will be the only generic in market and...?

That we can't predict because FDA will not make sort of a decision until they see our next generic. So because there are no next generic yet, FDA has not made that decision.

Okay. Okay. And my second question is now you have 2 transdermal approvals from Moraiya. What are the launch plan? And when do you see a meaningful pickup from these opportunities?

So if everything goes well, we believe we will launch at least 2 transdermals in the next financial year. And if we -- even if we do better, then maybe up to 3. So currently, that is the plan, and that would -- all 3 of them are meaningful launches.

Okay. And you have like all required setup from Moraiya, and you might not need to invest anything additional for these launches?

We have already made the investments earlier.

Okay. My final question is, your CapEx is currently trending at around [ INR 10 billion ] for a year. So where are the major spend happening?

So the major CapEx is happening on our expansion of our oral SEZ 2 facility, some expansion that happened in the ZPL, the transdermal area. We had a new line, injectable line that is getting commissioned and also the new prequalified -- I mean, a new plant for MR for WHO prequalification, which is getting ready now and some API projects.

Okay. And how do we see CapEx trending for coming years? Will it remain in similar range or you are like broadly done with some of the major spend?

No. I think our -- this kind of base will remain because we have -- are investing for our growth in different areas. So that -- this kind of range will remain.

The next question is from Surya Patra.

Congratulations for the good set of numbers. Sir, my first question is on the domestic formulation business. Sir, is it possible to share, excluding this biosimilar and the NCE portfolio, what is the growth for the quarter and the 9-month period?

No, I don't think we are segmenting our business like that. So when we push something, we are obviously doing it as a portfolio play. So I think we don't do business [indiscernible] one business and then look at the other business.

Basically, sir what -- sometimes make that we have been emphasizing about the new launches, and that means basically the specialty and the mask kind of approvals that we had some time back had followed and discussed. So now since we are not talking that way, so that is why I was trying to understand on the core portfolio.

We look at India geography and the formulation business as a whole. So the strategy and investments will depend on where we feel the maximum growth will be driven from. So it's -- we don't bifurcate like that. But -- so overall to say, even the base business, which is -- or the established products business of the company has done better than market.

Okay. Yes. And the second question is on, let's say, on the Moraiya front, is it -- whether we have seen any kind of advantage in the current quarter from the Moraiya side. So I'm not talking about the product launches, let's say, in terms of the cost or something like that or increment? No?

Moraiya, the main launches are the transdermals, which will come.

Yes. But on the cost front, also, there is no savings, right?

There is no saving.

Okay. And sir, is it possible to discuss something more about the Revlimid outlook? Like how should we be thinking that or how meaningful it could be? So not giving any number, but at least of the overall kind of run rate what we have been seeing for our U.S. business, so how meaningful this could be?

It is going to be meaningful and Revlimid, as I said, in the next quarters will be better than the preceding quarters.

Okay. Just last one question, sir, obviously, you are one of the -- one of the largely integrated manufacturer of formulation as well as APIs. And obviously, currently, the trend what we are witnessing, a bit challenging trend for even API business. So could you share something your view about the pricing volume trends in that API side to be specific?

So I think as -- for us, currently, a large part of our strategic initiative is for our backward integration for our formulations and driving our first-to-market launches and first-to-file. So the API strategy that we are generally following is for largely driven for internal consumption. Having said so, we also want to expand in the other markets, but we are not a very large player in terms of third-party sales. There has been some slowdown overall in the market as we see because over the last 2 years. But for us, the major critical part of the API business is for internal consumption. And -- but we hope going forward, we'll see growth coming back for us, because we are on a lower base.

The next question is from [ Devan ].

Yes. My first query is regarding the last quarter's [ VOC ], we are seeing some of the pressures on the U.S. markets, the pricing of the drugs. So is it continuing in the current quarter? Or like is it -- like what's the -- for next 2 quarters, what is the view for that?

So our view still continue to see single-digit price erosion in the U.S. market, and we are not seeing anything majorly changing other than the sort of guidance that we have given.

Okay. And the second question is like the growth was seen as the mid-teen high levels. Like that would be of nearby 18% or something near to that. So is it to continue with the same prospects or there are going to be the changes in the coming quarters or something like that? For the -- like quarter 4 also and for any 2, 3 quarters for update.

As I said, at least it's difficult to predict the full year, but the next 2 quarters are looking better than the current quarter.

The next question is from Sameer Baisiwala.

Sir, first question is on the working capital side. Over the last 9 months, it looks like it has gone up much more than the sales growth, so if you can talk about it?

Sameer, part rate is also because of the business mix with higher growth coming from U.S. and U.S., obviously, as a longer working capital cycle compared to India business. And also the growth in emerging markets were also relatively compared to India business, the working cap cycle is higher. I think it's some business mix, which is responsible, but there are no other factors.

Okay. Got it. And on transdermal from Moraiya. One is estradiol. The second, you got PAI inspection in January. Is that correct? And the third one may come and that's over and above this? And what about...

We got one estradiol approval, and we had a PAI for 3 products, and that's the current portfolio right now that has been inspected.

I see. Okay. So which means that you may have 4 approvals in a short order of time here?

It's potentially possible, yes.

And you said all 4 of them are going to be meaningful, yes?

Three out of the 4 at least, if I have to hedge.

Okay. Okay. That's great. And Sharvil bhai, what's the outlook for margins? I know you've guided 21%, 22% types, but you see this now change going forward?

So right now, we are trending on the higher margins. And as you know, we have some exclusive products and all of that. So current outlook for the margins are looking much better at 20%, 21% plus. But I think for the full year, at least we believe we will be better than the last year.

Okay. Great. And one final question, and I have to ask this. So in your assessment, in your outlook for U.S., how are you thinking about Asacol HD competition, sir?

We -- so I think the good thing is, obviously, for us is that there is no competition right now. And with the new products that we are launching, where we have also sort of exclusivities as well as maybe differentiation as well as some of the new launches, I believe that base will continue to grow. And we will -- as I've always said, we will find ways to make up for the losses on Asacol. So I think that is already happening, but we have not lost Asacol yet.

6 months to 12 months is what you would guess, if you?

What [indiscernible] number, Sameer, want to take?.

Short term, I can only say, first, at least the next quarter, nobody is there. Every quarter, maybe I can add.

The next question is from Prakash Agarwal.

Am I audible?

Yes.