Zydus Lifesciences Limited (ZYDUSLIFE) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Welcome to our post results teleconference for the fourth quarter and the financial year ended March 31, 2023. On 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'm sure you would have gone through the financials and other material, which we have filed with the stock exchanges. To begin with, let me give you an overview of the performance in the year gone by. As we progressed through the year, all businesses demonstrated strong momentum and delivered double-digit growth consistently. Consequently, we closed the year on an encouraging note with overall. Revenue growth of 14%. Our EBITDA growth of 16% was faster than the revenue growth, thanks to margin improvement achieved during the year. Our formulations business in India built further on the growth momentum from the previous financial year and registered double-digit growth through the year-on-year COVID adjusted base. Our consumer wellness business grew in double digits, despite softer consumer demand, due to increased inflationary pressure affecting discretionary spends. Performance of our U.S. formulations business improved significantly during the year as the business grew sequentially every quarter on the back of volume expansion and meaningful new product launches throughout the year. As a part of our ongoing initiative, we continuously analyze our spend base and identify and implement various ideas across functions to unlock the efficiencies in our operations. Our innovation journey continues to make progress and achieve important milestones. With that, let me take you through the financial numbers for the year gone by. During the year, we recorded consolidated revenues of INR 172.4 billion, a growth of 14% year-on-year. EBITDA margins expanded during the year, despite high base and stood at 22.4% of the revenues. Which is an improvement of 30 basis points over the previous year. EBITDA margin adjusted for onetime COVID-related inventory provision stood at 23.1%. Consequently, the consolidated EBITDA for the year grew by 16% to INR 38.6 billion. Net profit for the year adjusted for certain exceptional and nonrecurring items, and the impact of discontinued operations stood at INR 26.6 billion, up 16%. The balance sheet strengthened further as we had a net cash position of INR 5.5 billion as on 31st March '23 against the net cash of INR 0.6 billion as on 31st March 2022. With this, let me go to our performance for the quarter gone by. I'm happy to inform you that our quarterly revenues crossed the INR 50 billion mark, driven by robust performance across segments. Coming to the quarterly financial numbers, we registered revenues of INR 50.1 billion, up 32% year-on-year. Reported EBITDA for the quarter was INR 12.6 billion, up 75% year-on-year and 31% quarter-on-quarter. EBITDA margin for the quarter stood at 25.1%, which is an improvement of 620 basis points on a year-on-year and 260 basis points on a quarter-on-quarter basis. Net profit adjusted for certain exceptional and nonrecurring items, and the impact of discontinued operations stood at INR 9 billion, up 71% year-on-year. We expect all our businesses to sustain healthy growth on the back of our rich portfolio of products and focused execution efforts. Now let me take you through the operating highlights for the fourth quarter of FY '23 for our key business segments. Our India geography, which comprises our formulations and the consumer wellness business, accounted for 41% of the total revenues during the quarter and grew 11% year-on-year. The India geography consistently delivered double-digit growth in the current fiscal adjusted for COVID-related revenues in formulations business last year. Our formulations business in the India geography posted revenues of INR 12.9 billion, up 11% year-on-year. Excluding revenues from COVID-related products, growth during the quarter was 12% year-on-year. On a full year basis, too, the business delivered 12% growth, excluding the revenues from COVID-related products from the base. We continue to work towards strengthening our presence in our focused therapy areas. Our first new chemical entity, the brand, Lipaglyn, continued to enhance the reach as it expanded the patient base by 37% during the year. On the super specialty front, we retained our leadership position in the nephrology segment, while in the oncology space, we were the fastest-growing company. Our consumer wellness business recorded revenues of INR 7.1 billion, up 12% year-on-year. The business experienced gradual recovery in consumer sentiments during the quarter, though the urban demand still remained stronger than the rural demand. However, the rural demand slowdown seems to have bottomed out, and we expect the recovery going forward. With appropriate price increases across the portfolio undertaken over the last few quarters, coupled with stabilizing inflation in key inputs, except milk, the business registered improvement in gross margins and was in line with the gross margin of Q4 FY '22. 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 revenues of INR 22.5 billion and registered a robust 17% growth sequentially. The business delivered sequential growth during each quarter of the current financial year. Growth during the quarter was driven by new launches and volume expansion in existing products. We launched 8 new products during the quarter. New launches for the quarter include topiramate extended release capsules, which was the first generic launch of the product in the U.S. market. During the quarter, we filed 2 additional ANDAs and received 28 new product approvals, including 5 tentative approvals. Our emerging markets and Europe formulations business continued to deliver healthy growth with all the major markets contributing to the growth during the quarter. The business posted revenues of INR 4.4 billion, up 34% year-on-year, excluding revenues from COVID-related products. During the quarter, our Moraiya formulations facility successfully completed the pre-approval inspection for transdermal patches by the U.S. FDA. Recently, we received the EIR report from the U.S. FDA for this inspection. Our formulations facility located in Ahmedabad SEZ known as SEZ 1 facility was also inspected by the U.S. FDA, which was a pre-approval as well as GMP inspection. The inspection concluded with 3 observations. We submitted our response to the U.S. FDA within the stipulated time line and are awaiting their response to the same. 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 evening, ladies and gentlemen. It is a pleasure to have you all with us today on the call. We are pleased with our performance during the quarter and the year gone by, both won by as both our large geographies, India and U.S., continue to deliver consistent results, driven by focused execution. Our initiatives in R&D have continued to progress favorably in order to meet patients' demands across geographies. These investments provide us assurance of sustainable revenue and cash flow stream in the future. On the regulatory front, our Moraiya formulations facility successfully completed product pre-approval inspection by the U.S. FDA. This is the second successful inspection Moraiya during the year. We will continue to offer high quality, safe and effective health care solutions to patients around the world, thanks to our commitment to upholding high-quality standards and continual improvement in the same. Our strategic initiatives and interventions over the last 6 quarters have enabled our India formulations business to deliver consistent double-digit growth. We expect the trend to continue as we remain committed to deliver better than industry growth in the medium term. The U.S. formulations business had a very successful year with the revenue momentum continued to improve every quarter, driven by new product launches and volume expansion. We received 63 ANDA approvals during the year, which is one of the highest number of ANDA approvals received in a single financial year for the company. The complex products pipeline developed in-house over the years, coupled with the strategic BD&L efforts, should help us deliver sustainable revenue growth in the future. Our agile supply chain will help us capitalize on the onetime buy opportunities that emerge in the U.S. generics market. On the innovation front, we are committed to improving patient lives as evidenced by the success of our first NCE saroglitazar since its launch. We have also created one of the most extensive pipeline of biologicals serving multiple markets, including low and middle income countries. This has made the treatment affordable and accessible for patients and, in turn, has delivered strong volume growth consistently. With this, let me talk about some of the material developments on the innovation effort. On the NCE front, our lead molecule, saroglitazar magnesium, is currently undergoing a Phase IIb clinical trial in NASH indication and a Phase IIb/III clinical trial for PBC indication for the U.S. market. During the quarter, we received approval from the regulatory authorities of Turkey to conduct trials for NASH. The molecule is also undergoing clinical trials in the U.S. for PCOS with NAFLD indications. During the quarter, the U.S. FDA also granted an Orphan Drug Designation status to our molecules ZYIL 1 and NLRP3 inhibitor. Earlier this year, the molecule achieved positive proof of concept in a Phase II clinical trial in patients with cryopyrin-associated periodic syndrome known as CAPS. Coming to our vaccines effort. On the global development front, we submitted our dose -- one of the dossiers of the vaccine to the WHO for the purpose of pre-qualification. This is a second submission to the WHO. Our rabies vaccine has already been received WHO prequalification. On the specialty front, our wholly-owned subsidiary Sentynl Therapeutics, continue to work with our licensing partner Cyprium Therapeutics to complete the NDA filing of CUTX-101 targeted at Menkes disease. The company also continued to work towards adding both Menkes disease and MOCD A deficiency to key genetic lab panels in the U.S. We are also working towards ensuring early access to NULIBRY to patients of MoCD type A deficiency. Thank you. Now we start the Q&A session. Over to the coordinator for the Q&A.

[Operator Instructions] First question is from Saion Mukherjee.

Am I audible?

Yes. .

Yes. Dr. Sharvil, first question is around the U.S. momentum. You've seen a good momentum here now. Can you throw light on some of your key assets on Revlimid and Topiramate capsule [indiscernible] in the likes? And how should we think about $270-odd million that you achieved in this quarter, how should we think about the quarterly run rate going forward?

So yes, I think on the U.S. front, as I said, obviously, last year, we did continue to improve quarter-on-quarter. Going forward also, we still -- we are seeing a strong quarter non as we move into the new year. And I think over the full financial year, we still expect growth on the current base.

Okay. On topiramate, particularly, how is the competition like in the market? And is the numbers going to come down significantly in Q1 versus what you recorded in Q4?

Yes. So on Trokendi we believe competition will enter -- will be there in Q1 versus Q4. Having said so, in spite of that, I think we will see a good growth in quarter 1.

Okay. And two questions. One on -- the second question on your --I see a significant increase in our employee cost this quarter. if you can give some High color on that and your expectation on R&D spend for next year?

So On employee costs, I mean, Nitin bhai, you'd like to take it up?

So on a year-on-year basis, the increase in employee cost is because of impact of increments. And also if you consider evaluation that we have done. So this time, we had actual loss that we had to provide for. And in the last year same quarter, we had actual gain. That's the other factor which is impacting the personnel cost.

The R&D, as we continue to say, we are likely to be around the 8% range. And if we see better positive outcomes on more projects, maybe 3.5%, but we are probably range bound around that 8% to sales going forward.

Okay. And I mean, you mean to say incremental investments would be largely on your innovation programs or on the generic side?

I think more so the incremental growth will come from the innovation programs.

The next question is from Kunal Dhamesha.

Congratulations on a good set of numbers. Just digging a little bit more on the U.S. revenue, would you be able to kind of [ give ] primary driver on a quarter-on-quarter jump of roughly $40 million in terms of whether it was majorly new product launches or whether it was kind of existing product and also the price erosion scenario in this quarter?

So obviously, the larger jump is always because of new products. But we -- as I said, the base business also did well. But the majority of the growth is driven by new products. And we have -- not only we have received rich number of approvals, and we are also still expecting some good approvals during the year with limited competition. So we are seeing a good value creation on the new products in this coming financial year.

So would you say that the Revlimid was a major driver on a sequential jump?

No, no, it was an important driver for sure, and Revlimid will continue in quarter 1 also.

And secondly, on the impairment charge that you have taken on Sentynl for that we had -- we have already done with that Sentynl impairment. So was there nothing incremental which led us to take this impairment? And right now, let's say, in the goodwill number on our balance sheet, is there anything left on that front?

So goodwill impairment of Sentynl refers to the legacy business that we had acquired of Sentynl in 2017. So now we don't have any products in the market. So gradually, we started continuing certain products. Now there are no more products of a legally business, and that is why we -- while the assets which are 2 assets that we acquired, they have nothing to do with this. In fact, the valuation of the total business was much higher than the goodwill impairment. But once we, at a concept level, thought that legacy business we are not continuing, we have provided full amount of the goodwill of acquired business.

So right now, there is nothing left about Sentynl impairment.

No, nothing left.

So right now, whatever I see on consol balance sheet has been more or less Heinz acquisition?

Yes, there are some goodwill due to internal merger also and Biochem acquisition earlier, which is about INR 500 crores. But large part of the goodwill is related to Heinz acquisition.

The next question is from [indiscernible]

Great set of numbers. A couple of questions around the U.S. pipeline. Sharvil bhai, the last call. You had mentioned about one REMS product in the U.S. around mid this year. Are we on track? And would you be able to throw a bit more color on it?

Yes. So we did have a large REMS payment in the last quarter 3. And I think we are still planning for a quarter 1 -- we have 2 products between quarter 1 and quarter 2 launch is still expected for both the products.

And still, it's not time to reveal the products is it?

It doesn't make sense because it's defy the principles of competition, if we till we safe lines beforehand.

Okay. Okay. Understood. In our Asacol HD competition always we kind of push out by at least 6 months. So is it the same this time as well? Do you have any visibility? Or do we don't knock see anybody for next 6 months?

Yes. So yes, our best estimate is similar to what you just said. But I think the good thing that we can see from the business is with the current new products and the new pro survey that we're expecting to launch, we are more than offsetting Asacol any future losses.

Got it. And on saroglitazar, the PBC study, Phase III study, is that on going as per schedule or time lines are intact?

Mostly on track, we may be one month delayed, but not anything major. .

The next question is from Surya Patra.

Congrats for the great share of numbers, Sir, the first question is on the U.S. business front. So is it possible to share, let's say, excluding Revlimid, what would be the U.S. growth this year, FY '23?

No, I don't think we can do ex product because this is something -- the U.S. business is a composite business of all our products. So I don't think we are separating out new products. The way the U.S. business grows is you try and protect your base and grow on new products. So I sometimes find it very difficult to answer this question that every time people want to remove products and then the whole point of the U.S. business is launching new products. So I think this way of continuing to ask these questions is not good in the light of what our U.S. business is. And the other point I said on its concern on Revlimid, Revlimid continues to drive value in the last quarter in the coming quarter and will continue to drive value over the next 2 years. So it's not a one-off product, which people...

Yes, yes -- yes, of course. So -- but now having seen a ramp-up in progression the Revlimid front, is there any sense about what volumes are that we might be getting, some sense, if not the specific number?

Sorry, can you repeat that question?

So having seen the ramp-up on the Revlimid prescription front for you and also in the business so far, so could you give some sense what is the kind of volumes here that you are expecting, let's say, for -- till, let's say, progress until '26 because until now, we have not been commenting anything on it?

So directionally, volumes there are going to grow up, but we can't obviously give specific numbers that being a settlement.

Okay. Sure, sir. Sir, my second question is on the, let's say, the kind of approval that what we have seen this year, that is a record number, of course, for U.S. But I wanted to have a sense that -- see, there are many small value -- small targeted value products that we have witnessed in the list. So these are like old filings, which were pending because of the Moraiya facility issue and now getting released? Or it is the filing of recent passed...

It's a mix of both. And for us...

This is about this...

I think there's a lot of background noise where you are talking from, so difficult some...

Yes, sorry. So I was asking about the number of approvals what we have witnessed in this quarter -- or so -- or this year also full year. So whether-- these -- means so we planned and are filed for these products having very low target value in U.S. or what is...

U.S. -- I think let me explain the strategy on U.S. U.S. is a -- U.S., we are servicing key clients, key customers, a representation of having a large product portfolio is very important for the U.S. generics business, and that is always what we have believed in. And we strongly believe that a completion -- a completeness of portfolio is critical. So from our point of view, we believe whether they are small or large, all products are important for us from servicing the customer. So we will be launching small value products also depending on the market situation because there is a need to service the patients and customers. And of course, we are also -- we also look and file the difficult to do products, which have far larger opportunity. But from a strategy point of view, U.S., we will be launching all types of products because one important aspect of what we do is to create access for these products. So we cannot -- we have a plan to do that.

Okay. Sir, my next question is on the domestic business front. So now it is quite clear that at least during last 1 year period, we have witnessed our core business delivering much faster than the industry growth or the complex portfolio. So sure, progressively going ahead, how should we think? And overall portfolio, how would -- should that be growing or performing versus the industry? And whether we are seeing improvement in the profitability in the domestic business? And also, if you can share the specialty portfolio's contribution in terms of percentage or in terms of mix in the domestic formulation business for FY '23?

So yes, we are putting efforts behind our India formulations business to continue to drive a market growth or at least better than market growth. I think so far in the last year, we have achieved some -- most of the time better than market growth. And in the medium term, we also want to aspire for building better than market growth, which will mean gaining market share. It will be driven across the mass and chronic therapies. I don't think there's -- the plan is to only drive one specific type of therapy, but we are present both in the mass segment as well as in the chronic specialty segment. So all in all, I think on the composite side, that will deliver better at least market growth and our aspiration is to drive better than market growth.

And improvement in the profitability from the domestic base business, any sense on that, sir? .

It's a good profitable business on a medium term to long term, it will drive better profitability, but we will continue to look at opportunities to continue to invest in this business also. But yes, it will be -- our effort is to drive profitability also.

Okay. Just last one small clarification, sir. This WHO warning against Artificial sweeteners so how should that have an impact on our, let's say, key brand under the [indiscernible] health business?

Very early to give an answer to that. This study is not a new study. But I think it doesn't say that not to use the sugar subside, it has come out with I think we are studying. But I don't see an immediate impact, but we will keep -- we'll have our plans to counter that effort also.

The next question is from Prakash Agarwal.

Am I audible?

Yes.

Congratulations on good set of numbers. Couple of questions. One is I'm trying to understand your comment on new launches and volumes for U.S. growth. You've mentioned it's led by new launches and volume. So when you say new volume or onetime buying opportunity, these are like short-term 3 months kind of opportunity, these are 6-month kind of commitments or your -- kind of commitments and what is the typical size when you talk about this?

So onetime buys by the very nature are not long term. So they are, obviously, for that month, not even for the quarter, generally. But we continue to see those opportunities in that market. It varies product to product. So it's not the same product all the time. So I don't think these are like contracted or assured businesses, but those opportunities do exist in the market. As I said, on the overall guidance that I said, I said what we're trying to do is maintain and protect our base and find new products to grow from that. So that's been the effort, and that's what sort of helped us in the last many quarters and will also deliver better results in the coming quarters.

Yes. But these are sizable in terms of like $10 million, $20 million kind of opportunity? Or these are small ones?

They're sizable.

Okay. Fair enough. And when you say new launches, you mentioned you had 63 approvals, which is record. But how much was converted into new launches? And how much of those 63 are yet to be launched?

We are expect -- we launched 32 and we are planning to launch 35 this year.

Okay, okay. And in terms of -- you mentioned that fiscal '24 is also looking good, despite a good base, which we have achieved in fiscal '23. So -- you mentioned Revlimid and apart from these new launches and Trokendi still be a good product. And there are 2 REMS you mentioned, right? So one is expected this quarter and the other one is next quarter. Is that the right understanding in terms of stacking the grow drivers?

Trokendi has already faced competition versus quarter 4, obviously, will come down. But then we have launched the other topiramate, which will add value. And then we have, going forward, some critical launches in the next 3 months. So we believe if we are successful in 2 out of the 3 also, it will release good value.

So on the U.S., we can still see high single-digit growth, despite a very strong performance in fiscal '23?

Yes.

Okay. And there, you're factoring in Asacol or not really factoring Asacol?

So even after factoring Asacol, we still will have a single-digit growth.

Okay. And secondly, on guidance performance. So last year, similar time to guidance on R&D about 8%, we did around 7%. This year, we're also guiding about 8%. So anything to read out there? And what is the margin like we could see better margin going forward? Or this with 8% R&D 22 is a good margin to model this thing?

So we are seeing maybe a -- in spite of building for an 100 basis point increase in R&D, we are still building for at least another 100 basis point increase versus last year. So that we are still seeing. So we are seeing good improvement in margin going forward. So we -- that's the current best estimate that we can give.

So '23.

Many things have to work out, and maybe we are being conservative. But hopefully, that's what we will try and achieve even assuming some things go wrong.

So assuming there is no competition, Prakash on Asacol HD, in spite of higher R&D by 50 to 100 basis points, we expect margins to go up by 50 to 100 basis point.

That is great. Okay. And lastly, on India, so we've seen good growth, double-digit growth coming in. April was soft month. I mean do you read an aberration? Or do you think too early to call? Or what is the double -- do you think industry and your sale will be double-digit growth this year?

So it's difficult to -- I think that will be difficult to say. I mean, whether we are in -- it's obviously not going to -- it will be -- we hope it's double digit, but it could be anywhere between 9% to 12%. It's very difficult to predict where the growth of the industry will be because we have seen volume growth being a challenge on the overall industry. The other is also we continue to have price challenges with NLEM and other things. If you look at even our growth in the last quarter, it would have been at least 2 percentage points more had we not had the NLEM impact so -- which we hope to nullify going forward by doing the right product mix and other areas. But those challenges will remain. So I think it's difficult to predict. But having said so, I think -- our focus on our critical brands, the new launches and more importantly, our differentiated portfolio driving strong momentum in the market, I think in the medium term will allow us to outperform the market.

Okay. And last one here is the MR number, if you can share as on March field force?

Field force...

7,000 plus.

So this includes the managers or this is just a field force?

Only field force.

Okay and the full team, sir?

One minute, managers...

Sorry, this includes managers.

This includes managers.

[Operator Instructions] The next question is from Sameer Baisiwala.

A quick question on Vascepa. Your thoughts about when do you plan to launch? Are there any raw material availability issues and the market dynamics?

So Vascepa was a welcome approval for us. We had predicted a little much later approval, but we got it in the first cycle. So we're preparing for the launch. I don't -- We can't give the exact date, but we are working aggressively to launch the product. On the supply side, I am confident we'll be able to get enough material, which is the most limit -- which is a limiting factor in the market. And we are -- we believe we will have enough hopeful enough material to launch to get good share.

Great. And the second question is on the U.S. launches. So can you talk about the transdermals?

Sure. So transdermals, as I said, after successfully clearing our Moraiya facility, we have been in preparation for launching the products. We are planning for 3 launches, and those will be staggered from the July quarter onwards. So in this financial year, we at least hope to do 3 launches from Moraiya.

Okay. Great. So Sharvil bhai, if I have to summarize the U.S. calendar, you've got 2 REMS, 3 transdermals, Vascepa. And I guess all of them should be fairly meaningful, substantive. Anything else that we are missing out?

We do have at least another 5 programs, which have high value. So if we are successful in 3 also, it should significantly be good.

Okay. So Sharvil, this is quite a handful and you still expect just a single-digit sort of a growth for U.S. that's surprising, no?

We have to also plan for the negative side, which is competition to products, right? So -- and the base is also quite decent. So a small erosion also is a meaningful erosion.

The next question is from Kunal Randeria.

Sharvil bhai, if I understand correctly, you will maintain a generics R&D spend at around the current level of INR 1,300 crores, and the incremental spend will be on NCEs, right?

No, INR 1,300 crores...

So we have told the total in FY '24 will be 8% to 8.5%. And normally, the additional amounts would be more or less for innovation portfolio only and not the generic portfolio.

Sorry, I was not asking just for '24, but it's a slightly longer-term kind of question in the next 2 to 3 years because you will have a lot of NCE spends coming up.

So there will be very little or no growth on the generic side because we have a better base which is comfortable. So the most, as I said, the future delta of growth that comes on research with the growth in revenue is all going to be towards the IT -- I mean, the NCE and NBE portfolios.

Yes. Sure. And just one more. On the U.S. side, how -- what's the kind of price erosion that you are expecting? How are the competitors behaving? Because we have seen some shortages going up. We have seen some ANDA withdrawals by competitors. So just to get your thoughts on how the market is evolving for FY '24.