Lupin Ltd ADR (OTC:LUPNY) Q2 2021 Results Earnings Conference Call November 5, 2020 7:30 AM ET

Company Participants

Kamal Sharma – Vice Chairman

Ramesh Swaminathan – Executive Director, Global Chief Financial Officer and Head, Corporate Affairs

Nilesh Gupta – Managing Director

Vinita Gupta – Chief Executive Officer

Conference Call Participants

Nikhil Mathur – Ambit Capital

Nithya Balasubramaniam – Bernstein Research

Neha Manpuria – J.P. Morgan

Kunal Dhamesha – Emkay Global

Damayanti Kerai – HSBC Securities & Capital Markets

Prakash Agarwal – Axis Capital

Shyam Srinivasan – Goldman Sachs

Girish Bakhru – Bank of America Merrill Lynch

Sameer Baisiwala – Morgan Stanley

Surya Patra – PhillipCapital (India) Pvt Ltd.

Prashant Kothari – Pictet Asset Management

Ritesh Rathod – Nippon Life India Asset Management Limited

Operator

Hello. And welcome, everyone. Welcome to Lupin Q2 FY 2021 earnings call. Please note, all participants lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the opening remarks. [Operator Instructions]. Please note that this conference is being recorded. I now hand over the conference over to Lupin management. Thank you and over to you, sir.

Kamal Sharma

Thank you. Good evening friends. This is Kamal Sharma and I welcome you to this earnings call for Q2. I have with me Vinita Gupta, Nilesh Gupta, whom you know well, Ramesh Swaminathan, Arvind Bothra, and also Vishal Rathi, along with some of the other cohosts of this call.

As you would have seen from the results that we have had a relatively a good quarter, this one, where you see growth of 9% Q-on-Q in the revenue line and a growth of 14% in the EBITDA line. Also, the profit before tax has grown by 32%.

Although year-on-year the revenue line and the EBITDA have been more or less flat, revenue line has been slightly low at 1%. And the EBITDA is flat. But what is heartening in this quarter to see is that there has been growth all around in all our geographies.

Just to walk you through all the financial details, I will now request Ramesh to take that up. And thereafter, the floor will be open for you to ask any questions. Thank you very much. Over to you, Ramesh.

Ramesh Swaminathan

Yeah. Thank you, Dr. Sharma. And friends, welcome to a good set of numbers as compared to our recent past. This quarter, we saw a rebound in several ways.

Sales for Q2 were ₹3,781 crores compared to ₹3,468 crores in Q1, a growth of 9%, and a 1% decline over the same period last year. But I think you should also remember that, last year, we had an NCE licensing income. And if you were to knock that off, sales were actually up by 2.9%.

US sales grew by 15% sequentially, $180 million. We established $157 million in Q1. And the reasons for the growth were essentially launch of albuterol. But we also saw generic – inline generics going up in Q2.

The India region saw a degrowth of about 0.1% year-on-year due to COVID impact on demand, especially for acute products. You’re seeing growth in the market now and we expect Q3 to be much better than Q2.

Degrowth in the acute products sharply reduced in Q2 as compared to Q1. However, we continue to outperform the market in focused chronic therapy areas as in the case of antidiabetic and cardiac. H2, we expect to grow by 6% to 8% overall. At least the full year to be around that percent, 6% to 8%.

API sales showed degrowth on quarter-on-quarter due to lower volumes on some of our key products. We’ve seen price stabilized at Q1 levels. It continues to show growth strong growth year-on-year at 22.5% due to improve pricing as well as favorable forex as compared to Q2 of last year.

Sales for EMEA grew by 30.4% quarter-on-quarter due to pick up in demand in all markets, as well as the launch of etanercept in Germany through our partner, Mylan.

Sales for growth markets grew by 8% quarter-on-quarter due to pickup in demand in most markets led by Mexico and Philippines.

Coming up to the gross margins. Gross margins were up at 63.5% as compared to 62.9% in the previous quarter. This is coming from an overall business mix improvement led by America, of course, slight moderation on the freight rates and, of course, the fruits of continuous improvement programs that we have been pursuing for the last several quarters. There’s, of course, no significant impact because of forex in Q2 vis-à-vis Q1.

And a very important development during the course of this quarter was on the employee benefit line. In Q2, we closed at ₹685 crores. We saw the ₹793 crores in the first quarter, obviously, a reduction of well over ₹100 crores. And this is led by, in fact – last quarter, we actually had specialty restructuring and there were some COVID incentives. But we obviously took a lot of steps to contain the overall costs and the benefits are there for you to see in Q2. We expect this to continue, though, of course, we do believe that Q3 will be slightly higher, led by increments which would be declared.

In terms of manufacturing and other expenses, this is something that came up on various calls that I’ve had with investors over the last several hours. I’d rush to say that manufacturing and other expenses in Q2 was ₹1,186 crores as compared to ₹958 crores, an increase, of course, but the increase was driven by forex. It’s essentially because of forex losses, because of higher R&D expense and, of course, sales promotion expenses.

There are also certain one-time costs contained in here. And we believe that our focus on as SG&A expenses would continue and you’d see this bearing fruit, operating leverage really kicking in in Q3 and Q4.

In terms of ETR, we’ve taken a number of steps as could be seen in the results itself. There has been tremendous improvement. The full year ETR we believe will be around – in the mid-30s, a little around that.

If we look at the EBITDA margins, which is the most important thing, we believe that we have delivered tremendously on our promises. And the reasons for that are – as it’s been covered in the gross margins, as well as the improvement that we saw on the manpower line. And of course, I explained to you the manufacturing/other expenses.

We believe that we would deliver on the promises we made. If you recall, I had guided for 19% to 20% at the beginning of this year, but I also said that, because of COVID, things are a little fluid. We now believe strongly that, going forward, there would be a tremendous improvement in EBITDA. We would perhaps see – that we would see Q4 at around 18.5%. And over time, we would be back to the 20% to 22% that we were always known for in the past.

With this, may I hand it over to the floor for perhaps questions from your end?

Question-and-Answer Session

Operator

[Operator Instructions]. I will first request Nikhil Mathur to ask your question.

Nikhil Mathur

The first question I had was on the other expense line. Now, if I look at the other expense that has been recorded this particular quarter, they are broadly in line with what it was pre-COVID and it has also on a quarter-on-quarter basis. Whereas what we have seen in certain other peer set of yours is that the other expense line has seen quite a bit of rationalization, especially in this COVID environment. So, can you throw some light, why there’s some divergence between what’s happening at Lupin and possibly some of the other companies out there?

Ramesh Swaminathan

I think I answered this at the outset itself. There was, of course, a higher component of R&D expenses. There was also a normalization when it comes to field operations in India and other parts. There are certain one-off items which are contained in there and is, of course, partnered products in America. So, there’s an element of that. So, all of this actually were contained in this line, and that’s the reason why you find that it is what it is.

Nikhil Mathur

Okay. Does this line item have anything to do with still some remediation cost that might be ongoing or they’re completely over now?

Ramesh Swaminathan

Sorry, the second part of the question?

Nikhil Mathur

Does this line item still have certain remediation costs for the plants, which are still yet to be inspected? Or that is completely over now?

Ramesh Swaminathan

A large chunk of that is more or less done. So, we are now waiting for the inspection to happen. The FDA doesn’t really believe in virtual audit, so to speak. So, it isn’t because of that. So, we think it’s over, expenses on account that, that is.

Nikhil Mathur

Another question I had on the US part of the business. Now, I imagine that Glumetza was launched sometime towards the end of the quarter. Albuterol also came in towards end of August, first week of September. So, isn’t it the way it functions is that you might have shipped inventories worth, say, a couple of months or one month or even three months for that matter and the numbers could have been a bit better than what have been recorded or the inventory that have been shipped for albuterol or for metformin are pretty much taking care of the month in which they have been launched?

Vinita Gupta

It was at the tail end of the quarter and till end of August and September. And not really supplying a couple of months’ worth of inventories, like a typical launch. We are ramping up our supply of albuterol, and so are continuing to supply additional product in this quarter. And I would expect that, by Q4, we’ll be at a very good level with albuterol supply. So, no multiple months’ worth of revenues that you see in this quarter.

Likewise, in Glumetza generic relaunch, we’re very pleased to relaunch in September as we promised and have been able to gain share. There was a disruption in the marketplace at the time that we relaunched, much like when we had to recall the product, and we are again ramping up share there.

Operator

The next question is from Nithya Balasubramaniam.

Nithya Balasubramaniam

A couple of questions on the US business. So, last quarter, you had mentioned that the flu products didn’t perform well. Can you update us on whether that’s picking up in sales? Is that reflected in Q2 or not yet?

Ramesh Swaminathan

Actually, Q2 was the lightest from a flu product standpoint. It tends to be the lightest, just given the seasonality. And we haven’t seen really the flu season kickoff in a major way. We are tracking that very carefully, hoping that, in Q3, we’re going to see an upside from the flu products. So, I’d say all of the anti-infectives, Tamiflu and the cephalosporins, azithromycin, all were down versus Q1. But really, the other inline products had a very strong performance and then addition of albuterol as well as relaunch off Glumetza also helped us grow Q2.

Nithya Balasubramaniam

So, albuterol, if you can tell us a little bit about what the pricing environment is looking like and how – if you can give us some color on your market share for that since you’ve been able to launch the product.

Ramesh Swaminathan

It’s very early days. And as I mentioned that we are ramping up supply of the product to meet the demand. We see a very strong demand at this point in time, in particular given the changes in the marketplace with Perrigo having recalled their product. There certainly is a gap – demand/supply gap at present. So, we’re trying very hard. Our team is working very hard to meet the demand as much as we can. And the pricing is holding up, as you can imagine, again, given that Perrigo is out of the market and we’re the only true generic now to ProAir on the market. So, pricing is holding up.

Nithya Balasubramaniam

Taking share with us, what is the discount level compared to the brand pricing prevailing now?

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Ramesh Swaminathan

I wouldn’t want to comment on pricing in particular.

Nithya Balasubramaniam

Just one last one on the manufacturing and other expenses. So, Ramesh, you had mentioned that there are some one-time costs in the number. If you can help quantify what that is, so that we can understand what would be the new level.

Ramesh Swaminathan

It’s actually not a very significant amount. It’s about ₹10 crores to ₹15 crores. We can also take it offline.

Operator

[Operator Instructions]. Next question is from Neha Manpuria.

Neha Manpuria

This is Neha from J.P. Morgan. I have two questions. First, on the India business, given our strong presence in chronic and our opening remarks about our own performance in chronic, could you explain the reason for the muted growth that we witnessed in the Indian market or some color there?

And a follow-up question on India. Ramesh, did you mention 6% to 8% growth for the second half or for FY 2021?

Ramesh Swaminathan

Second half.

Nilesh Gupta

Maybe I can take the first part. You’re right. I think compared to our peer set, the proportion of sales that we get from chronic is perhaps the highest. Obviously, we’ve had strong sequential growth. The year-on-year growth is flat. The chronic part is actually then fine.

The acute is – even sequentially, we only had 2% growth. I think on the acute side, our feeling is that the bigger brands have done better. And other than that, people who don’t have a very large acute portfolio, such as ours, have not fared well in this market. Again, like Ramesh shared, we believe that the market is bouncing back and it certainly has in September and in October. We see probably in the second half market growing 4% to 5% year-on-year. And on that backbone, we believe that we’ll grow 6% to 8%.

Neha Manpuria

My second question is on – Ramesh, on the operating margin guidance that you mentioned, 18.5% by fourth quarter, could you just highlight some moving parts on what would get us there? Because you seem to indicate a higher employee cost. Other expenses, I understand. Again, R&D remains a moving factor. So, what essentially would be the key driver to take it to the 18.5% number in the fourth quarter. And I’m assuming this includes other income.

Ramesh Swaminathan

Neha, as you had recognized, it’s actually a function of several things. Firstly, on the products plant, so we’ll have the full measure of albuterol coming in and it’s the flu season, so, obviously, America will perform much better. Tamiflu and a host of other products as well, cephalosporins and the like. We expect normalization on the freight front as well. There’s, of course, this continuous improvement on the – with various initiatives on the gross margins. So, we think that gross margins could tend to be a little higher than what it is today.

And when you come to the manpower costs, whilst I said that there would be a slight increase in Q3, and that will sustain in Q4 also, it’s coming out of increments. So, you don’t expect a radical shift really. It will be a tens of crores, so to speak. It will not be huge, so to speak. And, of course, there’s a tremendous focus on costs, especially when it comes to – in fact, sales and promotion expenses and the like.

So, all of this will certainly bear fruit. And we think that we should be the programming for something around the 18.5% as a run rate going forward for Q4.

Vinita Gupta

Ramesh, on the manpower cost, just to put it into perspective, we’ve been able to reduce it to 18% of net sales and should be able to sustain that going forward.

Ramesh Swaminathan

Yes.

Operator

Next question is from Kunal Damesha.

Kunal Dhamesha

This is Kunal from Emkay Global. the first question is again on the EBITDA margin guidance of around 18.5%. What kind of flu season have you built in? Have you built in similar to what you’ve seen in the last two years? Is that the right or fair assumption to make in your guidance of 18.5% margin?

Vinita Gupta

Actually, the major driver there is more albuterol ramp up. And the other product launches as well as flu season products kicking in. We are assuming that the flu season is a little bit late. But given the albuterol ramp up, plus the inline products ramp up, we’re still in the process of ramping up levothyroxine, and we have other new product launches in the next – this quarter as well as next quarter when we have tacrolimus and mycophenolate in our partnered products; posaconazole, another one in our partnered products; dimethyl fumarate that we are planning to launch shortly in the next couple of weeks. So, it’s a combination of all of those, including some increase in the flu season products.

Kunal Dhamesha

Second, I wanted update on the status of Spiriva in terms of bad debt that you have got and when does the 30-month stay expire? Have you heard anything from FDA on that product?

Ramesh Swaminathan

Yeah, we are in constant dialogue with the FDA on the product. And we’re on track with all of the reviews from the agency. As you know, the product launch date is not until June of 2022. So, we feel pretty good to be able to get approval in time. And also, our year-end, so far that – there has been no other company that has made progress on the development front. So, feel pretty good about our position.

Operator

Next question is from Damayanti Kerai.

Damayanti Kerai

First, clarification on the staff cost front. So, Ramesh, you mentioned in your opening remarks that a large part of the decrease which we have seen in second quarter was due to restructuring in the specialty business. So, I assume that’s related to Solosec front and it should be structural change, right?

Ramesh Swaminathan

Not a bit. We also had some expenditure reduction in parts like Brazil and the like. There was also some income coming in because of the CARES Act in America. And so, all of this actually brought the staff costs to the levels that it did. So, as I said, it could bounce back slightly, but as Vinita corrected pointed out, you would think that there would still be a 200 basis points production vis-à-vis the previous year.

Damayanti Kerai

So, 2Q broadly is base going forward with some increment in line with business growth ahead, right?

Ramesh Swaminathan

Business growth, and of course, increments, et cetera, should be accounted for normalization of that and so on.

Damayanti Kerai

My second question is, can you share some update on your injectables portfolio because you always mentioned that it will be one of the critical growth driver for your US business. So, if you can share some update and how do you see this part of the business shaping up next three to four years from now?

Vinita Gupta

We’ve made tremendous progress on the injectable portfolio. I’d say from a business growth driver within the next three years, right now, the inhalation products will really drive the next year or two. The injectable products will also start. We have kind of focus around four areas. We have our iron colloid products, peptide products. We have our depot injectables out of Netherlands and we have our partnered products, in particular with the liposomal products that we licensed from ForDoz.

We have made progress across each of these areas in the last couple of months and quarters. I would expect us to launch, first, one of our peptide products, ganirelix in particular that we are getting ready to file this fiscal year. That will come in the next – as soon as we file, 12 to 18 months, I would think. We would hope that it is launched in the next fiscal year. And then, our iron colloid products will follow that. And the Nanomi depot products, paliperidone and risperidone, as well as the liposomal products, doxorubicin as well as AmBisome will be in fiscal year 2024 to 2025. So, that’s roughly the evolution from a launch perspective.

We also have, on the injectable side, kind of – there’s a good synergy with biosimilars. So, we have the pegfilgrastim product that is progressing very well in development. We hope to file that later this fiscal year and the commercial strength that we have started to build on the institutional front is something that we’ll leverage across both biosimilars as well as injectables. So, I’d say in the next two years, really the peptide products plus pegfilgrastim will start contributing.

Damayanti Kerai

What I understand, in near term, it will be more on the portfolio buildup and any sales which we should expect meaningfully coming to our numbers should be starting most likely after FY 2023, 2024 timeline, right?

Vinita Gupta

Yeah, that’s right.

Damayanti Kerai

If I may just squeeze in one more, can you just provide an update on biosimilar Enbrel launch into Europe? Which all other countries you will be targeting in near term after Germany? Have you launched in any other market after Germany?

Vinita Gupta

Yeah, it has been launched in October in Finland. And one more country – Croatia. And in the next couple of months, the fiscal year, we expect to see the product launched in France and Belgium as well. So, there is a full plan to launch it across all of the key markets.

Operator

Next question is from Prakash Agarwal.

Prakash Agarwal

My question is on Somerset. I understand that the inspection is done. If at all, you can confirm that. And do we expect the resolution of OI or what is our current understanding if you can comment there?

Vinita Gupta

The inspection is not done. It is still ongoing, so we will not speculate, obviously. It has been a little bit longer, the inspection, because of the fact that, through COVID, it’s been a little bit of a challenge. We actually had a COVID case, which led to a hiatus of two weeks. But we’re very pleased that, through this challenging time, the FDA has made time to come inspect our facility, and we’ll hope for a positive resolution.

Prakash Agarwal

All the best for that. Secondly, on the US, if I heard that correct that you’re expecting a ramp up more so from Q4 on albuterol, not the current quarter when it’s really in a sweet spot given Perrigo’s withdrawal. So, what is the key bottleneck in terms of ramping up? Is it the compound? I think you had enough time to prepare that? Is it the bottling? What really goes into that that it takes time? And also, seen from the other competitors, Cipla also took time. So, is it product related? Or is it like other vendor related? If you could help us. And that’s how you think Q4 would be more appropriate in terms of ramping up?

Vinita Gupta

I would hope – at least we’re working towards doing more also in this quarter. So, you will see a little bit of a ramp up, but we’d like to be at a different level with the product, just given the demand, the current market situation, and that we expect to meet really in Q4.

It is a complex supply chain, especially with third-party vendors on the components for the device. The lead time is a little bit longer. But our team has been working very hard to ramp up. And we will see some benefit of that in Q3 as well.

Prakash Agarwal

Lastly, on levothyroxine, so understanding your commentary, you’ve talked about ramp up, but if we see the market share in Bloomberg Primus [ph] market share has been more or less stable or very marginally up. So, we had this – all the R&Ds in place and the expectation that it will move up. And why we still think that it will continue to move up and what is the current bottleneck?

Vinita Gupta

We have grown share a little bit, like, just a couple of percentage points. It’s really from the 12% level to just over 13% level in the last couple of months in this last quarter. Or if you look at the share in terms of generic share, we have 16% share at this point in time.

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The reason I say we expect to ramp up is we believe there is really more of a potential even with our existing customers to get additional pull through versus what their forecasted demands – what their demand has been. So, we’re working closely with them to try to maximize that. And we’re not done yet. We’re still working on gaining additional share on the product, and so we’ll continue to work towards it.

But in the near term, we see the potential of really growing share, just like we’ve grown in the last couple of months. We picked up really some small accounts that added to a couple of percentage points. But in the next couple of months, we expect really to have better pull through with our existing customers itself.

Operator

Next question is from Shyam Srinivasan.

Shyam Srinivasan

This is Shyam from Goldman Sachs. First one on the presentation, you talked about a quality action plan launched in July 2020 on the regulatory side. What is this? And if you can give us some kind of – what are the things that we are trying to achieve through this?

Nilesh Gupta

The quality global quality action plan is really an overall transformative plan to address quality actions that come out anywhere. So, it could come from an FDA inspection, it could come from any other inspection, it could come from an internal audit. And the idea is really, how are we implementing corrective plans. It’s basically a broader, deeper transformation being driven across the company, and also ensuring that any action that we take are assessed and then addressed across the company, across all our sites. It covers every part of the quality system. And it’s just something that we believe comprehensively addresses any issues that agency or any other body finds out or that we feel that we need to address as well. So, this is something that we had planned to launch last year. It was deferred. We finally launched it in July. And it’s something which is very rapid. The idea is what are all the pending issues. So, for example, one of the sets of issues that we had, obviously, was investigations. So, what are the actions around investigation? And how’s it being addressed across the company, making sure that all sides rise to exactly that same level across?

So, an overall management tool as well, but also something to just make sure that the right priorities [indiscernible] an ongoing basis.

Shyam Srinivasan

Just a sub follow-up on that. The presentation also talks about desktop audits have been done at Dabhasa and Pithampur. Just some of the learnings that we’ve seen of that. And trying to tie it to Ramesh’s point that FDA may not be doing desktop audits. So, if you can just reconcile that please.

Nilesh Gupta

We’ve had other regulatory agencies like TGA do desktop audits, which are really – I think it depends on the inspector, it depends on the agency as well. So, we’ve seen some people do a much more virtual kind of interaction, some people happy with just more of a document kind of review. As you know, the US FDA does not have an approach aligned for remote kind of inspection there. There’s been document requests. We’ve had a couple as well. A lot of other companies have had as well. I think those go more in the line of PAIs or facilities that are otherwise already compliant or even for new facilities, for that matter.

I think it’s a little bit all over the place. I think some of the regulatory bodies are just choosing to expand – to extend GMP certifications. Some of the others are choosing remote interactions as well. We personally felt that the remote interaction was extremely effective. And like Vinita said, we will have to see how we can engage with US FDA to move some of our OIA or warning letter facilities ahead.

Shyam Srinivasan

Last question is on the top line guidance, if there is any. I know you’ve talked about India growing second half, but if you could kind of at least qualitatively tell us how should we look at the rest of the businesses including growth markets, KPI, some sense on the top line.

Ramesh Swaminathan

As I was saying, things are normalizing very fast across various markets. If you look at America, we hit $180 million. But we think going forward, it will be in the vicinity of slightly more. Q3 and Q4 will certainly be one up on Q2.

If we look at India, as we said, we expect Q3 and Q4 to be certainly much better. And we expect that we – we said that the growth would be about 6% to 8%. If you look at markets, the emerging markets, talk about Philippines, Philippines is still a little under the radar because there seems to be a bit of a recession out there. But Australia, Mexico, Brazil, all normalizing very fast. And of course, there is Europe. Europe performed particularly very well in Q2. We expect that momentum to be sustained across Europe, as well as South Africa. So, we have etanercept, we have [indiscernible] ramping up. So, we do expect our overall growth rates to be around – it will be in line with the respective region’s potential. But certainly, upward of 10%, I would say, for the company as a whole.

Shyam Srinivasan

You’re talking second half, right?

Ramesh Swaminathan

Yeah.

Operator

The next question is from Girish Bakhru.

Girish Bakhru

Vinita, one question on albuterol. So, is it fair to kind of understand that Perrigo exit right now has benefited you and Teva equally as we see from the data?

Vinita Gupta

Yes.

Girish Bakhru

If you look at the numbers, I’m just looking at the units that Perrigo would have vacated, let’s say, 7 million, 8 million units. And if I just do the back-of-the-envelope calculation, would your current capacity be largely absorbed in meeting the market that you would have got from this opportunity?

Vinita Gupta

Yeah. Current capacity – we are ramping up our supply, as I mentioned. So, we are selling as much as we can make at present.

Girish Bakhru

And when you say that it will gradually ramp up, would it be – if you could give qualitatively, would it be potentially a million unit plus kind of a product? Can we look at those numbers?

Vinita Gupta

Yeah. Certainly from Q4. We are targeting that. From a capacity standpoint, we’ll be well above the million unit per month.

Girish Bakhru

On this overall second wave, broadly, there’s a consensus emerging that maybe there is a big winter wave. So, could one also see another instance of albuterol demand/supply mismatch as we saw in the first wave of COVID?

Vinita Gupta

We’re tracking it very closely. It’s actually a third wave, if you look at – and it’s worse than the first and second wave. And we’re seeing a similar level of hospitalization, so there could be potentially increase in demand over the next few months.

Girish Bakhru

And this is not built in the 18.5% exit margin guidance, right?

Vinita Gupta

No. Albuterol is built in.

Girish Bakhru

No. I’m saying the potential of, let’s say, albuterol doing exceedingly well in Q4.

Vinita Gupta

There is potential upside on albuterol.

Operator

Next question is from Sameer Baisiwala.

Sameer Baisiwala

A couple of questions. First of all, Ramesh, on the EBITDA margins, I think you made an opening remark there. Beyond 18.5%, you’re looking at 22%. Can you just clarify that and the timeframe and the drivers for that?

Ramesh Swaminathan

I was saying that 20%, 22% is where we were in the not-too-distant past. So, we should be getting there. And we are moving in that direction because of the various steps that we are taking. And we spoke about products, we spoke about focus on gross margin improvement, and of course, on manpower and a host of other things also. So, we think that we should be there in the next few quarters. It’s not for this year, for sure. But we are we are hoping to get there as early as possible.

Sameer Baisiwala

The second question is on Fostair. Maybe can you update us on the approval and launch timeline?

Vinita Gupta

Sameer, we’ve had communication with the MHRA on the product and expect approval in the in the next quarter.

Sameer Baisiwala

Just one or two more, if I may. One is on solosec. Vinita, how are you going and what’s your expectation of ramp up? I remember, our aspirational volume market share used to be 15%. So, any updated thoughts on that?

And second, also very quickly on US pricing environment. Is it better Y-o-Y, but not better Q-on-Q? Is that the way you would think about it?

Vinita Gupta

On the pricing first, just a simpler one. It’s pretty stable at this point, as we look at it. Quarter-on-quarter, for the last couple of quarters, fairly stable in the mid-single digit kind of erosion, if you compare it to last year.

As far as solosec goes, the last two quarters have been quite a dynamic situation on that business. One, because of COVID itself. The business was down 50%. And then our restructuring bringing our sales force down from 120 plus people to 45 people in June. Certainly had an impact on our share of voice. So, if you look at it, Q1 versus Q2, our scripts are relatively flat and revenue is also relatively flat. Obviously, that’s not what we are satisfied with. So, the team is working on ramping up the scripts and revenues. There is a strong focus around the managed care wins that we have had, more targeted pull-through efforts around the territories and physicians with the managed care wins that we have.

And second, we’re also working to increase our share of voice. As we have seen, just given the drop in the sales force as well as share a voice, the product is very promotion sensitive. So, we are working on non-face to face, digital – complement to our face to face interaction and to increase our share of voice.

And third, one of the near term major opportunities that we have is the trich indication that we filed for this past quarter in August. We would expect that indication to be approved by June or so next year. And that is another opportunity for us to reposition solosec. Hopefully – we are hoping that the COVID impact is going to be minimized by then. This COVID is still impacting the calls in the OB-GYN offices as our calls are right now 35 or so percent face to face. 65% is still virtual calls. So, we’re hoping that also will improve. So, as we get into Q1, our calendar Q1, Q4 of this year, and going into the first quarter of next year, we hope to be optimized from a share of voice standpoint, as well as targeting standpoint to be able to leverage that BV as well as trich into June next year.

Sameer Baisiwala

Just to complete the point on solosec, if my understanding is correct, this is a bit of a recurring situation from a patients’ point of view. And if that’s correct, are you seeing the sort of renewal or the reuse by the same patient? Are you tracking that data?

Vinita Gupta

We are seeing some of it. Right now, it has been a little bit disruptive because of the fact that there has been a lot of this – because of surge in the different states. The call activity in a particular office has not been at the same kind of level as one would expect. It’s an optimal level of promotion, I would say. But we are seeing some patients that are dealing with recurrent BV, taking the product over a period of time as opposed to an acute care like – we would hope for more of that. But right now, it’s still – majority of our business is coming from the one-time use.

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Operator

Next question is from Nithya Balasubramaniam.

Nithya Balasubramaniam

I had a question on the India manufacturing plants that still have a warning letter or an OAI status. Vinita, I think in one of your earlier earnings calls, you had mentioned that, this year, you might launch 15 less products if the warning letter status is not lifted. Now we’re actually talking about FY 2022 and we still haven’t – unfortunately, because of COVID, inspections haven’t happened. So, assuming that gets delayed, what are the number of launches you would have normally expected for FY 2022 from these plants that will likely get delayed?

Vinita Gupta

Obviously, we have an impact of the products that are held back because of the OAI and warning letter. And we hope – we don’t have clarity as of yet. But I can’t imagine that the FDA does not do anything about these product approvals over the next couple of quarters when we would expect that the agency is not going to start travel anytime soon. Certainly not until the vaccine is out there and very widely used that they’re going to see travel –FDA inspectors travel back again. So, we do think there will be some solution over the next couple of quarters.

I do want to say, though, we certainly would like to see the full impact of all of our pipeline products. But as we look at the growth in the near term that we talked about, that remains talked about, as well as we look at growth in the next year, it’s very much from products that we either have approval for or are from other sites that have been inspected and cleared.

Nithya Balasubramaniam

So, you’re hopeful that there will be a resolution in the next couple of quarters?

Vinita Gupta

We hope that the FDA is going to come up with a solution.

Nithya Balasubramaniam

Just one more on the complex injectables portfolio that you’re building. Any visibility on when you’re likely to file the complex depo injections, paliperidone and risperidone? Can you give us an update?

Vinita Gupta

We made good progress there. We’re actually entering into the clinic with the two programs next quarter. And just given the length of the studies, it will take us through most of next year, so the filings would really be calendar 2022 – fiscal year 2022.

Nithya Balasubramaniam

One of your peers mentioned that FDA is now expecting you to submit impurity data through the course of the shelf life and asking you to compare it to the reference drug. Is that now an expectation for all of these complex injectables?

Vinita Gupta

We haven’t come across that as of yet. But we’ll make a note of that. We haven’t heard that.

Operator

Next question is from Neha Manpuria.

Nithya Balasubramaniam

My questions have been answered. Thank you.

Operator

Next question is from Nikhil Mathur.

Nikhil Mathur

My questions have been answered.

Operator

Next question is from Surya Patra.

Surya Patra

Just wanted to have some sense on the flu season in US this year. So, there are industry data points which suggested a kind of robust flu season given the COVID background? What is yours understanding and what is your preparedness for the flu as one of the leading supplier of the flu product for the US market?

Vinita Gupta

The flu season is a little bit late, as we see it right now. We’re starting to see some ramp up through October. We’ve seen some ramp up, but are tracking that very carefully. We’d expect to see more within November and December. And we are fully prepared to leverage the opportunity as we have been in the last years.

Surya Patra

Is it right to believe that, given the COVID background, the kind of intensity of the season will be much stronger because certain data points suggest 40%, 50% kind of Y-O-Y growth.

Vinita Gupta

But we haven’t seen that in the ramp up of cases so far and showing up in the demand from a prescription standpoint, but we are tracking that very closely. Typically, there are some years we have seen the flu season come in pretty late in the year even through December sometimes. So, we’re tracking that very closely.

Surya Patra

On the Glumetza, if you can give some sense that – so having seen whatever has happened for the product in the US market, with the relaunch, what is the competitive positioning and the kind of quantum of opportunity that we should be out of it?

Vinita Gupta

Actually, we are very pleased with the relaunch, one, that we were able to do it in September that we had planned and promised. And two, the time that we relaunched in September, there was more disruption in the marketplace. So, we were able to gain back our share of 50% plus. That will, of course, show in the next couple of – this quarter and next quarter in terms of gain in revenues. So, we’ve been happy with the share gain in terms of the customer accounts game that our team has been…

Surya Patra

Whether because of the less competitive scenario, whether the pricing trend or the kind of quantum as an opportunity, commercial opportunity for us, whether that has gone better or gone up compared to the earlier situation or any sense on that, if you can please provide?

Vinita Gupta

Pricing has been down a little bit actually in the last couple of months. So, it’s still a material opportunity, but at a little bit of a lower price.

Surya Patra

Just last one question on the progress of this etanercept in Europe. So, obviously, that we have seen the progress in Germany, but what time that you should be taking to have a kind of decent on ground presence in multiple European nations or meaningful European nations rather?

Vinita Gupta

The plan is over a 12-month period, launching into different countries. And so, in the next 12 months. As I mentioned, the launch already – Mylan has launched in Germany and Croatia, Finland and planning in France and Belgium and after that – and other countries. So, there’s a whole sequence of launches across all of the markets that are planned over the next 12 months.

Surya Patra

There could be a kind of proportionate to your market share gain or how should one – considering the kind of established competitors there, any sense on the kind of likely market share gains for this product there?

Vinita Gupta

It’s very early to comment on market share gains. We know from what we’ve heard from our partner, Mylan, they are very satisfied with the launch in Germany. It’s been a good start for them. But it is yet to reflect into market share. That should happen in the next six months or so.

Operator

Next question is from Prashant Kothari.

Prashant Kothari

My question is on albuterol. By when do you think you will be ramping up completely?

Vinita Gupta

Q4.

Prashant Kothari

And the second question was on the working capital side. We’ve seen an increase, especially on the inventory front. How should we be thinking about it going forward?

Ramesh Swaminathan

Working capital, of course, has increased. And as you very correctly pointed out, it is because of two components. One is of course the inventories. And the other is of course the accounts receivable itself. Accounts receivable has increased because a bulk of the sales in America actually happened in the later half of – second half of September, so Glumetza, albuterol and the like. And obviously, given the current period out there, it still comes in as accounts receivable. It will normalize as sales normalize, as the sales of these products normalize over the next few quarters. It will certainly come down.

Even in terms of operating days, it’s about 144, 145. This is in line with, in fact, the recent past. Q1 was a bit of an aberration. But if we go back to Q4 of last year and the light, it is around the same vicinity.

Vinita Gupta

Also to add, Ramesh, on the inventory front, as we gear up for more launches, inventory levels have gone up, right?

Ramesh Swaminathan

Yeah, that’s true.

Vinita Gupta

And we also have been working towards building inventories, so that we can shift more of our supplies to the US through ocean [ph]. That has been a proactive build.

Ramesh Swaminathan

That’s the strategy. Absolutely. That’s very well worked out, Vinita.

Operator

We will take one last question from Ritesh Rathod.

Ritesh Rathod

Your margin expansion on a medium term basis of 22%, would a large portion of it come from the cost saving side or would be dependent on product launches, which you alluded on the injectables, inhalers and biosimilars? And why I’m asking this question on the cost saving side is because, in the last five years, your employee expenses have moved from 13% to 19%, 20%. Your other expenses, excluding R&D, has moved up by 300 bps. So, would it be dependent on this product launches, or there’s enough cost lever on the operation side to do this?

Ramesh Swaminathan

We are focusing on several things. So, some years ago, a couple of – year-and-a-half ago, we actually started off with Berlin-owned [ph] consultants working on, in fact, the gross margins, et cetera. So, several initiatives taken there, voucher synthesis, alternate vendor strategies and the like, bringing down the overall procurement costs. That apart, of course, there was a famine in terms of products that we released over the last three years, so to speak, and that obviously meant that, whilst our overall expenses went up, the sales growth is not as much. So, we’re kind of correcting that situation, the ratios went astray, so to speak. So, we are working on, in fact, manpower costs and a host of other things as well to bring it back within the range which is acceptable. So, whilst the focus is, of course, to bring in a lot of quality products and the like, it is also equally on cost.

The other part, of course, is the R&D line. So, we are taking steps to actually bring it down. But the focus today is on more complex products and the like. But if you look at the total quantum, in terms of absolute numbers, it is hovering around the 1500s. And as a percentage of sales, it is around the 9%. And over the next four to five years – three years, within the next the next several quarters, so to speak, it will tend to be a little lower, perhaps settling around the 8% range.

So, all of this would actually mean that the EBITDA margins would have to creep up.

Vinita Gupta

To that, Ramesh, just on the manpower cost points that you made it, we are very confident of sustaining the current level that we’ve been able to bring our spend down to, 18% from the 20% last year, and continuing to get operating leverage as our business grows in the next couple of quarters and certainly into the next fiscal year.

Operator

Thank you. I now hand the conference over to the management for closing comments.

Kamal Sharma

Thank you for your participation in this call. And I do hope that you had satisfactory replies to your questions. In case you still have some doubt or something which is not answered, please take it offline with Arvind or with Ramesh and we will do our best to make sure that you get your requisite answers. And look forward to see you in the next quarter earnings call. Thank you very much once again and stay safe and stay good. Thank you very much.

Operator

Thank you, sir. On behalf of Lupin Ltd, that concludes this conference. Thank you for joining us and you may now exit the webinar.



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