Welcome to Zydus Lifesciences Limited Q1 FY24 earnings conference call. Please note that all participants line will be in listen-only mode, and there will be an opportunity for you to ask questions after the opening remarks. 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 afternoon, ladies and gentlemen. Welcome to our post-results teleconference for the quarter ended 30th June, 2023. On this 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. Let me now give you a broad overview of the developments during the quarter. We had a strong start to the financial year as we capitalized on the momentum built over the last several quarters and delivered robust growth across businesses. This, coupled with sustained improvement in profitability, helped us achieve the highest ever operating profit and margins during this quarter. Our formulations business in India performed well, as the branded business registered double-digit growth on a year-on-year basis for yet another quarter.
In the consumer wellness space, we continue to hold leadership positions in 5 out of 6 brands in their respective categories. Nycil, Sugar Free, and Everyuth brands gained market share during the quarter. Our US formulation business registered growth on a sequential basis, driven by new launches and volume expansion in the base portfolio. We achieved important milestones in our innovation journey in a quest to offer innovative solutions to the patients across the globe to meet their diverse healthcare needs. With that, let me take you through the financial numbers for the year gone by. I'm happy to inform you that our quarterly revenues surpassed the INR 50 billion mark for the second consecutive quarter, driven by robust performance across segments. During the quarter, we recorded consolidated revenues of INR 51.4 billion, a growth of 30% on a year-on-year basis.
Reported EBITDA for the quarter was INR 15.1 billion, up 81% year-on-year and 20% quarter-on-quarter. EBITDA margin for the quarter was 29.3%, which is an improvement of 830 basis points on a year-on-year and 420 basis points on a quarter-on-quarter basis. Net profit for the quarter stood at INR 10.9 billion, up 110% year-on-year. Our balance sheet further strengthened with a net cash position of INR 8.8 billion as at 30th June, 2023, as against the net cash of INR 5.5 billion as at 31st March, 2023. Let me take you through the operating highlights for the first quarter of 2024, FY24, for our key business segments.
Our Indian geography, which comprises of formulations and the consumer wellness businesses, accounted for 38% of the total revenues during the quarter and grew 6% year-on-year. Our branded formulations business in India delivered double-digit growth as it grew by 10% year-on-year during the quarter. Excluding the impact of NLEM-led price reduction, the branded business grew 12% year-on-year. Our innovative brands, namely Lipaglyn, Bilypsa, Ujwala, and Oxemia, witnessed strong volume traction during the quarter. We continued to work towards strengthening our presence in our focused therapy areas. On the super specialty front, we retained the leadership position in nephrology, in the nephrology segment, while in the oncology space, we were the fastest-growing company. Our first new chemical entity, Lipaglyn, was ranked as the 47th largest brand in the Indian pharmaceutical market during the quarter, which is an improvement of 19 positions over the previous year.
Our Bilypsa brand, too, continues to strengthen its volume share through various patient support programs and activities. The Ujwala brand, which is the first biosimilar of an antibody drug conjugate, continued to expand in volume since its launch on the back of patient-centric approach adopted by us to make it affordable to patients. Our consumer products, our consumer wellness business, recorded revenues of INR 6.9 billion with a flat year-on-year growth. Unseasonal rains across key states during the first half of the quarter impacted the offtake of our key summer-oriented brand, Glucon-D. However, the remaining portfolio posted near double-digit growth during the quarter. Commodity prices moderated during the quarter on a sequential basis, which eased the pressure on gross margins. Now, let me take you through the performance of our US formulations business.
The business accounted for 48% of the consolidated revenues during the quarter, with revenues of INR 24.5 billion. The business continued to display strong traction, with a robust 57% growth on a year-on-year basis, driven by new launches and improvement in the base business. On a sequential basis, the business grew by 9% on a high base of the previous quarter. We launched four new products during the quarter. During the quarter, we filed four additional ANDAs and received 20 new product approvals. Our emerging markets and Europe formulations businesses continued to deliver healthy growth, with all major markets contributing to the growth during the quarter. The business posted revenues of INR 4.9 billion, up 30% year-on-year. On the operations front, the U.S. FDA inspected our three manufacturing facilities during the quarter.
Oral Solid Dosage Facility 2, located in the Ahmedabad SEZ, completed the U.S. FDA pre-approval inspection without any observations. Our biologics fill finish facility, located at the Zydus Biotech Park in Changodar, and our animal health formulations manufacturing facility, located in the Ahmedabad SEZ, also completed the U.S. FDA inspections without any observations. This reinforces our commitment to upholding high quality standards and continual improvement in the same. We continue to improve our business processes with a focus on improving productivity, which helps us stay competitive. Adoption of digitalization across the organization continues to gather pace as various analytical tools are deployed to unlock the efficiencies in our operations and aid data-backed decision-making process. 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's a pleasure to have you all today on the call. We are pleased with the performance during the quarter. The performance was driven by our comprehensive product portfolio, our depth of innovation pipeline, and our focus on execution. On the India formulations front, consistent execution across focus therapies helped us achieve double-digit growth in the branded segment. We expect this trend to continue going forward. Portfolio of our innovation brands registered strong volume traction during the quarter, and in turn aided the patients to satisfy their unmet healthcare needs. Our comprehensive product portfolios, customer relationships, and an agility in operations helped us to deliver consistent growth in our US business.
We expect our US business to grow on a formidable base of FY23 going forward, on the back of a robust line of complex generics developed in-house, as well as the strategic BD&L efforts. Our diversified manufacturing network catering to the US market, backed by the responsive supply chain, augurs well for us to capitalize on one-time buy opportunities that keep on emerging in the US generics market. Our initiatives in R&D have continued to progress favorably in order to meet patients' demands across geographies. The investments made by us over the years across different areas have started delivering results, and we expect this to scale up further going ahead. This is evident from the expansion of patient coverage of different molecules since their launch.
We shall continue to roll out our various patient support programs and work towards creating the awareness about our brands in an effort to make a difference to patients' lives. Our R&D teams keep working towards offering solutions to patients across therapies to meet their unmet needs. On the regulatory front, we expect we extend our robust compliance record as we completed three U.S. FDA inspections during the quarter. We also remain committed to maintaining the highest quality standards across all our manufacturing facilities, to offer safe and effective healthcare solutions to patients globally. We strengthened our backward integration capabilities post the recent completion of acquisition of Teva's U.S. FDA-accredited API manufacturing facility, located at Ambernath in Maharashtra. With this, let me talk to you about some material developments on the innovation front.
On the NCE front, our lead molecule, Saroglitazar Magnesium, is currently undergoing phase IIb/3 clinical trials for PBC indication and a phase IIb clinical trial for NASH indication for the U.S. market. So far, we have recruited over 80% of the patients required for the PBC trial. For the NASH indication, we have been progressing in line with our plans on the patient recruitment front. The molecule is also undergoing trials in the US for two indications of PCOS and NAFLD. During the quarter, in order to generate real-world evidence, we initiated a large phase IV clinical trial of Saroglitazar Magnesium in India in NAFLD patients with comorbidities. The trial will enroll approximately 1,500 patients, and the primary endpoint is to measure the change in liver stiffness from the baseline to 52 weeks. This study duration is approximately 56 weeks.
In the biotech R&D space, clinical trials for two of our monoclonal antibodies are ongoing at present. We have completed recruitment of patients for one of these molecules during the quarter. Coming to our vaccines pipeline, we have commissioned a newly constructed Measles-Rubella drug substance manufacturing facility. We have initiated a phase II clinical trial of our hepatitis E vaccine during the quarter. We thank you. Now we start the Q&A session. Over to the coordinator for Q&A.
Thank you, sir. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask questions may raise your hand from the participant tab on your screen. Participants are requested to use headphones or earphones while asking a question. The first question is from Neha Manpuria.
Yeah, thanks for taking my question. sir, one on the U.S. business. While you mentioned in your opening remarks that there was volume growth in the base portfolio, how much would you say the quarter-on-quarter traction was because of incremental Revlimid, you know, and how much of it was the core underlying business, the pricing improvement? Some color, if you could give on the U.S. generic pricing?
In the first quarter, the growth was driven by the higher volume of take in our key products, which also included Revlimid. Also the pricing has been stable during this quarter. Also some new introductions, which were launched during the last quarter four also scaled up. All of that led to the expansion, but obviously driven also by Revlimid.
Understood. You know, given what we've done in the quarter and the launch pipeline that we, we've had, including some products that we have not yet launched, you know, doesn't the high single-digit growth for U.S. seem fairly, you know, conservative? You know, are, are we still stick to it, or are there any risks that we are not aware of that, that is keeping that guidance at that level?
As you said is right, despite an elevated base and factoring in also competition from Asacol, probably in the later part of the year, we still expect the U.S. business now to grow on back of volume expansion, in double digits.
Okay, got it. How, how should we think about, you know, margins in that case? Because I think margins also we were fairly conservative. If I look at our R&D, we are you know, we are much below what we had guided, you know, for the full year. You know, one, how should we look at the R&D trajectory and therefore, the U.S. growth, given the double-digit U.S. growth, the margins?
Yeah, with, we do expect now the EBITDA margins to increase by 150-200 basis on an annualized basis in this year, compared to our earlier guidance of 50-100 basis points. We are seeing an uptick to our guidance that we had earlier stated. This is also factoring in also an increase in R&D, so despite that, we will see margin improvement. Also building in for some competition on our lead, one of our lead compounds also.
R&Ds will maintain that 8% of sales?
Yes.
Okay. Thank you so much, sir.
Thank you. The next question is from Vino.
Hi, good afternoon. Sharvil, by a couple of, more questions on, U.S. products. Linagliptin, is that a product you expect in next couple of years, or is it very far out?
Not in the next one to two years, no.
Okay. how about Trofinetide, Celgene?
I think product wise, we are not talking because, again, a lot of things are driven by IP and company legal and settlement. I think we can definitely say that looking at our pipeline that we have, we do see good launches or important launches every year, partly driven by our own developments and partly through our licensing efforts. We do see a limited competition kind of launches every year, at least over the next three years.
Okay. Any, any update on the timelines of potential Saroglitazar filing in PBC? Do we still look forward to a later 2025 filing?
Yeah, we do still expect a calendar year-end 25 filing.
One last one. You know, earlier you had guided to 2-3 interesting products launches this year. We have seen possibly one or two, but I don't know if you were originally intending them. Do we still have one or two interesting product launches this year coming?
Yes. We did launch Topiramate, two brands on that molecule. We recently launched, the Indomethacin suppository with the exclusivity-
Right.
We do see some more differentiated launches during the year.
Okay. In Trokendi XR, have you already seen competition entry?
Yes. Yes, we have already seen, last quarter.
Great. Thank you very much. I'll jump back.
Thank you. The next question is from Surya.
Yeah, thanks for the opportunity. Sir, congratulations on a great set of numbers. Sir, on the margin front first, it looks like even if we hypothetically adjust the Revlimid revenue... and see the base business margin, it looks like both on the gross margin front as well as the EBITDA margin front, exclude of Revlimid, it looks like a very strong performance. So more than kind of a 300 basis point kind of positive surprise. What is driving this? Is it purely coming from, let's say, the improved performance in the domestic side, improved product mix in the domestic side, or it is contributed by the pricing scenario improving in the U.S. market, U.S.-based business?
I would say it's also many of the factors. I don't think there's a single factor, because both India, with the better product mix, that we have done, scaling above the emerging markets, which are improving in their profitability, and also U.S. with the kind of opportunities to do one-off business, grow the base as well as obviously launches. I think all of them have aided to the margin expansion.
Is it sustainable one, sir? Let's say, sir, is it a quarter-specific performance, or, let's say, it is likely to even continue in the subsequent quarter?
I, you know, I, I did say that, when you talk about sustainability, we have to look at the full year, we do expect, an improvement from our last guidance on EBITDA by... You know, we had earlier guided for 50-100 basis points improvement. Now we are talking about 150-200 basis point improvement, in assuming that we still have 8% of our spend on R&D.
Okay.
We are talking about an improved profitability of this financial year.
Okay. sir, my second question is on the Lenalidomide. The prescription trends, if I, I look at it, then I think, we have already surpassed, 5% or 5.5%. Near about 6% kind of a volume sale that we have already achieved. Whether we have garnered that kind of a revenue, in line with the kind of a prescription ramp-up, or the potential revenue booking will be seen subsequently? Generally, if we, we, we consider or see, generally it is also known that every 12 months, the volume share can increase. How should we really see it, sir?
As I said, Revlimid is, mid to long-term opportunity, so it has... I think, with the improvement in market shares, every year, we would see those numbers trickle through, so. But again, all of this are still accessing us to a very limited size of the market. But, you would see that, every year, I would say, in those, in those months.
Sir, just an extension to this Revlimid question. In the initial part of the means of your, or last year when you, you had launched the product, you had mentioned that the Revlimid is likely to be a kind of evenly distributed kind of a product for you. Do you think that is what you are likely to see?
For the year, yes.
Okay.
Quarter on quarter, they'll change. I, when I give the full year's guideline, every year, Revlimid will be well distributed. Yeah.
Okay. sir, in terms of the domestic formulation business, there is a positive surprise, obviously, in terms of the growth, compared to the market trend, all that. What is driving here? It is, are you really seeing that, the brands and the speciality products, so those are, really delivering better than your expectation, or your guidance is, covering those?
I think over the last two to three, three quarters, we have shown now at least market led, or market, equal to market growth, in some quarters better. This quarter also, we have done much better. I think the good thing to see for this quarter is also the volume expansion of 6% growth, because the volume is, I think, very good in, in the industry or the market that we are in today. As it is driven by multiple factors, the focus that was put in the, the rationalization that happened, and also the portfolio of innovative products that we have launched, which are scaling up, I think all of that is leading to that.
I think a lot of work is still left to be done, but we are hoping that we will continue to build on these important launches and scaling up our differentiated products, which will lead to this kind of better-than-market growth.
Okay. Just last one question on the balance sheet side, sir. The cash flow position anyway is looking really robust, but now, thanks to Revlimid also. The balance is anyway is strong given the cash flow that we had already generated last year. If we see that kind of a similar momentum also in Revlimid and the kind of momentum in the other other than the Revlimid also that we are talking about, then the cash flow generation is likely to remain really robust and strong for next couple of years. Given that, what would be your capital allocation strategy? If you can share something on that and on the CapEx front, this quarter that you have done INR 220 odd crore.
What should be your CapEx plan for the current year, and in which lines?
You, you are right to say, yes, we, we would see strong cash flows in the coming years. I think one important part is the CapEx cycle. We are talking about INR 1,000 crore CapEx in this year. The rest of it, I think we continue to obviously expand our research capabilities. You know, some increase in the R&D will be there. We are looking to expand our opportunities in getting into newer areas in the specialty space in the U.S. We do believe that we will find opportunities to invest behind that. Those are some of the areas that we do pursue, but yeah, currently, we don't have any major plans beyond this.
Hello?
Yeah. Could you hear me?
Sorry, sir, I missed last, last, couple of says.
As I said, we, we don't have any other significantly large other plans other than the few I talked about, which is looking into the specialty space in the U.S., our CapEx cycle of INR 1,000 crore that we will spend, and some investments in research and some market expansion.
Okay. for the domestic market, are you.
Yeah, you also seen, you know, the way, dividend payouts are also, you know, increase, depending on the availability of cash flow.
Yeah.
The buyback that we did last year and the enhanced dividend rate that we have proposed this year.
Sure, sir. Just an extension, sir, on the domestic side, what kind of investment that you are thinking about? Is it about adding a new product portfolio, or it is creating and building our own portfolio in the specialty area, let's say biosimilar or something like that? Or what kind of investment that you are looking at for the domestic market?
In domestic, from our internal point of view, it's... yes, it's investing in biosimilars, vaccines, and this, and the differentiated launches that we want to do, including launching our discovery-led products like Saro, Desi, and now we hope in the next few years, a few more. Beyond that is looking to see if we can find the right fitment in terms of acquiring brands, which we would look at. Now, as part of our overall life sciences strategy, we do believe in end-to-end outcomes for diseases, so companion diagnostics, and those areas will also become an integral part of how do we treat for many disease, chronic diseases.
Sure, sir. Yeah. Thank you, sir. I wish you all the best.
Thank you.
Thank you. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The next question is from Neha Mankuria.
Thanks for taking my question. Just one question. You know, we, we received approval for generic VASCEPA last quarter. We haven't yet launched the product. Any timelines on when we can, you know, probably enter that market? Any reason for the delay?
I think, well, it's a very complicated API, so we are making sure that we risk mitigate our supply chain on API so that we have enough so that we don't have problems in the future. Looking at that timelines and the approval that we got and the co-manufacturing of this complex formulation, we're looking at a quarter 3 launch.
Understood. Understood. Sir, in terms of our injectable portfolio, you know, we've seen a fair bit of approvals on the injectable portfolio as well. You know, what sort of a run rate have we reached? Do we want to give any color, any target in terms of, you know, what we are targeting on injectables? Should we see the momentum build, and when do we start seeing the more complex injectable approvals come through?
I think the gene injectable is still in the scale-up phase. I think it's not reached that size and scale where we talk about as a separate segment. It's part of our overall strategy on the portfolio. As when it becomes large and large, I think we will segment it in the right way. I think the complex portfolio, I, as we still believe, we will see some approvals in this financial year and also in the coming two financial year. As I had said, the slowly we will see launches of complex injectables in the next two to three years.
Understood, sir. Thank you so much.
Thank you. The next question is from Vishal Manchanda.
Thanks for the opportunity. Hope I am audible.
Yes.
there have been a few approvals you received in the last few quarters, like CHANTIX, Ivermectin cream, and transdermal patches, too. Have these been launched or they're yet to be launched?
Yeah, they have been, not the transdermals, but the other products have been launched.
Okay.
Then, you've been talking about launching 2 REMS product during the year. Again, have these been launched or they are yet to be?
Yet to be launched.
Any color, which quarter of the year?
In the third and fourth quarter.
So these would be limited competition and represent, what, what market size do these represent?
As is, we don't do product-wise, market size, but they are important launches.
Okay. finally, on the India business, can you share the contribution of biosimilar business to the overall sales?
Again, I said, you know, biosimilars is part of the therapy expansion in RA, in oncology and others, so we don't club biosimilars like that because they are branded formulations business. I would definitely say that the, they are scaling up significantly, and will continue to scale up in the next two to three years with the pipeline that we hope to launch. I think overall it is, it is in a, it is doing very well and scaling up, but it is part of our overall therapy focus, so it's not a technology focus from that point.
Okay. Do you have capacity to execute growth, or you would need to invest in more capacities around biosimilars?
We are expanding our capacity on biosimilars as we speak.
Right. What's the investment that you intend over the next two years in the biosimilars space?
That is part of overall CapEx budget of INR 800 crore-INR 1,000 crore that we have given guidance for.
Okay. Thank you.
Thank you.
Yes, we can close.
I think if there are maybe no more questions, then. Oh, I think we have one more.
Yes. The next question is from Harith.
I hope I'm audible.
Yes.
Yes.
On, on transdermals, you mentioned that you haven't done any launches while the approvals you received a few quarters back. What are the steps from approval to launch that we are undertaking now? Any color on when we'll be launching?
Yeah. So I think the most important thing in launches of transdermals is that when we come to launches, we need to significantly scale up from our earlier exhibit batches. It's a long processing cycle, and every material is imported, most of it, 95% of everything what we use is imported with long lead time. Getting that supply chain in order, to make sure that we are scaling up with the batches and launching, for the first time since we're doing it, it has been longer than our experience on other products. Having said so, we expect in this financial year to have, at least, two launches.
Okay. As a colleague, you, you, mentioned that you're factoring competition, in the product, by the second half of FY24, and then that's, you know, part of your guidance of, 10% growth. Any, any reasons for, this, expectation, that, that anything that you're hearing from customers or from competition, you know, in terms of?
That's part of our build-up in terms of planning for it, so, not- we haven't heard anything immediate which you can see, but it's better to be, err on the side of caution, and at least plan for a co- competition in the second half of the year.
Okay. That's all from my side. Thanks.
Thank you. As there are no further questions from the participants, I now hand the conference over to management for closing remarks.
Thank you very much. Look forward to interacting with you again in the month of November when we declare our Quarter Two results. Thank you. Have a nice evening.
Thank you so much. On behalf of Zydus Lifesciences Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines and exit the webinar.