In an interview with ET Now, S Ramesh, CFO, Lupin says, “We are essentially looking at the speciality portfolio as that is where the future lies.” Edited excerpts:
ET Now: How is Lupin doing on the pricing front?
S Ramesh: On the pricing front we do expect price erosion to be contained around 10% for inline products. We have had a couple of products which suffered loss of exclusivity sometime ago, essentially Glumetza and Fortamet. In fact, I do expect price erosion to continue in America in the first two quarters at least for the current year before it stabilises around 8-10%.
ET Now: When you say 10% erosion, I am assuming that this is on back of 20-25% erosion that you have already seen in last 12 months. So are trying to indicate that your core portfolio will remain under pressure and margins are unlikely to go higher?
S Ramesh: I would say that because there will be very few products to replace Glumetza and Fortamet. Those two were pretty large products in our portfolio. During the course of the year we do have the warning letter, which means that we cannot have too many good launches this year. This indeed is a dry year in any case. We do have a couple of products that we would be bringing to the market and this could include good ones like Ranolazine, for which we do have some exclusivity. We also have levothyroxine which we would be launching towards the end of this year. We are looking forward to some more exciting times coming in from the launch of Solosec. The first year could be lacklustre because it takes time to take up any speciality product but it is something that we are laying our bets on. We are pretty hopeful about markets like India or the emerging markets in general, which includes Brazil, Mexico, South Africa, Philippines and the like. But the advance markets like America will indeed be under some pressure.
ET Now: When do you expect the Pithampur unit clearance to come by? Do you expect clearance soon? What is the internal time line for the resolution?
S Ramesh: We were recently inspected by MHRA which gave clearance for Goa facility and we also had Health Canada commenting on it, so we are pretty hopeful about USFDA too. We are making our monthly submissions and we expect the last one to be done by April. We would then be inviting them to see our facilities but at the end it is up to them really. I do expect some kind of closure to come by the end of the current fiscal, rather calendar year.
ET Now: How would that pave the way for more drug approvals and more business coming in because apparently Unit-II is more critical in terms of revenues that stream in from that facility?
S Ramesh: The two big ones that you are speaking about for the current year are not from this facility. They are from other facilities and to that extent we are on a safe wicket there. We are standing by other launches from these two facilities but it is a particularly dry year for us so we really do not have too much to speak about during the course of this fiscal besides the two products that I already spoke about.
ET Now: No body is talking about Amazons entry. Is the entry of Amazon good news or bad news?
S Ramesh: We think it is good news because there is no competition coming in which is a replacement of the existing channels. There are only three big players in the US market, so fourth one is certainly welcome. I do not think it is going disrupt the abilities of manufacturing companies. I certainly think it is good news.
ET Now: As percentage of you total sales, how much do you think your domestic business would be in FY19 and at what rate is that business growing?
S Ramesh: Historically, it has been around the 25-28% mark. We do expect it to be around the same mark this year as well. It has been doing particularly well over the last several years. The growth rate has been around 12-15%. I expect it to be upward of 15% year too.
ET Now: Whatever you are losing in your global generic business, how much are you likely to make it up because of your domestic growth business?
S Ramesh: In a general sense the growth India in India kind of compensates for the overall price erosion in America. This would however be a lacklustre year because the number of products that we are launching in America would be lower.
ET Now: What about the pricing for the domestic markets and for some of the generics that you are looking to rollout or that you already rolled out? How is the pricing environment looking in India because it would be to my mind fairly competitive as well?
S Ramesh: Surely, it is a pretty competitive market. About 23 to 24% of our products are essentially under NLEM and we also have a price ceiling. There is an increase in prices in line with inflation. When it comes to the rest of the products we do have the ability to take it up by at least 10%. But with competition at play the weighted average increase in prices is likely to be around 4% overall. But this is something which has to be taken on year-on-year basis.
ET Now: Your R&D costs are likely to impact your margins and that is where the concern lies with the domestic pharma companies on how R&D as a percentage of sales might come at the cost of profitability.
S Ramesh: In the last few years our R&D has been averaging about 12-13% of our total sales. I expect the figures to be around the same numbers this year as well. We do what it takes to cap it somewhere around 12.5-13%. We have done something pretty innovative on this front. So the financiers to take the risk off our books finance certain molecules. They share the risk in the upside whilst the entire risk on the launch or development is essentially taken by them. With these arrangements, we do believe that we are in a position to protect the total increase in R&D.
ET Now: Where is the next big ticket of opportunity for you? Do you think biosimilars is the next big thing in the US considering the players are still very limited in that space?
S Ramesh: We are essentially looking at the speciality portfolio as that is where the future lies. We are looking at complex generics coming in from the entire respiratory portfolio. We are interested in the big three molecules which are Advair, Spiriva and Seretide. We also have Pro Air.
Apart from the respiratory portfolio we have got complex injectables which include Risperdal Consta, leuprolide, aripiprazole and the like. These are still undergoing testing. The big ones essentially would be from the biosimilars as well as speciality interest. When it comes to speciality, Solosec is going to be our first major product out there. In the past we had methergine but it is more of a generic product converted into a brand. The first real big product would be Solosec and we do have 10 years exclusivity there. When it comes to biosimilars, we are in a position to file for Etanercept in markets like Japan and Europe, although America could come in later. We expect to launch Etanercept in Japan in the next 15-18 months. Europe would follow later and after that US. There are a few more products lined up when it comes to biosimilars but these are under development at this stage.
ET Now: What is the view overall on the Indian markets? Do you see a growth in the high margins of 10-15% for the next 5-10 years?
S Ramesh: When it comes to the Indian markets I do expect it to grow at least 15%. The EBITDA margins from this business are slightly above the corporate average today, between 24-28%. And these numbers I think will sustained over time.
In the Japanese market because of pricing pressure we do expect the margins to be lower. The pricing pressure would continue and EBITDA margins would come down. Overall, I think EBITDA margins depend on the kind of realisations that you have on products and the cost of production. We are trying to be the last man standing with a lot of measures around procurement excellence, yield improvement, labour rationalisation, R&D productivity, sales force productivity and the likes of it.
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