Lupin aims to be specialist co; eyes more branded products

Lupin, which is considered to be one of the most interesting growth story in the pharma sector wants to now enter a new growth orbit by transforming it self in to a specialist company from its current branded generic character, said the Vice-Chairman Designate and Managing Director Kamal Sharma.

Lupin has already made around 12 submission to US Food and Drugs Administration (USFDA) for technology platforms in dermatology and ophthalmology. Once approved these technologies will become branded offerings in the market. "So while we will ride the wave of generics we would also continue to pump in more products into our branded portfolio," Sharma said. The company has adopted a four pronged strategy for its transformation in to specialty treatments. "There is a four-step definition of specialty - technology intensity, capital intensity, regulatory rigour and personal usage of the product," Shrama explained. Lupin which has become the India’s third largest pharmaceutical company and America’s fifth largest generic drug maker is on the brink of achieving USD 2 billion revenue. Also read: New drug price policy: Which pharma cos will feel the heat? Kumar who was recently elevated to vice-chairman position believes that his elevation will not have any clashes with designation of founding family members. He believes that Lupin which is known for the symbiotic relationship between professionals and the family that founded will continue in this tradition.  "We believe that the entire growth and success of the organisation comes through professional excellence and not merely through family leading the show," Kumar said. Below is the verbatim transcript of the interview. Q: You have become Vice-Chairman and you have had Vinita and Nilesh who are the children of the founder coming in or will come in and take a more hands on roles in the organisation. Ofcourse, they have been already working in the company for quite a long time and Vinita have been heading your American operations and Nilesh your research and development (R&D) operations. What does this change signify? A: It signifies a couple of things. One, it signifies a natural plan for succession because we have these two persons who have established themselves with a very strong track record, everyone is familiar of the US success of Lupin and the credit goes to the leadership of Vinita and her team. Likewise, massive investment that we have made in R&D and capital investments in the sense of creating new therapeutic groups, new lines, new products and in essence the management has supply chain that has been very effectively led by Nilesh Gupta. So, I think both of them besides very good credentials have also been able to bring in a lot of value. Q: So, they have proven their spurs? A: Proven their metal and won their spurs if I may say. As far as I am concerned I think I have been playing a transactional and a transformational role over some time now. I have been accountable for a profit and loss (P&L) for last 24 years in some form or the other. So for me I think again it a very interesting turn that I would do more of transformational work and little less of transactional work. Q: Does the relationship between founding family, the founder family and the professionals have now changed in anyway? I am asking you this because in the last decade Lupin was help up as a great example of the symbiotic relationship between professionals and the family that founded it. Does this change anyway this elevation of Vinita at CEO and Nilesh to MD? A: No, I don’t think so. I think the symbiotic relationship as you called it between professionals and the family, the promoters is actually ingrained in the DNA of the organisation because it has been so for many years. I have been in this system for a very long time and I don’t think it is just going to change because of this particular change happening now, that’s a given because we believe that the entire growth and success of the organisation comes through professional excellence and not merely through family leading the show because when you have a multi-geography, multi-product, multi-technology group you need experts, you need specialists and we all understand that none of us alone can serve that purpose of multiplicity and we got to have the contribution of all these specialists. Q: You spoke that you will continue to play a transformational role. Let us go back 10 years. What do you think was the biggest transformation that you made? Was it the fact that you decided to take Lupin out? You have entered the American markets later than most other Indian companies, you entered in 2005. You chose not to go the generic route, you did generic but you chose to pick up brands and go to the market. Would you say that was your transformational moment a decade ago? A: Yes, certainly. As a person I have always enjoyed creative pursuits and taking risk and bringing in new ideas and new thoughts. I have not enjoyed a typical CEO role where you just have certain goods and services which you put in market and make your margins. To me what gives high is creating new things, new products, new services, new markets. So in a manner of speaking as I said a while ago, I have been playing this transformational transaction role and I have been very fortunate to be in assignments where I could straddle across both these roles equally well. Going forward I would like to play more of transformational role. Q: What will be the next big transformation? In the last decade you have really ridden on some brands, Suprax was a brand that you really drove well on and generics contributed to volumes. What is the next big transformation? Is it going to be R&D? What is going to be the next big transformation? A: Yes. I think that is where my role comes. Today Lupin has moved from where it was 10 years ago to a big league. We are the 8th largest global generic company by market cap at about USD 5.9 billion. We are the third largest pharmaceutical company in India. We are on the brink of USD 2 billion revenue. So we have come a very long way from USD 250 million revenue 10 years ago to USD 2 billion now. Our profits have grown 28 percent over last 6-7 years on the trot. Our EBITDA margins have greatly improved. I think we are now entering a new orbit of our growth and from a branded generic character of our company we would like to be a specialist company and we need to pick a few areas where we can bring in the specialist character to the business which would mean a lot more investment in research. Q: Specialist as in specialist in certain treatments? A: Yes, certain treatments. Q: You are possibly the world's largest supplier of generic anti-TB drugs. A: That was the case 10 years ago. Today we have 65 percent of our portfolio in lifestyle. We are still leaders of TB. We have 45 percent market share in India and we supply large quantities of anti-TB drugs to World Health Organization (WHO) program, but despite that it was necessary for us to change the business mix of the company to be able to make profits and feed growth imperatives. Q: When we say specialised how will you choose the specialisation? Is it something you already have in mind or will it come out of your laboratories depending on what molecule you hit or are you focused to go after a certain cure in a certain area? A: The way we have defined specialist area is a four-step definition. First and foremost this is highly technology intensive area. You must have the superior end of technology as an input to this. Second, it has to be capital intensive. Capital intensity by itself acts as an entry barrier. We know in generic business many people can enter, but in specialty business few people can enter or biological business even fewer people can enter, because this is so much capital intensive. Not only it is intensive in capital investment, it is also your tenacity and ability to remain invested for longer period, because the results come out late. It is not a quick fix situation in specialty area. The third thing is that there are high regulatory demands. You are going to have simple bioequivalence but you have to do clinical trials in many cases. So regulatory rigour is of a high order. Lastly, if I may say these are very personal products. People do not switch that easily if they start using them. So there is a four-step definition of specialty - technology intensity, capital intensity, regulatory rigour and personal usage of the product. _PAGEBREAK_ Q: Will this investment now slowdown that rate of Return On Capital Employed (ROCE) so far? You gave a 200 percent dividend and your growth will be fantastic for the investor. Will they switch to capital intensive? How will you keep your investors insulated in a sense? A: Our success comes from telescoping the two complexions of the business very seamlessly. Sometimes it might sound easier said than done, but if you strategies and plan your investments properly, you have to get the right timing of your investments, while the earlier investments are still on their productive phase. You are not drying the earlier one and then starting afresh, then you are going to get into that trap which you were just saying. Q: You have got that balanced. A: We are fairly sorted out, yes. Q: Let us talk about the industry as a whole. You have completely outperformed the market if I can say so. You have grown almost 35-40 percent this year. But the Indian drug industry itself is in sluggish single digits. How long do you think you can keep beating industry? What is holding it back today? Is it the fragmented nature of the industry? What is holding the Indian drug industry back? A: If you see that till April 2006 it grew in single digits 7-8 percent, then after till quite recently it grew at 12-14 percent. I do not know whether this is so immediate, but the GDP growth has been pretty sluggish over last year or so and as economists will say that the healthcare expenditure grows almost twice the rate of GDP, so if GDP fell down from 8 to 5 percent will that create sluggishness, could be. In my view this sluggishness could also be only short-lived. The need for medical enhancement or healthcare is high in this country. Despite whatever we see, this growth and USD 20 billion market etc. there are still about half a billion people in the country who do not get good healthcare. Even with all that what we are talking about our per capita healthcare expenditure is still about USD 18-20 as against USD 1,000 in America. Q: Let us go back to America and plug in what you want to do transformational. Your success in America caught a lot of people by surprise. As we said earlier you have entered quite late. What is the way going forward in the American market for you? Today it is a blend of brands that you have bought over and generic. How important will generics play and how important will brands play for you in American market? A: I think we will continue to play on both streams of business. Typically speaking we had 35 percent brand and 65 percent generic which came down to 25 percent brand and 75 percent generic which I do not consider as a great indicator of any anxiety. This will happen. Suddenly you have a couple of good generic launches and volumes will just swing up. What is important is that your profitability is good, moving and sustainable, because that is the determinant of a successful business. Whatever I spoke of the specialty business all this will get into branded mode in America. For a few things like oral contraceptives, they would be generic because they are already branded, but some of the platform technologies that we will deploy in dermatology, in ophthalmology, we have already made about 12 submissions to US Food and Drugs Administration (USFDA) for ophthalmology which against qualifies for a specialty area, these would become branded offerings in the market. So while we will ride the wave of generics we would also continue to pump in more products into our branded portfolio. Q: Going forward what is your growth strategy going to be because you have make acquisitions abroad, but it seems to be more brand acquisitions than company acquisitions, is that the way forward for you, is that a conscious choice that you made?

A: I think brands certainly are a very important piece of inorganic growth strategy in our business. But at a philosophical level, I think we always felt that 75 percent of our growth or 80 percent of our growth should come out of organic strokes. So, we built our manufacturing base, our technology base, our quality assurance expertise, our people expertise in a manner that we can achieve that organic growth and 20-25 percent will come out of inorganic, but it will have three angles to it or three dimensions to it, there will be geographies, like we did in Japan or we did in South Africa or we may do in Latin America as we have been very keen to do, it will have brands and it will also have technologies because some of these specialty areas that I just spoke about we will have to invest in technology.

Q: Let's just take example of the largest generic company in the world Teva, is about USD 30 billion, so how different are you in your approach from them. Have they been completely generic driven? Do you look at them at all as an example? Who do you want to become?

A: Teva is a good example to emulate. But Teva always had very strong brand in form of Copaxone and if you look at Teva their profits were always driven by Copaxone and Azilect and some of the other brands that they had almost like USD 4-5 billion, one single brand itself. The new CEO who have come to them, Levine, I think his name, he is driving the business towards branded business, in fact he is kind of pulling gas out of the generic business.
So, I have no hesitation saying that we would like to emulate, but probably even do better because the difference that I see is in our strategic approach – there you can dilute your equity and keep acquiring and become big, whereas we like to become big by pumping in that adrenaline into the internal strength of the business. So, acquiring and becoming big is one story, but pumping in that adrenaline in the ecosystem of the organisation in terms of people, technology, processes and products and then building your growth story to me looks like long-lasting.

Q: Long-lasting that’s something that you can’t say of many Indian drug companies because lots of big Indian companies sold out, gone for foreign partnerships. What is the way forward for Indian companies because data that we are getting seems to suggest that multinational India are gaining very slowly, but the are surely gaining inch-by-inch. So, how do you see yourself in that scenario?

A: So, I think the answer would lie in what just I said a while ago because if the multinationals are encroaching upon your turf and getting into generic business, getting into emerging markets you have to prepare yourself to get into their turf. So, far the party was on with the generic and branded generic business, going forward you should create specialties.

Q: Is what you call specialty it is halfway house if I may call it so between generics and high drug cost, high research drug?

A: Simply put yes, it is not generic I would say it is between branded generics which are at least protected by trademark and the new drug, new chemical entity or new biological entity somewhere in between you have this platform where you can put in patent expired drugs if you may so desire and make them unique and make them protected by intellectual property rights.

Q: Finally, if you had look around you and look at other Indian companies around. Who do you thing is similarly wired to you and can come up and you would is a worthy competitor?

A: We like to believe that we are unique because there is certain pride that you take in differentiating yourself in the marketplace, but if it came to learning good things form some of your peers we would never shy away from that. I have always made an example of Sun Pharma when it comes to EBITDA margins and we have improved our Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margins piece by piece as promised 75-100 basis point (bps) year-on-year. This year we are at 24.3 percent. Our first landing should be 25 percent. So, we have come long way from 15 percent to 25 percent hopefully then there are other areas that you would like to emulate from Dr Reddys. So, I think we have built a culture here where we bring in our own excellence as I said by pumping in lot of development, lot of skills into the system as well as being open to learn from other people’s goodness and greatness because that’s what makes us probably unique.