Aspire to hit $5 bn in sales soon; focus on specialty biz: Lupin

On the persistent regulatory worries from US Food and Drug Administration’s observations on its facilities, Nilesh Gupta clarifies the Mandideep and Aurangabad inspections have been successfully closed, while issues at Goa are targeted to be resolved within the next 3 months.

He emphasises that not getting new approvals from the Goa plant will not impact business as majority of the nearly 100 approvals pending with US FDA are from non-Goa sites.  

The duo believe it is unreasonable for investors to get perturbed by a single event and take a myopic look at the company’s performance as the management has well laid out plans for the long term and all the required growth drivers in place.Below is the transcript of Vinita Gupta and Nilesh Gupta's interview with CNBC-TV18's Shereen Bhan.Q: Let me start by asking you what is this journey being like for you. We know from a markets perspective, from a market cap perspective, what the Lupin story is meant over the last decade or so, but for you Vinita personally what’s being the biggest highlight so far. Vinita Gupta: It’s being a phenomenal journey if I look at the last 10 years and that’s probably a bit too long, but it has been a wonderful journey of taking our company, Indian pharmaceutical company, the strong roots that we have in India to a global multinational bringing affordable quality medicines to major parts of the world including the United States, Japan and India. It’s being a phenomenal journey of transforming the company over the last 10 years.Even in the last couple of years, the last 2-3 years we have been preparing the company for the next phase of growth investing into, taking a generic model into complex generics, investing into proprietary speciality pipeline, acquiring entities to gain access into new markets that we think are going to be materially market for Lupin long term. It has been a phenomenal very rewarding, very satisfying fun journey, but the better part of it is yet to come.Q: This hunger of acquisitions, it has been a fairly significant last one and a half years on the acquisition front, the Gavis acquisition of course is the big one USD 880 million, appetite for big ticket acquisition still there.Nilesh Gupta: The appetite is on the speciality side and big, small and all kinds is what we are looking for. I think the geographical footprint is almost complete. I think what is missing is speciality in the US. We have some, but we have much more ambition on that side – that’s where we are looking at all kinds of acquisitions.Q: Is 2016 going to be a big year on the acquisitions front or likely to be a big year on the acquisitions front because as I said over the past decade about a dozen odd and most of them have happened in the last year and a half or so, two year or so.Nilesh Gupta: Yes, but almost 15 in the last decade and more than 6 in the last two years. The first step in 2016 is to integrate Gavis which is actually going really well, but we are on the prowl for specialities, so I think we are looking in whenever it happens we want to be there making sure that it does.Vinita Gupta: We have enough of an appetite. Hopefully, we can find enough to meet our appetite.Q: Haven’t found anything interesting yet?Vinita Gupta: Well, we have looked at a lot.Q: Or you spoilt for choice.Vinita Gupta: From our perspective it has to be very strong strategic fit as well as other things for the organisation and that where we spent a lot of time on and we hoped there will be enough for us to be able to bring into the company and provide new avenues for growth.Q: Let me ask you about the long term picture. You had an aspiration of USD 5 billion by 2018; you brought that down to about US 3.5 billion. Do you believe that you are going to be able to stick with US 3.5 billion and what kind of concerns at this point and I will come specifically to the FDA related concern, but on the big picture what are the main concerns that you are focussed on?Vinita Gupta: Our aspiration is still to get to USD 5 billion in revenue that is truly the aspiration, but with all the investments that we have made so far as an organisation both organic as well as acquisitions in the last couple of years and changes in the market place that we have experienced with all the customer consolidation that is going on in the industry. When we look at the realities of the market, we believe based on the current investments, we have visibility to USD 3.5 billion that doesn’t mean we will stop there. We continue to look for other growth opportunities, other acquisition opportunities in particular like Nilesh said on the speciality side of the business that will help us get closer to that number.Q: So you are still aspiring for USD 5 billion, but you will be closer to USD 3.5?Vinita Gupta: Well based on what we see right now the visibility that we have organically with what we have right now and the companies that we acquired we believe we will be at that level.Q: Let me get down to what everybody wants to talk about and that is the issues as far as the USFDA is concerned. Every analysts report talks about that being the near term overhang as far as the stock is concerned. Where do things currently stand because you have submitted your response to the USFDA? Have things moved forward. What is the sense that you get?Nilesh Gupta: Over the last six months there was actually a concern on three sides and we knew that the concern was overhyped on at least two of them and we been able to settle that, so we got the establishment inspection report (EIR). Mandideep and Aurangabad are clear and those are closed.Q: And for people who do not understand what an EIR means, it is essentially saying that it is an all clear from the US FDA.Nilesh Gupta: It is a closure of the inspection and that yes, the site is fine and obviously, you remain open to be audited at the later point of time.Q: So, the recent recall from Mandideep was that a mandatory recall because of the EIR or can you explain what that was on account of?Nilesh Gupta: As a part of the 483’s, we felt that that was something that we needed to do. So, we voluntarily did it. So, the FDA knew about that, so the EIR came well after the recall was done itself. So, to me it is all a done and closed matter. I know that there was some concern in India in the last couple of days on that count, but nothing to worry.Q: So, Mandideep and Aurangabad are back to business as usual?Nilesh Gupta: Yes. And Goa is obviously the other one where we had nine observations and then nine again. We have responded pretty comprehensively to the FDA. We sent an update thereafter as well.Q: When was the last update that you sent them?Nilesh Gupta: We sent in May and we will likely follow it up with another one in June. And the plan is right now, just about these are all the things we have committed and this is the update on that and we are actually adding new stuff along the way as well. I think it is going to be another three odd months before we close everything we have committed to. To the FDA we are committed till December, but we are really trying to see how we can do it even sooner. We have put our best foot forward. We have asked for a meeting with the FDA. They have not granted us that yet. To me, that will be a critical event. If they do grant us that. And if they determine one way or the other before that, then we will know.Q: So, just to understand, the observations of the FDA had made the action on those observations. You believe you will be able to put all of that to rest over the next three months and of course, then it is incumbent on the FDA to take a call?A: Yes. We have actually committed till December to the FDA, but we are trying internally to actually make it happen even sooner.Q: If there are delays and that is the other concern and I know there is an ongoing site transfer process that is already on. What will that mean in terms of product launches and your plans as far as the Goa facility is concerned?Nilesh Gupta: If the FDA does hold back approvals, in the meanwhile, obviously we will not get new approvals from Goa. It does not affect any of the existing business. Like Vinita shared earlier, pretty much all the big building blocks for FY17 are already in place, they are already baked in. So, the key products that we wanted to launch have actually launched already, including from Goa. I would not say the lion’s share but a majority of the approvals that we have pending with the FDA now are from non-Goa sites. So, we have sites like Indore._PAGEBREAK_Q: So, you have about 36 pending approvals if my memory serves right?Nilesh Gupta: We have almost 100. And I would say about 30 of them are from Goa and the rest are from other newer sites that we set up. So, a lot of the new approvals will come. There is a lot that we are expecting from India. We are expecting a lot from Gavis as well in terms of new approval action and if the FDA closes everything, then obviously Goa will be back on track as wellQ: So, do you have any sense of by when we could finally see closure on this?Nilesh Gupta: It is total crystal ball gazing at this point of time.Q: Cannot pre-empt what the US regulator does?Nilesh Gupta: No, I think it depends on whether they decide that want to do a re-inspection for example. So, it is hard to say at this point of time. But like I said, we have put our best foot forward. Let us see how it goes.Q: You also talked about how Lupin is now going to look at a holistic quality transformation as well. What is that going to entail? And it is not just Lupin but several Indian companies or pretty much every Indian company at this point in time is in some sort of tangle with the US FDA, in the US FDA’s crosshairs? Why is that?Vinita Gupta: Why, I believe very firmly is because the foreign inspections have a very different format than US inspections. You have new inspectors that arrive at your site. We have never had the same inspector come back to a site again and every inspector is going to look at it from their perspective, with a new lens. So, they are always going to catch something new. And we treat it as a learning experience. We know that a new inspector is going to come up with their own set of concerns and we will treat it as a learning experience. What we are doing across all our sites is making sure that we are ahead of the curve. Anything that we learn at one of our sites is applied across all of our sites. Plus, any time the FDA issues, any warnings letter or a 483 to any organisation, any major organisation that currently supplies products to the US, we will learn, we will go through it, screen it, see what we can learn from it so that we can bring our standard up to a different level to be above and beyond what the FDA is looking for at all points in time.Q: Let me then ask you in terms of research and development (R&D) investments and you have said that R&D investments are likely to go up from 12 to 15 percent. What is that going to mean as far as Lupin is concerned and when is that finally going to start to kick in from a revenue and a bottomline perspective for you. Vinita Gupta: R&D investment has ramped up over the last five years. Five years ago, it used to be the 7-8 percent level and now, this past year it was at 11-12 percent level. And you see the result of it. If you look at our growth over the last five years, it is because of our pipeline. The fact that we have invested into more barriers to entry, therefore limited competition, higher margin potential pipeline. That is why you see the margin expansion that you see in our business over the last five years. So, we very strongly believe that the investment that we are making today in R&D is going to yield results over the next 3-5 years otherwise, we would not do it.Q: But what kind of results?Vinita Gupta: We expect to continue our growth momentum as an organisation from a revenue perspective. We expect to continue our margin expansion as an organisation based on the investments that we are making. So, the investments that we are making in R&D, we want to evolve our generic pipeline into complex generics. So, areas of high barriers like inhalation, device related products and biosimilars to a certain extent, specialty pipeline to help us grow our specialty business. Those are the areas that we are investing which are very strategic to our business.Q: So, what could the margins then look like 3-5 years down the line for you? Vinita Gupta: We have been, if you look at all our quarters over the last few years, our margins at the highest have been at 30 percent level and we would like to be able to beat that 30 percent earnings before interest, taxes, depreciation and amortisation (EBITDA) margin.Q: That is a good target to have for yourself, but let me ask you about your core market and I will get to the US in just a second, but let me ask you about India. Last quarter, growth was about 15 odd percent for the India market. What is your sense give the regulatory uncertainty that continues in India at this point in time?Nilesh Gupta: India is a hostile market at this point and everybody I talk to in the industry is concerned about what is happening in India. And if you really look at the last couple of months, growth has come down significantly for the market. Our mandate in India has been a little different. You know the challenges in India, so there obviously, the pricing and the expanding price control lists and negative wholesale price index (WPI). So, there has been a lot of challenges in India. There is the fixed dose combination (FDC) ban so, there is a lot of gloom out there.We have for our part added a 1,000 representatives in Q4 and that is a clear sign of where we want to take this in India. There is one part of what the market grows at what you can grow as a multiple of that. The other is the kind of market share that you can grow. We are still very small. 3 odd percent is nowhere where we would like to be long-term.Q: So, what is the target for yourself?Nilesh Gupta: We need to get into 5 percent at some point of time.Q: By when?Nilesh Gupta: We do not give guidance and this is clear direction. The ambition would be to keep growing at anywhere from 1.5-2 times the market growth rate and that is what we have done these last 5-10 years as well. That is what we want to continue. We are also adding new flavours to it, so there is over the counter (OTC) for example. We have a pilot running in the country right now. In the next six months, we should do a nationwide rollout for an OTC portfolio. We have never done OTC before. So, there is also these newer angles, we have added five new divisions in India. There is a lot more new products, a lot more alliances with multinationals as well. So, despite the challenges, we will grow.Q: Are we likely to see more tie ups, the kind that you have with Lilly, etc?Nilesh Gupta: Yes, for sure. And some of those tie ups are getting deeper as well. So, more with Novartis, more with Merck. These are all on the cards. More with Lilly as well. We certainly are going to expand our alliances. We have actually been perhaps the most successful in getting alliances with multinational and we want to continue that.Q: Let me ask you now about the US. You mentioned that the customer consolidation has had an impact as far as pricing is concerned. But you have seen a very strong growth in the last quarter for your US business up about 54 percent. Where do you see the US market and what the aspiration really is as far as growth for the US market is concerned? Not a guidance, directionally.Vinita Gupta: we see it as a very lucrative market for the organisation and it continues to be the largest part of our focus from the standpoint of growth for the organisation in the coming years. The generics of the business certainly has been under a lot of pressure. We believe that a majority of the consolidation that was to happen has happened. The last bit of it is McKesson and Walmart coming together. That is happening right now. And all of the pricing impact based on the customer consolidation has also happened. So going forward, we think that the market is going to be stable for generic companies to be able to afford the investment that we are making in R&D and manufacturing to be able to service the market effectively. The R&D investment that we are making right now into complex generics, we expect it to pay off over the next five years. In the last couple of years we have been investing into areas like dermatology, like control substances with the acquisition of Gavis, inhalation products like metered dose inhalers (MDI), dry powder inhalers (DPI), limited by biologics, complex injectibles. All of these we expect to play out over the next five years to help us grow a business, expand our margin.Q: So, what kind of contribution do you see from these specific categories that you just spoke about? What is the kind of aspiration that you see for these specific categories over the next 3-5 years as you build them up?Vinita Gupta: Like Nilesh said, we do not give guidance.Q: But in a broad sense?Nilesh Gupta: It will be a meaningful chance. If we think about FY17, this financial year derm. It will start coming to markets. Some of the nasal sprays that we have filed will come to markets next financial year. The year after that, of course, the MDI is followed shortly by DPI, eventually the biosimilars. So, you will see a good part of that complexity panning out in the market in literally almost one therapy area every year.Vinita Gupta: I will add to that like Nilesh said about the Indian market, we are still very small. We are a very small percentage of the US market today. We are reaching close to USD 1 billion and you look at the larger companies at multi-billion dollars, USD 4-5 billion in revenues. So we have significant potential for growth.Q: Speaking about the levers for growth and in a business like yours, what is going to be the key differentiator that separates Lupin from the rest?Vinita Gupta: One, how we execute on our strategy. We have a very strong strategic plan in place. We have to execute on these new technology platforms that we just spoke about. We have to bring products to market, we have to file products and bring products to market, so that execution risk. On the specialty front, we have to do a lot of work. We need to in the near-term build our business back to the level it was a couple of years before Suprax went generic. And we believe we now have good near-term growth drivers to build up that business again. But in the long-term, we need to build an effective pipeline, a real engine to be able to grow our brand business.Q: So, outside of what the US FDA does, that of course, is a key concern. But outside of that, what would you be worried about today? As you look at your deck, what are the critical areas of concern?Nilesh Gupta: So, we need to deliver on the identity pipeline. We have taken some very meaningful bytes. We need to deliver, we are talking about much more expensive, clinical trial based kind of products. We need to deliver on that pipeline. We need to keep our eyes on operational excellence. Obviously, compliance remains a key part and then like Vinita said, the commercial excellence in being able to effectively commercialise. If you want to commercialise a biosimilar, there is a commercial risk to that as well. It is not just about being able to bring that product to market, is it going to be branded, is it going to be a generic, is it going to be somewhere in between? We need to play the cards right on that part as well.Q: You are here at the world entrepreneur award and the tendency usually is to think of second generation entrepreneurs as people who have had it easy. They have got it on a platter and so on and so forth. But I am sure the truth is very different.Nilesh Gupta: No, we had it very easy.Q: Seriously, what has been the hardest part of taking a business that existed, a legacy business forward?Vinita Gupta: We had a very tough act to follow. For certain Desh Bandhu Gupta, our father created and established, an amazing platform that made material difference in India. It was difficult to follow that act and enough of a differentiation to be able to set apart what we can do for the organisation going forward. But I believe we have done that. If you look at the both of us, when I joined the company, the company was primarily an Indian pharmaceutical company with hardly any presence outside of India. And my dream was to take the company global starting with the largest market, the US. If you look at what we have done over the last 10 years, we have executed on that plan. So, it has not been easy. Nilesh Gupta: To Lupin, we needed earn our stripes and that is what Lupin stands for and that is what Lupin will always stand for. So, we had to build our own space, excel at what we did before we were accepted. And then obviously the transition which was very natural as well. We are bringing a lot more in our leadership team. In the last year, we have added four presidents in Lupin and that is unheard of. But that talks about the depth, the muscle that we are adding across geographies, Asia-Pacific, Latin America, Europe, Middle-east, Africa. So, there is a lot more bandwidth that we are adding now.Vinita Gupta: When I just joined the company, my father said that he wants Lupin to be a company where family work like professionals and professionals feel like family. And that was very important learning for me early.Q: Speaking of family, it is hard enough trying to convince everyone on what to order for dinner. How do you sort things out?Vinita Gupta: Talking about dinner, our dining table conversations were always about the business and there was a weak when mum said, for a week let us not talk about business on the dining table. It was a very quiet week. So, we all love the business. Nilesh and I love the business and it is not that every time we see eye to eye on everything, but nine times out of ten.Q: What’s been the issue that you had your worst disagreement over?Nilesh Gupta: There is always that something come up, I will give you a couple of examples, but I think the passion to build the business is so strong that’s what drive the biggest level of alignment, but for example R&D we have had a tough year while we were talking about the increase in spent, it almost a 50 percent increase in the spent, where should we place this, should we do much more in inhalation, should we do new chemical entity, should we do biosimilars, whatever we are ready for. What is important for Lupin at that point, you can’t have natural alignment on that – you have to go through a process to that and we evolve some pretty good processes on that. I think we got good people, we have got advisers as well that we have engaged and all of that helps us to come to consensus – we always been a consensus driven company and we work hard to make sure that we come to that consensus and then we stick with it.Q: As investors were watching this show and you articulated what your long term as well as your short and medium vision for the company is, but you delivered on growth and the kind of numbers that you promised quarter after quarter on the 20 percent plus kind of margins that you have promised. For investors who are watching this, what is the single message that you would like to send out as far as Lupin is concerned because that is all of this business on valuation and growth potential and the regulatory concerns etc, but what is the message that you would like to send out to investors.Vinita Gupta: I would ask that they looked at the performance of the company over the last many years, not just couple of quarters and not get too perturbed about an event here or there. The company is not a company for a quarter one, quarter two, quarter three quarters. We think long term. We have always been long term thinkers and as long as they are long term investors in our organisation they will stand to benefit.Nilesh Gupta: I was going to say the same. I think we are here for the long term and our lens is extremely long term in terms of thinking as well – we can’t even think quarter to quarter and we just can’t think of that and investors have placed a huge trust in us all these years. I note that there was concern on Gavis for example on the valuation.Q: But give us a sense of what we can expect on the Gavis front. Both of you have spoken about how confident you feel about that, but what can we expect on Gavis?Nilesh Gupta: We feel very good about the Gavis numbers, so Vinita has talked earlier about 3 times in 3 years, we are on track for that. We will be at 2.5, we will be at 3.5 but the broad direction is absolutely correct. The portfolio from Gavis is a very interesting one and the interesting number of filings will happen this year as well, moves on the speciality side as well. Generics is what we really, really understand and Gavis is right in that sweet spot with a lot of complementarity to what we were looking for. I think we will make a great success out of Gavis.Q: You want to add on that Gavis?Vinita Gupta: I believe in it otherwise, I won’t have made that investment, but a large one but we already seeing the results of it. It has paved a way into women’s health in the US, which is a nice growth driver for our brand business, speciality business going forward. We are seeing approval comes through at Somerset at Gavis. We have a fantastic team there that we have been able to retain. We have added to the leadership team and we believe that it will be a significant growth driver for the organisation going forward.Q: So the key priorities for FY17 before I let the two of you go?Nilesh Gupta: Delivering on the R&D pipeline, obviously sorting out the Goa matter as well.Vinita Gupta: And commercial excellence.