"If the gross domestic product (GDP) is around 7-8 percent for the country and pharma sector grows at 10-12 percent, Lupin can grow at 18 percent going ahead on the back of its strong strategies," says S Ramesh, CFO of the company.
Lupin's June quarter margins were off 2.5 percent. This was on account of the change in accounting standards, said S Ramesh, CFO of the company. Not just this, the company's research and development (R&D) spends increased tremendously to 60 percent year-on-year (YoY), he added.
However, he expects the company's margins to be around 30 percent going forward.
In an interview to CNBC-TV18, Ramesh said Lupin is looking at launching specialty and complex products as to stand out in the competition and has a 340 number filings in the pipeline.
In a cautiously optimistic approach, he said the company is working with best of consultants to mitigate any risks in its internationla business.
On the domestic business, Ramesh said: "If the gross domestic product (GDP) is around 7-8 percent for the country and pharma sector grows at 10-12 percent, Lupin can grow at 18 percent going ahead on the back of its strong strategies."
Below is the transcript of S Ramesh’s interview to Ekta Batra and Prashant Nair on CNBC-TV18.
Ekta: First just talking about your margins, 29 percent, but there was a one-off which came into play with regards to GAVIS and the inventory, etc. there. Your sense in terms of what exactly would be a sustainable margin picture for Lupin in the coming quarters?
A: Let me take it in two parts. The first question about the gross margins being slightly lower than in the previous quarter, because it is the way we account for things. There is a purchase accounting that needs to be done because of the accounting standards itself and there is a fair value to be attributed to inventory that we take over from any acquisition which is exactly what we did.
So, when we actually have taken a fair value, what we mean is that we have taken it at market values. So, when it actually gets disposed off in the market, you do not make a single cent in terms of profits on the gross margin front or in the flow through to the earnings before interest, taxes, depreciation and amortisation (EBITDA). That is why you find that there is a suppressor which has happened on the gross margin front which is flowing to the net margins as well.
On the second part, we invest ahead of the curve as we do in research and development (R&D). That expenditure has gone up tremendously over the previous year close to about 60 percent increase. It is a pretty large percentage of our sales. Today it is about 11.6 percent. 1.4 percent increase over the previous year and that obviously has suppressed the overall margins a bit. But despite that, if you compare with the previous year, the margins are actually higher by close to 4.5 percent. We include that R&D bit as well. So, I am a little surprise about the comment on the EBITDA margins itself and as a company, we continue to invest ahead of the curve in terms of R&D, in terms of production capabilities which have not paid off as yet.
Prashant: Just to press on the point that my colleague was asking you. What will margins be looking like in FY17 and beyond that? Your FY16 margins were about 26.5 percent. That has gone up to 29 percent plus. But that is exclusive products as well. Some of the effect of that is going to weigh in a way. What should we expect, what band?
A: It is very difficult to answer that question. I would think it is going to be around the 30 percent mark, but it is obviously not something which is going to stay at that. You would have to take it in a block of 3-5 years where you would in fact, find margin expansion happening over time. And that is essentially because of the reason that I attributed. It is because of investing ahead of the curve.
Prashant: So margins, one should expect around the 30 percent mark, right?
Prashant: Is it 29.5 percent to 30.5 percent?
A: Look at it over a period of time.
Prashant: Over a period of time, starting now till the end of FY18?
A: No, even longer. If you talk about a longer period, I would say that will certainly expand. For this period, I would say that it will hang around the 30 percent mark.
Ekta: The other point of concern and it is not only with Lupin. It is also across pharmaceutical companies is what is happening about the base business and the pricing pressure that we are facing in the US. Yes, Lupin said that it is not as much as what we have seen in the past couple of months, but can you give us a sense in terms of what the scenario is in the US? What is the sustainable growth rate, what are the launches that we can expect and by when?
A: Price erosion which is a constant in this business. In the past, we found it to be unprecedented, close to about 14 percent, at least last year. This year, it has been a little more contained at around 5-6 percent on the base business itself. And that is the nature of the business. That is why we are actually looking at launching newer products all the time looking at in fact speciality. And look at the building blocks that we have done for this, looking at respiratory products, more complex products in the injectibles front and likes, looking at speciality business over time. So, all of these are building blocks for the future. And that is where we distinguish from the competition.
Prashant: In terms of new large exciting products coming up, could you give us some indication? Some of the big products which you think you would be able to launch this year?
A: Minastrin is something which will happen during the course of this year, perhaps towards the end of later part of the third quarter, fourth quarter. The other products that we spoke about Renagel, speak about Welchol, all of these will happen but perhaps early part of next fiscal rather than this year itself. So, we have got enough products otherwise going. So, if you look at our own pipeline, it is a very rich pipeline, 180 odd products already approved, the total number of filings close to about 340. So, the pipeline is what should be exciting most people.
Prashant: You said Minastrin, that is about USD 250 million in overall sales. And you would have exclusivity there?
A: Yes, we would have a pretty large share there for sure.
Ekta: When you talk about the US markets, you obviously have to talk about the Goa facility and what is happening there. You said your cautiously optimistic. That is what the management said about the Goa facility. Can you just update us on the status of the second set of observations which is March, 2016? Where does it stand and your possible resolution timeline?
A: As we said, we are cautiously optimistic and we would leave it at that. The first set of question, we have already got the establishment inspection report (EIR) for it. The second set, we have got an approval, one tentative approval and we do hope that that is an indication of things to come as well. We have done what it takes to work on those, we are working with the best of consultants to remedy whatever observations that they were. So, we are doing all the right things, ticking all the right boxes and we do not want to say anything beyond this.
Ekta: But to mitigate risk, you would continue with site transfers?
A: In a sense, yes.
Ekta: The domestic business, up 5 percent this quarter. But you are expecting it to recover. What would you sense be in terms of wading through things such as the National List of Essential Medicines (NLEM) changes as well as the fixed dose combinations (FDC) and the uncertainty which comes with the FDC now. What is the sustainable growth rate for the domestic business? When do you expect a bounce back?
A: The industry has grown about 6 percent in the first quarter and in a sense, we always find the industry growth to be about 1.5 times that of the gross domestic product (GDP) growth. And if you are expecting the GDP to be about 7-8 percent for the country, I would expect the healthcare, the pharmaceutical sector to grow at around 10-12 percent. So, the 6 percent was an aberration. And Lupin has always in the past grown at around 1.5 times that of the industry. So our growth rate would be close to 18 percent. We are very confident about our strategies. So, NLEM and of course the FDC ban, all of that are there and we need to work on those. But that said, we are very bullish about the long term prospects for the industry in the Indian economy’s context, and we are doing what it takes to actually capitalise on that.The Great Diwali Discount!
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First Published on Aug 10, 2016 11:40 am