India’s third largest pharmaceutical company Lupin reported muted earnings in Q2 FY16 due to a slowdown in approvals that hindered launch of new drugs in US market. Net profit declined from Rs 525 crore in the previous quarter to R409 crore in Q2 FY16, while ebitda declined from R892.2 crore in Q1 FY16 to R713.6 crore in Q2 FY16.
In an interview, Kamal Sharma, vice-chairman, Lupin told Neha Bothra that the company’s financial performance is expected to significantly improve fourth quarter onwards since he was confident of some key drug approvals. Sharma expects around 25 drug approvals in the next one year.
Excerpts:
Q. What are the key factors that affected earnings this quarter?
The performance this quarter was subdued and we are unhappy because it does not meet our internal benchmarks, but we had indicated in the last quarter that we expect a couple of quarters to be subdued because of lack of approvals from the US FDA. But we also said that from Q3 onwards we will see some improvement. Q4 onwards we expect substantial improvement since we already have approvals in our hand for some of the products that are likely to be launched this quarter. Secondly, apart from no new launches there has also been a reduction in prices due to competition in the market and peer group. Our R&D expenditure has also substantially increased by 2% q-o-q. Employee costs also increased due to increase of sales force in India and overseas recruitment. While, the planned investments have happened, we have not earned the expected revenues.
Q.What is the outlook on the pricing front going forward?
Historically, we have seen a year-on-year price reduction of 5% in generic products already launched in the market. Two to three percent of that we recover through our cost reduction efforts and so on. And a large portion is offset by new launches. However, last year there was a major supply chain consolidation in the US and there was an almost 14% reduction in prices. This year price cuts is about 6% but we haven’t got commensurate revenues. If the new launches would have happened, we would have been able to deal with this reduction. But in the absence of new launches this looks more pronounced.
Q. How does the drug pipeline look? How many approvals are you expecting?
Our total pipeline is about 220 products, and we have got 112 approvals, of which about 85 or so are in the market. Some of these are tentative approvals and some of these are final approvals. Q4 onwards we see substantial improvement in our performance on strength of the fact that we know that some of the products that are likely to be launched have final or tentative approvals in place. We are awaiting approval for 100-odd products from the US FDA. We expect good traction of approvals going forward, and expect 25 approvals or so in the next one year.
Q. What’s the visibility as far as key launches like Nexium is concerned?
The reason I am optimistic about the performance getting better Q4 onwards is because I know that some approvals have already come.
Q. Lupin has been debt-free till this quarter. Do you expect the current debt equity ratio to increase going forward since your appetite for acquisitions is still strong?
We do see an increase in debt as far as Lupin is concerned but we are very aware of the gearing in the company. So the debt will remain well within conservative limits. While the banks may allow you to borrow 3 to 3.5 times ebitda, we may restrict it to two times ebitda maximum. We believe with the acquired assets and profitability of the company we will very quickly come back to, if not cash surplus position, at least 0.5 debt equity and gradually make it cash surplus.