HEAL­ING LUPIN

Mar­ket changes and in­creased reg­u­la­tory over­sight in the US have hurt Lupin, but In­dia’s third- big­gest drug maker is mak­ing ef­forts to come back.

Business Today - - THE HUB - By P. B. Jayaku­mar Pho­to­graph by Danesh Jas­sawala

Mar­ket changes and in­creased reg­u­la­tory over­sight in the US have hurt Lupin, but In­dia’s third­biggest drug maker is mak­ing ef­forts to come back.

ItHAS BEEN A SUB­DUED golden ju­bilee for Lupin Ltd, and not only be­cause founder Desh­bandhu Gupta did not live to see it, hav­ing passed away last year, but also be­cause the com­pany stum­bled in 2017/18, post­ing a net loss of ` 774 crore in the last quar­ter. Over a dra­matic 12 years start­ing 2005, it had raced ahead of peers to be­come In­dia’s sec­ond-largest in pharma (af­ter Sun Phar­ma­ceu­ti­cals) in 2016/17, and the eighth big­gest generic drug maker in the world. But in 2017/18, all its key fi­nan­cial in­dices took a hit – net sales, which had risen 24.4 per cent in 2016/17 over the pre­vi­ous year to reach ` 17,119 crore, fell to ` 15,559 crore, while net profit, which had risen 13 per cent to touch ` 2,557 crore in 2016/17 was down to just ` 251 crore.

Sales in North Amer­ica, the US in par­tic­u­lar, con­trib­ute heav­ily to Lupin’s rev­enue (as they do for all lead­ing In­dian pharma com­pa­nies). In 2017/18, North Amer­i­can sales dropped 28.7 per cent to ` 5,893.9 crore against ` 8,262.7 crore the pre­vi­ous year, while the US’s con­tri­bu­tion to over­all sales de­clined to 38 per cent from 45 per cent three years ago. It has since dropped fur­ther to 31 per cent.

“The ac­qui­si­tion ( of Gavis) did not de­liver the ex­pected value. Both opi­oids is­sue and chan­nel con­sol­i­da­tion con­trib­uted to the prob­lem” Nilesh Gupta Manag­ing Di­rec­tor, Lupin

In the first half of this fi­nan­cial year, Lupin’s to­tal rev­enues were ` 7,807 crore, just 0.2 per cent higher than the same pe­riod last year. But the re­ported net profit was only ` 468.7 crore, 42.4 per cent down from ` 813.1 crore for the cor­re­spond­ing pe­riod last year. The lower fig­ures have taken their toll on Lupin’s mar­ket cap, which dropped to ` 38,629 crore (as of Novem­ber 11) from ` 79,600 core in end 2015. What went wrong?

THE RISE

The rapid growth of the ini­tially se­date Lupin be­gan af­ter the sec­ond gen­er­a­tion – Gupta’s daugh­ter Vinita (CEO) and son Nilesh (MD) – started play­ing an ac­tive role from the early 2000s. (The com­pany also brought back a pro­fes­sional man­ager, Ka­mal K. Sharma, in 2003, who has been with the com­pany for over three decades.) Rev­enue rose from ` 1,212 crore in 2004/05 to ` 12,600 crore in 2014/15, a com­pound an­nual growth rate (CAGR) of 26 per cent. Profit sky­rock­eted from ` 84.4 crore in 2004/05 to ` 2,403 crore in 2014/15, with a CAGR of 40 per cent. That was when the mar­ket cap, too, went up from around ` 2,200 crore to about ` 79,600 crore, helped no doubt by the 15 ac­qui­si­tions across the world Lupin made dur­ing this pe­riod, start­ing with Ja­pan’s Ky­owa Phar­ma­ceu­ti­cals in 2007. Most of these were small ac­qui­si­tions which were made to cre­ate a ‘string of pearls’ and boost the com­pany’s global pres­ence.

With sus­tained in­vest­ments of over 10 per cent of rev­enue in re­search and de­vel­op­ment, Lupin en­tered new generic plat­forms such as in­hala­tion drugs and der­ma­tol­ogy, and made a mark in new ge­ogra­phies, es­pe­cially the US and Ja­pan. Over­all, it has a pres­ence in nearly 40 coun­tries, and di­rect pres­ence in 13, which in­cludes mar­kets as di­verse as Brazil and Ger­many. In the US, it be­came the third-largest pharma com­pany in terms of gen­er­ated doc­tors’ pre­scrip­tions, mar­ket leader in 64 prod­ucts and among the top three sup­pli­ers in 111 prod­ucts.

A vi­tal fea­ture of Lupin’s US suc­cess was Vinita Gupta mov­ing per­ma­nently to the US in 2005, and launch­ing what was then a new strat­egy for In­dian pharma com­pa­nies – di­rect mar­ket­ing to physi­cians. (Most In­dian pharma com­pa­nies pre­fer the safer route of en­trust­ing distri­bu­tion en­tirely to a lo­cal chan­nel part­ner.) Lupin’s de­ci­sion proved a win­ner. The first branded drug it in­tro­duced in the US, which it sold di­rectly, a cephalosporin an­tibi­otic called Suprax, was in par­tic­u­lar a run­away suc­cess. “For a decade, un­til our patent ex­pired, it was al­most an ex­clu­sive drug in the US, earn­ing us $100 mil­lion a year,” says Vinita Gupta.

A sec­ond US best­seller was the choles­terol-low­er­ing fenofi­brate brand An­tara, which Lupin bought in 2009 from US-based Oscient Phar­ma­ceu­ti­cals – then un­der­go­ing bank­ruptcy pro­ceed­ings – but which had an­nual sales of $85 mil­lion. A third big hit was the

“Value mi­gra­tion hap­pens in all in­dus­tries. The gener­ics in­dus­try is ma­tur­ing,

evolv­ing to­wards spe­cialty and com­plex gener­ics, and we have to do the same” Ka­mal K. Sharma

Vice Chair­man and Ad­vi­sor, Lupin

nasal spray AllerNaze, ac­quired from US-based Col­legium Phar­ma­ceu­ti­cal for an undis­closed amount. In the gener­ics mar­ket, Lupin is still the big­gest global sup­plier of anti-TB cephalosporins, the first drugs Desh­bandhu Gupta started with.

In Sep­tem­ber 2013, Desh­bandhu Gupta, then al­most 75, with­drew (along with Ka­mal Sharma) from ac­tive man­age­ment to men­tor­ship, hand­ing over Lupin’s day-to-day busi­ness com­pletely to Nilesh and Vinita. But he also set them a tar­get for 2018 – reach­ing a rev­enue of $5 bil­lion (`36,000 crore). Sadly, that is still a long way off, but it re­mains an ‘as­pi­ra­tional’ goal.

THE WOB­BLE

Con­sol­i­da­tion among US chan­nel part­ners was the first big set­back. Three of the largest chan­nel part­ners there merged – CVS- Care­mark, Medco-Ex­press Scripts and Wal­green-Al­liance Boots – which enabled the new be­he­moth to re­work deals with sup­pli­ers and dic­tate terms. Gener­ics man­u­fac­tur­ers found their mar­gins sharply eroded. “When we started, there were five to six play­ers who con­trolled 80-85 per cent of the mar­ket, but now just three play­ers con­trol 90 per cent of the mar­ket,” says Vinita. “Mar­ket­place changes oc­curred faster than we an­tic­i­pated.”

Next, Lupin’s last and big­gest ac­qui­si­tion fell well short of ex­pec­ta­tions. In 2015, it had gone on an ag­gres­sive shop­ping spree – it bought the re­main­ing 40 per cent stake in South Africa’s Pharma Dy­nam­ics (it had al­ready ac­quired 60 per cent in 2008); it for­ayed into Brazil to buy Mediquim­ica and into Ger­many for the spe­cialty gener­ics busi­ness of Temm­ler. Fi­nally, it bought the US-based Gavis Pharma for a whop­ping $880 mil­lion, the big­gest over­seas ac­qui­si­tion by any In­dian pharma com­pany. Gavis had a man­u­fac­tur­ing fa­cil­ity (which would be Lupin’s first in the US), 66 prod­ucts pend­ing ap­proval from the US’s Food and Drugs Ad­min­is­tra­tion (USFDA), and an­other 65 niche dosage forms in the pipe­line. It had an im­pres­sive record of fil­ing patents as well and seemed like a good buy.

Some an­a­lysts, how­ever, felt even then that Lupin was over­pay­ing for Gavis. Its sub­se­quent per­for­mance seems to have proved them right. Lupin’s fourth quar­ter loss in 2017/18 was mainly due to the one-time ‘ im­pair­ment pro­vi­sion’ of ` 1,464.35 crore it had to make to­wards the ac­qui­si­tion of Gavis. Lupin has ac­knowl­edged that some of Gavis’s pipe­line prod­ucts are not com­ing through, nor would some planned ex­pan­sions hap­pen. The main rea­son, how­ever, was one that could not have been an­tic­i­pated – the US gov­ern­ment’s in­creased scru­tiny around opi­oids (drugs that use nar­cotics in their for­mu­la­tion). It made get­ting USFDA ap­provals for some of Gavis’s prod­ucts more dif­fi­cult and shrunk the opi­oids mar­ket as well.

“The tim­ing of the ac­qui­si­tion was wrong,” says Vinita. “The scru­tiny around opi­oids and their pos­si­ble mis­use in­creased, caus­ing their vol­umes to go down sig­nif­i­cantly in the mar­ket.” Her brother Nilesh agrees: “The ac­qui­si­tion did not de­liver the value ex­pected. Both the opi­oids is­sue and chan­nel

con­sol­i­da­tion con­trib­uted to the prob­lem.”

A third blow – which hit Lupin’s rep­u­ta­tion and in turn its share price – was a USFDA warn­ing in Novem­ber 2017 that two of its man­u­fac­tur­ing fa­cil­i­ties in In­dia were not meet­ing qual­ity stan­dards. The two units – at Goa and In­dore – made 30- 40 prod­ucts, bring­ing in rev­enues of around $60-80 mil­lion. The USFDA had been com­ing down hard on In­dian pharma com­pa­nies which ex­ported to the US for some years, with re­peated in­spec­tions and damn­ing re­ports, but Lupin till then had never been pulled up. Other prob­lems in­cluded more drugs be­ing brought un­der price con­trol in In­dia from 2013, and drug pric­ing cuts im­posed in Ja­pan.

THE RE­SPONSE

Lupin is mov­ing to com­bat the cri­sis in dif­fer­ent ways. For one, it has en­gaged a lead­ing con­sul­tancy firm to ad­vise it. “We are work­ing with the con­sul­tants to iden­tify ar­eas of op­er­a­tional im­prove­ment in sup­ply chain man­age­ment and raw ma­te­rial op­ti­mi­sa­tion, in­creas­ing pro­duc­tiv­ity of our sales per­son­nel, and more,” says Ramesh Swami­nathan, Chief Fi­nan­cial Of­fi­cer (CFO) of the com­pany. For an­other, it claims to have fixed the is­sues raised by the USFDA at its Goa and In­dore plants. “The mat­ter will be re­solved be­fore the end of this fi­nan­cial year,” says Nilesh.

Most im­por­tantly, Lupin in­tends to ra­tio­nalise its prod­uct list, re­duce in­vest­ment in lower-value gener­ics and fo­cus on com­plex, high-value ones, as well as on spe­cialty branded prod­ucts ( like its first suc­cess in the US, Suprax). It is look­ing at a new busi­ness model where op­er­at­ing profit (i.e. earn­ings be­fore in­ter­est, tax­a­tion, de­pre­ci­a­tion and amor­ti­sa­tion, or EBITDA) mar­gins will be above 30 per cent in­stead of the cur­rent un­der-20 per cent. “Value mi­gra­tion hap­pens in all in­dus­tries,” says Ka­mal Sharma, who re­mains Vice Chair­man of the Lupin board in a non-ex­ec­u­tive role and was re­cently ap­pointed for a year as ad­viser. “The gener­ics in­dus­try is ma­tur­ing, evolv­ing to­wards spe­cialty and com­plex gener­ics and we have to do the same.”

Ab­bre­vi­ated new drug ap­pli­ca­tions (ANDAs) are mar­ket­ing ap­pli­ca­tions for gener­ics drugs in the US as per the generic laws there and Lupin has 405 such ANDAs. Of these, over 247 have been ap­proved, 39 have been ac­knowl­edged as ‘ first to file’ and an­other 14 ex­clu­sives are await­ing ap­proval. As of end of 2017/18, 162 prod­ucts were in the mar­ket and 158 fil­ings were pend­ing for ap­proval. This cov­ers a po­ten­tial $104 bil­lion-mar­ket, of which 30 per cent is com­plex gener­ics (mainly in­hala­tion and in­jecta­bles) and an­other 32 per cent are biosim­i­lars. “We have 20 com­plex gener­ics in the pipe­line and if we can crack the first gen­er­a­tion prod­ucts suc­cess­fully, it will be eas­ier to de­velop a sec­ond gen­er­a­tion of sim­i­lar prod­ucts,” says Nilesh.

Spe­cialty branded prod­ucts cur­rently con­trib­ute only five to six per cent of rev­enues, but it in­tends to in-

crease this share sub­stan­tially, by fo­cussing in par­tic­u­lar on women’s health prod­ucts, a $12-bil­lion mar­ket. Lupin sees a grow­ing op­por­tu­nity in this seg­ment in the US, as some of the mar­ket lead­ers in it like Pfizer, Al­ler­gan and Teva are mov­ing out. Its 16th ac­qui­si­tion – and the only one af­ter Gavis – has been the US-based Sym­biomix Ther­a­peu­tics in Oc­to­ber last year for $150 mil­lion. It is bet­ting heav­ily on one of Sym­biomix’s prod­ucts, Solosec, a one-dose treat­ment for bac­te­rial vagi­nosis, and which got USFDA ap­proval in Sep­tem­ber. Lupin will have ex­clu­sive rights for 10 years. “We launched it in June this year and the re­sults have been en­cour­ag­ing,” says Vinita. Neu­rol­ogy, car­dio­vas­cu­lar and ner­vous sys­tems drugs meant for de­vel­oped mar­kets is an­other fo­cus area in the spe­cialty pipe­line.

To mar­ket branded prod­ucts suc­cess­fully, ef­fec­tive med­i­cal rep­re­sen­ta­tives are es­sen­tial and Lupin has in­creased its num­ber of such rep­re­sen­ta­tives in the US from 40 to 166 in re­cent months. Re­cently, the com­pany ap­pointed Alok Sonig, a for­mer Dr Reddy’s Lab top ex­ec­u­tive, as CEO – US Gener­ics and Global Head – Gener­ics R&D and Biosim­i­lars to boost its US busi­ness.

To re­duce risk, Lupin has also be­gun rop­ing in part­ners to de­velop and mar­ket prod­ucts. It has formed a joint ven­ture with Ja­pan-based YL Bi­o­log­ics to de­velop a biosim­i­lar of the au­toim­mune drug Etan­er­cept, used to treat chronic arthri­tis. Etan­er­cept, cur­rently sold by Pfizer un­der the brand name En­brel, had global sales of $11 bil­lion, of which $4 bil­lion is in Ja­pan, and Lupin hopes to make in­roads into this mar­ket with part­ner Nichi-Iko. The com­pany has teamed up with global drug gi­ant My­lan to mar­ket the biosim­i­lar in Europe, Asia, Aus­tralia and New Zea­land. It has also part­nered with the Ger­many-based Boehringer In­gel­heim to mar­ket two of the lat­ter’s anti- di­a­betic drugs in In­dia.

In the near fu­ture, more ac­qui­si­tions are un­likely. “We want to build on the foun­da­tion we have laid,” says Vinita. “We may not re­quire more geo­graph­i­cal ac­qui­si­tions.” But she does not agree that Lupin is pay­ing the price of hav­ing grown too fast. “We were not over­speed­ing,” she says. “We had an­tic­i­pated the mar­ket changes that oc­curred; it’s just that they hap­pened too fast. We should be able to off­set the de­cline in the busi­ness with the evo­lu­tion of some of the new ar­eas we have in­vested in.” Both she and Nilesh are con­fi­dent that the $5-bil­lion goal their late fa­ther set is achiev­able in the next five years. “The pain will con­tinue for next 3- 4 quar­ters, and then the big growth story will be back,” says a con­fi­dent Nilesh.

“We are work­ing with con­sul­tants to iden­tify ar­eas of op­er­a­tional im­prove­ment in sup­ply chain man­age­ment and raw ma­te­rial op­ti­mi­sa­tion, in­creas­ing pro­duc­tiv­ity of our sales per­son­nel, and more” Ramesh Swami­nathan CFO, Lupin

Vinita Gupta CEO, Lupin

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