October is a good time to be in Goa if you’re in the mood for some beachside R&R. But when the team from Japan’s Kyowa Pharmaceutical Industry Co landed at Dabolim in 2007, it wasn’t for the sea, surf and sand. Kyowa and Lupin were in the midst of serious negotiations and the visit to the Indian pharma giant’s three-year-old facility at Verna was to be followed by meetings in Mumbai.
Lupin and Kyowa already had a two-year-old strategic alliance to market finished formulations in Japan. Now, Lupin was about to acquire its Japanese partner, and when the discussion moved to dinner at a plush Mumbai hotel, Kamal K Sharma, the then-managing director of Lupin, asked Kyowa’s chairman Y Sugiura what he thought of the Goa facility. “He said it was nice but there was some discomfort on his face,” recalls Sharma. He prodded a little and was told that the surface of the tablets being manufactured was a little rough. “I was taken aback. The plant manufactures over 8 billion units each year and had been approved by the USFDA,” he says. Sugiura reached into his pocket and pulled out a magnifying glass and a small plastic bottle with Lupin’s tablets. “In the restaurant light, it looked perfect to me. But I courteously said we would take care of it.”
For Sharma, who is now vice-chairman of Lupin, there was an important takeaway from that meeting. “I was surprised that the vice-chairman thought it necessary to carry a magnifying glass in his pocket, but it showed how the top brass of a company pay attention to even minute details of the business.” Back at Goa, Sharma initiated some minor changes to the punches to ensure the tablets had the smooth feel preferred by Japanese consumers. The deal went through and Japan is now a key market for Lupin, bringing in $240 million in revenues in FY13, a 52% jump over the previous year.
The rising sun
Unlike its peers, Lupin has a strong Japanese presence
As it happens, it is only one of several markets for India’s third-largest pharma company by revenues. “Today, we have a strong onshore presence in 10 countries. We are much stronger than we were earlier,” says Sharma. Between FY09 and FY13, Lupin’s revenues have moved impressively, from ₹3,867 crore to ₹9,641 crore, while net profit has kept pace, zooming from ₹508 crore to ₹1,340 crore. The growth has been driven by the US, India and Japan markets, in that order, and by products such as Suprax, Antara, Alinia, Tunact and Aimel. The US — the world’s largest pharma market — brings in 40% of Lupin’s revenues, while India brought in 25% in FY13 and Japan, 14% (see: The rising sun). Not bad at all for a company that started its global journey less than a decade ago.
Oddly enough, the entry into Japan was a direct fallout of the US experience. “We thought we were late in entering the US and decided we had to be the first to enter another market,” says Sharma. Besides, being in Japan was an imperative — at $100 billion, it is the world’s second-largest pharma market, growing at 7-8% a year. It was a vastly different market, he adds, and Lupin decided to first work with a few local companies to understand the region. Hence, the alliance with Kyowa, which later became Lupin’s first overseas buyout. Within a year of taking over, Lupin had improved productivity to push margins up from 33% to 41%. At the same time, it has had to follow the Japanese practice of reducing prices across categories by 12-15% every two years; so far, Lupin has had to cut prices thrice in Japan.
People would argue that Japan is actually more benevolent than the US when it comes to dropping prices for generic drugs. Price erosion in plain-vanilla generic drugs in the US could be as high as 98% as soon as the exclusivity period is over, whereas in Japan, typically, prices for the first year are set at 70% of the innovator price. Also, generic penetration in Japan is at barely 17% of the total market, compared with over 80% in the US. But, as the government looks to increase use of generics, companies such as Lupin that have a headstart in the market stand to gain.
Of course, it won’t be easy. Sharma points out that, unlike in the US, in Japan, given the low acceptance of generics, the company needs a sales force to promote its products. “That alone could increase costs by as much as 30%.” How, then, does it maintain margins, considering it also has to take price cuts every two years? By launching new products: in the past three years, there have been 18-20 new products launched in Japan. Business in other markets, too, seems to have been bitten by the same growth bug.
The growth engine
It is Nilesh Gupta’s first day as managing director of Lupin and he heads to the conference room for a meeting. Instead, he walks into a surprise party, complete with cake. The 39-year-old Gupta, who is the son of Lupin’s founder Desh Bandhu Gupta, was till recently the company’s executive director. He cuts the cake and quickly settles into his first media interaction after taking over as MD. In the past decade, says Gupta, Lupin’s sales have grown eight times, while profits jumped 20 times. Market capitalisation, too, is up 50 times. “This is a far cry from 2000, when analysts would not even meet us. They thought the company was going nowhere,” he says with a laugh.
Started in 1968, until 2003, Lupin was making 80% of its revenues from the acute segment (especially the anti-TB segment). Today, the company gets 60% of its income from the chronic segment, while anti-TB brings in 9%. Four years ago, the company entered the diabetes market and is now the No.3 player. It has also had successful launches in asthma treatment, where it has become No.2 in just six years, and in nephrology and central nervous system (CNS). Those successes have acted as a tonic for the company’s ambitions: it now wants to be a $5-billion company by 2018, from $1.5 billion currently.
Gupta believes the current income mix won’t change drastically as Lupin pushes towards this new goal. Currently, 80% of revenue comes from the US, India and Japan. “In five years, this may come down marginally, but these will continue to be high-growth markets,” he predicts. That wasn’t the case nine years ago, when Lupin first entered the US market. The company struggled to be taken seriously — not only was it among the last Indian pharmas to head Stateside, it also offered just five products. “We had to test the waters before making serious investments,” explains Sharma. That happened soon enough, though: R&D spend climbed to 6.5% in 2005, up from 3% the previous year; it is now at 7.5%.
The opportunity unfolding in the US market is huge
In the US, Lupin quickly entered the branded generics space by relaunching Suprax, an antibiotic Wyeth had discarded a couple of years earlier. Over the years, it has launched various extensions of the drug, which now has annual sales of $120 million. The company also acquired the US rights of anti-cholesterol drug Antara, which now brings in $25 million. The company now has 52 branded generics in the US market, which have helped it become the fifth-largest pharma company there by prescription (165 million prescriptions last year). Lupin also has one of the largest ANDA filings (abbreviated new drug application, for the clearance of a generic version of a branded drug) — 177 as of June 30, 2013, of which 86 have been approved. Accordingly, the company has plans to launch 20 products in the American market next fiscal year. And analysts such as Hemant Bakhru of CLSA think the depth in the US pipeline will easily facilitate a 20% y-o-y growth (see: American dream).
Moving up the value chain
Gupta believes moving from generics drugs to specialty areas will drive a large part of the journey to $5 billion. Specialty includes five areas: oral contraceptives, ophthalmology, dermatology, asthma and biosimilars (generic equivalents of biotech drugs, such as insulin). “Both asthma and biosimilars can become $1-billion verticals each in the next eight to 10 years,” he predicts. “Dermatology can bring in $200 million in three years, while oral contraceptives can bring in $150 million. Ophthalmology will account for another $100 million.”
But, while oral contraceptives bring in $50 million a year, Lupin is yet to get off the block in ophthalmology and dermatology. It will be another three years before the company is ready to make filings for asthma and biosimilars, which means the products won’t even hit the market before 2018 and they will have no role to play in achieving the $5-billion goal.
In which case, how will Lupin get there? The short answer: inorganic growth. Lupin is actively seeking acquisitions in Latin America, especially its biggest markets, Brazil ($12 billion generics market) and Mexico ($8 billion), but is yet to find a suitable target. “There are many companies here with turnover of $50-100 million. We have looked at 10 companies at least, but none of the deals came to fruition,” he says. Most pharma companies in the region are owned by first-generation promoters, who are all too aware of the market potential — generics have an over 60% share — so valuations are often prohibitively high. “If deals in the US are struck at 10-12 times Ebitda, it is 15-18 times in LatAm,” says Gupta.
It’s also not an easy market, warn analysts. Surjit Pal, analyst at Prabhudas Lilladher, points out that Latin America is characterised by whimsical regulations and a bad workforce. “There is no doubt that it is attractive, but also extremely difficult. Firms like Dr Reddy’s, Torrent and Strides have not done well in this region,” he adds. But Gupta is convinced of the potential and, as long as the deal matches the company philosophy — payback of not more than seven years — he will go ahead. “I am certain we will have a presence of consequence there in five years. But for that, we will have to loosen our purse strings.”
Opportunities in other geographies may be far more limited. In FY13, Europe brought in just 2% of revenues. While Gupta dismisses western Europe as “difficult”, Turkey, Poland and Russia remain attractive. “We will need to build a sales force, since this is a branded generics market. We make very little money in this huge market, but it will be of some consequence in five years,” he maintains. South Africa, Australia and the Philippines, too, remain bit players for Lupin, contributing just 9% to FY13 income. While Japan continues to grow well, more acquisitions there seem unlikely — so far, the company has made two buyouts there: Kyowa and I’rom in 2011 for an estimated $50 million. India, too, seems set to remain an organic play. “The fact is that nothing is available. Besides, high valuations here mean it will be difficult to get returns,” sighs Gupta.
In India, Lupin is already in a leadership position in TB, diabetes and cardiovascular drugs. If it has to grow further in these areas, it will have to take market share from other players. “That is not easy,” acknowledges Gupta. But there is still scope for growth in rural markets and over-the-counter drugs and the company has an insignificant presence in cancer and injectables. So, is there potential at home? India revenues grew 22% to touch ₹2,252 crore in FY13, but CLSA’s Bakhru maintains things will start slowing down. “There is a constraint on discretionary expenditure, which will cut across sectors. That is coupled with the tightening of new drug approvals,” he says.
Lupin’s track record on drug discovery, too, is a can-do-better. Gupta, who leads this division, concedes that the company had nothing to show at the end of seven years’ work. Lupin’s peers agree that it’s a difficult business. In an earlier interaction with Outlook Business, GV Prasad, chairman and CEO, Dr Reddy’s Laboratories, acknowledged that getting a new molecule to the market is a huge challenge, because one needs deep pockets and large research budgets. “Companies are developing their own innovation models and combining it with their generic and services business,” he explained. His company, he added, was looking at areas where the risk was lower and where the translation from lab to commercial products was higher.
Gupta, too, remains optimistic. Lupin’s first compounds in the metabolic/endocrine disorders, pain and inflammation, autoimmune diseases, CNS disorders, cancer and infectious diseases categories have entered phase 2 of clinical trials, with more compounds entering phase 1. “If we don’t have success with drug discovery in three or four years, something must be very wrong,” he says confidently.
He is just as optimistic when it comes to predicting Lupin’s course over the next few years. “We have always been known for 20-25% growth. We will continue to do that with a focus on research, acquisitions and high-quality execution.” Sharma agrees. “We have always scored when it comes to differentiation and having a good value-proposition. Yes, the dynamics are changing in the global pharma business, but we are ready for it.” The name Lupin is derived from a flower, but the word, in Latin, also means wolf. This one is certainly on the prowl.