Sun Pharmaceutical Industries Ltd

Ladies and gentlemen, good day, and welcome to the Sun Pharmaceutical Industries Limited Q4 FY '24 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded.

Thank you. Good evening, and a warm welcome to our fourth quarter FY '24 earnings call.

Welcome, and thank you for joining us for this earnings call after the announcement of financial results for the fourth quarter FY '24. Our full year and Q4 financials are already with you. As usual, we will look at key consolidated financials.

Thank you, Murali. I shall take you through the performance of our India business. Our India formulation sales for the full year FY '24 were INR148,893 million, recording 9.5% growth over previous year.

Thank you, Kirti. I will update on the performance highlights of our U.S. businesses. Our overall U.S. business grew by 10.1% to $1,854 million for the full year FY'24. The growth is driven by specialty with all our growth products contributing, like Ilumya, Cequa, Winlevi and Odomzo.

Thank you, Abhay. I will provide an update on the performance highlights of our other businesses as well as give you an update on our R&D initiatives. Our branded formulation revenues in Emerging Markets were $1.041 billion for the full year, up by 5.9% year-on-year. For Q4, sales in Emerging Markets were $245 million, up by 10.8% over Q4 last year. The underlying growth in constant currency terms was 17% year- on-year for Q4.

Thank you very much. We will now begin the question-and-answer session. We'll take the first question from the line of Damayanti Kerai from HSBC. Please go ahead.

My first question is on your U.S. business, excluding Taro and Specialty. So have you seen improvement in the performance, considering prior few quarters have seen lower shipment from key plants like Mohali? So excluding Revlimid also, have you seen a pickup in that part of the business?

Your question is on the generics business, right?

Yes, U.S. generic business.

Yes. So I think supplies from Mohali have resumed, but obviously not fully in effect, and it will gradually improve over a period of time. So we had to make do with what we had. And in that context, we'll did the best as possible.

Okay. And you mentioned two launch during the quarter. How are you positioned for launches in FY'25 for U.S. generic business?

So we have a plan of filing and getting approvals for a few products. Specific details, obviously, we won't give. But the pipeline looks healthy and most of the key products that we wanted to get to market are in that basket.

Sure. And my second question is on your pipeline for GLP-1 products. So can you share like how far those are from market launch? And like how many you have filed so far? Some colour on that will be helpful.

You mean the generic GLP-1?

Yes, generic GLP-1 products.

We generally don't give out information related to future products, specific product launches but they are interesting products globally.

Okay. But you are working for your global portfolio, right, without discussing further?

Yes, we are working for the global portfolio, correct.

We'll take our next question from the line of Neha Manpuria from Bank Of America.

Sir, based on your guidance of high single-digit growth for FY '25, even if I were to just think about the various businesses, particularly Specialty; is it fair to assume that this year, even with ILUMYA growth, we are not expecting too much momentum in the rest of the portfolio, particularly Winlevi? Is that how I should be reading this number? And along with that, if you could just give us an update on what you're seeing in Winlevi.

Abhay will respond to specifics. But otherwise, the overall guidance is a consolidated guidance for all businesses. Not only specific businesses Abhay, maybe you can respond.

On Winlevi specifically, Neha, if you see the quarter and from external data, you can validate this; I mean we have seen actually a very strong quarter for Winlevi.

And do you expect the momentum to build from here, now that you've started seeing a pickup on Winlevi? Would that be fair to assume?

That would be our expectation, yes.

And on Ilumya, Abhay, given 20% growth, are we close to getting sort of the growth peaking out? Or you think there's more steam left in ILUMYA as we look through the next few years?

I mean our task as a team is to continuously find ways to grow this product.

Understood. Despite the fact that we are seeing competition from biosimilar, Humira, etc?

Yes, sure.

And the Deuruxo launch approval, which is due in July, launch-related cost for that would start coming through in the second half of this year, will that be a fair assumption? I mean, just wanted to get a sense on the launch timeline for Deuruxo, assuming we get approval in July?

There are small costs that we are incurring even today for all the pre-launch activities. But I think the major cost will obviously hit our numbers when we actually launch the product.

Which would be when, based on the July '24 timeline for approval?

So we are on track to launch it post the PDUFA date. Do remember, it takes a little bit of time to actually enter the market with all the pre-launch activities that need to be done. But we are on track as of now.

We'll take our next question from the line of Bino Pathiparampil from Elara Capital.

Dilip Bhai, could you please comment a bit on this FDA issues at Mohali and Dadra. Do you think the worst we've seen and from here on, we will improve? Or do you expect anything more?

No, I think we are concerned about the negative outcomes in the audit. And I think it's our job to find a way to ensure that we come out of whatever the learnings that we have so that we perform much better in subsequent audits.

I understand. But I asked you this because especially in Mohali, we had inspection for 483, then we've got an OAI status. And subsequently a few months later again, we've got something else which is like that third-party consultant verification, etc. So, you have been on a worsening course. Do you think that has bottomed out? Or do you have the confidence that, that has bottomed out?

I mean, we feel that we've done enough corrections so that we should see a positive outcome in subsequent audits.

Okay. Second, on this product, MM-II, from your press release, I see that you plan to initiate a Phase III. But if I remember correctly, it has not met the primary endpoint in Phase II. So could you put that in context, please?

No. I think what we disclosed in the Phase or the press release is that it did not meet the primary endpoint. But we believe that with our learnings and our understanding, we can design a Phase III study, which will not only meet primary endpoint but will also be proven to be a very effective product.

Okay. And the Phase III will be in the U.S.?

Yes. It's a global study, including U.S.

Including U.S. Okay. If it's successful, you can directly file in the U.S. That's the way it’s designed.

Sure.

Okay. If I could push one last question on the Nigeria-related Forex loss. Is that a balance sheet item? I mean is it a receivable that you have written down?

So this was due to the sharp currency depreciation by the regulator, and we've booked an MTM loss against the payables.

Understood. Okay. So it's a balance sheet item. On the payables, you had to book.

It's a P&L item, shown as exceptional because action was initiated by the regulator.

Understood. So what I'm trying to understand is that on the balance sheet, you had some money that was receivable or payable. And on that, because of the devaluation, there is a loss. Is that correct?

That's correct. Balance sheet via P&L.

We'll take our next question from the line of Tushar Manudhane from Motilal Oswal.

Sir, with respect to Deuruxolitinib? Are there any queries pending with US FDA?

We haven't received any specific queries, which have till date not been answered.

Understood. And just on this India market, if you could share the outlook for at the industry level, what do you think would be the growth rate for next one to two years? Is the trade generics eating away the volume from the prescription sales, if you could give your perspective overview?

For us, it's very difficult to predict what will be the industry growth in the next 1 to 2 years, but the effort in India business as a team is always we grow in line with market or slightly higher than market.

We'll take our next question from the line of Girish Bakhru from OrbiMed.

Abhay, just on deuruxo, just need a clarification. If the approval comes in by July, should this product have a normal NCE exclusivity of 5 years like any other?

Abhay, are you responding?

Sure. So Dilip bhai, just digging this little bit deeper because there was no compound patent in this case. So I mean, is that understanding correct that generic cannot file for at least NCE minus 1, so you will have that window like any other product, right?

Yes. Yes. I think, I'm not responding to specific patent-related issue. But your understanding of generics ability to file is correct. Now we have multiple patents and we feel that we should be able to protect the product for a much longer period of time.

That's helpful. And just when you compare this vis-a-vis Ilumya, I know there's no direct comparison, Ilumya has become a very sizable product for you; I mean, given that this makes a larger share in terms of growth for you in FY '26 and beyond and you are possibly the third player entering alopecia, market with a very strong product, do you think this product essentially will have a much higher potential than Ilumya for you?

I mean, we are not giving comparative, what you call, sales long-term projection. But I think we feel very happy about the way the product has performed. Abhay, you're back?

Yes, I'm back. I think you said it correctly. We are happy with the way the product has performed.

Understood. And just last one, if I can squeeze. Is it possible to give a specific US sales number for Ilumya?

No. We've given global sales, no.

Yes. I was just wondering if US-specific sales, if you can get Ilumya?

I mean, US is a major market, is what I can tell you. But no specific detail for US sales.

Mr. Patra, please go ahead.

My first question is on the margin profile, sir. So starting with the current quarter, see, in fact, the gross margin swing of around more than 200 basis points that we are witnessing for this quarter, although we have seen a sequential decline in the domestic business, there is a last quarter was supported by there is a $20 million of licensing income. So despite those key contributors to the margins were not there, still there is a more than 200 basis point kind of swing that we are witnessing.

So you're right, first, on the gross margins. You're right that in the previous quarter, the milestone income was there. However, with the current quarter, the gross margins have increased by about 200 basis points, primarily because of the function of both products and geography mix.

I think we are clear that we have to continue to invest for the future. And our effort would be that while we are creating that investment for future, we don't do it at the cost of profitability. But even if it does require some increased investment, we would do that because ultimately, our focus is on building a business which is strong long term.

Sure, sir. Sir, my second question is about the global specialty business, which will about the Ilumya's progress in China. In fact, the last quarter, we had seen a big development, so far as Ilumya is concerned,

No. I think your assessment that the product got what you call reimbursement as well as we are happy with how the product launch is progressing. We just responded to a question about the US sales of Ilumya.

Okay. No, my point was that, in fact, in the last few quarters, we have seen extending our global or the US specialty portfolio to various global markets. And possibly there is a kind of few quarters already lapsed on that front. So are we seeing a kind of enhanced growth for the specialty portfolio played by the non-US market presence and progress there?

I think, we will see my view is that we will see specialty business becoming an increasingly important part of the business. And that's what I think we've been guiding. And our initial focus and presence was in the US. And now that we are launching these products in other geographies, we will see increasing acceptance in potential sales of this.

Okay. Just last one, if I may. So can you share some thought process about your plans for the Taro about its integration and integrating the business into the overall US and the potential growth subsequently? How should one think about this integration of Taro?

So I think broadly, Taro, we have been actively involved in managing the business. So it's not a pure acquisition where we kind of buy a company and we don't know anything about it. So I'm not seeing any dramatic change in the way the business is run.

We take our next question from the line of Saion Mukherjee from Nomura.

Abhay, you have indicated in the past, these last 2 quarters, Revlimid was not a big contributor.

So for quarter 4, it was not a huge contributor. Certainly, more than what we did in Q3. And like you said, referring to my earlier comments on the product, the sales of this product will be episodic and a bit lumpy when we look at it from an annual kind of basis.

All right. Understood. And the second question again on ILUMYA in the US, in particular.

I think the biggest growth driver we have is the current amount of data and the experience that current users have had with the product. So I think that's a big positive, as far as product is concerned. Secondly, I think over a period of time, we should be able to get our new indication of psoriatic arthritis. That will be another driver for growth.

We'll take our next question from the line of Ankush Mahajan from Axis Securities.

This is in extension to the gross margins, a very healthy improvement in gross margins Q-on- Q. Sir, as we are launching new products in the specialty this year also, the product mix is changing towards specialty. So there is any further scope of improvement in gross margins?

So while you are right that we have seen an upward movement of gross margin in Q4, however, it's difficult to say at this juncture what we feel is that our full-year gross margin will be a better indicator to look at while looking at forward period.

Okay. So we can say whatever we are spending on R&D that could be set off by the improvement in gross margins?

We are not giving any guidance on margins at this point of time.

Okay. Sir, this what is the status for the NIDLEGY in the European market? And can you tell us, sir, what is the total market size for this drug in the Europe?

So I think it all depends on the kind of label that we will get. We are excited with the kind of clinical data that we've seen. But it all depends on what kind of final label we will get. It's a useful and important product for patients in Europe.

Sir, any idea about what is our total market size for this product?

No, I think you should keep in mind that the number of patients would be in thousands. It not a very large market. But I think and also how many we will be able to capture is the second issue. But we feel comfortable, based on the market research, that we can get reasonably good reimbursement. And in Europe, if you get good reimbursement and you have good marketing infrastructure, you should be able to at least successfully ensure that the product benefits are able to reach the patient.

We have our next question from the line of Krish Mehta from Enam Holdings.

I just wanted to ask on the restructuring costs you've taken in Japan of around INR232 million this quarter, as to what this restructuring involves? And as a follow-up to that, if you could just expand a bit on our Japanese portfolio and how we are seeing Japan products in terms of the specialty business as well as the Novartis portfolio that you had acquired several years ago? Thank you.

So the first question on the Japan restructuring costs, we've been a global company. We do relook at our businesses on the structures, and we have taken some appropriate business decisions to the current circumstances. That's why you see this restructuring cost, which is a onetime cost. On the Japan portfolio, of course, we have our specialty products currently approved, ILUMYA is our product there. And we also got the long-listed brands, which we market there currently.

I think, we are excited about the overall success that ILUMYA has had in Japan, especially considering limited familiarity that doctors had with Sun Pharma as a company. And our effort now is to ensure that we are able to get a fair share of the prescription of the IL-23.

We'll take the next question from the line of Vishal Manchanda from Systematix.

On Ilumya, would you be able to share what would be its market share in the biologics category for psoriasis?

Is the question pertaining to US?

Yes, in the US, right.

It will be very small. It will be a slightly less than 1% of total market.

Sorry.

Of total market, it will be less than 1%.

Yes, the psoriasis market and biologics category.

That's what I referred to.

Okay. So 1% of the biologics market in psoriasis.

Yes.

Okay. And another one on Deuruxolitinib, if you could share some sense on how is it differentiated versus the other 2 options Olumiant and Ritlecitimib?

So that's a very specific science question, which I don't know that on the call I can do justice without spending 10 minutes on it. So maybe you can separately take it up with Abhishek later.

Yes. But actually, we don't have any comparative study. All that understanding we have is based on separate...

Our own data.

And also separate Phase III studies, which are available in public domain or around label of both the products. And based on that, I think at least based on the feedback that we've received from KOL they feel that the overall performance of deuruxolitinib is very good.

Okay. And on Sezaby, if you could update if there is something around exclusivity getting triggered for the product during the year.

I think Spark has filed a citizens petition and we are working on that. That's all I will say.

Got it. And just one more. With Stelara getting genericized next year, do you expect any pricing pressure for that?

I mean, it is one of the options out of many. And all these competitive activities keep happening around us. So the overall guidance, which Mr. Shanghvi has given, factors in whatever possible competitive changes that we see, not only for one product, but for all products and on a global scale.

Thank you. We'll take our next question from the line of Madhav Marda from FIL. Please go ahead.

I had two questions. The first one was the initial launch cost, you need approvals also for Durexo in the next few months. Is this a sort of a nonrecurring expense, which would happen in the first few months the first few months of first 2 quarter of it's launch and then that goes away or still down? Is that how we should think about initial launch expense for products?

So some of those expenses may be onetime, but a large part of the expense will be a recurring one.

And these expenses pertain to basically manpower and promotion costs or both, both the items I am seeing?

Yes. And there will be others, but these 2 will be the bulk of it.

Understood. And then just a second question was on the R&D spend, where when we're guiding for 8% to 10% that would mean...

Sorry, your voice is a little low, and you're speaking very fast. So I don't think that I'm catching your questions very clearly.

I'll just repeat my question. So my second question was that we are seeing the R&D spend could go up to 8% to 10% of revenue, but I'm just doing this simple math. That would mean almost $200 million increase on the R&D spend. So could you help us understand where some of this incremental spend will be going towards?

Yes, I think what I indicated in my readout is that a large part of the R&D spend increase would be in the specialty products.

Okay. If you can call out anything more specific? Is it like specific tiers for specific products?

We have shared the plans for all the products.

Thank you. We'll take the next question from the line of Prashant Nair from Ambit Capital. Please go ahead.

My first question is on your comment that you would be in investment phase during the next financial year. So just wanted to understand, would this be more skewed towards R&D? Or would it be more

I think my comment was more for the R&D-related expenses. We believe that increased business that we will get, we should be able to adjust for the increased marketing spend, except in some onetime costs. But those are not big costs. And as I explained, our focus would be that how do we increase the spend without negatively impacting our overall profitability. How much we're able to execute is something that we will see. So we are not guiding for any profitability, but the focus would be that even if it means some compromise with profitability, we would like to create a longer-term high value for the business.

Yes. That helps. And the second question is related to your tax rate. I mean how should we think about it on an annual basis over the next few years?

So we already mentioned that tax expense should be seen on an annual basis. Yes, we look at the current annualized ETR for the current year is 13%, what was 9% in the previous year. So we have been recommending that look at our tax rate on an annual basis. And it's likely to inch up as we move forward year after year.

Thank you. We'll take our next question from the line of Saion Mukherjee from Nomura. Please go ahead.

Just two questions. So firstly, sir, on the Emerging Market, I think you mentioned, if I got the right on constant currency term, a 17% growth. This quarter, it is, a very strong growth, and we have seen good traction there. Typically, for these markets, what we understand, do not have a very high growth, right, in Brazil, South Africa and all.

So I think our focus is to, what you call, sell products, which are a more consistent business rather than focusing on tender kind of business. Unfortunately, the markets are such that we always have the risk of currency depreciation. What we are happy is that in spite of this, the business continues to do well.

Okay. And my second question was on R&D, you mentioned about investments there. In your guidance, you suggest a meaningful step-up in the spend. If I look at the speciality pipeline, it appears that there

No, I think my challenge has been that I have limited capacity to predict long-term future. So I don't know what will happen in 2 years, 3 years later. So our focus is to find a way to give you a guidance for this year, and our effort would be to see that we meet the guidance.

Sir, just to sort of ask this question in a different way, right, clearly, you suggest that you we will invest in short-term is required from a long-term perspective. Are there any sort of how do you manage the risk here in the sense that do you have some limits on the spend that you want to incur as a company?

No, I don't think I want to respond to a specific question whether I have a limit or not. But I believe that when we look at our overall performance, then our investment in R&D is significantly higher than many generic companies. At the same point of time, if we look at our overall spend in what you call R&D-as-a- specialty company, then there are many other companies whose overall spend is much higher than ours. So we need to find a balance and find a way by which we continue to generate growth and positive cash flow for our investors while we continue to create long-term value, and that's our focus.

If I can ask one last question on the generic business, firstly, sir, any comment on pricing environment? And secondly, the plant issues that we have with Dadra, Mohali, etc. Is that having any impact on your meaningful launch that you expect, let's say, in the next 1 years or 2 years? Or do you think the meaningful launch are protected, given the compliance status at this point?

So Abhay, maybe you can respond about the pricing.

Yes, we have said this on our call in the past as well that is a highly product-specific issue. On certain products, we see a deep cut. And on certain, we don't see deep cut. But overall, I think the environment remains the same as we saw in the previous year.

Yes. And I think the overall guidance we have presumes in fact of the current challenges that we have in the facilities.

Thank you. We'll take our next question from the line of Nitesh Dutt from Burman Capital. Please go ahead.

I have a question on our India business. So I just wanted to understand our manufacturing strategy, basically two questions. One, what percentage of the production is being done in-house versus outsourced? And are you trying to maintain the same mix of trying to increase in-house? And also, is it like a concentrated supply base or segmented across a lot of players?

No, I think I don't know whether we've shared this specific information, but I think our focus would be to find a way to produce in-house as much as possible. So our relative percentage of outsourced products are limited. But it would be buying from a few vendors, and that increases the challenge in terms of ensuring that they meet all the compliance requirements for what we are expecting from manufacturing facilities that we run ourselves. So that's one of the key reasons why we want to produce in-house.

And sir, as government is tightening the norms, etc. For the contract manufacturer, so can you provide us an, again, opportunity to move in-house or improve our gross margins in that sense if you move some production?

Since we don't have a large business from third-party manufacturers, it cannot have a material impact on what further we do.

Understood. Thanks for the response. I'll come back to this.

Thank you. We have a next question from the line of Prashant Nair from Ambit Capital. Please go ahead.

The first question is on Ilumya. So in terms of development, are there any indications other than psoriatic arthritis that you are currently thinking about from this product's perspective? Or will that be the only additional one that you look at?

Yes. I think that's the only disclosed indication

Okay. And is there a potential to look at other options as well or at a later date?

We haven't taken any specific decision. If we decide to, then that's something that we will share with people.

Okay, great. Thanks a lot.

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Dr. Abhishek Sharma for closing comments. Over to you.

Thank you. Everyone, for joining us at this late hour. If any of your questions remain unanswered, you can get back to the Investor Relations team or to me, and we'll be happy to take those separately. Thank you.

Thank you. On behalf of Sun Pharmaceutical Industries Limited, that concludes this conference.