Zydus Lifesciences Limited (ZYDUSLIFE) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Zydus Life Sciences Earnings Conference Call for First Quarter of FY '27. [Operator Instructions] Please note, this conference is being recorded. I now hand over the call to Mr. Ganesh Nayak, Director at Zydus Lifesciences. Thank you, and over to you, sir.

Good evening, ladies and gentlemen. It's my pleasure to welcome you all to our post results teleconference for the first quarter ended June 30, 2026. For today's call, we have with us Dr. Sharvil Patel, Managing Director; Mr. Tushar Shroff, Chief Financial Officer; Mr. Arvind Bothra, Head of Investor Relations; and Mr. Alok Garg from the Managing Directors office. To begin with, let me talk among the key developments during the quarter. I'm happy to report that we commenced FY '27 with strong double-digit growth, building on the formidable base of FY '26. This performance reflects the sustained momentum across all our key businesses, each of which contributed meaningfully to the overall performance during the quarter. With this, first of all, let me walk you through the financial performance for the quarter under review. We registered consolidated revenues of INR 80.2 billion, up 22% on a year-on-year basis. On the operating profitability front as well, our performance was robust with an EBITDA margin of 24.1%. Consequently, EBITDA for the quarter stood at INR 90.3 billion, while net profit for the quarter stood at INR 9.4 billion. Our net debt-to-EBITDA ratio stood at 0.7x as on the 30th of June 2026. Now let me take you through the operating highlights for the first quarter of FY '27 for our key business segments. In the pharmaceutical space in India, our Branded Formulations business sustained market outperformance with a strong 20% year-on-year growth during the quarter. This business has, in fact, outperformed the market growth consistently over the last 3 financial years. Growth during the quarter was broad-based as we grew faster than the market in super specialty chronic as well as acute segments. In terms of therapy counts, the business grew faster than the market in cardiology, dermatology, gynecology, anti-infectives, pain management and in the super specialty areas of oncology and nephrology. Our ranking improved increased key terabits of cardiology, divitology and pain management, while on the superspecialty front, we continue to retain leadership position in the oncology therapy. Our large innovative brands led by Lipaglyn continue to strengthen their market standing and improve their rankings quarter after quarter, undergoing the impact of our innovation on improved patient outcomes. Contribution of chronic and subchronic portfolio has increased consistently over the last several years and stood at 54.2% as per AWAC MAT June 2026, an improvement of 360 basis points over the last 4 years. International Markets Formulations business has delivered strong growth during the last several quarters, and has established itself as a formidable growth pillar for the company. The business sustained the growth momentum during the quarter and posted revenues of INR 9.7 billion with a year-on-year growth of 34%. The growth was led by strong demand-driven performance across markets and supported by focused execution. North America business, comprising of the U.S. and Canada exhibit resilience with revenues of INR 31 billion during the quarter, up 5% quarter-on-quarter. The base U.S. business continued to gain share driven by sustained volume expansion supplemented by 2 product launches. On the U.S. generic front, we filed 5 ANDAs received 9 approvals, including 4 tentative approvals and launched 11 new products during the quarter. Our U.S. Specialty business achieved 2 important milestones during the quarter. First, we launched Nueno Index, which is [indiscernible], our first biosimilar in the U.S. market marking a meaningful expansion of our specialty capabilities and laying the foundation for future participation in the growing biosimilars segment. Second, we completed the acquisition of Assertio Holdings, significantly strengthening our commercial capability portfolio break and with access in the U.S. specialty space. These milestones underscore our continued focus on building a robust specialty platform in the U.S. and advancing our transition towards a more differentiated innovation-led business model. In Canada, we received 2 ANDA approvals and launched 2 new products during the quarter. Our Consumer business recorded revenues of INR 14.3 billion, up 67% year-on-year. With this, the international business, including the Comfort portfolio delivered a like-to-like growth of 25%, while the domestic business grew 5% year-on-year. Within the domestic portfolio, skin and hair care and Food & Nutrition continued their strong momentum, delivering growth of 35% and 16%, respectively. Seasonal brands, however, we grew primarily due to the softer summer season. In the medical de-asset space, the business registered revenues of INR 2.8 billion during the quarter. We are investing in enhancing our capabilities in the focused therapies, which offer long-term growth potential to create differentiated value. On the operations front, our injectable manufacturing facility at Zydus Biotech Park, recently received an establishment inspection report EIR with a voluntary action indicated VAI classification, following a GMP severance inspection conducted in April and May 2026. During the quarter, we entered into a joint venture agreement with Sunshine Health care to establish a pharmaceutical manufacturing facility in Sri Lanka to strengthen global production and reduce import dependence for the country. Now this concludes the business review. I will now request Dr. Sharvil Patel to take you through the key drivers across business as well as initiatives in our innovation program. Thank you.

Thank you, Ganesh, and good evening, ladies and gentlemen. It's a pleasure to have you all today on our call. FY '27 is off to a great start with a strong performance across the key businesses. More importantly, we continue to advance our transformation into an innovation-related organization. The share of our branded portfolio in the total revenues has steadily increased over the last several quarters. Account over 55% of our total revenue in the first quarter of this year. As our branded business continues to gain scale across markets, we expect their share to exceed 2/3 of our overall revenue over the near term. I'm confident that the strategic choices that we have made over the last several years will build strong growth pillars for us in the long term. With our innovation efforts translating into commercial opportunities, a growing branded portfolio and simple execution across businesses, we are well positioned for our next phase of growth. On the pharmaceutical front, our strategy for India formation business is working favorably. The Branded business delivered a formidable 20% growth during the quarter. In fact, the business has been consistently outperformed the market growth over the last several quarters. A big driver of this outperformance is our chronic portfolio. These therapies continue to gain share and significantly add to our overall growth momentum. This is further supported by some uptake of our innovation and differentiated portfolios. In addition, our brand-building initiatives and a stronger execution focus are delivering clear results. We remain fully confident in our ability to outpace the interindustry growth and growing sustainably. The international market formulation business continued to deliver strong growth and has emerged as a formidable group pillar for the company. While our therapy led strategy continues to drive midterm in the emerging markets, portfolio expansion and deeper market penetration in Europe are supporting this sustained growth momentum across the business. We have steadily strengthened our position in the U.S. generics market through our diversified portfolio, a stronger execution and a resilient supply chain. This is reflected in sustained prescription growth market share gains and improved market acts, reinforcing our position as a trusted generics player in the U.S. I'm pleased to report that our branded business in the U.S. now contributes 10% of our revenue in the U.S. We expect the share of this segment in the U.S. to continue to increase as a specialty and innovation-led business gains scale. The growth drivers are firmly in place orphan and rare disease franchise, a growing portfolio of 52 products, the recent acquisition of [indiscernible] and an NDA submission to the U.S. FDA of saroglitazar, our first internally developed innovation in the U.S. Collectively, these businesses position us for a sustained shift towards the most differentiated and specially driven U.S. portfolio. In the Consumer Wellness business, we continue to build a future-ready portfolio through innovation, disciplined execution and data-driven decision-making. Our investments in analytics and digital capabilities are enabling sharper consumer insights improving resource allocation and sustainable profit growth. In the [indiscernible], we continue to strengthen our presence across the orthopedic [indiscernible] nephrology by building a scalable platform for long-term growth, leveraging [indiscernible] portfolio and the property antirobotic surgery surgical system, we're expanding access to advanced solutions. At the same time, we're broadening our cardiology offerings and establishing our [indiscernible] membrane facility to address [indiscernible] global demand in [indiscernible]. With this, let me share some material developments on the innovation network during the quarter. On the research front, the U.S. FDA granted priority review to our new drug application of [indiscernible] for the treatment of primary [indiscernible]. Recently, we received also a regulatory approval in India to initiate a Phase III clinical trial of desidustat in patients with sickle cell disease. The study will be conducted in collection with high CMR. These represents a potentially first-in-class therapeutic opportunity for the treatment optical cell disease. On the biotech R&D space, we initiated our Phase III clinical trials in India for our second of biosimilar. This development further centers and deeper and differentiated biotic pipeline and underscores our capability in developing advanced biotics. It further enhances the long-term growth potential of [indiscernible] franchise. On the R&D front, on the vaccines R&D, we completed our Phase II trial of the viral type conjugate vaccine and also initiated a Phase I trial of our chikungunya vaccine in India. On the global development front, we [indiscernible] of the MRXWHO, the [indiscernible] has been accepted for review. Thank you. And now we can start with the Q&A session. Over to the coordinator for the question and answers.

[Operator Instructions] The first question is from Kunal Dhamesha.

This is Kunal from Macquarie. Congratulations on a strong set of numbers. Dr. Sharvil with quarter 1, suggesting strong top line growth, would we be kind of looking at a much higher growth than what we have guided for FY '27, which is currently at double digit is what we have said. So yes, that's the first question.

So thank you for the wishes. And I think we continue to stay in the guideline that we will deliver strong neuro-digit growth for the -- starting in the first quarter. I think our India business is poised to deliver a significantly good traction better than market at least by 300 to 500 basis points. So we see mid-teens growth continuing for that business. So is our international markets and U.S. being around single digit growth. So looking at that, we will still see good growth for the coming year in that end.

Sure, sure. And for the India business, I think last time we shared the share of the Progressive brand, I believe that with the strong growth, has that gone up meaningfully in this quarter? And should we expect that momentum of progressive brands to kind of continue at that level?

Yes, I think we are seeing more than expected exceptional strong growth on our innovative portfolio, which has the current expectations. Also on our value base, biosimilar, we have seen a very significant uptake on all brands. So that has seen a very significant uptick also -- so I think both of them have significantly added to this momentum. And at the same time, which has also led to an improvement in a chronic basket and [indiscernible]. So I would say the [indiscernible] across but better than expected on the innovation and [indiscernible] and also the scaling up of vaccines.

Okay. And the last question that I have is on the overall, some of these new growth drivers, right, in the medium term, we suggested that the branded pieces will become more than 2/3 of the revenue, right? Would you say most of these new drivers would add to our profitability over medium term?

Yes. I think if I break down into businesses, India and EM. I agree for the -- with improvement in our portfolio branded as well as chronic, we'll see better profitability. On the U.S., I would say the only scale up that we need to do with [indiscernible], which will require investments. But if you take our other portfolio which is our center that is already profitable and is broken even and profitable, and we continue to add to profitability. We are seeing our portfolio on the [indiscernible] becoming profitable from now and growing. And as I said today, it's only 10% of our business and probably by end of the year, crossed 15% or more, and we can only see that increasing equally.

The next question is from Neha Manpuria.

My first question is on the increase in the operating costs that we have seen in the current year. Given that we'll have the full impact of Assertio as well as Sarospend, how should we think about both the employee cost as well as the SG&A cost? When should we start expecting the incremental Saro cost to flow through? And just an update on our guidance, margin guidance. Are we still maintaining the 24-plus percent margin guidance that we'd indicated?

So Saro, there is already certain costs that have started, but we will see an increase in the second half of the year. And owing to that meaningful increase that we will see in the next second half, we are still guiding towards the 24% federal margin.

Yes. So our current run rate of about INR 1,900 crores to INR 2,000 crores. I think that kind of a run rate, I think we should assume as a part of other expenses, excluding R&D on a quarterly basis.

And this is despite us increasing the spend on Saro?

Yes, it's all inclusive.

Okay. And the increase that we have seen quarter-on-quarter so far is essentially on the back of what would this increase, like sir mentioned, Saro, is one of them. But what is the other reason for the sharp increase that we have seen in costs quarter-on-quarter?

So it's all acquisition driven the impact that we see on increasing the other expenses largely, I would say that almost like I would say that about 80% is -- increase in the cost is driven by acquisitions that we had in the last 1 year.

That I understand. So year-on-year, I understand. But even if I look at this number quarter-on-quarter, it seems like a fairly steep increase.

[indiscernible] the freight expenses.

Okay. Okay. Understood. My second question is on the CapEx. We see a pretty sharp increase in CapEx this quarter as well. If you could give us some color in terms of where we are spending in terms of CapEx and what the guidance for the full year would be.

So the CapEx -- from a CapEx point of view, I think a meaningful part of it obviously is setting up the facilities, [indiscernible], which is coming. Right now, the completion of the expansion that we have done in our existing perspectives for higher capacity, including Morea, [indiscernible] Unit 2, Unit 3 and [indiscernible]. We are also building a new [indiscernible] formulation development, which has happened. There is one-off investment in [indiscernible] for a larger land acquisition for infill facility, which is really exceptionally for one entire investment. And then it's the new [indiscernible] facility that we built for biologics, [indiscernible] vaccines DS facility. So there are multiple things around to this increase, including some investment that continues in [indiscernible] also. So it's also many things. So it's not one particular thing that is a large item other than the wellness land acquisition, but multiple investments in increasing scale and capacity in existing and new capability.

And for the full year, what would this number be in that case?

Right now, I think for around INR 1,500 crores to INR 1,600 crores CapEx.

Understood. And for Saro, based on -- given that we have the TAD coming in the later part of this year, how should we think about the ramp-up of market share there? If you could give us some color to help us understand in terms of what the sales opportunity could be?

So on Saro, I mean, we are willing for next FY '28 launch right now. So April launch. And we are investing for that. The first year or first 3 years -- I mean, first 2 years will be just a buildup of this. So we won't see any significant revenue in the first year, not -- but as we move to second and third year, we will see the revenue build up. So I think it will -- first 2 years will look more from an investment point of view to how much we're investing. On the market point of view, obviously, if you see the recent guidance from both the competitors in the current segment, they are seeing better traction than their earlier guidance and they've operated some of their guidance and that is led from higher patients -- bigger patient pool and more patients wanting to access this indication. So we are seeing a positive in terms of market being a real market than expected. So we are only seeing some positive signs in terms of how this market formation is happening. And so we're quite excited with that opportunity.

And any indication that you would want to give on target market share or, let's say, peak sales that we expect from this product?

So [indiscernible] we said on our conservative side, we're looking at INR 200 million to 300 million range. And we may be more optimistic we can cross the INR 400-plus million.

The next question is from Saion Mukherjee.

On the U.S., sir, you mentioned currently, we have 10% of revenues coming from branded. So that would mean roughly, let's say, $130 million, $35 million of revenues on an annual basis. How is that like the rare disease would be like $40 million, $50 million? And if you can throw some light, what are the other constituents and whether sort is a significant number in this?

So currently, in this quarter, which is 10%, we don't have any assertion [indiscernible] year was around $60 million, which is our driver disease business. And could start adding from the coming quarters. That's why we said the numbers from [indiscernible] point of view, will go towards 15% because those numbers are still to be baked in.

Understood. So you're saying rare disease is around $60 million and the remaining $60 million to $70 million is like 505(b)(2) products. Would that be a right way to think about it? .

Yes, they have a cluster of 5 products.

Okay. Okay. And sir, this Assertio acquisition, [indiscernible] on sales, how should we think about the contribution this year, next year? What's the expectation there?

So I think we are -- we have just begun. So it seems to be on track. We are looking at around $15 million to $20 million per quarter run rate.

And this will -- we would see that from next quarter, right?

Yes.

Understood. Understood. And sir, on the India business, we have seen good growth here. If you can -- I mean what's clearly driving? If you can give some color, of course, you mentioned about innovation asset, maybe how is semaglutide done. If you can give some color here. I'm just wondering what's the sustainable number, let's say, if I take a 2-, 3-year horizon, how should we think about the growth for India business?

So I think -- I mean, I'm trying to summarize a little bit. I think there are 2 things. One is -- overall price part of our business is growing, I mean, at more than 20%. And if you were given July numbers that have been reported by [indiscernible], we're seeing strong traction on the chronic side of therapies and growing very meaningfully in terms of the approval. The second is we are seeing a very, very meaningful uptake on [indiscernible], which is adding quite meaningfully, almost to tier in this business. So that's also a and scaling up, and we see that traction continue. . The other 1/3 is biologics. We have seen extremely good traction on 3 of our 4 brands, which are also very, very significantly scaled after genericization also. So we are seeing very strong momentum in growth. And semi is just the beginning. So it is a small contributor. We are the fourth in market share today. I mean our own brand but overall largest as a semi innovative generic that we've launched. So that also is adding to the momentum. So I would say it's just the whole defense pipeline and the chronic business made helping this growth and we see that sustaining going forward.

Understood. Sir, I know the INR 6,500 crores of revenues that was booked last year. How much would be biologics, novation and vaccine in that, if you can give a rough percentage?

So we've not given any breakup because it's all different divisions, which are multiple brands, both chronic and so -- we don't track them separately. But as I said, that ocular portfolio is the fastest growing and then followed by the chronic portfolio. And vaccine is obviously a very different business, which is which I have always said that we want to achieve the INR 300 crores to INR 400 crore mark, and we are on track to see that.

Understood. Sir, if I can ask one last question, which is on the international formulation. We have crossed $100 million of revenues this quarter and the growth has been exceptionally strong. I would appreciate if you can give some granular color on this, either in terms of geographic segment or product segment, which is driving this. And again, the question is around sustainability of very strong double-digit growth from, let's say, next 2, 3 years perspective?

So in 3 things. One is our 4 existing markets have delivered on the emerging market for the year. They continue to do better than last year and growing very strongly. The second is Europe, which used to be a little difficult for us in terms of growth as 2 things have changed, both our old markets, the [indiscernible] pain have significantly delivered on growth, and they continue to see a very strong traction on that. And our new market entry of U.K. has scaled up much faster than expected and is also becoming a very important business for us. So that the interest part in terms of -- you have started to be extremely well in terms of the revenue. And the service we enter new geographies and those geographies, we are seeing an innovative pipeline or first generic kind of launches in many markets, we're just seeing a good healthy traction in terms of commercialization. . So I think all in all, all these 3 things are helping core markets, the Europe doing much better and the new markets meaningfully staying up.

The next question is from [indiscernible]

Congrats on a good set of numbers. So my first question is in terms of the 550 portfolio that we have. So of the 20 assets, if I'm not wrong, close to 5 have been commercialized. So how much of -- how do you expect the overall portfolio to ramp up in terms of the launches that are going to schedule -- which are scheduled for the rest of the year? And in terms of the steady-state sales, I remember in one of the calls, we have guided that some of these assets could hit a $50 million kind of market. So how is that kind of panning out at this point of time?

So on [indiscernible], we have a good mix of our own products and license products also. So we have about 19 products that we have from an in-house and own pipeline creation. They have partner products, which are about 8 that we're working on in different players. We have commercialized 4-plus products now as we said. And we have more products in the pipeline. So I think it's a pipeline that we are trying to develop for the market. From the current point of view, I would say the -- most of them are doing better than expected. I think the going on lease rate is slower than what we had expected, and we hope in the next financial year, you'll see most bigger scaler. But beyond that, the other 2, 3 products that we have launched are doing extremely well. At the same time, [indiscernible] will add meaningfully to that business going forward. And then the biosimilars launched initial launch of ranibizumab and with the PFS starting next year and also further product, we will see a good uptake on that. And also the specialty rare disease business on sentiment, which has meaningfully started to do well. So all in all, I think that's doing well and is growing well.

If I just may also ask a couple of questions around the liquids portfolio. So currently, how big is this in terms of the overall contribution and how many of the overall 52 assets within the liquid pool have already been commercialized?

So yes, around several launches, I think, and we have 10-plus approvals, and we continue to [indiscernible]. .

Understood, sir. And lastly, also on desidustat, any update in terms of -- our China partner launching it in the Chinese market and how the ramp-up is happening there? And how big of an opportunity do you think it should be over the next couple of years?

So the -- yes, I think we achieved the milestone of getting it approved in China now. The -- we have supplied [indiscernible] formulation manufacturing in that market [indiscernible], this product is naturally reimbursed in the drug list. So obviously, we need to get enough [indiscernible] to there in the NRDL to gain a major part of the share. But having looked at that, there are 120 million CKD patients in China. So it's a very, very large market. And the prevalence of [indiscernible] is very strong in that market. So looking at all of that, I'm looking at how the peers are done in this space. We see that as a good opportunity. But first, we need to go through the registration and making sure it is available through the -- to the reimbursement phase and not the reimbursement phase is [indiscernible] and we can see an uptick in that business. So maybe in a couple of quarters, we can give more highlight, but we see this being a set unfortunately, a long-term opportunity, but we'll have to wait for another 2 to 3 quarters to make sure that all the important approvals go through and the access to the molecules created in the list.

Understood, sir. And just one last question. So given that it's an NCE asset, and I presume that, of course, it will also be under patent protection in the Chinese market. So if not as big as Saro in comparison, like how much of steady-state sales would this asset generate once it reaches its, let's say, 3 to 4 years down the line, what kind of top line contribution coming could be coming from this product? On the China market?

The quarterly is very difficult to say right now. We have not factored in any meaningful scale in terms of our current year. But as we get experience in terms of it getting reimbursement through, then we can see it importantly doing well because the other molecule is doing very well, which is already launched. And I think they are doing about $200-plus million in the Chinese market. So we can see it also being a [indiscernible] contributor to us.

The next question is from Kunal Dhamesha.

Dr. Sharvil, one question on saroglitazar. So for the incremental addressable patient pool. One, do we need to do additional studies? If yes, what would be the size, scope and duration of that study? And with, let's say, initial indication we already applied, would we be going for an expedited process there?

Saro is already being granted prior to [indiscernible] indication in PBC. So that is on track. And as I said, we relieve launch capabilities on that. This will be a continuing [indiscernible] because we have to follow the patients through and roll in Phase III. So that will continue. We are also adding a marginal VAP trial to South for certain patients who are marginal ALP issues. So that will also expand the opportunity size of the market, which is that trials about to start. So those are the updates on the key trials. .

And the duration, if you could share like there's, let's say, expanded indication, can it be a near-term opportunity or would take, let's say, 2 to 3 years, how should we think about it?

No, it's not the expanded indication is not here, it will take 2 to 3 years.

Okay. Sure. And any update on Usnoflast for ALS indication when is the readout that we expect for that?

Usnoflast, as I said, we have a couple of trials that we are doing, one, either Phase II [indiscernible] in the U.S. for ALS. So that is ongoing. The study for enroll 240 patients, gains the placebo. So that is the way it is moving. Maybe see it as a FY '28 kind of time line when we didn't see some data coming out of that [indiscernible]. That's when we see the data come out. On the ulcerative colitis side, we have -- also looking at that as a potential opportunity also, we are seeing good Phase II data, and we hope we can -- in India, and we hope to move that obviously in India in the next phase to and also potentially value it in the U.S., which is under evaluation right now.

The next question is from Damayanti Kerai.

My first question is for Dr. [indiscernible] indicated your medium-term goal of [indiscernible] so for these, what kind of spend you foresee, whether it's towards the SG&A or building up team for specialty, et cetera?