Lupin no longer bullish on Japanese market as price rules prove a dampener

Topics Lupin Pharma

Pharmaceuticals major Lupin stayed invested in Japan when most Indian peers quit. Its Japanese subsidiary has grown at a 15 per cent compound annual rate in the past decade.

However, with stringent price regulations, Japan has become an unattractive market for the company and is no longer, says Lupin, bullish on it.

In  a recent candid chat with Business Standard, managing director Nilesh Gupta had said that from a volume perspective the Japanese market keeps growing at 10 per cent yearly but from a value perspective, single digit growth at best. "The main reason (behind this) is the price cuts - from once in two years, now it's down to every year. There is a lot of pain in that market. We are not bullish on the market -- it will grow at a rate which is lower than the company's growth rate. The profitability is a bit lower than the average profitability at the company," Gupta had told us.

The focus now regarding Japan, he felt, had to be on improving of vertical integration, on efficiencies for both research and development  and manufacturing for that market. "We manufacture a lot of products for the Japan market at our Goa plant. The intent is now to make it more vertically integrated. Our goal is to accelerate vertical integration for our products where we don't do the active pharmaceutical ingredients (APIs)," Gupta had said. 

During the earnings call, Gupta said that he did not wish to comment on market speculations around Lupin looking to sell its Japanese subsidiary. "We keep looking at alliances, partnerships, but there is nothing concrete to share at the moment," he said. 

As for the Japanese market he added that there was  a reduction in off take in anticipation of a price cut  in that market (that happened in October), but that has reversed now. The manufacturing for the Japan market would continue to happen in India, Lupin said. The three plants in Japan have capacities for packaging while the manufacturing capabilities are set up in India. 

Analysts say margins in the Japanese market are 8-10 per cent. With the pricing pressure increasing, these are in for further squeeze. "The pressure has intensified there, especially over the past on year," says Deepak Malik of Edelweiss.

Kyowa, Lupin's Japanese subsidiary, had sales of Rs 1,784 crore, with profit after tax of Rs 68.6 crore, says the 2018-19 annual report. The profit, however, is down 54 per cent year-on-year. Lupin acquired Kyowa in 2007 and grew it to rank sixth in 10 years. In 2018-19, Japan contributed around 11 per cent of Lupin's consolidated turnover.  

Lupin has for some time been focusing on rationalisation in the Japanese market. Gupta had in the March quarter earnings call said the company had taken significant cuts in research and development and sales force, in the US and Japan. 

He added that the market in Japan, the company's third largest, had been fairly flat over the past five years. "However, within the Japanese pharma industry, the generics market has grown, driven by the measures that the government had put in place to drive generic utilisation. Pricing pressures are here to stay in Japan. We have worked hard to improve our margins in Japan through back-ending products into India, where we get better end-to-end margins. Additionally, we have right-sized our infrastructure in Japan, based on current market needs, to really help in the interim," Gupta had told investors then.  

Lupin had divested its Japanese injectables business to Neo ALA Co, a wholly owned subsidiary of Abu Dhabi-based Neopharma Group in August, in a bid to streamline operations in the country. 

Most Indian players have exited Japan in the past decade. Ranbaxy was one of the early entrants. It exited its joint venture with Nippon Chemiphar in December 2009. Dr Reddy’s Laboratories, Orchid Chemicals and Cadila Healthcare wound up their Japanese business in the following years. They did not find it made strategic enough sense to stay invested in a highly regulated market, where margins were comparatively lower than in other developed markets.  

Said a senior official of a firm which exited the Japan market some years before, "The regulatory landscape in Japan has been changing. The government wants nearly 80 per cent of the pharma market there to be of generic drugs by 2020. More recently, it decided to revise drug prices every year, which has led to price erosion of seven to eight per cent. It is a difficult market. One has to choose wisely when it comes to business decisions." 

Japan is the third largest pharmaceutical market in the world, with sales of $91 billion (at National Health Insurance prices). The Japanese pharma market is forecast to drop at a compounded annual rate of 1.4 per cent over the next five years. Generics utilisation rate in the country reached 74.7 per cent in volume terms as of December 2018. It is expected to achieve the 80 per cent generics utilisation goal by 2020-21.

In FY19, Japan contributed 82 per cent to the Asia-Pacific region revenues of Lupin. 

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