Lupin looks to sell Japanese arm Kyowa for $600 million

MUMBAI: India’s Lupin Ltd is in advanced talks to sell its Japanese generics subsidiary Kyowa Pharmaceuticals for an enterprise value of $600 million to a local player as it steps up efforts to significantly cut operations in the world’s third largest pharma market. The name of the buyer could not be independently verified. People close to the discussions said that an announcement is expected in November.
In August, Lupin sold its injectables business to neo ALA Co, a wholly owned subsidiary of Abu Dhabi based Neopharma group, for an undisclosed sum to help streamline Japanese operations and increase focus on branded generics.

Lupin did not respond to emails till press time on Thursday.

Lupin acquired Kyowa in 2007 from the Sugiura family, two years after entering a strategic alliance to market finished formulations in Japan. In 2018-19, Kyowa earned revenue of Rs 1,784 crore, contributing 11% to Lupin’s consolidated revenues. It grew a modest 5% over the year-ago level. Its net profit halved to Rs 68.6 crore – constituting 11.3% of Lupin’s consolidated profit while Ebitda margins also dropped sharply from 20% to 11%.

Lupin is among the few Indian players that managed to crack the highly-regulated, brand-conscious $100-billion East Asian market.

It has been reviewing its global footprint and the decision to scale down Japan is part of that exercise, officials aware of the development said. “The Japanese subsidiary grew at an impressive 14%+ CAGR in the last 11 years (since acquisition) in yen terms,” said an official familiar with the ongoing developments on condition of anonymity as talks are in private domain. “However, the recent decline in growth and impending further decline have led to re-evaluate the market and investment. Pricing pressure in Japan has hit the company very hard, especially last year. Since then, gross margins have dropped from 55% in FY18 to 31% in FY19.” At a recent analysts call, Lupin managing director Nilesh Gupta said, “Volume growth will happen, but value growth will be muted as far as Japan is concerned. We need to bring cost efficiencies and operational excellence into the structure.”

Lupin has already moved a lion’s share of its drugs for Japan to its Goa manufacturing plant and wants to vertically integrate it. Its latest annual report says that the Japanese generics market is increasingly converging towards a substitution-oriented model and it needs to develop products at the right cost, gain substantial market share and simultaneously build the specialty portfolio.

Surajit Pal, senior analyst at Prabhudas Lilladher, said such a move would be good for Lupin and its investors. Despite its growth potential, the slow-growing Japanese business has been a drag on profitability, he added.