Aurobindo Pharma Ltd (ARBQY) on Q1 2021 Results – Earnings Call Transcript


Aurobindo Pharma Ltd (OTC:ARBQY) Q1 2021 Earnings Conference Call August 12, 2020 11:00 PM ET

Company Participants

Krishna Kiran – IR Officer

Narayanan Govindarajan – MD & Executive Director

Sanjeev Dani – COO & Head, Formulations

P.V. Ramaprasad Reddy – Executive Chairman

Swami Iyer – CFO, North America

Santhanam Subramanian – CFO

Conference Call Participants

Shyam Srinivasan – Goldman Sachs Group

Neha Manpuria – JPMorgan Chase & Co.

Girish Bakhru – Bank of America Merrill Lynch

Nitin Agarwal – IDFC Securities Limited

Ravi Dharamshi – Valuequest

Cyndrella Carvalho – Centrum Broking Limited

Damayanti Kerai – HSBC

Anubhav Aggarwal – Crédit Suisse

Tarang Agrawal – Old Bridge Capital

Surya Patra – Phillip Capital

Sameer Baisiwala – Morgan Stanley

Rahul Veera – Abakkus Asset Management

Prakash Agarwal – Axis Capital Limited

Operator

Ladies and gentlemen, good day, and welcome to Aurobindo Pharma’s Q1 FY ’21 Earnings Conference Call. [Operator Instructions].

I now hand the conference over to Mr. Krishna Kiran from Investor Relations. Thank you, and over to you, sir.

Krishna Kiran

Thank you, Vikram. Good morning, and a warm welcome to our first quarter FY ’21 earnings call. I am Krishna Kiran from Aurobindo Pharma Investor Relations. We hope you have received the Q1 FY ’21 financials and the press release that were sent out yesterday. These are also available on our website. With me, we have our senior management team represented by Mr. P.V. Ramaprasad Reddy, Executive Chairman, Aurobindo Pharma USA; Mr. N. Govindarajan, Managing Director; Mr. Sanjeev Dani, COO and Head, Formulations; Mr. Santhanam Subramanian, CFO; Mr. Swami Iyer, CFO, Aurobindo Pharma USA.

We will begin the call with summary highlights from the management followed by an interactive Q&A session. Please note that some of the matters we will discuss today are forward-looking, including and without limitations, statements relating to the implementation of strategic actions, and other affirmations on our future business, business development and commercial performance. While these forward-looking statements exemplify our judgment and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors may cause actual developments and results to differ materially from our expectations. Aurobindo Pharma undertakes no obligation to publicly revise any forward-looking statements to reflect future events or circumstances.

And with that, I’ll hand over the call to Mr. Govindarajan for the highlights. Over to you, sir.

Narayanan Govindarajan

Thank you, Krishna. Good morning, everyone. I hope that all of you and your families are safe and healthy. As an organization, we have understood the gravity of the pandemic situation and have taken adequate steps. We have enhanced the safety requirements across all our manufacturing units, including our offices by mandatory use of protective equipment, maintaining physical distancing norms and all other preventive measures. We are thankful to all our colleagues for their efforts in ensuring business continuity.

We will now discuss the results for the first quarter financial year 2021 declared by the company. For the quarter, the company clocked a revenue of INR5,925 crores, an increase of 9% over last year. The EBITDA before forex and other income increased by 10% year-on-year to INR1,257 crores. Net profit increased by 23% year-on-year to INR781 crores.

In terms of the business breakdown, Formulations business in Q1 FY ’21 witnessed a growth of 9% year-on-year to INR5,144 crores and contributed 87% to the total revenue. API business witnessed a growth of 7% and clocked a revenue of INR780 crores.

In the Formulations business, U.S. business posted a growth of 16% year-on-year to INR3,107 crores in Q1 FY ’21. On a constant currency basis, U.S. business increased by 7% year-on-year to USD 412 million.

During the quarter, we have seen the impact on certain businesses due to COVID-19. However, the improvement in other businesses has led to the overall growth. During the quarter under review, we have filed 14 ANDAs, including 3 injectable ANDAs. We have received final approval for 10 ANDAs, including 2 injectables and launched 6 products, including 1 injectable in the quarter under review.

Revenue of Aurobindo Pharma USA, the company marketing oral products in the U.S., has increased by 16% for the quarter. Revenue of AuroMedics, the injectables business, declined by 24% year-on-year to $51 million for the quarter. AuroMedics sales for the quarter has been impacted due to reduction in hospital procedures in the back of COVID-related issues. We have filed a total of 134 injectable ANDAs as on June 30, 2020, out of which 75 have received final approval and the balance 59 are under review.

The company as on June 30, 2020, has filed 604 ANDAs on a simulated basis, out of fund 410 have final approval and 28 having tentative approvals, including 8 ANDAs, which are tentatively approved under PEPFAR and the balance 156 ANDAs are under review. Europe formulation revenue clocked at INR1,322 crores in Q1 FY 2021, a decline of 5% over last year. In euro terms, the revenues declined by 11% year-on-year. Europe had witnessed stocking up at the start of pandemic in Q4 FY ’20. During first half of the current calendar year, calendar year ’20, Europe revenue posted a growth of 10% over last year’s corresponding period. In euro terms, the revenues grew by 7% year-on-year basis.

Growth Markets revenue declined by 8% on a year-on-year basis to INR290 crore in Q1 FY 2021. On a constant currency basis, Growth Markets reported a decline of 15% year-on-year. Growth Markets also had witnessed stocking up at the start of the pandemic in Q4 FY ’20. During first half of the current calendar year, Growth Markets revenue posted a growth of 10.8% over last year’s corresponding period. On a constant currency basis, Growth Markets reported a growth of 4.7% on a year-on-year basis.

ARV formulation revenues were at INR425 crore, increased by 34% over the previous year. On a constant currency basis, ARV revenues witnessed an increase of 23% over the previous year. The increased conversion from TLE to TLD across the geographies has led to the growth.

R&D expenditure is at INR254 crores during the quarter, which is 4.3% of the revenue. Net organic CapEx for the quarter is around $49 million. The closing rupee versus U.S. dollar rate was at INR75.505 in June 2020 and INR75.665 in March 2020. The net debt has decreased by $168 million from $359 million at the end of March 2020, resulting to $191 million at the end of June 2020. The majority of the company’s debt is denominated in foreign currency. The cash and bank balance is at $441 million. The average finance cost is at 1.5% mainly due to availing multiple currency loans.

This is all from our end, and we are happy to take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions]. We have a first question from the line of Shyam from Goldman Sachs.

Shyam Srinivasan

First question is on the U.S. business. You talked about some of the other parts of the business, actually filling in the void to whatever the injectable slowdown that we have seen. Govind, if you can just tell us what’s happening in Q2 per se, specifically on the injectable. Have you seen the hospital-led kind of injectable sales starting to come back as the lockdowns across U.S. are starting to ease now?

Narayanan Govindarajan

Yes, that is true. Swami, do you want to take this?

Swami Iyer

Yes. Sure. Sure. So the pandemic has impacted the injectables quite a bit, and we think to get back to normalcy could take between 6 to 9 months. This is based on the study conducted by ICRA and others. Now having said that, I should also say that we have seen improvement in the last 2 months or what happened in May.

Narayanan Govindarajan

July month…

Swami Iyer

We have seen gradual improvement. Yes, sir. July month also we have done well, and we continued to do well related to the earlier quarter. We think Q2 will be better than Q1.

Shyam Srinivasan

Got it. And just trying to understand the differences between Spectrum versus generic injectables. Spectrum seems to have held up better. So is there something that in the portfolio is working during this quarter as well?

Swami Iyer

Spectrum – there is no connection between injectable and Spectrum. That is a special division.

Shyam Srinivasan

Okay. Okay. Got it. But are you saying the demand there has clearly not seen any slowdown at all?

Swami Iyer

Yes.

Shyam Srinivasan

Got it. Got it. My second question is on the API division, and there were lots of read-across coming from the other companies on API side. So a little surprised that it was slightly more muted relative to the starting point over the past few quarters. So just want to understand, Govind, just on the API side of the business. And also, if you can link that to the Make in India kind of a localization narrative that the government is talking about. Will Aurobindo look at that scheme? Is there any specific segments that you’d be interested in?

Narayanan Govindarajan

Yes. So there are two parts to the question. So the first aspect is in terms of, like, I think you have seen that 7%, 8% is a bit muted. And the reason is very simple. Like I think you are aware of it, like, even today, around 50%, 55% of our API sale is from antibiotics. And in fact, the last 3, 4 months, I would say, the antibiotic sale has been very, I would say, neutral, and that is the reason, like, I think, you would not have seen the overall growth. And this is not, I mean, a growth comparable to the industry. And this is not an apple-to-apple comparison because, obviously, like, I think, when you are having 50% of the business which this is not, like, I think, commensurate to the previous month, this is a challenge. But having said that, we are – our – one good thing which has happened is when you have more of nonantibiotic sale, in fact, the bottom line would be better than, like, I think, having it together. That’s what I would say.

Coming to the scheme in terms of, like, I think, Make in India scheme, the PLI scheme, specifically. In fact, there are a few products which are interesting to us. We are critically reviewing it. All of us are spending time in terms of getting into every aspect of that particular product. We will be arriving at our decision in a month or so, but there are some interesting products in that. That’s what I would say at this juncture, Shyam.

Operator

We have next question from the line of Neha Manpuria from JPMorgan.

Neha Manpuria

I just wanted some color on the gross margins. Govind sir just mentioned, obviously, the sales mix in API, but is there any other reason for the gross margins being flat? FX, I can understand, is one of them, but any color there would be helpful.

Narayanan Govindarajan

Subbu, do you want to take that?

Santhanam Subramanian

Yes. This quarter we made some provision due to sluggish demand on the account of COVID. We have made some provision for R&D assets developed by the third party amounting to INR60 crores actually. By way of conservative measures, we have done that. If you really adjust this, the adjusted EBITDA will be around 22.2%, which is far higher than what we have achieved in the last quarter also and year as a whole also.

Neha Manpuria

Sir, this INR60 crore provision is for what again? Sorry, I didn’t catch it.

Santhanam Subramanian

We have made some provision for the R&D assets developed by third party, which has amounted to this much of amount, and we have made provisions for that. In the normal course, we would have reviewed it at the end of the year. Because of the COVID scenario, we reviewed and in line with the advice given by the auditors, we have reviewed and made the provision.

Swami Iyer

Some intangible [indiscernible].

Neha Manpuria

Understood. Understood. And so this is included as a part of our other expenses for this quarter?

Santhanam Subramanian

Absolutely, you’re right. Otherwise, the adjusted EBITDA would be 22.2%.

Neha Manpuria

Okay. Understood. And Subbu sir, on net debt, the reduction this quarter seems to be because of a good working capital reduction also evident in your FCS. Is this level sustainable? Or as the underlying U.S. business picks up, you should see some increase in net debt from this level?

Santhanam Subramanian

See, if you really see, Neha, in the last 3, 4 quarters, we have been continuously reducing the debt. And especially in the last 2 quarters, the collections in U.S. have been very – pretty good. And we have seen a good spike in the collection, especially in the last quarter – the last half of the quarter. Our overall debt base has come down from 65 days to 49 days and also the gross to net has been softer than the last quarter, which has been – I mean compared to every company, it is softer. So if you really see, the overall working capital ratio also has come down to 32% from 35%. I think we have been reducing as much as possible. 32% we never achieved in the past, and this is the first time we have achieved, and we will see how it goes out in the coming quarters.

Neha Manpuria

But is it fair to assume that as the business normalizes in the U.S., some part of this working capital will increase?

Santhanam Subramanian

Swami?

Narayanan Govindarajan

Yes, Neha. I will take this, Swami. Neha, like, I think, it can increase a bit, but just to make it very simple in terms of your query, whether the net – you’ll see increase in net debt, you’ll not see increase in net debt, the reduction may not be – every quarter would be at the same level, it can be slightly lower, but the reduction will still happen, Neha. Does it answer your query?

Operator

We have next question from the line of Girish Bakhru from Bank of America.

Girish Bakhru

Actually, I missed initial remarks a bit so maybe, sir, repeat. But on the injectable side, some of your peers have commented that they have seen pickup because maybe had a portfolio of COVID-related drugs, maybe part of anesthesia or whatnot, have you not seen any of that? And if at all, are there any such products in pipeline?

Swami Iyer

I can take this question, Govind. So we mentioned this earlier, we have seen some improvement in the last couple of months. For example, in the month of June and July, we have seen better numbers. And then we expect this to do better going forward. One thing you should remember, our portfolio has got close to around 78% of…

Narayanan Govindarajan

Swami, he is asking different thing…

Swami Iyer

[Indiscernible] COVID-related products.

Narayanan Govindarajan

Yes, there are a few products in the portfolio, Girish, but let me put it this way, like, I think, we have seen the improvement in terms of the sale. June has been better. July has been better than June, and we will continue to monitor this. But let me also step back and give you some color in terms of the overall injectable business. This year is not a comparable year for injectable for the last year, but since we have enough products in the pipeline, we’ll continue to grow with our confidence as we move forward. Does it answer your query, Girish?

Girish Bakhru

Yes. But more specifically, let’s say, when you look at the product, is there something that you would specifically want to call out can become potentially meaningful, let’s say, if COVID extends? Is this something like that?

Swami Iyer

No, we don’t have, like, remdesivir [indiscernible] those products honestly, we don’t have except dexamethasone and a few more products. And in COVID, direct related ones, we have very much – little less.

Narayanan Govindarajan

And the products, what we have also would not be, like, I think, even if the volume increases, it would not be a tectonic shift, Girish, I would say that.

Girish Bakhru

Yes. Actually, my question was more outside, let’s say, some of these remdesivir-related products, but more on, let’s say, bag products or anesthesia products. Some of your peers have seen sharp growth there.

Narayanan Govindarajan

So as far as bag line is concerned, we recently commissioned and right now only it is picking up. So we have to wait and watch as far as bag line is concerned. We don’t have any major anesthetic products is what I would say. Like, if you take an example of propofol, we don’t have in our portfolio.

Girish Bakhru

Right. Okay. And when you look at this API side, I know you mentioned you are looking at investment in PLI evaluating. But from a very overarching perspective, Govind, particularly on the betalactams side, do you think this sort of investment or shift, is it realistically possible? Like, can you throw some color on can we see significant manufacturing of betalactams in India?

Narayanan Govindarajan

Yes. My answer is very simple, Girish. I think we are exactly studying that only to ensure that, like, before we make the investment, we are convinced about the investment, to answer it simply. Because at the end of the day, like, I think, we are studying that thoroughly to ensure that, like, it should be sustainable for us. Is that – does it answer your query, Girish?

Girish Bakhru

But would you like at least through a ballpark number in terms of what sort of, let’s say, investment versus demand would it make it, let’s say, realistic from a sustainable period of time?

Narayanan Govindarajan

No, I will answer – instead of just giving a number, which will not make any sense at this juncture, I can tell you very clearly that there is enough demand in the market. And there are certain products we ourselves consume 50% of the demand. So from a perspective of demand, definitely, there is a demand. From a perspective of justifying the investment is what we are studying, as I told earlier. We may need another 4 – 6 weeks to conclude that decision. We are interested. So that is the reason we’re spending more time and studying every aspect of it to ensure that when we are investing, it should be a sustainable return basis.

I also wanted to add one more thing. Apart from the PLI scheme and apart from antibiotics, one aspect you need to remember, we are also investing in terms of API just to let you know that, I think, we are, in fact, investing in large volume, at least 2, 3 modules, to ensure that we are freeing up our existing capacity because we are also seeing the surge in demand.

Operator

We have next question from the line of Nitin Agarwal from IDFC Securities.

Nitin Agarwal

Govind, on U.S. business, as we – there are, obviously, uncertainties around COVID for the injectable piece. But overall, when you look at the business in its sort of wholesome, how do you – how should we look at the U.S. business over the remaining part of the year in terms of new launches, scale-up of the existing portfolio?

Narayanan Govindarajan

Yes. Swami, do you want to take it? Or…

Swami Iyer

Yes. Sure. So on an overall basis, we think the business is going to be steady. We would have some growth.

Narayanan Govindarajan

Yes. Nitin, overall, like I think we are clearly seeing that we will be able to continue to grow. The reason is, like, while – as Swami has earlier explained that while there are some challenges in terms of certain businesses, certain businesses have even exceeded our expectations, if you take an example of, let’s say, Natrol. Having said that, our pipeline is, like, I think, pretty healthy, and we are also expecting three more approvals. And we feel there are enough opportunities, both in terms of NBOs as well as onetime opportunities, because of which we still are confident about continuing to grow.

Nitin Agarwal

And I guess associated point, I mean, how are we seeing these NBO opportunities? Have they – in terms of – as a quantum, have they increased, decreased over the last couple of quarters? Have there been more supply disruptions in the market that you’re seeing by giving up more opportunities like these?

Narayanan Govindarajan

So we do continue to get NBOs. And typically, when some disturbances happen, it will be more of short-term disturbances, it will be more of onetime opportunities, one-time buy is what Swami calls it as, like, I think, and those one – OTPs definitely are happening slightly more in this quarter, is what I would say. Over and above that, one of the reasons we are also confident about our growth is because we are planning to have 50 launches this year.

Nitin Agarwal

And Govind, we had only six this quarter, right? So there is a meaningful step-up that you’re looking at for – is it going to be more back-ended? Or are we going to start from Q2 itself?

Narayanan Govindarajan

So in fact, it will start from July-August time line onwards, you can start seeing the pickup.

Nitin Agarwal

Okay. And if I can squeeze in one last one. On Europe, how is the market in Europe? Has there been any – I mean has – some of these trends that you’re seeing in the U.S. around shortages, are they playing out in Europe also? Is there any impact on pricing in a positive sense on the market in general?

Sanjeev Dani

Yes, there have been shortages in some of the countries, and we have taken benefit of that. However, it depends on the product and the country. Because many of the countries have contracted sale. And in that case, it is bought from the outside contract, then we supply at a higher price. But if we are contracted, then we have to continue at the same price.

Operator

We have next question from the line of Ravi Dharamshi from Valuequest Investment Advisors.

Ravi Dharamshi

I’m not sure if it’s been asked earlier, but I just wanted to check, the whole industry has performed brilliantly in the API segment. What could be the reason why our performance in API was a little tepid? And also, if you can throw some light on what happened in Europe.

Narayanan Govindarajan

Yes. So let me repeat the answer, as far as API is concerned, the 7%, 8% growth is what we have seen. And as you are aware of it, even today, when we are looking at the external sales of API, 50% of that sale would still be from antibiotics. And last 3, 4 months, we have seen – because most of the manufacturers are not running, and they have been having the old stock as well, there has been a slowdown in terms of the procurement of antibiotic products because of which I think it’s not an apple-to-apple comparison in terms of the overall growth measurement. As far as API growth, in case if you see, it isn’t muted at 7%, 8%. That’s the background. Does it answer your query on the API? If yes, then I will let Sanjeev to answer the Europe.

Ravi Dharamshi

Yes, yes, yes.

Narayanan Govindarajan

Over to you, Sanjeev.

Sanjeev Dani

Yes. I think what I understood is that whether there are upside of sale in Europe, right?

Ravi Dharamshi

Yes.

Sanjeev Dani

Yes. So as I say, that usually, there are contracts, and there are off-contract business, and then there is a pharmacy where you have to collect the monthly orders, okay? So in contract, you just supply and logistics. There have been no problems, and even increased quantities are supplied, but at the same price. There are many off-contract sales when somebody – some other competitor is out of market and then government or insurance company or even the hospital chain, they buy off the market from us and that there is some opportunity to make an upside.

And then in the pharmacy, usually, when there is a stand-alone pharmacy, we have to collect the orders and then supply. By and large, it is related with the previous history. But some cases, like, which are not price-controlled products, which are not reimbursed, we are able to supply at a higher price. And then of course, there are retail chains where there is a longer-term contract.

So all in all, we have seen actually the May was the lowest, but after that the activities have resumed, and then June was higher. In July also, the momentum is carried forward. So again, we have to see this overall sales movement over a longer period rather than only 1 month or 3-month basis.

Operator

We have next question from the line of Cyndrella Carvalho from Centrum Broking.

Cyndrella Carvalho

And sir, I would like to understand from you on the API side, again, sorry for repeating this. But just more clarity as in, from our perspective, are we looking more from a KSM perspective addition going forward or participation? And how is the China level disruption? Are we seeing some benefit of that coming towards us going forward? What is our view over there?

Narayanan Govindarajan

Okay. There are a few questions, so let me fragment this question. The first question in terms of, like, I think, we are looking at, like, investing, we are looking at whether KSM, the answer is PLI scheme has been predominantly for KSMs only. So that part is clear, madam?

The next part is you’re asking whether we have seen any opportunity because of any disturbances from China. The answer is yes. To also give a context in terms of the previous statements I may have made, like, even though our antibiotic sale has come down, the non-antibiotic has actually improved by 30%, if you look at it, almost 29.3%, sequentially. So to that extent, like, I think, the growth has been seen. And irrespective of these 2 aspects of it, we also clearly see the demands for both the internal and external. That is the reason we are also investing in terms of our own capacities in large volumes so that, like, I think, it will free up a few more modules in the medium volume, which can be used for further small-to-medium volume products as well as large volume products also will grow with a new capacity. Does it answer all your queries, madam? Or anything else you have?

Cyndrella Carvalho

Yes. Sir, just to follow on that. So eventually, as we move ahead, our dependence on outside sourcing or raw material would change meaningfully according to you? Or if you could indicate from a current level where it could be?

Narayanan Govindarajan

Yes. So at the end of the day, the shift in terms of meaningful shift will take some time, madam, because even if you look at the PLI scheme, we are talking about only starting materials to the extent of 57 APIs, and you know our portfolio is much, much larger. So to that extent, if you are thinking that, I think, that particular shift will happen in an immediate future, the answer is it will take some more time is what I would say. Even for this particular 57-product shift itself, we are talking of 2 to 3 years. So commensurately, if we are looking at other products, it will take some more time if at all if you are looking at that shift. Currently, we would say, like, I think, we are not seeing a tectonic shift in terms of, like, I think, movement of – procurement of raw material or other intermediates. It will not shift overnight, but it will take some time. Does it answer your query, madam?

Cyndrella Carvalho

Yes. And sir, the second question is largely on the European profitability, if you can comment, and the compliance side, if you could update us on the opportunities.

Sanjeev Dani

Yes. So on Europe profitability, actually, as you have seen over 6 months period, we are on course with our guidance earlier, which was given. We have grown at 7% on a constant currency basis. So if you have to interpret the EBITDA or EBITDA margin at – over a 6-month period. But obviously, when our sales is lower than the base, then there will be – so under the quarter under review, actually, obviously, the percentage dropped. But I think we will recover in the quarter 2. And overall, we have said that EBITDA is around – just touching about double percentage – double digit in terms of percentage.

Cyndrella Carvalho

Okay, that’s helpful. And sir, on compliance side, please?

Narayanan Govindarajan

Yes. On the compliance side, let me start with Unit I, IX and XI. We have completed all our committed CAPAs, and we have submitted the request for even desktop view as well, and we are awaiting further direction from the agency. And as far as Unit VII is concerned, we have completed most of the committed CAPAs, and we are waiting for further direction from the agency. As far as AuroLife is concerned, we completed all of our committed CAPAs, and again, we’ll be awaiting further direction from them. That is as far as the 3 sets of units are concerned.

Operator

We have next question from the line of Damayanti Kerai from HSBC.

Damayanti Kerai

My question is regarding the expansion of your injectable and other formulations, which you mentioned in the annual report. So I would like to understand more on the injectables scale-up in terms of capacity. What kind of scale-up you would like to achieve, say, in the next 3 to 4 years kind of time frame? And if you can comment on the pricing part of generic injectables, what are you seeing? And what are your expectation going ahead in view of competition? So if you can comment on this, please?

Narayanan Govindarajan

Yes. Whether Mr. Reddy would take or I can take…

P.V. Ramaprasad Reddy

Yes. We have at least 80 to 90 products at various stages of the development for U.S. And our plant also – new plant is – around 5 to 6 lines is getting ready to operation in the first quarter of the calendar year next year. Other than this, we are dedicated for Europe and other markets. Injectable plant also is coming near Vizag. And we have a lot of focus on the injectable small volume products. And we feel that there’s a reasonable growth. It is possible.

Damayanti Kerai

Sorry, sir, initial comment I could not hear you. You’re working on 8 to 9 more lines? Or…

P.V. Ramaprasad Reddy

No. Around 80 to 90 products are under various stages of development for U.S.A.

Damayanti Kerai

Okay. And sir, on the price…

P.V. Ramaprasad Reddy

[Indiscernible] we have yet to approve around 40 products and 20 products exhibits, like that at various stages. So that itself is more than whatever we approved now and launch these 50 products. Another 90 products at various stages.

Damayanti Kerai

Okay. And sir, on the pricing environment for generic injectables?

P.V. Ramaprasad Reddy

There is not much difference except any niche product prices, maybe a drop here and there. But otherwise, overall price, there is no big drop or big increase.

Damayanti Kerai

So how do you compare this against your pricing for the oral basket?

P.V. Ramaprasad Reddy

Now July sale is comparable with normal, before COVID sale. It is more or less normal. There is no much difference.

Narayanan Govindarajan

On the pricing, it is not comparable, madam. It is not at all comparable. Please understand the fact that when we are talking about oral solids, we talk about erosion. Like, an injectable, whatever like price reduction can be one-off. When suddenly a new player comes in, then there can be some price disturbances. Otherwise, you don’t see like similar to orals. Is that your query, madam?

Damayanti Kerai

Yes. Sure. Okay. My second question is on sustainability of ARV Formulation growth, which we have seen in a few quarters. So how do you see this growth to sustain it?

Narayanan Govindarajan

Yes. We believe it is sustainable, madam, for the current year as well as next year. Like, as long as, I think, since the migration to TLD has happened, it has been very beneficial to us. And as long as, I think, you see some new molecule coming up for Dolutegravir over a period of time. Till then, like, I think, this growth is sustainable, madam.

Operator

We have next question from the line of Anubhav Agarwal from Crédit Suisse.

Anubhav Aggarwal

Subbu, sir, one clarity on the debtor days, which you mentioned 65 days has reduced to 49 days. Can you just talk about which markets have seen this?

Santhanam Subramanian

Predominantly U.S. market. It has good collection, good spike in the collection, especially in the latter half of the quarter. It has happened in the U.S. market.

Anubhav Aggarwal

So if I look at your balance sheet, the receivables in the U.S. were only $55 million. You mean to say that $55 million is all which has increased? And now what is the receivables level [indiscernible] $155 million, which was there in…

Santhanam Subramanian

I don’t know where you have picked up the data, but let me…

Anubhav Aggarwal

This is from the annual report, U.S. – Aurobindo Pharma USA, Inc.

Santhanam Subramanian

What the data which we are saying is that debtors at the end of March vis-à-vis debtors at the end of June, the drop has taken place from 68 days to 50 days, and that’s the reason why we had good collections, and that has helped in terms of reducing the debt, it has happened. I think I – exactly I do not know where you have picked up the debtors. Maybe offline, I will be able to pick up – get the data and explain to you.

Anubhav Aggarwal

Sure. Second question was on this factoring. Can you just absolute – talk about the absolute amount of factoring that we’re doing on the balance sheet right now?

Santhanam Subramanian

We have not done any factoring in the last two quarters. Maybe I need to find out what is – I think we stopped in the last two quarters. That much I’ll say. In fact, our utilization level has come down. Rather we are not using the full program, and we have been reducing quarter-on-quarter in the last two quarters.

Anubhav Aggarwal

So you mean to say for the last two quarters, our factoring has been 0 in the U.S.?

Santhanam Subramanian

Yes…

Narayanan Govindarajan

What I think – what Subbu is trying to say is we have not done any additional factoring. In fact, we have some unutilized balances.

Santhanam Subramanian

We reduced the factoring.

Anubhav Aggarwal

So what is the absolute amount that we’re doing, what we’re doing right now? Can you talk about that?

Narayanan Govindarajan

Anubhav, we have not specifically got into that number so far, Anubhav.

Anubhav Aggarwal

So Govind, I was asking that because that number looks high to me to the north of $300 million to $400 million, that’s the reason I’m checking that whether…

Narayanan Govindarajan

My answer is, Anubhav, it is not very high as you might consider. So we can discuss more on this, but we have not got into the specific factoring number so far, Anubhav.

Anubhav Aggarwal

Okay. Just one more last question on this. In this annual report, I see acceptance as an item, which the analyst say that we’re using acceptances of $50 million last year to buy raw material. Now something which I just wanted to understand, accounting-wise it may be correct, but why it is not classified as a short-term debt and why it is…

Santhanam Subramanian

Acceptance is not given by the company. Acceptance is given by the company’s supplier. Supplier in the COVID scenario, if they want to discount it, they will have the ability to discount and take out the cash by the suppliers. Say, for example, if you’re having a credit period of 90 days, and if you give me a bill of discount, if I accept it, they will take – discount it and take the money in the 45th day. So it is an advantage to the supplier to generate cash in this uncertain environment. It has nothing to do with the company.

Anubhav Aggarwal

Okay, but it is appearing as current liability for you?

Santhanam Subramanian

Yes. It should be appearing as current liability because instead of them paying the money to the creditors, we are paying the money to the banker of the creditors.

Anubhav Aggarwal

Okay. And this amount has remained largely same in this quarter as well?

Santhanam Subramanian

It has come down this quarter.

Operator

We have next question from the line of Tarang Agrawal from Old Bridge Capital.

Tarang Agrawal

Sincere congratulations on achieving the feat of being the second largest generic company in the United States in terms of prescription dispensed. My question – I have 3 actually. One is with respect to the annual report. When I go through your FY ’20 P&L, and in comparison, to your previous year, a couple of things stand out. The employee expenses have grown in the ballpark of almost INR650 crores, 24%, which is substantially more than the previous period; and your selling expenses, which is your commission plus selling expenses, grew by almost 65% from INR500-odd crores to INR850-odd crores. Were they all in the normal course of business or something was done differently in FY ’20 in terms of increased hiring or payouts or differentiated selling?

Narayanan Govindarajan

You need to consider our acquisitions as well. Like, I think, the full year of Spectrum as well as full year of Apotex manpower also would have come in. You need to consider that as well, sir, when you’re talking about this comparison.

Tarang Agrawal

Okay. So there wasn’t any differentiated selling or any change in our policy, so to say. Would that be a fair assumption then?

Narayanan Govindarajan

I didn’t get you, sir, I am sorry?

Tarang Agrawal

The meaningful increase that I see in terms of employee expenses or selling and commission expenses, they were all in the normal course of the business. Would that be a reasonable conclusion to draw?

Narayanan Govindarajan

Yes, sir. Yes, sir. So the numbers would get added up and those particular full year reflection would happen, like, I think, compared to the previous year, you’ll see that increase, apart from the normal increment which has been given to the people.

Tarang Agrawal

Sure. Ex injectable, the business seems to have grown at around 12%, 12.5% in this quarter on a constant currency basis. What has led Aurobindo grow so meaningfully? And is this a one-off because of some onetime opportunities or we could see this trend continue?

Narayanan Govindarajan

Okay. As far as this year is concerned, like, Swami had earlier explained that this will not be a comparable year to the previous – okay, you are talking about the previous year compared to the last year. So obviously, we believe that…

Tarang Agrawal

No, no, I’m comparing Q1 FY ’21 versus Q1 FY ’20, excluding injectables, the business seems to be grown at around 12.5% on a constant currency basis.

Narayanan Govindarajan

Okay. So we believe it is sustainable, sir.

Tarang Agrawal

Okay. And there were some news articles on Aurobindo trying for a COVID-19 vaccine. If you could throw some light on that.

Narayanan Govindarajan

Yes. So if you remember, we had acquired a company called Profectus, which we rechristened it as Auro Vaccines. So on the VSV platform, they were already developing a COVID vaccine as well, and we are creating the capacity in India wherein there are 2 phases of capacity: the first set of capacity would be ready by October time line where we would like to make the product and start the Phase I and Phase II by the end of the year; and our commercial facility we are still aiming to get it ready by around March-April time line where we would like to make the product for even the Phase III trial. That is the time line for the COVID vaccine based on our current assumptions.

Operator

We have the next question from the line of Surya Patra from Philip Capital.

Surya Patra

Can you give you some sense about the CapEx that you are planning, whether it is going to be kind of accelerating the momentum since last couple of years? What is the kind of indication? That is the first question. And secondly, on the – eventually, in the post-COVID – hello?

Narayanan Govindarajan

Sir, I think – can you – the first question I can – I have understood, sir. The second – I’m not able to hear your voice clearly.

Surya Patra

Yes, yes. So if you can answer that, then I’ll…

Narayanan Govindarajan

As far as the CapEx is concerned, sir, this year, we would be maintaining somewhere around $150 million to $200 million, sir. As far as our next year is concerned, we will need some more time because by the time, we would have arrived at the decision on PLI as well as we would have had more clarity in terms of the capacity creation that will come back. But for the current year, we still believe it should be in the range of $150 million to $200 million, sir.

Surya Patra

Okay. And sir, particularly, my second question is on the – in the post-COVID world, do you really see any change in the demand scenario for APIs and formulation separately. And particularly, this question is largely relating to the European market, what I’m trying to understand. In the post-COVID world, do you really see kind of enhanced supply opportunities, both for your Formulations as well as the API and more about the nonantibiotic kind of APIs? Or do you really see any replacing China kind of advantage for your European region or ROW region?

Narayanan Govindarajan

Yes. So first, I will request Sanjeev to answer in terms of the European market for the finished dosage, then I’ll come back to the API, please.

Sanjeev Dani

Yes. So actually, every year in Europe, considering our wide presence in terms of top 80% contributing market and also a very large portfolio and a 3%, 4% market share, you always have opportunity. And in terms of the competitor shortage or some demand going up. But they are related to specific products from time to time, and that continues. Maybe it has increased in some part due to Brexit also in U.K., but I think this increase or a onetime opportunity, which sometimes last even 1 and 2 years, will continue. It’s very early to actually quantify that in the last 3 or 4 months.

Narayanan Govindarajan

As far as API is concerned, we surely see surge in demand, sir, and we are also getting ready for that, is what I would say.

Surya Patra

Okay. And any different situation compared to the formulation demand, sir?

Narayanan Govindarajan

I think it will be commensurate only. At the end of the day, like, I think, only when the formulation grows, API can grow, right? Like, that’s as simple as that in terms of where the customer…

Surya Patra

No. See, if you see from the Chinese angle, then possibly the opportunity seems much larger. So that is why I was asking, sir.

Narayanan Govindarajan

So from that perspective, like, I think, first of all, even if they need to qualify and they need to commercialize it, like, I think, in the regulatory market, it will take some time, right? Because they need to, first of all, put the product, take the batches, keep it on stability, file and wait for approval. So that reflection you’ll have to wait and see how it is surging. Otherwise, it’s a premature statement, is what I would say.

Surya Patra

Sir, just last one question on the kind of aggressiveness that we have seen in case of ANDA filings. We are around – more or less since last 3, 4 years that we have been – around 50 to 60 kind of run rate that we have been maintaining, and same is the case even for this quarter. So how sustainable is this aggressiveness in terms of ANDA filing? And what’s the growth trajectory that we are anticipating for our U.S. business? Obviously, there is a value progress for our portfolio, U.S. portfolio that is visible, and that will come in the subsequent period, but generally, growth in the U.S. business that is coming from the aggressive filing and the trend in the base business that you are witnessing sir. On this if you can comment something.

Narayanan Govindarajan

So you have – there are a few questions you have asked. The first and foremost, this year, we are going to file around 50 products or so in terms of the new filing. And one important aspect is, as you move forward, instead of – when you are looking at the world aggressive filing, I would even use the word, like, I think, you need to look at the qualitative aspect of filing rather than the quantitative aspect of filing. If you really look at – like, I think, currently, our R&D expenditure is around 4.3%. But if you really look at the subdivision of the expenses, around 32% of that would have been spent on specialty, and around 68 – 35% would be in specialty and 65% would have been on regular generics.

So as we move forward – it can have a role reversal in terms of as we move forward. So you may not look for, like, I think, every year over the next few years only on the quantity, you have to look at the qualitative filing and specialty filing, which cannot be measured only by the number of filings, is what I would say. So definitely, there is a shift which is we are also seeing in terms of how the expenses are also getting distributed between specialty and the normal generics. That is as far as the filing and the future.

The third aspect, we believe that we have enough opportunity to still maintain our growth. We don’t give any forward-looking projections at all in terms of our US business as well, sir.

Operator

We have next question from the line of Sameer Baisiwala from Morgan Stanley.

Sameer Baisiwala

Sir, just checking on the earlier question – on the earlier remarks that you’ve made. Did you say that the gross to net in the U.S. market has reduced?

Narayanan Govindarajan

Swami?

Swami Iyer

So I can take this question, Govind. So the gross to net, it depends – it’s product specific. So it depends on the portfolio of products that we sell. So we have seen certain positive change in terms of the basket of products. So that is what Subbu was referring to.

Sameer Baisiwala

Okay. I mean is it a meaningful part of your portfolio that you’re seeing this? And is this going to sustain?

Swami Iyer

So we have seen this for the last couple of quarters. So I mean we have seen some improvement, some positiveness. We believe that this should be sustainable. Obviously, the market dynamics are different. We can’t predict, but we believe that we are in a better shape now.

Sameer Baisiwala

Okay. No, that’s good to hear. And just – is it meaningful part of your portfolio? Is it like under 15%, 20%?

Narayanan Govindarajan

I only want to say that percent-wise it’s better. Product-wise it doesn’t matter because it depends again on the volume of the product, right?

Sameer Baisiwala

Okay. Okay. That’s fine. Sir, the second question is, where are you exactly in your development and filing of long-acting injectables?

Narayanan Govindarajan

So as far as depo injection is concerned – okay. So we will be starting our clinical trial for the first product in the third quarter of FY ’21, and we’ll be filing it by second half of FY ’22. And subsequently, Sameer, every year you might see 1 SKU – we’ll continue to file. The first product is very critical because we have to establish the relief profile over a long-acting period. After that, continuing on that particular platform, we’ll be able to continue filing every year, 1 SKU, because largely we are working on four products, and each product will have a few SKUs.

Sameer Baisiwala

Okay. That’s great. And sir, final question, for your vaccine facility, what sort of capacity are you looking at, I mean millions of doses?

Narayanan Govindarajan

Yes. So in fact, the CapEx was increased only yesterday, like, to get ready for around 300 million, 350 million doses per year in anticipation. That’s what I would say, like, in terms of the viral vaccine facility. As far as the bacterial facility is concerned, we are starting at 50 million doses, but we have the capability to ramp it up quickly. That is for the pneumococcal.

Operator

We have next question from the line of Rahul Veera from Abakkus Asset Management.

Rahul Veera

Sir, most of my questions have been answered. Just wanted to understand one thing. We have invested INR360 crore on Quretech Biosciences, right, in a subsidiary? Will that be enough for next two years?

Narayanan Govindarajan

No, I think, first of all, it is – the INR360 crore is an investment to transfer the assets into this new subsidiary. And as far as next two years is concerned, like, I think, we’ll be investing further in terms of those clinical trials and all. So the overall outlay would be more.

Rahul Veera

Okay. What could be the estimate for the outlay.

Narayanan Govindarajan

No. So I would say, like, I think, at this juncture we have budgeted around INR800 crores, Subbu, overall, including the INR350 crores?

Santhanam Subramanian

Yes. That will be the number, expected. Yes.

Operator

We have next question from the line of Prakash Agarwal from Axis Capital.

Prakash Agarwal

Sir, just some color on the China API prices between the last quarter and July and August that we see, are the prices being coming down? Could you give us some trend?

Narayanan Govindarajan

See, I think, Prakash, our procurement of APIs directly from China is not huge. There are a few products which we import directly as API from China. And there can – we have 1 or 2 products that could have been a reduction, but overall, we are not seeing any tectonic shift because in the last 3, 4 months, our objective was to secure the supply rather than, like, I think, focusing on the price because as you know that if you don’t secure the supply, we should not end up in penalty. So our focus is more on that, but as we move forward, we can see the reduction.

Prakash Agarwal

Okay. And not particularly China. I meant prices in general, wherever you are sourcing it from, have you seen prices coming down a bit? Or is it stable? Or is it going up?

Narayanan Govindarajan

At this juncture, it is stable is what I would say, even though there are 1 or 2 reduction that has happened, and I think at this juncture, it is stable. As we move forward, we need to see because even non-China also, we are more focused towards ensuring the stability of supplies rather than only price as the criteria at this juncture. But as we move forward, we would also be qualifying more sources, and we’ll be looking at optimizing that particular API fast as well, which – wherever we are sourcing it from.

Prakash Agarwal

Fair enough. Perfect. And on the U.S. pricing, a couple of your peers have mentioned that it is pretty much stable. And wherever there are opportunities or shortages, the prices are actually [indiscernible]. So on a portfolio basis, would you agree or pricing is more or less stable?

Narayanan Govindarajan

Yes, it is stable.

Prakash Agarwal

And Q-on-Q, would it have improved?

Narayanan Govindarajan

Yes. So when we budget for a 5% erosion, and as soon as you don’t have an erosion, I think, I would say, like, I think, it is an improvement. And it is – at this juncture, we will say it is flattish, and we are happy with the scenario.

Prakash Agarwal

Perfect. That helps. And when you say you expect improvement in – or the injectable business continue to grow, you meant on last year’s base or quarter-on-quarter?

Narayanan Govindarajan

First of all, like, I think, this year is not a right comparison at all, Prakash. So since we have enough headroom in terms of the filed products and we will continue to file as well from next year onwards, you will be able to see the growth irrespective of the lower base this year. Even if you compare the standard base also, we will continue to grow from next year onwards is what Swami Iyer also explained in terms of the injectable business, Prakash.

Prakash Agarwal

Okay. Great. And lastly, on R&D, so your annual report clearly talks about various projects. Some of them are starting R&D programs from second half of this year plus some of the filings, some entering clinics. So you maintain a 5.5% R&D expense to sales, or given COVID, some of the clinical trials can be pushed out and we can expect a lower R&D?

Narayanan Govindarajan

No. I think we will not be able to lower the R&D expenditure for a simple reason because most of these clinics would start hitting from now onwards. That’s why we have – so compared to the last year, we have already talked about around 5.5% for this year. And in fact, next year, when we come back, it would be slightly more because, again, certain Phase IIIs would also come up in terms of biosimilars as well as vaccine in case if any viral vaccine trials also – some preliminary trial will start. But overall, I think it should be in this range is what we believe as we move forward. It won’t come down is what I would say till we start achieving the critical mass on the specialty.

Operator

We have next question from the line of Nitin Agarwal from IDFC Securities.

Nitin Agarwal

For the year, when we look through the next, say, 12 to 18 months, from a milestone perspective on the R&D side, one thing you mentioned is the filing of the first depo injection. What are the other complex – I mean specialty-related milestones one should watch out for or one can sort of expect?

Narayanan Govindarajan

One biosimilar for Europe would definitely get filed before the end of this year is what we are planning to do. One more would come by first quarter of next year as far as the biosimilar is concerned. Like, I think, the Phase III for one more biosimilar for the global market would start by next year’s beginning. So these are as far as our biosimilars are concerned. As far as vaccine is concerned, like, the Phase III for current year, the Phase III will start for the pneumococcal, and that actually should get filed towards the end of the year or beginning of next year is what I would say as far as pneumococcal is concerned. In case if we progress aggressively in terms of the COVID vaccine, that will also – those expenses will also happen.

Sanjeev Dani

Yes. One more thing, Nitin, like, we have filed in the current quarter 1 inhaler. And we are working on a few more products, which can file over the next 1 to 2 years.

Nitin Agarwal

Okay. This is very encouraging. Govind, on – obviously, in terms of the new product – in terms of approvals in the U.S., I mean, we haven’t had any reasonable meaningful approval given the fact that we’ve been making investments in specialty for some time now. I mean when you look through – so what’s your sense by when we should expect some of these larger big-ticket approvals beginning to come [indiscernible]?

Narayanan Govindarajan

So we have already seen approval for a few products in the North Carolina facility. That is as far as the specialties in North Carolina, like, in terms of nasals. And as we progress – so let me just subdivide this particular time line. Depo, we have already told you, like, I thing, the filing would happen by next year. So you had to wait for another year for that approval to start. And then onwards, every year, you will start launching one product. That is as far depo is concerned. As far as biosimilars are concerned, we said, like, for Europe, towards the end of this year, one product, and beginning of next year, one product. Those two in my…

Nitin Agarwal

So next year onwards, Govind, we will do – at least two products of biosimilars we will file, not less than that.

Narayanan Govindarajan

Yes. The European products, we still believe that 210 days we should get approval. That would happen. And next year, I think two global products would be filed, and subsequently every year, at least two more products will be filed. That is on biosimilars side of the story.

Nitin Agarwal

Okay. And anything on – any progress on the transdermal part you also mentioned in the annual report, if I recall.

Narayanan Govindarajan

Yes. As far as transdermal is concerned, we are developing 8 patches, which has a market size of around $3 billion. We’ve started our scale-up batches for one product and trying to file this in January 2021, and these products would be manufactured in our U.S. plant.

Nitin Agarwal

Okay. And lastly, in terms of our plant for – I mean where are we in terms of – earlier we were constrained by injectable capacity to take our injectable portfolio more global. Having – how – what is the – any update on that in terms of how should we look at that part of the business? Because we have a very valuable portfolio in the U.S. which, obviously, presumably has a lot of leverage across multiple parts of the world, right, in terms of replicability of the portfolio.

Narayanan Govindarajan

Yes. So as far as injectable is concerned, we are also coming up with those lines, additional lines in the year, which should get ready by next year. That is as far as U.S. is concerned. Mr. Reddy, would you like to throw some light in terms of the additional capacity it should be creating for Europe?

P.V. Ramaprasad Reddy

So our plant in U.S. will be – start production from January or February, early next year onwards, the calendar year. And the new – other injectable plant for the Europe and other emerging markets, we have a dedicated plant that is coming in the next 15 months. That way, we have a very broad plan on this injectable and other specialty products in injectables.

Operator

Ladies and gentlemen, that was the last question due to time constraint. I would now like to hand the conference over to Mr. Krishna Kiran from Investor Relations for closing comments. Over to you, sir.

Krishna Kiran

Thank you all for joining us on the call. If you have any questions unanswered, please feel free to keep in touch with Investor Relations. The transcript of this call will be uploaded on our website in due course. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, on behalf of Aurobindo Pharma, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.

Be the first to comment

Leave a Reply

Your email address will not be published.


*