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Aurobindo Pharma Ltd
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Good day, ladies and gentlemen, and welcome to the Aurobindo Pharma Limited Q1 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Mr. Krishna Kiran, Investor Relations, Aurobindo Pharma Limited. Thank you, and over to you, sir.
Thank you, [ Margaret ]. Good morning, and a warm welcome to our first quarter FY '19 earnings call. I am Krishna Kiran from the Aurobindo Pharma Investor Relations. We hope you have received the Q1 financials and the press release that we have 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. We will begin the call with the 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 limitation, 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.
Thank you, Krishna. Good morning, everyone. We are here to discuss the first quarter financial year '18/'19 results declared by the company.Revenue increased by 16% year-on-year to INR 4,250 crores driven by strong growth across most of our business verticals. The EBITDA before ForEx and other income decreased by 7% year-on-year to INR 779 crores. EBITDA margin was at 18.3% for the quarter under review and declined by 450 basis points year-on-year. Net profit declined by 12% year-on-year to INR 458 crores.In terms of business breakdown, Formulations business contributed to 82% of the total revenues, and clocked a revenue of INR 3,501 crores, positioning a 15% growth year-on-year. API business grew to INR 748 crores for the quarter, an increase of 20% year-on-year. In the Formulations business, the revenues from the U.S. market stood at INR 1,890 crores, an increase of 11% year-on-year. On a constant currency basis, U.S. revenues witnessed a growth of 7% year-on-year basis to USD 282 million. The growth was primarily driven by improved volumes in existing products. We have received final approvals for 13 ANDAs including one injectable during the quarter. We have filed 7 ANDAs including 3 ANDAs for injectable products and launched 14 products including 4 injectables in the quarter under review. Aurobindo USA, the company marketing all our products in USA has witnessed a growth of 7% year-on-year.AuroMedics, the injectable business, remains flat on year-on-year basis to USD 36 million. We have filed a total of 95 injectable ANDAs as on 30th June, out of which, 60 have received approval including 2 tentative approvals and the balance 35 are under review. Aurohealth, our OTC business in the U.S., has continued its strong growth momentum driven by new product launches. The company as on 30th June 2018 has filed 487 ANDAs on a cumulative basis, out of which 342 have final approval and 33 have tentative approvals, including 10 ANDAs which are tentatively approved under PEPFAR and the balance 112 ANDAs are under review.During the quarter, we have filed our first dermatology ANDA as well. Euro formulation revenues clocked INR 1,999 crores in Q1 FY '18/'19, an increase of 31% growth year-on-year.On a constant currency basis, the Euro revenues grew by 16% year-on-year. As on 30th June 2018, we have transferred manufacturing of 94 products from Europe to India. In the month of July, Aurobindo Pharma has signed a definitive agreement to acquire commercial operations and certain supporting infrastructure in 5 European countries from Apotex International Inc., this acquisition is in line with our strategy of entering into Eastern Europe markets. Those markets witnessed a growth of 32% year-on-year basis to INR 257 crores.On a constant currency basis, growth markets reported a growth of 27% year-on-year. ARV Formulations revenues stood at INR 156 crores, declined by 36% year-on-year. In terms of segmental classification, U.S. Formulations contributed 44% of the overall revenues in Q1 FY '18/'19 versus 46% in Q1 FY '17/'18. Share of EU formulations increased to 28% in Q1 FY '18/'19 versus 25% in Q1 FY '17/'18.Growth market share improved to 6% in Q1 FY '18/'19 versus 5% in Q1 FY '17/'18. ARV segment represents a 4% of the overall revenues in Q1 FY '18/'19 versus 7% in Q1 FY '17/'18. API business contributed 18% of the total revenues in Q1 FY '18/'19 versus 17% in the previous year for the same quarter.R&D expenditure is at INR 169 crores during the quarter, which is 4% of the revenues. Net direct CapEx for the quarter is around USD 55 million. The effective tax rate for the quarter is at 20.2% of PBT.The closing rupee versus U.S. dollars rate was at INR 68.47 in June 2018 on INR 65.17 in March 2018.The net debt as on 30th June 2018 was USD 571 million against USD 538 million as on 31st March 2018. The majority of the company's debt is denominated in foreign currency. The cash and bank balance is at $203 million. The average finance cost is at 2.3% mainly due to availing multiple foreign currency loans. ForEx loss for the quarter was at INR 68 crores, which includes MTM loss of INR 3 crores on forward contracts and remaining amount due to reinstatement of loans, intergroup elimination of currency variations. This is all from our end and we are happy to take your questions now.
[Operator Instructions] The first question is from the line of Neha Manpuria from JPMorgan.
My first question is on the U.S. business. It has seen a good ramp-up quarter-on-quarter. But obviously, injectable has remained flat. One, how do we look at the injectable business over the next few quarters now that the Unit IV is cleared, we've got a few good approvals? And two, what drove the quarter-on-quarter improvement? Is this the new business activity that we -- the new business opportunities that we talked about that's driving this growth?
So basically, you would appreciate the fact that there are 2 large reasons on -- one is because the Unit IV EIR, we were awaiting. And related to that, the product approval was also awaited. And also Ertapenem approval took some more time. So those are the 2 predominant reasons. And ultimately, the back line also asked to kick in, in terms of, I think, creating the revenues in the bottom line. As far as the current year is concerned, even though, first quarter has been soft, we are fairly confident to say that we will still maintain our guidance of 30-plus percentage in terms of the growth for the current year compared to the previous year, Neha, as far as injectable is concerned.
And this ramp-up will start from the second quarter now, right sir? Because all of the issues that you mentioned are pretty much resolved into the second quarter.
Not all would be in second -- this quarter. Example, Ertapenem has already been approved and we have launched the product, and a couple of more products also would help this quarter. But then, ultimately, bag line would come by around October timeline so that will also add as far as the overall year is concerned, Neha.
So this growth will be more back-end weighted in that case?
So it would start from second quarter. I won't say everything is back end. From current quarter onwards, you will start to see the difference.
And, sir -- okay then -- okay. And the second question. Then what drove the quarter-on-quarter improvement in U.S.?
So the -- I think basically, it's more of a base business improvement and that is one of the predominant reason is what I would say. In fact, for overall year also I think there are certain things which have positively happened. To give an example, I mean, we had one certain NBO to the extent of $90 million to $100 million, which would be third over a period of 12 months, I think, 12 to 14 months I would say. I think that is one of the key aspects of it in terms of, I think, the overall growth for the year as well.
Okay, sir. And if I look at the gross margins. Particularly, because U.S. has been good. What -- why have the gross margins declined? You -- there's a mention in your press release of certain provisions. But if you could give more color on what these provisions and how, excluding these provisions, gross margins have done?
Yes. So the decline in gross profit margin was largely due to provisions related to product recalls and product sold in the past. Apart from the change in product mix, it will also add to reduction in the gross margin, which you would agree with me, Neha. And also certain raw materials and intermediate prices have gone up in the API and the market correction would happen subsequently because it would not happen at the same time, as you would appreciate. So -- and the first 3 aspects of it, whatever I told is more of one-off. So this we don't expect it to repeat and that is the one which largely brought down the gross margin.
And excluding this, what would the margin be like?
I don't think that I would be specific on that. But I would say -- I would put it just say let's say as far as the provisions are concerned, it would be around INR 90 crores to INR 100 crores. And the remaining I think is divided between the product mix as well as in terms of certain raw material increases. But predominantly more of product mix, which was also over a period of time, when our injectables starts growing and the other better margin products starts growing, it will be skewed more positively towards the improved gross margin, Neha.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
Govind, just one question. The provision you mentioned about almost INR 100 crore, this is almost $15 million, right? If I just take a gross margin also of about, let's say, even very consultative, let's say, 60% or 50%, this amount shows loss of almost $40 million. So, which products we have written off almost which would have amounted to $40 million inventory write off in the quarter?
I'm not going to get into the specifics, Anubhav. What I would only say is please understand the fact how the U.S. market functions and how the provisions are coming sometimes in terms of later so that's how it is. I'm not -- so this would include certain more products, which we have sold in the past, and for which we are observing as far as the provision is concerned.
Sorry, this is -- is this what you're saying is more a shelf stock adjustment?
It is a shelf stock adjustment, Anubhav, that's right.
Stock end as well as returns and multiple things around $80 million to $100 million.
Sorry, sir, you mentioned $80 million to $100 million?
INR 80 crores to INR 100 crores.
INR 80 crores to INR 100 crores. This is not the inventory write-off? You would say majority of this is share stock adjustment?
Yes. It is not inventory write-off. It is more -- majority of it is shelf stock and then we also talked about certain written provision also, Anubhav -- so it includes both, that's what Mr. Reddy was also clarifying.
Okay. That's helpful. Secondly, on working capital increase, can you just explain that why the receivables would have explained -- expanded so much because it's an increase of almost like $60 million almost increase of working capital?
Yes. So let me cover the net debt as well as the working capital simultaneously. So the net debt at the end of quarter has been increased by $33 million. So we generated the cash profit of around $100 million and we spent direct CapEx of around $55 million and indirect preoperating expenses, reinstatement of the foreign currency on the capital work in progress, et cetera, all put together, another $15 million. So that comes to $70 million. The working capital has increased by $63 million that totals to $133 million and we generated a cash profit of $100 million that led to an increase in the net debt to the -- that $33 million. So when I go back to the net working capital increase of around $63 million -- it's actually $62 million -- $60 million. So $60 million may -- around $33 million is on an account of the inventory. I would say, around 50% to 60% of it is increase in the finished goods because we have taken, as Govind explained in the earlier question we have taken the NBO, which is likely to come around $90 million to $100 million in the next 12 months. So increase in the finished goods is one of the key things which we have done this quarter. And around $14 million is the increase in the debtors and balance is adjustment within the current assets and the current liabilities.
And this inventory increase on top of in fourth quarter, I remember, we almost took inventory increase in, let's say, second half of last year of almost $100 million, we further increased by almost say $15 million, $20 million in this quarter?
Yes, Anubhav, we have clearly said that we would like to have minimum inventory of 3 months. Please remember the fact that we had also said at that time like when we will be spread across this quarter as well.
Okay. Okay. And then just last question I have on the ARV business. Now you will start the DTG sales contract. Earlier you mentioned that you got a contract of $80 million spanning over 2 years. So should we assume that $40 million is for 3 quarters I mean, let's say, 3/4 -- we should realize that in this year?
This quarter, surely would be better than last quarter and predominantly driven by the DTG orders, which we have already received, Anubhav. I think that is for sure. So now as far as presale is concerned, we had to deliberate about one more quarter because there are certain concerns, which have been raised in terms of certain, the moment cannot consume on certain age groups. But I think, that is still being addressed. And that would -- once that is clear, which we are fairly confident that would get cleared over the next few months, I think definitely, we'd be able to realize majority of the numbers driven by the DTG as well. Apart from that, we are also conscious about working towards improving the normal -- non-DTG product combinations as well to ensure we are coming back strongly in terms of the overall ARV portfolio sales. And I'm fairly confident that from now on, I think we should be able to see the improvement in terms of ARV business, Anubhav.
The next question is from the line of Ranjit Kapadia from Centrum Broking.
My question relates to dermatology business. We have filed first ANDA. So what is the future of pipeline? And how does the dermatology look in U.S. context?
I think Mr. Reddy would be able to give a better color on that, Ranjit Bhai.
No. We have just filed 2 products and we are filing in another 12 months another 10, 12 products. And it is very premature to tell at what stage the pricing thinks at that time. After 1 year, only we are going to launch 1 or 2 products. Full launch will happen around 18 months. So I don't want to comment how the margins will be there after 12 to 18 months.
Sir , but these revenues will start kicking in from FY '20?
Yes. Around -- some revenues -- the first few ANDAs, 2, 3 ANDAs, will come approval from June, July of 2019 onwards.
The next question is from the line of Nimish Mehta from Research Delta Advisor.
A lot of my questions have been answered. I just wanted to know the impact of the -- the likely impact going forward due to the price increase because of China environmental clampdown. So if you can just tell us what is the impact this quarter? And what do you think is going to be from here on? That will be helpful.
So the current quarter it has impacted, Nimish, surely, that is one of the reasons you also mentioned. And also, generally, Nimish, you have to remember the fact that whenever the price increase happens at the raw material intermediate level for the API, the market correction would take some more time before the particular absorption by the customers as far as that is concerned. So to that extent, it may not happen the same quarter or the next quarter, it will take some time. So there are -- we're also working towards ensuring that. I think wherever we see that it is going beyond like the threshold, we've already started qualifying Indian sources. As far as wherever it is needed, we're also looking on our own in terms of either getting toll manufacturer or contract manufacturer by developing the process on our own. So my opinion, I think, this is something -- in fact, at one level I would even say, this is beneficial because otherwise, we would not have looked at all these options of securing ourselves. That is how we look at it and we are moving forward to ensure that we're not going to be under pressure on that forever. But this would hurt us for next few quarters in terms of certain percentage points. But then we are also confident that we would be able to still grow that particular issue also because the product mix would be skewed better. But having said that, we're working towards improving this aspect of it as we move forward.
Okay. Can you quantify the impact in this quarter? And also if you can let us know what is the cumulative Chinese raw materials?
I'm not going specifically. Let me put it this way. I think I will give you some more color in terms of so that you will comfortable on what we are doing. As far as API is concerned, even today predominant of the top line around 60% would be on antibiotics. The antibiotics, wherever the increase happens, we would be passing it onto the customers because we are all low-margin and that is not something which we can absorb. So as far as the [indiscernible] which is around 40%, what I said it will take some more time for the market correction to happen, which will ensure that we're not taking the complete hit.
Okay. But I'm talking about the U.S. -- and the raw material getting into U.S. Formulations sales. So will that be impacted because that is where you cannot pass on the price? So that is my major worry if you can just...
I understand. But, Nimish, you ought to understand the fact to an extent it is impacted even in the first quarter, but please understand the fact -- so as we move forward, at some point the market correction would happen because, I think, even the U.S. market, everybody is now going to absorb every price increase, which is going to happen. So that market correction would happen some -- would take some more time to happen. So to that extent that is something which we are absorbing. Having said that, in the beginning of the call, we also talked about having certain NBO. Generally, NBOs have better margin than the normal business we have. So to that extent, also, we would be able to accommodate this for some more time. That's what we're expanding the mission.
Definitely, some prices are increase in raw material prices, some impact is there in the last quarter and this quarter both the quarters, no doubt about it. Across the prices are increasing.
Okay. Okay. Fair point. I appreciate that. And lastly, if you can give some outlook on the interest expense. I mean given the interest rate scenario world over. So do you think this will increase? Or how do we -- how should we look at it?
So it is expected. The interest rates -- federal will increase the rate by 25 basis points every quarter in the next 2 quarters. And so accordingly our interest expenses will go up because that's the basic interest, which you have to pay.
Okay. So currently I think you mentioned that 2.3% is the finance cost.
You can take it to 2.6% in the next quarter and 2.9% to the December quarter like you said you can do it. Because our -- mostly our loans are foreign currency, right?
Right. Right. Right. And then it should stabilize at what, 3%, 3.2%? I mean, just a guesstimate.
It all depends upon the currency.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
First question is on the OTC business. I think opening remarks from Govind suggested strong growth. Can you just kind of quantify what the growth is? And also on Natrol, so what is the run rate we're doing? So that's my first question.
Yes. So as far as what we see is concerning the overall year we're still targeting around $16 million, even though I think it is a bit slower in terms of start, but we're still confident of making it up for the full year that's as far as OTC is concerned. As far as Natrol is concerned, the top line is growing well, but we have launched new line in terms of gummies, which actually would have some more marketing expenses. So the sales growth, I think, we don't see an issue. Definitely, like it should be double-digit in terms of, I think, let's say 10% to 15% is something which we are fairly confident about in terms of the top line growth, Shyam.
So Govind, we did $32 million last quarter. So that -- we are on run rate for their $120 million plus for Natrol?
No. Actually, it was $34.1 million worth for the first quarter. So you can definitely let me not take that run rate as something which is achievable.
So we did $32 million this time last quarter. Now it is $34 million?
Yes. $34.1 million is for the first quarter.
I got it. I got it. I got it. So and the second question is on DTG. I think adding on to Anubhav's question. So have we started booking revenues now in DTG or is it there in your line items today? Or it will take some time for it to start showing up?
We started believing that. But in -- so the last quarter would have been -- some numbers would have been booked but that would not be significant. But this quarter definitely would be better than last quarter. So whatever orders which we had booked till November definitely we have orders book to deliver those products till now but as far as DTG is concerned. After that, finally, have to wait for some 3, 4 months in terms of by the time all this sponsors as well as the technical team are sitting down and addressing that issue in terms of how do we address that certain human group, which had certain side effect, which is claimed by one of the reports which they are understanding it. We are all fairly confident and they are getting a feel that I think for the period of 3, 4 months it should get addressed and we should be back in track in terms of our DTG. But as I mentioned earlier, Shyam, apart from DTG, we are also focusing to ensure that we are coming back strongly in terms of the rest of the portfolio as well.
Got it. So, Govind, if you can help quantify how large is it? Is this like $80 million, $100 million -- over time, I'm not saying today? But is it like just that large an opportunity for us over time for this entire piece to be?
Over time, the answer is, yes, it is feasible. But then please understand the fact I am talking about addressable market is much larger, but then we also have to be careful in terms of how many people are going to compete and how they're going to behave in terms of the prices is important, Shyam. So to that extent, yes, is it feasible. The answer is yes, it is feasible. Because please remember the fact we had earlier spelled out about that 2-year contract also we categorically said how much we are booked. Even in the contract, we had to wait for additionally 3, 4 months as they have mentioned to achieve the particular number what we had committed earlier.
Right. And my last question is on the injectable run rate. I think with it $36 million, you still are seeing 30%. I feel like a steep ramp starting from 2Q. I was just doing basic math. It looks like we need to reach $60 million, $70 million in the second half on a quarterly basis. So which products are there that is going to ramp up like almost double today's rate on a quarterly basis?
No, I think we have launched Ertapenem and then we are expecting a few more approvals, which would accrue. Apart from that, the bag line will also kick in. So these are the reasons why we are spelling out clearly stating that we are confident about achieving that particular run rate, Shyam.
Okay. And just for reference, so it's like a -- last year was $164 million. So if I multiply by 1.3, $210 million to $215 million that is what we're working at that?
Yes, that is what we're talking about. But obviously, one suggestion is it won't be exactly month-by-month, quarter-by-quarter divide it and then looking at it. I think you need to give this a particular space in terms of still overall year, we'll achieve.
The next question is from the line of Sumit Singhania from IDFC Securities.
This is Nitin here. On debt now, how should we look at on our debt going forward? Do we have still -- do we need to still add to our inventory -- our finished goods inventories or in line with our policy to keep higher inventory?
Yes. The policy is to keep the higher inventory, 3 months' inventory, as we spelled out very clearly in the last call itself. We said in the last call, we'll be reducing the debt by about $100 million and we will continue to work towards that.
And so this is despite the acquisition -- the recent acquisition that you announced in the European business?
No. We are not talking about acquisitions. That is separate. As and when it happens, we will review the numbers and then tell you.
Okay, sir. And secondly, Govind, on this provision bid, this charge back. Shelf stock adjustment is a pretty normal business activity. So why would you flag that out in this quarter?
The reason is it is not normal because it is more because of certain products that is a reason we have flagged out and we don't expect that to happen quarter-on-quarter to that extent. Is that clear?
And this is captured in the cost of goods sold or in the top line itself?
In the top line and whatever stocks, which has been given to the distributors and which we are not billed it, it will be captured in the cost of goods.
Okay. Thanks. And lastly, Govind, when you look at the non-injectable piece now for the rest of the year, I mean, how should we think about it? Are there any meaningful launches which are there? Or it's just about the new business opportunity growth in the business that will keep driving growth for us?
A lot of meaningful launches which are coming up, I think, which includes metoprolol that is generic Toprol as well as I think lansoprazole delayed relief, which is generic Prevacid ODT and at some point in time we'll get Welchol as well. So we have, I think, meaningful launches in terms of oral as well as some injectable products, which can kick in. So definitely, there are some meaningful launches. Apart from whatever we talked about in terms of the NBOs and also the OTC improvement and the injectable improvements. So definitely, I think, we have enough.
And what's the timeframe for Toprol and Prevacid?
It should within this year. I would point that we have -- see all these products we have certain TAD, but then we have to be careful in terms of are we going to commit that TAD because as of now, based on whatever queries have been raised and matters, we are maintaining the TAD. But we are still fairly confident that within this year it will happen. We will take an example, Toprol, we have in the October time. We will just say. But then that is based on today's understanding because we have submitted the response and we are awaiting the clearance. In case, if there is -- let's say additional query comes, which we need to address, we should get close to let's say 4-8 weeks of the time from when the query is raised. So this time, within this year, we are fairly confident about launching this product is what I would say, Nitin.
The next question is from the line of Surajit Pal from Prabhudas Lilladher.
Govind, this INR 80 crores to INR 100 crores, which you are saying is one-off. Is it related to failure to supply penalty?
It is not failure to supply penalty, clearly not. So some -- see that is not something, which we are talking about in the INR 80 crores to INR 100 crores. This INR 80 crores to INR 100 crores what we talked about is certain recall as well as certain provisions, is what we talked about, Surajit.
Yes. Yes, so basically, the kind of products, which you recall last year say from November. Are those products related to those recall? Or -- and whatever the product was left over, you just recalled to be on the safer side?
Yes. All expenses and recalls, everything has come in the last quarter. That is one of the major and other small items.
It is one of the reasons again. So as I -- we have explained it earlier, we don't expect that -- to that extent -- and we are again talking about to that extent really we don't expect it to happen every quarter. That's why we are clearly spelling that out. These are all normal business aspects of it. [indiscernible]
Right. So since you have increased your inventory days to, say, 3 months. And last quarter, it was up to 2 months. Now this quarter, it is 3 months. Could you -- or your accounting numbers still represent some part of failure to supply penalty now?
In the sense?
In the sense that when you were supposed to commit certain quantity and you failed to supply and you pay because of the spend penalty to that distributor, that number is still represented in there?
It has not increased 2 months to 3 months in 1 quarter, actually. It is only -- Subbu, can you explain what is the real increase in the finished products in the areas of Europe, how much increase in the one quarter?
First, let me address that failure to supply. Yes, we are accounted on a quarterly basis based on the estimated provision. So -- and this is forming already part of the profit and loss account. Second, as Chairman has explained, last quarter, we were around anywhere between 2 to 2.5 months. And it has been spelled out clearly we will make it to 3.
Quantifying the numbers, how much has it increased, is the question.
The quantity which I said earlier, the increase in the inventory is around $33 million. Out of that, 50% to 60% predominantly on the finished goods.
Okay. Okay. So your FSM or failure to supply penalty has been deducted from your sales, as per the new accounting standards, right?
Absolutely. Absolutely.
So what could be that beneficial increase in our margin?
That is negligible. I mean, it is, in decimals, low-digit figure.
Okay. Okay. Govind, as far as Eugia is concerned. I found that there are filing of around 12, of which 1 you have a capacity win you have got. That is in oral. In how many injectable oncology product you have filed? And what could be the current addressable market of this product?
So overall, 8 hormonal and 71 oncology products are under development, and we have started filing products in February 2017, if you remember. As on 30th June, we have filed 13 ANDAs, including 7 oncology, which are 6 oral and 1 injectable; and 6 hormonal products, 5 injectables and 1 oral. Apart from these 13 ANDAs, we also bought 2 more ANDAs during the quarter. So we are planning to file 15 ANDAs this year.
That is all injectable?
It's a mix. In Oncology, 71 products, approximately 40, 45 products are injectables; balance are orals. And almost every product will be filed before 2019 December.
Okay. And what could be the market -- say, the current market price?
That is actually not the right measure. I would tell you [ $45 billion ], but that has no meaning to this business.
The next question is from the line of Abhishek Sharma from IIFL.
Sir, a couple of broader questions. See, Aurobindo's U.S. business is one of the very few which have grown in revenue terms in the last couple of years. And given the fact that we are in a declining price environment. Just wanted to understand what kind of a volume growth have we witnessed, let's say, over the last 2 years?
Volume growth, we have not mapped specifically, Abhishek. So we'll come back to you on that off-line, if that is okay, with you, Abhishek.
Yes, that's fine.
We're sure the volume has grown, without any doubt. I'm not trying to -- I'm not able to specifically put a number to that, Abhishek.
Yes. I know it's an offbeat question. But just in terms of -- so where I was leading to is in terms of capacity. New capacity had come up in the last few years. So are we already reaching capacity utilization on that? Are you looking at more capacity addition in order to grow revenues from here?
In the finished dosages, we have already created that Unit X, which would cater to our additional need of U.S. market. And if any capacity expansion happen, would be more incremental within Unit X and we don't see at this juncture the need for creating one more finished dosage. Mr. Reddy would be able to confirm that. So is that correct?
Yes. And definitely, an extra 2 years up to 2020 December, we have enough capacity '20 or '21, and except some small miscellaneous CapEx. Otherwise, in formulation side, we are not expecting -- in the oral products, there is no additional capacity.
But having said that, some more CapEx can come under API, Abhishek, but that will not be like [ metatronics ]. So that is something which we -- we'll go through that. So we are also conscious about, like, I mean, restricting our CapEx also to the extent of our cash flow. So we are conscious about that, Abhishek.
Sure, Govind. The other one is on the M&A priorities. I mean, given the fact that we are looking to do some of the segments on our own; and in some of these segments we have like Natrol, which we are required. So in terms of our M&A priorities. I mean, what remains? Does opioid -- and given the fact that there has been so much pressure in that market around opioids. I mean, what's the thought process around that?
No, we outlooked something but we have decided not to go ahead with the opportunity, Abhishek. Let me close that topic.
Right. And your interest in opioids remains. Is that...
No, I would put it this way, like, Abhishek, see as far as -- I will say, I mean, our M&A strategy is extremely clear and -- I mean, we look at like market expansion, both in terms of geographic expansion and business expansion and any new technologies or platforms is what we have spelled out, and that's the basis on which I think our investments had happened in terms of any M&As. And so far, I think has been working in our favor in terms of what we have done so far. So is opioid -- in the opioid, from that aspect was -- it was looked at but then we decided not to move ahead, Abhishek.
The next question is from the line of Ranvir Singh from Systematix Shares & Stocks.
So my question relates to ARV business. There, we've got tentative approval for that combination drug type TDL (sic) [ TLD ]. So I just wanted to understand when our next tender is likely to open up and whether we'll be able to supply?
We have already received orders, as I have mentioned earlier also, [indiscernible] we have orders like for the combinations, and we are supplying. And this quarter we have some more meaningful supply compared to the last quarter is what I have spelled out. As far as the new tenders are concerned, in terms of the further orders, in fact, I forgot and I need to spell it out, we need to wait for -- small, small orders would come from larger orders, like we need to wait for -- there would be a gap of 3 to 4 months because there are some concerns raised in terms of one of the studies and that is getting addressed. That is why I'm talking about a 3-, 4-month gap might happen, which the sponsors and the technical team are certainly addressing it. After that, again, we will be able to bring back that particular product as we had anticipated in the earlier, Ranvir.
So what I understood was that related to DTG, Dolutegravir, and is that the same product we are talking about, the combination TDL (sic) [ TLD ], that tenofovir, dolutegravir and lamivudine?
That's right, tenofovir, lamivudine and dolutegravir. That's right. And I think as far as South Africa is concerned, Sanjeev, is it fair to say it might be end of the year or beginning of next year that particular tender might open, Sanjeev?
Yes, that's right. It will be opened in quarter 3 and awarded in January.
Okay. And as far as market size is concerned, I think we have already discussed. But if I talk about the tender size itself, is this possible to give some ballpark number what would be the tender size for Africa?
[indiscernible] billion, maybe...
Actually... no, this is yet to be finalized by the government. They are discussing amongst themselves because there is a conversion of existing product, TEE -- or TLE to this DTG. So they are yet to make this decision. They will be making an announcement very soon.
The next question is from the line of C. Srihari from PCS Securities.
My questions mainly pertain to the U.S. market. You mentioned that the base business grew in volume terms, if you could please quantify that and whether there was any segment where you could even see some price increases? And secondly, if you could please outline the marketing arrangement with Citron Pharma.
So as far as the base business is concerned, like I think, we've clearly spelled out in terms of the numbers and NBOs, which is in the range of $90 million to $100 million. And typically, the NBOs would have a slightly better margin than our typical base business, Srihari. And Citron got bought out by...
There is no more Citron, Govind. It was sold to ACETO. There is no Citron, and the ACETO business, as it is, will continue for next 7, 8 years.
No -- so basically, yes, you had the marketing arrangement for duloxetine with ACETO. So are more products added to it or what is the status currently?
No. Same products. Whatever we signed 4, 5 years back, more or less same products only will go with that. We are not doing any additional products.
Okay, okay. And then Govindarajan, I was talking about -- you had mentioned that volume increased for your base business. Can we get some kind of color on that? I mean, was it in low single digits, high single digits?
It should be the low double digits is what I would say like, Srihari.
The next question is from the line of Charulata Gaidhani from Dalal & Broacha.
My question pertains to the inventory write-off. Do you expect more such write-offs in the coming quarters? Or is it -- is this all that is done with?
No. We don't expect in the future like this. Because these are all pertaining to some recalls, we made provisions for recalls and we had taken some charge backs, et cetera. It's a blend of -- both front-end as well as the raw material -- I mean, finished good end. We don't expect this to continue, as Govind explained earlier.
Okay. And my second question pertains to the ARV business. Has -- how has the business grown in the current quarter?
The -- actually, there was a de-growth as far as quarter 1 is concerned, and we are fairly confident that Q2 will be growing better than Q1 sequentially. That's what we are talking about, Charulata.
Okay. Now in the coming quarters, you think you will be able to maintain profitability on ARVs? This is in view of the increasing raw material prices from China?
I understand that. But then, so when you are moving from the -- I mean, conventional formulation to Dolutegravir, generally the margins will be better. I do agree that like there are some pressure in terms of the raw material price increase and we are still like, I think, we would be able to maintain or improve our margins slightly because of the Dolutegravir combination driving the growth. And we are also working towards improving the raw material intermediate cost of the remaining ARVs as well to ensure that we are able to come back stronger in the portfolio to maintain the margin.
The next question is from the line of Prashant Nair from Citigroup.
Can you provide some color or some perspective on how you see this recent acquisition of the Apotex businesses panning out from here, say, over the next couple of years?
Yes. Sanjeev here, I'll just answer that. This particular deal will be consummated sometime in quarter 3 and we will be thereafter delineating the strategies. But this would add clear 3 countries, where we were almost not present in Europe. So as you know, we are operating very well in 8 countries; in Belgium, which is our ninth country, we are very, very thin. But this acquisition will give entry into Poland, Czech Republic and Belgium, apart from strengthening our business in Netherlands and Spain. So I think, the main opportunity will come in terms of getting market share with our new product pipeline into those market where we were not represented or we're very thin. So that will give additional opportunity upside. And at the same time, we had plans to enter this market through organic route, so it will also buffer some of the expenses. And at the same time, it will strengthen our position in certain channels and segments in Netherlands and Spain, and that will give further boost to our operations. We will be obviously, looking at the 50% or thereabout the sales, which is coming from outsourced product for this business and that will give opportunity to bring you to the low-cost manufacturing, the way we have done for Actavis earlier. So I think, all in all, this -- all synergy will pan out in next 2 to 3 years.
As it is, Apotex is around $5 million minus EBITDA. But in next 18 to 24 months, it will normalize into positive.
Ladies gentlemen, we seem to have lost his line. So in the meanwhile, we'll move to our next question, which is from the line of Prakash Agarwal from Axis Capital.
Just a clarification on the gross margin side again. If I add back that INR 90 crores to INR 100 crore impact, we're still at about 57.5%. You mentioned there are a couple of more adjustments, what would be the magnitude of those? And so I'm just trying to understand like from next quarter onwards, we are entering a high base of last year where we had Sevelamer. So would we be able to sustain that 60% kind of gross margins?
Prakash, as we explained, it's a combination of multiple things. So we expect next quarter we will go back to our original margin. Whether we'll go to 60% et cetera, only maybe we'll be able to tell at that time, right? But we certainly expect to be normalized -- I mean, we expect the gross margin to be normalized in the coming quarter.
The question was actually, what would have been a normalized gross margin in the Q1?
I think last quarter -- I mean, last year, we did 58%, if I'm right. Correct, Krishna? So, that is what we expect.
Okay. Understood. And secondly, on -- if I see the base of last year, obviously, injectables was a little aberration because of this remediation that we were doing. Looking at ex of injectable business, would we expect a growth on the U.S. base business, factoring in the NBO that you talked about, $100 million?
See, Prakash, it's a combination of everything actually. We cannot say at this stage how much NBO are additional margin income or we lose some of the product like that we cannot do. But what is a very -- on an overall basis, we will aim to move towards 58% flat. That's what our objective immediately.
Majority, 95% of the NBO was coming from the oral products. Very few from this one. And as Govind told Ertapenem driven and a few more products we may launch and some increases. But we -- that's what [indiscernible] today.
Okay. So even after the high base of last year. We have enough approvals or expected approvals that would lead to overall growth in the U.S. business, is what we anticipate?
I mean, we have categorically said as an institution, we will be growing now, Prakash. I mean, in terms of specifics, maybe we can take it more off-line. But then definitely, we are confident about that.
Okay. And secondly, on ROW business. In the past, we have seen very, very strong growth both Q-on-Q and Y-o-Y. Again, in 2Q last year, we were seeing a high base of INR 2.4 billion. And just trying to understand, so last year what really happened that has led to a very strong growth? And can this growth be sustainable? Or we entered few markets and that's why there was a spike in growth in the last 4, 5 quarters?
Last year, actually, Brazil was responsible for revival of the business. And this year also, if you see, in a quarter, we have a 32% growth. I think it is going to be lumpy because many of the markets we operate through the distributor. And also, we invoice in dollar terms in some of the markets. So depending upon the currency movement in those particular markets, there will be a certain buying and building up of stocks. But if you see on the 6-month basis, we have grown by 20% in Growth Markets and we think we will be able to maintain this kind of pace.
Okay. Okay, great. And lastly on Europe, what would be on our current margins, the improvement that we've been doing?
Yes. We're firmly into double digits in terms of the EBITDA for European business and actually, it is grown faster than the top line.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
Question on NBO opportunities. I just want to understand very broadly that -- what is the reason that we've been so successful? I mean, if you were to choose 2 factors, let's say, we have good capacity available. Second is that the main reason our cost significantly lower versus the Indian peers? Out of the two, which you will put that you've been so successful, which is the key reason out of the 2?
I don't believe the cost is the key. Almost all Indian manufacturers have came, because of the breadth of the ANDA portfolio, maybe that is one of the reasons.
But sir this -- let's say this -- apologies, looking more at a molecular level. So how the breadth of the portfolio will help you?
Because of -- that we have the more ANDAs so definitely have some NBOs in that category we got are better than others.
So when you say that you've got $90 million, $100 million opportunity with you. And let's say what the other $100 million or $200 million opportunity that you have not got. Is that just because you don't have ANDAs over there?
[indiscernible] and the ANDAs may not be there and we are not competitive in those products.
Anubhav, one thing you ought to remember is like I think every company would be competitive in certain set of products.
Yes. We are strong in some raw materials in some areas. Are so like that, I cannot get all the NBOs to be one. Everybody will get some part in that.
Sure. That's helpful. And just in terms of, let's say, these NBOs panning out for us, quarter 1 has seen some benefit. Would you say by quarter 2, we would see majority of this benefit there in our U.S. sales?
It would get spread over a period of next 4 quarters, is what I would say. And Mr. Reddy was saying something. Go ahead, sir.
The majority starting from this quarter.
When you say this quarter, this is the second quarter you're saying?
Yes. July to September onwards, the majority of it will come in.
So this quarter, if we -- if the shelf stock adjustment that we talked about, if I adjust back in the sales, $282 million what we have done. And by adjusting, just taking a number, maybe the real sales were about $290 million plus. So last quarter, we did about $270 million. So we are already seeing $20 million extra sales which you mentioned is from volume growth. So you're not seeing that this quarter, the June quarter that we've seen benefit from an NBO. Then where did this such a sharp growth of $20 million sequentially came from?
Some penicillin sales starting from this quarter. And in -- last quarter, we announced some areas and some other products starting in July to September onwards will be starting. And from there, it is 12 months.
But sir, at the same time, can you explain the other question which I asked that, in the June quarter, we have seen a quarterly increase of $20 million in the U.S. Where in the oral product that a large part of growth has come from...?
Not necessarily oral alone, Anubhav. Like, I think we are talking about the entire basket. So Natrol has given additional numbers, oral has given additional numbers. Apart from oral, others have increased; so it's not purely all of them are from oral, Anubhav.
But majority though in this from oral, right? Natrol has grown by $2 million...
[indiscernible] Like I think Natrol was -- a comparison, like I mean, how much has it gone up?
It is around $5 million gone up. Direct sales has gone up.
Direct sales have gone up. Auro Health also has gone up like I think. So it's a combination of several, not purely like I think oral, Anubhav.
Okay. That's helpful. And just last question on valsartan. Is pricing still the same as what you were selling earlier before the Chinese player exited?
There is definitely some increase in prices in this coming -- in July quarter onwards, but not too much and not directly towards increase.
And Anubhav, remember these are short-term opportunity, okay? So this is not something which is perpetual.
Yes, I appreciate. But we have also seen some price increase for us.
Yes.
The next question is from the line of Shrikant Akolkar from IIFL Securities.
I just want to get more information, that you had done 3 to 4 product recalls during this calendar year. So is it that, that was delaying your EIR?
So I would -- the EIR had a [indiscernible] divisions which we had to close on. But I think that did not necessarily delayed EIR in our opinion. But this is purely in our opinion.
Okay. secondly is about the Ertapenem product. Now how do you see the ramp-up in market share going ahead?
They were launched very recently, my friend. Like actually, we have launched only like maybe a couple -- a few weeks back. I think it's premature to talk about the market formation. We are fairly confident about getting a good market share. That's where I leave it now.
The next question is from the line of Surajit Pal from Prabhudas Lilladher.
Govind, how many -- do you file any filing under CGT?
Is that the shortage product you talking about?
Yes. Yes, the Competitive Generic Therapy window.
So I think we had... go ahead, sir.
Yes. Yes, I mean, if we have filed, how many are filed and how many we can exclude? I mean that is under faster window?
Yes, as I said, I think I need to check it out in terms of exactly whether we have filed under CGT or not. But we have certain products which got reviewed because of shortages. That much, I'm aware of it, Surajit. On the specific whether we have filed against CGT, can I get back to you on that Surajit, is that okay?
Sure. Sure. In European acquisition, there is 1 country, Poland, where you got quite a good number of reps and I think one product is quite enormous in terms of size. And if I go by your number of people addition, which is also quite high because you will be dealing with a lot of branded business. So going forward, how many -- I mean, do you think this number is optimal or you are going to reduce it? And then how to turn around your EBITDA level? And how will you focus the brand? Because I think brand is the area which is fairly new for your company.
Yes, you're right, Surajit, that actually we have now significant addition of people. But we will obviously finalize our strategy after the day 1 of the deal. I don't foresee any changes -- major changes in Poland because that is where we had practically no operations. And most of the people are in sales and marketing, and actually they are in branded marketing. So I don't think there are 246 reps and marketing people that we are going to touch. And in fact, we would like to build on our product pipeline and product launches. So that will come very handy. Of course, we will be operationalizing our strategy a little later. When it comes to the branded marketing, let me also tell you that actually it is not identical to what we see in India. However, we do have brand marketing expertise and competencies. I think still, the power is there with the doctors but it is shifting to the pharmacies. And most of the European market, particularly the Western Europe also have a lot of pharmacy power to substitute the brands and actually that will be our strength area hereto. And are going to continue with the APO brand in Poland, so that will stabilize the business.
Okay. Okay. In Ertapenem, Govind, ACS Dobfar got approval before you. So is there any other generic along with you in Ertapenem currently?
AstraZeneca launched, Surajit.
They have not yet launched.
Already launched.
They have launched, okay. And as far as ARV is concerned, given the current run rate you have been doing in the last 2 quarters, is it fair to assume that without DTG, your run rate will be more or less are around INR 600 crores yearly?
No, I would -- I'm sure that I would put it this way, Surajit, like I think our run rate like would start improving from -- the current quarter definitely would be better because we already have orders and next quarter, partially we have orders in November. We have to wait subsequently for the clearance of the DTG. But as clearly spelled out earlier, like we are also working hard towards finding out how to make the rest of the portfolio also competitive rather than losing that also. So our run rate can start improving like from now on, except for a gap of quarters still that DTG resolution is happening. Otherwise, definitely, like I think the current rate -- run rate should start improving from now on.
And you have started production of your Vanco and Panto in lyophilized segment?
Panto, yes. But Vanco, no like because Vanco we're waiting for approval.
Ladies gentlemen, that was the last question for today. I'll now hand the conference over to Mr. Krishna Kiran for closing comments.
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 in our website, www.aurobindo.com in due course. Thank you.
Thank you. On behalf of our Aurobindo Pharma Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.