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Aurobindo Pharma Ltd
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Ladies and gentlemen, good day, and welcome to the Aurobindo Pharma Limited Q2 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Krishna Kiran, Investor Relations. Thank you, and over to you, sir.
Thank you. Good morning, and a warm welcome to our Second Quarter FY '19 Earnings Call. I am Krishna Kiran from Aurobindo Pharma Investor Relations. We hope that you have received the Q2 FY '19 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, CEO and Head, Formulations; Mr. Santhanam Subramanian, CFO. 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 limitation, statements relating to the implementation of strategic actions and other informations 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. We would like to focus the discussion on the quarterly performance, hence, we request participants to restrict their queries to the same. And with that, I will hand over the call to Govindarajan for the highlights. Over to you, sir.
Thank you, Krishna. Good morning, everyone. We are here to discuss the results of the second quarter of financial year '18/'19 declared by the company. Revenue increased by 7% year-on-year at INR 4,751 crores led by healthy growth across all our business verticals, despite a high base due to one-off opportunities in Q2 FY '18. The EBITDA before ForEx and other income stood at INR 1,026 crores. EBITDA margin was at 21.6% for the quarter under review. Net profit stood at INR 611 crores. In terms of the business breakdown, Formulations business contributed to 83% of the total revenues and posted revenue of INR 3,935 crores, registering a 7% growth year-on-year. API business grew by 6% year-on-year to INR 817 crores for the quarter. In the Formulations business, the revenues from the U.S. market increased by 6% year-on-year to INR 2,227 crores. On a constant currency basis, U.S. revenues declined by 3% year-on-year basis to $318 million. The sales, excluding one-off opportunities, witnessed a strong growth led by new product launches and improvement in volumes of existing products. We have received final approval for 13 ANDAs, including 1 injectable during the quarter. We have 5 -- 25 ANDAs, including 8 ANDAs for injectable products, and launched 14 products, including 2 injectables in the quarter under review. Aurobindo USA, the company marketing all our products in the U.S.A. has witnessed a decline of 11% year-on-year on a higher base due to one-off opportunities in Q2 FY '18. AuroMedics, the injectable business, witnessed a growth of 8% year-on-year to USD 40 million. We have filed a total of 104 injectable ANDAs as on 30th September 2018, out of which 59 has received final approval, 1 tentative approval, and the balance, 44, are under review. Aurohealth, our OTC business in the U.S., has continued its strong growth, driven by new product launches. The company as on 30th September 2018, has filed 510 ANDAs on a cumulative basis, out of which 356 has received final approval and 29 having tentative approvals, including 9 ANDAs, which are tentatively approved under PEPFAR, and the balance, 123 ANDAs, are under review. Euro Formulations revenues was INR 1,157 crores in Q2 FY '18/'19, an increase of 4% growth year-on-year. In euro terms, the revenues declined by 4% year-on-year. As on 30th September 2018, we have transferred manufacturing of 97 products from Europe to India. Growth markets witnessed a growth of 26% year-on-year basis to INR 308 crores. In a constant currency basis, growth markets reported a growth of [ 16% ] year-on-year. ARV Formulations revenues increased by 18% year-on-year to INR 244 crores. On a constant currency basis, ARV reported a growth of 8% year-on-year. In terms of segmental classification, U.S. Formulations contributed 46.9% of the overall revenue in Q2 FY '18/'19 versus 47.3% in Q2 FY '17/'18. Share of EU Formulations decreased to 24.3% in Q2 FY '18/'19 versus 25.1% total in Q2 FY '17/'18. Growth market share improved to 6.5% in Q2 FY '18/'19 versus 5.5% in Q2 FY '17/'18. The ARV segment represents 5.1% of the overall revenues in Q2 FY '18/'19 versus 4.7% in Q2 FY '17/'18. API business contributed to 17.2% of the total revenues in FY '18/'19 versus 17.4% in Q2 '17/'18. R&D expenditure is at INR 217 crores during the quarter, which is 4.6% of the revenues. During the quarter, we have filed our first nasal ANDA and the second dermatology ANDA. Net CapEx for the quarter is around USD 41 million. The effective tax rate for the quarter is at 22.3% of PBT. The closing rupee versus U.S. dollar rate was at INR 72.485 in September 2018 and INR 68.47 in June 2018. The net debt has decreased by USD 20 million quarter-on-quarter to USD 551 million against USD 571 million as on 30th June 2018. The majority of the company's debt is denominated in foreign currency. The cash and bank balance is at $245 million. The average finance cost is at 2.56%, mainly due to availing multiple currency loans. ForEx loss for the quarter was at INR 40 crores, which includes realized MTM loss of INR 1 crore on forward contracts and remaining amount due to restatement of loans and as well as intergroup elimination of currency variations. This is all from our end, and we are happy to take your questions now.
[Operator Instructions] We have the first question from the line of Neha Manpuria from JPMorgan.
My first question is on the U.S. So if I look at the first half growth versus our existing -- in the fourth quarter, you've added nearly $50 million, and part of it has been injectables. The remaining, you indicated in your opening comments also because of volume growth and new products. Could you give us a sense of how much it was, the new business opportunity that you have invested in? And is that fully realized? Or you could see more benefit of that going through into the coming quarters?
As far as the new business opportunity is concerned and the date, which some may have, we had mentioned in the last call itself, it would be around $90 million to $100 million over a period of 4 to 5 quarters. Some numbers are coming in the last quarter. But that would come -- I mean, we'll keep servicing the business growth the next 3 to 4 quarters. So hence, I think we are not fully realized. We will keep realizing it over the next 4 quarters as far as NBO is concerned, Neha. Does it answer your query?
Sir, is this -- should we see this opportunity as more transient in terms of this existing 4 or 5 quarters and probably competition taking it away? Is that the way to look at this business, the $90 million to $100 million that we are talking about?
Not necessarily. I think as long as I think we are competitive and we are able to serve that business, that I think until and unless there is some competition, which can take up 3 quarters, that I think it should be a business which can continue. Not completely. It all depends on how the -- it is spanning over toward the next year or so, like when there's 4, 5 quarters ending. So every time I think there would be a new break that took a month in terms of the new business opportunities, and I think I am right, I think all it takes is if all of it continues, that's how it would go on. Like these are contracts for a certain period of time.
Understood. And just to tie this up with our gross margins. Our adjusted gross margins have pretty much been flat quarter-on-quarter despite the higher-margin new business opportunity, despite the improvement in injectable and the ARV ramp-up in DTG. The -- is there any one-offs again in this quarter because I would have assumed the rupee benefit should also have reflected in gross margins?
So there is no one-off, Neha. The one thing's happening across all the business portfolios, the gross margin has improved. But the growth in ARV and API business is significant. That, the business, it is due to the portfolio mix. Otherwise, there is no different reason.
Okay. Okay. And this reflects the full rupee benefit in the quarter too...
Yes, it could -- the full rupee impact, that's both on the sale, raw material, everywhere.
The next question is from the line of [ Ganesh Pater ] from Goldman Sachs.
Sir, on the balance sheet there is a line item, that is development, which has increased by about INR 70 crores or so from the March balance sheet to this balance sheet...
Ganesh, the line is not clear. Can you come closer to the phone, please?
Is it better now, sir?
Perfect, yes. Perfect.
Sir, I was asking that can you provide some details, that on the balance sheet, there is a line item, intangibles and the development, that has increased by about INR 70 crores from the March balance sheet to the September balance sheet. Can you provide some explanation on what is that?
The timing is indeed to be buying some ANDAs and be commercialized, and we'll be classifying as that intangible and business development.
So in the 1H, how many ANDAs have we bought?
4.
And INR 70 crores we paid. Okay. And at the line between -- the underlying asset behind that INR 250 crores of intangibles under development is all ANDAs related to the U.S. market, is that a correct understanding?
It may not be this. There are other markets also. But the development includes all the purchase out -- whatever we have purchased from outside, plus whatever we are doing in our side [indiscernible].
Okay. So on CWIP, can you provide some details in terms of the underlying assets? Like what Formulations blocks are underlying it, and what API blocks are behind that INR 1,200 crores of CWIP?
I probably can get back on that a little later, Ganesh, since it's not here.
The next question is from the line of Girish Bakhru from Bank of America.
Govin, what's the status on the bad line now?
I think -- so we have maintained last time, if you remember, like barring the regulatory asset software, I think we should commercialize it in the last quarter, to develop the portfolio within the day. So just to let you know, right now, I think whatever changes, it has to be made has been already made. And the trials are on, and so I think, to that extent, we are still in line with whatever we had mentioned here, Girish.
And any update on the new lyo line in the new block? Have you started manufacturing from that?
I think we have filed a CB-30 for one of the products, and we are waiting -- it just takes some time for approval, and probably, it will certainly take 2 to 3 months before the approval can accrue.
I mean, does this require reinspection? Why is it just taking time?
We filed it recently, Girish. We're talking about filing it in the mid of October.
Okay. And on the Sandoz deal, if you can share any updates. They have -- you kind of assessed the portfolio more in detail and taken any -- more -- if you can share more details on the pipeline that you might be getting with the product.
At this venture is not for us to comment. In fact, one of the reasons that we're giving you a sort of clarity is we would like to restrict more on the quarterly discussion, Girish, because it has to go through the process of [ under thesis ] and then we have call for it before we start at looking at the revenue. And then you will have time for the understanding. It's not a comment on any product-specific because it can always change, Girish.
The next question is from the line of Prashant Nair from Citigroup.
So 2 questions. Firstly, in Europe, is this -- it's the growth is slower this quarter than we have seen over the last few quarters. Is this more of a quarterly aberration? Or I mean, what is the normalized growth that we should expect from that business?
Yes, in Europe, actually, our guidance has been always 8% to 10%, in view of the market growth rate of 0% to 5%. But thanks to our last 3 quarters, we have been growing at 14%, 15% because of market opportunities. So we went up from $100 million, say, to $140 million. Now we are at around $136 million, $137 million. So I think those market opportunities will come and go. And that has been always our guidance. But on a sustainable basis, I think we should be growing double of the market growth rate.
Yes. And really, July to September is the -- they are obviously the holiday months in Europe. Generally, it is little than...
And just to follow up on that, the -- when you mentioned the market opportunity, it's come up from time to time, but now this is part of our base, I know, was it a -- tell me, with one-off opportunity, this may also go away?
No, they -- sometimes, it is lumpy, in the sense that there are more opportunities. Sometimes, it is less. But always, there are market opportunities.
All right. And my second question is on -- I mean, can you provide some more color on this acquisition you made in Australia, Advent?
So it's basically on -- it would be a [ receiving feeling ], more like, I think, we already have the ANDA as part of our development portfolio. Look, and this is basically a [ DPA ]. And this company has a strong background and has about 30 employees and now a very strong focus on -- enough experiences, most of the innovative components in the past. And I think the development pipeline is good, like -- and it's also on food, help us in terms of more complex products for the future. And we expect to file our first product by around 2021. I think, '21, depending on when it will file, we can expect that to with '22, '23.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
I first, I wanted from the injectables. I missed the number for what the absolute sales was.
50 million, Shyam.
Okay 5-0 million. That's -- so some 36 million last quarter. Do you kind of ramp it up to 50 million? How should we look at this number for the full year, Govin?
If -- we are maintaining the guidance of 30% plus growth, Shyam, compared to last year.
Okay. And the key molecules, this could drive one, and so definitely, cadence seen is ramping up. But what else do you think kind of needs to kind of ramp up? I know the background is coming up next quarter, but what else could drive the growth?
So we have a few more products in the pipeline. I think, an example, we talked about like [indiscernible] like I think. So apart from that, like as I already mentioned, the leader will be still [indiscernible]. And so that's -- the bad -- I'm sorry, the [ bad line ] as well as [indiscernible] and a few more products.
Got it. Okay. That's helpful to know. Just on the U.S. business, x of this NBO opportunity, how are you looking at the market right now in terms of either price erosion, or what discussions you are having with the channel? If you can give us some color, that would be helpful.
So I think the market has stabilized in my opinion. In fact, if I remember correctly, last time, I was on the schedule, commenting sort of that, like compared to the previous year, like, definitely, the market has stabilized. And if you really look at the erosion year-on-year, it was around -- in the range of around, let's say, 5% to 6%. We believe that, like I think, moving forward, the erosion could be in the range of 5-plus. I mean, we have to take a 2% from -- on both [indiscernible], like I think sequentially, that I think got that [indiscernible] erosion. We have some opportunities because [indiscernible]. But overall, this is as we see the market versus this current figure.
Govin, just one point here. So we know that, clearly, the [indiscernible] kind of eased off. But isn't there a second wave of smaller plays for entering, for time to challenge the [indiscernible]? Today, what are you seeing in the market, in this, I...
It's already there, Shyam. So that would keep happening. So the result [indiscernible]. That is already there and that would keep happening. And I think, remember the time that irrespective of the size of the player, I think every product has its threshold on how much it can be a player there. So from that perspective, we are talking about...
Got it. And my last question is on Dolutegravir . Have you started seeing significant numbers in the quarter from DTG?
We had mentioned in the past, if you remember, we had a clear business stability, and that at whatever numbers this quarter has totaled in the quarter last -- second quarter, it's from Dolutegravir, and this formulation only, complete and the combination. Moving forward, we have mentioned earlier also, there can be a gap of almost 3, 4 months because of -- it can result in terms of negating on side effects on the [indiscernible], which is getting addressed. To that extent, I think there can be some gap, even though like our colleagues feel that the gap may not be much and it might be -- the results are even -- will be having their OTC also. Some orders can flow in this. It's what our colleagues are confident about. I think the business is doing well, and we expect it to further grow, Shyam.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
First question is on the inventory levels. So our inventory levels are further increasing in the September quarter also. My question here is that, is this high inventory level, which is incremental increase? Is this to support their higher [ MD ] volumes that you have already won? Or you are preparing to win further volumes? I know it -- I'm just interested in which one is the dominant factor here?
There's a combination. In fact, I won't be able to answer that except, it's a number the fact that we see wonderful demand, there are many factors. Like I think the main factor like I think we have some quantity is one and some quality which to -- and [ Brexit and some inventory levels which I think are items to come. There's a combination of others, a combination of series some more products and inventory which will be more than on price. ] I think it is a combination of the actual as well as the opportunity but I would like to ask [indiscernible] if he would like to clarify more.
Yes, it's -- Anubhav, actually, even though the increases around INR 959 crores in the balance sheet, it is partly due to the cancellation of the stocks lying in various subsidiary companies. Effectively if you [ deal with YouBuy ], your increase is only 95 million, not 132 million as reflected in the balance sheet. It is mainly because of the cancellation. Regarding the preferred, why it has increased, Govind has explained to you already.
Okay, just a related question here. So we have $190 million, $200 million India opportunity. How much more is there to grab right now? Because some of the, let's say, Teva have already stated that they are largely done with the restructuring they wanted to do in their portfolio. How much is up for grab right now in the market?
[ It's undervalued. ] Ready to throw some light on it. So would anyone more than view it, it just keeps coming up because...
Growth is coming clearly. And we don't want to comment because these [ Viral ] products are in Thailand, and that's something we don't know. But the NBO is still coming, but not at the pace, which we got 2 quarters or at a quarter back -- a quarter -- 2 quarters before. Otherwise we are continuing getting and we will -- some with this product.
Yes. The quantum of that depends on [ the fact that before this and growth ] coming up on the growth, yes.
Okay, that's fair. Just a couple of products update. One is, this -- did this quarter see, any significant benefit for [indiscernible] or will that flow in the next quarter?
Full quarter benefit would be more in this quarter. It could sustain to the end of the quarter. So that is the one thing and in certain model synergy. We don't like when others can get approval after clearing their NDA -- I mean the security issues. Like we don't know. Barring that, is nobody -- continues with 3 or 4 quarters benefit and this quarter [indiscernible] [ is that a fad? We also think so ].
Yes. And Govind, last can you update on Toprol XL? When are you expecting that approval?
Which one?
So I think that's one of -- that's one I think the new goal date that has been given as around Jan or so. There's a change due to an update, and some changes, which are made in the DM. That is the reason that old date adjust to the first quarter next year. That is calendar year.
The next question is from the line of Ranjit Kapadia from Centrum Broking.
My question relates to the domestic pharma market, formulation market. We have all the pieces across the world, but the domestic pharma market has been somewhere -- somehow taken a side. So in term -- of the management, what is the thought process of the management for this market? Because we view highly the growth for the Indian market, as well as views a lot of lot of confidence for the domestic companies? So can -- my second question relate to peptides and vaccines, if you came give some update on these 2 businesses.
Yes, so and so, the domestic market is something that is interesting so we are not leaving that and once in a while, we keep looking at earning, and like nothing we do -- and we also appreciate at the end of the day, the size has to be justifying our need in terms of getting the conviction on it and how we will be able to recover the money on the investment we make. So to that extent, I think that probably, the domestic market needs some more time. We need to wait to jump in to get at that profit. And not that we are adverse of it, number one. Number two is as far as the sales are concerned, we've now filed 6[ VMOs ] and we are continuing to file more number of products as we progress. As far as [ Toprol XL ] is concerned, the phase I has been completed, we've submitted the data to [ TPDA ]. We have updated them in terms of whether we need to do the Phase II or any way that it's possible, we do different. [ But we potentially -- like ] in Phase II we need to do, it would start in the next few months.
The next question is from the line of Kunal Dhamesha from SBICAP Securities.
Sir, my question was for the growth business, we've now see growth of around $36 million out of the [ $50 million in H2 to do our debt finance ]. So can you give some detail on how the OTC business or Natrol business contributed to this growth?
I think, so we have talked about our business, we have talked about injectable business, that is clear. As far as what we see, sometimes the business is picking up. I think we still expect that to do well in the remaining 2 quarters and are assuming, I think, we should definitely be in the range of $35 million, $40 million, like, I think, is our estimate at this juncture. As far as Natrol is concerned, I think the first quarter was a bit softer and actually second quarter. I'm not sure what would happen. And we would still aim to grow that double-digit level, like I think a sense of some level as far as Natrol is concerned. Obviously, we're getting for -- working hard towards getting the penetration after this new product introduction of sort of Natrol and OTC is concerned.
Okay. And can you give the numbers of was the revenue for this quarter for OTC and Natrol?
As far as OTC is concerned, 11.5 million was what I remember. I think it's 11.5 million -- [ 9.5 million ]. As far as Natrol is concerned, it's 32.2 million.
And depending on [ that element ], have we seen [ the card ] players has entered the market? Do you see the [ spectrum ]?
No, not yet. But we don't know when it would happen, not yet.
The next question is from the line of Tushar Manudhane from Motilal Oswal Securities.
Sir, just would like to understand the outlook on the ARV business. Is there any impact of sanctions on the tender part?
So we have not seen any -- so the only issue we have encountered we've explained to you earlier. But that sort of bolt-ons which we have funds on. But that is a size of it, in terms of the fragmented environment which in fact, the sponsors, are working towards addressing theirs. Even though, like I think the countries are working towards the releasing certain others, both in terms of plain and the combinations. There can be a gap of 3, 4 months is what we have anticipated earlier. And now pharma settings are back to the same timing we are -- now we are holding in terms of dissolving and moving on. Clearly we believe that the future for this product was good and we clearly see the growth will happen. So that is as far as this product has come -- products are concerned.
And apart from -- so this was like for products [ which had heavy duty was the issue. But apart from duty ], any other any other products?
Further business is early -- the current business or usual business, we are not seeing any much changes in term of the scenario.
As far as the tender, it will not open that. It will open in next month -- this month sometime. Maybe I could only see next year in other products.
But that is so -- so [ the figures, Denka ] is very much on track and...
Yes, yes. It's is very on track.
And apart from the [indiscernible] which can -- the business can potentially can start in the April 2019. That means we are also working towards revising the other '18 level of other products also which will allow us to come back in terms of the other combination also to become competitive pricing versus [ Landoserv ] we are working on, Tushar.
And secondly, just on valsartan, coming back to valsartan, is there a recoding of our prices? Or...
Maybe some extent, but let us see next 1 or 2 quarters.
And further too, so we had actually like whatever prices that we had evaluated in terms of our contracts. And those contracts are still holding. So as we have mentioned, we still believe that it's a short-term opportunity. And as long as somebody doesn't like -- get in, like, aggressively, absent that, I think we are hoping that it will continue for this quarter. How long it will continue is something we cannot judge, Tushar.
And that is spreading to others' items also, I guess. So anything on that? Any others' items, any unique opportunities?
There are some meaningful issue in other circumstances.
There are some opportunities not to the same scale of on certain other ventures, Tushar, as far as we are concerned.
Next question is from the line of Surya Patra with PhillipCapital.
And see on the [indiscernible] just wanted to clarify, whether there is a price rising trend that we are witnessing?
No, I don't think the price rising trend is witnessed. Because remember the fact that, apart from the end return, I think there is an upgrade in this as well. So to the extent of capturing the margin, I just think it's priced -- right priced. It's got to be price increase, in my opinion. Now Mr. Reddy you can also comment.
That's right, Govind.
Okay. Because there's certain data points that we look at because there is a rise sequentially and the prices. So is it fair to really say this swing is really largely coming from [ the covenant ]. Because there is -- obviously, on the market share front, there is a ramp up that is visible? And how sustainable the revenue opportunity in the fourth -- further penetration that we can that have on that opportunity front, can you give?
No as far as the [ government ] is concerned that has no negative an effect to the ] opportunity of continuing to do it. And we feel that as long as some more players other than -- even if one more player comes, like I think, there can be some probably -- they're not really a huge difference. But I think, as long as, I think, the current scenario continues, we would benefit for a period [ attempt unless ] other players enter and sort of the numbers come down. As far as the India [ single ] opportunity is concerned, please remember the fact that I'm sure you would have heard about the number of pending approvals which we have. I think we are also having about -- like I think the [indiscernible] Approval can come in, over and above the [ back lane ] incumbents. So we still believe that we have enough headroom as far as the growth in the injectable business is concerned for a period of at least next couple of years.
And similarly, can you give some outlook about the oral dosages business which is obviously, the large end of the U.S. portfolio? So though, we haven't -- so the moment of filing as well as the launch is [ more innovative and very ] significant since last couple of years or few quarters. So going ahead, what is the kind of growth driver, or what growth, at least, that you'd be looking at? Or what growth figures that you are you currently having apart from the NBO opportunity that we're discussing?
I think as far as the NBO opportunity is concerned, that is under a base business. But please remember the fact that as far as oral is concerned, we still have enough headroom in terms of the product side, which are pending approval. And we keep filing more number of products every year, so clearly like I think we are seeing the growth happening and would continue for foreseeable future is what we are maintaining, sir.
This filing momentum, how sustainable this could be for you? Annually 40 plus, I think what you have been doing, so how sustainable is it at the moment?
Not for eternity, but definitely for the next at least 2 to 3 years.
For U.S. we have products going on average INR 60 crores to INR 70 crores during all type of [ invest ].
Overall, it would be approximately half of this year, you can think that way.
Yes. Overall, that is the same.
Okay, And on the Europe business venture, on the -- so is it possible to share what is the margin profile of the Euro business now? And is there any margin lever that is there for Europe as well as for the entire operation going ahead?
Let me tell you -- we remain in double-digit percentage. So that has not been diluted. Going forward, actually some of the day one launches are there, but they are not, themselves, a big product, but they help the entire portfolio. I think we continue to rationalize some of the low margin products and also bring some of the products to India to improve the overall margin. So that -- these are the levers, which could improve the margins.
Okay, and last question on the raw material impact because of the raw material price impact because of the China factor. Did you find anything -- for your business during the quarter? Because there is a consistent price rise that is visible?
There is an impact surely, significant, I think as far as from an [ APA ] perspective, we have divided this into 2 parts. I think whatever impact has happened, [indiscernible] we were able to pass it on to the customer. Whatever is happening in the general product which are non-developed and [indiscernible] but I think we are still absorbing a certain percentage of the price increase because it will not be immediately be passed on to the customer. And this is a challenge in fact, which is tying more of management's time on a daily basis because one of -- in terms of pricing, so the price increase, typically before the price increase, there is always a shortage of supply or a stoppage of supply, which will be covered in the price inflation. We need to handle that, because if you end up -- not having the product is much more dangerous. So that is the balance which we are striking. So yes, there is an impact to a certain percentage point. But [ Subu ] can clarify later in terms of how much is the percentage increase in terms of -- because of raw material and come back later?
Yes, I will get back to you later.
The next question is from the line of speech Prakash Agarwal from Axis Capital.
I'm just trying to understand the announced acquisition of Advent [indiscernible]. So you mentioned, it's for the DPI, so which markets are we referring here? How can this -- is it in the regular, some clinical trials, which you can take it for U.S. markets? And would it be for other emerging markets as well?
We'll start with the U.S. market, Prakash.
So only for U.S. you have bought it.
To start with, I said. Like later it can go to other countries. One more market is very important, let's say China can be an interesting opportunity, but we'll start with this in the U.S. market.
Okay. And what kind of developments do you see in the business?
I think they are ready for a starting the clinicals.
Okay. And you mentioned you're looking to file that 2021.
Yes, around 2021, we'll take it. Depending on filing, it'll take approximately 18 months -- 24 months for approvals. Let's say to 2021, approval 2020 to 2023.
Maybe 2020 also, isn't it?
I think 2020 or '21, I said, sir.
Understood. And secondly on the injectable approvals, I think, you mentioned, but I mean the kind of pending pipeline we have in the injectables. And we got good approval like [indiscernible]. But the new ones are not coming. Any particular reason, sir? How should we think about the approvals for this year and next year?
Is not that, that it is not coming. Actually, we are expecting approval for another product by January or so. So we lump it in to a specific venture. Definitely, like I think we are expecting the approval to [indiscernible]. There is no specific reason to -- for slowdown. In the past, the slowdown was because of the EIR were not scheduled so, which we had received, like even for the [indiscernible] which got delayed the certain, I mean, approvals -- which have slowed down approvals. Now I think it started coming, even last quarter, we have seen that one approval has come. Now I think last week, in fact, we got an approval and now we had approval happening. So we don't see an issue.
Okay. Because in the past, you have seen 5, 10 approvals. Would that be a run rate that we can expect going forward?
Yes, definitely I think that can happen. We are -- in fact there are some [indiscernible] approvals in January as well.
Understood. And secondly on the R&D side, so you had talked about working on depo injections, biosimilars, [indiscernible]. How should we think about, A, monetization, time lines and for depo injections, oncology, peptides in terms of a couple of years away or more? And on the R&D cost, would this be in the same level 4% to 5%? Or do we see this moving up?
Let me answer first in terms of the time lines. The oncology approval has already started happening [ to 2 quarter, 3 quarter approval. And it's a portion of like -- a combination of approval before we can start monetizing that. It can happen probably by end of this year, towards the end of this year. And as far as, I think, depo injection is concerned, I think we need wait for some more time because these are strategies and financially, it just takes some time. So I think hopefully, like I think it will -- by next year-end, like I think with the mid to end of next year. I think you need to wait for 18 months for approval. And typically in this approach is also relatable to the first idea, remember one important aspect of it, is the first quarter because the first quarter is very crucial which establishes the release of funds. So I think after that, every year you can see when products are being filed. That is as far as depo is concerned. As far as biosimilar, it depends our first filing to happen in 2021, and then like I think it can even get approval in '22 also because there are defined time lines in terms of Europe for approval. And also the U.S. can happen in a period of let's say a year or 18 months as far as that. So coming back to the R&D expenditure, we have maintained in the past that I think it could go up to around 5%. And we had also mentioned that to -- Phase II happen, it can go to even, let's say 8% to 9%, but we also had to be conscious about the fact that the top line is growing and the acquisition number also flowing and it may -- it may not, actually be we [indiscernible] it may be even lower than that, Prakash.
Understood. And lastly, on the Europe side. So in the past you mentioned that with more business, we move the rank up, market share increases. And if you're in the top 5, top 10 you get more market share as per the government. So currently, what is the market share? Or the market rank in overall Europe? And how is this moving? And what is the target for the next 2 years?
So at the moment, we are at estimating that we are about 3% market share and -- around the 10th rank. But there is no hard data available because there is no one source of market report and we are having this [ aftertax ] attribution, which will happen in quarter 4, with that. With that, it will do further entry into the 2 additional markets of Eastern Europe. So I think we'll be making progress on market shares.
One more. Since you said Apotex expected by Q4 what are the expectations in terms of close-out for the Sandoz Inc.?
So we expect somewhere in the first quarter of next financial year is when we are expecting that. But as you would appreciate, the regulatory time lines is something which is so safe to estimate, Prakash.
The next question is the line from Ranvir Singh from Systematix Shares.
Just on debt front, whether -- we see debt going from end of FY '19 and '20?
FY '19, we said we'll be achieving around the $450 million before any inorganic debt coming into the picture. So we continue to maintain the same thing. And 2020 probably will be working for reduction -- further reduction of another $100 million to $150 million, but we'll be talking about this later because there are no acquisition [ or shouldn't be also -- be in place ] Apotex and Sandoz will be in place, so we will give you -- we'll talk about it at a later date.
So what kind of acquisition opportunity you are targeting now? We have been seeing the trend in diverse directions. In Europe we heard some things and identified. So what would be ideally the next target?
Ranvir, first of all, I'd like to clarify, I said earlier acquisition of our strategies, we have talked about those 2 acquisitions flowing in. That would determine in terms of how much debt can further come down. So that has to do with seeing that clarity and we win. As far as future acquisition is concerned, it will be more towards things like product opportunity for our branded division but that will not be at the same scale like what we are doing now.
The next question is from the line of Surajit Pal from Prabhudas Lilladher.
Govind, you got one of the first approval in the [indiscernible] vis-à-vis your peers, quite unexpected at the time. But in Welchol, you have not decreased it. While I think 3 guys from India already bought it then. The place is quite crowded and I think the opportunity is very much lost for all. Any particular reason in terms of quality of filing?
No, I think I would put it to say in fact, other than [indiscernible] which is not unexpected from our end when you put our efforts to make it happen. And the issue here is like [ penalty ] for sales in terms of [ particular heath ]. And what all learning we had allowed ourselves in terms of separating the data for [ mass ] and Welchol. But unfortunately I think they exaggerate the material assets, that's all, and that's okay, I think I agree with you that the opportunity will not be great with more number of players being there. I think that a lot can happen next year, Surajit.
Okay, and allowing it to increase in inventory of which might be your new business opportunity. Is it also possible that some of the big approvals of a good number of key product approvals in Jan which you are basically putting yourself with production of those so something that's the key product which is also -- take a lot of time? Which you might be building inventory, that could be a possibility also?
I want to clarify. Certainly we are also expecting approval in Jan for some good product. We're not getting same scale-up like what will happen in [ Marada ]. There could be good product in the [indiscernible] and there will be some imbalance at the end of the product. I mean that, that as far as inventory to do has clarified that I think it is a culmination of one is a new product launch as well as also the [indiscernible] but over and above all that, [indiscernible]. It's really, this will all be culminated in terms of increase in inventory. But [indiscernible] to ensure that I think that we don't -- someone should at least [indiscernible] Inventory and there are some additional efforts going on in terms of content of inventory there as well.
Also, there is a good progress in your onco hormone filing, which is currently around 14. How many of them will be a very good opportunity in terms of in terms of key -- in terms very limited competition and size for market, say, in FY '20?
So what I would -- like when we are closer to like when the readiness to launch will be more like [indiscernible] because that's a danger even if you come on by the way with somebody if that whole sector become less opportunity. But I could comment on that as we go closer to that.
Sure. My last question on, the commercial impacts as I look over the last slides. You have 5 [indiscernible]. So is it mainly for that you have so is it mainly for Ramco?
So I follow that [indiscernible] we have filed and I said filed some of -- with the -- so we were a couple of months before we can get approval and we can announce the products.
The next question is from the line of [ C. Seari from BPN Securities].
Taking for the China factor, I mean, basically there are 2 things. Firstly, has it grown in terms of the number of products? And secondly, how is your backward integration program panning out? And if you could throw some light on the CGT space, what is the kind of opportunity you see for yourself there?
Yes, the first one I think -- as far as I think the very best one in number of products and the answer is yes. Because I think it started with the [indiscernible] products. Now in fact it is growing. In my opinion, it could be across the board, is my opinion in the area as far as the China factor is concerned. And possible the backward integration, like we are working on 2 aspects of it. Whatever we can find another shows. And also like whatever we don't find ourselves we also work close in manufacturing using our own technology and we are working with certain partners. I mean we are -- more we -- our efforts are going on are far as direction, but we will see more directly over the next 3 to 6 months. By then, we would have tied up with -- start to be areas to make more than 10. We did [indiscernible] there are technologies to stabilize ourselves and secure ourselves. And the second question, I missed it, like in terms of what was the CGT which was the one we actually in?
CGT. Competitive general therapy.
Competitive general therapy. We are working on some. I think right now it's too premature to talk about in terms of the time line.
Any size of the opportunities?
I mean it's still pretty much [ premature ].
Okay. And the China matter, so basically -- you think it's somewhere around that cost? What is the round of -- how much...
See it's a [ typical extra at one level, ] so really explain it in simple terms. Like I think we are interested in creating a huge capacity? I think, we do not come up. And finally, some said the new capacity still will not be utilized for that particular [ $80 million ] barometer which had constructed the capacity. So it's a level which is -- are they -- to an extent it's standard as well, issue our goal, let's say, permission is an issue. Like I think most of the players, as you have mentioned are still maintaining that they would come back their present period. So let me throw an example that, so strictly my opinion like had -- we stock this price and it is not pulled down to a kind of, let's just say, 10%, 15%. So it will not reach anywhere close to the original price. But I think we accept -- there are other products also over a period of time which the period cannot be -- just a reminder that I think it will come back or not it has to be evaluated before we talk in terms of, like, on all the products.
So it's not very crystal clear as far as you know it.
I think the answer that it is it is not clear at all. These products will come never back. So you need to be on your own. But it is better to make strategically have, we are backward integration, so that you have a strategic collection of what you need, rather than purely depending on the external volumes.
So how much of your total raw material is the impacted balance?
Okay currently, as has been the fact with some of our players, the upgrade is very miniscule which is the fact that we are able to maintain the supply except for one product, which in terms of 3 months it was not available. And we had to make and delay that by about 3 months. Except that product, I think most of it were made available. Even though it might be slightly costly. Having said that, I think with -- In fact, I think the impact has to do with the execution in terms of -- so the impact is, as of now, it is in single-digit when I compare quarter-on-quarter but we will evaluate going forward every quarter.
You wouldn't say what is the total of your raw material costs.
Yes.
The next question is from the line of Nimish Mehta, Research Delta Advisors.
One question, I actually don't -- I'm not sure it's been asked. There had been some, recalls in [indiscernible]. And we have seen [indiscernible] for some other companies. So do you see the issue of the toxic impurity impacting you or how are you exposed to that? What are the items?
So it is a combination of many things. The [indiscernible] recall was more because of the [ APA ], which we have supplied to 1 customer which we had to recall, a few batches in terms of the finished [indiscernible]. In the fact those few batches that we had recalled and finished [indiscernible] except for one batch, the others were even within the limit. But as a proactive measure, we were asked to, and then we took a fall on recall. Having said that, we have already resolved and we have filed the [ BZ 30 ] with that. And overall, the next year, whether it's 30 days or 60 days, we should get the approval as far as the [indiscernible] is concerned. And as far as we are concerned, none of the other parcels had this issue, Nimish.
So is it not the same issue of toxic impurity as we have seeing in [indiscernible]? It's something different?
No, it is the same [indiscernible] in the MD -- in the MD&A. That's not the issue. But please understand the fact that as far as [indiscernible] is concerned, our [ routers and business ] would not even allow the impurity to be formed.
Okay. The neurotoxins?
No. The existing process itself.
We were able to continue, right Nimish?
Whereas [indiscernible] is a possibility but sir, we cleaned the process and we already filed the [ CV 30 ] for the regulators. That's what we are waiting for. Again, it's not a negative thing because some minor change in the [indiscernible] it's possible that there's impurity in the process itself.
Just one last question, again I'm sorry if it has been asked and answered. What is the outlook on the impact now that we are not seeing any competition? What is your outlook on the likely competition in the next, let's say 2, 3 quarters?
First of all, there is already a competition because the authorized generics are launched. I'm sure you will have observed that, Nimish, apart from the innovator. Having said that, we don't know when the other one that already got will come back. But as far as we're concerned so for the market is good. And we're not separately giving any numbers for it. So we are giving the total injectables, what we have maintained in terms of the growth compared to the last year growth of 34% growth, which we are commented also. So we have not specifically commented on the numbers on a general basis.
The next question is from the line of Charulata Gaidhani, Dalal & Broacha.
My question pertains to the ARV portfolio. There is growth of around 18%. Which geographies has it come from?
This is a sector region only, madame.
Okay. So entire is tender business?
Yes.
Okay, and was there no effect on lower government spendings in South Africa?
I think South Africa, first of all, we are not relevant because they're not supplying to South Africa at this juncture. As Mr. Reddy had explained earlier, I think the bidding process is opening and probably, like I think the bidding process will get completed in December. And the bids should be awarded by the end of this financial year. And the supplies should stand for April. So for us, South Africa is not relevant, and we'll not able to comment on various our changes, which has happened in South Africa.
Okay, fine. My second question pertains to Sandoz, if you could throw some light on whether you're going to be selecting products and then decide on what portfolio is going to come to you?
We will not be commenting much on Sandoz at all. Because please understand the fact it is going through the regulatory process and until the regulator has -- the regulatory process [indiscernible] is available, we cannot comment on portfolio of product or any aspect of it, madame.
The next question is from the line of [ Hari Melawo from Rankin Capital Markets ].
This is regarding the financing cost. The financing cost had increased to Q-o-Q as well as Y-o-Y basis also. Almost a double from year-over-year basis, why is that? How -- where is your noncurrent and current liabilities? They're both getting reduced over a period.
The finance cost has increased because as we explained, we have most of the borrowings are in multiple foreign currency. The LIBOR rate has been increasing quite comfortably in the last 1, to 1.5 years. [indiscernible] used to be around 1%, now it is around -- minimum LIBOR is around 2.4%. So that's the reason why it is going up. And in terms of the finance numbers, the function of the overall graph, that which we had been sharing it with the industry in the regulatory, I would say look into that.
Sir, are you doing, by the way, any aging of your borrowings whatever you have taken?
No, we don't because we have mostly, we have around 85% natural hedged. What is left out is only around 15%. So we don't lose facility.
No, that, I understood. Another question is that the export-oriented number, we -- they had advantage with the recovery of the rupee. But whereas this foreign exchange losses this is normal compared to y-o-y, y-o-y was immediately earning almost 0, and this -- it was around INR 39 crores, INR 40 crores. How is that happening?
This INR 40 crores, what we have said is mostly around [indiscernible] borrowing yields. When you said the synergies are getting the benefit, yes it will throw into the top line as well as into the EBITDA level. It is going to that. This ForEx loss is not going to be in mark-to-market, the segment of the foreign currency loss.
Next we have a follow-up question from [ Nimish Mehta ] from Goldman Sachs.
Can you just mention the gross ForEx debt that we have, which is subject to mark-to-market each quarter?
It's somewhere around $600 million flat.
So then if it's $600 million, then I would have expected...
We have a graph there, what has said $600 million, which is the subject to around $100 million to $125 million.
So why is that in the entire $600 million to not subject to mark-to-market.
As I said, there is a natural hedge because we are having [ the rupee ] also against the borrowing, what is the -- at rupee around 100 million type?
That is mark-to-market.
That helps answer one other clarification I needed have been below the presented TAC and this other comprehensive income items, which will be declassified subsequently to profit and loss, which is like INR 191 crores this quarter. So what is that related to?
This is the various items like the actual gains and plus also the ForEx return, which has been subject leveraging both types of items.
The last question, other expenses is there any ForEx element?
No ForEx element. We show it separately.
Okay, so then the mark-to-market on the monetary current asset which is seeing the inventory stable is all captured in this ForEx foreign exchange loss, net?
Yes that is net.
Due to time constrains, we'll take that as the last question. I would now like to hand the conference back to management team for closing comments.
Thank you all for joining us on the call. If you have any question unanswered please feel free to keep in touch with Investor Relations. A transcript of this call will be uploaded on our website at. www.aurobindo.com in due course. Thank you.
On behalf of Aurobindo Pharma Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.