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Aurobindo Pharma Ltd
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Good morning, ladies and gentlemen. Welcome to the Aurobindo Pharma Limited Q2 FY '21 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, Aurobindo Pharma Limited. Thank you and over to you, sir.
Thank you. Good morning and a warm welcome to our second quarter FY '21 earnings call. I am Krishna Kiran from the Aurobindo Pharma Investor Relations. We hope you have received Q2 financials and the press release that were sent out yesterday. These are also available on our website.With me, we have our senior management team represented by Mr. P.V. Ram Prasad Reddy, Executive Chairman, Aurobindo Pharma USA; Mr. N. Govindarajan, Managing Director; Mr. Sanjeev Dani, COO and Head, Formulation; Mr. Santhanam Subramanian, CFO; and Mr. Swami Iyer, CFO, Aurobindo Pharma USA.We will begin the call with summary highlights from the management followed by an interactive Q&A session. Please note that some of the matters we will discuss today are forward-looking, including and without limitations, statements relating to the implementation of strategic actions and other affirmations on our future business, business development and commercial performance. While these forward-looking statements exemplify our judgment and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors may cause actual development and the results to differ materially from our expectations. Aurobindo Pharma undertakes no obligation to publicly revise any forward-looking statement to reflect future events or circumstances.And with that, I will hand over the call to Mr. Santhanam Subramanian for the highlights. Over to you, sir.
Yes. Thank you, Krishna. Good morning, everyone. We hope all of you and your families are safe and healthy. We will now discuss the results for the second quarter of the financial year 2021 declared by the company.For the quarter, the company clocked a revenue of INR 6,483 crores, an increase of 16% over last year. The EBITDA before ForEx and other income increased by 23% year-on-year to INR 1,433 crores. Net profit increased by 26% year-on-year to INR 806 crores.In terms of the business breakdown, formulation business in Q2 FY '21 witnessed a growth of 18% year-on-year to INR 5,654 crores and contributed 87% of the total revenue. The API business witnessed a growth of 3% year-on-year and clocked a revenue of INR 829 crores.In the formulation business, U.S. business posted a growth of 12% year-on-year to INR 3,190 crores in Q2 FY '21. On a constant currency basis, the U.S. business increased by 7% year-on-year to around $413 million. During the quarter under review, we had filed 24 ANDAs, including 10 injectable ANDAs. Revenue of Aurobindo Pharma USA, the company marketing oral products in USA, have increased by 8% for the quarter.Revenue of AuroMedics, the injectable business, decreased by 15% year-on-year to $64 million for the quarter. However, the injectable business witnessed a healthy growth of 25% sequentially. We have filed a total 144 injectable ANDA as of 30th September, out of which 78 have received final approval and the balance 66 are under review.European formulation revenue clocked at INR 1,515 crores in Q2 FY 2021, an increase of 8% over last year. In euro terms, the revenues decreased by 3% year-on-year. However, euro business has record on sequentially in Q2 FY '21 by recording a healthy growth of 15% in rupee term and 10% in euro term over the previous year, which was earlier impacted due to stocking up at the beginning of the pandemic.Gross market revenue increased by 40% year-on-year to INR 446 crore in Q2 FY 2021. On a constant currency basis, the gross market reported an increase of 33% year-on-year. Gross markets have recorded a record and sequentially grown by 54% in rupee term and 57% in constant currency terms after Q1 FY '21 was impacted earlier due to stocking up at the beginning of the pandemic.ARV formulation revenues were at INR 503 crore, increased by 111% over previous year. On a constant currency basis, ARV revenue witnessed an increase of 100% over the previous year. The increased conversion from TLE to TLD across geographies has led to this growth.R&D expenditure is at INR 408 crore during the quarter, which is 6.3% of the total revenue. Net organic CapEx for the quarter is around $37 million. The closing rupee versus U.S. dollar rate was INR 73.770 in September '20 versus INR 75.505 in June '20. The net debt has marginally gone up to $194 million at the end of September '20.The majority of the company's debt is denominated in foreign currency. The cash and short-term investments is at $483 million. The average finance cost is at 1.3%, mainly due to availing multiple currency loans.This is all from our end and we are happy to take your questions now. Thank you.
[Operator Instructions] The first question is from the line of Neha Manpuria from JPMorgan.
Sir, my first question is on the gross margin in this quarter. We've seen a pretty sharp improvement quarter-on-quarter and year-on-year. Is this sustainable? What drove this improvement? Or should we look at gross margins similar to what you've been guiding in the past?
Subbu?
Sir, I'm sorry, communication [ remote ]. Sir, the increase in gross margin due to change in the geography mix as well as the business mix within U.S. Also individual businesses have contributed better margin due to favorable portfolio mix, especially the injectables in U.S. We had NBOs, which have contributed to good margins also.Also, the betalactams had low gross margins as non-betalactams have degrown this quarter and they contributed a favorable mix. If you recollect, we have said in the past call -- in the past earnings call, we will target mark less than 58% to 59% GM and it is our endeavor to keep on improving the above.
Understood, sir. So for the full year, we should still look it at -- it in the 58% to 59% range?
If you recall, Neha, we said now the currency rate at this rate, we will be doing better than what we have said. And if there is a change in the currency rate, et cetera, for whatever appreciation of rupee or et cetera, it will be best at this stage we don't see a problem in terms of maintaining that and moving on above 59%.
Understood. My second question is on the Natrol divestment. If you could give us some color on the thought behind this divestment? And second, how do you plan to use the cash or capital allocation priorities for the use of this cash?
Yes. Sure, Neha. Natrol is a very good business to own and we actually really enjoy having this company in our portfolio. However, the business has reached a critical mass. And for the next level of growth, it needs a lot of focus and investment in terms of brand marketing, in terms of [indiscernible], in terms of positioning the brand, et cetera, et cetera. So actually, it would be appropriate for the business to be in the right hands for further level of growth and to [indiscernible] diverse the business. On the other hand, you would also appreciate that we have made a good return on our investment.On the capital allocation, so we have been mentioning this in the past as well that we will not be looking at any large ticket acquisitions for the next couple of years. Our current year asset should be around $180 million to $200 million. We are also setting up an injectable facility for Europe and emerging markets in Vizag, also setting up a capacity for inhalers and dermatology in the U.S. We're planning to expand our API capacity because this is an opportunity for us to grow the external sales. As of now, we have secured ourselves in terms of the capacity requirement for the internal supplies.Our spending on specialty product portfolio will also be increasing as we move higher. Apart from this, we also need to invest in [ reality ] in case if we move forward.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
The first question is on R&D. We have actually seen a sequential jump to about INR 408 crores. Now that's about 6% of sales. So this is something that was flat, but just want to know what is the constituents of this particular R&D jump, what projects are you -- is this being used for, the incremental part?
Yes. The current quarter, the incremental cost is more towards the biosimilar strength. In fact, most of the clinical trials got concentrated in this quarter because of slight delay because of the pandemic. And for the full year -- so even though you're right in terms of the current quarter, it is around 6.3% of the revenue, which is around INR 408 crores. And for the full year, we expect it to be in the range of 5.5% to 6% is what we are aiming at.
Yes. So Govind, these biosimilars you talked about, if you can help us understand split of that into generic versus, say, nongeneric, if I can use that term, right, either biosimilars or complex, if you want to kind of give some quantitative or qualitative sense. And the 5% to 5.5% is what you're saying for the full year, right?
Yes, 5.5% to 6% is what I'm talking about for the full year. From a generic perspective, the current quarter, we have spent -- 47% of our spending on R&D has gone to generic and 53% has gone to specialty. Is -- does it answer your queries, Shyam?
Yes, yes. So should we look at a similar mix in terms of -- because if the biosimilars -- how many projects are we doing, Govind, on biosimilar?
Yes, I think Mr. Reddy will throw some more light on biosimilar, Shyam, so we'll get better idea.
Phase I now, we are completing the clinicals, Shyam. Now what -- we already started clinical from last quarter at minimum amount around 3 million, 4 million. This quarter we spent on the chemical around 17 million. And we have 5 products we are focusing. Out of the 5 products, we are going to file 2 products in Europe in the end of the next year and one product in U.S.Maybe the second -- no, 3 products in Europe, one product in U.S. Maybe that is -- another product also may file in U.S., but 3 plus 2. But otherwise, as on today, it is 3 in the 2021, 3 products in Europe we have, 2 products in U.S. we file. Other than that, we have 2 more products we are doing the clinicals. In total, 5 products we are doing clinical. This clinical will end up to 2022 to '23, middle of 2022 to '23. This is the Phase I.Other than this, we have Phase II, will start from 2022, '23, middle of '22, '23, another 8 products in the beginning stage at the time that we'll start. So more or less, this clinical expenditure will continue to be there at least 2 to 3 years minimum.
Got it. So just following up on this one. In terms of secondary biosimilars, if I could use the term, is there any lesser requirement in terms of can I just do a Phase I extended and not do Phase II or Phase III, let's assume? I'm just throwing it in there, but have you seen anything from the regulatory perspective which makes you believe...
We are closely monitoring U.K. and have an association in U.K., Canada and something 3, 4 countries and some -- in some cases going on in the U.S. also. So we are closely observing. And maybe, whatever you are telling may be possible if they extended Phase I something like that. But let us see for what will happen in the coming quarters.
I think, Shyam, Mr. Reddy, when he said the first 2 products, 1 towards the end of this year and 1 towards the beginning of next year is also like extended Phase I only, Shyam.
Okay. Got it. Helpful, Govind. My second question is just in growth markets, 30% constant currency growth. Govind and team, what are these key geographies, right? It's not become large enough. So if you can just give us some color there. And what's the path forward?
Yes, the main growth markets are Canada, Brazil, Mexico, Colombia. And this side of the world is South Africa and certain Eastern African and some South Asian countries. And going forward, I think we are focusing only on select growth markets. We are improving and increasing the filings there, and we are keeping on radar 1 or 2 large emerging market, depending upon opportunity which comes along for inorganic growth.
Our next question is from the line of Girish Bakhru from Bank of America.
Great set of numbers. First question was on injectables, good recovery in the quarter. Can you give us a broad guidance how overall injectables essentially moves from here? And if possible, if you can also share from the overall share this quarter was something about 19.6%. Where do we see this share going in, let's say, 3 years?
Sure. Girish, our generic injectable business has seen a significant improvement in the last 5 years. The current annual run rate of our generic injectable business in the USA and other market cumulatively is around $380 million, and this is expected to reach around $650 million to $700 million over the next 3 years. This will be predominantly driven by our new plants in the USA, new plant at Vizag for Europe and emerging markets as well as our expansion in Unit IV apart from the ramp-up in Eugia.
And Govind, within this $650 million, $700 million, is it possible to share more split U.S. versus gross markets?
I think still the facility for the emerging markets and Europe kicks in like it would be driven more of U.S. And once that facility kicks in, I think the split would be -- like, I think the growth would more start from once the approval approves, relatively from more of Europe and emerging markets to catch up with the U.S. injectable business, Girish.
Fairly moving [indiscernible] investment in Europe and emerging markets we had already started during the oncology and we are also doing from our existing U.S. plants some 10%, 20% we are doing for Europe as well as a lot of antibiotics injectables we have.
Sorry to interrupt, sir, we're not able to hear you clearly.[Technical Difficulty]
Yes. So yes, we are doing and now at present we are dedicated solely in Vizag. The new plant will be completed in almost 12 months. And the list for Europe, only Europe and dedicated to emerging markets. With all these things, which growth we are expecting, and our U.S. plant is already ready and we'll be -- this year, moving in January, February time. That is also a reasonably deep plant with the power line.So with this, we are totally in our portfolio 6 injectable plans, including oncology symptoms. Oncology is really beginning. So in our area [indiscernible] in our injectable, as Govind told, share value reaching [indiscernible].
This is very helpful. And just related in the growth markets, I know they come in a bit later after U.S., Europe. Is the competitive landscape very different when you look at markets like Canada, Brazil, Colombia, Mexico and South Africa? And injectables, per se, I mean, as a strategy, if you could throw more color on, like, is it relatively less crowded? That will be helpful.
Govind?
Yes. So obviously, injectable is subjectively, relatively getting less crowded compared to the other portfolio, which is approved. And also, I wanted to add, we already have injectable marketing team with us in Europe.Sanjay, would you like to throw some light on that?
Yes. We are actually #1 in hospital generic market in 2 of the large European market. And there are several other markets where we have an ongoing hospital team, which is marketing in-licensed product or in-source product in oncology as well as general anesthetic and antibiotics. So I think this new plant is going to further support, therefore.
The next question is from the line of Cyndrella Carvalho from Centrum Broking.
Congratulations on great set of numbers. I want to understand a bit on the U.S. market, if you could help us understand how is the scenario post...
Sorry to interrupt. Ms. Carvalho, your voice is breaking.
Is this any better.
No, ma'am. Can you speak a little far away from...
Is this okay?
Please go ahead.
Yes, just want to understand the U.S. market from an injectable and overall perspective post the Q2. How is the recovery and any impact of the next COVID spikes that we are hearing around? And also in Europe, if you could add color.
Swami?
Okay. So let me step in that. As far as the current...
Can you repeat? I didn't understand the question also.
Yes, let me just take this. So as you would have seen that due to reduction in elective surgeries and lower number of footfalls in the hospital, the demand for certain therapeutic segments, particularly, let's say antibiotics, have come down, which has impacted our business in the Q1 FY '21. Currently, we have seen the recovery in the injectable business in Q2. And we have reached our internal budget. So that is the same pace as far as even Acrotech is concerned in terms of from an injectable business again. Does it answer your query, ma'am?
Yes. And sir, on the facility update, if you could make some comment?
Okay. So you are talking about from the regulatory perspective?
Yes, sir.
Okay. So as far as Unit I, IX and XI is concerned, we have completed the committed CAPAs and we are awaiting the further direction from our -- from the regulator as far as U.S. is concerned -- since we have already completed the remedial measures. Post the completion of the remedial measures, our Unit XI was inspected by regulatory authorities from Europe, Japan and Brazil, and we already got the GMP certificate for Europe as well as the Japanese authorities have played -- concluded the inspection, and Brazil also has cleared the inspection. So all the inspection has gone well is what I would say.As far as Unit I is concerned, the facility was inspected by Europe and we received the GMP certificate. That is as far as the I, IX and XI is concerned. As far as Unit VII is concerned, we have completed the committed CAPAs till date and we are awaiting further direction from the regulator. As far as AuroLife is concerned, we already engaged consultants and we'll be submitting our response in the current week. And so we will be -- after we submit the response, we'll be awaiting further direction from the regulator to move forward.
That's helpful, sir. And sir, any additional comments from a European perspective from the profitability side? Have we seen improvement there? And should the entire gross margin improvement that we have seen and already highlighted earlier should continue?
Yes. See, if you recollect, we had this Actavis business acquired about 5 years back. And from loss making, it was turned into the positive EBITDA and positive status. After that, we acquired 1.5 years back, the Apotex, which is also loss-making, and we have initiated a number of other actions such as streamlining sales and marketing operations in the 5 countries of Apotex business that we had acquired. Then we also merged the companies in 3 out of 5 countries that is Spain, Czech and the Poland, and the Belgium and Netherlands will be merging in quarter 3. At the same time, we have filed the products which were sourced from other resources to a lower cost of base of manufacturing and the products have started supply in quarter 1 and 2, and that pace will increase.We have launched new products also from our enlarged platform in these Apotex countries and that is ongoing efforts. So at the same time, some of the high manufacturing base which we had in Leiden in Netherlands, that we have turned into contract manufacturing. So you will see the further gross margin improvement going forward, but it is already -- some of the benefit has already come. And overall, in European business, in quarter 2, we have again touched double-digit percentage EBITDA level.
The next question is from the line of Tushar from Motilal Oswal.
So just on the ARV front, if you could just explain the kind of conversion that has happened from TLE to TLD. Is that more or less stabilized now? Or you see significant conversion even going forward?
Yes. Well, current procurement volume of TLD is almost around 8 million to 9 million [ TADs ]. In fact, we believe that some more transition would happen, which will -- after that, it would take around 14 million to 15 million TADs over the next 1 or 2 years. So this will further drive our growth in terms of the overall market share for us.
And so what would be the current market share if you could share in the TLD space overall?
So we have not explained that differently in market share and also it is difficult because you need to measure across various aspects offered. Like I think currently, we are pretty happy with the market share what we are having. Maybe 20%.
So broadly, considering this TLE conversion and gaining market share, so the run rate in terms of ARV revenues can still be further in the range of 20%, 25%? Or it could -- it will taper out?
Mr. Reddy?
No, no. ARV is more or less stabilized. There may not be little growth there. That's what you asked questions. Govind?
Yes. So we expect to maintain this current momentum is what I would say, sir. So because once that 8 million to 9 million reaches the 14 million to 15 million, again, to that commerciality, we'll be able to grow our business.
The next question is from the line of Surya Patra from PhillipCapital.
Congrats on the good set of numbers. So my first question is on the -- and I will first congratulate for multiplying the value in the Natrol transactions what we have seen. So it is almost like 5, 8 I believe, more or less, [ a 2-part ] investment. So now on the thing, so this practically makes us a kind of net case company. So if you can talk something more on the usage of this fund. And do you still believe there are some gaps in terms of asset or in terms of products, so which we could think about allocating for acquisition or something like that, although you have broadly said that no difficult acquisition in the near future?
So you're right, Surya. Like I think we have categorically said that we are not looking at any large ticket acquisition for at least foreseeability, let's say, a couple of years. And for the current year, CapEx is around 180 million to 200 million. And I would say that we would like to maintain that. Apart from -- which is over and above that, I think we are looking at -- like I think the TLE is natural. That is something which should be an additional investment if at all if we move forward is what I would say, as far as TLE is concerned.Apart from that, from a capital allocation, we are also putting up an injectable facility as Mr. Reddy and Sanjeev both had explained for Europe and emerging markets in Vizag, and we're also setting up a capacity for inhalers and dermatology in U.S. and we are also planning to expand our API capacity to focus on external sales because our current capacity is absolutely I think feeding well for our internal supplies, and we feel that I think it can create capacity problems [indiscernible].Apart from that, our spending on specialty product basket will also increase as we move forward. As you might have seen that this year the R&D expense is also more skewed towards like I think the specialty. So this is the overall capital allocation plan, Surya.
Okay. So that means that there is no bullet debt repayment likely also why because it is anyway the cash generation from the internal [indiscernible] likely to be sufficient to handle the current debt provision, is that right, sir?
Yes. I think I would rather allow Subbu to take this in terms of whether there's a bullet payment. Go ahead, Subbu.
So we are at present having all the things by way of the short-term loans. Which, what I meant by short-term loans less than 1 year or 1 year. So we will able to handle all these things within the internal approval of the existing business.So as we said earlier, the 31,322 the existing business will generate and then [indiscernible]. The Natrol money which has been there, it will be allocated for various initiatives, various strategic plans, which grow in the articulated area.
Okay, sir. And the second question, sir, on the vaccine side. So I think multiple initiatives that you have taken. And particularly for the COVID vaccine, which is the kind of [indiscernible]. So I think dual initiative that you are taking. One is the Auro vaccine U.S. and also simultaneously tie up with the multiple government agencies here in India. So what is the thought process? Why multiple COVID targeted vaccines? And what is your ultimate thought process around it and if you can share something on that? And how -- what are the kind of progress so far we are have achieved on our initiatives on the COVID vaccine front?
Yes. I think I would clarify this. So there are 3 pronged approach we taken. One is in terms of Auro vaccine, one is in terms of the 3-year, 4-year labs, which, in fact, there are 3 different developments and 3 different platforms by 3 institutes. Apart from that, we are also exploring a collaboration with potential partners who will be getting ready with the product as soon as done like our product or even, say, their product. So this is a 3-prong strategy is what I were saying.Our product is slightly delayed. But having said that, I can say the product is progressing well. And our manufacturing facility, we are still targeting to complete it by March, April time line and start the qualification by April, and we can start commercializing it by April, May time. That is the plan.And the reason is very simple and straightforward, that I think the facility what we created, it'd be having a capacity on a multi-dose level, it's around 400 million, 450 million gross doses. And the objective was, we would be able to utilize the facility along with our partner, whoever is getting ready earlier than whatever efforts we are investing on. So that is the reason we went ahead and created the capacity, that's the plan. Does it answer your query?
Yes. Yes, sir. But just some more clarification on it. So like why Auro vaccine -- means, why the development in U.S.? That is one. Are you thinking about global business opportunity there, that is why? Or secondly, sir, we have talked about the partnership or partners. So whether initially it would be like commercial manufacturing for some third party that is what we are thinking about when you say that? Or commercializing can start early April, May like that?
Yes. I will say that the manufacturing facility would be ready by the April, May time line for commercialization as far the manufacturing specialty is concerned. And when we collaborate with partners, it would not be -- it is a multi-pronged approach again there. We should be like even doing the manufacturing, taking the product bulk from them. And over a period, we can even do the bulk and then do the finished doses. And we will also be taking certain markets for distribution as well. That is as far the partnership is concerned.To answer the question on why the development in the U.S., because we acquired a company called Profectus Life Sciences, which, in fact, we re-sustained it as Auro Vaccines and they have the [ VSA ] platform on which the product is getting developed. So that's why we are developing the product in the U.S.Any further story -- I asked because I heard some other aspects as well. Anything I like unanswered, like can you tell me?
No, that's it.
The next question is from the line of Kunal Dhamesha from Emkay Global.
So the first question is now that we are focusing more on injectables in Europe as well as emerging markets, so specifically on Europe, the margins in that business, does it significantly higher than what we are currently making in Europe? Or is it largely in line or how should we think about it going forward?
I think, of course, I mean, Europe margin cannot be compared with U.S., but if you have been tracking the Europe history, actually there used to be compression of margins 5 years back and there used to be higher and higher demand for discount, even some price cut. That we have not seen, pressure, in the last 3 years or so.So actually, we are steadily improving the margins through better gross margin at a manufacturing level as well as in terms of improving our market share and thereby gaining some kind of advantage. Overall compared with margins in Europe is slightly better than the U.S. for injectables.
Okay. Yes. Secondly, on the injectable pricing in U.S., so I think for the last couple of years we are seeing kind of a positive pricing trend in injectable space. But do you believe given a lot of players are now focusing on injectables and with the pipeline that we have 19 [ LOEs ] that we are seeing over the next 4, 5 years, do you believe that positive pricing is sustainable for next 2 to 3 years in injectables in U.S.?
In any country, also the increasing margins may not be sustainable. This is what I strongly believe from the beginning. But in the same way the injectables also may come down a few points, okay. But injectables, because it's having a lot of compliance issues and a lot of other issues, so injectables naturally some points of margin always is slightly more than do. But the bigger margin, I don't believe. Overall also I don't believe better margin will stay only temporary but not permanently.
The next question is from the line of Nithya Balasubramanian from Bernstein Research.
A quick one on the export incentives capping. I was wondering if there is an impact this quarter, if you can help quantify it. And how should we think about it going forward, is there anything you're hearing from the government?
Yes. So the export incentives we have taken only up to the period of August, Nithya. We have not considered the export incentive for the month of September. The government is coming out with a new export policy, incentive policy, which will be hopefully by 1st of January onwards. And at this stage...
[Indiscernible] Subbu.
Pardon?
That is 5% something is coming. That is not at all in India. [indiscernible] Govind also knows about that. It is not much if we calculate.
I'm sorry. That comment wasn't clear. If you could repeat that for me.
Yes. Nithya, that was Subbu was driving at. So yes, we will be having some drop in terms of the numbers because of the export incentive. But we are working hard towards how to still maintain our margins.
So is there any indications in the government that they might come up with some other form of compensating export companies or [indiscernible]?
My opinion is that -- I think -- I don't want to second guess that. I think it is better that we see that and then debate how it is. I think we are mentally prepared that in such scenario there will be some draws, and we have to work hard towards ensuring that we are able to maintain our margin even after the project that we are working towards, Nithya.
Got it. Another quick one on the ARV. So just a bit of help to understand how long do these tenders typically last. We see cycles as to normally have when it comes to revenue numbers.
Yes. So if you take South African tender, you are aware of it, it is for a period of 2 years and other tender...
3 years.
Sorry, 3 years. Thanks for correcting. For 3 years. As far as the other tenders are concerned, it would be cyclic. I think certain tenders could be for a year, certain could be 6 months, certain could be even shorter. We typically, all other businesses other than South Africa, as we put together, we will always have visibility to the extent of 3 to 5 months, I would say, Nithya. From orders also, like it'd be for at least 3 months, and then we will have clarity for even for subsequent 2 months in terms of clear forecast, which will be converted.
The next question is from the line of Prakash Agarwal from Axis Capital.
My first question is, if you could reiterate your R&D guidance for second half and next year, given that there are various initiatives in the biosimilars, depot and other complex injectables?
Yes. This year, we are guiding around 5.5% to 6% for the full year, Prakash, because the first quarter, if you remember, it was around 4.3%, if I can remember it right and the current quarter is around 6.5% -- 6.3%. So overall this current year, we would be getting still around between pipeline 5.5% to 6%. As far as next year is concerned, I think we would like to maintain this, but you also have to appreciate the fact that we need to relook in terms of how the concentration of biosimilar Phase III can happen. If that happens, it can slightly go up by another 1%, 1.5% if it is concentrated.
Okay. And just wanted to understand, like since we are in a few of the products in the second wave and in opthal maybe the first wave, what kind of approx ballpark number we are spending on each of the molecule? I mean the biocons of the world typically spend about $50 million to $70 million, $80 million, which are in the first wave. So I understand we would be half of it or less than that?
I think Mr. Reddy would be...
Everybody is more or less same. More spends high and nobody spends low. Clinically everybody is seeing that I think the international acclaim in the laboratory and R&D costs also are there. More or less, everybody is around 40 million [indiscernible]. Again, we are talking R&D and clinical and other clinical or pilot Phase I. Those things we are talking. We are not talking about the [indiscernible] manufacturing. Those area we are not talking.
Yes. To add to what Mr. Reddy said, Prakash, there are a couple of products, which should be much slower where he had earlier clarified that we'll be doing extended [indiscernible]. Those would be much lower than this number, whatever Mr. Reddy is talking about. This is for the global product.
Those 2 products. All other products, everything in...
Exactly, exactly. Those 2 products, it will not be the same number, yes.
Okay. Understood. Fair enough. And given the pipeline that you have been disclosing in your presentation across complex products, what is our 3-year outlook on the base that we have. So what kind of -- I mean, we've been typically doing mid to high single-digit growth, would that -- I mean, this kind of pipeline would help to sustain that? Or could we see a little step up on the growth platform? 3 to 5 years, sir.
Yes, we know that we are doing a lot of efforts. We're doing vaccines and we're on to biosimilars and injectable capacity increases and all this. We are confident in between 5% to 10% the growth will continue to be there. Maybe except 1 or 2 [ corporations] in there maybe. Otherwise, we are very, very confident of this.
Your voice is very muted. You are saying confident of doing what percentage, sir?
Confident of maintaining this growth, 5% to 10% of growth. I think my phone has some problem. I don't know. I will go over landline.
One more, if I may. On the New Jersey, the recent FDA action, so I'm sure we have taken all the precautionary measures. And so given that the 483 is still not available, what do you think would be time required to address and go back to FDA in terms of time lines, CAPA plans and all? So when do you think that you will be ready for a reinspection?
We'll be -- in fact, submitting our response for the warning letter this week itself. And in fact, as part of this particular response itself, we're getting a good percentage of CAPA that includes. And we'll be further working with them in terms of the way forward. That's what I would say at this juncture, Prakash.
Okay. But any time line, sir, I mean, what we want to say to FDA that we will be ready in a year or 6 months?
No, I think we should be -- for us, in terms of completing the CAPA, they should not take more time. It is more -- I mean, for us, I think the existing facility, CAPA should get addressed in the next 2 to 3 months, I would say. I'm not saying 2 to 4 month. It would not be beyond that is what I would say, Prakash.
The next question is from the line of Rahul Veera from Abakkus.
Just wanted to have some clarity on what kind of investments have you made for this wide vaccine facility? Total investment?
Yes. So when we are talking about total investment, you're talking about both bacterial and viral facility you're talking about?
Yes.
Yes. So it would be in the range of INR 250 crore to INR 300 crore. That will be that both put together it will be around INR 250 crore. Yes, around INR 250 crore to INR 275 crores is what I would say, sir.
This is all nothing -- there is no -- now those things will start this type of clinical. Is it right, Govind?
No, sir, for bacterial facility, we are already moving to Phase III, so that would get [ committed to ] earlier where there won't be much of an investment. Whatever significant investment would happen on virus.
When we talk about all these leading vaccines, which are in the late Phase III trial. So in terms of capability, whether it's RNA or DNA vaccines, we can -- we have the capability to manufacture either? Or we are just a fill and finish kind of a facility?
No, I would answer it this way. From our fill and finish, we have our capacity to either go for liquid filling or life-life product. We have the capability of building that. As far as the drug substance is concerned, I think we need to evaluate because -- suppose, if you take an example, we are evaluating with one -- we are collaborating with one particular group, wherein I think those products can be made anywhere. It doesn't have any restriction in terms of where you need to make it.With the MRNA, like I think we need to understand in terms of how the bulk need to be produced because we have the capability of doing it on a fixed reactor or we can even go for a conventional buyer actor. So we need to understand in terms of reach of this potential partner, what we are looking for. And then we will be matching and letting them know how do we grow there. That's what we have been doing so for Rahul. But we have a capability.
The next question is from the line of Tushar from Motilal Oswal.
Just to recap in terms of the CapEx requirement in terms of this -- separately in terms of injectables for the [indiscernible] facility or the [ EPS ] facility?
Yes, what we have projected is in $180 million to $200 million because you would agree with the fact that all this investment will take approximately, from today if you take, it'll be 24 months. So partially, this will be this year, partially next year and something can go to the subsequent 2 quarters. You can take it as this year and next year it will be around $180 million to $200 million is what we are planning. Apart from those TLE scheme is what we are mentioning.
Got you. And this included the vaccine manufacturing facility CapEx as well?
The vaccine manufacturing facility has been already invested, Tushar. That would be considered most of the investment in this year itself. Because when we -- couple of those like trying to commission the facility, most of the investments will happen in this year itself.
The next question is from the line of Charulata Gaidhani from Dalal & Broacha Stock Broking Pvt. Ltd.
I have 2 questions. One is on the ARV. Do you think the numbers in the ARV business are the new norms? Or do you see them coming down because of COVID?
No, we have not seen that. And currently, we are able to regain that business and we are able to grow is what I would say at this juncture.
So we can take this as the run rate going forward?
As we have mentioned earlier, ma'am, so we typically have some orders for a period of 3 to 4 months, and we even have visibility for the subsequent 2 years, so we can currently take this as a run rate, ma'am.
Okay. And what is the COVID geographies, [ any supply issues ]?
We are adequate [indiscernible], madam.
That's fine. And what about South Africa?
Yes. So additionally, South Africa would there, but majority I say would be still Africa. If -- it includes those African markets only, madam, most of this.
Okay. Right. And currently, how many injectables have you commercialized in U.S.?
Around 60, madam. Around 60.
The next question is from the line of Amit Goela from Rare Enterprises.
I have got 2 questions, more strategic in nature. So one is you have executed brilliantly and the numbers also very good, so congratulations on that. So going forward, now for the first time, we are getting a company listed in the country, which is purely injectables. And our size of injectable business is almost similar to theirs, it's much slightly bigger. So could you throw some more light on the injectable business in the U.S.? Number one.And sir, how do you see our generic business going forward over the next 2, 3 years? Like, what is your strategy? And how -- because so far, you've executed brilliantly. And going forward, how do we see this business? Like what kind of growth numbers and products? Like you're adding a complex pipeline to that, but pure generics, how do you see it going forward? If you could say a few lines on that, sir.
Would you like to answer, sir?
Yes, injectable business, as we told before also, just a few questions sometime before, 10 minutes before. As Govind told, in present $380 million, we are confident of next 2, 3 years to reach around $700 million, because there -- better growth we are expecting. And the pricing side also more or less same or slightly lesser. And otherwise, as far as the orals and other areas, the products and biosimilar and all that, as we said. Overall, the company growth is 5% to 10% we are expecting. You just now told that answer also. This is what you are asking or any other thing I'm missing from you, sir?
No, sir. One is, let's say, injectable is good to know, sir, in terms of -- if you could throw some light on like on the margins, if possible? And then generic like we keep -- like you've had solid volume growth over the last few years. So what is your strategy on that over the next 2, 3 years? Are you going to be doing more on the same? Or are you looking at something different like, sir?
No, we have generic same overall products. We already filed around -- we have yet to get approval 182 products, including tentative approvals, are the file and to be approved are to be launched, 182 products at various stages. And other than that, 290 products in the various stages, the way the exhibit batch are filing.So we have a very good visibility for next 5 to 7 years. So that is what we are telling based of all this background and we have biosimilars and in other areas and specialty and difficult to develop. And we are confident the growth can continue in the near future in 5 to 7 years. Afterwards, we can tell you after some time.
Once again, sir, like that Natrol transaction was brilliantly done, sir. And all the very best, sir.
The next question is from the line of Damayanti Kerai from HSBC.
Sir, my question is on the European business. So from the current portfolio, right now like how many are manufacturers at your own end? And approximately like how many are outsourced or in-licensed? And with regard to that, how many products you are planning to transfer from in-licensed outsourced to own manufacturing, say next 2 to 3 years' time frame?
So actually [indiscernible] in in-licensed, and the largest we market almost 600 products like France and couple of other countries. And we are supplying about close to 200 products from India. But don't go by the number of products, but percentage of sale, I think it is growing, and it is -- we are leveraging the cost difference. And over the next 3 years, I think we have more than 250 products under development, including the UTI and oncology products.
Okay. If we don't look at numbers, approximately in terms of sales percentage, right now, you are having more sales from the outsourced or in-license products, but eventually you are planning to increase share from the products manufactured in-house, right?
That's right. And however, we have to keep in mind some strategic advantage of manufacturing in Europe.
We many not change the existing products, maybe the new additional products where we are going to manufacture in our Portugal plant and our Unit XV oral Vizag plant and China plant. Also, we are going dedicated for Europe as well as for only in China. So 3 plants we are allocating to emerging and Europe plants.
Okay, sir. That's helpful. And just referring to this China update, it's been a while like we heard anything. So what's the progress on the move for Chinese market? Like how should we look at that part of the business?
So I think we are completing our plan. We are going to start the [indiscernible] in the month of February, March and the first batches we are taking in the February. And from there, we are taking every month, we are taking 3 to 4 products is our goal, some for Europe, some for China and some for both.So this is what we are planning. And we are also filing from India as on today, we have filed around 27 products. And -- but fortunately or unfortunately, we are getting approval, but we are going to get approval in next 1 month, at least 2 products. That is the present situation in our Chinese operations.And madam, can I -- have I explained it properly or you want me to tell anything different?
No, sir. What I broadly understand, China, we are progressing though it might take some time before we can see actual sales coming in from these new filings, right? If I understand correct?
Actual sales will come because the production is starting from February in the next 3, 4 -- 3 months. Actual sales, my personal opinion will start in 2022 for the local China sales. But we have seen from China plan for Europe sales we are doing second half of 2021.
Okay. Products manufactured at China plant for the European market, that will start...
Yes, yes, yes.
Okay. Okay, sir.
That starts second half of 2021.
The next question is from the line of Tarang from Old Bridge.
First of all, congratulations on fantastic value creation on the macros side. Like in the price at which we bought it, the price that we sold it and the profit that we made in the last 5 years, I think the value creation has been significant.Just wanted to double check. This question has been asked a couple of times. The CapEx on the Vizag plant plus the CapEx in North America plus EPI CapEx will be over and above the organic CapEx guidance of $180 million to $200 million. Is that correct? Have I got it correctly?
Most of it would be a accommodated within that stage is what I would say. So when I say $180 million to $200 million, sir, all these CapEx would never happen in one single year. So that is the reason that as we progress I think within this number, we will be able to conclude because -- see, any project when you take it over a period of 18 months or 24 months depending on the complexity of the project.
Sure. So then in that sense, Govind sir, if I look at your capital structure today, your balance sheet is probably at its most conservative form it has been in the last decade. And net debt in FY '10 used to be almost INR 2,000 crores when you had a similar net worth. And now 10 years, your net growth has gone up by about 9x and your debt is down to INR 1,500 crores. Further, if I consider these $180 million to $200 million of CapEx, in my calculation, you will still be left with $200 million to $250 million of organic free cash flows, post CapEx and tax. Has that Natrol divestment under extremely benign interest rate environment, would it therefore not be prudent for you to maybe lever up your balance sheet appropriately for a suitable acquisition or in absence of any, seriously consider a buyback?
Yes. My answer is, I had earlier said that as well, sir. What we are not considered in this particular topic of what we talked about, the $180 million to $200 million and also the R&D investment, which may come up from a cash flow perspective, we are also looking at the [ realized ] scheme, which we have not conclude as yet. And as you progress, you need to consider that also and then only, you have to take up a decision in terms of how do we move forward.
Sure. Okay. Is buyback being considered, sir?
Sir, I think it would be considered after you allocate all the needs. And then only, if you have surplus, that will be considered. But please understand the facts as I told you that next 2 years we have clarity in terms of what we need to do, other than the PLA scheme is what I said. Once we make up our mind, we will -- the Board will consider and they will take the appropriate decision is what I would say, sir.
Thank you. Ladies and gentlemen, that is the last question. I now hand the conference over to Mr. Krishna Kiran for his 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 the call will be uploaded on our website, www.aurobindo.com in due course. Thank you.
Thank you. Ladies and gentlemen, on behalf of Aurobindo Pharma Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines. Thank you.s