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Aurobindo Pharma Ltd
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Ladies and gentlemen, good day, and welcome to the Aurobindo Pharma Limited Q3 FY '18/'19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to 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 Third Quarter FY '19 Earnings Call. I am Krishna Kiran from the Aurobindo Pharma Investor Relations. We hope you have received the Q3 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; Sanjeev Dani, COO 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 to statements relating to the implementation of strategic actions and other affirmations on our future business, business development and commercial performance. While these forward-looking statements exemplify our judgment and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors may cause actual developments and results to differ materially from our expectations. Aurobindo Pharma undertakes no obligation to publicly revise any forward-looking statements to reflect future events or circumstances. And with that, I'll hand over the call to Mr. Govindarajan for the highlights. Over to you, sir.
Thank you, Krishna. Good morning, everyone. We are here to discuss the results for the third quarter of financial year '18/'19 declared by the company. Revenue increased by 22% year-on-year to INR 5,270 crores led by growth across all business segments and markets. The EBITDA before ForEx and Other Income stood at INR 1,086 crores, an increase of 6% over corresponding previous period. EBITDA margin was at 20.6% for the quarter under review. Net profit increased by 20% to INR 712 crores. In terms of the business breakdown, Formulations business contributed to 83% of the total revenues and clocked a revenue of INR 4,348 crores, registering a growth of 22% year-on-year. API business witnessed a growth of 20% year-on-year to INR 922 crores for the quarter. In the Formulations business, the revenues from the U.S. market increased by 27% year-on-year to INR 2,433 crores. On a constant-currency basis, U.S. revenues increased by 15% year-on-year basis to $339 million led by new product launches and improvement in volumes of existing products. We have received final approval for 14 ANDAs, including 6 injectables during the quarter. We have filed 10 ANDAs, including 4 injectables and launched 7 products, including 2 injectables in the quarter under review. Revenue of Aurobindo Pharma USA, the company marketing all oral products in U.S.A., has increased by 18% year-on-year. Revenue of AuroMedics, the injectable business, witnessed a strong growth of 32% year-on-year to $61 million. We have filed a total of 107 injectables ANDAs as on 31st December 2018, out of which 65 have received final approval and the balance 42 are under review. Aurohealth, our OTC business in the U.S., has continued its growth driven by new product launches. The company as on 31st December, 2018, has filed 519 ANDAs on a cumulative basis, out of which 369 have final approval and 28 are having tentative approvals, including 9 ANDAs, which are tentatively approved under PEPFAR and the balance 122 ANDAs are under review. Euro Formulations revenues clocked INR 1,293 crores in Q3 FY '18/'19, an increase of 10% growth year-on-year. In euro terms, the revenues increased by 3% year-on-year. Growth Markets witnessed a growth of 36% year-on-year basis to INR 341 crores. On a constant-currency basis, Growth Markets reported a growth of 23% year-on-year. ARV Formulations revenues increased by 18% year-on-year to INR 281 crores. On a constant-currency basis, ARV reported a growth of 6% year-on-year. In terms of segmental classification, U.S. formulations contributed 46.2% of the overall revenues in Q3 FY '18/'19 versus 44% in Q3 FY '17/'18. Share of EU Formulations decreased to 24.5% in Q3 FY '18/'19 versus 27% in Q3 FY '17/'18. Growth Market's share improved to 6.5% in Q3 FY '18/'19 versus 5.8% in Q3 FY '17/'18. Share of ARV segment decreased to 5.3% in Q3 FY '18/'19 versus 5.5% in Q3 FY '17/'18 and API business contributed 17.5% of the total revenues in Q3 FY '18/'19 versus 17.7% in Q3 FY '17/'18. R&D expenditure is at INR 254 crores during the quarter, which is 4.8% of the revenues. During the quarter, we have filed our second nasal ANDA. During the quarter, we have also completed the acquisition of Advent Pharmaceuticals, Australia. Net organic CapEx for the quarter is around $52 million. The effective tax rate for the quarter is at 22.4% of PBT. The closing rupee versus U.S. dollar rate was INR 69.775 in December 2018 and INR 72.485 in September 2018. The net debt has increased by $7 million quarter-to-quarter to $558 million. The majority of the company's debt is denominated in foreign currency. The cash and bank balance is at $454 million. The average finance cost is at 3.3%, mainly due to availing multiple currency loans. And this is all from our end, and we are happy to take your questions now.
[Operator Instructions]
There is a request that they are not able to join the Q&A. Can you just check the technical team, please?
Oh, sure, we will. [Technical Difficulty] [Operator Instructions] We take the first question from the line of Neha Manpuria from JP Morgan.
Sir, if I look at the gross margins, in the press release, you mentioned a certain onetime provision. If you could provide some color on that and if you could quantify that if possible.
Yes, so the gross profit margin for the quarter was impacted due to certain onetime provisions like failure to supply and charges of certain products, including sartans and certain provisions. So these are all onetime, Neha.
But this was not related to a recall in any way?
This will not be related to recall at this juncture, and this is more towards like more a failure to supply and certain provisions of certain R&D aspects.
Okay, understood. And sir, R&D expense seemed to have increased. Obviously, it is within the guided range. But how should we look at R&D spend on an absolute basis going forward, particularly as we integrate Apotex and Sandoz next year?
As you rightly observed, the top line is also growing. Even though in the past we are talking about higher number, we still believe that I think it should be like below 6% as far as a normalized R&D expenditure is concerned, could be in the range of 5% to 6%. It will be below 6% as long as we don't get a couple of Phase IIIs together happening. If that happens, it can go to the range of, let's say, 6% to 8%. That's also in case if it is phased out in terms of expenses, it still should be around 6% to 7%, Neha.
Okay, this is -- you're talking on a quarterly run rate basis?
Yes. And one of the reasons, obviously, is because of the fact, Neha, that the top line will also accrue because of those acquisitions, as you rightly mentioned. Because of which, this so-called percentage would be -- likely taper.
Okay, understood. And my last question is on the net debt. That has been flat quarter-on-quarter. We had indicated, excluding acquisitions, we will probably close net debt at $450 million or lower. Given we will complete the acquisitions over the next few quarters, how should we look at net debt reduction over the next 12 to 18 months?
Neha, we said in the call in the month of May '18 that the net debt will be reduced by about $100 million. At that time, the sale was around INR 4,000 crores and, today, that business has grown to INR 5,250 crores. And despite not having any -- I mean, without increasing much debt, actually the substantial investments have gone into the inventory and as well as the working capital, receivables and other things without increasing much of the debt. The free cash flow, if you really see for the quarter, it is around $10 million. And [ we'll think of it, ] the $100 million, we'll be able to decrease the debt by about $50 million on the existing business.
In the fourth quarter?
In the fourth quarter. Overall, the year as a whole, we may be able to bring it down by about $50 million because substantial investment has gone into the working capital inventories, receivables, et cetera.
And certain acquisition costs as well, Subbu?
Yes, I said the existing business.
And what about FY '20, sir?
I think in FY '20, we -- exactly, we may not be able to tell you because the Sandoz synergies have to be worked out. But time being, I can put a ballpark number. We'll be trying not less than $200 million for next year and the year after next year, also around $200 million to $250 million. But these are all very, very ballpark numbers at this stage.
Next question is from the line of Ranjit K. from Centrum Broking.
If you can throw some light on pricing pressure in the U.S. market, first thing. And the second thing, what are the plans to enter the domestic formulations market in the nutraceutical business in India?
Yes, as far as the erosion is concerned, even though it has been flat for us, we still believe that, I think, the so-called range of 5 plus or minus 2% is a given we should take as far as moving forward, Ranjit. And as far as the domestic business is concerned, we have indicated evaluating once in a while but, obviously, currently, the priority is in terms of integrating what we had acquired. And that would keep us busy for the next couple of years. So we are not, like I think, looking at any large-scale of any acquisition at those nutraceuticals. We might look at some -- adding some couple of branded products into the portfolio of our probiotics. So as far as dietary supplement in India, like I think, we would definitely be looking at it. But again, it would not happen in the near future. But that is something which is also in our plan for the long term, Ranjit.
And sir, regarding this debt, how confident are you that you will be repaying your $200 million next year?
I think what Subbu said is very clear. So at this juncture, it is more ballpark, Ranjit. I think we have some level of confidence that we will be reducing the debt as we progress because, I think, cumulatively, our numbers would be still better than what we are currently achieving. So that could give us an opportunity and the headroom to continue to reduce our debt on the long-term basis, Ranjit.
We take the next question from the line of Shyam Srinivasan from Goldman Sachs.
Just going back to Neha's question on the gross margins. If you can help us understand the 54.6 kind of margins, is it like large part because of the penalty? If you can give us some quantification or at least direction for us to kind of look through and what could be the gross margins that we -- could be a normalized number for next quarter, I think that will be very helpful. I think that's my question.
We never give specific projection, but I would help you in terms of arriving at something. I think probably the failure to supply would have added approximately around 0.9% to 1% in terms of R&D provisions.
Okay, so that's at the level. So 100 bps is what you're seeing could be...
Yes, approximately under failure to supply. So it could have been slightly better looking at some more provisions in terms of certain R&D provisions. So definitely, you would look at that ballpark and move on, Shyam.
Okay. If I look at the injectables for this quarter, we have done about $61 million, like you said. So this is like the highest level we have seen on a quarterly basis. When just looking back now, you've had this franchise now for now a good 3, 4 years now. Have we achieved some of the goals that we set out from when you started this whole segment? And from a profitability perspective, is it now -- because these are the big goals, right, that once injectables comes, the margin profile will improve. So have you kind of seen those kind of things in your numbers?
No, so I would put it this way. So we obviously don't give any forward-looking statements or projections. Like are we happy with what we are achieving in injectables? The answer is yes. As far as injectables is concerned, it has still got headroom over the next 2 to 3 years to further grow, which we are absolutely confident about. If you remember, at the beginning of the year itself, as far as this year is concerned, we have said like we would reach around 30-plus percent, which we are still maintaining. And that is another reason the $61 million would also impose the confidence that we would be able to achieve that number or whatever we have projected at the beginning of the year. Over the next 2 to 4 years, we are absolutely confident that the growth opportunities are enough in terms of this portfolio which, obviously, would improve the injectables as well as it would propel our margins overall because of the better margins in injectables.
Okay. And the guidance for injectables sales this year is the same or around $200 million?
Yes, around $200 million, $210 million is something which we are maintaining, Shyam. We generally don't give projections. But injectables for this year, since there are those concerns, we have given the clarity, and that is the run rate we are maintaining now.
Got it. And my last question is on any updates on the biosimilars? If you can share that, please.
We are -- so I think next financial year, surely, like I think, we'd have completed and filed our, at least, say, I mean, 2 products. I mean, our best bet is we start with 1. At least, we might even work towards filing the second product as well and the subsequent year, like I think, at least 1 year. Europe is clear, around 210 days plus. I think we should look for approval, if everything is in line in terms of the filing. As far as U.S. is concerned, you should estimate around 12 to 15 or maximum 18 months before which that approval should happen.
We take the next question from the line of [ Sayantan ] from Crédit Suisse.
This is Anubhav here. Govind, so I just want to check on the China market. We've seen Aurobindo filing some products. Just want to check how you're seeing this market. When do you see yourself first commercializing the product in this?
I think we are right now, I think, got the permission for constructing our facility, which would take approximately 12 months. And after that, like I think, the validation and the filing and the approval. So you should wait for another 2-plus years or 2 to 2.5 years by which you will start seeing some commercialization in this market. Apart from that, we've also got another JV for a certain inhalers product, and that would also be in the -- I mean, that can happen even earlier than the timing whatever I'm talking about.
[ Just however we file, that is from India site ] .
Yes, so just a basic question. What difference does it make versus, let's say, filing from India facility or having a facility in China? Is it like...
Definitely, we want to convert this India site to -- I mean, to the Chinese site. And that's maybe after 2 years or so.
There are certain regulatory...
Subject to approvals.
Yes, there are certain regulatory changes which have happened in the Chinese market where in case if you have USFDA approval and if you have filed and, I mean, from the local site, I think, that approval would be faster. And that is one of the reasons we are all doing that.
Okay. And on this gross margin question, when you talk about 100 basis point impact like approximately like INR 50 crores kind of impact in this quarter, can you just put in context like, in first half, what kind of impact would we have from this failure to supply? I'm just trying to understand that. What's a normal run rate? Or -- it's not good to call it run rate, but what's the normal impact versus how this quarter was different?
Our aim is to make it to 0. Even though that is our aim, like I said -- generally, like the INR 50 crores or something, I think, which is -- it's not to that extent we pay a penalty, the failure to supply, that is the reason we are highlighting that. So it should be much lesser than that when we are talking about guarantees which we pay. Is it a fair statement, Mr. Reddy?
Yes. This quarter definitely is very high, and it may not happen in future quarters.
Okay. Third question was on the Europe market. I think my perception was that our sales, last quarter, we made a comment that now sales have more normalized towards EUR 140 million, EUR 145 million. This quarter was pretty good again. Any new business we got -- or can you just guide us what's happening in the European market?
Yes. So actually, there will be opportunities in Europe market. So we have different segments of European business. One is [ to ] pharmacy, which is more of a generics which is stable and growing and we are launching more products. That is pretty stable. Second is tender markets which depends on the opportunities. And the third one is a hospital product which is a combination of both. So actually, this quarter was pretty good even though we would have done better if Valsartan and other products were available full year.
Which segment out of these was [ fairly liquid ] in this quarter?
I think it is more of opportunity sales. But then as I mentioned, that comes all the time. But injectables also have done very well.
Okay, sure. But do you think this is not a new run rate that we should focus on. This is -- I mean, would you say EUR 140 million, EUR 145 million a quarter is a more sustainable revenue?
Yes, certainly. I think, maybe EUR 150 million we can touch.
Next question is from the line of Girish B. from Bank of America.
Just on question on injectables, you said it's quite -- still got room to grow in next 2, 3 years. Besides Unit IV, which other facilities can take injectables?
I think even before Unit IV kicks in, you would remember Unit XII was supplying injectables and, subsequently, even the [ lower shelf ] with Unit XVI as well. So currently, these are the 3 assets which are, I mean, selling products. Apart from that, there would be some minor numbers towards end of next year from U.S. as well.
So U.S. facility is not yet equipped to...
Yes, I said that's towards the end of next year, plus oncology from Eugia.
Okay. And just if you can give some color on capacity in the U.S. facility vis-a-vis the Unit IV and Unit XVI.
No, I think, that would be much smaller. That is more in terms of, like I think, certain small-volume -- I mean, higher value, more of as a mitigation, Girish. You cannot look at that estimated capacity at this juncture, even in the -- I mean, the future. Is that a fair statement, Mr. Reddy?
Yes, it's almost we can take in Unit IV so many other -- like [ mags ] and so many things are there. Otherwise, once it was completed, it will be 40% of the Unit IV capacity in liquids.
Okay. And just going on the recent observation letter, any thoughts there on Unit IV?
Yes, so there are a couple of observations as far as Unit IV is concerned. And none of them were related to data integrity or repeat observations. We have responded to the regulator as to the stipulated time line and we are awaiting their direction. In case if they have any further queries, we'll be working with them in terms of addressing that. And remember one thing, Girish, any inspection, it would conclude only after receipt of EIR.
Right. And just on the depo filings, have you, I mean, progressed well there? Any color on when first depo will be filed?
So as far as the depo is concerned, we'll be filing by next year. So that is what we have committed earlier as well, and we are still on target in terms of filing that.
Okay. And Govind, just last question on Spectrum. I mean, I was actually looking at the data. $105 million reported sales that you actually said in 2018. Is that the IMS number or is the company reported number?
I think I'm not -- I mean, how does it correlate to IMS, Krishna, that we are selling? I think the number is -- it's our number, Girish, but I'll also check the IMS number and get back to you.
And what would be the margin broadly in Spectrum currently?
Better than company's margin, Girish.
Next question is from the line of Aditya Khemka from DSP BlackRock Mutual Fund.
Sir, when was this Unit IV inspection conducted? Could you remind me the dates?
It was in December, Aditya.
Okay. And could you throw some more light on the observation. You said it was around data integrity. What exactly was it that the inspector found and what is the issue there?
Aditya, I said that it is not related to any data integrity and no repeat observations, Aditya.
Okay, I got it. Sorry, I misheard you. Secondly, on the Sandoz acquisition, where are we in terms of consolidating the entity and closing the [ Sandoz ] acquisition?
So we are still working with the FTC and we expect that approval to happen by next financial year. And after that, like I think our work in terms of consolidating and synergies [indiscernible].
Great. So would March '19 would still be the period by which you expect the closure or...
I don't think that we can give a specific time line when it is still in the hands of FTC. I think -- I mean, it should happen by next financial year, surely. But I think it could be in like, I mean -- any specific time line is not [ in our hands ]. It is in the hands of the regulators, Aditya.
Fair enough, sir. And sir, could you talk a little bit about the U.S. pricing environment now? What is the kind of price erosion you saw quarter-over-quarter in the base portfolio? And what is the consolidation of your top 5 or 10 products? If you could give that number, that would be very helpful.
Yes, as far as the pricing erosion is concerned, you should consider moving forward, like in the range of 5 plus or minus 2% as is given in terms of the January pricing erosion. As far as we are concerned, the current quarter, it has been very flat, I would say, like I think -- and our top 25 products is contributing to approximately around 40.5% of the overall U.S. sales percentage.
Top 25 is 40%-odd?
Yes.
Okay, that's comforting. And lastly, sir, if you could also let us know about the frequent recalls that we have had on the sartan side. Do you feel that these recalls could lead FDA to sort of look at things in much adverse light when it comes to your plants or practices? Or is it something that the FDA understands about the product itself being sort of [ a circus ]. I mean, how do you look at this issue at all?
My request to you, Aditya, is to spend some more time because there are lots and loads of data available about the sartans and the various companies who had recalled. And there are a couple of interviews from experts, including FDA Commissioner and European authorities. So this is a larger issue rather than trying to restrict to 1 individual company is what I would say, Aditya.
Okay, but you don't feel that the sartan issue could lead the FDA to look at plants from a more skeptical standpoint? You think it's something that they understand about the product and, therefore, would not penalize the company for something in it?
I would rather request you to read those reports, then you'll have a better understanding, Aditya, rather than be commenting on this way.
Next question is from the line of Ranvir Singh from IDBI Capital.
My question relates to your cost of debt. So you say the cost of debt has gone up. Going forward, what kind of scenario we can foresee for cost of debt?
The cost of debt will be in this range only. It cannot -- I mean, it is not expected to go up because based on the recent FYMC meeting, we have the sense that the interest costs are not going to go up, and it's likely to be softened. So we believe it will be in the range of around 3%. That's what we believe.
Fine. And we saw a news about this acquisition we have recently released. So can you give us some more detail about it, something on this company?
Yes, so that is -- it's an intermediate manufacturing facility based out of Tirupathi. Our objective is to create a satellite of like strategic suppliers because, I think, obviously, when we have more issue from China in certain supplies, it would make more sense for us to develop certain set of suppliers locally. And when we have a typical supplier/buyer relationship, the commitment from the other end might be, like I think, waiting or weighing. So to ensure that we have our commitment in terms of their supplies towards us. And this is a strategic investment from that perspective, Ranvir.
So what would be the size of -- for the -- is this significant in size?
No, it's not. Subbu, you would like to throw the number? So we have acquired around 19.9% for a consideration of INR 15 crores.
Next question is from the line of Damayanti Kerai from HSBC.
Sir, can you comment on the current situation of this raw material price increase due to disruption from China? Are we seeing -- what kind of situation is there right now?
So there are challenges still as far as raw materials are concerned. I will subdivide that into 2 parts. One is in terms of like in the API, we still have enough exposure to antibiotics. And there were some price increase which had happened. To an extent, [ it has settled as well. And the advantage there is ] because it is more of a commodity and we ensure that we pass it on to the customers, so to that extent that we will not have much of an issue. As far as the non-betalactam is concerned, I think, there has been certain supply disruption which has happened in the past. While it is settling, there are still certain products which we have challenges and which is what we are working towards resolution. At this juncture, it has not hurt us too much to the extent of meaningful impact like -- but we have to be conscious and cautious to ensure that we are securing with more number of suppliers. We are transferring to some site in India or developing our own supply which are all the efforts which we are doing. And that is the reason even the [ Shenogen ] acquisition is also part of that particular strategy.
Okay. So broadly, like we haven't seen much changes on that front, but we are working towards mitigating some of the price increase, right?
There are some minor impact, which has happened, Damayanti, and it has not -- impacting -- impactful to the extent of meaningful impact. So that is the reason we are actually working towards avoiding any such aspects in the future.
Okay, sir. Can you update us on the ARV part of the business, like where we are we in terms of new tender wins and how we look at supply situation for next few years?
As far as the South African tender is concerned, I think, we should receive some announcement before the end of this quarter. And actually, the tender itself would start somewhere in June, July time line is what now we are hearing. Is that right Sanjeev?
Yes, that's right.
Okay. So that's South African part. Any other supplies or...
Yes, the rest of the tenders are going on. And as we have been maintaining that our focus is to more move towards the yearly and, to that extent, yes, the current set of tenders, which we are participating and we are also interested in is more of TLD, and that is what -- in fact, we are winning as well from various countries' tenders. To that extent, the margins would also be relatively better to the past.
Finally, if you can update us on Vancomycin. I think where are we there right now?
Yes, we've got approval and we will start, like I think, in a minor way. But the ramp-up would take at least 2 to 3 quarters, Damayanti. I mean it would take time for establishing that commercial more volume, I would say.
Next question is from the line of Nitin Agarwal from IDBI (sic) [ IDFC ] Securities.
Sir, 2 questions. One is on the Eugia business, how should we look at the ramp-up into the business over the next couple of quarters -- next couple of years?
I think we had spelled out that we had a target of filing around 55 products which are -- 55 to 60 products and which would happen -- over the next 12 to 18 months we'd be able to file. And we are going to commercialize in the next quarter, next -- the first quarter of the next financial year. And we'll continue to ramp up that particular business.
So how many -- I mean in terms of approvals, how do you see it, sir, for the next 2 years? What kind of ramp-up?
So as of 31st December, we have filed around 19 ANDAs. I mean, and including 11 oncology, which is 8 oral and 3 injectables and 8 hormonal products, which is 7 injectables and 1 oral. So as we -- apart from this 19, we also bought 2 more oncology injectables products. So apparently, I think, we should ramp up as we progress once these approvals are through, Nitin.
Okay, sir. And then secondly, on the sartans -- sort of opportunity right now, in terms of how is the market -- I mean, how different is the market versus the last quarter? And how do you see it going forward?
The volumes have come down even though, like I think, they might be maintaining the market share. I think the volumes have definitely come down. In my opinion, it has come down particularly, say, if you take an example of Valsartan, it is almost half of the market is what I would say. Mr. Reddy, I mean would you like to throw some light on that, sir?
Yes, especially Valsartan, Irbesartan is going down, overall market more than 50%. And now, it is shifting to losartan and other sartans. And it -- maybe, it may continue to go down, that's what our expectation. It's not our market share, it's the overall share.
And so the switch that is happening, I mean, how are we supposed to leverage on it? I mean, is it going to -- is it an opportunity for us or how should we look at that?
We are positioned to take advantage on how the market is shaping up. Having said that, obviously like I think, current scenario is this, Nitin. As we progress, we'll have more clarity in terms of how well it's shaping up. But we are positioned to -- in fact, in all these products to the extent like I think having -- and if you take an example of losartan, like I think, we also have sources to supply losartan as well. But I think we would like to observe in terms of how the market is shaping up.
And sir, lastly, on this injectable business, the rollout in Europe. I mean, have we got into a position where we've got capacities now to start servicing Europe and other markets in any meaningful way?
We are already supplying Meropenem and piperacillin tazobactam very much in Europe, and they are doing very well. We are also supplying 3, 4 other products from Unit IV, but not to the fullest extent that the demand could be there. And we are prioritizing and allocating the capacity based on the pricing. But at the same time, we are working on the greenfield project in Portugal near Generis. And we hope to file the future products from there.
And sir, what is the time line for that, sir, in terms of the plant coming through and contributing to your European business?
I think the products would be in the market in 1.5 to 2 years.
Next question is from the line of Chirag Dagli from HDFC.
Sir, Q-on-Q pricing, you indicated it is stable, but gross margin erosion is about 240 basis points of which would be 90 basis points is this penalty. Is there anything else that you want to call out for the quarter-on-quarter dip in gross margins?
I think it will also be a combination of change in product mix as well, Chirag.
But there's nothing otherwise to call out?
No.
Okay. And sir, on oncology, what sort of asset turns versus your current business do you expect for this business?
Asset turnover? You're talking of asset turnover?
Yes.
I think we would work towards the same what we are maintaining, which is around 2.5 or 2.4 to 2.5x is what we would be aiming for, Chirag.
And margins should be higher, sir?
It's a combination of injectables as well. Obviously, to that extent, the margin should be better because if you look at the whole oncology molecules, I think, there are certain products this can even be like a commodity. But it's a combination of injectables and then overall, the margins should be better.
Next question is from the line of Rakesh Jhunjhunwala from Rare Enterprises.
I just wanted to ask what is the time horizon with the Sandoz acquisition. Time horizons are unpredictable. But do you have some idea?
I think it could be definitely, like I think, the initial part of next year, like when I say initial part is we cannot give a definitive time line to any regulatory [ once this is going on ] , Rakesh. To that extent, we will be careful to say next financial definitely it will happen. Could be the first half of the next financial year, but we cannot assure any time line on that.
[ I understand what you are saying is not an assurance. ] Maybe judgment of the time may be subject to government.
Yes.
So maybe the first half of next year?
Yes, yes.
Next question is from the line of Jatin Kotian from CMB Securities.
I just wanted some guidance in light of the recent acquisitions that you've done, how our CapEx would now play out over the next, say, 2 years. If you can share some numbers on that.
I think our objective, as far as CapEx is concerned, I mean, as far as the existing assets are concerned, could be around $200 million, you can take it as the number. So that is actually like over the next couple of years, you can keep that as the base. Barring the capital expenditure which might be needed to get synergies to be added to that. But please remember the fact that in case we cease spend any CapEx to get any synergistic value from the acquisition we are doing, that would have a much faster [ phase ]. That is the reason that investment would happen, Jatin.
Okay. So this is $200 million annualized, right?
Yes, $200 million annualized. But it can be more in case if any acquisition-related CapEx might be done.
Okay. And what would this CapEx be towards? If you can just broadly highlight which are the current...
It will not be annualized.
It might be -- you are saying it might be less than is what you are saying, Mr. Reddy?
Yes.
So would be around, say, $150 million or I mean -- that number?
Not more than $150 million, yes.
Okay. So take it as around $150 million to $200 million. It would be like more towards $150 million is what Mr. Reddy is saying, Jatin. Coming to this particular expenses would be -- investment would be more towards capacity expansion and de-bottlenecking of the current capacity is what it could go towards. See, take it as around INR 40 crores per quarter, which is approximately INR 150 crores. We are talking about around $25 million, $30 million out of this would be for maintenance CapEx. The remaining would be more towards capacity de-bottlenecking and expansion.
Next question is from the line of Nishit Shah from Ambika Fincap.
Govind, it may be useful if you could give us some color on the Spectrum acquisition and some of the milestone-related payments because, as I see it, the current turnover is about $105 million. But if you look at a couple of the products, Marqibo, we are talking about milestone payments to be made on $200 million of [indiscernible] and $400 million of [indiscernible]. So it can be useful if you could explain a little bit to us.
Yes, so as far as Spectrum is concerned, as we have clearly mentioned, currently we are saying that [indiscernible] which is around $160 million. Subsequent to that, whatever additional number, which would be fair is related to certain approvals and certain stage [indiscernible] process in terms of reaching certain milestones. If at all if we are ending in any of those particular numbers, barring the [indiscernible] time line for a minute, Nishit. But definitely, I think, that effectively means we are also gaining [indiscernible] we are only [ starting ] a certain gain of the particular overall gain. So to that extent, I think, it would be beneficial. [ If he starts ] paying up those money means it is actually more beneficial towards us is what you should consider, Nishit.
No, I agree with you, but on the Spectrum call, the management said that they are fairly confident of achieving some of these milestones on both these products, Marqibo as well as Khapzory. So that's why I thought it will be useful if you could...
I understand. So currently, they are the one who are running the company and they are confident of something which we'll also reflect on. And we appreciate those confidence. And definitely if it happens, we are also happy, Nishit. Why? Because it would actually benefit us, as what I mentioned to you.
Yes, that's correct. My next question is on Toprol. We've been expecting this product. Can you give us some color on this?
So as far as Toprol is concerned, we've received a query and we'll be responding to it in this month. So we expect the launch to happen probably, like I think, by Q3 FY '20.
Next question is from the line of Surajit Pal from Prabhudas Lilladher.
Govind, I was going through your -- the gross margin number vis-à-vis the comments which you have given. And I found the incremental gross margin is basically 32% quarter-on-quarter and which is around 40% lower than your normal margin which you have done. So my query is that, is there any kind of cost you have preponed?
No. Surajit, I have a suggestion. So let us not try and assume anything here. I have clearly categorically said that, I think, at the release itself, that the gross margins could have been better. I also said to the extent of 100 basis points is more because of the ANDAs. There are certain other provisions also which we have done, which is more immediate and we have done that. So that has been all the cumulative reasons why the gross margins are lowered. So and also we don't give line-by-line item in terms of those aspects. So this is the overall direction so that people understand these are onetime.
So that is including some inventory write-off kind of things?
It's a combination of several things. Inventory write-offs can happen every time when some inventory we are maintaining anticipating sale or to protect our, like I think, contain our -- any penalties, there can be some write-offs. Those are -- something which is normal as far as business is concerned. So those are not extraordinary.
Okay. So Q4, you will get back to your normal gross margin level?
We never give forward-looking statement or commit anything for the future, Surajit.
Okay. Second point is that what the FDA Commissioner recently is saying is that they are visiting almost all the companies' plant where there were -- there are some -- certain recall has happened because of contaminated vancomycin. And they are saying is that it is mainly because of reuse of solvents. Now my question is that wherever you are producing your sartan API, are those plants already visited by USFDA post recall?
Unit I and Unit IX inspection has already been gone over. There were few observations and none of them were related to data integrity or any of them are repeat observations. We would be -- this inspection was over last weekend. So we will be preparing our response [ on selling ] it perhaps within the stipulated time line. And one more inspection is currently ongoing.
And that is unit?
XI.
So does it mean is that your sartan supply currently is one of the lowest and you will be able to supply once these observations, you could answer it or you will wait or you will start supplying now normally?
If you heard Mr. Reddy clearly, as far as sartan is concerned, Surajit, the market itself has come down by half of what it used to be even though from a market share perspective, you would still be retaining the market share whatever we have retained from last quarter. So to that extent, I think, we are still continuing as far as Valsartan is concerned and a couple of more sartans as well. The only product which we are not in the market is Irbesartan where we have filed certain amendments. And we'll be working -- we'll be looking at like responses and addressing any queries which can be raised on that before we move forward.
Okay. So basically, we are expanding more into losartan.
What Mr. Reddy said was the business is moving to losartan and as the business moves, if need be, like I think we have sufficient tools, like we can supply as well is what we have commented, Surajit.
Okay. As far as European business is concerned, including Apotex which we have -- if I remove that, does the core business increase? That is my query on that.
Apotex is not yet part of Aurobindo and not as of now. But we expect to close that acquisition very soon within this month. So we are talking like-to-like comparison and that is what's the appropriate reply.
Okay. So it means that inorganic growth will be further increasing. In Eugia your injectables business and hormone business. Now when do we expect your first oncology injectable to come by?
I'll come back to you on this because we have filed 3 injectables as far as Oncology is concerned and of those filed, 7 injectables are hormonal products. I think I'll come back on the time line in terms of the approval timing.
Okay. And last few more products. Welchol, Prevacid ODT, where do you stand there as far as approval is concerned? I think the guidance last time it was given has already been crossed. And where are you standing in terms of supply of Pantoprazole?
[ Last year as well, you mean ] ?
Welchol, you mean like wholesale numbers?
Yes.
And [ profit of ] Lansoprazole?
Lansoprazole ODT, yes.
Okay, that's fine. Welchol is concerned, we expect the launch to happen only in the next fiscal because we responded to the query and we are waiting for further information on that. And as far as Lansoprazole is concerned, we received a query and we'll be responding before end of this quarter. And we expect to launch somewhere in Q3 FY '20.
And where do you stand currently Pantoprazole a lot less supply?
We are already supplying, we are in the market.
May. I'm talking about last time it was an issue in terms of some of the recall happened. So are you in the full speed or you are still in reaching...
We are in the market well -- Mr. Reddy, like I think, we are very well in the market, right, as far as Lansoprazole is concerned?
What for?
Lansoprazole injection?
Yes, yes. We are in full production, yes.
We are in full swing there, Surajit, in the market.
Next question is from the line of [ Ashish Rathi ] from Lucky Investment.
Sir, we are -- in the cephalosporin injectable business that we were in earlier, any plans to reenter this if the opportunity is still there and there is [indiscernible].
No. Not Ashish. We have not even looked at that in the recent past.
[indiscernible] is already doing cephalosporin injectables for Europe, if I'm not wrong, or other markets?
That plant is not currently [indiscernible]. So we have moved on. I think we converted the plant completely to oral and we have moved on. So we don't have the capacity now.
Got it. Sir, another question is on the -- more on the U.S. business outlook for the next 2, 3 years. If I'm getting the number right 14%, 15% CAGR in the past 5 years, whereas [indiscernible] outperformance versus other players, most of them have declined sharply. So sir in the next 2 to 3 years with this increased base and also possibly Sandoz coming into the base, can we look at a number which is around 14%, 15% CAGR from here?
We don't give any forward-looking statement or any future projection at all, Ashish. I can only say that we'll be investing our resources to maintain our momentum.
Okay. And sir, coming to acquisition, we've had a very strong [indiscernible] in the company [indiscernible] acquisitions RFP accretive for us [indiscernible] company?
So first of all, we are not looking at any large-scale acquisition in the near future. As I mentioned, we might be looking at some product addition into the Spectrum portfolio, a couple of products. I think that is it, yes, when we look at any acquisition, we are typically extremely conservative in terms of ensuring that it is accretive to the business.
Mostly that question was on the acquisitions that we have announced, Sandoz [indiscernible] and a couple of others which you announced. Are those in the [indiscernible] directly.
Yes, Ashish.
Next question is from the line of Nimish Mehta from [ Times ] DeltaAdvisors.
Just wanted some understanding on the products of Spectrum, Marqibo and Khapzory. If you can tell us, who are the lead competitors to this product? And also which is standard treatment for the indication that this product can be used? That would be very helpful.
So you are specifically talking about Marqibo?
Both. So Marqibo, if you can start with -- yes, so Marqibo, is it -- it competes with which product directly? And in that indication, which is the kind of standard of care? Which product is the standard of care?
Okay. I think I'll come back to -- sorry?
Send the note to him.
Yes, we can do. See the label indication for diffuse large B-cell lymphoma is what, I think, as we are expecting that -- we expect the approval. I think as well, I think, more specifically, they have mentioned DLBCL is still in the early phases. So we'll come back on the specific note on this, Nimish, later.
Okay, no problem. And secondly, just wanted to know where have we been -- like how much have we gained from the new business opportunity that we were targeting earlier? And we understand some of the peers we also actually gained out of the exit of Teva and Sandoz in certain products. So what do you think? I mean, do we -- have we gained? And given our infrastructure, are we likely to see any growth there further?
Two quarters back, we had announced we have -- I mean, we got NBOs to the extent of $90 million to $100 million which would be supplied over the next 4 to 5 quarters. So we have completed 2 quarters of that. Another 2 to 3 quarters, we'll be still supplying. And I would request Mr. Reddy to comment on further NBOs.
So whatever the names are there, it is over 2 quarters back. Now it is the normal business. There is no further special gains. Whatever the NBOs are, it continues to be coming. So there is no special in this quarter, normal business.
So basically, whatever gains we could have done, we have actually achieved it or it will be achieved in near term.
We are achieving is the right word, Nimish because they we are still achieving.
Achieving, yes.
Next question is from the line of Tushar M. from Motilal Oswal Asset Management.
So just would like to know the quantum of business from Unit I, IX, XI currently.
Subbu, do you have those numbers ready? Not available because you have to be careful, Tushar because I, IX and XI, IX is an intermediate supplier to Unit I, VIII and XI. And Unit I and XI are API facilities, and you cannot directly measure because these are all again translated into Unit I and XI supplying to Unit III, VII and X and XV. So it's very difficult to give an impact right away, Tushar. I think, Subbu can get back to you later on specific numbers.
And -- okay. And so -- that would be helpful. And the incremental filings using these sites?
Again, that we can come back to you because those are DMFs which has to be related to the ANDAs. We'll come back to you on that, Tushar.
Next question is from the line of Srihari C. from PCS Securities.
Firstly, regarding sartans, I mean, what is the total addressable market share right now? And presuming the problems persist then which molecule is likely to substitute that? And how are you placed on that front? And secondly, if you can please let us know what are the key launches over the next 12 to 18 months, potential launches?
As far as sartans are concerned, I think, we'll come back on specific numbers in terms of overall market that we share with sartans which we may not have a definite number at this juncture. What Mr. Reddy was explaining is that, in the past, I think, the Valsartan has certain market and that market had come down or, in fact, it is, I mean, 50% of the original market. And within the sartan family, what we are observing is that the market might be moving more towards losartan compared to the other sartans, which also we need to wait and watch in terms of how it is shaping up. In case if it is moving to losartan as well, we'll be positioned to supply as far as losartan is considered. That is as far as sartan is concerned. Obviously, like I think, the 3 product approvals we'll be looking at, metoprolol, Xopenex, that is a generic profile as well, and the generic Prevacid ODT as well as generic Welchol [indiscernible]. A few more products are there in the future so including [indiscernible] now recently, we got approval as well [indiscernible]. So we have a list of products, I would say...
Lots of products.
Yes, I mean can be -- probably a little bit more time to list all that completely.
Yes, with the -- the second question was what can be a substitute for sartan if things come to that?
Mr. Reddy, is there any...
The broader question it is -- so there is a lot of concerns in the sartans. They can wait. Again, which one is going to shift to which one and what is going to be the alternate, only time only has to tell. We are not very clear on that.
I mean, let's say, if doxys becomes a substitute, then how are you placed on that front?
Which one?
Doxycycline.
No. We are in the preliminary stages and not in doxy.
Ladies and gentlemen, that was the last question for today. I would now like to 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. A transcript of this call will be uploaded on our website, www.aurobindo.com in due course. Thank you.
Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Aurobindo Pharma Limited, we conclude today's conference. Thank you all for joining us. You may disconnect your lines now.