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Aurobindo Pharma Ltd
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Ladies and gentlemen, good day, and welcome to the Q3 FY '20 earnings conference call of Aurobindo Pharma Limited. [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, Janice. Good morning, and a warm welcome to our third quarter FY '20 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. Ram Prasad Reddy, Executive Chairman, Aurobindo Pharma USA; Mr. N. Govindarajan, Managing Director; Mr. Sanjeev Dani, COO, 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 related 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 statement to reflect future events or circumstances. And with that, I will 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 '19/'20 declared by the company. Revenue increased by 12% year-on-year to INR 5,895 crores, led by healthy growth in our key geographies. The EBITDA before ForEx and other income stood at INR 1,208 crores, 1-2-0-8 crores, an increase of 11% over corresponding previous period. EBITDA margin was at 20.5% for the quarter under review. Net profit stood at INR 705 crores.In terms of the business breakdown, Formulations business contributed to 86.6% of the total revenue and clocked the revenue of INR 5,105 crores, registering a growth of 17% year-on-year. API business contributed remaining balance of 13.4% and clocked the revenue of INR 790 crores. In the Formulations business, the revenue from the U.S. market increased by 22% year-on-year to INR 2,969 crores. On a constant currency basis, U.S. revenue increased by 24% year-on-year basis to $418 million, led by new product launches and improvement in volumes of existing products. We have received final approval for 4 ANDAs and launched 5 products in the quarter under review. We have filed 6 ANDAs during the quarter. Revenue of Aurobindo Pharma USA, the company marketing oral products in USA, has increased by 15% year-on-year. Revenue of AuroMedics, the injectable business, witnessed a growth of 24% year-on-year to $76 million. We have filed a total of 122 injectable ANDAs as on December 31, 2019, out of which 73 have received final approval and the balance, 49, are under review. The company as on December 31, 2019, has filed 572 ANDAs on a cumulative basis, out of which 391 have final approval and 27 having tentative approvals, including 8 ANDAS, which are tentatively approved under PEPFAR and the balance, 154 ANDAs, are under review. Europe Formulations revenue came in at INR 1,476 crores in Q3 FY '19/'20, an increase of 14% growth year-on-year. In euro terms, the revenue increased by 19% year-on-year. Growth markets revenue witnessed a growth of 2% on year-on-year basis to INR 346 crores. On a constant currency basis, growth markets reported a growth of 3% year-on-year. ARV Formulations revenues increased by 11% year-on-year to INR 313 crores. In terms of segmental classification, U.S. formulations contributed 50.4% of the overall revenue in Q3 FY '19/'20 versus 46.2% in Q3 FY '18/'19. Share of EU Formulations increased to 25% in Q3 FY '19/'20 versus 24.5% in Q3 FY '18/'19. Growth market share decreased to 5.9% in Q3 FY '19/'20 versus 6.5% in Q3 FY '18/'19. Share of ARV segment remained flat at 5.3%. API business contributed to 13.4% of the total revenue in Q3 FY '19/'20 versus 17.5% in Q3 FY '18/'19. R&D expenditure is at INR 253 crores during the quarter, which is 4.3% of the revenue. Net organic CapEx for the quarter is around $44 million. The closing rupee versus U.S. dollar rate was at INR 71.385 in December 2019 and INR 70.875 in September 2019. The net debt has increased by $77 million -- decreased by $77 million quarter-on-quarter to $446 million at the end of December 2019 versus $522 million at the end of September 2019. The majority of the company's debt is denominated in foreign currency. The cash and bank balance is at $311 -- $311 million. The average finance cost is at 2.6% mainly due to availing multiple currency loans. This is all from our end. We are happy to take your questions now.
[Operator Instructions] We take the first question from the line of Srihari from PCS Securities.
My questions are basically centered around the U.S. business. Many other players have spoken about shortages, so I would like to know what has been your experience in that regard. And secondly, how has the Spectrum fared and what is the outlook out there? And finally, if, let's say, Unit IV also gets an OAI, so what would be your plan B for the 2 units?
Yes. Swami, can you take the first 2 aspects of it, Swami?
Yes. So with regard to shortages, at this point of time, we have been managing well, and we have stocks to meet the demand. But there is another aspect to it, which is the coronavirus. I think as we go forward, there will be some discussion on if there's any -- in China, there is an uncertainty there, but all that I can say is that we have been able to meet the demand for the U.S. That's the first question.
No. In shortages, I meant opportunities. People have spoken that in this quarter in particular, there have been shortage of generic products in the U.S. market. We could encash on that.
Yes. Right. So we have a fairly large portfolio. We have been availing of the opportunities whenever this comes up, and we continue to do that. The quarter has been fairly strong. Part of the reason is because we could meet some of these product requirements.
Yes. So the second was pertaining to Spectrum?
Yes. Now I'm going to Spectrum. Spectrum, we're on track to achieve what we planned. I think we are marginally doing better than what we expected.
Can you give us some kind of color on the sequential movement?
There has been marginal growth. That's all I can say at this point of time. And we are completely on track or slightly better in terms of the top line and in terms of the bottom line, too.
Any long-term guidance you can give in this regard? I mean...
Generally, we don't give any long-term guidance on any of the specific business, Srihari. Let me just get into the Unit IV. We have submitted a comprehensive response with FDA and are awaiting the response. And as of now, we have not received any inquiries from FDA. There are certain CAPAs to the best of my memory, like, I think, would get concluded by April-May time line. And -- as well as, like I think Unit IV is concerned, we have around 15 products, which would be approved over the next 1 year. There is one more product, which is not from Unit IV, which is in AuroMedics. In fact, that is an important product. But other than that, these 15 products, we don't see any major product in that, but those products are decent products is what I would say.
I mean are you planning in terms of site switches for either unit?
So as far as Unit IV is concerned, we are coming up with another low-volume, high-value sort of setup in U.S., which would take another 12 months to come up online, Srihari.
We take the next question from the line of Neha Manpuria from JPMorgan.
Just taking forward. If you look at our oral solids business, that's been doing well for over a year now encashing these opportunities that we are seeing in the market. Mr. Reddy, is there anything that is changing in the oral solids market, which you think could make this a more sustainable revenue base? Or you -- is there a risk that the one-off revenues that we are seeing go away as the market normalizes into next year?
No, whatever we feel, there is no -- it is not an opportunity still whatever products we are selling and we're maximum utilizing all the approved products. And we are not expecting any up or down or something. It's very stable. That's it.
But do you see a risk of these -- the one-off opportunities that are there in the markets probably reducing in 2020?
There is no opportunities. There is no specific one-off opportunities. So a lot of things come and go, come and go. But otherwise, it is very stable something. It is -- if this opportunity goes, some opportunity will come. It is not -- those are not pure opportunities. That is hardly 5%, 10%.
If you look at, Neha, any specific opportunity, like I think last time also, Mr. Reddy clarified, like I mean, 1 year back, that there was an NBO opportunity, which came for a certain value. But please understand the fact that I think those NBOs will not vanish. That is number one. Certain percentage of NBOs will continue and certain -- and then whatever I think may move out, there will be always new NBOs, which would come up. As Mr. Reddy rightly explained, it is not that we are riding our numbers against 1 or 2 products, I mean -- and always some opportunity would come, some opportunity would go. It gets balanced out. And because of the depth and breadth of the portfolio, we are able to still maintain our growth. Does it answer your queries, Neha?
Understood. So basically, what I was trying to understand is there is no one-off element or one-off product in this -- one-off product sale in this number -- in the oral solids number?
No.
No.
Okay. Second, sir, I know on the Sandoz timing, we've given several time line, but that -- what is outstanding in your view at the FTC level? I mean what do you think are the -- is the reason why the approval is not coming through based on your understanding?
Swami would answer this. Swami?
Govind, do you want me to take this?
Yes.
Thanks, Neha, for this question. Yes, there has been some time lines which have moved beyond our expectation. So we believe that we have given all the requirements that FTC wanted in terms of documentation, and we expect the transaction to close probably in this quarter. The issue was with documentation and then for the -- some of the products, the FTC wanted some more detail. So this has taken time. But otherwise, I would say it is normal. And we hope to get some good news soon.
So at the moment...
We expect approval -- we expect in this month, February, Neha. And that is our hope, maybe 1st March, if everything is all right. If needed, it will be one more month.
But there's nothing from our end to the FTC, right?
No, no, no. It went into the -- already all other points over it went into the higher level. There is no issue.
It's in the final leg, Neha. I think as Mr. Reddy said, if not February end, at least in March first week, it should get concluded is our understanding, at least we think in the first.
Supposed to come March. When it will come, we will start by 1st March. If February middle come, 1st March. If March middle come, we will start 1st April.
Okay. Understood. And my last question. Our net debt reduction has been pretty good in the last 2 quarters. Excluding the acquisitions, Apotex, Spectrum, by when do we see us -- see Aurobindo going to 0 debt based on the cash flow generation we are seeing?
Neha, if you recollect, last quarter in the earnings call itself we said in a period of 3 years sans Sandoz, we'll be able to make -- we'll be able to achieve 0 debt, and we are moving in that direction. It is not that we have given a target and keeping it set. We will continuously review and see what best we need to do that to improve upon the position.
And if I were to exclude Apotex and Spectrum, then that would be achieved probably sooner, given the...
Yes. We've already given. Without Spectrum and Apotex, we are already $200 million against $446 million. So even the $446 million also, we're saying in 3 years' time, it will become 0. That's what we have told.
We take the next question from the line of Dipan Mehta from Elixir Equities.
So my question is regarding the drop in gross margins, sir. Considering that we had higher sales of formulations and lower of APIs, one would have thought that the gross margin would in fact move up, but sequentially as well as year-on-year, it has declined, sir.
I think you cannot look at that way at all, Dipan, for a simple reason that year-on-year, like I think that Apotex business has been added, which would not have any margin. So I think it's not a fair comparison or not an apple-to-apple comparison is what I would say. Yes, your understanding is right. When the finished dosage business is higher than API business, obviously, the margin should be better. But also, like, I don't think that year-on-year, if you really compare our gross margins for the current quarter is 56.5% compared to 54.6% the previous quarter. So it has improved. But it could have been even better in case, like, I think, they're adding the business -- certain businesses, which may not have current margins, which have good future, is also like adding up not having higher margins. But as of now, we're definitely growing.
But in Q2 FY '20 also, we didn't have Apotex. Is that the reason why it went down from 57.7% to 56.5% because we had Apotex in Q3? I'm talking sequentially, sir, 57.7% to 56.5%.
There's one more reason apart from the Apotex has also higher ARV business, which had low margins. And now I think the ARV business is better with better margins. So it is more of a -- not of [ consultative ] business, it is more of like I think a [ tentative landlord ] program. Like I think now it is moving more towards [ certification ] that also is one more reason that, I think, the difference in margin can be seen.
We take the next question from the line of Shyam Srinivasan from Goldman Sachs.
Just first one on the warning letter plan. So is there a potential reinspection? Or can you just give us update on what's happening on those 3 units, please?
Yes. As far as Unit XI is concerned, which is under warning letter and Unit I and IX is concerned, which is under [ ROW AA ]. In fact, specifically on XI, our -- so there's a recommendation for consultant towards the certain actions and the consultant has already sent a note to FDA towards end of November or beginning of -- end of November or beginning of December that it has been placed. And then we are ready for inspection. So we are awaiting -- we, in fact, are sending a further note to let them just look for when the inspection can happen. Does it answer your query on that, Shyam?
Yes. So Govind, you're saying -- is there a time line you want to add on when it could potentially happen?
We are waiting for it, Shyam. And we don't -- you would also appreciate the fact that, I think, we would await them. They can even come in anytime. So this is not something where they need to give us a few months to walk in. They can even come by anytime whenever they want to inspect. So we are waiting for that.
Yes. Going to stepping back on regulatory compliance, just a philosophical question here. Inordinate amount of time in the last 3, 6 months, maybe more has actually gone towards regulatory compliance. Is there something that Aurobindo can do differently in maybe a different -- somebody is specialized in [ CQA ] quality? I'm just throwing things here, but is there -- because of the high dependence on U.S., are there certain things from a strategic point that you're thinking differently about regulatory compliance?
I think I would also philosophically answer you that we keep continuously looking at ways and means of improving ourselves. I mean so much so now, I think, in fact, we are also adding more senior people to help our CQA team to find out how do we further enhance our capability competency in terms of getting ready for any inspection. This is a process, Shyam. I think -- I don't think that I think we can say that we are doing something different. It's not the fact. The fact is, we are continuously working towards improving the fundamentals so that we can be ready.
Got it. Lastly, on your point on Unit IV, where you mentioned that April, May, so it is -- and it seems to be past 90-day inspection date. So would that mean since we have not yet done most of the stuff that you could see some kind of inspection flag coming from the FDA? Or do you think it's work in progress?
See, first and foremost, like I think whenever we talk about certain CAPAs, Shyam, that certain -- suppose if we say that we are going to add certain, let's say, instruments into the particular line, I'm telling you, I'm just giving you an example. So we have done that in certain units. Now when we order that particular specific instrument, it might even take delivery like, let's say, 4 months or 6 months. So that doesn't mean that is it a showstopper, I don't think that I would like to think like that.
Got it. Got it. Lastly, on R&D. I think R&D filings were about single digit. I think this is the lowest filing number I've seen in several quarters. Can you just walk us through what's happening on the R&D front? I could calculate about 4% of sales for this quarter and your outlook?
Yes, I don't want you to start looking at it quantitatively, you should start looking at it more qualitatively is what I would say, Shyam. I don't think that, future, you should not go by only number of filings, you need to look at like the product -- type of product which is being filed, which is if you take an example of we are moving towards biosimilars, vaccines, depots, those are -- probably 1 filing equivalent to probably x number of like I think simple oral solids product also. So I think the measurement of quantity is not, moving forward, would be correct is what I would say. We are moving more qualitatively. But having said that, like I think in Q2, we had filed 20 ANDAs like this is what I remember, Krishna?
Yes, sir.
So Govind, just last question, sorry. So the split of R&D you're saying is more towards comp? But would you kind of quantify how much is nonorals or more complex generics now in your R&D?
I don't have that number currently. But I will give an example. So like I think our current R&D expense for the quarter was INR 253 crores or 4.3% of the revenue. We've also guided that moving forward, 5% to 6% of the expenditure -- 5% to 6% on the expanded basis is what we are budgeting for. You would appreciate the fact, by the time next year, when we do a couple of clinical trial for a biologics product, and by the time, let's say, Phase III of, let's say, vaccines, those would be a significant number in the particular expenditure we are talking about. That is what I was -- I meant. As far as the exact division is concerned, like I think, we will -- Subbu, we can get back with Shyam later on that?
Yes.
We take the next question from the line of Chirag Dagli from HDFC Mutual Fund.
Sir, when was the last communication with the FDA on Unit IV?
Unit IV, after we had sent our initial comprehensive response, we have not received any queries so far, Chirag. But in the initial response itself, there are certain CAPAs which we've committed would run until April, May time line, based on memory of what I was trying to say.
So nowadays, just on the earlier point that nowadays the FDA is trying to adhere to the 90-day clock. How do you think the FDA will respond to something like this?
My answer is, Chirag, I think we have -- I have read somewhere, this 90 days is not 100%. So they were able to complete only certain percentage of the reviews and certain percentage of reviews goes more over 90 days also is what I have read somewhere. So I won't make it as a binary answer is what at this juncture I would say, Chirag.
Okay, sir. Fair point, sir. And sir, on the fixed cost buildup, there's a quarter-on-quarter increase as well in the other expenses and the staff cost. Is there anything specific you want to highlight? Is this base -- this quarterly base something that we should extrapolate? It seems like a fairly large number, the increase, both Y-o-Y as well as quarter-on-quarter?
Let us ask Subbu [Foreign Language] to...
So this last quarter, we had INR 1,288 crores of the other expenditure and whereas this quarter, it was INR 1,320 crores. And one is, basically, this quarter, we had certain registration filing charges, legal charges and rates and taxes, various types of expenses, may not be anything any significant, but a lot of small, small, small expenditures which has increased, that is the reason. And that is the main reason. Lastly, in U.S. also, we had filed certain increased costs on account of legal professional charges, et cetera, which we have been doing.
On a more sustainable annualized basis, sir, where do you see -- what sort of staff cost do you think is...
No. Staff costs if you really see, we have the practice of giving the increments to certain set of -- segments of people in the quarter, in third quarter, that is Q3. So that is the reason why the staff cost has increased in Q3. So we give the increments to some set of people in Q1, some set of people in Q3, like that. That's the way we...
Yes. To add to what Subbu said, our R&D division, like I think both the clinical R&D as well as finished dosage R&D, they run on a cycle between October to September, Chirag, to just give you some clarity on that.
Fair point. And just the third bit, if I can. So on the R&D, is a substantially large part of our R&D towards U.S.? Or is there an element of Europe as well which is sitting there?
I think when we select a product, Chirag, I think we look at it like, if a global opportunity is there, the product would get prioritized. I don't think that we sell it only for U.S. or only for Europe. It's not the case. There are certain products which might end up that way. But if a product can go to both the markets, that would get more prioritized than some product which can go to only one market. But again, that is one criteria, that is not the only criteria based on which it is selected. So it can be both. It is not that like we are only focusing on U.S. alone. So to give an example, that our specialty portfolio, like, let's say, biologics, I think in fact the first set of products might be launched in Europe and U.S. might come later.
Next question is from the line of Nitin Agarwal from IDFC Securities.
Sir, on the biologics business, can you give us any -- some sense on the pipeline and the filing plans for the next 2, 3 years in terms -- and when do we see the initial set of revenues as per expectations on this -- in the business?
Yes. So as far as the biologics is concerned, we started our clinical trial for 1 product, which the product name is announced, I'm repeating it, it is bevacizumab and planning to start the clinical trial for at least 2 more products over the next 6 months. You'll appreciate the fact that we have not given other than the 1 product the product list at this juncture. So having -- apart from bevacizumab, which, in fact, we have started the Phase I, we expect to file the product by Q2 FY '23. The second product, which is an ophthalmic product, we may start our Phase III in early next year. So there is no Phase I for that product. And this drug is again for both U.S. and EU to just answer the earlier question as well. There are 2 more products, in fact, it would go into Europe with an extended Phase I, which we expect to complete at the back end of FY '20 and expect to file by Q3 FY '21 or probably like worst case Q4 FY '21. And the subsequent product is also like I think we expect to file the product again with an extended Phase I in Q4 FY '21 for Europe. And the final product, I think, we have received the approval to start the Phase III, and we expect the product to be filed by Q4 -- sorry, rather, we expect the first patient to be injected in Q4 FY '20. So it would take some more time for us for filing. Again, this will be for both U.S. and Europe.
So Govind, when do we expect, as per our estimates, the first approval or revenues from this business across geographies?
The 2 European products, which would be filed by -- before the end of this year, next financial year, I think the first year only we will start the revenues.
Sorry, I missed that, Govind, can you repeat that?
The 2 products where we are doing an extended Phase I for Europe, which are -- the trials would happen by the next financial year starting from April 1, 2020. By the subsequent financial year, we will start the revenues -- rather FY '22.
Okay. Perfect. And secondly, on the injectable business, is Ertapenem normalized now in current quarter? Or is this still a reasonably high number as it was at the peak?
Swami?
To some extent, a little bit. But otherwise, overall, it is fine that product.
So what I meant is in term...
Nitin, I'll answer you this way simply, listen and so that -- we are happy with the current business of Ertapenem. So -- I mean it has come down a bit. Mr. Reddy was explaining, it has come down a bit, but we are happy with the current business.
So my point is with the competition which has entered, there is a concern that there could be -- do we see a risk of meaningful erosion from the current levels of Ertapenem is what the question was?
To an extent -- certain extent, the erosion has already happened, Nitin. And currently, like I think, we are still having this as a decent product, and we continue to run the business with the particular expectation.
Okay. And lastly, if I can squeeze in last one. Govind, on the injectable business, excluding approval for new products, do we still see a scope for expansion of revenue base from the current $78 million that we've done in the current -- in the quarter?
First of all, Nitin, I don't want to start considering all sorts of worst-case scenario at this juncture, Nitin. That is the first aspect of it. The second aspect of it is, please remember the fact that we have a certain [ fixed ] capacity in terms of like Unit IV, barring the equivalence of [ XII and XVI ], I'm keeping it aside. So as far as Unit IV is concerned, look, I think we have the existing set of products. I mean apart from Unit IV, even AuroNext is there, we have our existing set of products, which itself has got scope for growing. So we have not gone to the extreme phase at this juncture. And over and above that one part we should not miss is that Eugia also would start kicking in from the next financial year and basically -- currently, there are only 2 major products which have been in the wemarket. And next year, I think we will get some more approval, which will also add to the AuroMedics' numbers.
We take the next question from the line of Hari Belawat from Techfin Consulting.
This is regarding the U.S. FDA inspections. There are so many observations in the month of October, November, even in January also. It would have been better if you give in your investor presentation 1 slide showing the -- I mean the status of U.S. FDA inspection or any other statutory inspection. Then it will be clear to us where do we stand in that.
Hari, we will take your inputs, and we'll discuss with our colleagues and debate on that, Hari.
Okay. One more observation, this API imports from China. In view of the coronavirus, what is the impact do we expect for the company?
Yes. So currently, we have stock. The average stock would be approximately 2 to 3 months, Hari. And at this juncture, we are observing critically because it's too premature to comment one way or other because we expect certain facilities -- so originally, they were supposed to start by 1st of February after the holidays. They have been now told to start by around the 10th or 11th of February. We are hearing that it might be 10th or 11th, it is 17th or 18th, it might start with certain local staff is what we are hearing. We have been in touch with our colleagues on a daily basis. First of all, before even we start talking about it, like our staff, our colleagues in China are safe and they are healthy, there are no issues. That is one important aspect of it. And we -- as we progress, we will observe it, and we will evaluate any concerns that are there, but at this juncture, we have on an average 2 to 3 months of inventory we'll have for the raw materials.
Okay. Sir, I think this is the right step taken by the company. One more opportunity, which I have been reading, since the company is manufacturing ARVs and selling this. ARVs could be one of the solutions for coronavirus. I don't know how far this news is okay or not okay. If you can just give a color to it?
Yes. So there are certain products which have been said can work. Like lopinavir-ritonavir is one aspect, which has been said, but then adding 1 more product also, it becomes more effective. We have read that as well. And we've also heard 1 large innovative company working with Chinese government with another product. We've heard that. So we're also -- but we have limited capacity in terms of lopinavir-ritonavir with certain committed orders. We are also working towards donating certain number of bottles, around 10,000, 15,000 bottles to the Chinese government, which my colleague is working in terms of getting permission from the innovator and the government to do that. So we're working on that, Hari.
Next question is from the line of Prakash Agarwal from Axis Capital.
A question on this USFDA again. I mean we have seen this series of inspections and some of which has been escalated. Just trying to understand, would we had an interaction with the FDA and understanding what -- where we are actually going wrong? Or what are the steps which are required to not make it a company-wide, system-wide issue? And would the approval of any facility be linked to all the facilities, if you could throw some light there?
I think Prakash, every inspection, irrespective of like whichever regulator or even from the customer, there are always scope for improvement, which we capture, and we keep working towards across our organization how to improve. First of all, I don't want to go to a situation of stating that everything got escalated. As you would appreciate the fact, as much as like a couple of them are not escalated, we have also had audits for Unit X, for which we had received EIR. We had inspection on Unit V, which we got EIR. 2, 3 weeks back or 3, 4 weeks back, we had RC-II, one of our development centers, which got audited. There is no observations. Eugia got audited, it went like -- so my answer is, like, I think there are certain inspections. There can be certain recommendations. There are certain things which can get escalated. We continuously work towards learning from that and would like to improve across the organization based on that learning, Prakash. It's a process. It is not a single event.
So what I'm trying to understand is, like, has there been any discussion with the FDA? Like is there a common thread that you are picking up looking at these observations across your facilities?
So I would say it this way, that like I think we keep evaluating in terms of the areas of where we need to further improve and we not only work with the regulators. In fact, regulators are also proactively conducting a lot of workshops and sessions in collaboration with IP and collaboration with certain other institutions and our people attend that and have more discussions in terms of understanding what areas of improvement are there. Apart from that, we also keep evaluating in terms of the observation not only for us, we also evaluate like I mean whatever is in the public domain and look at how do we improve further to ensure that we don't end up in such gaps which can be in the system. That is again like something which we continuously keep doing with, Prakash.
Okay. Fair enough. And secondly, on the R&D piece, did I hear correct that you're talking about 5% to 6% for next year as you scale up investments in your complex generics pipeline?
Yes, sir. And 5% to 6% is also on the expanded base we're considering, Prakash.
That is when you also include Sandoz or...
Yes. So when I say 5% to 6%, it's not necessarily next year it will go to 6%. We are keeping that particular range for a foreseeable future of next 2 to 3 years.
Okay. Okay. On expanded basis, with Sandoz basically?
Yes, sir.
Okay. And last 1 from the oral side -- oral solids pipeline perspective, is there a rethink in terms of the pipeline grid that you have over the last 6, 12 months looking at the market? And also, whether there has been any withdrawal of existing ANDAs as some of the companies like Sun mentioned yesterday that they pulled out some of the ANDAs not making money or not worth launching? So just commentary on those, please.
We have done that last year. Mr. Reddy might also help me in my memory. I think last year, we had withdrawn certain ANDAs which did not make sense to us. Like I think that we did last year, I think, 2 ANDAs were withdrawn, if I remember it right. So last quarter also, we've withdrawn 2 ANDAs. So that is a continuous process which we keep doing it, Prakash.
No, no. And the first part was a rethink on the pipeline grid, which is not ANDA as of now, but something which is in the development grid, especially in light of oral solids or your other complex generic initiatives, like derms or maybe inhalers? Is there a rethink on the pipeline, sir?
No, that gets reviewed always. And particularly, it will also be reviewed every time when we also consolidate in terms of -- recently because of the acquisition, we are looking at adding more number of products also. We will look at our portfolio and look at consolidation and optimization. That is again a process which we keep doing it, Prakash, even though that would -- that information will not come to the public domain.
Sir, does that answer your question?
Yes. Just the last 1 here. On the supply disruption opportunities that you mentioned, it's a function of large product basket you have across a lot of therapies that you serve. But -- and you said there's no special NBO to call out for. You also mentioned that these opportunities can continue for longer term. Is that what I understood correct?
I think let me clarify. So what we said was that these opportunities keep happening, Prakash. I think what we've said is when we talked about NBO, like I think last year, if you remember, almost 6 quarters back we have said like we had won around $90 million, $100 million of NBO. So on that NBO, not after the NBO contract has already vanished, certain percentage of that would continue. But what we might lose because of the depth and breadth of the portfolio, as you rightly mentioned, we'll always get some other opportunity to fill this particular drop which can happen.
But this -- the momentum is increasing given there are a lot of supply issues across facilities by different companies also?
I'm not commenting on other companies. I would say, for us, we still see the opportunities existing, Prakash.
Next question is from the line of Nithya Balasubramanian from Bernstein Research.
My question is actually on your Spectrum portfolio. And what are your thoughts and strategy to sustain the portfolio? Would this be through internal pipeline when -- if so, then when do we start to see that? Or would it be mostly through BD?
Swami?
We are looking at all options, Nithya, at this point of time. We would be adding 1 product that we are doing through BD sometime in the fiscal year '21, middle of fiscal year '21. Plus, we also expect to add a couple of products through Sandoz acquisition. And we're always looking for opportunities on both sides. It's a BD and co-development.
Do you have plans for supporting it through internal pipeline as well?
A few products are...
We're developing 3, 4 products in those areas, both BD as well as in-house, both we are working, and we want to add next 2 years, 2 to 3 products, overall, either BD or in-house.
Are they likely to be substantial investments?
Not much. See we are more on 505(b)(2) area, we are working, but definitely some cost will be there.
Next question is from the line of Charulata Gaidhani from Dalal & Broacha.
I wanted to know...
Ma'am, this is the operator, I'm so sorry to interrupt, there's a lot of disturbance coming from your line. Requesting you to please use the handset mode while speaking.
Yes, is it okay now?
Yes. Thank you.
My question pertains to the Sandoz acquisition. Are -- is a major part of the acquisition into oral solids? Or is it more of injectables or complex generics?
So this is Swami Iyer from U.S. I would limit it now to the oral solids, derma and very few injectables. So complex generics, I think, it will be a little difficult to define at this point of time. But I would say it's mostly oral solids and then the derma, probably a couple of injectable products.
Okay. And what part of this acquisition can be immediately commercialized?
So I don't understand. So the...
Swami, I'll answer that. Madam, I would request you probably like you'll have a lot of information about this. At the time of acquisition, we have sent a note. For clarity, 70% of the products are oral and 30% is derma, and these are all commercialized products which are already in the market, madam.
Okay. And my second question pertains to the plant. Will you need to add labor? I mean how much -- how many employees do you have in the plant? And whether they are your own or on contract?
Are you talking about Sandoz, Madam?
No. Aurobindo.
Okay. Aurobindo is 22,000 people strong, madam. I think we are a manufacturing company at the end of the day. So majority of the workforce would be in the manufacturing. So most of these numbers whatever I'm talking about are direct employees of Aurobindo.
Okay. And -- okay. So you don't take people on contract?
We do take people on contract, which is more for housekeeping and other aspects of it, but they are not directly working in process and the plant directly.
Next question is from the line of from Cyndrella Carvalho from Centrum Broking.
Sir, did you make any commentary on Unit VII? I missed it. Could you please repeat it?
As far as Unit VII is concerned, we have received -- recently, like I think it has been classified as OAI by FDA with respect to the instruction carried out in September. So we are further engaging with them for resolution, madam.
Okay. But sir -- I mean when -- what is the revenue from our end? What is the CAPA? Like when do we see it? What is the status? Any color on that?
As far as Unit VII is concerned, we have sent 1 set of last responses on those CAPAs last month. So we are -- I mean I cannot like clearly say whether that was reviewed before the issue of OAI. So that is something which we cannot comment on that. Having said that, we are working with them. In our considered opinion, there can be a meeting is what we believe, that we are waiting. We are working with them in terms of resolution, madam.
And sir, coming to the U.S. business, if we look at the generic portion of your business or specifically oral solids, how should we look at it going ahead? The continuous momentum or the expansion that we are seeing in the base, should we expect a similar trajectory going ahead?
So we never give a forward-looking statement, madam, but I would like to clarify that the opportunity for us in terms of growth is like one of the new product approvals, once the growth in the existing products and also like I mean certain NBOs which can happen. So it's a combination of a few factors which we always work towards. As Mr. Reddy was earlier explaining that like I think we are not riding our growth based on 1 or 2 products. It's always a combination of several of these opportunities whatever we have mentioned. Our endeavor is to keep working towards that, and we still believe that there are opportunities to grow.
Okay. And sir, very quickly on the other expenses, what should be a sustainable kind of other expense number to look at?
See, the same question has been asked earlier also. In the last quarter, our other expenses percentage to the turnover was 22.7%. And this quarter, it is 22.5%. See, the other expenses include certain portion of various semi-variables as well as fixed expenses. So when the turnover has been growing continuously quarter-on-quarter, that bound to be there should be an increase. As a thumb rule, you can take whatever be the percentage, it looks consistent and you should take like that.
Next question is from the line of Nitin Agarwal from IDFC Securities.
Sir, on the European business, I mean, where are we on this Apotex integration? And when do we see the turnaround? And secondly, sir, what would be for the year, the typical profitability of the European business at this point of time, consolidated business?
Yes. So Sanjeev Dani here. I'll just answer first on Apotex. You know that there were businesses in 5 countries, different countries and there were losses amounting to almost double-digit in euro million. And we have made a good progress. However, it will take some time because our priority always has been to optimize the overheads first, then restructure the sales and marketing processes and their divisions. Then at the same time, make the product cost competitive base from India or wherever our other factories are and then launch the new products from the larger platform to get a greater market share. So I think we have made a very good progress in a couple of countries. And we expect that by second half of the next financial year, that is FY '21, we should be showing a considerable progress on making this loss into neutral. So that is how we are looking at the business right now.
And sir, what is the profitability for the European business indicative currently overall?
See, if we exclude these losses of Apotex, then we would be definitely in double-digit percentage of PBT.
Next question is from the line of Nimish Mehta from Research Delta.
Sir, I just wanted to know now that we have Spectrum integrated and this -- these are products which are innovative products, are we likely to incur higher marketing expense going forward? And if yes, what do you expect the expenses to be?
So yes, this is Swami Iyer from U.S. As far as Spectrum is concerned, we have acquired 7 brands, and we have rationalized some of the expenses. For these 7 brands, we do not expect any spurt in the expenses. Obviously, if we add any new products, that's different.
So the current marketing expense whatever we are incurring will continue? I mean which is fairly reflected in the quarter? Is that a fair assumption?
It will not exceed that. That's a better assumption.
Okay. Okay. And how do we think to ramp up the sales, because I understand it was not profit-making at this stage? So increase in sales -- or I may be wrong, please correct me, increase in sales was going to be the way forward. What is the plan there given that it's again innovative products?
So first and foremost, I don't know why you assumed that it's loss-making. That is not correct. That's the first thing I want to tell you. And then the second one is if we want to increase, there are several ways that we can build, and then we are planning to do that. Obviously, these are products which have been there for a while. One is addition of more products into the portfolio by way of BD and our own development, which has been discussed. So we -- these are several strategies that we can adopt, and we will be doing so.
Essentially new products addition will mean growth to this and not really increase in the existing base. Is it a better understanding?
No. So growth, if you add new products, that is different. The cost of that, the cost of marketing could be additional. If we are talking about the existing base, what I said was gross expenses will be maintained or will be lower than that.
Next question is from the line of Dipan Mehta from Elixir Equities.
My question relates to Sandoz. It's been a while since you announced the acquisition, but how has that business progressed since -- I mean in terms of revenue and EBITDA? Do we have any access to that information? Are we tracking it in any way? Is it as per our expectations? And what our forecast was or whatever the answer would be.
Based on what is available in the media, and Sandoz recently had their -- Novartis had their investors meeting, we think that they're on track. And we already said this, but we go by the guidance that we gave earlier when we acquired this business. We have no reason to believe that there's going to be any change in whatever guidance we gave.
Mr. Mehta, does that answer your question?
Yes, thank you.
Well, 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. The transcript of this call will be uploaded on our website, www.aurobindo.com in due course. Thank you.
On behalf of Aurobindo Pharma Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.