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Aurobindo Pharma Ltd
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Good day, ladies and gentlemen, and welcome to the Q4 FY '18 Earnings Conference Call of Aurobindo Pharma Limited. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Krishna Kiran, Investor Relations, Aurobindo Pharma Limited. Thank you, and over to you, sir.
Thank you, Mildred. Good morning, and a warm welcome to our fourth quarter and FY '18 earnings call. I am Krishna Kiran from the Aurobindo Pharma Investor Relations. We hope you have received the Q4 and FY '18 financials and the press release that we have sent out yesterday. These are also available on our website. With me, we have our senior management team represented by: Mr. P.V. Ramaprasad Reddy, Executive Chairman, Aurobindo Pharma USA; Mr. N. Govindarajan, Managing Director; Mr. Sanjeev Dani, COO, Head Formulations; and Mr. Santhanam Subramanian, CFO. We will begin the call with summary highlights from the management followed by an interactive Q&A session.Please note that some of the matters we will discuss today are forward-looking, including and without limitation, statements relating to the implementation of strategic actions and other information 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 fourth quarter and financial year '17/'18 results declared by the company.For the year, the company closed a revenue of INR 16,500 crores, an increase of 9% over last year. The growth was driven by healthy growth in U.S., Europe and Growth Markets. The EBITDA before ForEx and other income increased by 10% year-on-year to INR 3,789 crores. Our net profit increase by 5% year-on-year to INR 2,423 crores.In Q4 FY '17/'18, overall revenue increased by 11% year-on-year to INR 4,049 crores. The EBITDA before ForEx and other income increased by 11% year-on-year to INR 804 crores. Net profit declined by 1% year-on-year to INR 529 crores.In terms of the business breakdown, formulations business contributed 82% of the revenues in FY '17/'18. The formulation revenues for the year stands at INR 13,533 crores, registering a 12% growth year-on-year; and for the quarter stands at INR 3,249 crores, an increase of 13% year-on-year. API revenues for the year were at INR 2,962 crores, and for the quarter were at INR 800 crores, a growth of 5% year-on-year.On the Formulations business, the U.S. market revenues stood at INR 7,442 crores for the year, an increase of 9% year-on-year. In dollar terms, U.S. revenues witnessed a growth of 13% year-on-year basis to USD 1.15 billion.For the quarter, the U.S. revenues witnessed a growth of 5.8% year-on-year at INR 1,739 crores. In dollar terms, the U.S. revenue grew by 10.1% year-on-year to $271 million. The growth was primarily driven by new product -- the growth was primarily driven by new product launches and improved volumes of existing products.We have filed 11 ANDAs and launched 7 products in the quarter under review. We have received final approval for 10 ANDAs during the quarter. The year as a whole, we had received 49 final approvals. Aurobindo U.S.A., the company marketing oral products in the U.S.A., has witnessed a growth of 18% year-on-year in FY '17/'18. For the quarter, the growth was at 21% year-on-year.AuroMedics, the injectable business, [ saw ] a growth of 4% year-on-year to $154 million in FY '17/'18. For the quarter, the revenue declined to 16% to $35 million, majorly on the back of product recalls and stoppage of the bag line. We have filed a total of 90 injectable ANDAs as on 31st March 2018, out of which 57 have received approval, including 2 tentative approvals and the balance, 33, are under review.Aurohealth, our OTC business in the U.S., has started picking up with new product launches. The company as of 31st March 2018, has filed 478 ANDAs on a cumulative basis. Out of which, 327 have final approval and 34 having tentative approvals, including 11 ANDAs, which are tentatively approved under PEPFAR, and the balance, 117 ANDAs, are under review. The unit wise filing and approvals are as follows: From Unit III, 126 filed, 108 approved; Unit VII, 160 filed, 117 approved; AuroLife, 27 filed, 17 approved; Unit IV, 90 filed, 50 approved; Unit XII, 20 filed, 19 approved; Unit VI, 11 filed and approved; AuroNext, 2 filed, and 1 approved; Unit X, 25 filed; and Eugia 13 products have been filed. Unit III, Unit VII and Unit X and AuroLife manufactures oral non-betalactam products. Unit IV manufactures general injectables and ophthalmic products. Unit VI and Unit XII manufactures cephalosporin and Semi-Synthetic Penicillin, respectively. Eugia manufactures oncology and hormonal products, and AuroNext, which has its facility in Bhiwadi in Rajasthan manufactures Penem injectable products.Euro Formulations revenues closed at INR 4,354 crores in FY '17/'18, an increase of 32.9% growth over last year. On a constant-currency basis, the EU revenues grew by 29%. For the quarter, Euro Formulations revenues closed INR 1,152 crores, registering a growth of 48% year-on-year. On a constant-currency basis, the year revenues grew by 34%. As on 31st March 2018, we have transferred manufacturing of 83 products from Europe to India.Growth Markets witnessed a growth of 18.7% year-on-year to INR 897.1 crores in FY '17/'18. On a constant-currency basis, Growth Markets secured a growth of 23%. For the quarter, Growth Markets grew by 6.4% year-on-year basis at INR 210 crores. On a constant-currency basis, Growth Markets recorded a growth of 11%.ARV Formulations revenues were at INR 840 crores, declined by 29% year-on-year in FY '17/'18. On a constant-currency basis, the ARV revenues witnessed a decline of 26%. For the quarter, ARV revenues declined to 43% year-on-year to INR 149 crores due to increase in pricing pressure in one of the key products on reduction of the tenders sorted by various countries. In terms of segmental classification, U.S. formulations contributed 43% of the overall revenues in Q4 FY '17/'18 versus 45% in Q4 FY '17/'18.Share of EU Formulations increased to 28% in Q4 FY '17/'18 versus 21% in Q4 FY '16/'17. Growth Markets remained at 5% in Q4 FY '17 versus Q4 FY '16/'17. ARV segment represents 4% of the overall revenues in Q4 '17/'18 versus 7% in Q4 FY '16/'17. API business contributed 20% of the total revenues in Q4 FY '17/'18 versus Q4 -- versus 21% in Q4 FY '16/'17. R&D expenses is at INR 187 crores during the quarter, which is 4.6% of the revenues. Net CapEx for the quarter is around $70 million. The effective tax rate for the quarter is 18.8% of PBT. The closing rupee versus U.S. dollar rate was INR 65.175 in March 2018 and INR 63.875 in December 2017.The net debt as on 31st of March 2018 was at USD 538 million against USD 540 million as on 31st December 2017. Further reduction did not happen due to increased inventory to improve the service levels and increased capital expenditures during the quarter. We also paid a dividend including tax of USD 10 million. And the majority of the company's debt is denominated in foreign currency. The cash and bank balance is at $194 million. The average finance cost is at 2%, mainly due to [ availing ] multiple foreign currency loans.This is all from our end, and we are happy to take your questions now.
Sir, should we open it for Q&A now?
[indiscernible]?
[indiscernible].
Go ahead.
Sir, we'll open it for Q&A now?
Please.
[Operator Instructions] The first question is from the line of Neha Manpuria from JPMorgan.
First, on the U.S. business, what exactly happened in the injectable -- the business this quarter? Because when we spoke in Feb, in the last conference call, the management was very confident of achieving the sort of the 40%, 50% year-on-year growth. So -- and how do you look at FY '19 because of the pending inspection of -- pending issues from the inspection, and the recalls that we have seen, again, recently?
And so I don't know any pending issues from the inspection, Neha?
Unit IV? I don't think we got any AR there, right?
We have received our AR last weekend, Neha.
Okay. So then, well, how should we look at FY '09 -- FY '19?
So let me just answer the first part of the question so we can get into the subsequent period. And subsequent to the discussion we had in the last quarter call, and there are a few more recalls. And in fact, we also have to completely pull out the bag line, which is not the case at the earlier part of it. So those are changes which have happened. So obviously, like, I think we are consciously looking at those aspects of it in terms of the future as well. In fact, we are also investing heavily in terms of our resources to enhance the quality aspects in injectable specifically. So that is something which is very clear in terms of, like, I think the injectable numbers being down because of those recalls and the stoppage of bag line, clearly. A lot of the changes has happened. So as far as FY '19 is concerned, our objective is very clear that we would like to grow. And that we have received some clarity now and also, we would like to put our resources in terms of enhancing the quality aspects. We will have complete clarity as we progress towards the next, let's say, few days to -- by next quarter, we'll have complete clarity in terms of how the year is going to pan out.
So the initial guidance that we've given of growing double digit, that will definitely come down as we invest more and probably see more stoppages to ensure that there is no issues with quality?
So I would put it this way. It is not a question of -- I mean, purely on the time lines of investment and time lines are the investments we are talking about. What we are talking about currently is in terms of you'll have better clarity as we progress. This is a post [indiscernible] ensuring that, like, once we start, we should be able to predict on a sustainable basis is what we are looking at it. Our objective is still to grow clearly, Neha. So it is too premature to accommodate that we are at this juncture.
Okay. And my second question is on the net debt number. And you mentioned that we won't be able to achieve a guidance of it being less than $475 million because of higher CapEx and higher inventory levels to improve service. Is this going to be higher inventory level to include -- is that something new which has happened in the quarter, which we didn't know about? Or is it related to certain product launches or product approvals that you were expecting in the first quarter?
Yes, Subbu is going to answer that, Neha.
Yes. So in this quarter, the service -- we have increased the inventory to improve the service level. Because the ForEx -- the exchange rate also was going up, so we want to take advantage of it to get some strategic inventory by which we will be able to gain in the future. That is one of the reason. Going in the third, we have already incurred CapEx of around $70 million during the quarter. Apart from that, we have also paid a dividend of $10 million. So because of these reasons, I would say this is very temporary, this one. It's not that there is a setback or anything.
And how should we look at FY '19 then, sir?
FY '19, so we are -- because we believe that next year, the level of inventory, which has gone up this year, will not happen, so we are, at this stage, we are very clear we will be able to reduce inventory by about -- reduce that debt by about $100 million, at least.
Now, I'm going to answer both. You see, we have taken addition to make compulsorily the raw material and the recipient's inventory to minimum compulsory 3 months. And also the finished products also at subsidiary and compulsorily 3 months. That exactly did not happen, but the increase in the inventory is happening in the last 4 months. And the -- with almost future [ indiscernible ] of the products, maybe given that small amount will happen, balance products. Periods, we have 1.5 months to around 2 months on that. So that's -- there we are [ committing ] the gaps and because of small, one product factor making a big penalty, so we want to avoid the execution and making these issues.
Now on the cause, Neha, just to add to whatever Mr. Reddy and Subbu said. Please understand the fact that if you have seen the particular numbers, the growth has also happened from the existing products in terms of the volume. That is predominantly we are seeing that there are NBOs, which are coming up. And in case if you need to confidently participate in the NBOs, it is better to maintain some level of inventory before even you participate in an NBO rather than every time taking an order and start thinking of producing them, Neha.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
First is on the ARV business. I think you made an opening remark. And also related, what's happening there? Is the pricing pressure that you talked about, can you elaborate that? And can you also give us some color on the DTG product? I thought it was starting to go off -- start off from the 1st of April or something? Can you clarify that?
As far as DTG is -- let me start with something positive, as far as DTG combination is concerned, definitely, look, I think there are more orders which are flowing in our way. And in fact, anticipating the combination of TLD, we are also, like, working towards expanding the capacity of both Tenofovir and Lamivudine in terms of the [ ATE ] as well. So clearly, like, the shift on TLD, you will start seeing from this year. It may not be in the first quarter but definitely starting from second quarter, you will start seeing that shift. And obviously, we have that shift, the existing products would be under pressure as we have mentioned in the past, and that's what we've talked about the pressure on the TLE aspects of it, which will -- this is common, that bringing down the number.
So what about the -- can you also talk a little bit about the year's price erosion, please? I think you have guided in the past about 8% to 10% kind of a level. Have you seen something change on the U.S. pricing? This could be on the industry as well? Any color there?
The U.S. price erosion. As far as the year-on-year is concern, it's around 8% in terms of, like, I think, last year to this year. Even though, like, I think we are clearly seeing the directions are definitely changing, because as you see, sequentially, the erosion is only 1%. And clearly, as we move forward, we expect that to be, like, getting normalized, because generally -- in the past, also, generally, it used to have around 5% erosion. You can take it as that as a new norm is what we are expecting it to be. There can always be changes in terms of plus or minus 1% or 2%, which can happen in terms of, like, I think 1 or 2 quarters. But then in the long term, I think we believe it should settle at 5% is our belief.
Okay. Now still you're in there around 15% in the base products, the overall products. [indiscernible].
We -- that [indiscernible] products...
[indiscernible].
Yes, so we are talking about base products that we see. Obviously, there that's -- it will be excluding products [indiscernible]. That's the reason I'm talking about, like, I think, the 8% advantage.
And last question here. EIR that you mentioned for Unit IV, we've seen certain peers despite getting an EIR, there are pending issues as well. Do you think in your case, it's all clear and you will start getting approvals from Unit IV?
When I talked about that we are investing our resources to enhance the quality aspects, I'm not only restricting it to Unit IV, I'm talking about the entire injectable portfolio for all the 3 units, Shyam. So that is what I talked about because we would like to ensure -- so in fact, if you remember, there had been certain recalls in terms of Unit XVI also. So we have invested in terms of certain enhanced x-ray emissions and improved our inspection effectiveness, et cetera, et cetera. So overall, we are talking about ensuring that, I think, we should be -- we would like to add to the [ indiscernible ] curve in terms of like meeting the particular standards or even better than the particular standards? That's what we are working towards. As far as Unit IV EIR is concerned, we have received probably 48 [ last time we count ] bag, Shyam, I think. So we will have much better clarity as we start getting some product approvals, as well.
The next question is from the line of Anubhav Aggarwal from Credit Suisse.
Govind, can you provide some clarity on incremental injectable sales? How much of the decline sequentially was driven by product recall and stoppage of bag line, because we almost lost about $11 million sales sequentially?
Almost 60%, 70% of that is because of that, around-about.
Sorry, you mentioned 60% to 70% is because of this?
Yes.
And when do you expect this...
The recalls are slowed down in some products. [indiscernible] these recalls. [indiscernible]?
[indiscernible] bag line...
[indiscernible].
Yes. It's a combination. Yes.
A combination.
And when do you, sir, expect to restart the bag line?
You should take it as some third quarter -- sorry, from a financial year, it should be somewhere on September, October time line, you take it as the -- Anubhav.
September or October, okay. And what about -- so this was about the bag line. But for the products, were you still down? And now you have the clearance as well. So for the other products where you slowed down, when the ramp-up should happen? Or this is the new base for us?
No, I think I'll put it this way. Like, we had slowed down on even products like ampicillin, Bactrim or peptides for some time. And those are back on track. And like ampicillin, [indiscernible] also is getting back on track, is what I would say. So I'm not saying that this is a new base. What I only commented is in terms of the overall year, we need some more time to clearly talk about the directional number. That's what I talked about.
Okay, okay. And just on injectables. When do you still expect Ertapenem approval for us?
That's, I think, pending from our end. I fact, actually, the -- a couple of -- I mean, a week or 2 back, we have heard that our [ demo ] got cleared. And if there are no further queries, it's hopefully soon, there, like, I think we should get approval at some point of time in the next few days to few weeks, Anubhav.
And you are already ready for launch whenever you get approval. Have you already shifted?
As soon as we get approval, within a couple of weeks, actually, I think we should be capable of launching this, I believe. Because this one, we're keeping here is, you have to remember, Anubhav, is this product is a sensitive product and it has to be cold storage in terms of what [ ATE ] level. So we are also cautiously approaching this.
Okay, that's helpful. Second question is that we -- you talked about inventory increase. Now inventory increase is really sharp. It's almost $100 million increase over the last 6 months. So is this largely driven by U.S. because $100 million inventory increase is -- you are targeting a sales increase of almost $300 million, $400 million, at least. So in that respect, $100 million increase looks very, very sharp increase.
Sir, would like to comment, sir?
The increases in [indiscernible] [ market ] would be primarily the end result. Because with our cost up [indiscernible] a year [indiscernible], [ 25% ] especially in the tender countries in Europe, and we want to maintain between 3 to 3.5 months, and as a policy -- and that resulted in a lot of products, whatever we are maintaining 1.5, 2 months, other than the 2 shipment product timing. And also, that has to be -- now that we have covered [indiscernible]. Maybe some more may happen in the next 1 quarter.
Sir, just as a benchmark now, the 3, 3.5 months, what was it earlier, your inventory level that you're benchmarking?
It has not been a demand inventory. Remember that we want the raw material and the difference in inventory at our factory end, and we want the inventory at that subsidiary end. What we are not building is our sales. Our sales is more or less in between. There is not much difference. What there is a difference is inventory on the subsidiary stocks as well as our plant stocks.
So Anubhav, I also would like to add to whatever Mr. Reddy has said. We had built up some inventory and certainly, there are a bump up of some NBOs and those inventories immediately were consumed. So what happens is, like, I think you need to build it up again to a level where those minor order income do not -- I mean, incoming should not disturb the entire inventory is also one more angle you need to look at, Anubhav.
Sorry, I got a little confused here. So is this a change in -- so what Mr. Reddy was explaining looks like exchange of, let's say, whatever inventory you want to keep, it's a change of level for us. And it seems like a permanent change for us. What you seem to suggest, it's more like a temporary thing and inventory levels will...
I'm not saying that. I'm not saying that. You asked about what is the earlier policy. Earlier also, we are trying to build it on a global network, and I think is what I was trying to explain.
Okay, okay. What triggered all this? Was it a big penalty that we had to face? What triggered all this?
There are 2 things. One is in terms of our penalties and there is also legroom to ensure that we are able to cash in, in terms of those NBOs can come in, Anubhav. New business opportunities, when I say NBOs.
After 2 months, we work on the [indiscernible] inventories. And there's something on the bids products. Volume speed, it is possible only if you held stock. That is possible. Otherwise, we will never get any delivered from the bids products.
But have that number shown up, sir, in sales as yet or is yet to show up because the sales have...
[That is the inventory I am planning on ].
Okay. Okay. Just one clarity on Toprol XL. When do you expect that approval, in the near term or will it happen end of this year?
So as far as Toprol is concerned, like, I think we have submitted our response in February 2018 and I think we should -- in case there are no further queries, we can expect it around October time line, Anubhav. And obviously that will even be stretched in cases there are further queries.
Which product, again?
That's Toprol XL.
The next question is from the line of Ranjit Kapadia from Centrum Broking.
My first question related to can you elaborate our [indiscernible] business, what is the latest update? And my second question is related to injectable business. What is our immediate measure in recall cost for all this which has happened in the recent past?
Ranjit, I may not have a specific number to that, currently, in terms of the remediation measure in terms of cost because it is still work in progress is what I would say. Like I think we'll have to -- as soon as we get clarity, we'll provide that particular detail. As far as our health is concerned, clearly, I think this year is going to be, as we have explained earlier also, this year is going to be a good year. And once -- already, we have those 2 products, which are launched last year is also doing well. Plus, we should get the omeprazole by September, like, I think -- sorry, it's June end.
June -- June, July end.
June, July -- June end or July beginning is what...
[indiscernible] around $35 million to $40 million. Maybe we are expecting kind of approximate growth. Let us see if that will happen.
And how many products, sir, are planning to be launched in the OTC segment in the current -- FY '19? Effective omeprazole?
Around another 12 to 14 products.
20 to 30 products?
12 to 14 products is the quantity.
12 to 14 products.
12 to 14 products. Okay.
[Operator Instructions] The next question is from the line of Kartik Mehta from Deutsche Bank.
I want to know if you could give -- if you could give a guidance for the U.S. sales FY '19, FY '20 in terms of the launch? And in case of injectables contribution from the Unit XVI, will it start in the second half or how should we look at it?
Unit XVI is already supplying 2 years market, Kartik. As far as we don't give any guidance per se, except that we can tell you, definitely, we should be growing.
So given I asked the quarterly U.S. sales number, that $271 million is almost maybe near to the 3 renewal numbers that we had of $263 million. So if for us an exclusivity or a product with low competition, we are able to see higher sales for the next 3, 4 months, if we need to grow, do you believe we have products, which we will be able to grow by low double-digit for the U.S. sales in FY '19? And two, also in terms of the profitability, because all the regular ones will not have a contribution which we would have seen for renewal in the early days?
As far as the new product approvals are concerned, even though, like, I think we can look at certain product starts and it is important for us to wait and see like the emerging [indiscernible] committing any number on that, Kartik. And when we talk about growth, it's not purely depending on the new product only. It's a combination of new product as well as a volume growth. As you would have heard Mr. Reddy talking about the opportunities in the NBOs. And typically, Mr. Reddy can also comment on this. Typically, the NBOs I think would be relating better than the normal pricing, sir?
Yes, definitely. The [indiscernible] on this product, we are not -- in prices are definitely better than last year or last few quarter spreads.
And in the R&D cost, sir, will this remain at this level? So for the quarter, it was higher. And if yes, how much should we build it?
No, I think we have talked about around 5%, if you remember, like, Kartik, in the past also. Like, I think FY '20 is then the year to watch out for, because other venture, we have complete clarity in terms of having a Phase III for 1 molecule of biosimilars. And then, we are also working on another product. In fact, it is a positive one, in the case that both of Phase IIIs happen in that year, then the particular percentage can go up to 8%, 9% if you remember what we talked about. So I think, definitely, like 1 product was taken, like, I think the second product also, the folks are working hard on that. Then, if both happens, then the R&D cost in that particularly can go up. Actually, it is positive is what I would say, because they are expecting to do only one. The subsequent product has now got [ indiscernible ] launched.
The next question comes from the line of Nitin Agarwal from IDFC Securities.
Going on the European business, we have done exceptionally well this year. So apart from the Generis acquisition, what had been the organic growth in the business? And I mean, how do you see this business now going forward?
Yes, I'll answer that. If you see, the constant-currency basis we have grown by 33%. But without Generis also, we have grown it 15% on a whole-year basis. So actually, this growth has continued in quarter 4 at 17% without Generis. Long term, we have always maintained that actually markets are growing between 0 to 5%, so at a constant-currency basis will grow at about 8% to 10%, because we are a mid-level player, and I think we can grow double of the market growth rate.
And on Europe now going forward, do you see opportunities for further addition to the portfolio or to geographies between organic growth? Or you look to largely grow this portfolio through organically only going forward?
It will be a combination of strategy, of course. But we have a number of products under development. As you know, more than 200 products are under development. In fact, during the year, we launched 2 major [day-one] launches also. Even though in Europe, the [day-one] sale is much different than in U.S. because there are, at a time, 8 to 10 competitors like [indiscernible] [ Ezetimibe ]. But that kind of launches will continue.
And lastly, how do you see the profitability on this business going forward? I mean, how -- on a sustained business?
It is in the double digit of EBITDA margins. And we think we will be able to maintain that.
The next question is from the line of Chirag Dagli from HDFC Asset Management.
Sir, what is our China import as a percentage of the overall import. How much do we import from China?
It will be to the extent of almost $400 million, Chirag, our last number I had looked at. From a value perspective, I can talk about that.
Okay, sir. And sir, the customer consolidation the last of the 3 big -- the last of the consolidation, has that sort of brought -- baked into current prices? In a sense, has renegotiations happened, new contracts been signed, et cetera?
So far, there's not been material impact, Chirag, I would say. I think as we move forward, we'll see. But as of now, like, there's no material impact.
But the consolidate -- I mean, those customers have now -- now, there are 3 big customers. They're buying as 3 big customers? That understanding is correct?
There is no further any consolidation last few months. Rightly, we want to get someone that will go from the customer and it will join somewhere in other search. So truly, there's no matching change in operation the last 3 months, next to 6 months as far as our cover -- our way of thinking -- our understanding of this business.
Right. Okay, Sir. And sir, last question on the U.S. is, in terms of number of launches for this year and the next, how are you thinking about the number of product launches?
Around 30 to 40 products.
Of these, mostly -- most of these are -- how many of these are already approved, sir?
At least 10 are already approved -- launch of the products.
The next question is from the line of Surya Patra from PhillipCapital.
Sir, I just missed the injectable number for the full year. If you can share that? What is the injectable number for U.S. and also for the quarter?
It was INR 150 crore for the full year and INR 35 million for the last quarter.
Okay. And now on the margin franchise for the European business, you have -- sir, anything that you can share there, okay, what is the kind of margin level that we have achieved now for the entire consolidated European operation now?
Our European operations profitability in terms of EBITDA is about -- I mean, in a double-digit percentage.
Okay. So like from the earlier acquisitions, ex-negative margin profile to positive, and now what level that we have progressed, and what is the kind of scope for further expansion? That is what I wanted to have some sense. So if you can talk on that?
Looking for balanced growth. So there will be some high profit margin products as well as top line portfolio fillers. So I think we will be able to -- our focus is on balancing both the sides, but definitely on improving profit little faster than the sales.
Okay. If you can share what is the utilization level at the plants level, sir, in the injectable and then the formulation overall separately put together?
I think the overall as far as Unit VII is concerned, it is already running at an optimal level. And Unit X, as you would appreciate, is going to only start now. So obviously it is very premature to talk about capacity utilization there, so that is where we stand as far as overall expansion. As far as injectable is concerned, Unit XII is at optimal level and Unit XVI is also catching up. And Unit IV, we need some more time to -- that capacity to get consolidated because as we have talked about defending the guideline for some time. In starting also we have given you the timeline. So this ensures again it is better to get that online to talk about capacity utilization.
Okay. Just one last question on the Oral -- the U.S. Oral formulations business. So that has been one of -- consistently, it has been growing despite the market challenges and all. So what is the visibility one should have from here having the base of exclusive...
For projections -- Surya, like I think we can only talk to -- we can say that it should continue to grow is what we would say, we're not giving any specific projections per se.
Yes. Correct. But it seems that price erosion challenges and all that. So what is the kind of visibility that we are having for the Oral business, sir?
So even at the...
Go ahead, sir.
Even in the Oral business, like I think we talked about -- while even the -- as far as the future is concerned, we have talked that we are considering a 5% erosion as a normal erosion which used to be there in the generic business in the past there, give or take 1% year-on-year. Having said that, apart from the erosion you also have opportunity. One is in terms of the new product launches. And also like the growth in terms of existing base business assets which could ensure that even beyond this, the growth will be -- we'll be able to maintain the growth is our belief, Surya.
Any other questions, Mr. Patra?
No, thanks.
[Operator Instructions] The next question is from the line of Chirag Dagli from HDFC Asset Management.
Sir, API profitability, how has it changed over the last couple of quarters given whatever is happening in China in terms of intermediate pricing? For our API business, how has profitability changed?
I think as you'd appreciate, currently like, whatever Chinese intermediate prices which has -- you're talking about Chinese API or are you talking about Chinese intermediaries you're talking about?
Intermediate, sir. Pricing and the change with that?
So the intermediate pricing, when you're talking about, in antibiotic sector, I would say like I think we have now there expect to pass it on to the customer. To that extent, I think it would not be hurting us. But in the non-betalactam business is concerned, majority of non-betalactam business is to Aurobindo-only in terms of like I think the regulated market, and that is going on a standard costing or method of cost at 10% level. But definitely, like I think it is a bit of a concern at this juncture. So we are also working towards securing once whatever the sources we are having in China, we're also looking at alternative wherever possible to have an Indian source as well. But there are some concerns on that area, and we're working towards mitigating that as well is what I would say, Chirag.
Okay, sir. And sir, on the ARV business, this quarterly run rate on the formulation side, is this what we should sort of now assume is the new normal given that whatever has happened has happened because of pricing?
Not at all. As I was talking about, this year should be like I think the year where we can see that TLV making some in-roads and we can start. This year will be definitely better than last year as a whole. But that reflection would not happen quarterly on -- in terms of the first quarter, we would start seeing that particular improvement from the second quarter is what I said there, Chirag.
So the full year number plus DTG, whatever you're expecting, that is how you're thinking about this?
Full year number and including DTG to say would be better than the last year.
The next question is from the line of Surajit Pal from Prabhudas Lilladher. Due to no response, we'll move to our next question which is from the line of Prakash Agarwal from Axis Capital.
Just one clarification. On the status of the 2 facilities, you mentioned Unit IV has got EIR. What's the status of Unit XII, sir?
Unit XII will receive the EIR as well, Prakash.
Unit IV and Unit XII, both are cleared now, you're saying?
Yes.
So of the 30 to 40 launches, what is the expectation from Unit IV, sir?
We have not given specific number on that as well then, Prakash.
Okay. And second question again, a clarification. You mentioned about 8% kind of price erosion. I think sir also mentioned about 15%, and then you mentioned ex-Sevelamer. So I got a little confused. What is the...
From a business angle, year-on-year, it is 8% erosion. On a sequential basis, it is only 1% erosion is what we said. And then Mr. Reddy was trying to say about the overall number, exactly we are talking about only the base number, which is we don't consider Sevelamer. So is it clear to you Prakash now?
Yes, okay. Which number it is 15%, because Sevelamer would be a much higher number.
It cannot be considered as a base business at all, Prakash.
Okay. And you're expecting, on a -- so basically you expect this is normalizing now and you're also putting up more inventory as you see more business. So I'm trying to understand the volume growth that we achieved for the year, and what is the expectation going forward?
Again, we are not giving any specific projection against the volume growth. Overall, we are still maintaining that we would be able to grow, Prakash.
Okay. And lastly on the employee expense side, has there been additional facilities which has been commissioned or -- so which has led to increase in employee expense? So how should we look at it also going in?
Yes. Subbu, will be able to explain that, Prakash.
Yes. Within the last quarter, there is no increase in the new facilities or anything, because the last 2 facilities, which has been commissioned was in July and June 2017. The increase in last quarter to this quarter is the annual incentive which has been given to certain set of people.
Great. And lastly on the ROW sir, what has really happened? We used to grow 20% plus, growth has little softened, and how should we look going forward?
Yes. I think our long-term outlook remains the same stable 15% to 20%. But this quarter, in Latin America, particularly, in Brazil and some parts of Northeast Africa, we had de-growth. But overall, like South Africa, Canada and all other markets have grown quite healthily.
The next question is from the line of Surajit Pal from Prabhudas Lilladher.
Madam, can I request you to ensure that those first people are waiting on their line being given an opportunity rather than repeat calls please.
Yes. Sure, sir.
It is about the strategic view of Aurobindo, in say next 3 to 5 years when people were leaving space despite that there is a lot of competition, that is one. Second, is that, there will be lot of specialty business, people will be jumping and there is a surety of success is very much questioned about at this point of time. Do you think the growth in outside U.S. is one of the key focus for next 3 to 5 years for Aurobindo, I mean, other than Europe?
I think I'll answer you this way that I think we would like to grow across. And obviously, like, I think there is a conscious decision which was taken even 4 years back that we would not like to depend on only one market that's where like the movement towards like Europe and that has really served us well. So our objective is to grow across, and we will also like to ensure that we are spread well geographically. So today, U.S. and Europe together is 67% in fact with Europe also growing, well, it can be even better. So that's the objective rather than saying one against the other objective.
Okay. Because the point is that we haven't seen much of your activities in terms of acquisition or growth in ROW market. So I was just thinking, whether -- are you guys really focused to grow into that to offset the kind of competition that we are seeing in the U.S.?
No, I think I would answer it this way. We keep evaluating, but we agree acquisition would be based on its own merit rather than put one against the other that's how I would say. Like, I mean, right now, whatever acquisition which has happened has been attractive in specific that geography. So because of it, we have gone ahead with that. Moving forward, you know about the strategy which has been clearly spelled out, the strategy has been looking out for some opportunities can happen in the Eastern Europe, which would also make the Europe as a continent complete in terms of future requirements. So any other opportunity, we'll be conferring it based on its own merit then we'll take a pause.
Sure. Subbu, I have a question on your overhead charges. If I look into Q1 and Q4 in between all those -- your SG&A expenses excluding R&D, it has been -- in second quarter, it has been told that INR 170 crores roughly around would be one-off. And from INR 685 crores kind of that has been increased by roughly around INR 100 crores, INR 150 crores if I go by Q4. So what could be the reason? Is it because the penalty you guys are paying for that or what could be the reason for SG&A expenses gone up so drastically?
There is -- Surajit, if you recollect, we said in the second quarter, the overheads will be anywhere between INR 925 crores to INR 975 crores, right? I'm just trying to recollect what has been said at that time, and against this, we are around INR 990 million -- INR 990 crores. So one is on account of the translation charges we had incurred. And apart from that, we have certain year-end discovery, renewed the debt stock profile at the end of the year and we are taking a hit of around INR 25 crores at the end of this quarter. That is the main reason for the increase in overheads.
And your staff cost has also increased quite drastically. I mean, from -- if I look into Q1 and Q4, it has been quite high. Your staff cost in Q1 was INR 490 crore, and in Q4, it is roughly around INR [ 518 ] crore. So any particular reason for such...
This is not comparable, Surajit. We said very clearly on July 1, 2017, we have commissioned Unit XVI. And generics came into picture by May 2017. So the full quarter impact has not been felt and which has been now felt in Q4. Second, there is a translation expenditure happened in salaries also, because of the euro appreciated quite considerably against the rupee. That is one thing. And apart from that there is a normal increment which has been paid also as [ FX ], annual incentives and other things as [ FX ].
And your CapEx has also staked up quite high in Q4, any special investment this quarter?
Govind?
I think this is what many years we have talked about, the expenses actually come more in the Q4, Surajit, as well as annually the quarterly number we talked about is maintained, if at all, this time only, that expenses exactly happened during the last quarter.
I was just thinking is it on some new plants or some specific projects you guys are putting?
We are, in fact, one of the conscious things we need to invest on CapEx as we progress this year, this year also our CapEx should be around $175 million plus, because when the volume growth happens, commensurately we need to ensure that we are capable of servicing those volume growth as well, Surajit.
So it will be the similar amount in FY '19/'20 also or how is it going to pan out?
So '19/'20, it will be premature at this juncture. But actually, FY '19, I can tell you, like we expect it to be around $175 million, $180 million, Surajit.
The next question is from the line of Rakesh Jhunjhunwala of Rare Enterprises.
[indiscernible]
Sorry, Rakesh. We can't hear you clearly. Can you please speak on the handset mode?
How will the interest cost be affected or the increase in what kind of interest cost do we anticipate for '18/'19?
Sir, this year, we have -- this quarter Q4, we end up with a interest cost of 2%. Our interest cost is predominantly foreign currency denominated. So depending upon the fed rate hike in the interest rate, our interest cost also move accordingly, but it will be slightly below that, because we are using other currencies also.
Right. So if fed rate goes up by 75 basis points, R&D cost should also grow by 75 basis points, is it correct?
Yes, sir. That's true, sir. It will be slightly below, but nevertheless, it will be of that range.
And how do you expect the inventory in the working capital will increase next year? It should normally -- you are adding for higher sales, that means higher working capital. But if your inventory is going to be normalized and you're carrying extra inventory today, what would be the increase in working capital next year if overall it goes up by 15%, how much will be the working capital going to be?
Sir, we have -- if you see the balance sheet, we have here, on an average, the working capital is around 40% of the turnover. If the increase in the turnover by about 15% as we said, so our working capital also will be similar or maybe slightly lower.
Then why do you -- suppose I say your EBITDA grows, your profit next year is say, INR 2,400 crore, I say, INR 2,400 crore and you're INR 3,200 crore. If you have $175 million of capital expenditure, right, why will your debt not go down further only, why it will go down only $100 million?
Sir, it is like this, when the turnover goes up by 15%, even though the working capital to turnover percentage remains the same, but the absolute amount will go in line with the...
And so, the scale goes up by INR 2,000 crore, and your working capital grow by $120 million. So $300 million is your increase in working capital and your capital expenditure. Your profit plus depreciation is $600 million, and you have about $550 million. So why should your debt go down only by $100 million.
Sir, take my example which I said, if the turnover grows by $200 million and with the working capital ratio at around 40%, so the increase in the working capital will be $80 million.
If $175 million is your working capital or $250 million?
So $80 million not happen, it may come down by around $60 million, $70 million. So that will be the incremental working capital required for the -- at the absolute amount.
So $250 million, but even if I take this year's interest, the share depreciation plus profit after tax is about INR 4,200 crores. So then why will we -- why should your debt not come down $250 million?
Sir, we said we will target not less than $100 million. That's what we said. We have not given an absolute amount.
No sir, but then your target miss this, don't add up Mr. Subbu. And why you should target only $100 million. Either you're guiding to a wrong end?
Not like that, sir. We have not worked out the thank you numbers because as we said, the year has come only 2 days back and we are working out how it is we going to pan out in terms of new products and other things.
Okay. Thank you. And hello, see there is some problem with injectables. I'm not able to understand. You have 3 plants, am I right?
Yes.
IV, XII and one more, which is XV?
No, it is actually IV, XII and XVI, I'm not even considering [indiscernible], because it's an independent business. Go ahead.
IV, XII and XVI, right? And those plants and all the 3 plants are all EIR by the FDA?
No, so the IV EIR, which received 10 or 12 days back, and the XII EIR has been received already a couple of -- a few weeks back.
And XVI?
XVI got inspected only a couple of weeks back, sir. There are 3 observations, and we have responded only last week. So we will await the regulators review on that.
Right. Now so what is the problem? I mean, I recall overall, because still continuing or you have to make investments for that [indiscernible].
Yes, I would like to clarify, sir. As far as deadline is concerned, initially, our assumption was I think we're okay in terms only recalling a couple of issues -- whatever batches that have issues. But then when we had evaluated collaboratively with the regulatory, it made more sense for us to withdraw the entire residual line when product which is available. So that all we took later, that is the reason you might have seen the same bag line recall being filed like, let's say, more than 2 or 3 times. So that's...
I never understand. But as we recalled, overall, we have to make further recall.
So I think companies understand the fact that when we run a campaign, sir, even if one batch add an issue, we immediately evaluate in terms of the impact. And based on the impact assessment, the calls will be taken. So as of now, like I think whatever we had recalled is in fact even the recent recall which has been filed which also for the whole batches as what we have recalled, Mr. Rakesh.
Sir, if I recall, therefore as of now, whatever knowledge of recall you have, you had recalled?
Yes.
[indiscernible], am I right?
That's right. Because please understand the fact that I think these recalls are all normal in the industry, sir, even though for us it is new like, so generally I think when you are in doubt and when it is something doubt, which makes more sense in terms have not been any patient safety, immediately we should recall. That is the norm.
As you know, today, recalls have come are over within the knowledge of what you want to recall.
On our knowledge, we had recalls, so whatever we need to recall.
Right. And are there any production problems which have occurred because of the -- for the future after recalls which you have to rectify and then put into production?
Yes. So as far as last quarter is concerned, when we have recall, obviously, the bag line is something which we are doing larger remediation. Because of it, we are taking more time. I clearly said, like September, October timeline is when we will come back on the bag line. But then when we had issues in terms of certain product in terms of XVI or in terms of even XII. I think we had gone for some more modifications in terms of enhanced x-ray as well as enhanced instruction. Whenever we are doing those remediation, we will not be producing the product. So that is the reason that I think the deferrals also happened.
[Operator Instructions] We'll move to our next question from the line of Ashi Anand from Allegro Capital Advisors.
Just to understand how Oral would be positioned in the U.S. business say, 2 to 3 years down the line. What we have seen is over the last couple of years, saw various segments which were very limited competition such as tropicals have few significantly higher competition. So just trying to understand on our injectable portfolio, how is it actually the way to look at it 2, 3 years down the line, do we see this bit having become commoditized? And how large could segments like nutraceuticals and OTC come from a 2- to 3-year perspective?
I think, overall, it's clear from the strategy, [indiscernible]?
Okay. As far as citing injectable is concerned, I would put it this way, Ashi, we don't expect it to be commoditized over the period of next -- foreseeable future of 2 to 3 years or even 3 to 3.5 years, we are not expecting it to be commoditized. At the same time, we do expect competition on those particular injectable products beyond that particular time line. And overall strategy is to ensure that we are able to set out in terms of our injectable portfolio. And during the same time line, the amount of investments which we have made in terms of the peptides or the [indiscernible] and respiratory products, and apart from our other differentiated portfolio which we had invested would kicking in, in terms of the particular timeline which would take overgrowth from then on in terms of driving the growth.
Okay. And with regards to OTC and nutraceuticals, I think how large do you think the way you think the to become.
As far as the company is considered and in fact Mr. Reddy has clearly said I think this year we're expecting 35% growth compared to last year. And we are expected to be stable as far as the OTC business is concerned, because our strategy apart from the typical OTC product is also focused in terms of the switches from the ANDAs to the OTC prescription to the OTC structure, which is not particularly gained for most of the OTC players, but to that extent that particular market would also be less crowded, and we would be able to sustain our growth as our belief as far as the OTC -- pharma OTC is concerned. As far as dietary supplement is concerned, in fact, our last Natrol is concerned, last year was more consolidation. But current year almost we clearly see a double-digit growth work. And interestingly, we clearly see as far as Natrol is concerned, which we have been maintaining from day 1, we still have enough opportunities both domestically in the U.S. as well as the international business. In fact, the international business is being driven well. In fact, we have been extending our budget from last year and we expect the international growth also to continue to see that like I think Natrol is also able to grow for the foreseeable future.
Okay, excellent. And just slipping one last question. On a biosimilar portfolio, it seems like there still can be more second wave of launches with the issues in some of the drugs that we've spoken about. What makes us confident of actually being able to create value here, because again, strength or belief is that in biosimilar you sort of make money or you need to be in full speed? So are we kind of late in the scheme, and therefore the overall outlook in the space?
Sir, we might be late for a couple of products. We are not late for all the products. And we cannot necessarily claim that all of our products would only be in the second wave, in fact, the first product itself, it might be the second wave as far as U.S. is concerned. But it would be in the first wave in the Europe, because we are still expecting the first-day launch in the Europe whenever that particular product can be launched. In fact, the second molecule where I was explaining that there is a possibility of doing the Phase III in FY '20, technically, that should be in the first wave of product both in U.S. and Europe. That's again an interesting product. So we cannot be claiming that all our portfolio would get into the second wave is not true, Ashi.
The next question is from the line of Ranvir Singh from Systematix Shares.
I'm Ranvir from Systematix. Just on facilities, Unit X, Unit XV were supposed to go in production in the next 4, 5 months last quarter we had. So what's the status there?
As far as Unit XV is concerned, it's already exporting. Subbu, the date of conversion, again, the month of conversion, even clarify Subbu on Unit XV.
It's July to June.
Yes, July 2015 to -- July 2017 onwards.
2017 onwards.
And that [indiscernible] of Unit IV?
That actually we are awaiting the approval because we have filed a change. So we are waiting for approval in terms of that particular new line is concerned.
Okay. And just on -- about the big players, most of the bigger players actually working on the simularization rationalizing their portfolio in the U.S. given the challenges. So just wanted some sense from you whether you are also rationalizing any product pipeline or have rescheduled any R&D on product development?
So what we do is wherever we see that there are certain products we are not competitive, we always go back to improve those products to come back stronger is how we have been working on, Ranvir. So at this juncture, we do not see the need for dropping any products from our portfolio and we rework and we get back on that. That's what we have talked to that.
Okay, fine. And just the last one, in your presentation, sir you have mentioned product approvals and filings. Are there other formulations for product approved? So what is the [indiscernible]?
Sir, we bought 2 ANDA. So that's what it is reflecting.
The next question is from the line of Girish Bakhru from Bank of America Merrill Lynch.
Just one question on the injectables. I mean, earlier you had alluded to growth of 30% on, I mean, given the -- $10 million, $11 million loss this fiscal. Would you be able to cover up that number or it would be lower?
Girish, our objective is to still grow. And please understand the fact that we would like to ensure that we are having better clarity. When we are having better clarity, we'd be able to comment better. But definitely, our objective is to grow there, but sir, you said like the next quarter we'll have complete clarity in terms of the growth and how much growth would happen.
And when you had done root cause analysis on time to award, it's specific to time too, or is it more products involved in that?
Whenever we take any product, when we do the root cause analysis, we cover the entire products not only in their side, across also on restructure we do that in terms of root cause analysis.
Right. And just on the product side, I mean, besides Ertapenem, which you're expecting a launch anytime soon -- approval anytime soon. I mean, which are the -- are you seeing very big products out there in injectable space? Or there will be bunch of products cumulating to say good growth in this fiscal?
There will be a bunch of products. I think if you have seen the list of products while we have already filed the ANDA, and we are getting approval, definitely it's a set of bunch of products is what will happen.
Any color on [indiscernible], Govind?
[indiscernible], actually, we have given -- we have tried to update in terms of queries whatever they had. And as long as we don't have any further query, we should get approval in the next, let's say 2, 3 months is our belief.
The next question is from the line of Nimish Mehta from Research Delta Advisors.
Sir, once again on Unit IV, and sorry, not able to fully comprehend. So on one hand, we have this bag line which you had under [indiscernible] at the moment, and we ultimately received the EIR. So is it EIR kind of subject to the bag line. I mean, how do you look at it, because, I mean it looks like...
The inspection had happened a few weeks back, a few months back, a couple of months, 3 or 4 months back. When the inspection happened, there are a few observations on the facility. And we have responded for those observations, and the year would be reflecting that those observations has been considered and that's the year that has been issued. The bag lane, I should think is our own voluntary decision, because when we have seen certain recalls and we have collaborated with the regulator and it made more sense for us to recall those products, and since we had a recall on those particular line, we would like to remediate to ensure that whatever we are doing and that line should be sustainable. That's the reason we have taken of the modification, where I clearly said, that we would come back on that line by September, October time line. So these 2 -- I mean, during the inspection whatever happens, that's why the EIR happens. So the guideline whatever we talked about is on our own we have said, and we are remediating and we should come back in the September, October time line, is that clear to you?
Okay. I understand, it is basically not reflecting the bad line, is it more reflecting the...
EIR is for the facilities, sir. We would not be talking specific lines, sir.
Okay. Okay so -- okay, fine, no problem. On the impact on the approval that you mentioned, I mean correct me if I'm wrong. I'm under the impression that you would prefer the approved inspection if it is approved? Is that right?
The inspection had happened and we have received the EIR sir.
No, no. I'm talking about specific to Ertapenem.
I am talking specific to Ertapenem, sir.
It has happened?
Yes.
Fine. And lastly on Dolutegravir, there had been some FDA reports talking dose effects, side effects. So do you think this would be [indiscernible] kind of impact there on overall DTG sales?
So at this juncture, all the sponsors are sitting down and evaluating that particular aspect of it. And they're also working towards addressing that particular risk by mitigating and doing certain other safety studies which they are planning to do. At this juncture, like I think for them, the first lane as of now, we have taken this as the product and there are orders which we have, which we are servicing. I think in terms of the long-term impact, I would still say it is premature to comment on it one way or another.
Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Krishna Kiran for closing comments.
Thank you all for joining us on the call. If you have any questions unanswered, please feel free to keep in touch with Investor Relations. A transcript of this call will be uploaded on our website www.aurobindo.com in due course. Thank you.
Thank you. On behalf of Aurobindo Pharma Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.