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Aurobindo Pharma Ltd
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Ladies and gentlemen, good day. And welcome to Aurobindo Pharma's Q4 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Krishna Kiran, Investor Relations. Thank you, and over to you, sir.
Yes. Thank you. Good morning, and a warm welcome to our fourth quarter and FY '20 earnings call. I am Krishna Kiran from the Aurobindo Pharma Investor Relations. We hope you have received Q4 FY '20 and FY '20 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 and Head Formulations; Mr. Santhanam Subramanian, CFO; 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 limitation statements relating to the implementation of strategic action and other affirmations on our business, business development and commercial performance. While these forward-looking statements exemplify our judgment and future expectations concerning the business development of our business, a number of risks, uncertainties and other important factors may cause actual developments and the results to differ materially from our expectations. Aurobindo Pharma undertakes no obligation to publicly revise any forward-looking statement to reflect future events or circumstances.And with that, I will hand over the call to Mr. Govindarajan for the highlights. Over to you, sir.
Thank you, Krishna. Good evening, everyone. The new fiscal year has begun with a lot of challenges that the global industry had ever witnessed. We are committed to protecting the health and well-being of all our stakeholders, including our employees and their families. We have enhanced the safety requirements across all our manufacturing units, including offices by mandatory use of protective equipment, maintaining the social distancing norms as well as other preventive measures.Within a couple of days of announcement of lockdown, over 1,500 employees are enabled with virtual remote access. Our manufacturing units continued to function at healthy capacity utilization levels. On a whole, we are truly happy to see our colleagues raising up to the challenge to ensure business continuity.We will now discuss the results for the fourth quarter and full financial year of '19/'20 declared by the company. For the year, the company clocked a revenue of INR 23,099 crores, an increase of 18% over last year. The EBITDA before ForEx and other income increased by 23% year-on-year to INR 4,864 crores. EBITDA margin for the year was at 21.1%, an improvement of 90 basis points over corresponding previous period. Net profit increased by 20% year-on-year to INR 2,831 crores. In Q4 FY '19/'20, revenue increased by 16% year-on-year to INR 6,158 crores, led by healthy growth in our key markets. The EBITDA before ForEx and other income stood at INR 1,342 crores, an increase of 27% over corresponding previous period. EBITDA margin was at 21.8% for the quarter under review, witnessed an improved of 180 basis points over Q4 last year. Net profit stood at INR 850 crores, an increase of 45% year-on-year.In terms of the business breakdown, Formulations business in FY '20 witnessed a growth of 24% year-on-year to INR 20,012 crores and contributed around 87% to the total revenue. API business contributed for the remaining balance of 13% and clocked a revenue of INR 3,083 crores. For the quarter, Formulations business contributed 88% of the total revenues and clocked a revenue of INR 5,401 crores, registering a growth of 23% year-on-year. API business clocked a revenue of INR 756 crores and contributed remaining balance 12%.In the Formulations business, U.S. business posted a growth of 27% year-on-year to INR 11,484 crores in FY '20. On a constant currency basis, U.S. business increased by 26% year-on-year to around $1.62 billion, led by improvement in volumes and new product launches. For the quarter, the revenue from the U.S. market increased by 21% year-on-year to INR 2,990 crores. On a constant currency basis, U.S. revenue increased by 17% year-on-year basis to $413 million. We have received final approval for 6 ANDAs and launched 4 products in the quarter under review. For the year, we have received approval for 22 ANDAs and launched 34 products across Oral, injectable and OTC segments. We have filed 17 ANDAs during the quarter and 55 ANDAs for the year.Revenue of Aurobindo Pharma USA, the company marketing oral products in the U.S.A., has increased by 17% for the year and 10% year-on-year for the quarter. Revenue of AuroMedics, the injectable business, witnessed a growth of 30% year-on-year to $277 million for the year and declined by 9% year-on-year to $59 million for the quarter. AuroMedics sales for the quarter has been impacted due to reduction in hospital procedures on the back of COVID-related issues and incremental competition on Ertapenem. We filed a total of 131 injectable ANDAs as on 31st March 2020, out of which 73 have received final approval and the balance 58 are under review.The company as on 31st March 2020 has filed 586 ANDAs on a cumulative basis, out of which 397 have final approval and 28 having tentative approvals, including 8 ANDAs which are tentatively approved under PEPFAR program. And the balance 161 ANDAs are under review.Europe Formulations revenues clocked at INR 5,922 crores in FY '19/'20, an increase of 19% growth over last year. In euro terms, the revenues grew by 22% year-on-year. For the quarter, Europe Formulations revenues clocked at INR 1,653 crores, registering a growth of 26% over corresponding previous period. In euro terms, the revenues increased by 26% year-on-year.Growth Markets witnessed a growth of 14% year-on-year to INR 1,355 crores in FY '19/'20. On a constant currency basis, Growth Markets reported a growth of 12% year-on-year. For the quarter, Growth Markets grew by 30% year-on-year basis to INR 377 crores. On a constant currency basis, Growth Markets reported a growth of 27% year-on-year.In FY '19 and '20, ARV Formulations business grew by 29% year-on-year to INR 1,251 crores. On a constant currency basis, ARV revenues witnessed an increase of 27% over the previous year. In Q4 FY '20, ARV revenues grew by 31% year-on-year to INR 382 crores. On a constant currency basis, ARV revenues witnessed an increase of 27% year-on-year.In terms of segmental classification, US Formulations contributed to 48.6% of the overall revenue in Q4 FY '19/'20 versus 46.9% in Q4 FY '18/'19. Share of EU Formulations increased to 26.8% in Q4 FY '19/'20 versus 24.8% in Q4 FY '18/'19. Gross Markets share increased to 6.1% in Q4 FY '19/'20 versus 5.5% in Q4 FY '18/'19. Share of ARV segment increased to 6.2% versus 5.5% in Q4 FY '18/'19. API business contributed 12.3% of the total revenue in Q4 FY '19/'20 versus 17.3% in Q4 FY '18/'19. R&D expenditure is at INR 239 crores during the quarter, which is 3.9% of the revenue. For the year, R&D expenditure is at INR 958 crores, which is 4.1% of the revenue. Net organic CapEx for the quarter is around $37 million. The closing rupee versus U.S. dollar rate was at INR 75.665 in March 2020 versus INR 71.385 in December 2019.The net debt has decreased by $87 million quarter-on-quarter to $359 million at the end of March 2020. On a full year basis, net debt had reduced by $365 million. The majority of the company's debt is denominated in foreign currency. The cash and bank balance is at $376 million. The average finance cost is at 2.1%, mainly due to availing multiple currency loans.This is all from our end, and we are happy to take your questions now.
[Operator Instructions] We take the first question from the line of Nithya Balasubramanian from Bernstein Research.
Sir, congratulations on a good quarter. I had 2 questions. One was on your R&D spend. So I think in one of the previous calls, you had guided for more like 5% R&D spend, but we have seen that trending lower in the recent quarter as well. So if you can help us understand if any programs were delayed in the current quarter as well as give us some color on what it could look like for the next fiscal.
Yes. So Nithya, basically, what we have said in the past is, like, I think it would start increasing once we start clinical trials for both the differentiated portfolio as well as biosimilars. Actually, in fact, the next year, we expect it to be around 5.5%. So that's our expectation, and actually, some clinicals for the biosimilars as well as depot we have some.
Understood. So my next question was actually if you can show, again, light on the current status of the various plants, which are under the FDA scanner. When do you expect resolution for the various plants?
Okay. As far as Unit VII is concerned, we've had a discussion with the FDA in the mid of April. In fact, we had a video conference -- audio conferencing with them in mid of April. And we have completed the CAPAs, which we have committed. And the last update was chat to FDA yesterday. We'll be working with them in terms of the further course of action. That is as far as Unit VII is concerned. As far as Unit I, IX and XI is concerned, in fact -- before I progress on I, IX and XI, as far as Unit VII is concerned, it is OAI status. As far as Unit XI is concerned, it is a warning letter, whereas I and IX are under OAI. And we, in fact, we have completed all our actions and -- including the consultant certification of the completion of those actions by November mid, and we have submitted those documents to FDA. On a logical term, we would have expected the inspection to happen by the first quarter. With the current situation, like I think it is getting delayed. So we had actually requested for a desktop review. And we will be working with them in terms of whenever they could do that, and we'll move ahead with that.
Is the FDA now open to doing remote inspections like this?
To the best of our knowledge, we are working on those procedures is what we understood from the various forums, whatever we have read and what we have heard. And then once whenever we are completely ready, we'll be progressing on that. There are no definitive time line we'd be able to comment on that. But in our considered opening, that should start anytime in the next few weeks or so.
I'm sorry, just a clarification. So the desktop review that you mentioned is actually for Unit XI, right, the I and XI?
We had already submitted for the desktop review request for I, IX and XI. And Unit VII we have submitted our final response yesterday after completing those CAPAs. And I also would add that we had received the OAI status for AuroLife only recently. So these are the 3 aspects of it.So as far as Unit VII is concerned, like since we have submitted our response -- final response yesterday, we'll be working with them in terms of the further course of action. So at this juncture, the desktop review has been sought for I, IX and XI.
We'll take the next question from the line of Neha Manpuria from JPMorgan.
First question on the U.S. business. Two parts. One, did we see any benefit in our oral solid business from up-stocking in March? And second, given the high base we are in and a few of our facilities are still under pending review from the FDA, how should we look at approval momentum both for the injectable business and the oral solid business?
Okay. Go ahead, Swami. Yes. Go ahead, Swami. Go ahead.
Yes. Okay. So thanks, Neha. We have seen some uptick in volume in U.S., especially in respect of oral solids and nutraceutical. The kind of drugs that went up was mostly the antibiotics, antiviral and some of the long-treatment protein drugs. And primarily, we believe that customers are increasing their inventory level in preparation for the disruption. And higher number of 90-day scripts was another point, which was responsible probably for the surge. Then there were also opportunities that was created when other companies probably had some supply issues. These are primary reasons. So we saw certain surge in the demand.
And would this have disproportionately benefited the 10% year-on-year growth that we reported in the oral solid business?
What I would like to say here is, on an overall basis, we also saw some tepid growth. There was some -- like demand was lower in terms of injectables, like go and explained, this was primarily for the -- due to the COVID-19. But as far as the oral solids is concerned, I think, we have a good base. We have a number of products that we would be monetizing. We are looking very cautiously in an optimistic way going forward.
And how many launches should we expect, sir? I think we did 34 launches, right, for -- in FY '20. What's the number we're looking at in FY '21?
We expect to launch around...
50 to 60 products around -- Swami, so we would -- we are expecting to launch around 50 to 60 products, Neha, this year.
This is including injectables, right, sir?
Including everything.
Okay. And irrespective of the facility status, Unit VII and the API facilities?
Yes. Considering that only we have talked about this number, Neha.
Understood. My second question...
Out of the 50 to 60 products what we are talking about, Neha, 26 products have already been approved.
Okay. Fair enough. Okay. Understood, sir. And my second question is on the gross margins. This quarter, the gross margin was pretty strong quarter-on-quarter, especially given some of our lower-margin businesses like ARV or Europe, they contributed to growth. So how should we look at -- is this the new base for gross margin given the currency benefit? Or is there any one-off number that we need to adjust for in the gross margins?
The gross margin during the quarter has improved across all geographies, namely U.S., Europe, ARV, API everywhere. See, apart from the good -- the main reason is the good product mix within the geographies and also we carried low-cost of material because of the low cost before the COVID as on 31st December 2019 and also the rupee depreciation as well as [indiscernible]. So you know as every rupee depreciation will improve the gross margin as well as the EBITDA by about INR 30 crores to INR 40 crores. That's the thing.And even some of the products, as explained Swami, in the Oral segment also has improved, the gross margins have improved. So we are -- we have been informing in the past, our gross margin will be of the order of around 58%. Even when we are 55%, 56%, our target is to move towards the normal margin of around 58%. And that's what -- where we think we'll be around 58% to 59% depending -- I mean, based on the new currency rates.
We'll take the next question from the line of Surya Patra from PhillipCapital.
Congrats for the good set of numbers, sir. Sir, just on the U.S. business front. If you can just update, since it is year closing, what is in the progress for this Natrol and all. And also, you can indicate the injectable numbers. So excluding the Spectrum, what is the kind of a progress that we would have seen in full year FY '20?
Swami?
Yes. Sure. So Natrol, I don't know what exactly is your specific question but Natrol had a very healthy growth in the current fiscal. We are seeing continuing growth so far, probably one of the reasons could be because of COVID-19. And as far as the injectables concerned, Govind already mentioned in the call that we had an increase of about 30% year-on-year. However, we have to temper this with the current situation where the demands had dropped because of nonperformance of the elective surgeries. And once it comes back, the real demand will come back. So I just have to temper with it. But clearly, on a year-to-year basis, we had good growth.
I would also add to what Swami said, like we still maintain our market share. Is it fair to say, Swami?
That is correct. So we still -- in terms of volume, we still maintain the market share compared to the overall market, yes.
The overall IMS market share itself has fallen 43%, Govind, April and May.
Okay. Sir, I was trying to understand, even without factoring the Spectrum that we acquired, what would be the growth in the injectable business for the -- for the year?
So the Spectrum was not part of -- when we talked about injectable, we brought -- Govind mentioned as 30% growth is primarily in AuroMedics. Spectrum is -- we treat that as a brand. And for the purpose of discussion, we are not including that as part of the injectable.
That's great, sir. My second question would be on the European performance. Yes. So for across everybody that we have witnessed, there is a kind of a positive surprise in terms of revenue performance there in Europe. So on that EBITDA performance, where we have reached factoring all the kind of recent acquisition and all that? And what is the EBITDA level that we should be closing this FY '20 year, sir, in case of Europe?
Yes. So without Apotex acquisition, we were already into double digit as a percentage to sale. And because Apotex business was a loss-making one, and we expect that Apotex will break even in the second half of this year, FY '21, so I guess it will still not make such a big difference because the business is only a fraction of original business that we had, say, approximately 10% to 12%. So I guess we'll -- we may improve EBITDA margin, again, back to the double-digit of our percentage to sale.
Okay. Sir, is it possible to share some specific number that how have we progressed, let's say, last couple of years? Why because the profitable progress of Europe that can really support the overall earning performance and margin performance so meaningfully, considering the level at which we are currently. So if you can -- directionally can give us some sense that, okay, compared to last year, what kind of expansion that we would have seen? And what is our outlook going ahead for, let's say, current year, FY '21?
Yes. Because there is no like-to-like comparison, so it will be difficult to quantify as an improvement because Apotex business was -- we integrated only about 13, 14 months back. So if you look at that, I would imagine that earlier, we were at about 12% operating margin. Then with Apotex integration, it just remain between 9% to 10% and then again will go back and plow back to about 12%, 13%.
Sure, sir. Just one last question. On the U.S. business front, Govind sir, if you can just give us some sense about how progressively that we are thinking about upgrading our portfolio? The kind of pipeline that we have been working on, either on the inhalers or the biosimilars or the patches, so how quickly or in what manner that we should be seeing a portfolio upgrade for U.S. business? And how can that improve our overall earning efficiency for U.S.?
Yes. I think I'll talk about like the pipeline. And then as far as the margin expansion, once those approvals happen, obviously, like I think we would expect the margin to expand. So from the inhalers perspective, we are developing 8 inhalers, including 6 MDI inhalers and 2 DPIs. And as far as nasals are concerned, like we are currently working on 6 nasal sprays and out of which 2 products have been already filed during the quarter.And as far as the topicals are concerned, 37 products in the topicals pipeline are at various stage of development. And transdermal, like I think, we're developing 8 transdermal patches as well. Apart from that, you're also aware about the pipeline and, let's say, biosimilars, it should be like currently we are focusing on 5 products. But ultimately, like I think our overall portfolio, we are in 14 products. And so I think we -- and as far as depot is concerned, like, I think we are actually filing in Q3 FY '21 in terms of like the first product.And subsequently, every year, we'll be filing at least 1 or 2 variants as well. So we have enough products in the differentiated or the specialty portfolio. And if you have seen the timing as well, like I think every year, you will start seeing some progression in terms of the portfolio as well. So what is important is to start getting those approvals. And obviously, it will have a positive impact in terms of the overall margin financials.
We take the next question from the line of Nitin Agarwal from IDFC Securities.
Govind, just continuing on from -- you talked about the biosimilar a bit. On the biosimilars, can you help us understand a little bit more about the thought process? You already talked about shifting the biosimilar business into a 100% sub, and we talked about raising money in that business. So what is it -- I mean, so if you could probably just help us understand how is Aurobindo looking at biosimilars over the next 3 to 5 years? And what kind of trajectory from a monetization perspective should one assume on this business?
Yes. See, the whole objective of like saving 100% sub is because of the fact that one is, obviously, we'll have better focus and better review in terms of like being a separate entity. Obviously, like on a long-term perspective, at some point in time, we'd like to unlock the value. That is the overall objective where we have done this particular exercise.And -- so right now, we've already got 5 products which are being progressed out of is the first 2 products. I think we would be finding the product towards end of this year or early next year. So obviously, those first 2 products would be filed for Europe, which has a fixed time line of 210 days for approval if everything goes well. So obviously, the subsequent year it is going to get large. And we are also progressing the ophthalmic products as well, like I think which we are expecting to start the Phase III clinical trial early next year. And subsequently, the filing would happen for both EU and U.S. And there are other 3 products also being progressed parallelly.The whole objective is like, I think, when we are talking about like even getting some partners, we would do it at an appropriate time after succeeding on certain of the initial exercises, whatever we have done. So that will actually improve the overall, I mean, image of the particular division as well. So that's the whole objective.
And Govind, do you have any broad sort of strength in terms of at what stage will this business start breaking even for a sense in terms of the way you see this thing the business progressing and in terms of revenue contribution?
I think as I told you that towards the end of this year or beginning of next year, those first 2 products would be filed and within 7 months, at least, I mean 7 months, we should expect approval...
[indiscernible]
Yes. So in FY '22 -- yes, 2022, we should start earning revenues once the approvals in the Europe happens. As far as standing alone on their own feet, like I think subsequently, it would take only 2 years. By that time 1 or 2 more products also would be launched across the globe. So definitely, like I think they will be sustaining is what I would say.
Okay. And secondly on -- can you just update us on your plans for China? And if the some of the recent developments impact any of those plans?
So as far as China is concerned, like -- you are talking about our filings from China?
Yes. So the clients we were looking -- setting up 2 or 3 different manufacturing facilities in China in partnerships and otherwise. So just a broad brush sense on how we see China over the next 3, 5 years?
So currently, for the Chinese market, we already started filing products from India. And the construction of our own oral formulation manufacturing facility is going on. And we expect to take [indiscernible] the second half of FY '21. And also, you are aware of the joint venture, which we have signed in the last around 1.5 years or so, where we have seen -- in fact, we are seeing certain price correction in terms of the [ different ] products in the tender, but we will get more clarity as we get more closer to the launch is what I would say. But we are not restricting ourselves only for tender business. We'll also look at the other -- I mean the [ prior ] business as well as we progress.
We have only 2 plants. One is oral plant and one is the joint venture. That's all.
Okay, sir. And lastly, Govind, on the U.S. this year, we had a very strong filing rate, about 55-odd ANDAs that we filed. I mean what is the kind of run rate are we looking at for filing going forward?
No. I said, current year, we are expected to file around 50 to 60 products -- sorry, current filing around 50 to 60 products we'll be filing.
And as a run rate, you should -- could be able to maintain for next couple of years -- going forward also? Or this is like...
At least 50 products over the next 2 to 3 years you can consider, Nitin.
Okay. And lastly, if I can squeeze in. On the balance sheet, you had a very, very strong improvement this year on cash flow generation. Now how should we look at the balance sheet going forward? In terms of when -- I mean do we aim to become debt-free over a period -- in a certain period of time? Are there opportunities for us to invest back into organic growth or -- into inorganic growth? I mean how are we looking at the whole balance sheet picture now?
Yes. Subbu will give the answer on the debt part first. Subbu, go ahead.
Yes. So Nitin, we have said at the beginning of the year, we will go and then make it a debt-free company by 31/3/23. The way we have done accelerated performance last year, now we have been -- we are advancing this to 31/3/22. We were -- also, we are trying to [ end up ] between $200 million to $250 million, we will be reducing that debt from the existing business. We are planning to do that. As regarding the other one, Govind can answer.
Yes. So your query is more in terms of the deployment, Nitin?
Yes. So I mean, how do we see usage of cash now? I mean given the very strong cash flows which are there -- going forward now apart from debt deduction?
Yes. The first objective is the debt reduction, but we'll also have CapEx, which is to the extent of $150 million to $200 million we will have this year as well. And as we move forward, the growing business, we also need some capacities. That is where we will start with this. And in fact, I think, we'll get better clarity in terms of deployment once we retire the debt, like we will plan in terms of the further course of action.
We take the next question from the line of Shyam from Goldman Sachs.
Just the first one on secondary data that you've seen for the U.S. in terms of volumes for both industry as well as Aurobindo kind of down, I think, 18%, 20%. So far -- I'm talking about April, May. So are you seeing similar trends at the primary level? Or you think there is -- there are other levers that actually ensure that the drop is not that significant? I'm talking about the U.S. business.
Yes. Swami, you want to take that?
Yes. Sure. So Shyam, thank you. We had a very good growth in the last quarter, especially in the month of February and March in terms of oral solids. We have increased the number of tablets, number of doses that we give. In fact, year-on-year, it's gone up by about 24%. We see continuing growth, but however I, again, want to temper this. March was an extraordinary month. We continued -- I mean, we continued doing well in April. We obviously need to understand that it may not be as high as March, but we are continuing to do well in terms of volume.
Swami, the pointing that market share is something that one should look at rather than -- and that you're seeing, you are able to kind of sustain for the products that -- based on the demand.
We have had consistent increase in market share in terms of volume, and we see no reason for any decrease in that.
Got it. And sir, my second question is on the injectable number. I think it comes to about $59 million for the quarter. And we were doing between $70 million to $75 million a quarter before that. So is that the loss sale because of COVID impact and we can probably go back to this run rate during the course of this year?
So as far as injectable is concerned, first, we should understand the extraordinary situation we are in. There is a drop of about over 80% in elective surgery. And then there's been drop in the volume growth, significant amount of volume growth drop. We are in line with the overall percentage that we have been maintaining. So this is one reason why there's a fair amount of drop. This is a significant portion of it.And in addition to that, there was pricing pressure in one-off product. So this has also contributed to the overall degrowth. We believe that over a period of time I -- at this point, we cannot commit anything or say and how soon this is all going to come back. We believe, overall, considering the market, we'll continue to do well.
Just to add to whatever Swami said, like in fact, we just started the bag line, but that impact also would not be seen because the hospitals are not opened up fully. So that also would be seen as Swami was explaining.
Govind...
April, May, June, there's a lot of fall in the sales in the injectables because of what Swami told.
In this quarter, it could be slightly lower than in last quarter. But overall, as we progress, I think, we should start seeing the recoveries. And that's what even Swami and Mr. Reddy are talking about.
Perfect, sir. And the last question is on branded oncology. So we have now seen 1 year of this acquisition almost, right? So just wanted to get a sense of how this portfolio has progressed? And given that now Sandoz is no longer there, from an M&A perspective, is there any specific areas or geographies that we would like to do, not do, whichever way?
So I can take the first question, Govind. So as far as the numbers are concerned, we are very happy with what we have got. We -- I would say top line wise, we are on target, and then we are doing well. And we are quite pleased with the profitability of the product so far. So that's what I would say. Overall, it is a good acquisition. That's all I would say at this point of time. And as far as the M&A is concerned, I would leave this to Govind.
Yes. Before I start talking about M&A, Swami, you'll also agree like there could be some challenges for this quarter, as we see for Acrotech. I'm just clarifying because the same footfall in terms of hospitals, it will have impact. But as we progress, I think, that will also should get normal, Shyam. So as far as the M&A is concerned, like I think we are not currently evaluating or looking at any large-ticket items. But if -- we would be happy to end with the pipeline of companies like Acrotech by getting some brands, if it is available at like, say, $50 million around level, like I think we would still be evaluating those options. Or any new technology platforms, which can enhance our portfolio, we'd be happy. So because we have enough in our pipeline where we don't need to chase technically any portfolio other than this perfectly branded business.
Next question is from the line of Tarang Agrawal from Old Bridge Capital.
I have a couple of questions. So when I look at the balance sheet of the net debt, the cash balances increased substantially over the last 3 years from INR 500-odd crores in FY '17 to INR 2,815 crores as on 31st March. So what's the group's thought process around holding this cash? And how should we look at it going forward?
So this is a specific case because as on 31st March, we are planning to do the Sandoz deal. So we have accumulated cash for that purpose. Since it was not done, it will be deployed in the coming quarters as it progresses.
So we should see that number going down going forward?
Yes. Yes.
Okay. The next question is, if you could give me a sense on Aurobindo's Rx share in the U.S. index as per the last 12-month data?
It's around 9%.
We take the next question from the line of Damayanti Kerai from HSBC.
I'm coming back to Spectrum. So obviously, fourth quarter has seen impact of COVID disruption. So once the situation normalize, how we can see ramp-up from $100 million sales, which Spectrum portfolio did in FY '20? And how many products we are planning to add to the portfolio?
Swami, go ahead.
Yes. More or less, our first quarter sale is down at least 15%, 20%. Otherwise, we are adding one more branded product we are launching in middle of this year. Otherwise, in the quarter 4, sale is at par with the overall average of the $25 million approximately. So there is no much difference.
Okay. Actually, I just tried back calculating your FY '20 number and 9-month number. So earlier, you clocked around $25 million, $30 million, and I think it was much lower in the fourth quarter. So that's why I asked this question.
Fourth quarter is around $24 million, our sale. So it is at par with the overall other quarters. And more quarter 1 of 2021 is less around 15%, 20% and where it will be easily go back to the normal levels and some improvement. And we are launching one new product in middle of this year.
Okay. And during the Spectrum portfolio acquisition, we mentioned about some milestone payments, which should be made for some 2 particular brands. So have you started paying milestone for Marqibo and KHAPZORY brands?
No. Still -- that is still we have not reached to that level. So we have not yet paid.
Okay. And for the Spectrum portfolio, we have already achieved cost breakeven, and it's a profitable portfolio, right?
Of course. Yes, definitely.
Okay. And my next question is regarding some of the differentiated opportunities which you mentioned where Aurobindo is working. So are we like working on the capacities also? Or we have enough to reach some critical level, say, like once we start launching and then we'll work on the capacities also?
On the specialty portfolio, as we progress, we have started creating capacities. Like biologics, it has its capacity. Vaccine has its capacity. Depot injections, we already started having that area earmarked in Unit IV already. Like I think -- so as we progress and as far as the other portfolio, North Carolina already is ready in terms of accommodating that portfolio. So capacity is not an issue per se.
Okay. And we have couple of approvals on the ophthalmic portfolio. Have we launched those products or not yet?
We have launched 3 ophthalmic products last 1 year. And maybe next year onwards, we will launch more products.
Sure. My last question is, we have seen very strong growth in other formulation verticals such as ARV and ROW. So is fourth quarter more of COVID-related stocking up phenomena, which we have seen for the U.S. market? Or we should be seeing fourth quarter number as more indicative of performance in coming quarters?
At least on the ARV front, I can tell you it is not related to COVID at all because that is a standard business. And since we have gone into Dolutegravir as well as its combination, I think that has been ramping up is what I would say. In my opinion, that should continue to grow.
We take the next question from the line of Prakash Agarwal from Axis Capital.
Congrats on good numbers. Sir, first question on what has really led to this kind of strong growth in the oral solid business? Would it be the portfolio range that we have or the supply chain ability to put in inventories? Or what has really worked for us? Because we have seen other larger companies not -- the growth has not been to that extent, especially in the oral solids side. What has worked well for us?
Yes. Swami, would you like to answer? I'd like to -- before Swami starts, I would like to say like, I think, in fact, I would like to take this opportunity to thank all our employees who are really like, I think, made it happen in terms of the business continuity and in spite of the various challenges. Over to you, Swami.
Yes. So thanks, Prakash. So the first thing I would like to say is the nimbleness of the supply chain that we have, the capacities that we have created. So this has been very useful in the -- getting the opportunity to -- in terms of revenue. So we have done well in terms of that, though we had some transportation challenges. But overall, I think it is the broad breadth of portfolio and the supply chain ability to meet the demands and the sales team in the U.S., which has contributed quite a bit in taking up these opportunities.
Fair enough. Understood. And how much of this is sustainable, both for the oral solid business and also previous participant asked on the ROW and Europe site, since we understand that the prescriptions from doctors were increased from 30-day prescription to 90-day prescription. So when we enter, say, April, May, has the volume trends similar? Or as the previous participant asked, it has come down by 10%, 20%?
I think so let Sanjeev to take this...
I'd like to look at it on a month-to-month basis because this gets spread out. One month could have a huge surge. And obviously, when the stocks are available, other months could be lesser. But on an overall basis, we feel confident that the volumes have grown, and it will remain somewhat close to that, barring few updations.
Okay. So -- okay. So growth will continue. Maybe the rate might little bit taper because of significant prebuying already being done. Would that be correct understanding?
So what I would say is, understanding on the overall basis, if you look at it probably on a yearly basis, we would have a fair amount of growth, and we don't see a problem in that. Just -- I also mentioned that we had 24% growth in terms of number of doses that we gave. We have increased the number of customers. So we believe we have everything in place for decent growth.
Okay. And you're not -- sequentially?
Sorry, Prakash.
Yes. So we want to see the April to June quarter, because April is good, May is a little dull, and June maybe a little dull. And maybe we are sure that we will be back from July onwards.
Perfect. That helps. And second question is on, if I see your gross profit, that has increased by around INR 300-odd crores and same is the proportion with the Formulations business, about INR 300 crores. So the sales mix obviously improved, but the kind of gross profit improvement is much larger. So only sales mix is not explaining. And we've always maintained, there's not a single product that moves the needle. We are a broad-based company. So what has really moved the needle here? I mean, sales mix very marginal, I would say. Currency would be there, but not to that INR 300 crores extent. So if you could explain the INR 300 crores sequential up move, that would be helpful.
I think Subbu had already explained that. He will repeat that, Prakash. Go ahead, Subbu.
He said 3 things, which I heard, but if you could give more clarity. He said sales mix, currency and product mix. So I'm not able to understand the product mix.
[ I spoke to that also ] which you had missed out, Prakash. I said the carrying cost of the inventory as on 31st March was lower at a low currency rate, and then we sold it at a higher rate. So that also would have helped you because the carrying cost is lower [ as I explained to you ]. I mean maybe off the line, we can talk about it how it has built up because it's a too detailed one because we have multiple geographies, multiple products and multiple business segments.
Okay. Perfect. Great. And you are guiding that you would be at a 58% plus/minus gross margin going forward, if the currency remains similar levels?
Yes. We have said that long time back itself that's our goal, and we have been moving towards that always. That we have said a long time back.
[Operator Instructions] We take the next question from the line of Nimish Mehta from Research Delta Advisors.
Congrats for great numbers. I have actually a question on -- if you can just let us know what is the amount of factoring you have used to kind of monetize the receivables in '20?
Yes. Go ahead, Swami.
Yes. We have a little over $400 million that we have used for selling [indiscernible]. It's between $400 million to $500 million.
I'm sorry. It was $400 million.
He is asking about this last year, Swami, like specifically.
What exactly is the question, Govind?
He is asking about, like I think in the debt reduction, like how much is it because of factoring is what he's asking in terms of the last year. So let's -- Subbu, do you want to take that?
Last year to this year may be another $500 million?
No. Subbu, go ahead, Subbu.
See, you cannot -- see the factoring as a process, we always go under new factoring for the additional growth coming, where we need to invest money in the charge back, which is -- that's the only reason we go and do factoring. And factoring is very low compared to what we have achieved the overall reduction.
Sir, if I look at your cash flow statement that we published, there is this financial asset for monetization of almost INR 1,260 crores -- INR 1,270 crores, which I guess would be for factoring. So -- and that maybe give the difference between the last year's outstanding factoring versus this year's outstanding factoring. The actual number will be even larger than that. Is that my correct assumption? Or how do you...
Nimish, it's not the correct understanding. I'll tell you, you are looking at the trade receivables INR 4,315 crores versus INR 3,414 crores. Am I right?
No, no, no. I'm looking at the cash flow statement. And under that, we have mentioned that decrease in financial assets under the working capital operation -- I mean cash flow from working...
No. That we have explained in the last quarter itself. We have -- the coverage ratio, which we have earlier at 100% of the customers, we reduced to 60%. That's the reason why it has come down this year. Whereas if you really see, we could have moved up in the trade receivables, trade receivables. Trade receivables is now more -- I think it is at INR 4,315 crores versus INR 3,430 crores. You have to read together. You cannot read it separately.
So if I understand well, I mean, we have -- what we are trying to say is that you'll reduce the factoring or you'll increase the factoring between last year and this year?
You look at it like that. INR 4,315 crores plus INR 40 crores, which is INR 4,350 crores.
But, sir...
INR 3,413 crores. And if you read it together, it is more or less the same.
No. But sir, factoring, we just net it off from the receivables, right? So that number will never be reflected in the receivable number.
No. It is -- it's for the charge back. So really, we do not go into -- for everything, there is a price to it. Nothing comes free. So it depends upon what is the sales growth, what is the additional charge back investment we are doing. To that extent only we will do. Because we need to pay that money.
Look, that I understand. What I'm trying to say that if I look at the receivables, that will not tell me the amount of factoring we would have done because...
No. It's a standard practice. If the banks are down-selling the loan, they don't go and then give what's the down-sold amount.
Right, right. So how to read the factoring amount between this year and last year is the question, actually. Because the receivables will be net of factoring and thus will not tell us the story how much factoring...
[indiscernible]
Subbu, Subbu, Subbu, I have a suggestion. Between you and Nimish, if you can just have another specific call to address in terms of what his queries are so that we have minimal time for others to ask the questions, please.
Okay.
Next question is from the line of Chirag Dagli from HDFC Mutual Fund. Looks like no response from the current participant. We take the next question from the line of Dipan Mehta from Elixir Equities.
Congratulations on great set of numbers. Only one question I have is, how are you reading the U.S. generics market now in terms of price erosion? Has it come off? And how are you basically tackling it?
I think we've always maintained that whenever we look at the market and whenever we look at the erosion, we consider around 5% as a nominal erosion, which you should consider for those products which has just come out of the [indiscernible]. I'm not talking about those old products which have already eroded. So to that extent, like I think, currently, we are seeing less than that. But generally, we consider the 5% as our benchmarking.
We take the next question from the line of Tushar Manudhane from Motilal Oswal.
Congrats on a good set of numbers. Just would like to understand on the biosimilar side, how much investment you would have made till date in terms of CapEx and R&D separately?
Subbu, can you provide that number right away if you have it?
Yes, I will give it to you, Tushar, separately. I don't have it right now.
And you referred to have higher R&D spend as a percentage of sales for FY '21. But -- in a sense just would like to understand whether the clinical trial can happen during this COVID or it will be more in the second half of FY '21?
I think we have said like towards the end of the year, like we expect the 2 products Phase I to be completed, extended Phase I for Europe we expected towards the end of this year or beginning next year, it would get concluded. That's the first set of clinical trial. As we are talking with the Phase I clinical trial is going for one more product, but then ultimately, that will get into Phase III as well. So we expect these 2 first products -- set of products for Europe, which would actually -- the trial would get completed by end of this year or beginning of next year, that would get filed first in the Europe.
Tushar, just to give you, the investment is anywhere between INR 400 crores to INR 500 crores.
Okay. And R&D spend?
R&D spend currently is more in terms of the revenue expenses because the clinical trial is just now starting. So last year, I think, if I remember, [indiscernible] is approximately $11 million or so is what we have spent.
Yes.
And just one last clarity on this Unit VII. So you said that you've completed the CAPA? And you had a call yesterday. So for Unit VII...
Go ahead, sir. Unit VII...
Is there a request for even desktop review for Unit VII as well?
So we have submitted our last set of data only yesterday, sir. So first, we would like to give them some time to digest it whether they have any queries on that before we further progress on that request, please.
We take the next question from the line of Kunal Dhamesha from [ SBICAP Securities ].
My first question is on portfolio overlap between U.S. and Europe. I think we have 201 products in U.S. and 284 in Europe. How much will be the common products? And if there is significant overlap, are we supplying it from the same plants or the plants are different? That is the first question.
Most of the U.S. products should be there in U.S. and most of the Europe products should be there in U.S. as well. That is the first point I would like to say. As far as the plant is concerned, right now, like I think it is common for -- in terms of Unit III and Unit VII because Europe products can go from Unit III and Unit VII as well. From a dedicated facility, Unit XV, which is in Vizag caters only for European market.
Okay. Okay. Okay. And there'll be majority, so 201 products will be there for Europe as well, the same U.S. product that we have?
Yes.
Okay. And second question is on China. So you alluded to the other channels other than the tender. So what are those other channels in China? And how are pricing behavior in those channels? And how does having a plant in China exactly help?
Yes. I think the regulation has changed in terms of like having a preference in terms of FDA inspected -- I mean the FDA-filed product and FDA-inspected facility in China would get preference in terms of expedited review. That is the reason like it makes more sense to have a facility in China. That is the first aspect of it. In terms of pricing in the other market other than tender, it is too -- it is attractive. That is the reason we are moving ahead with it. But in terms of specifics, we'll have more clarity as we go closer to the filing and launch.
Okay. And if we have to divide the Chinese market into those channels, what would be those channels? I mean, just not colors -- and if we have to divide it in those channels, can we have the proportion of market that is there in each of these channels?
Yes. Mr. Reddy would comment on that.
Ultimately, this plant will go to the Chinese requirement. Up to that, we may use for China some percentage, Europe some percentage and some for U.S. percentage. But in the end of the day, it will go to the Chinese requirement.
His question is sir in terms of...
Based on the market improvement in China, some in the tender, some in the -- still promotion products or something. This way we are following.
His question is in terms of channel, sir, apart from tender in terms of like, I think, what are the other channels available in the Chinese market.
So we are doing some promotion activity, where -- which is the products, which is not in the tender products, those special products also, we are planning to register. And we'll have the -- through distributor -- doctor promotion, we're planning to go ahead.
Okay. That kind of partially answers my question, but the question was more on the -- how the market is distributed between the channels? Some color, the tender mix up for a bidder...
Presently, the tender market is not more than the overall -- the value-wise, it is not more than 10%, 15%. Still major generic market is still with the distributor and promotion market in China. But slowly, slowly in next 3 years, it will cross 50%, 55% level, something tender market. But now they have limited products and at the low price, they made some products. But there are still lots of products over there.
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 closing comments. Over to you, sir.
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.
Thank you very much. Ladies and gentlemen, on behalf of Aurobindo Pharma, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.