Aurobindo Pharma Limited (AUROPHARMA) Earnings Call Transcript & Summary

Hello, and welcome to the JPMorgan Healthcare Conference at the emerging market track. I am Neha Manpuria, the Healthcare -- India Healthcare Analyst at JPMorgan. Our next session will be a fireside chat with the Managing Director of Aurobindo Pharma. We have with us, Mr. Govindarajan, we'll try to touch upon most topics that cover the growth strategy of the company as well as some investor queries that we have been receiving on Aurobindo. Thank you so much for joining us for the session, sir, virtually.

So I'll jump into questions directly, if it's okay with you?

Sure, Neha. Thanks for hosting us. Go ahead.

So, sir, if I look at Aurobindo, we have created a fairly large presence. We are probably the largest Indian player in both U.S. and European markets. And we've created a well-diversified and a profitable business in both these markets in the last 5 years. If I were to look at our priorities for growth in the next year, what would these be? Particularly given the one question that I'm sure you must be getting is the large base in the U.S. How do you continue to maintain the growth momentum from here? What will be your capital allocation strategy for this growth?

Yes. So let me talk about the capital allocation to start with. First of all, we are not looking at any large ticket acquisition in the foreseeable future, Neha. So -- because as you are aware of it, like I think our acquisition is largely based on 2 large strategy: one is in terms of market penetration; and the others is in terms of getting into newer platforms or newer technologies. So I don't think that we need to do any acquisition because we are well [indiscernible] in terms of like our own portfolio and anything which we look at it would have a significant overlap. So I don't see the need for doing any large ticket acquisition in the foreseeable future. But of course, we may look at the few brands that would improve our branded business in USA. The Acrotech business. Our capital allocation strategy would be to more improving the capacities and the capabilities. To just throw some examples that we'll be setting up a greenfield injectable facility at Vizag to improve capacities for Europe and emerging markets. As you are aware of it, currently, like we have only Unit IV, which is catering to the needs of the global injectable needs. And that is not enough for us to really, like, I think, support or penetrate in terms of the Europe and the emerging markets. So we are setting up an independent facility, which can be dedicated for Europe and emerging markets. Also exploring into -- from a market expansion perspective, getting into CAS markets as well. We will be expanding our Portugal manufacturing facilities by adding capacities, which encompasses both injectable and [indiscernible]. We'll also set up a release lab for over biosimilar batch release. We also have some residual CapEx, which we need to invest in terms of setting up the greenfield injectable facility, which should be up and running in the next few months, I would say, 3, 4 months, I think we should start running our validation batches. And also a greenfield facility for inhalers and transdermal batches in the U.S. and also the overall solid manufacturing facility in China for Chinese and the European market. So these 3 aspects are more of a residual CapEx, which should be doing to commission those capacities. Apart from this, we are also planning to expand our API capacity. So suddenly, like we also see that there is a need and from the customers also, the expectation is there. So right now, I think we are able to cater to our internal needs. And all along, we did not offer much to the external world because our internal needs of consuming the capacity. But you clearly see that if you need to expand the API business itself, like I think we need to have capacity. So we are clearly planning to invest on API as well. The last one is on the PLI. So we need to wait and see that because we already applied for a few products. We need to wait and see how it pans out, depending on whatever is the result on how many products we get, we will be able to throw more light in terms of both the capacity as well as the capital allocation on that.

Understood. Since you've mentioned a couple of things that I wanted to cover. I'll start off with the biosimilars business. Aurobindo's pipeline will probably start unfolding in the next year for the regulated markets. We will probably be late entrants in the first wave of launches. And in that context, how do you see the competitive landscape and our ability to sort of break into this market? And could you also throw light on when we can start seeing -- in terms of what time lines we should watch out for -- in U.S. and Europe when it comes to a biosimilar pipeline?

So when we are talking about the timing of the entry into this business, Neha, you would agree with the fact that I think we had waited enough to ensure that the regulatory pathway is opening up and there is more clarity on that. And from that perspective, I think we have got into this business at the right time. And we're also lucky to get a portfolio of products to -- from a partner from Europe from Lonza, like which also helped us in terms of ramping up our portfolio. So even though might be looking at like I think -- like a late entrant into the business, but we have built the capabilities and the capacities. And in fact, just to let me know that we would be launching our first set of products in Europe by the next financial year. And incidentally, in my opinion, I think from the day we started constructing the facility and the launch, probably we could be one of the shortest in terms of getting into the market. So since we delayed in terms of our entry into this business. We are also like coming -- we are happy to say that I think our first 2 set of products, which should be getting into the European market, we'll be able to do it with the extended Phase I rather than doing a full phase -- a full-fledged Phase III. So that is an advantage we have enjoyed, I would say. So apart from that, we are also, like, I think, clearly seeing that the benefit of Aurobindo's entry into this business is that we have the front end already ready. Incidentally, our colleagues in the -- in certain markets are already like -- I mean selling certain products, including biosimilars, which would allow us to directly go through our own channel rather than like those people who don't have a front-end has to tie up with someone. So to that extent that we don't lose those margins, and we would be able to gain that. And the last, but not the least, is also like our a platform is based on better yields. In fact, the [indiscernible], we are talking about on the range 4 to 5-gram per liter, which is a pretty good yield in terms of this platform, which also, like, obviously, because we have come in late, I think we are able to get into this platform compared to like, I think, the early launches would have lower yield. So in total, we are developing 13 molecules in 2 waves, which is a global market size of over $50 billion. In the first wave, we are working on 5 molecules in [Audio Gap] 4 on oncology and one in ophthalmology. And remaining 8 molecules will be developed in the second wave. That is as far as our biosimilar is concerned.

And did I hear correctly that Europe, we will see our launches in the next fiscal? And what about the U.S., sir?

U.S. would take one more because we will be filing towards the end of the year, and we had to wait for the regulatory clearance. So you can take it as additional, from the day we file it, you can take it as around 12 to 18 months before we could launch the product.

Okay. Fair enough. Just moving a little bit to the U.S., the generic injectable business. There's been a lot of focus on it in the last few months. We've seen a lot of generic players talk about investing in this business, getting approvals, new entrants in the segment. Do you think injectables could see the same risk as oral solids in the medium term? And if you could throw some light on how Aurobindo's injectable -- generic injectable business looks at in the medium term, both in the U.S. market and the ex-U.S. market?

Sure. So we don't see a similar level of price erosion in injectables, like what we have seen in oral solids. That's my first answer, Neha. There can always be a product-specific. In case if somebody is coming up fresh on a product, there can always be some pressure on individual products. But overall, I don't see similar pressure like oral solids in terms of injectable, is what I would say. Having said that, I think we are also aware that like over the next 4 to 5 years, there could be new players who would have had enough basket. And obviously, like I think, by the time we would have expanded our portfolio, including the specialty portfolio to strengthen our injectable is what I would say. We are confident about our growth. In fact, from the current $380 million annual sales, we are aiming to reach around $650 million to $700 million in the next I would say, 3 to 3.5 years. This could be achieved on the back of a strong product portfolio, apart from the capacity addition, which I had mentioned earlier. So we are adding up 2 greenfield manufacturing facilities, one in [indiscernible] for U.S. market. And in fact, the U.S., whatever we are setting up is more of a 4 lines, which would cater to more of a small volume, high value product, which this will also be a facility to risk mitigate even Unit IV in terms of any risk on Unit IV. The other in Vizag is more dedicated for Europe and other emerging markets, as I had explained earlier. As you are aware that we always believed in a diversified product portfolio. And as of December 31, we have received approval for 87 injectable products. And 52 ANDAs are still awaiting for final approval. Apart from this, we are also in the process of developing 70 injectable products, including oncology, hormonal and complex pipette-based injectables, which should be filed in the due course.

Understood. And just touching up on the branded business. I think in the beginning, you mentioned that we could look at acquisitions for the Acrotech business, will that be the strategy for growth for the branded injectable business?

As far as Acrotech is concerned, the reason I mentioned, as part of our strategy on acquisition is because we still believe that we can get a few more brands into that portfolio to set the assets better. But obviously, like, I think we would like to grow that -- that business has been doing well. From the day we have acquired, I think, it has been doing as anticipated, except for those couple of quarters of COVID, I think the pandemic, it has definitely like I think done as we expected or sometimes even better than what we expected. But our objective is like I think we would like to strengthen the branded business also by adding a few more. First is like to get a few brands to strengthen our existing portfolio. But overall, on long term, also, we'd like to add more products into that portfolio to ensure that we are able to grow that on a sustainable basis.

Understood. Just shifting to the European business. Another area where we have grown organically and inorganically over the last few years. Some of the low-hanging fruits in the European market is probably already reflected in earnings, to a large extent, other than our most recent acquisition. What could be the drivers of growth for Europe from here? Is it fair to assume that a large part of this would be dependent on our CapEx and new launches?

So I would put it this way. Like as far as Europe is concerned, that all along it was more on a turnaround scenario. And from now on, it would be going on a growth scenario is what I would say. Like, obviously, like it is changing gears and changing the face as well. So we're absolutely confident about the growth. We have already -- having close to 250 products, which are under development, which includes injectables and specialty products, such as biosimilars. We are also, as I have mentioned earlier, setting up a dedicated injectable facility for Europe and emerging markets, which will be commissioned in the next, say, 16 to 18 months. We'll also be launching new products from our China facility in the next 5 to 6 months into Europe. So the launch of injectables and biosimilars and also other specialty portfolio will further propel the margins from the current level of margins.

And this would happen [Audio Gap] more in the near term? Or this could be like a 3 to 5-year...

No, I think we will continue to grow in the short, medium as well as long term is what I'm trying to say.

Okay, understood. You mentioned the PLI scheme of the government also in your capacity allocation strategy. Aurobindo has had a very strong presence in API. How do you see your competitive position in the market? And do you think this scheme could benefit the company in any way?

No. I think we clearly believe that I think if you are able to go through the plan as it has been [indiscernible], definitely, it should help our -- not only our company -- I mean the country as well. So we have already applied for a few products in the scheme, and we are awaiting further decision on these products. Once it is finalized, we'll be able to give you more color in terms of the capacity and the CapEx depending on which product we win and how much capacity we win. And the PLI scheme is important for us because we are already in the market with those APIs and with significant market share. And that actually would -- rather, I would say, force us to look at those products because if you don't backward integrate into these products, we would also lose the advantage in terms of those APIs we are existing in the market as well. So this should help us in terms of benefiting on the backward integration as well as bring stability to the existing API business as well in terms of the -- so those PLI products.

Sir, in the existing API business, if we work with an assumption that the PLI scheme will not come to us or give us any benefit, then what do we see growth outlook? Especially given that's been one segment that's seen phenomenal growth for companies during this pandemic?

I think antibiotics is one aspect of the API business, Neha. Like I think when we are talking about like PLI scheme, which is more towards those antibiotic-based products, which are the large first [indiscernible] products, I would say. Personally speaking, I think, I would say, like, I think we would like to grow the nonantibiotic business as well. That's why we have clearly said that we would like to invest in terms of creating capacities. Because all along, we are more inwardly focused, and we are very, very conscious in terms of not committing to customer what we cannot deliver. So to that extent, we are very, very careful in terms of growing our API business more on a muted way. Because of the same capacity, you cannot commit to the external customer as well as commit to the internal customer and create a conflict. So we have handled that well in terms of not committing anything which we cannot deliver to the external customer, and we have built a reputation in terms of like delivering whatever we are committed to the customers. If you need to grow our external customers, we need capacity. That's what we have clearly decided that we would be investing in terms of the capacities for those nonantibiotic business, which has nothing to do [indiscernible] to the PLI scheme is what I would say, Neha.

Okay. Okay. Fair enough. On the -- a large part of your investment, given you've talked about biosimilars, injectables, your CapEx and inhalers, et cetera. You've also guided to a steep increase in R&D, given this pipeline investment. How do you balance the margin outlook to drive earnings growth? Or should one believe that profitability for Aurobindo has peaked at FY '20 or first half levels?

I don't think that we have peaked our profitability, Neha, because we still believe that we have enough headroom left for us to grow. In fact, our specialty portfolio is going to come out only in the future. So obviously, like I think we don't think that we've peaked out as far as profitability is concerned. And when we are talking about the steep increase in terms of the R&D investments, I think you would agree with the fact that this increase is mainly due to the investment in complex and specialty pipelines such as biosimilars, vaccines, inhalers, et cetera. So the pipeline once commercialize will yield better margins for the company. Hence, going forward, there is ample room in terms of like, I think, improvement. Talking about the steep increase. First and foremost, let us understand the fact that what we have projected for the future is at peak, it can go to 8% to 9%, when we have 2 Phase III simultaneously happening, which, in fact, it might happen 1 or 2 years, but we are not saying that consistently, that would be the level of steep increase, which should be -- which we'll be staying with in terms of R&D percentage, that's not what we said. We would -- we said that it can reach that peak level for 1 or 2 years then we have combined Phase III, so let's say, 1 or 2 products together coming up, let's say, 2 -- or 2 products Phase III happens in the same financial year, then the particular level of 8% to 9% can happen. But you also have to remember the fact that consistently, as we are investing and we are trying to launch those products as well, our top line will also grow. To that extent, this would be commensurative is what I would say, and we don't expect it to keep picking up in terms of our R&D percentage as well.

Understood, understood. The one point I forgot to, Sir, since you mentioned in your opening comments -- in your first question is on China. We've heard yet again China being spoken about by a lot of generic players. What is Aurobindo's strategy for China?

China is an important market in terms of geographic expansion for us going ahead. In fact, we are setting up an oral solid manufacturing facility in China. And we recently received an approval for our first product from China, which we are planning to launch in the near future. In total, we have filed around 28 products and also started filing products from our Chinese facility as well. So we expect approval of 8 to 10 products in this calendar year from China. So definitely, like I think we see a good future in China market as well.

The contribution from China, that means would start from the next fiscal...

Yes. So if you're looking at significant revenue it would be from next fiscal. But since one -- towards the second half of next fiscal is what I would say, because we need to see a few more products because the first product approval has come. And we expect a few more products to come up. Once you have the basket getting filled up with some good products, I think, definitely, you would start seeing the traction in terms of the revenue and the bottom line as well.

Fair enough. The -- one other interesting area that has been talked about quite a bit in context of Aurobindo is the COVID vaccine. We've been fairly different in our approach from peers. We have done several partnership in term -- for development. We have a much larger capacity that we are setting up for vaccine. Could you: one, give me some progress on the vaccine that is being developed in India and in oral vaccines? And a second question to that is timelines on the vaccine facility. And given there could be some lag by the time these products that we are developing probably gets approved, are we considering contract manufacturing in the near-term as an opportunity?

So first and foremost, I think I will explain you like I think how we got into all these aspects of it. So that would give you clarity in terms of where we are headed. Like you might be aware of the fact that we acquired the Profectus Life Sciences way back in December 2019. And in fact, when we acquired that, we were very clear that moving forward, we need to have a manufacturing base in India for Profectus, which we rechristened it as Auro Vaccines. So that's how we decided that we will be having a capacity. But when we saw the pandemic, I think the promoters and the Board were very clear that it was an opportunity for us to advance the creation of the capacity because, one, is while we are working in terms of the product COVID vaccine, we also see that if the capacity is available. It would serve the purpose of serving the public at large in terms of having the capacity as well as it would make more business sense also to have the capacity only advanced. Because even if you don't utilize the capacity much, it would be definitely like I think you're only advancing the creation of the capacity and it is not going to go as a waste. So from a development perspective, we have a 3 pronged -- we have taken a 3-pronged approach. I think which you had explained earlier also. One is like, I think, our own vaccine, which is delayed, which will have some details for the next week, we are having a discussion on that to know the way forward on that. Apart from that, we have also tied up with the CSIR labs. In fact, 3 different CSIR labs are on 3 different platforms on the COVID vaccine. Apart from these 2 opportunities, we also recently announced a tie-up with the U.S.-based company called COVAXX. And under the signed agreement with COVAXX, Aurobindo obtained the exclusive rights to develop, manufacture and sell COVAXX UB-612 vaccine in India and to UNICEF. And we also have nonexclusive rights in other select emerging and developing markets. So we are partnering both Aurobindo and COVAXX. We are partnering on clinical development, manufacturing and marketing of COVAXX vaccine candidate UB-612. And this is the first product to the rest of our knowledge, which is based on peptide. It's a synthetic peptide-based product. And when we have read, like clearly, obviously, like there are several advantage we are seeing. One is like the temperature to store is only 2 to 8 degrees integrate. Second thing is I think we see that like I think on paper at the [indiscernible] that I think the side effects are minimal compared to the typical virus-based vaccines. Over and above that, when we talk about capacity, there is a learning which I had. I would like every one of us to understand that. Like I think in the vaccine capacity, it is calculated on a multi-dose level. So if single vial is having 10, let's say, doses. So when you're talking about 10 million vials, you are talking about 100 million doses. So from that perspective, like I think whatever we are estimating as 220 million doses in the multi-dose presentation at the current capacity of 480 million doses by June, it's still conservative. Frankly, even better than that in case if you run the full capacity.

And this capacity comes on board by June, you said?

No, we already have a capacity to the extent of 220 million doses, which is from the existing facility. And what we are saying is we'll be reaching the 480 million doses capacity by June.

Understood. Understood. And in terms of...

And these are all multi-dose presentation.

Understood. And in terms of time lines for development, these would be likely entering Phase III in the second half -- I mean towards the second half of the calendar year?

So we are, in fact, working closely in terms of submitting our documents at the earliest, seeking Phase II stroke 3 clinical trial. And in case if you get approval, and I think we would like to start it in this first half itself, not the second one. And that's the plan as of now.

Okay. Understood. Post the Natrol divestment last year, the biggest concern that investors had last -- the same time last year, which is leverage that's completely gone away. We will probably now have a net cash balance sheet. You -- the first thing that you mentioned in this session is that we are not going to do any large acquisitions as a part of a capital allocation. Then what is the M&A strategy? How should we look at this cash being utilized? Will it only be CapEx?

I think we are not changing our strategy in terms of our M&A at all. Like I think we are still talking about the 2 large areas of market expansion, that newer platforms and newer technology. So we are not changing that at all in terms of M&A. Even though like I think we have enough cash at this juncture. So if you really look at like I think keeping those 2 aspects intact, like I think our acquisition of recent Apotex acquisition, which happened a year or 18 months back, is also in line with our strategy of market expansion. Our Apotex acquisition is in terms of getting into the newer platform. So we have not diluted our 2-pronged strategy in terms of M&As at all. So we don't expect to do any large ticket acquisition on a foreseeable future because as I was explaining you that whatever we are looking at even newer technology and newer platforms, we are not going to do a very large acquisition. We are looking at like I think certain ticket size to ensure that we are able to propel our accurate growth, which we can keep consistently doing it over a period of time. We don't need to do it on a single shot. And as far as the market penetration is concerned, I think we have got enough in our portfolio to penetrate in the market. And we don't see the need for us in terms of acquiring some company to get into a market like in terms of like, I think. Probably like I think we will always looking at like getting opportunities to get into, let's say, CAS. But these are not like, I think, the large ticket acquisition we are -- in terms of talking about getting into any market is what I would say. Like I think I don't see us doing any large ticket acquisition in the foreseeable future.

Sure. Since we have a minute or so. I can't let you go without asking about the resolution of the facilities. I know it's difficult to put time lines, but have you heard from the FDA on a desktop audit, could the delay impact our earnings momentum or cost in any way?

On the lighter sense, other than FDA, every one of us have talked about the desktop audit, and we have to only wait for FDA to talk about the desktop audit is what I would say. From a preparation perspective, even for a desktop audit, like I think we caught our facility -- I mean with one of the leading consultant to do a desktop audit and we made all of our people to even participate to ensure that even potentially, if you need to do a desktop audit, how would it work. And as we did that incidentally, one more agency, like I think for one of our units have done a desktop audit and there are no critical observation. And we are responding to them in terms of certain observations they made, and we can get that facility cleared by the agency as well. As far as the Units I, IX and XI are concerned, we have completed all the committed [indiscernible] and we are awaiting further direction from the regulator. Could be desktop, could be physical or -- we wait and see. In fact, post-implementation of the remedial measures our Unit XI has been inspected by regulatory bodies of Europe, Japan and Brazil, and the facility was clear and certified. And our Unit X facility was inspected by the European agency, and we had received the GMP certificate as well. As far as Unit VII is concerned, we have completed all our committed coffers and awaiting further direction from the regulator. And as far as our own life is concerned, we completed most of the committed [indiscernible]. And probably, we should expect some clarity in terms of the way forward in the next couple of months is our belief. As far as the impact on the earnings are concerned, we have mentioned in the past also that around 18 to 20 products, which could get delayed, but these are not major or meaningful products is what I would say.

Understood. Thank you so much, sir. Appreciate the insights and the thought. Thank you for joining us for this session. Hope to see you in-person next year.

Appreciate your time, Neha. Thanks for hosting us. Thank you.