Aurobindo Pharma Limited (AUROPHARMA) Earnings Call Transcript & Summary

Welcome to Aurobindo Pharma Q2 FY '24 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to management for opening remarks. Thank you, and over to you, sir.

Good morning, and a warm welcome to our second quarter FY '24 earnings call. I'm Shriniwas Dange from the Investor Relations team. We hope you have received Q2 FY '24 financials and the press release that was sent out yesterday. These are also available on our website. I would now like to introduce my senior management team on the call with us, represented by Dr. Satakarni Makkapati, CEO of Aurobindo Biosimilars, Vaccines & Peptide businesses and Director Aurobindo Pharma Limited; Mr. Yugandhar Puvvala, CEO of Eugia Pharma Specialties Limited; Mr. Sanjeev Dani, COO and Head Formulations Aurobindo Pharma Limited; Mr. Swami Iyer, CEO Aurobindo Pharma USA; and Mr. S. 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 limitations, statements relating to the implementation of strategic actions and other affirmations on our future business, business development and commercial performance. While these forward-looking statements exemplify our judgment and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors may cause actual developments and results to vary materially from our expectations. Aurobindo Pharma undertakes no obligation to publicly revise any forward-looking statements to reflect in future events or circumstances. With that, I will hand over the call to Mr. S. Subramanian for the highlights. Over to you, sir.

Thank you, Shriniwas. Good morning, and a warm welcome to our Q2 FY '24 earnings call. I'm extremely delighted to inform it has been yet another quarter with highest-ever sales. The sales growth was seen across the market and businesses. This is further augmented by the highest EBITDA in the past 12 quarters. Now let me take you through the details of the results for the second quarter of FY '24 declared by the company. For Q2, the company registered a revenue of INR 7,219 crores with an increase of 25.8% year-on-year. The EBITDA, before ForEx and other income, grew by 67.7% year-on-year and by about 21.9% quarter-on-quarter to INR 1,403 crores. EBITDA margin for the quarter was at 19.4% against 16.8% for the last quarter. Net profit increased by 83.6% year-on-year and by 31.7% quarter-on-quarter to INR 752 crores. In terms of the business breakdown, formulation business, excluding Puerto Rico in Q2 FY '24 witnessed a growth of 29% year-on-year to INR 5,968 crores and contributed around 82.7% to the total revenue. The API business contributed around 16.2% and clocked a revenue INR 1,166 crores for the quarter, registering a growth of 20.3% on a year-on-year basis. The growth is mainly driven by higher volumes on account of the improved asset utilization and debottlenecking. For the quarter, the revenue from U.S. formulations, without Puerto Rico, increased by 35.7% year-on-year to INR 3,385 crores. On a constant currency basis, U.S. revenue increased by 30.7% year-on-year basis to USD 409 million. Please note that these numbers are without Revlimid, which have started to contribute during Q3 FY '24. The growth was mainly driven by volume gains, stable demand and new product launches. Price erosion has moderated and continues to be neutral. Our wide range of approved basket has helped us optimally manage the price erosion. We have received final approval for 15 ANDAs and launched 19 products in Q2 FY '24. We have filed 10 ANDAs during the quarter. Revenue of Aurobindo Pharma USA, the company marketing oral products in USA, has increased by 23.3% year-on-year to USD 212 million in Q2 FY '24. Revenue of Eugia Pharma Specialties Limited in the U.S. increased by 64.2% year-on-year. The year-on-year growth was driven by improved volumes in our existing products and new product launches. This was coupled with a stable pricing scenario in this quarter with a low single-digit price erosion. The total Eugia specialty sales in U.S., including the specialty OSD amounted to USD 91 million. During the quarter, the Eugia performance in various financial performance are better than the last quarter. As informed by my colleague during the previous quarter's earnings call, we are on track to achieve the USD 560 million globally for the Eugia Specialties for FY '24. We have a total of 169 injectable ANDA filings on 30th September, out of which 133 have received final approval and the remaining 36 are under review or have tentative approval. The company as on 30th September 2023, has 817 ANDAs filed with the U.S. FDA on a cumulative basis, out of which 628 have final approval and 32 have tentative approvals, including 6 ANDAs which are tentatively approved for under PEPFAR and the remaining 157 ANDAs are under review. For the quarter, the European formulation clocked a revenue of INR 1,769 crores, an increase of 16.7% year-on-year growth. In constant currency terms, Europe revenue was EUR 197 million against EUR 189 million of last year Q2. For the quarter, growth market revenue increased by 24.7% year-on-year to INR 564 crores. In U.S. dollar terms, revenue grew to $68 million in Q2 from USD 58 million in Q1. For the quarter, ARV formulation business revenue increased by 52.1% year-on-year to INR 250 crores or USD 30 million. During the quarter, the raw material costs and freight costs have improved further, aiding our gross contribution which stood at INR 3,983 crores. Gross margin for the quarter was higher at 55.2% against 53.9% last quarter, mainly due to low material costs and favorable product business mix. R&D expenditure stood at INR 300 crores during the quarter, which is 4.2% of the revenue. Previous quarter expenditure was high on account of clinical trial expenses for multiple projects. Capacity utilization has gone up well this quarter driving the operating leverage. Consequently, EBITDA has improved to INR 1,403 crores, reflecting a margin of 19.4%. As on date out of 18 U.S. FDA-regulatory units, 15 units have classification of VAI, 2 units have received 1 observation each and 1 unit is under warning letter. Net CapEx for the quarter is $154 million, which mainly includes $48 million towards the acquisition of marketing authorization in Indonesia and USD 42 million towards PLI CapEx. Cumulative CapEx for PenG PLI project till September 30 amounts to USD 188 million. The average USD-INR exchange rate is 82.68 in Q2 against 82.15. The average finance cost is 5.3%, mainly due to availing multiple currency loans. The business generated a free cash flow of $48 million during this quarter before the PLI investments and the investments in new markets, right? Our API business was transferred to the new subsidiary, Apitoria Pharma Private Limited, effective 1st October 2023. Outlook. Our financial performance in Q2 was on the back of a positive business environment across our markets as well as our continued focus on driving growth and efficiency. We are confident of growing the growth trajectory across the top line and bottom line fueled by new launches, cost efficiencies, healthy product pipeline and new business opportunities. We remain committed to strong execution. Our structural strength through the significant volumes and pricing are the underpinnings of the U.S. generic growth. Some of the key highlights for the coming quarters have summarized below. We launched Revlimid in October '23. In Q2, U.S. continued to improve price. Erosions remain neutral. All raw material cost logistics have continued. We remain optimistic in Q3 in terms of the margins. We are on track to achieve the 20% plus EBITDA margin target set internally for the year. We have the following plants under commissioning. China plant is fully installed and has received the EU GMP approval. It is expected to start revenue generation, I mean, end of Q4 or early Q1 FY '25. The PenG plant and the 6-APA plant are under installation and expected to be operational by -- from Q4 FY '24 or Q1 FY '25 -- I mean end of Q4. Further, we are conducting clinical studies for our biosimilar products, and the plant is expected to be commissioned by FY '25 or early FY '26. With the above actions, including commercialization of PenG and other projects over a period of time and stabilization of the manufacturing processes, base EBITDA margin is expected to improve considering the current market conditions. This margin be without considering the margin for biosimilars, et cetera. We are strongly focused on biosimilars and peptides and these are significant levers for the future. Strategic partnership like Merck announced recently will continue to fuel growth and margin for the future beyond FY '25. My colleague, Satakarni will provide more insights. We will continue to explore opportunity for any bolt-on acquisition aligned with our company strategy, especially acquisition of ANDAs and market authorization based on market opportunities, there we reducing the gestation period. Indonesia opportunity is one such, Sanjeev will talk about it. The CapEx of generics over the near to medium term, except towards the major plants, as mentioned earlier, will be more focused towards the debottlenecking, some additional lines and maintenance, thereby increasing the manufacturing capacity and the efficiency. This is all from my end. My colleagues in the panel will give more clarity on any specific aspects in our Q&A session. We are happy to take your questions now. Thank you.

[Operator Instructions] The first question is from Kunal Dhamesha.

Congratulations on a good set of numbers. So first one on the LOI that we have signed with MSD, right? I just wanted to understand what's the kind of investment that we could be looking here as well as what kind of capacities that we would be putting? And what is our right to win versus already established players, I mean, originally, or even globally like Lonza, Samsung Bio? That would be the first question.

Kunal, this is Satakarni. So to answer your question, I'll provide you some context into it. The limited letter of intent that we signed with MSD entity allows us to create infrastructure for contract manufacturing of innovator biologics. Now the market for the originator biologics right now is about USD 300 billion to USD 350 billion. With more biologics approvals and their success that we are seeing in treating, debilitating diseases worldwide, the need for reliable manufacturing, improving lead time efficiencies and reducing supply chain length is becoming more relevant than ever in this industry. Personally, I believe biologics contract manufacturing industry is growing immensely and is poised to grow to about USD 30 billion to USD 40 billion by 2030. Now if you look at the landscape of -- that's part B of your question, the landscape of competition, most of these innovator biologics or innovator companies opt for contract manufacturing in the West. You have contract manufacturers like Lonza, like the Boehringer Ingelheims, like the Patheons, et cetera. In Asia, you have companies like the WuXi Biologics, the LG Life Sciences and the Samsungs. Now the kind of capacities that we are installing for mammalian cell culture manufacturing are over 15 KL bioreactor scale. Now this is way, way higher than the capacities that you see in India in contract manufacturing. So the ideation here is to essentially have a large mammalian cell culture, drug substance manufacturing facility with a freeze of 15 KL bioreactors and which is also complete fill-and-finish capabilities. Now in contract manufacturing space, either you'll see drug substance manufacturing capabilities in biologics or the fill-and-finish capabilities, and it is very rare for a customer to come in and do both drug substance and the finished product in one site. So in this regard, I believe this is a unique proposition vis-à-vis the competition. It is being positioned to supply the product commercially right from day 1 to the collaborators or the partners. So we are positioning this to compete with the CMOs, the large CMOs in Asia and outside over a period of time, but the objective and the intent is that. Now in terms of investments, as we have made a press release and disclosure to the exchanges, we have signed a limited letter of intent, and we are continuing to negotiate the final terms with the partner. We hope to conclude these negotiations by 31st of March 2024, which is when we will have a clear idea of the sort of investments that we are going to have in this plant. But right now, we are going ahead with some investments. The final investments that we'll be making to complete this plan, there are a few items which are still to be sorted out between us. And I'll be able to provide a clear picture 4 to 5 months from now. I hope this answers your question.

Yes, sir, this answers my question to great extent. So we are seeing that unique USPs, drug substance plus drug product. At some point, we are also...

Because if I look at the Indian contract manufacturing space, Kunal, I'm sure you have checked it. There is no scale in biologics, who are positioning it and trying to call -- see, we need an anchor industry here, right? I mean India needs WuXi sort of a moment to make sure that we have a contract manufacturing setup that can compete globally. And for us, I think we have done to a great extent the right steps. We have a good anchor, who is a partner, and then we are investing in good scales. And we are planning to get into commercial space right through the first supplies. So let's see how this unfolds. I am thoroughly excited by it. Aurobindo is excited by it. It's now the time for execution of this project in the next 2 to 2.5 years, and we'll keep you posted on the progress that we make with this project.

Sure. And one for the Subbu sir, if I see gross debt has gone up by almost around $160 million, and I see that we have done some acquisition in Indonesia as well. So could you throw some light as to what that acquisition, how that fits into our number? And where do we see the gross debt number by the year-end?

See, the net cash we are having, we had end of June was around $179 million, if I'm right, or say $180 million around. And today, we are having around $130 million net cash, predominantly that $50 million has gone for the acquisition finance, right? That is the thing. So in terms of the cash generated from the business, et cetera, we have effectively plowed back into the PLI project, which is the fag end of the completion of the project. We need to complete the project by March before that everything will be expanded. And accruals -- of the existing accruals, which is happening will be spent towards the PLI projects and other things. So the gross debt predominantly will remain maybe between gross and net -- gross and cash put together, probably by end of the year, we will be anywhere between $0 to $50 million that's what I think. Because after that, once the PLI project has been commissioned, that is the biggest project and from next year, first quarter onwards, we'll start able to generate the profit. Once again, it will help us to take that net cash back to $200 million over a period of maybe in a year's time or maybe 6 to 9 months' time.

Sure. Yes, yes, and just one clarification. This 20% plus EBITDA margin guidance for FY '24 includes Revlimid contribution?

Absolutely. Today, we are having 18.2% is YTD gross -- I mean YTD EBITDA margin. So thanks to Revlimid and the entire Eugia team, we should be able to make a 20% year as a whole. That's what we are working on.

The next question is from Neha.

Sir, on the U.S. business, if I were to strip out the Puerto Rico, there seems to be very strong traction that we have seen in the oral solid business. So one, is there any one-off sale, which is there in this number? Or should we assume that a limit build happens on the existing base of U.S. sales? And what's happened in oral solid? And second, we haven't seen any improvement in the injectable business quarter-on-quarter, the generic injectable business in the U.S. So what's our expectation in the second half for that business? Is this the new base for injectable till we get any large approval? Color there would help.

Swami?

Yes, Subbu. Okay. So let me handle the oral solids. Thanks, Neha. We had earlier talked about in the early call, we talked about the introduction of newer products -- launching of the newer products and our surge in volumes generally in the overall solids area. We have been having steady improvement in terms of volume growth. And we've been able to leverage our large manufacturing capabilities and our demand has also been very steady. We have a very broad portfolio, so we continue to grow and surge which volumes across our broad and diverse portfolio. And this is driven by new launches, plus the base business. We have also seen some positive outcome and new opportunities, thus, I think we are fairly positioned for a steady performance in future.

So there isn't any one-off in this number, right? That's the right way to...

No.

So we build on the existing base as we launch new products?

That's correct.

And I think in the opening remarks, sir mentioned that oral solid pricing was neutral for the quarter?

Yes.

And on the injectable business, if Yugandhar sir can help?

Yes, Yugandhar will take the question.

Neha, yes, you are right, in fact, injectable business from year-on-year, it is a significant growth, but quarter-on-quarter, it is single-digit growth. And from a base level of overall injectables, we have gone from $100 million run rate to $120-plus million run rate, and we expect the same trend to continue. So it will be -- if you compare quarter 1 to quarter 2, it's $122 million to $127 million at a good global level. But if you compare year-on-year, it is 60-plus-percent growth. And this is -- all these are without any one-offs. And obviously, like we will be -- we have launched Revlimid in October, and we expect Revlimid to continue to give us good revenues from quarter 3 and 4, but base business will continue to be in the range of $120 million-plus globally.

Yes, Yugandhar sir, I understand the Eugia number and Revlimid contribution. I'm talking about generic injectable business, right? Because we had guided to that base improving as we are launching more products, pricing there is also improved. So the $81 million that we reported for the generic injectable business, not the Eugia number, can that improve as we go ahead? Or is this the new base where we get some large product revenues?

So at this juncture, it is generic injectable business has stabilized around $80 million per quarter for the U.S. market. And we expect that it can go up to $90 million. But as you see, like we are getting significant number of approvals, and we expect that this run rate can go up from $80 million to $85 million and $90 million.

Understood. And Subbu sir, on the margin number that you have mentioned, I think that our R&D spend is trending below what we saw in the second half last year. So should the R&D be at the current level of 5-ish percent that we've done in the first half?

See, our R&D spent approximately in the quarter will be around INR 375 crores. This quarter, it's INR 300 crores, because some of the major clinical trial studies, which has happened has been completed in the month of June. Before the next phase starts, which may take starting October and some of the milestones are being met in October, November only. So we'll be back to around anywhere between INR 350 crores to INR 400 crores in the third quarter.

Okay. Got it. And your 20% margin guidance is after assuming higher R&D number?

Yes, obviously. It has not guidance. That is our internal target set ourselves, and we'll be working on that.

The next question is from Surya Patra.

Congratulations for the great set of numbers and the broad-based performance across segments and across line items. My first question is on the strong double-digit growth, what we are witnessing in the U.S. oral solid business. Whether this is a kind of a temporary momentum as you mentioned that you were witnessing volume growth as well as new product launches and all that. But is it a temporary momentum that you're witnessing? Or it is kind of a sustainable run rate that we are now having? And can we maintain near double-digit growth consistently in the near future for the oral solid business, sir?

I'll take this question, Subbu. Thanks, Surya. There are a couple of questions that you asked whether our growth is temporary. I think that's a question Neha had also asked. We don't have -- in a different way, we don't have a one-off in this. This is the actual demand, and this is the actual sale. Based on that, these are the numbers that we achieved. And we have been talking about this in each of the earnings call that we expect growth in the U.S. market, because we were expecting approvals. And we did mention that we will be launching 40 new products -- I mean, launch 40 products over the next 12 months, and we are on track with that. And see, this is one, which is the new product launches. Apart from that, even in our existing business, we have been -- wherever we have the new opportunities, there have been some positive outcomes. And then this has positioned us well for the current quarter, and I believe that in future, too. But these are markets, which you can never say, as more people come into the market, there could be competition and then we have to meet the competition. We believe we are well positioned because we have got that kind of manufacturing capability. And we have a very broad portfolio, somewhere you will lose, somewhere you will win. Net-net, I think, we are in a better shape with a broader portfolio. That's all I would like to say.

Okay. Okay. And secondly, on the injectable front, basically the Revlimid. Sir, you have launched the Revlimid this quarter, but any sense whether our volume share are likely to be kind of average of the existing players or -- and the pricings are similar to the existing players, some sense if you can give?

Frankly, like it is, we can't disclose in terms of the settlement terms. So I will leave that there, but the pricing seems to be almost similar.

Okay. And do you think, sir, it will be kind of streamlined revenue, I mean even a distributor revenue stream for you or it would be a kind of lumpy one within the year?

No, in fact, we are planning to do -- it is going -- not going to be lumpy. It will be distributed across quarters throughout the settlement period.

Okay. And in fact, my next question is about this PLI project. Now we are inching ahead towards the completion of the project, and we should be positioning ourselves also commercially. So Subbu sir, if you can give some more clarity at this juncture what you have about that? And whether you have mentioned in the opening remarks that you will get the payback in the first year itself for the project?

I never said we'll get the payback in the first year. What I said is we are likely to complete the entire project, and we will commercialize on 1st April as planned, and we will be starting the project. Phase-by-phase the project starting will take place from next week onwards.

Okay. Okay. In terms of utilization volume, any sense that you can provide, sir? Because you would possibly be making arrangements for commercial launch and all that.

Surya, actually, we have said in the past also, we are out of the 15,000 tonne capacity, which we are having. 45% to 50% will be self-consumed. And to that extent, we are better positioned to take out the project. And it is too early for us to talk about it. I mean we'll talk about how we are going to do that, which are all the parties, how the commercial or external parties will take place, et cetera. We will get a better clarity once the trial runs are completed successfully in the month of January and February for the fermentation process.

Okay, okay. My last question is on the European market, sir. See, in the previous quarter, we had got a kind of a very positive remarks that the business which used to hover around 12-odd percentage kind of margin. It has already surpassed kind of mid-teens levels. So if you can update about the European business in terms of growth, growth outlook, where from that, we are seeing this double-digit kind of growth? And what is the margin levels that we are currently at? And what outlook that we are having, let's say, for next year driven by the injectable launches, what is in plan for you?

Surya, European business on the top line has grown by 4.2% on constant currency. But if you discount the discontinued business, in a couple of markets last year, then it will improve by about 1%. And the margins are growing faster than the topline. And our focus is -- because we are lower than the average company's EBITDA, our focus mainly is on improving the margins. And our EBITDA remains in the mid-teens percentage. So even though this quarter seasonality is lower in Europe, but still, we have -- with the fixed cost that we have also, we have maintained the EBITDA margins. So that has been the performance. And obviously, the margins are growing in double digit. Top line growing double digit is not expected in a market, which is growing 2% to 3% per annum. And we are fine with that unless some -- different dynamics happen like withdrawal of some products from a major competitor or otherwise there will not be such opportunity. Going forward, I think that our focus is to grow profit EBITDA margin in double digit. That is what our main objective is.

Sir, but is it ever possible to achieve the company level margins for our European business, sir?

Yes, that is our desire and the goal, 20% is what we should be looking at and the scale will allow that to happen. We are looking at -- I mean, as you know, that for biosimilar as well as oncology, the distribution platform is this European companies that we have. So we hope that with specialty product launched, we'll further improve the top line.

The next question is from Tarang. [Operator Instructions]

A couple of questions on Europe and Indonesia and then probably one more on Eugia, particularly with respect to the Vizag plant coming in, Sanjeev sir, and hopefully, China coming through, how do you see this business evolving, say, from FY '25 onwards? Because it does take care of a lot of bottlenecks that were there in the system.

Yes, that is true. Actually, our top line would have been better if we had more stocks available. That is true. So demand was higher than what the P&L will reflect. And we are very hopeful. In fact, the unit 15 expansion is also getting over in December, January, plus we are sourcing, Europe is sourcing from unit 3 and unit 7. So actually, there is some declogging and expansion is happening in those areas also. So we think that our stock situation in oral solid should improve in next 2 to 4 months. And of course, China facility is back up, but we are taking one at a time and the facility is already approved for European Union. Injectables, Vizag will definitely allow us to supply some of the products which are already approved in Europe and plus the new filing will happen.

Okay. Yugandhar sir, how are you seeing FY '25 when you -- do you see Vizag contributing meaningfully to the business to the bottom line?

I don't think FY '25 will have a meaningful impact, but I think it will be FY '26.

Okay. And just last on Indonesia. If you could give us a sense on the market and how does this acquisition help you? And how should we see this business evolving?

Yes. So Tarang, I'll just answer very briefly, but if you have more questions, I can answer that. So Indonesia is the fourth largest populous country, and it is -- economy is doing well and expected to do well, has a lot of other opportunities. And it is having a universal health insurance scheme, but the acquisition that we have made is the branded products of Pfizer. And they are sold in a private market through the medical representatives and patients, they purchase from the pharmacies. And these are 16 products, and there are quite a well-known brand like Lipitor, Norvasc, Viagra, Lyrica, Neurontin, et cetera. And there are -- people strength is about 160. The top line is 31 million and with a very good margin. And we expect to close the acquisition in this quarter.

The next question is from [ Marcel Lewis ].

Yes. My question is that currently, how many sites are under U.S. FDA restriction? And what's our like road map to get it through?

See, there is no unit is under restriction.

Sorry, can you speak loudly, sir?

There is no restriction on any of the units. The only one unit is having a warning letter. But still, we are supplying the material and there are no major filings in that. And the 2 units have been having VAI have been inspected and one observation each has been given. We're yet to get EIR. So there are no major issues for us in terms of the compliance, and we look forward to resolve all the issues very -- in consultation with the FDA, and we look forward to resolve all the issues.

Like regarding our power -- sorry, regarding our power brands, so like what kind of growth prospects do we look in the current quarter from the power brands coming from like a specific territory or about any new loans or about any 180 days, for example, exclusive...

Sorry?

Shall I repeat?

We don't have specifically power brands, but if you can put it, Swami can reply.

So -- but like do we have any -- like did you have any 180 days exclusivity, like in the last quarter or like quarter 2 come by, like -- do we like -- are we going to have any 180 days exclusivities, like selling rights for any off-patent thing?

No. When you say exclusivity right, we will have something called CGT, right? So that's for about 180 days. So we'll have for that kind of approval will be there for maybe a few products -- 3, 4 products, at least in the last few quarters, we've been having it. Otherwise, brands-wise, we have some brands in the U.S. for the oncology division, branded injectables. And then we have a small branded consumer division. That was an acquisition in the last 2 years. Other than that, we don't have anything with the brand. And exclusivity-wise, at least from the U.S. side, there is nothing else other than some CGT items.

And like -- do we like -- what kind of turnover growth and EBITDA growth do you see in the current quarter and the next quarter as compared to September 2 -- September quarter?

Subbu?

Mr. Lewis, if you have seen Swami has been telling you, they're working on...

Sir, your voice is not audible. Can you speak loudly? Or can you please like come closer to the microphone?

Yes. We have been working on growing the business on a high single digit in U.S. continuously, and that is what has been said in the last earnings call, and we continue to maintain that. Having said that, it is not that we are looking -- we are restricting ourselves to single -- high single-digit growth. Wherever there is an opportunity, the sales team will be looking for more growth, okay?

The next question is from Bino.

Subbu, this Puerto Rico revenue, as I understand, was reported earlier as part of U.S. sales, is it? And why have you separated that out now? And has it got something to do with the restructuring you're doing in Puerto Rico?

Yes. We have said that we are shutting down the operation to do the restructuring and modifying the plant and other things that we are planning to put CapEx in a couple of years' time. So we are scaling down the operations and then bringing it to a close. That is the reason we don't want to club it, because this is the revenue, which has been done as a contract manufacturing for the [indiscernible] Viatris, that is the reason. Now having completed all our commitments, et cetera, we may not be doing that, hence we are showing it as separate.

Okay. So this particular sales will not be there from next quarter onwards?

That is what, yes.

Okay. Just on two products in the U.S., Mirabegron and Macitentan, on which, I believe, you have first to file a status, are these products which we can expect in the next 12 to 18 months or so?

Bino, I think this question you raised last time also, and I did mention that these are under settlement and we don't expect a launch in the short term. When we say short term, anything below 12 months or 12 months is short-term. We don't expect to launch it.

Understood. And Subbu, just a bookkeeping question. The depreciation number seems to have jumped quite a bit from the previous few quarters. What has led to that? And is this new level of depreciation we will see going forward?

No, no. See, periodically, we do the impairment assessment and consultation with the statutory auditors. And the statutory auditors have advised us to make some impairment provision for some of the assets. So we have done the provision.

Okay. So is this level going to continue? Or this was just because this one quarter?

It is like the base depreciation will be around INR 350 crores and whatever is the extra is the impairment, and we will continue to have INR 350 crores every quarter. And if there are any suggestions or advice given by the auditors, we will stick on to.

The next question is from Nitin Agarwal.

Sir, my question is we have about INR 6,000 crores of CWIP, which is there on the books as of September. Can you give us some sense on the phasing of the capitalization of this CWIP over the next -- over what period of time some of this will get capitalized?

So the INR 6,000 crores is tantamount to around $700 million capital work in progress. Out of that, if you really see the PenG project itself is nearing $185 million as on this day, which will get capitalized by March quarter, right? And probably China also part of it -- if we are able to successfully start the operation by Q4, probably we may capitalize some of the portion of China. I mean the number of lines, which we will be capitalizing -- using it will be capitalized like that. And the other projects, I don't think like Vizag, Yugandhar said, he will do it only in FY '25 end or FY '26, and biosimilar will be in FY '26, right? And then you have the Eugia manufacturing -- I mean, AuroLife and Eugia manufacturing U.S. will be done in FY '26. Part of it has been capitalized in AuroLife that is Raleigh plant, part of it has been capitalized and the balance order maybe it will be capitalized either by end of FY '25 or FY '26. So that is a broad thing. The main thing is around $185 million is for the PenG project, which will get capitalized by Q1 -- I mean, I'm sorry, Q4.

Okay, sir. And sir, secondly, on the biologics CDMO business that we talked about, sir, what is the date of commissioning of this business in terms of when do we start revenues coming through? And at what stage do we onboard clients barring MSD in this business in our assessment?

Nitin, so we expect the plant to be fully commissioned by '26 -- early '26. And we expect the revenue streams to flow in, in the calendar year '26 or the fiscal year '27. The steady state of supplies, commercial supplies, I expect to -- these to begin to the potential partner from '27 onwards. The reason being that when you do a technology transfer into a new plant, you need to carry out the validation batches, which results in the filing in multiple territories and the procedure unfolds anywhere between 6 to 15 months depending on the markets that the partner would intend to file. So I expect a steady supply -- steady revenues to come in from '27 onwards. So that's one part of your question. What was the other part of your question?

Sir, at what stage do we -- in your assessment begin to onboard more clients? Or this is intended to be a single client business option?

No, no, it is not intended to be a single client endeavor at all. But as you know, when you wanted to leapfrog into the CMO ecosystem, that has evolved in the West and that has not evolved in India to the levels that we see in the West or in countries like Singapore and Korea, it is important that we have anchor. And here, the anchor is our first strategic partner, which you know. So we would like to develop a client base over a period of time. But having said that, I would like to experience this partnership for at least 3 years before I go to bigger clients or similar clients. But to answer your question, it is not going to be a single client endeavor at all.

The next question is from Damayanti.

So you have seen strong performance across segments. So I have a question on 2 segments specifically, API and ARV. So in ARV, have you seen improvement in funding situation that has helped this quarter number? And also API, is it a sustainable number or it's some kind of seasonal benefit which has come in for second quarter?

Damayanti, this question, I have answered in the past also, we repeat the same thing. The ARV business, we are looking at their sales on a quarter of around $25 million plus or minus $5 million, and we don't see there is a huge growth. In case if we are not able to supply the material in a particular quarter, right, that probably it may hit the next quarter. That's the reason why you are seeing $30 million. But ideally, you should take the ARV sales around $25 million probably plus or minus $5 million. That's the way you have to take it.

Okay. And on the API part?

API part, there is -- continuous improvement has been taking place since April. And last quarter, we have done around INR 1,033 crores or something like that. And this quarter, we have grown INR 1,166 crores. Our capacity utilization has been very good. And part through that, they are also able to supply to the captive consumption for the formulation business, because the formulation business has been requiring more APIs in view of the improved demand in U.S., which Swami has explained earlier. So API business continued to do well.

Okay. My second question is, can you update us on some of the complex or differentiated opportunities in the injectable part, specifically the antidiabetic portfolio, which will open up, say, next few years?

Yugandhar?

No, in fact, Damayanti, like it is, obviously, our endeavor is to continue to file significant products, and we have a big pipeline of 100-plus products, and it is also antidiabetic is part of that. So we are working on it. As and when like we file and as and when we get approvals, we'll keep informing all the investors.

But most likely, these would be, say, more of medium-term opportunity, right, rather than something in short term?

Yes. Obviously, nothing in short term.

The next question is from Parth Shah.

This is Nithya Balasubramanian from Bernstein. Can you give us an update on your PEG and filgrastim filings in Europe?

Nithya, so as you know that we had a technicality last time that the audit got delayed into day 180 where we were not left with more than 2 weeks. So we had to -- in consultation with CHMP, we had to withdraw and resubmit the files. Now we had our meetings with CHMP, and we have started the process of resubmission. In fact, we have submitted one product already to CHMP. And the second product, we are waiting for the assignment of rapporteurs and the sooner the rapporteurs get assigned, it will be submitted as well. So I expect all the 3 biosimilars, PEGylated filgrastim, filgrastim and the important product, the breast cancer drug that we have, trastuzumab for which we have announced a successful completion of Phase III clinical outcome. All 3 will be aligned and filed before the end of January 2024, already one product has been filed and the other two will also be filed in the next 4 to 6 weeks' time or 8 weeks' time.

And it's a 250-odd day cycle, and therefore, these are FY '26 revenue opportunities, right?

It's roughly going to be day 210. We expect things to move faster, because we don't have -- for filgrastim and PEG filgrastim, I expect the clock to really move faster in the terms -- in terms of the time required for us to respond, because these files are going through the second time, and I don't foresee -- in our discussions with CHMP, we don't foresee any time more than 2 or 3 weeks for us to respond to their queries. So the only thing pending on filgrastim or PEG filgrastim will be the audit, which we expect and CHMP is intending to audit us sometime in Q1 next year as soon as we file within 3 to 4 months, that's the hope. Trastuzumab 210, maybe Q4, but the other two I expect to be faster, because there are absolutely no queries on those files that we foresee coming through. Trastuzumab being the first filing in Europe, we expect queries and sometimes that we take to respond to the queries within the clock stop. So yes, to answer your question, trastuzumab 210 could be Q3 and Q4. The other two can be at least a quarter faster than trastuzumab.

Got it. On the CDMO business, would Merck's product be occupying both your 15 KL bioreactors?

Absolutely.

And is Merck's product currently pre-commercial? Or is that an asset that's already in the market?

I am bound by my confidentiality norms. I can't disclose it at this point of time, Nithya, unfortunately. But at an appropriate time, we will be making the disclosure.

The next question is from Tushar Manudhane.

I missed the comment. So R&D for the quarter was lower at 4% of sales or even at absolute basis, INR 300 crores. So how much R&D spend will be there in second half FY '24 and FY '25?

So Tushar, as I said, we estimate around INR 700 crores to INR 750 crores -- yes, INR 750 crores to INR 800 crores in the second half. That's what we are estimating. But having said that, it depends upon how the things pan out in the next 2 quarters in terms of the clinical trial CRO-based meeting the milestones.

The next question is from the Ritesh.

Am I audible?

Yes.

Can you guide on your organic CapEx, given first half, you have already done $80 million, $83 million kind of a number?

Yes. This year, probably -- I mean, we -- definitely, we don't give the organic CapEx, because it includes there are a lot of strategic CapEx also and many projects, nearly 7, 8 plants are under commission -- under installation through commissioning. But if you ask for the existing plants, what are the CapEx, et cetera, which we may be leading in, probably we have been doing it around $125 million to $150 million. Any new green plant, et cetera -- I mean greenfield plant, et cetera, is not included in that. Plus we are also embarking -- as I said in my earlier one, we are also embarking on getting the -- trying to acquire some market authorizations, et cetera, which is ANDAs market authorization, which should be over and above this.

Yes, which is where my second question is, last year, you spent $74 million in acquiring such for new business or business acquisitions or new markets. This year, you have already -- first half, you have done $95 million. So would this number be there continuing for FY '25, '26? Like you will keep doing this kind of $80 million to $100 million annually to enter into new markets, new business, are they over and above your organic CapEx?

See if you really see, Ritesh, we have already -- new market includes China market, which we have already -- we've clearly explained what is happening there. And Indonesia is another market where we are not present, right? So we don't see any new major market, but we do not know if some good opportunity comes, where it makes a lot of sense, either new market or new product, new business model, et cetera, which we can always look into that, so long it is allowing us to grow significantly over a period of time.

Okay. And this existing plant CapEx of $120 million to $150 million, that would sustain in FY '25, '26? Or there's a possibility of coming down?

May not be that much. As I explained, we are not embarking on many new major greenfield plant, right? We are trying to add new lines, debottlenecking like that we are trying to do that, by which we are trying to reduce the gestation period. If you put a greenfield, whatever we say it takes around 5 years -- 4 to 5 years' time. So what we are trying to do is, we are trying to add new lines in the existing plant provided we have an adequate space. So that is the way we are going to put it. And also China, also, we are having -- going to have around significant capacity, right? That also will help us to serve various U.S. market, Europe market, may not be U.S. immediately, maybe over a period of time, later part, but immediately Europe and China, we'll be doing that. And later if the capacity is still available, we will take it to the U.S. market. And Sanjeev has clearly explained, he's expanding the unit 15 by which he will take out some of the capacity which has been occupied by Europe in unit 3 and 7, which will be shifted to unit 15, by which more capacity available for the U.S. market. So we have been continuously depending upon the growth, which Swami has been demonstrating, which we have been trying to increase the capacity to meet the demand. As on date, our capacity utilization for formulation is significantly high.

So my question intent was, is there possibility of this coming down dramatically in FY '25, '26, if you...

Obviously, will come, because the major CapEx which is taking place is on account of the greenfield, like Eugia, Vizag, then we have the thing, but strategic CapEx will be there always. Strategic CapEx will always be there, $100 million to $150 million will be there. Like biosimilars, Satakarni has explained neatly what is going to happen in CMO, et cetera. These are all the CapEx which is meant for the future. But for the existing generic business, we will be adding less. We may not be doing any major CapEx.

The next question is from Ranjit. The next question is from [ Aayush Bhansali ].

Can you hear me?

Yes.

I just wanted to ask what are the corporate governance initiatives that the company has taken after the incidents which happened last year? Because even after the good performances that the company has kept up over the last 3, 4 quarters, the valuation still seems to be a bit depressed compared to the other peer companies?

So what is your question, Aayush?

So from last year, are there any corporate governance initiatives that the company has taken?

No, corporate governance, we have inducted the new directors, et cetera. We have got CEOs in all verticals, which is driven effectively and we have inducted Mr. Satakarni, who is a specialized chemistry -- I mean specialized in chemistry. He is brought into the Board, by which Board is getting more information and the knowledge. So we have been doing continuously. This is a continuous process now.

As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Thank you all for joining us on the call today. If you have any of your questions unanswered, please feel free to keep in touch with the Investor Relations team. The transcript of this call will be uploaded on our website, www.aurobindo.com in due course. Thank you, and have a great day.

On behalf of Aurobindo Pharma, that concludes this conference. Thank you for joining us, and you may now disconnect your lines and exit the webinar. Thank you.