Aurobindo Pharma Limited (AUROPHARMA) Earnings Call Transcript & Summary

[Audio Gap] available on our website. I would now like to introduce you to our senior management on the call today. Dr. Satukarni Makapati, CEO Aurobindo biosimilars, vaccines, peptides Business and Director Aurobindo Pharma Limited; Mr. Uganda Powala, CEO, [indiscernible] Pharma Specialties Limited; Mr. Swami Iyer, CEO, Aurobindo Pharma USA; Mr. V. Muralidharan, CEO Europe Formulation Business; Mr. S. Subramanian, CFO, Aurobindo Pharma Limited. We will begin the call with the 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 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 now hand over the call to our CFO for the highlights. Over to you, sir.

Good morning, everyone. A very warm welcome to Aurobindo Pharma's Q1 FY '26 Earnings Call. Thank you for taking the time to join us today to discuss the company's financial and operational performance of the first quarter of the current fiscal year. Let me begin with a brief summary of our performance. Our consolidated revenues grew by 4% year-on-year to INR 7,868 crores, reflecting a steady start to FY '26. This growth was driven primarily by continued momentum in our European and the growth market operations, along with incremental contribution from our [indiscernible] segment. Our U.S. formulation-based business remains stable and resilient. EBITDA for the quarter of INR 1,603 crores with a margin of 20.4%. At the EBITDA level, Q1 FY '26 includes a substantially lower contribution from GE Development compared to both Q4 FY '25 and Q1 FY '26. Q1 FY '26 was lower by about INR 150 crores versus Q1 '25 and INR 550 crores versus Q4 '25. [indiscernible] growth in EBITDA is 12% year-on-year. In another major development, we are pleased to share that we have secured the renewal of consent to operate as well as the wastewater disposal clearance from the Andra Pradesh pollution control board for our P&G manufacturing plant. The facility successfully resumed operations on early hours of 1st July. We continue to scale up the operations and have achieved encouraging yields and are confident of sustaining the momentum. Business highlights. Let me now walk you through the key business highlights for the quarter. Overall, formulation business witnessed a year-on-year growth of 7% with the revenues reaching INR 6,953 crores, contributing approximately 88% of the total consolidated revenues. This growth was led by strong performance in Europe and key emerging markets. The APA business accounted for 12% of the overall revenues, declining 16% year-on-year to INR 916 crores impacted by geopolitical challenges, business mix and the pricing pressures. U.S. formulation. U.S. revenues experienced a year-on-year decline of 4% to $408 million, primarily attributable to the significant reduction in the transient product sale Revlimid, a temporary moderation in customer demand due to seasonal dynamics, destocking effects of the last quarter inventory due to anticipated tariffs. Despite lower [indiscernible], overall sales was partially offset by steady demand in our overall base business and a series of new product launches during the quarter. Also, our U.S. injectable sales increased by quarter-on-quarter by 11%. We launched 15 new products in the U.S. this quarter filed 4 ANDAs received 14 approvals. European formulation. Our European business continued its strong trajectory, delivering 9% year-on-year revenue growth. Revenues reached EUR 241 million this quarter, compared to EUR 221 million in Q1 last year. With this consistent performance across all European major markets, we will cross the milestone of EUR 1 billion in annual revenues for the region by end of FY '26. Growth markets. Revenues increased by 9% year-on-year to INR 772 crores in or $90 million, supported by strong underlying performance across key countries. ERV formulation. ERV revenue delivered a strong 55% year-on-year increase. reaching INR 355 crores or $41 million. These are primarily driven by volume uptake and new tender wins in several geographies, which we expect to sustain in the near term. Operational and financial highlights. Gross margins remained stable for the quarter at 58.8% compared to 59.4% in Q1, supported by softer raw material prices and better product and business mix. Our contribution amounted to INR 4629 crores. R&D expenditure was INR 367 crores, representing 4.7% of the revenue. This continues to reflect our ongoing commitment to innovation and to build a robust pipeline, especially in complex generics and specialty therapeutics. Net CapEx for the quarter stood at $73 million aligned with our investment priorities in expanding manufacturing footprint, enhancing compliance and automation. We generated a net cash inflow of $98 million during the quarter, improving our net cash position, including investments to $140 million as of June 30, '25 up from $42 million as of March 31, 2025. Our finance cost declined to 4.9% from 5.5% in the previous quarter, benefiting from prudent treasury management. PAT for the quarter was INR 3,824 crores. Gross debt reduced to $884 million, down from $930 million at the end of March 25, reflecting ongoing deleveraging and disciplined allocation. New projects. Further in the following years where CapEx have been done and where revenues have been delayed include the following: In biosimilars, the approvals have started coming in from EU, we expect revenue to start from Q3, Q4. well above the company average of EBITDA margins. Approximately USD 145 million invested in China facility, which has commenced production from Q4 FY '25 and invoicing started in Q1 FY '26. This facility with an initial capacity of 2 billion units plus is ramping up as expected, and will begin contributing to revenue in the coming quarters and expected to break even at EBITDA level by Q3 FY '26. Third, approximately USD 70 million in 2 U.S. facility, Dayton will start producing from Q2, Q3 FY '26, waiting for approval from the regulatory authorities. Four, the PLA project, where we -- all the approvals have been received and the plant has commence [indiscernible] production since 1st of July. Production is going well and yields are improving. We are confident of generating healthy EBITDA from Q3 onwards. Five, on [indiscernible] Vizag plant, we expect to file more than 20 products in U.S. and Europe from this site over the next 2 years. On UGI 3, we have invited the U.S. FDA for reinspection. Six. Approximately $13 million spent in biologics CMO, balance 100 million plus expected to be invested between now March 27. To reiterate, the company is not expecting any further greenfield CapEx investments in the near to midterm. We will be focusing on maintenance and replacement CapEx and capacity enhancements in the existing facilities. Company has a net cash relation of $140 million as of June '25. Outlook. Looking ahead, we remain optimistic about sustaining our growth momentum. Our confidence is supported by expected volume expansion, continued product launches and a stable pricing environment, especially in the U.S. and Europe. Ramping up of commercial operations at new manufacturing sites would further support the both top line growth and margin improvement in the upcoming quarters. We are confident of achieving our internal target margin of 20% to 21% range in FY '26 Lastly, our recent strategic U.S. acquisition will help us to continue the growth momentum in the medium term. We now look forward to taking your question. Our senior leadership team is happy to provide further insight, more details and clarifications wherever needed. Thank you.

[Operator Instructions] First question is from Damayanti Kerai.

This is Damayanti from HSBC Securities. Sir, my first question is on Revlimid. So just to clarify, this INR 150 crore less number and then INR 550 crores less number versus 4Q, is at the EBITDA level, right?

You can take that is at the top line level. EBITDA, you can work it out yourself. You must be knowing I'm sure.

Okay. So this is at the revenue level. Okay, that was good. My question is on Revlimid, definitely, pricing pressure has intensified and some of your peers have also mentioned this. So opportunity perspective, do you think you can like still make some reasonable sales from this product in FY '26? Or is this is an opportunity which is broadly gone down?

Yes. Damayanti, in fact, I think we mentioned this in the last call as well. We have -- most of our Revlimid settlement quantities, we have sold it. We have nothing more to say other than a minimal thing. So the price impact will not have any bearing on our future revenues. But at the same time, we don't expect significant sales coming from Revlimid as because we already sold off.

Okay. So it's already adjusted the volume allotment which you have got, and nothing much to look ahead.

That's right.

Okay. My second question is, sir, if you can explain what has happened in the API? And do you think it's a temporary phenomena and you can see recovery ahead? .

The turnover has dropped because of the -- mainly because of the pricing pressures. Otherwise, I think over a period of time, it will start recovering because it cannot sustain for a long time, right? That is the main reason. Yes.

Okay. And my last question is you are maintaining your EBITDA guidance for the year. So basically, which will be the key drivers, which makes you confident that you can achieve your earlier guidance?

Yes. Because despite low G revlimid, we have been able to maintain that. This is the numbers of the last quarter is helping me to retain that confidence.

The next question is from Tushar Manudhane .

Sir, with respect to the, let's say, operational losses for various plants, if I have to club together for FY '26, if you can share that number. And subsequently, how to think about that number for FY '27, considering any new plant that might come up in FY'27?

See, last year, we have incurred losses predominantly, as you know, in [indiscernible], and other things, right? And as I explained in the origin in the script itself, I said, we are expecting good EBITDA starting Q3 onwards. So the losses will come down, right? So that is -- that's the main thing. Out of the total thing, PenG was the biggest last year, and hopefully, that will not get continued.

So this year, how much that number for this like first 2 quarters, given that the scale-up probably will have benefit coming from second half?

See, last quarter was around a very low number around less than INR 50 crores, right? But 1 good thing is we started the production. We had a good production in -- I mean, even though the plant is really the first output came sometime in the second fortnight of July, we had a good ramp. And what is very encouraging is the yields are improving day by day. And hopefully, it will get stabilized in the month of August and September. So that is the reason we think by Q3 onwards, we'll able to do well. That's the main reason.

And sir, just to add that, like how much PLI income to consider for this year?

I think we will be expecting anywhere between 7000 to 8000 tonnes production right? That means at least you can take more than half of it, maybe around INR 150 crores type. I mean -- but the clear numbers, et cetera, will be known in the next quarter because the key thing is we need to sustain this yield improvement which has happened in the last 3, 4 days in this month of August and September, then that will give you a very clear indication in the next quarter.

Understood. And just 1 more from my side. So maybe the basis contract, the Revlimid business is no more, but given to any has increased competition and also beyond contract, we will be able to sell or it's like -- because of the contract, we will not sell itself. And so the other guys have their share and subsequently, the pricing still remains steady. How to think about Revlimid as a [indiscernible].

Tushar in general, the entire market will open up from first February 2026 -- and we are getting prepared to take more market share starting from February 2026. So even though like we will have limited sales of Revlimid for next 1 to 2 quarters. But we expect Q4, we will -- because the entire market will open up and we have capacity to pan the market share. So it will be an open market game at that point of time.

The next question is from Tarang Agarwal.

Okay. One on the API business, you spoke about pricing pressure. I mean this pricing pressure is on account of domestic supply being more aggressive? Or is it because of imports or is it because of both? .

Because of both.

Okay. Because a 16% decline is something to the best of my knowledge, I have never seen in this business? -- in the last multiple quarters.

While maybe a 16% on the top line, it may not be that much percentage in terms of the volume, right. And plus this quarter is always a summer quarter. So the offtake is also very low across India, no.

Got it. Okay. Second question is on [indiscernible]. I mean if you could give us the U.S. sales numbers of [indiscernible] for Q4 and Q1, Q4 of '25 and Q1 of '26.

So we are not giving that number separately, Tarang.

Okay.

In general, Tarang, we already mentioned that the regular injectable sales is growing, and we have shown a growth of 11% [indiscernible].

This 11% is on a year-on-year basis, correct?

As year-on-year as well as quarter-on-quarter, it is almost a similar number.

Okay. And the European exposure of U or ROW exposure to us continues to be in the ballpark of $35 million to $40 million a quarter. .

Yes, it is it's a split of you can say that it's around $50 million there, then Europe is $100 million, and the growth markets like Canada, Brazil continues to grow -- so overall, we are trying to shift the balance of sales. It's around 70-30. We are planning to ship it to 60-40, and we are hopeful of doing that.

Got it. The third question is on [indiscernible]. I just wanted to check. I mean, I think the initial estimate of capacity creation was about INR 1,000 crores, which was later upended to about INR 1,500 crores. I think Subu sir did call out in his opening comments. So of some outlay already being done, if you could just reach in terms of what's happening there? And in terms of -- are you seeing incremental demand in that business?

Tarang, as you know, we initially started the project with the [indiscernible] mammalian cell culture, bioreactor lines. And the CapEx guidance was around INR 1000 crore -- close to INR 1,000 crores to complete the project and fully commission it. . In the CMO space, what we are trying to do is that we are working towards strengthening our collaboration with MSD. This means that or this translate into addition of the need to add 2 more 150 KL bioreactor manufacturing lines and its associated purification and utility capacities. These lines will also come into full operations somewhere in '28. So the additional CapEx guidance that we provided of around of INR 350 crores to INR 400 crores essentially is to enhance capacities and strengthen our collaboration with MSD if that answers your question.

It does. It does. That's quite helpful. Sir, just a couple of more. [indiscernible], on the free cash generation, last 2 quarters consistently, almost about $100 million of free cash generation for the business on each quarter basis. Is that the trend that we should work with? Or some working capital expansion should probably -- I mean, the place what I'm trying to get at is, is the business now at a point of time where $400 million to $450 million of regular free cash generation is something that's visible for you? That's one. And second, on [indiscernible]. If you could just walk us through the transaction and why it would take about 8 to 12 months for the transaction to achieve closure.

Yes. I'll answer the first one. So Sami will answer the second one. In terms of the free cash flow, we have -- I mean we have reduced the working capital considerably. -- and that is what helping. Apart from that, the CapEx -- overall CapEx has come down in the last 2 quarters. Like this quarter, the overall CapEx is around $73 million, including the new market, PLA- everything put together around 73. Compared to earlier trend of around more than 100 million. So that is also helping. So there is a working capital improvement taking place, and there is improve -- I mean there is a reduction in the CapEx. That is the reason why it is that? We will strive -- we will endeavor to achieve a cash generation of $100 million quarter-on-quarter. I mean, subject to any strategic expenditures being incurred. Okay? Swami?

Okay. So on the Lannett acquisition, this is subject to FTC approval. Obviously, there will be a lot of back and forth. We have given 9 months as a matter of indent caution. It could be earlier. But obviously, we will do whatever we can to expect this. It gets clearance earlier, obviously, the integration would happen earlier.

Sir, just wanted to understand, I mean, are there -- I mean, how difficult or how soon can you integrate this business? What are the synergies that you're looking between both the setups and some metrics on the broader market of -- in which the target is operating.

Sure. So we believe that integration is very easy because we have similar kind of product, they are in the [indiscernible] segment. They are mostly in the control substances, and even the other product that they have, we believe that those are very close to what we have. What they have one other advantage is -- they had a strong BD team, which we have started working on now, and they also have a bit of in-licensing. That is going to be clearly one synergy. The other synergy, they have got 70-plus active products and many of them are in control substance. They're all in niche area where the products are in short supply. We believe, based on what we have seen quarter-on-quarter 10, there could be good potential for an upside in this business. They have been consistently able to get the quota. They have been consistently able to utilize a quota, which is very important, and the market pricing is pretty stable. We also think there are some synergies in terms of rationalization of some of the resources that would be immediately -- some of these could be low-hanging fruit. And another factor that they have a good CMO business with a few countries with the approval in some of the other markets, which we think we'll be able to tap better because we've got good presence in those markets. And we -- our understanding is that some of the products that is being manufactured there at and could have a good potential in 1 of our neighboring countries and also, we can spread out a little beyond that because they do have the regulatory pools for those countries. They also have manufacturing capability for oral solids, liquids, and potent substances. The manufacturing capacity is not fully utilized. They utilize only to the extent of ballpark, around 40%, which gives Arvind has a large portfolio, we can quickly leverage our large portfolio to bring in some more products, which are in demand in the U.S., especially for the government market. And that could be an immediate gainer. Lannett has also discontinued some of the products. We think there is scope for -- with our procurement practices with our ability, we believe that we can revive those products, especially for the government markets. And last, but not the least, -- they have a very good workforce in the manufacturing. They all have very long tenure and the wage level, everything is very -- I would say, very comparable or better -- so that gives us a good feel about the whole acquisition. -- net, net we are very upbeat about this. SP-6 In queue? .

Next question is from Surya Patra.

My first question on the U.S. business, you have commented about destocking impact. What is the nature of this destocking there? Is it anything relating to tariff-related preparation [indiscernible] can clarify this.

Yes. Surya, what Subu had alluded to was primarily the tariffs is supposed to go into effect from April 1. If you see there's a huge surge much more than the normal quarter surge in the quarter ending March. We believe that some of the -- some of the wholesalers have stocked up the product in anticipation. They will also ask us to keep more inventory and made themselves seem to sort up. We have not seen a decline in the demand of the oral solids in the U.S. nor have we seen any loss of awards, any major award. So we -- our understanding, it's our understanding that this is primarily because the wholesalers have stocked up during the last quarter, and they are winding down those positions.

Okay. Okay. So it is a quarter-specific issue then I believe.

Not dead. -- for Q1, there has been a fairly good quarter as certainly on the total volume that has been sold from the wholesalers. Typically, Q1 is a non-seasonal quarter, but it's been a fairly decent part, I would say.

Sure, sir. My second point is about the PenG plant, sir. So now having resumed our operation there, what is the kind of visibility that we are having in terms of the ramp-up? And Also, in the previous quarter that we had indicated about the MIP and the minimum import price -- so what is the update on that front, whether that is a kind of a necessity given the current situation? And what is your like risk assessment about that relating to the PenG you can .

So in terms of the PenG production, as I said, it's -- the production is improving in the last 3, 4 days and the yields are improving. We believe -- I mean, we are very pretty confident this going will be very good in the coming 2 months, and we will be able to do very well in the Q3. That is what we believe. And in terms of the MAP, I'm not sure we can talk about it in detail because there are a lot of things that are happening. So probably we may be able to talk about it in the next call.

Okay. My last question is about the European business. So obviously, that we have been seeing a very strong book pant consistently since last few quarters. And you have already guided about a kind of strong growth in the FY '26. So my point was about the margin performance there. Sir, with the new capacity additions, what is the kind of outsourcing that we are dependent on external resources for European operation now. And what it is likely to improve to by the end of this year? And what margin performance that 1 should anticipate for the European business? .

Yes. From the market perspective, I can handle this again on the plant-related, Subbu, I would suggest you to do that. Surya, first of all, pleasure speaking to you. Good morning. And thank you for your compliments for the European business. Yes, we have been demonstrating the sustained momentum since last several quarters and happy to be also posting a strong number this quarter. And coming to the third-party sourcing versus in-house. We are steadily moving the products in-house as much as possible. Of course, there are certain small volume or some technologies, which we cannot handle -- so this continued to come from the third-party suppliers. But as far as the margins are concerned, where you would have known seat a few quarters ago, where we were in the mid-teens, but now we are going strongly much above to the high teens and attaching their 20 mark very soon. So this is on the margin perspective. .

Yes. So in terms of the production, I'm sure you must be knowing -- we have been having a capacity around 3 billion to 4 billion tablets -- as explained in the last or previous call, I'm not sure. We have ramped up the capacity further and that help in terms of supplying more material. And that is also one of the reasons the European team was able to take the sales to greater heights, right? And we'll continue to do that. And in terms of the margin also because of the in-house production, and we were able to increase the margin percentage also. And your last question was in terms of percentage, we were somewhere around 50% or slightly above in favor of the captive consumption.

So this, sir, whether the injectables have seen any ramp-up in Europe?

Yes. In fact, we have been growing at a rate of 20% for European market because we find a lot of shortages happening in Europe. And Murli's team could take full advantage of the market situation there. So now like what's happening is our capacity versus demand. The demand is outstripping the capacity. So we -- in fact, we have taken a decision to add 2 more lines oncology lines. to take care of the European requirements. I'm quite positive that Europe has continued to grow.

The next question is from Neha Manpuria. .

Two questions on the U.S. business. Swami sir, if I look at the oral solid business, could you quantify how much would be the destocking impact, just to understand how the this business is done both from a year-on-year and a quarter-on-quarter perspective.

It's hard to quantify exactly that kind of amount. But what I'm saying is in terms of total demand for the U.S., it has been pretty stable. And we have got our awards intact barring few losses and few gain. So overall, I think we are in good shape there. I'm not exactly sure on how much -- my guess would be could be anywhere between half a month to one month. That's my guess. Because the -- if the wholesalers have stopped it, they would have stocked it for at least 15 days to 1 month for the tariff is certainly my guess. I can't say precisely.

Understood. And then I'm just talking about the U.S. business decline quarter-on-quarter. And you can just just comment that the injectable business seems to be improving. Is it just 15 days of 15 days or 1 month of destocking the entire INR 550 crores decline quarter-on-quarter is just regiment. -- if I were to look at the last quarter injectable base or use your days that we used to mention, it seems like the ex Revlimid business isn't actually showing as much improvement or normalcy as what we seem to be using. So what am I missing here in the U.S. business.