Aurobindo Pharma Limited (AUROPHARMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aurobindo Pharma's Earnings Conference Call for the Second Quarter of FY '26. [Operator Instructions] Please note, this conference is being recorded. I now hand over to Mr. Varun Mali for the opening remarks. Thank you, and over to you, sir.

Thank you, and good morning, ladies and gentlemen, and welcome to our second quarter FY '26 earnings call. I'm Varun Mali from the Investor Relations and Corporate Communications team. We hope you have received the Q2 FY '26 financials and the press release that was sent out yesterday. These are also available on our website. I would now like to introduce our senior management team on the call with us today, represented by Dr. Satakarni Makkapati, CEO Aurobindo Biosimilars, Vaccines and Peptide Businesses and Director, Aurobindo Pharma Limited; Mr. Yugandhar Puvvala, CEO, Eugia 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 information on our future business, business development and commercial performance. While these forward-looking statements exemplify our judgment and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors may cause active developments and results to vary materially from our expectations. Obando 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 business highlights. Over to you, sir.

Good morning, everyone. A very warm welcome to Aurobindo Pharma Q2 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 second quarter of the current fiscal year. Let me begin with a brief summary of our performance. Our consolidated revenue grew by 6% year-on-year to INR 8,286 crores, a reflecting sustained best momentum through the first half of FY '26. The growth was driven by strong U.S. formulation-based business and continued momentum in our European and growth market operations. EBITDA for the quarter stood at INR 1,678 crores, with a margin of 20.3%, demonstrating a 7% year-on-year growth. The performance underscores our operating leverage, cost efficiency and disciplined execution, business highlight. Let me now walk through the key business highlights for the quarter. The overall formulation business reported a year-on-year growth of 10%, with revenues reaching INR 1,325 crores. contributing approximately 88% of the total consolidated revenues. This growth was led by strong performance in U.S., Europe and key growth markets. The API business contributed to 12% of the overall revenues amounting to INR 961 crores, reflecting the ongoing market dynamics in the current pricing environment U.S. formulation. U.S. revenue stood at INR 417 million. Excluding gRevlimid, the U.S. oral solid delivered a healthy 6% quarter on growth, underscoring the strength and resilience of our diversified portfolio. This quarter also saw continued demand from our base business, supported by increased volumes and new product launches. Our U.S. injectable sales also grew by 6% quarter-on-quarter. During the quarter, we launched 6 new products, 13 ANDAs and received 7 final approvals, demonstrating robust pipeline execution and continued regulatory progress. European business. The European business maintained a strong growth trajectory, delivering 18% year-on-year revenue growth amounting to INR 2,480 crores. In euro terms, amounting to EUR 243 million this quarter. with consistent performance across all major markets, we are firmly on track to comfortably support the $1 billion annual revenue milestone by -- from Europe by the end of FY '26. Growth markets. Revenue from the growth markets increased by 9% year-on-year to INR 882 crores or INR 101 million, driven by strong volume growth and resilient commercial footprint. ARV formulation. ARV revenue grew by 69% year-on-year, reaching INR 325 crores or INR 37 million. This was primarily fueled by higher volumes and new tender wins across multiple geographies and we expect to sustain this momentum over the medium to long-term operational and financial highlights. Gross margins for the quarter stood at 59.7% compared to 58.8% last quarter. supported by raw material prices and the business mix. Gross contribution stood at INR 4,947. Excluding development, on a quarter-on-quarter, our sales have increased approximately by 7% and gross profit by 10%, our EBITDA by 14%, respectively. R&D expenditure was INR 414 crores, representing a 5% of the total revenue. thereby reaffirming our continued focus on innovation and advancing a robust pipeline of complex specialty therapeutics. Update on PenG. During the quarter, we started the operations of PenG on July 25 after getting the necessary regulatory approval. The scaling of the plant is as planned and is poised to make a meaningful contribution to profitability going forward. During the quarter, we produced around 1,050 metric tonnes by operating at 40% to 50% capacity, amounting to approximately 6,000 metric ton production on an annualized basis. It is pertinent to note that the yields are consistently improving. Like other companies, we have made a representation to the government to implement the minimum import price, which will support the further ramp-up in achieving 100% capacity utilization taking the production to 15,000 metric tons in a very short term. Next cap -- the net CapEx for the quarter stood at $106 million, in line with our strategic priorities of enhancing our manufacturing capabilities, strengthening complaints and accelerating automation. We generated net cash inflows before dividend $57 million during the quarter resulting in an improved net cash position, including investment $170 million as of September 30 compared to $140 million as of 30th June 25. Average finance curve declined to 4.7% in the previous -- compared to previous quarter, reflecting effective treasury and cash flow management. PAT for the quarter was INR 848 crores. Outlook. Looking ahead, we remain confident about sustaining our growth momentum and driving value creation across all businesses. Our optimism is underpinned by expected volume expansion and reasonably stable pricing in normal. Europe continued to deliver a robust revenue growth undergrowing the region's strategic importance and operational strength and market challenge to the company. In the U.S. data has transitioned into commercial phase with manufacturing interway packaging approval secured on product launches scheduled from January, positioning to positioning the rig to start contributing significant revenues in FY '27. Meanwhile, rallied awaiting regulatory layer. The OST facility in China continues to ramp up advancing towards the capacity of 2 billion backed by European approval, approval of 10 products and 3 local product approvals. The site is on track to deliver the EBITDA breakeven by Q3, Q4 FY '26, reinforcing its strategic importance to the global network. To summarize our next 2 years, our growth will be driven by several key factors, including ramp-up of our paint facility, commercialization of the biosimilar portfolio and rapid progress in our biologic CMO. We expect continued improvement in injectable business driven by continued supply ramp up, increasing supplies from China plant to Europe, additional contribution from a robust pipeline of new launches and the [ Lane ] acquisition in U.S., which will further strengthen our market position, expand our polio and drive medium-term growth. Last but not least, we are confident of achieving our internal margin target of 20% to 21% for FY '26 as communicated earlier. We remain focused on execution, operational excellence and disciplined capital management, all of which position us well for sustained performance in the coming quarters. We now look forward to taking your question. Our senior leadership team will be pleased to provide additional insight details and clarification wherever required. Thank you.

[Operator Instructions] The first question is from Damayanti Kerai.

Hello. Am I audible?

Yes.

Sir, my first question is on generic injectable business in the U.S. Sorry, I missed your comment. You mentioned it grew 6% quarter-on-quarter, so a few clarifications. Are we broadly back to the level where disruption happened? And how do you see this business shaping up in the next 2 years? And if you can just talk a bit about some of the key pipeline products, which you may have in your pipeline?

Damayanti, still we are not back to the pre-disruption levels. I think we still have another $5 million, $10 million to go to reach that well, but it is mainly driven not because of existing products growth. But because we don't have new products to offset the single-digit price decline. We still have a quarter or 2 to go to come back to the pre-disruption levels. But the production is back on track, and there's no issue there. Going forward into the future, what we are looking at is, number one, on the injectable side, we have some interesting products. And hopefully, like guess reinspection and approvals. We have multiple products to launch. Second is with respect to our Vizag and visa commercialization and some new products coming from Vizag plant. And third, from a specialty portfolio, we have a lot of oncology oral solids, which we are expected to launch in Q4 and Q1 of next year. So the multiple levers going forward.

Sure. And if you can just remind us about when you're expecting Eugia 3 reinspection?

Eugia 3, like we have already requested FDA and in the month of that is end of Q2. And now we have the confirmation from FDA granting reinspection for user. So normally, as per -- we received the official letter from FDA on 25th of September, that they have accepted our request for reinspection. So as for good for 3 guidelines, normally, it is anytime from now till -- for 8 months, okay? So they can come in any time for the inspection.

Okay. So majority of new logics, which we are expecting is broadly tied up to Eugia 3 clearance, right, if I understand correct?

Yes, injectables, yes, but not oral solid, mainly the oncology oral solids are all from Eugia 1. So I don't have any problem from Eugia 1. So those approvals will continue to happen. but Eugia 3, yes, part of injectables are from Eugia 3.

Okay. My second question is on PenG plant. Sir, you mentioned now that capacity has reached up to metric ton on an annualized basis, right? So when you go and discuss with government for the PLI benefit, what kind of scale up by then you are expecting? And what is the amount?

We are not running all the fermenters. We are running only 40% to 50% of the fermenters. As and when we have represented to the government as an on any policy changes takes place, we will ramp it up in a very short time.

But the current production, will that enable you for the PLI benefit or not?

This current -- yes, it is enabling me benefit, not out of [indiscernible].

[Operator Instructions] The next question is from Neha Manpuria. .

My first question on PenG. So sir, what would be the EBITDA loss contribution from PenG at the moment? And at what level do we break even on the PenG plan? And second, let's say this MIP representation has not come to [indiscernible]? What's the plan B in terms of achieving breakeven? Does that impact your ability to ramp up the plant even if MIP gets delayed or does not come through?

So it's a good question, Neha. As I explained to you, we have been improving on the yield, et cetera. We are nearing the breakeven, right, from the current operations, et cetera. We have been doing around 6,000 tonnes per annum. See, we are doing 500 tonnes per month. I can increase it to 800 immediately, not a big issue, right? One side touch 800, totally, it will contribute to the EBITDA. But having said that, we also need to look at it at what price we need to take that and move on. So that is what we are looking for the policy changes. As and when it happens, we will do that. As a plan B, what you are saying is we have been continuously working on improving the yields and other things. once that is going in a very positive direction has informed you in the life. So we are ready with the Plan B in case if there are any issues, but I don't think that is necessary, in my view.

And sorry to have on this, sir. But what would be -- given where prices are for PenG and NGL products, are we still cost competitive if we get to 8,000 tonne per month reduction level, will we still be cost competitive to be...

Yes. We are the biggest consumer of fixed APA, amounts, everything in the country. So we will, irrespective of that we will produce it and then we will consume it ourselves, right? That will help me in terms of improving the overall capacity utilization and that will take. And I also work on other necessary actions we will work on that to improve the capacity, which I would not like to share it now.

Understood. Okay. Got it. And my second question is on the U.S. business. Swami, sir, are we seeing any change in the erosion trends. Actually, you Giner are we seeing any change in erosion trends in the market in the recent times? And obviously, one of our competitors have seen issues in their plant. How does that position us to probably scale up our business in the U.S. on the back of that? Any color there?

Neha, I'm not sure I understood your question. You're talking about price erosion?

Yes. So my question is, have you seen any change in the price erosion trend in the U.S. in the recent months? And with this disruption in one of our competitors' plants, how does that position us to probably gain more volume in the market? Do you see that as an opportunity in the near term?

So when we take it as a basket, we think we are close to neutral. We have a little bit of erosion, which very low single digit. I would say it's closer to 1% in the -- for the quarter. And this is based on the overall basket of products, there are some increases. There are some decreases. However, I have to make one point here. We did have some product which were opportunistic, which for a limited period, you get some better opportunity in terms of pricing and volume. So those things, when they tapers down, when a compete comes in, those prices will go down when you had a single car or when you had just 1 completer later when somebody enters it could go down. So we have seen such phenomena of a few products. In any quarter, if you take, you will always have one product, which you have either got a shortage because of that, there are opportunities. and there are products which got. So net-net, I think we are still at a comfortable stage.

Understood. And you can put any color from you on the injectable pricing? I think you said single-digit erosion? Has that increased in the recent months?

It is a similar trend. It's things as Swami rightly said, they can be one-off products here and there where the erosion can be higher or lower. But on an overall level, it is still single digit.

Requesting participants to have 2 questions, please. The next question is from Tushar Manudhane.

Sir, on the EBITDA margin first, like your guidance of 20%, 21% for FY '26, now that PenG plant is largely stable, closer to EBITDA breakeven, Eugia related operational cost is largely done, probably inspecting can only move up from -- in terms of profitability from here on. So if I have to extend this for maybe without considering the inspection outcome of Eugia, how do we see the margin trajectory from here on?

I think we will be able to give -- I mean, clear guidance once we come to know about the status of the PenG, right, which hopefully, it will happen very soon, maybe a month to 2 months time. So what we're able to tell you very clearly in the month of February.

Got you. So China plant operational cost, how much that is? I'm trying to understand...

China, as on it, in the quarter, I'll be incurring your loss of around maybe $1 million but probably we'll be achieving -- able to achieve the breakeven between Q3 and Q4. And after that, China will start moving up in the overall contributing to the growth of the EBITDA growth.

Got it. In fact, trying to understand that even without, let's say, MIP related benefit on PenG, still how much is the scope to improve the EBITDA margin from the current 20%, 21% for FY '26 or FY '27?

Sir, you are putting a lot of variables like to consider Eugia 3, don't consider PenG, then it will remain the same. Because these are all the key drivers which is expected to take it up in the next year.

Understood. Sir secondly, on Europe, which has been sort of a robust growth for now almost 3 years, and reaching $1 billion. So given this size of the business, we that we'll be able to still sustain mid-teens sort of growth over next 2 to 3 years?

Sure. Yes, Tushar, thank you for raising this question. Just one interesting correction. We are now touching EUR 1 billion mark, whereas last financial year, we were at reaching distance of $1 billion. But no, we are well on track for EUR 1 billion. And yes, as you have seen in the last 3 years, Q-on-Q, we are demonstrating growth and considering my all major countries contributors in France, Portugal, Netherlands and Germany continue to demonstrate this growth statically. I am very confident in the coming quarters and period as well. There will be a sustained growth.

The next question is from Bino.

So sir, if I heard correctly, you said the EBITDA excluding Revlimid has improved 14% Q-o-Q. Is that correct?

That's right. That's right.

Sir, what are the drivers of this? Is it mainly coming from lower losses in the PenG plant? Or is there something else to it?

That was also one, and sales has grown up by about 7%. Gross profit also gone up by 10%. I think overall, there is an improvement across the businesses, which is what's driving the overall improvement of the EBITDA.

Okay. And the gross margin Q-on-Q has gone up despite lower travel made. What has driven that? What has changed so much in the product mix? .

See, one is if you really see the formation products have gone up this quarter compared to right? That is 1 small product change? And second, if you really see, Europe has been continuously growing. So it is -- the operating leverage is getting increased quarter-on-quarter, which is also helping us. And the third point is there is a product mix which is happening across U.S. is also right? I may not like to get into the details in terms of which segment, which product, et cetera. But there is a good amount of product mix is changing place in U.S., which is also helping. So it's a combination of multiple factors, which is helping to grow, I think. And the last one is, once the PenG comes, the gross margin will be very high because the major cost apart from the raw material is the [ pole ]. One -- so you're able to see a slight still a slight increase in the gross margin once the PenG plant comes fully operational. Once it's operated fully, probably we may cross 60% also.

Understood. And Revlimid, was it minimal for the quarter? And are we completely done with it?

No, it's a minimal for the quarter. .

Okay. And then next quarter will be close to 0. .

Yes. .

Understood. And sorry, one last question on tax rate. For the first half, we have been at a tax rate about 30%. Is that likely to be the case for full year as well?

So see, basically, some of the businesses are incurring losses, which you know that at a PBT level, like PenG, Life at some of the other businesses. We don't take tax credit on the losses. We will take only as and when it started making profit, we will adjust it. So because of that, it appears like we are having a 35% tax rate. But in reality, it's only 25%, whereas the tax returns will carry the losses as credit in books of account, we don't.

Okay. So once they become profitable, the reported tax rate can fall below 25%.

Below 25%, Yes, you're absolutely right.

The next question is from Tarang Agrawal.

A couple of questions specifically in U.S. How does [ Lannett ] help it improve, say, quantitatively and what are the steps to improve? And similarly, in Europe, things get a little complicated in Europe because it's a confederation of many [indiscernible] of the business continues to be reasonably high despite a reasonable amount of capacity, which continue to be unutilized. H1, it's already at INR 1,500 crores. So should we really now pencil in CapEx intensity for the business given a wash footprint of unutilized capacities?

Let me talk about U.S. first after that, probably Murali can talk about or you can generally talk about other countries. As a U.S. is concerned, we have prescription of about 10.2%, which is the largest. So that tells you the coverage. It's very fairly large across all segments, and we have been growing. We've been growing now this quarter. We had -- we have seen some momentum in terms of seasonality. So that has also helped us that as far as the U.S. is concerned. And when you talk about lane-specific Lannett has a number of products, which are good additions to our portfolio like the ABSD products. And we are very excited to have those products in our preview as once the merger is done. We are still awaiting the FTC approval, as you may be aware. And that's a process we have to go through.

Sir, if I could just chip in. I mean I understand that you've got north of 10% volume share but does it come after covering, say, 50% of the market? Or does it come after covering 60% of the market? It's really -- that's the metric that I was looking for.

So I didn't get your question. I don't know what is that 50% and 60% you're talking about?

Portfolio coverage, Swami. .

Okay. So we are into all segments, all therapeutic areas. I would say that we are probably around 50% or more but it does not cover all the presentations of a product. For example, now home logistic form is one, some of the derma areas, we have still not covered so I would only say that we are in a significant. We have significant coverage in the therapeutic area. So I don't have the exact percentage, but that's where we are.

Yes. So, Tarang maybe I can touch upon the European part of the query. Murali here. So you touched upon the portfolio bid and also the complexities in Europe under which we are operating in. So let me touch the second point. Yes, we are talking of multiple regulators, multiple language packs, different language packs and fragmented market. and different market architects, whether it is a tender the generic market of pharmacy-driven or prescription to well. Across all these, we have demonstrated our success there is a very well set system, front-end the commercial infrastructure, well-motivated team acting across these different markets. that way we are able to overcome the challenges. In addition to the regulators, we are also an set the European Commission, European Medicine Agency, newer challenges like on nitrosamines, we keep hearing, but we were able to overcome all these with all of our efforts. Coming to the portfolio on the representative market, if you assess, we are on upward of 80% of portfolio coverage. And we are constantly striving to touch that 85% to 90% levels. Of course, here, I have excluded biosimilars and inhalation products. But there, again, very soon, we will be making our launches.