Aurobindo Pharma Limited (AUROPHARMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aurobindo Pharma's earnings conference call for first quarter of FY '27. [Operator Instructions] Please note, this conference is being recorded. I now hand over the conference to Mr. Varun Mali. Thank you, and over to you, sir.

Thank you, Vandit. Good morning, ladies and gentlemen, and welcome to our first quarter FY '27 earnings call. I'm Varun Mali from the Investor Relations and Corporate Communications team. We hope you have received the Q1 FY '27 financials and the press release that was sent out yesterday. These are also available on our website, www.aurobindo.com. I would now like to introduce our senior management team who is 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 of Europe Formulations 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 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 now hand over the call to our CFO for the business highlights of this quarter. Over to you, sir.

Good morning, everyone. A warm welcome to Aurobindo Pharma's Q1 FY '27 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. Q1 marked another quarter of disciplined execution underpinned by strong operating performance, continued strategic progress and prudent capital allocation. Our diversified business model continues to perform well despite geopolitical issues, positioning us for sustainable long-term value creation. Our consolidated revenues increased by 16% year-on-year to INR 9,150 crores, driven by broad-based performance across our business areas. Europe and growth markets maintained strong momentum and our U.S. business continued the sustained growth. Operating EBITDA, excluding onetime impact of INR 43 crores towards a loss on derecognition of lease receivable stood at INR 1,924 crores with a margin of 21%. A defining milestone during the quarter was the successful completion of the Lannett acquisition following FTC approval within the stipulated time lines. Beyond adding scale, the acquisition strengthens our U.S. platform, expands our presence in complex and controlled substances and enhances our long-term competitive position. Further production at our China OSD facility doubled over the past 12 months, marking a significant milestone in the ramp-up of one of our strategic investments for sustained growth. We are pleased to report increase in supply from China to Europe and also to U.S. starting now. Business highlights. Let me walk through the key business highlights for the quarter. Our formulation business remained a primary growth driver, growing 17% year-on-year to INR 8,101 crores and contributing approximately 89% of the consolidated revenues, supported by growth across all key markets. API business clocked revenue of INR 1,049 crores, accounting for 11% of the overall revenue supported by our backward integration strategy. U.S. revenue grew by 8.1% year-on-year to INR 3,770 crores or $399 million, reflecting resilience of our base business. We launched 10 new products this quarter, filed 9 ANDAs, received 10 final approvals, indicating strong pipeline execution and regulatory momentum. Our European business continued its strong trajectory with revenues reaching EUR 267 million, delivering 11% year-on-year growth in constant currency terms. Growth markets revenue increased by 38% year-on-year to INR 1,063 crores or $113 million, supported by strong underlying performance across key markets. ARV formulation remained stable at $35 million for the quarter, driven by stable volume. Our biosimilar and biological CMO strategy continues to progress well and represent important long-term growth drivers along our base business. Operational and financial highlights. Gross margin remained resilient at 60.4% compared to 58.8% of Q1 FY '26, benefiting from an improved business mix and operating efficiencies. Our gross contribution amounted to INR 5,523 crores. Net CapEx for the quarter stood at $78 million. Capital expenditure remained focused mainly towards TheraNym Biologics. R&D expenses for the quarter is around INR 350 crores, amounting to 4% of the revenue. We expect the current rate to continue driven by research costs towards the pipeline and the higher base of revenues. Further, since multiple clinical studies are at advanced stage, we expect slightly lower development costs for the upcoming period. Our balance sheet continues to remain strong with a strong net cash position of $42 million after payment of $85 million towards buyback and $247 million for Lannett acquisition, reinforcing our strong financial resilience and focus on various accretive growth opportunities while maintaining a disciplined capital structure. Our average finance cost declined to 4.8% from 5% in the previous quarter, reflecting prudent treasury management. Our net effective tax rate is 31.9% on account of not taking the tax credit on loss-making subsidiaries. However, we expect the tax rate to normalize around 28% to 29% by year-end. Profit after tax stood at INR 1,032 crores, reflecting a healthy operating leverage and efficient capital management. Return on capital. The investments we have made in the past decade are now approaching an important inflection point. Many of these platforms are transitioning from an investment phase to milestone monetization phase, which we believe will progressively improve margins, cash generation and returns on capital over the coming years. As in [indiscernible] our strategic focus is increasingly centered on enhancing the quality of growth rather than simply pursuing scale. Over past several years we have consciously allocated capital towards high-value businesses, superior margin profiles and structurally high return on capital. Whether it is complex generics or specialty pharmaceuticals or injectables or biologics or CDMO services or backward integration, each investment is guided by a common objective, building durable competitive advantages while steadily improving capital productivity. We believe Aurobindo is steadily transforming into a more differentiated pharmaceutical company with multiple levers, higher quality earnings and stronger free cash flows and sustained ROCE. As we look ahead, we are encouraged by the strength of our underlying business and believe we are well positioned to deliver the next phase of profitable growth driven by our focus on complex respiratory product portfolio, significant number of products, including DPIs and MDI with multiple near-term filings, thereby improving visibility across both revenue and earnings. We continue to reiterate our FY '27 guidance for double-digit revenue growth with EBITDA margin north of 21% and absolute EBITDA in excess of INR 8,000 crores with potential upside driven by positive outperformance in our high-value strategic business areas. We now look forward to taking your questions. Our senior leadership team is very happy to provide you further insight, more details, clarification wherever required. Thank you. Over to you, Vandit.

[Operator Instructions] The first question is from Surya Patra. The next question is from [Kaushik Shaikh].

My first question is related to the growth markets. We have shown a strong growth this quarter. Can you help us understand what is leading this growth? Are there any specific countries which is driving this growth?

You are asking overall or any particular...

About growth markets, sir. About growth markets.

Our growth markets, all the growth market countries are driving growth in line with the normal this one. There is no specific country which is growing extraordinarily [indiscernible]. See, we are also getting into new markets like we have gone into Indonesia, we have gone into China, we have gone into -- I mean, Canada is doing well. So every country is doing well. There is no specific country which is doing an extraordinary performance like that.

That's helpful, sir. My second question is related to Lannett, with now the acquisition being complete. Can you tell us what are the key products in the pipeline for the near term? And specifically, can you talk about our partnership with the [ RespireRx Pharma ] for the inhalers? Where do we stand currently in terms for Advair and Spiriva? I think we have received approval for Advair, sir.

Yes. Hi, Kaushik. This is Swami Iyer from Aurobindo USA. Now with regard to Lannett, your -- as regard to pipeline, we are going to launch Advair any time in the month of August. And rest of the product, I can't really tell you, share with you on what are the products we are going to launch. That's confidential. But we do have a fair amount of products in the pipeline staggered over a period of time. Is there any other question you wanted?

Sir, any reason for the delay of launch of Advair? I guess we have received approval earlier this year.

So it's not delay. It's just that the product had to be ready and then it has to be positioned because when you get a certain market share, it should be ready with the inventory. So it takes a little time for buildup of the inventory before you launch.

The next question is from Damayanti Kerai.

My question is continuing on Lannett. So besides the respiratory portfolio, which is building up well for you, can you also update on the existing portfolio, if you see headroom to grow it further, especially in the controlled substance product? And if so, what kind of upside we can see from current level as well?

As far as the existing products are concerned, there are a few. We call them the crown jewels because they grow well. They grow decently. And fortunately, Lannett has been able to get a fair amount of quotas for the controlled substances. We see some growth there. But the control substance, you should be knowing that there is an overall limit on how much quota is available. If it's 10,000 kgs, 10,000 kgs for the entire U.S. and it's allocated between different suppliers. So Lannett happens to be one of the suppliers. So we should not expect any sudden jump unless somebody defaults. If some other supplier defaults, others will get it. So Lannett had that opportunity. They have ramped up a bit. They continue to do that. That's all I can say for now as far as the ramp-up is concerned, as far as the increases are concerned. The market, when it expands, the quota will expand. It's not like the other products. The quotas are very limited. They are very careful because these are all controlled substances.

Got it. So it's fair to assume the incremental sales for Lannett portfolio will be driven by the new launches, especially in the respiratory, right?

Yes, it will be driven by new launches, I would say. Respiratory is one of them, that certainly I agree. And it's not as though the control substance will not go up. When we have an opportunity, we will go up. It has done in the recent past.

Sure. My second question is if you can update us on the Pen-G plant supplies and whether you have got any clarity from the government on PLI benefits for this year? And also in terms of progress for external sales of Pen-G from your sites?

The Pen-G plant, we have been continuously achieving a capacity of around more than 800 tonnes to 900 tonnes is the range we have been producing. The India market, if you really see, it is around 800 to 900 tonnes, and we have been producing that and which has been effectively converted into 6-APA and ultimately converted into Amoxicillin. We have been doing very well on the Amoxicillin in the last 2, 3 months. And we have been able to produce 6-APA also effectively. And we got -- our yield is also coming out very nicely, in line with our expectations. And we have been -- regarding the PLI incentive, government, we have filed the application and they will make the payment in the month of September or March, whatever be the policy of the government, they will pay it. There is no issue on that.

And regarding supply to the external parties.

We have been supplying external -- whoever is asking, we have been supplying Pen-G, we have been supplying external parties. We have been supplying to some of the big corporates in India, right? And 6-APA also, we have been supplying. Wherever they have been asking us, we have been supplying. And if you really see the import data also, the level of imports of 6-APA has come down -- I mean, very drastically compared to what it used to be in October to December. And these are all mostly on account of the advanced supply mechanism. I mean, re-exporting or exporting, whatever may be the word. That is the main thing. So there is no issue and we have been going on. Yes.

So sir, this year, we have this minimum import price benefit, which is in place. But when we look at beyond this, what kind of clarity we have on the pricing part, which can safeguard against the cheaper import if, say, year -- yes.

Yes. What we are trying to do is irrespective of the MIP or the PLI incentive, we have been working towards achieving the self-reliance on the cost structure and ensuring that we are making profit irrespective of the price, et cetera. That is what we have been working on. The MIP or -- I mean, we have not achieved, we'll be reaching very soon. Maybe by end of the year, we'll achieve that status. And if MIP and the PLI comes, that will be seen at that particular point of time with respect to the market prices.

The next question is from Neha Manpuria.

Swami sir, on Lannett, from what I understand, there's a facility in the U.S. which is operating at fairly low utilizations. So given that there is not as much scope to improve, let's say, increase market share in controlled substances, how do we plan to essentially improve utilization in that plant? That's the first question. And second question to Subbu sir, for Lannett, what sort of synergies should we look at in terms of timing of synergies, let's say, over the next 2 years? And what do you think does Lannett get to where our U.S. business margins are?

Both will be answered by Swami. Swami? Swami?

Sorry, I was on mute, sorry, yes. So thanks, Neha. So let me take both the questions. First and foremost, Lannett has a fair amount of unutilized capacity, which we think is a big plus because we can use this capacity to bring in products in the U.S. that we could not do earlier. One is the controlled substances itself, some of the products that we can bring in. Plus it opens up a lot of markets for us, including the government market. We have also made a plan. For the next 12 months, we have created a strategic plan. I can't share too much of details on that. But essentially, what we are doing is we are trying to bring in products from our portfolio as site transfer that we are either not commercialized or we have not been able to ramp up, all which is required for the government business in the U.S. So there's a plan for it. There are people already working on it. The integration is in -- it's in full speed. It's going on. So we think that some of these products would be transferred and that would enhance the capacity. We have got a staggered approach in 12 months what kind of numbers we are going to have in terms of monthly output and over a 3-year period what we are going to do. We feel very optimistic about it, having seen this opportunity. The team is very good. They have well-trained manpower. They have very good machinery. So we think we are in good shape there.

What would be the...

And as far as the synergy -- yes?

Sorry, sorry, go ahead, sir.

So you also talked about the synergies. So there are a number of synergies that we can talk about. I can talk about it for the whole call. But let's talk about the top ones. You see, first, let's talk about the SGA synergies, SG&A rationalization. So when we bought Lannett, prior to 29th of June, that's the date we closed, prior to that date they had x number of employees. On 29th June, it was x minus probably 40 or 30 employees. The idea was to reduce the manpower where we have got overlap, especially where it's very expensive. So we had substantial -- we foresee substantial savings in that. Apart from that, there are a number of other advantages that we get. One is when we start using the facility, there's an operational leverage by better spread of overheads. Then if you talk about the procurement synergy, Aurobindo is a fairly large player globally. We get vendor synergy, vendor procurement benefits. So we get synergy through that. This will enhance our margins overall. Plus we see a lot of other benefits in terms of cost saving, in terms of expanded markets. And very important, which has not been highlighted so far is the strategic partnerships that we get. We do get a number of partnerships, and this is a good opportunity for us to enhance that kind of partnership.

And Swami, sir, by what time do you think Lannett gets to Aurobindo margins? Would that be -- would that require this facility ramp-up that you're talking about? So would that take like 2 years, 3 years?

I think it may not require that kind of time frame. I told you that we already had a fair amount of SG&A synergies in dollar terms because of a decent value. And we are also looking at some of the procurement that is going to be additional benefit. Well, we immediately see some amount of increase in the capacity utilization. So that will also add up. I think we will see some benefit going forward in the next 9 months also.

Okay. And sorry, sir, what is the utilization currently at Lannett? And how much do we plan to take it to, let's say, in the 12-month strategic plan that you have?

So we have about 40% utilization. And then we plan to take it to a decent level. Unfortunately, I think I would not like to disclose the percentage, but we are taking it up to a decent level in the next few months. It is a 12-months plan, yes.

The next question is from Surya Patra. The next question is from Bino.

Can I have an update on the biosimilar pipeline, especially biosimilar Xolair filing in the U.S.?

Hi, Bino. So on the U.S. side of biosimilar filing, we are continuing to engage with the FDA on a planned first 3 filings this season, which underpins the at least 3 product in the U.S. aspiration that I laid out in some of the previous earnings calls by 2030. So the U.S. filing this year is imminent. One quarter here and there we expect the first filings to happen, and we are actively engaging with the agency. To answer your part of the question on the updates, this quarter we completed a successful ANVISA inspection, securing GMP certification for both our drug substance and drug product facilities. The timing of the certification is particularly meaningful because we currently have a couple of oncology biosimilars under active review with ANVISA in Brazil. I think one of them is under expedited review by a new task force initiative launched by ANVISA. So the GMP certification is therefore a key input to the ANVISA's marketing authorization process. But having said that, as I mentioned in the last quarter, we already have a head start in the LatAm market with commercial supplies of 3 of our oncology biosimilars already underway in Mexico. So I think we are already getting some traction there. With respect to other updates, we filed BP16 denosumab. As I mentioned in the last quarter, we are gearing up to file a couple of products. Denosumab, both FILVIZY a biosimilar to Prolia and FUGEVY a biosimilar to Xgeva. Both of them have been filed with CHMP or the European Medicines Agency. This will position us to address both osteoporosis and oncology supportive care segments. Likewise, I also gave guidance last quarter about Omalizumab. Omalizumab filing is on track. We announced a successful Phase III results sometime back. The filing is on track for Q3 with European Medicines Agency. The U.S. filing may happen at quarter end -- quarter here and there. So broadly, to summarize this, broadly, my guidance for a broader 7 to 8 products, EU, U.K., Canada based by '28, '29 is on track with 4 approvals already received. On the U.S. side, the 2 or 3 product filings this year is imminent, which means that the guidance that I provided earlier about at least 3 products in the U.S. by 2030, we are truly on track with it. I hope that answers your question.

And second question is around the biologic manufacturing with Merck. Do you still -- would you be able to give some sense of the kind of revenue ramp-up we can expect in FY '28, '29, 2 years?

I would give you some color about where we are right now. So, as you know, with our disclosure, Unit 1 was inaugurated on 3rd June 2026, and we remain on track to begin qualification activities of the facility and the equipment by November 2026. So that is in line with the guidance I have been providing over a couple of quarters. The validation batches for the customer, for the anchor product in Unit 1 of TheraNym are scheduled in 2027. After which the customer will file the product from this site in the target markets. So I expect steady revenue stream beginning 2028 as I anticipate some stockpiling requirements to be paid ahead of the launch for the customer. Now we have milestone payments for the revenues that we generate. So 2027, when we conclude our validation batches, we do our engineering and validation batches, there will be a flow of revenues. But I see a steady-state revenue flow to happen once the customer starts to stockpile the product. And to be honest, I see that to be from 2028. So in a nutshell, you can expect a steady revenue stream from 2028 depending on the stockpiling efforts of the customer. That's with the TheraNym Unit 1. TheraNym Unit 2, which is part of the product schedule 3 that I announced in April, where we are going to set up a pure-play drug substance manufacturing facility, which we call it as TheraNym Unit 2. That would be commissioned by end 2029, provided I get all the statutory clearances and environmental clearance to begin construction this October. So 2029 end will be when the facility will be available for qualification, means a 2-year horizon, 2030 will be the PPQ batches, the validation batches. Revenues will start. But again, 2031, I expect after the filings, the customer to base the stockpiling effort to happen for the commercial launch, which means 2031 will be when the Unit 2 will start to generate the revenues. So in a nutshell, the structure for TheraNym is designed specifically to derisk the CapEx ramp with contracted volumes from Unit 1 providing revenue visibility from '28 onwards before the full capital cycle of Unit 2 completes and Unit 2 will start generating revenues from 2031. I hope that answers your question.

The next question is from Shrikant Akolkar.

I have a question on the CRO business. So we have recently acquired a small CRO business. Can you provide some thoughts that led to this acquisition? And how much of scalability that you can bring in this business?

Shrikant, see, we recently bought this A1 Biochem. A1 Biochem as on date is having a turnover of around INR 100 crores, right? See, the A1 Biochem has started that journey in the year 2015. So in 10 years, they establish the entire credibility and they have developed the business everything. It's only a CRO. Now they have a capacity limitation to enhance further. That's the reason why they joined us. And we are already having enough experience in the API. And what we thought is, by acquiring the CRO and along with our existing plant, et cetera, which we can organize it, we can make it into integrated CRDM. And that is what we are working. And A1 Biochem is already having customers more than 50 customers and they have executed more than 800 projects in the last 12 years. So these are all some of the things which will complement -- which our capabilities will complement with the existing CRO capabilities. This will do. And third thing is, it also comes with the attractive valuation. And we expanded the access to capabilities compared to the greenfield investment. If we take a greenfield investment to come to this level, I think to start up, it will take 5 years. Now we are ahead by 5 years in the whole process. Now having said that, now it's our job to take it forward with, accelerate the entire process. That's what we are working on. The closing has not happened. Closing is expected to happen in the next 1 or 2 months' time. After that, we will start looking into what to do next on this.

Understood. And sir, that INR 100 crore revenue, do you think there is meaningful upside to that going forward?

I think at least -- see, the existing promoter itself is going to be the CEO of the new company. And he has a very big vision of taking it to at least 3 to 5x over a period of 3 to 5 years.

Understood. Sir, and second question, we have a presence in Canada and China. So you can talk about what's our plan in the Canadian market, which seems to have turned kind of attractive. And in China, where we have a formulation play and a facility. So if you can update on that?

Sir, the China plant, we are having a capacity of more than 2 billion tablets. And last year, we did around something like 500 million plus. And already we are seeing in this quarter we have already doubled that. So our objective is to go beyond 2 billion probably by end of the year or mid of the next year. That is what our plan is there. And we are also having -- in Canada also, we have got -- I mean, we have been supplying material like what we have been doing it for Europe, wherein we reduced the third-party dependency to own captive supply of material to Europe, which has helped us in improving the overall revenue for the Europe. Like that, we are also trying to do for Canada.

Okay. And sir, last question, Lannett had 2 products, respiratory products, Spiriva and Flovent under development a few years back. Is there any development on those 2 filing so far?

So we have...

I think they are working...

Yes, go ahead.

Swami. No, no please go ahead, Swami.

Yes. So it's still ongoing. It's an ongoing development.

The next question is from Abdulkader.

My first question is to Satakarni sir. Sir, just wanted to understand with the 3 products what we have in Europe and in U.K., how has our experience been in terms of grabbing market share? And how has the overall competitive landscape been into this particular geography?

So this is the first 2 quarters of commercial supplies and commercial stage operations. So I would describe our progress as a modest steady and a measured start, which is exactly how we intend to approach the transition from a development and clinical stage biosimilars company to a commercial one, rather than trying to scale across every market simultaneously. But having said that, on direct commercialization, we have begun catering to the U.K. and EU through our own Aurobindo Europe well-oiled infrastructure there. While the Nordics and Baltics are being served through our partner, Orion, who also have started to pick our product. So there is a distinct commercial channel in these territories. What is also an important development for you to note, Abdul, would be our STADA partnership is about to open a further commercialization channel in Europe. We expect a duplicate marketing authorization for an oncology product to be approved very soon, after which we will see commercialization running through STADA as well in its designated territories alongside our own Aurobindo Europe presence. So in a nutshell, very early stage around 2 quarters of supplies. So across the U.K., Nordics and Baltics, we will effectively have 3 commercial routes to market running in parallel, our routes directly and through Orion and STADA in their respective territories. What is also worth noting is that most oncology biosimilars, this is answering your part 2 of the question. Most oncology biosimilars in Europe are sold through tenders rather than the open retail channels. And only my next 2 products, denosumab and omalizumab are primarily retail products, but the products that have been approved so far are tender-based products. And what you must also know is the tender participation doesn't translate into supply on the same time line. So there's a natural lag between entering a tender cycle and actually shipping a product. So I expect all of these to tie in very well after 3 to -- at least 2 to 3 quarters from now. We already see our own Aurobindo Europe picking up the product. Likewise, I see our partners picking up the product. So in 2 to 3 quarters' time, we will see how the European presence is shaping up. Right now it's slightly early for me, but I'd like to give you color of what I think my commercial channels will be in Europe going forward, Abdul.