Aurobindo Pharma - Can it give more?

The Background of Pharma

The pharma market in India is highly competitive owing to the number of players in the
generics segment and lower pricing strategy employed by these players. According to a
Mckinsey Report, ‘Indian Pharma 2020’ the Indian market will grow to about $55 billion.
Competition from top players such as Dr. Reddy’s, Lupin, Sun Pharma, Cipla, Cadila, etc,
especially in generic drug segment, has left little room for new players .

Ever since liberalization, India has found itself at the golden spot of creating a niche in IT
services industry. But there is one more emerging industry where India has built its strength
and steadily has been clinching the rank among the top 5 in the world ( by volume) - ‘ The
Pharmaceutical Industry’. Today our story will cover one such Indian company, Aurobindo
Pharma.

The Story

In what once started as a small single unit pharma manufacturing firm in Hyderabad in 1986,
today has become the 2nd highest pharma company in India in terms of revenue. Aurobindo
Pharma specializes in manufacturing generic drugs, APIs and formulations and sustains itself
by diversifying its portfolio to major therapeutic areas (which are formulations) ranging from
antibiotics, antiretroviral (ARVs), CVS, CNS, gastroenterologicals, anti-diabetics and
anti-allergics. Before going ahead and bombarding with much intricate pharma terms, lets
go through some definitions here.
What is API and formulation?
API is the active ingredient of the drug that performs the main action. API is very small in
amount and has to be ultra-pure. Formulation is the end product of the product, i.e. the
form in which it is consumed. It can be the in form of tablet, capsules or the liquid
substance.
Back to the story.

Strategy
In the formative years, the company focused on building a sturdy and deep foundation in
API manufacturing, limiting its presence to India. By the turn of 21st century, Aurobindo
gained the expertise in manufacturing complex APIs, along with it, added the capacity to
built formulations, while expanded its foothold to nations in USA, Europe (both organic and
inorganic). After the 2010 era, the company augmented into the realm of further specialized
products (will talk later on this) adding to its diversity full spectrum APIs. The company is
high on ambition and plans to expand into yet untapped parts of Europe and other growth
markets (Latin America, Africa, Gulf Cooperation countries) especially in the lower generics
penetration, thereby diversifying portfolio while also looking to improve its supply chain.

To thrive in the current competitive environment and stay ahead in the game for the future
years, the company will be diversifying into new segments, different from its generic
offerings - specialized products such as biosimilars, specialty injectables, oncology, peptides,
respiratory, topicals, vaccines and penems. Groundwork has already been built and
Aurobindo has filed for Abbreviated New Drug Application (ANDA) .

All this is fine, but how is company reaping huge profits?

Outsourcing and Reverse Outsourcing . By setting up manufacturing plants in India,

Aurobindo Pharma Limited (APL) has been able to drive down the manufacturing costs and
export its API and formulations to countries across USA (under the name Aurolife, APUSA)
and form tie-ups (with Pfizer in 2013, acting as marketing channel), Europe, and other
growth nations, accounting for about 90% of its revenue (outside India). Low cost pricing
(cost leadership) has provided a strong competitive advantage.
Over the years APL has made number of acquisition in US/Europe market to quickly establish
its position. In USA acquisitions include Natrol, Sandoz and in Europe, some them include,
Milpharm in UK, Generis in Portugal, Apotex (acquired international business in 5 European
countries). This will not only help APL expand in international market, utilizing the already
established players distribution network, but also help the company diversify in new areas of
specialization such as dermatology (Sandoz) and other areas.

The Catch
Tough USFDA (US Food and Drug Administrations) regulations and pricing pressure in the
previous years, has diminished the growth rate in USA profits. APL couldn’t always function
by exporting its drug from India to other nations. To capture market in USA and Europe
regions, it had to made certain acquisitions and also set-up some R&D centers outside India
which has affected cash flow.

Even in India, APL has not been able to capture much of the market in the generic drug
segment.

“If revenues is vanity, profit is sanity, cash is the reality”. Though the revenues have been
growing since the past 5 years, the growth rate has come down, for USA segment (which
makes 45% of overall revenues) and overall segment as well. Net overall cash flow has also
been erratic in the past 5 years.

As a quote from ‘Shawshank Redemtion’ - “Remember Red, hope is a good thing, maybe the
best of things, and no good thing ever dies”. There is a good possibility that, going forward,
APL will be able to reap high revenues, owing to the acquisitions and expansion into
specialized products. But this will require some amount of time .
May be 3 or more years. What do you think?

Although the Debt/Equity ratio (D/E) is quite under control and over the years APL has been
able to reduce it(current D/E = 0.4%), APL has been constantly loading up additional debt
due to fierce acquisition and expansions in US, Europe and RoW.

APL’s current R&D (3-4%) expenditure is well below the industry standards of 8-10%.
Although this number might look good for ‘Proft and Loss Statement’ view but in the long
term, for a company to thrive (and not merely survive) in pharma industry, R&D has to form
a major part. It’s forte as a generic drug manufacturer, might not remain clinched in the long
run, until and unless Aurobindo differentiates itself along the lines of producing high end
patented drugs. Lets hope that acquisitions will add something to its

So Fellow reader, Where is your bet?

Appendix

USA Product Line

USA Revenue Segment

Europe Therapeutic Product Profile

Europe Revenue Segment

Sources:
1. Company Website and annual reports -
https://www.aurobindo.com/about-us/
https://www.aurobindo.com/wp-content/uploads/2018/10/Annual-Report-2017-18.pd
f
https://www.aurobindo.com/wp-content/uploads/2018/10/Investor-Presentation-May
-2018.pdf
2. Hindu Business Line -
https://www.thehindubusinessline.com/companies/aurobindo-pharma-to-focus-on-hig
hvalue-products-in-us/article9722248.ece

3. Process Worldwide -
https://www.process-worldwide.com/india-ranks-third-most-competitive-nation-in-glo
bal-pharma-index-a-661349/

4. Economic Times -
https://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/h
ow-clerk-turned-billionaire-ramprasad-reddy-made-aurobindo-a-giant-pharma-compan
y/articleshow/65791165.cms

5. Katsura Chemical -
https://www.katsura-chemical.co.jp/en/drugs/

6. Screener - https://www.screener.in/

7. Moneycontrol