Aurobindo climbs value chain to ascend drug firm rankings

P V Ramaprasad Reddy, co-founder of Aurobindo Pharma, is known for his ability to learn as he goes along. Some years ago he moved to the US to build business in new segments such as injectables, controlled substance, and nutraceuticals. This has now helped the firm move up the value chain in the formulations business to claim the second spot among Indian pharma companies.

With sales of over ~122.4 billion in nine months of the current financial year, they are ahead of the ~115.8 billion recorded by Lupin but behind Sun Pharma, which reported ~193.5 billion sales.

This is 8.7 per cent growth in net sales for the Hyderabad-based company at a time when most Indian pharma companies are seeing decline in their sales due to pricing pressure in their key market, the US.

While Lupin recorded a 10.6 per cent decline in its sales for the period, the largest, Sun Pharma, recorded a 17.4 per cent fall.

The company, which started in 1986 with making bulk drugs (active pharma ingredients) and then moved to formulations (finished dosages), has now emerged as the most profitable in the current financial year with a 7.1 per cent growth rate in net profit to ~17.7 billion, leaving all others including Sun Pharma and Lupin behind. This has been possible with its effort to move up the value chain in formulations business.

“The management focus to grow newer segments such as injectables, controlled substance, and nutraceuticals in the US has helped the company grow at a time when others are losing market due to pricing pressure on generic drugs,” said Ranjit Kapadia, analyst at Centrum Broking. The company has also been able to off-set the pricing pressure on generic drugs with increasing its volume in the oral segment.

Much of Aurobindo’s strength comes from the fact that it makes many of the component chemicals used to manufacture finished drugs, rather than buying those pharmaceutical ingredients from other companies. Supported by a large-scale, integrated manufacturing system, Aurobindo is able to cut costs often to levels below its domestic competitors.

The pharma major earns around 82 per cent of its total revenue through formulations (finished dosages in oral and injecatables forms). Rest comes from bulk drug business, based in India.

In the quarter ending December, the formulations business grew 14 per cent annually to ~35.7 billion due to strong growth across geographies. While formulations sales in the US (44 per cent of total revenue) grew by 9 per cent, in the European Union (27 per cent of total sales), it grew by 37 per cent annually to ~11. 7 billion.

“During the quarter, growth was witnessed on account of the rise in tender purchases. The top five countries — Italy, Germany, UK, Spain and France — posted a double-digit growth,” said Vishal Manchanda, analyst with domestic brokerage Nirmal Bang. Aurobindo Pharma also completed the integration of its Portugal business in November 2017, helping it register a high growth rate. It had acquired Generis Farmaceutica SA for ~9.69 billion in January 2017. “The company witnessed no pricing pressure in this geography,” said Manchanda

Remaining formulations business company gets from ROW (rest-of-the-world) market and those from antiretroviral drugs (ARVs), which are used for treating HIV. The company’s ARV formulations business (6 per cent of total revenue) declined by 30 per cent Y-o-Y due to lack of profitable tenders while ROW business grew by 2.1 per cent annually.