How Aurobindo is remodelling its China strategy

Aurobindo Pharma, the Hyderabad based specialist in active pharma ingredients, has decided to largely revamp its China business strategy. For a long time, the business model of Aurobindo Pharma had an overdependence on raw-material imports from China. This is all set to change. More than 10 years back, Aurobindo had decided to divest its Chinese manufacturing subsidiary to Sinopharm group. However, now Aurobindo Pharma (APL) is revamping its strategy around the China business. Here is what it entails.

For starters, it plans to again establish a manufacturing facility in China. At the same time, the broad thrust will be to significantly reduce the reliance on raw-material imports from China for manufacturing in India. Instead, the focus of Aurobindo will be on shifting from India to China more than a couple of dozen finished pharmaceutical formulations. Instead of importing the raw materials from China and making in India, the new strategy would be manufacture these formulations in China itself with a brand new China factory.

Considering its low cost economics of producing in China, Aurobindo’s Chinese oral formulations manufacturing facility will not only cater to the needs of the Chinese market, but also cater to Europe and to other emerging markets. With annual revenues of Rs23,455 crore, Aurobindo Pharma is the second largest pharmaceutical company in India. However, it had really felt the pinch of its current model when the COVID pandemic had led to serious supply chain constraints due to disruptions from the China end of the value chain.

Currently, the raw material sourcing of Aurobindo for its API requirements are sharply focused on China. For example, Aurobindo currently procures around 55% of its raw material from China, around 7% from other countries while the balance 38% is procured locally from India. Currently, to address the problem of supply disruptions from China, Aurobindo Pharma has started to increasingly procure raw-material from Indian sources. This will continue but China manufacturing will be part of the new strategy.

Aurobindo Pharma is currently investing Rs1,900 crore in building a large manufacturing facility to make Penicillin-G and its derivatives. The proposed 15,000 tons Penicillin-G project is part of the Indian government’s production liked incentive (PLI) scheme. Going ahead, as part of its new strategy, Aurobindo will transfer 30 of its finished pharmaceutical formulations from India to China. In China, its oral formulations facility has already commenced commercial production in January 2022.

The broad plan is that over time it will also transfer another 10-15 products from Europe and other countries to China and take the total products manufactured in China to 40 products. The top management expects that if the China plan fructifies, then it could contribute substantially to the top line and to the bottom line of Aurobindo Pharma. China is already expected to enhance its spending on pharmaceuticals from the current $169 billion to $200 billion by the year 2026. The China facility is poised for growth.