Growth across geographies keeps analysts positive on Aurobindo Pharma

Aurobindo Pharma
In a quarter which saw its peers struggle, Aurobindo Pharma put out a strong March quarter performance. The company saw a 30.7 per cent growth in revenues, led by a strong 42.7 per cent growth in US sales.

The geography is its single largest, accounting for 47 per cent of overall revenues. This was largely driven by the higher margin injectables business growth, with a ramp-up in antibacterial Ertapenem injection and new launches. The company launched 15 products, including four injectables in the fourth quarter of 2018-19 (FY19). Aurobindo also completed acquisition of seven branded oncology injectable products from Spectrum Pharmaceuticals, Inc.

In addition to the March quarter results, easing of regulatory worries and attractive valuations, too, have led to an improving sentiment for the stock. Analysts expect the company to maintain a strong growth momentum in the US and Europe, led by acquisitions as well as base business.  

Among the key triggers for the stock is the company’s limited-competition niche injectable portfolio. The portfolio achieved the targeted 30 per cent growth in FY19 and is expected to continue growing at a similar pace for another three years, led by new approvals (12-15 products in 2019-20, or FY20). Reliance Securities expects this capacity expansion to boost Aurobindo’s overall profitability.

The company is also expected to complete the acquisition of Sandoz’s derma and oral solid business by the second quarter (Q2) of FY20, which analysts feel will scale up Aurobindo’s US operations significantly. Elara Capital expects the incorporation of Sandoz business to increase the company’s 2020-21 earnings by 10 per cent. 

For FY20, analysts expect the sterile portfolio to drive bulk of the growth, along with the consolidation of Sandoz as well as the Spectrum portfolios.

In addition to the US, the company continues to do well in Europe and clocked a 13.9 per cent year-on-year growth during the quarter. Europe now contributes about a fourth to consolidated revenues. After turning around the acquired Actavis portfolio, Aurobindo is in the process of turning around the acquired Apotex portfolio (acquisition completed during March quarter). After transferring product manufacturing to India, the company is likely to see benefits on profitability accrue from Q2FY20.   

With strong growth momentum in the US and Europe likely to get further boost from acquisitions and new product launches, the outlook remains strong. However, investors need to watch out for regulatory issues and the debt profile of the company. This is what keeps some analysts cautious, despite a positive view on the overall growth.

The companies’ three ingredients (active pharmaceutical ingredient, or API) facilities have seen official action indicated (OAI) status by the US drug regulator. The company has submitted corrective action preventive action and is looking at alternative ways to get the issue resolved. Five to six products are pending approval from a key API site. 

Analysts at Motilal Oswal Securities say they have reduced the price-to-earnings multiple to 13x (from 15x) on the 12M forward earnings basis to factor in regulatory headwinds at one of the key API sites under the OAI status. However, they remain positive on Aurobindo, given its strong abbreviated new drug application pipeline/approval pace for the US market and improving traction in the European Union market. 

The company’s gross debt at the end of FY19 stands at Rs 6,967 crore, which analysts at Edelweiss expect to double further over the next six months, following the acquisition of Sandoz’s portfolio. They believe that the burgeoning debt and intensifying competition pose risks to Aurobindo’s consensus estimates.

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